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Killing Entrepeneurship

September 17, 2007, 10:21 am

Regulation is a frequent topic on this blog, and one of the points I try to make over and over is that most supposedly pro-consumer regulation is in fact put in place to protect incumbents from competition and new entrants.   It's worth repeating this Milton Friedman quote:

The justification offered is always the same: to protect the consumer. However, the reason
is demonstrated by observing who lobbies at the state legislature for
the imposition or strengthening of licensure. The lobbyists are
invariably representatives of the occupation in question rather than of
the customers. True enough, plumbers presumably know better than anyone
else what their customers need to be protected against. However, it is
hard to regard altruistic concern for their customers as the primary
motive behind their determined efforts to get legal power to decide who
may be a plumber.

Apparently, the NY Times has discovered the phenomenon, and argues that it is accelerating under the Bush administration.  I have no evidence to refute this claim, though I note that the NY Times offers no evidence in support of it either.

Never-the-less, it certainly is a feature of most governments to try to protect politically powerful businesses against competitors, foreign and domestic.  Basically, the entire German and French economy is built on this practice, which is why the top corporations in these countries in 1960 are still the top companies today, whereas the list has completely turned over in the US.  Our economy thrives because of entrepreneurship.  New entrants replace senescent competitors, or at least keep the pressure on them so they stay sharp and focused.

This is an enormous issue in my business.  My industry is characterized by about 4-5 larger companies that operate many recreation facilities, of which we are one, and hundreds or perhaps thousands of individual operators.  Over the last five years, the US and state governments have passes a myriad of rules and regulations that are making it virtually impossible for smaller companies to compete.  I don't know if these are being suggested by any of the larger players (they certainly aren't coming from me) but these regulations are serving the purpose of strangling smaller competitors and making it nearly impossible for new entrants to compete.

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Category: Regulation
  • CRC

    Can you provide some examples of the regulations (in your industry) that make it more difficult for smaller operators?

  • http://www.google.com ErikTheRed

    Basically, the entire German and French economy is built on this practice.

    I was in Germany for the first time the other month (on business), and I had been pretty eager to try the fabled German beer. Turns out that in Germany there are local monopolies granted to breweries - In the city we were in we could go to a bar and choose between light beer or dark beer (one brand). Allegedly this is to protect the breweries from the evils of competition. The breweries have a right to exist and force (well, if you want a hassle-free beer) their product on a certain population whether the beer they produce is good or not. Unfortunately, the beer (Frankenheim Alt, or something like that) sold in the city of Dusseldorf is mediocre at best. There are many nationally-distributed brands in the US that taste better (granted, most nationally-distributed brands in the US taste like chilled piss, but there are some good ones - and hey, we have choice), and it couldn't hold a candle to the lamest of our microbrews. Extremely disappointing.

    @CRC I can't speak for the blogger, but I run a small business also. An amazing percentage of my time is spent with compliance with regulations (state of California) and legal requirements - and we're an "office-based" company (no special licensing, no hazmat, pretty basic safety, etc). I've outsourced as much as I can - at a cost of roughly $2,400 per employee per year - money I'd much rather just give to the employee. The overhead as measured on a "per employee" (marginal) basis shrinks as you grow, so larger businesses have a significant advantage here. Many small businesses risk just blowing off compliance until they grow to a certain size. Maybe I'm a bad businessperson for not doing that as well.