Voice For Liberty

Tag: Free markets

  • Myth: Markets don’t work (or are inefficient) when there are negative or positive externalities

    When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The seventh myth — Markets Don’t Work (or Are Inefficient) When There Are Negative or Positive Externalities — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

    Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

    Myth: Markets Don’t Work (or Are Inefficient) When There Are Negative or Positive Externalities

    Myth: Markets only work when all of the effects of action are born by those who make the decisions. If people receive benefits without contributing to their production, markets will fail to produce the right amount. Similarly, if people receive “negative benefits,” that is, if they are harmed and those costs are not taken into account in the decision to produce the goods, markets will benefit some at the expense of others, as the benefits of the action go to one set of parties and the costs are borne by another.

    Tom G. Palmer: The mere existence of an externality is no argument for having the state take over some activity or displace private choices. Fashionable clothes and good grooming generate plenty of positive externalities, as others admire those who are well clothed or groomed, but that’s no reason to turn choice of or provision of clothing and grooming over to the state. Gardening, architecture, and many other activities generate positive externalities on others, but people undertake to beautify their gardens and their buildings just the same. In all those cases, the benefits to the producers alone — including the approbation of those on whom the positive externalities are showered — are sufficient to induce them to produce the goods. In other cases, such as the provision of television and radio broadcasts, the public good is “tied” to the provision of other goods, such as advertising for firms; the variety of mechanisms to produce public goods is as great as the ingenuity of the entrepreneurs who produce them.

    More commonly, however, it’s the existence of negative externalities that leads people to question the efficacy or justice of market mechanisms. Pollution is the most commonly cited example. If a producer can produce products profitably because he imposes the costs of production on others who have not consented to be a part of the production process, say, by throwing huge amounts of smoke into the air or chemicals into a river, he will probably do so. Those who breathe the polluted air or drink the toxic water will bear the costs of producing the product, while the producer will get the benefits from the sale of the product. The problem in such cases, however, is not that markets have failed, but that they are absent. Markets rest on property and cannot function when property rights are not defined or enforced. Cases of pollution are precisely cases, not of market failure, but of government failure to define and defend the property rights of others, such as those who breathe polluted air or drink polluted water. When people downwind or downstream have the right to defend their rights, they can assert their rights and stop the polluters from polluting. The producer can install at his own expense equipment or technology to eliminate the pollution (or reduce it to tolerable and non-harmful levels), or offer to pay the people downwind or downstream for the rights to use their resources (perhaps offering them a better place to live), or he must stop producing the product, because he is harming the rights of others who will not accept his offers, showing that the total costs exceed the benefits. It’s property rights that make such calculations possible and that induce people to take into account the effects of their actions on others. And it’s markets, that is, the opportunity to engage in free exchange of rights, that allow all of the various parties to calculate the costs of actions.

    Negative externalities such as air and water pollution are not a sign of market failure, but of government’s failure to define and defend the property rights on which markets rest.

  • Myth: Markets cannot possibly produce public (collective) goods

    When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The sixth myth — Markets Cannot Possibly Produce Public (Collective) Goods — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

    Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

    Myth: Markets Cannot Possibly Produce Public (Collective) Goods

    Myth: If I eat an apple, you can’t; consumption of an apple is purely rivalrous. If I show a movie and don’t want other people to see it, I have to spend money to build walls to keep out non-payers. Some goods, those for which consumption is non-rival and exclusion is costly, cannot be produced on markets, as everyone has an incentive to wait for others to produce them. If you produce a unit, I can just consume it, so I have no incentive to produce it. The same goes for you. The publicness of such goods requires state provision, as the only means to provide them. Such goods include not only defense and provision of a legal system, but also education, transportation, health care, and many other such goods. Markets can never be relied on to produce such goods, because non-payers would free-ride off of those who pay, and since everyone would want to be a free-rider, nobody would pay. Thus, only government can produce such goods.

