Tag: government regulation

How Free Markets Enhance Freedom of Choice

by Hunter Hastings – Mises Daily:freedom of choice

Ludwig von Mises was careful to establish the individual actor as the basis for all economic analysis. An individual acts to improve his circumstances. To do so, he chooses among various available means in order to achieve his ends. Those ends are based on his individual values, which are subjectively established. Methodological individualism and dynamic subjectivism are distinctive features of Misesian Austrian economics.

The Importance of Economics Based on the Individual

Interventionists and Keynesians, on the other hand, use economic aggregates such as GDP and aggregate demand as their basis for analysis. By reducing economic activity to a matter of measuring aggregates, interventionists seek to justify the manipulation of those aggregates in order to establish policy goals, and to design interventionist policies that purportedly are intended to achieve those goals.

In order to manipulate such immense aggregates, Keynesians turn to powerful government institutions that, the Keynesian rationale goes, are necessary to manage such a huge economy. These institutions include not only government agencies and regulations, but also their favored partners including big banks (protected financial franchises benefiting from central bank policies and bailouts), big pharma (government-protected pharmaceutical monopolies), and big food (government-protected purveyors of government-approved diets).

This regulation and manipulation is supposedly done for the good of “the economy,” but in the face of so much government favoritism and management for the benefit of certain special interests, it is easy for individual economic actors to feel disempowered. And it’s not just a feeling. The more government intervenes to control markets, the less sovereignty the consumers have.

How Governments Destroy Competition

An example is the increasing domination of the major Wall Street banks in the US. Consumers and small businesses report in surveys that two-thirds of respondents consistently report dissatisfaction with big banks, and three-quarters say it is important to bank locally. Yet, the number of community banks has declined by 24 percent over 2000–2013, while big banks grew their share of deposits — the five biggest banks now hold 47 percent of deposits, and in some counties, as much as 75 percent of deposits. Their low consumer satisfaction scores are a result, at least in part, of higher prices. For example, Consumer Reports found that the ten largest banks charged a monthly fee of $10.27 for a non-interest checking account, compared to $7.45 at small banks and $6.00 at the ten biggest credit unions.

Professor Amat R. Admati of Stanford University stated in testimony to the Senate Banking Committee in July 2014 that Too-Big-To-Fail legislation provides an explicit subsidy to large banks in the form of a lower cost of capital, and bemoaned the “extreme opacity of large banking institutions” that grow “to inefficiently large sizes.”

Yet customers do not switch. Some of this can be explained by the convenience found in banking with a very large enterprise, but consumers also find it costly to switch to smaller banks in the face of market dominance facilitated by government protection.

Things would be different if big banks had to truly compete. In Liberty and Property Mises explained that the real power in the market lies with individual consumers who are making the choices that ultimately determine output and prices; he termed it “consumer sovereignty.” Murray Rothbard in Man, Economy, and State elevated the idea of individual economic power, emphasizing not only the right to choose, but also (and perhaps more tellingly) the right to refuse: “Economic power, then, is simply the right under freedom to refuse to make an exchange. Every man has this power. Every man has the same right to refuse to make a proffered exchange.”

To choose and refuse to make an exchange, i.e., to do business with any other economic entity, is the essence of individual economic power.

True Diversity in the Marketplace

True freedom in the marketplace can greatly shape a consumer’s entire lifestyle.

In their financial lives — if true market competition is allowed — individual economic actors can refuse to do business even with big Wall Street or global banks, and choose, instead, community banks or credit unions.

In their home lives, consumers can install solar panels or a home generator and disconnect from the regulated energy utility. This releases them from guaranteed price increases, often caused by the need for the utilities to support their excessive pension commitments, and the charges imposed by the forced redistribution of energy subsidies to low-income households.

Consumers can refuse to buy from the food companies that hide behind government food regulations and agricultural subsidies, and instead choose smaller, more local and healthier options. They can choose online education in the form of free MOOC’s (Massive Open Online Courses offered by top professors at many universities) or pay per course from online providers like Udemy, and refuse the offerings of pro-government biased content and tenured Keynesian professors. They can choose Uber and refuse the highly regulated local taxi monopoly, which is often typified by old, uncomfortable, and poorly maintained vehicles caused by the high cost of taxi regulations and lack of competition.

On the other hand, every government subsidy, every regulation, and every tax-code change that favors one group of businesses over another reduces consumer sovereignty. This interference results in monopolies and oligopolies which are typically the product of government intervention in markets.

Nevertheless, short of a total monopoly — such as those often enjoyed by the government itself in law and other areas — the individual economic actor does have freedom to refuse to do business with these government-favored industries.

A Partnership of Entrepreneurs and Consumers

Freedom of choice is best secured by allowing true freedom for both entrepreneurs and consumers.

Entrepreneurs “are at the helm and steer the ship,” Mises noted in Human Action. “But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer.”

Not only is the exercise of individual economic power a choice, it is a powerful tool for directing change, one that we can wield with purpose. As Frank Fetter wrote in The Principles of Economics: “Every individual may organize a consumer’s league, leaguing himself with the powers of righteousness. Every purchase has far-reaching consequences. You may spend your monthly allowance as an agent of iniquity or of truth.”

Article originally posted at Mises.org.

Government Regulation is a Hidden Tax

by Brady Nelson – Mises Daily:Regulation

Perhaps due to it not being as readily quantifiable as government taxation, debt, welfare, and money creation; regulation has too often been superficially dealt with. In many ways, the largely “hidden tax” of regulation is a bigger threat to liberty, economy, and morality than other weapons of forceful government intervention.

