Regulation and Incumbents

One of the most prevelent misconceptions about the political economy is the assumption that business universally opposes government licensing and regulation.  Often this misconception manifests itself as someone making a statement like, "Even [name of large competitor in the industry to be regulated] supports the proposed regulation so what are you libertarians complaining about."

In fact, regulation tends to protect incumbents at the expense of new entrants or new business models.  Large competitors can pass on the costs of regulation to customers, but new entrants have substantial investments to make just to build the systems and knowledge for compliance.  Perhaps worse, regulation like licensing tends to lock in current business models, by making current business practices part and parcel of becoming licensed.

For these reasons, I am excited by the book In Restraint of Trade by Butler Shaffer:

This extremely important study by Butler Shaffer--professor of law
and economist--will change the way you think of the relationship
between the state and business. It makes a deep inquiry into the
attitudes of business leaders toward competition during the years 1918
through 1938 to see how those attitudes were translated into proposals
for controlling competition, through political machinery under the
direction of trade associations.

What he finds is a business sector not only hostile to free markets
but aggressively in favor of restrictions that would protect their
interests. This, he finds, is the very source of the origins and
development of the regulatory state.

The author chooses this period because it was a time when the entire
relationship between American business and the federal government
underwent dramatic upheaval. It was in this time that business forged a
consensus about the scope and intensity of competition behavior that
they would tolerate. This began to exhibit a disposition favoring
collectivist authority over one another via government-backed
enforcement agencies.

Free and unrestrained competition required more of them than they
were willing to tolerate. It required constant innovation, a fight
against falling prices, a continued effort to seek out new markets, and
the willingness to subject their bottom line to consumer preferences
for lower prices and better products. They saw the vibrancy of free
enterprise as a threat to their firms and well being, so they used
anti-business sentiment in politics to hamper the market in ways that
would benefit them....

If you ever thought that the struggle for free enterprise was about
business versus government, this study, which is written in exciting
prose and beautiful English, will change the way you understand the
essential struggle. The evidence is vast that big business cooperated
closely with big government in building the essential architecture of
the mixed economy.

  • Ian Random

    Perfectly said, but no matter how well put no liberal will believe it. I have been trying to find some numbers to support that. I suspect that higher capitalization is required in socialized states like Oregon, Washington and California and that contributes to a higher cost of living and less competition. The only association that even comes close is that too many millionaires make you liberal:

    http://www.netstate.com/states/tables/state_millionaires_household.htm

  • K

    The study may be superb but the tendency of dominant business to support government regulation has been well known since the 19th century. And probably far earlier.

    The dominant see no reason to compete and every reason to discourage competition. If possible they persuade government to hamper the growth of rivals.

    The behavior of a dominant group is not always so neatly summarized. Traditions, education, ego, testosterone, and nature drive men the other way. Look at Europe before WWI. No leader there had anything to gain from the ultimate competition, war.

  • K

    The study may be superb but the tendency of dominant business to support government regulation has been well known since the 19th century. And probably far earlier.

    The dominant see no reason to compete and every reason to discourage competition. If possible they persuade government to hamper the growth of rivals.

    The behavior of a dominant group is not always so neatly summarized. Traditions, education, ego, testosterone, and nature drive men the other way. Look at Europe before WWI. No leader there had anything to gain from the ultimate competition, war.

  • glenn

    Interesting. Rereading Atlas Shrugged and was mildly astonished to find that most of the villains were, wait for it... businessmen.

  • glenn

    Interesting. Rereading Atlas Shrugged and was mildly astonished to find that most of the villains were, wait for it... businessmen.

  • glenn

    Interesting. Rereading Atlas Shrugged and was mildly astonished to find that most of the villains were, wait for it... businessmen.