    Tom G. Palmer: The public goods justification for the state is one of the most commonly misapplied of economic arguments. Whether goods are rivalrous in consumption or not is often not an inherent feature of the good, but a feature of the size of the consuming group: a swimming pool may be non-rivalrous for two people, but quite rivalrous for two hundred people. And costs of exclusion are applicable to all goods, public or private: if I want to keep you from eating my apples, I may have to take some action to protect them, such as building a fence. Many goods that are non-rivalrous in consumption, such as a professional football game (if you see it, it doesn’t mean that I can’t see it, too), are produced only because entrepreneurs invest in means to exclude non-payers.

    Besides not being an inherent feature of the goods per se, the alleged publicness of many goods is a feature of the political decision to make the goods available on a nonexclusive and even non-priced basis. If the state produces “freeways,” it’s hard to see how private enterprise could produce “freeways,” that is, zero-priced transportation, that could compete. But notice that the “freeway” isn’t really free, since it’s financed through taxes (which have a particularly harsh form of exclusion from enjoyment, known as jail), and also that the lack of pricing is the primary reason for inefficient use patterns, such as traffic jams, which reflect a lack of any mechanism to allocate scarce resources (space in traffic) to their most highly valued uses. Indeed, the trend around the world has been toward pricing of roads, which deeply undercuts the public goods argument for state provision of roads.

    Many goods that are allegedly impossible to provide on markets have been, or are at present, provided through market mechanisms — from lighthouses to education to policing to transportation, which suggests that the common invocation of alleged publicness is unjustified, or at least overstated.

    A common form of the argument that certain goods are allegedly only producible through state action is that there are “externalities” that are not contracted for through the price mechanism. Thus, widespread education generates public benefits beyond the benefits to the persons who are educated, allegedly justifying state provision and financing through general tax revenues. But despite the benefits to others, which may be great or small, the benefits to the persons educated are so great for them that they induce sufficient investment in education. Public benefits don’t always generate the defection of free-riders. In fact, as a wealth of research is demonstrating today, when states monopolize education they often fail to produce it for the poorest of the poor, who nonetheless perceive the benefits to them of education and invest substantial percentages of their meager incomes to educate their children. Whatever externalities may be generated by their children’s education does not stop them from paying their own money to procure education for their children.

    Finally, it should be remembered that virtually every argument alleging the impossibility of efficient production of public goods through the market applies at least equally strongly– and in many cases much more strongly –to the likelihood that the state will produce public goods. The existence and operation of a just and law-governed state is itself a public good, that is, the consumption of its benefits is non-rivalrous (at least among the citizenry) and it would be costly to exclude non-contributors to its maintenance (such as informed voters) from the enjoyment of its benefits. The incentives for politicians and voters to produce just and efficient government are not very impressive, certainly when placed next to the incentives that entrepreneurs and consumers have to procure public goods through cooperation in the marketplace. That does not mean that the state should never have any role in producing public goods, but it should make citizens less willing to cede to the state additional responsibilities forproviding goods and services. In fact, the more responsibilities are given to the state, the less likely it is to be able to produce those public goods, such as defense of the rights of its citizens from aggression, at which it might enjoy special advantages.

  • Wichita teacher labor kerfuffle illustrates the problem

    A dispute over teacher working conditions in USD 259, the Wichita public school district, provides a window into the workings of the public school system and its problems. There is a way out, but it’s not happening in Kansas.

    Public school teachers want to be recognized by the public as professionals. But when Wichita school district management seeks to actually manage teachers, the union intervenes, and change must be negotiated.

    The issue, according to Wichita Eagle reporting, is that the school district “wants to start requiring teachers to write detailed lesson plans, file grades online every week and contact each student’s parent or guardian at least once per grading period.”

    This request was deemed “insulting” by United Teachers of Wichita, the union for Wichita public school teachers.