What Is the Problem?

The total number of restrictions in federal regulations has grown from about 835,000 in 1997 to over one million by 2010, and the number of pages published annually in the Code of Federal Regulations, never substantially declined, and in fact has consistently grown. It has been estimated that regulatory compliance and economic impacts cost $1.863 trillion annually. This amounts to US households paying $14,974 annually in regulatory hidden taxes, with households thereby spending more on embedded regulation than on health care, food, transportation, entertainment, apparel and services, and savings.

However, this is just the proverbial tip of the regulatory-burden iceberg. The tangible burdens above are a quite manageable list of the more immediate impacts such as extra money spent by business to comply and government to enforce regulation. However, the intangible burdens are an almost infinite list of the less immediate impacts, such as lower performance throughout the economy in terms of entrepreneurship, innovation, growth, customer service, and jobs. The intangible burdens do not readily lend themselves to quantification like the tangible burdens do, and thus it is harder to understand the magnitude and even the exact nature of the almost infinite potential problems caused-and-effected. This is made harder due to the fact that value is always subjective (and ordinal) to each individual at any one point in time and, thus, there are no objective (or cardinal) opportunity costs and benefits of regulations as a whole that can simply be observed, calculated, and compared using cost benefit analysis (CBA).

Why Is There a Problem?

The most important of these intangible burdens of regulation are the unintended negative consequences on decentralized and dispersed knowledge and incentives. As Frédéric Bastiat pointed out: “In the economy … a law gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen.”

Thus, in terms of regulation and other policies: “[I]t almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse.” The unintended consequences of regulation are usually even worse than this, as they usually — unlike in free markets — promote a relatively small group of private interests at the expense of a relatively large group of individuals.

From a Public Choice school perspective, the regulation problem is essentially one of government failure andrent seeking, noting that: “(1) individuals in government (politicians, regulators, voters, etc.) are driven by self-interest, just as individuals in other circumstances are, and (2) they are not omniscient.”

Worse still: “[S]pecial interests are disinclined to seek direct wealth transfers because their machinations would be too obvious. Instead, regulatory approaches that purport to provide public benefits confuse the public and reduce voter opposition to transfers of wealth to special interests.”

From an Austrian school perspective, the regulation problem is essentially one of economic calculation and bureaucracy. Ludwig von Mises explains: “Without market prices for the means of production, government planners cannot engage in economic calculation, and so literally have no idea if they are using society’s resources efficiently. Consequently, socialism [and regulatory interventionism] suffers not only from a problem of incentives, but also from a problem of knowledge.” Mises said regarding the latter that: “A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation.” And this inevitably leads to regulatory failure as: “… [t]he lack of [profit-and-loss, price and customer-oriented] standards [which] kills ambition, destroys initiative and the incentive to do more than the minimum required.” All of this is, of course, the antithesis of consumer-driven entrepreneurialism.

At perhaps a still deeper level, Murray Rothbard reasoned:

When people are free to act, they will always act in a way that they believe will maximize their utility. … Any exchange that takes place on the free market occurs because of the expected benefit to each party concerned. If we allow ourselves to use the term “society” to depict the pattern of all individual exchanges, then we may say that the free market ‘maximizes’ social utility, since everyone gains in utility.

On the other hand:

Coercive intervention … signifies per se that the individual or individuals coerced would not have done what they are now doing were it not for the intervention. … The coerced individual loses in utility as a result of the intervention, for his action has been changed by its impact. … [I]n intervention, at least one, and sometimes both, of the pair of would-be exchangers lose in utility.

What Is the Solution?

The solution is of course deregulation — as much as possible, as fast as possible. However, both special interests (as emphasized by the Public Choice school) and bad economics (as emphasized by the Austrian school) will need to be overcome.

This combination was colorfully dubbed the “Bootleggers and Baptists” phenomenon. It has been observed that:

[U]nvarnished special interest groups cannot expect politicians to push through [regulation] that simply raises prices on a few products so that the protected group can get rich at the expense of consumers. Like the bootleggers in the early-20th-century South, who benefited from laws that banned the sale of liquor on Sundays, special interests need to justify their efforts to obtain special favors with public interest stories. In the case of Sunday liquor sales, the Baptists, who supported the Sunday ban on moral grounds, provided that public interest support. While the Baptists vocally endorsed the ban on Sunday sales, the bootleggers worked behind the scenes and quietly rewarded the politicians with a portion of their Sunday liquor sale profits.

More dauntingly, Murray Rothbard reminds us that, in many ways, the history of humanity can be seen as a race between bigger government versus freer markets:

Always man — led by the producers — has tried to advance the conquest of his natural environment. And always men — other men — have tried to extend political power in order to seize the fruits of this conquest over nature. … In the more abundant periods, e.g., after the Industrial Revolution, [freer markets took] a large spurt ahead of political power [including over regulation], which ha[d] not yet had a chance to catch up. The stagnant periods are those in which [such] power has at last come to extend its control over the newer areas of [freer markets].

It will not be easy to slow, stop, and reverse the century-plus growth of the regulatory state in the US and around the world. The crucial job of pursuing deregulation cannot just be left to politicians from the top down. It will need to come more from as many voters and seceders as possible from the bottom up and every direction in between.

Article originally posted at Mises.org.