    Right away we can see some problems with public education, illustrated for all to see here in Wichita. First, why are the working conditions of Wichita schoolteachers a public matter? The answer is, of course, is that they are public employees, paid by tax dollars, and the public therefore has an interest and a right to know certain things.

    This interest — and controversy — was played out in some of the comments left to the online version of this story. Two controversial issues argued about include whether teachers are paid too little (or too much), and how many hours teachers work (or not).

    Both of these issues relate to professionalism. Most professional employees are paid based on performance or an agreement struck between the employee and management. That’s not the case in most public school systems, including Wichita. Here, teacher pay is based solely on two factors: longevity and education credentials earned. There is no opportunity for any teachers to earn more, no matter how they distinguish themselves. The reverse is true: the poor teachers earn the same as the outstanding. This lockstep pay scale is not characteristic of professional employees.

    Regarding how much teachers actually work, I’m sure some work long hours to complete their work. But the union contract for Wichita teachers is full of language like “The ending time of the school day in each building shall be seven (7) hours and ten (10) minutes after the beginning time” and “The teacher work day will be increased by forty (40) minutes one day per week for seventeen (17) weeks of the school year for PLC.” Again, union contract language like this is not characteristic of professional employees.

    But whether we call teachers “professional” or not is just a label. The real issue is that these issues are a matter for public discussion, and that they cause so much controversy and heated argument. This is characteristic of government institutions that have a monopoly or near-monopoly and are isolated from market competition.

    In Kansas, the public schools have a near-monopoly on the use of public funds for education. Unless a family wants to send their children to religious schools, not many have the financial resources to send their children to private schools.

    So we are left with a monolithic public school system, a system run by government. People are going to argue about how the system is run. People will resist paying for it. Some people will suffer the delusion that they can have an impact on the way the system is run, only to find out that the system protects itself very well.

    In many areas of human life, market competition has found to be the force that makes things better. Market competition doesn’t mean that people have to work harder and longer. Instead it means that there is a marketplace where consumers have a choice. It also means that people are free to enter the market as suppliers, as well as consumers.

    In the introduction to The Morality of Capitalism, Tom G. Palmer explains further how genuine capitalism — the system of market competition — is a system of innovation and creativity:

    The term ‘capitalism’ refers not just to markets for the exchange of goods and services, which have existed since time immemorial, but to the system of innovation, wealth creation, and social change that has brought to billions of people prosperity that was unimaginable to earlier generations of human beings. Capitalism refers to a legal, social, economic, and cultural system that embraces equality of rights and ‘careers open to talent’ and that energizes decentralized innovation and processes of trial and error. … Capitalist culture celebrates the entrepreneur, the scientist, the risk-taker, the innovator, the creator. … Far from being an amoral arena for the clash of interests, as capitalism is often portrayed by those who seek to undermine or destroy it, capitalist interaction is highly structured by ethical norms and rules. Indeed, capitalism rests on a rejection of the ethics of loot and grab. … Capitalism puts human creativity to the service of humanity by respecting and encouraging entrepreneurial innovation, that elusive factor that explains the difference between the way we live now and how generation after generation after generation of our ancestors lived prior to the nineteenth century.

    We don’t experience the benefit of this in Kansas and Wichita public education. Except for religious schools and a handful of private schools that few can afford, education is provided by a government monopoly isolated from the creative and entrepreneurial impetus of markets. We don’t benefit from decentralized innovation. We don’t respect and encourage entrepreneurial innovation. Government programs don’t have these features.

    Paradoxically, while supporters of public education are likely to describe capitalism as an “amoral arena for the clash of interests,” we can see that the Wichita public school system is where the clash between management and workers is happening, played out in public.

    Instead of the education of children being the responsibility of parents and the concern of those they choose to voluntarily associate with, we have a government program. We fight over it. We destroy civil society, turning over something so vital and important to government bureaucrats and unions.

    In Kansas, schools face very little market competition. The public school establishment vigorously beats back every attempt to introduce even small amounts of choice and competition. Instead we are left to fuss over phony reform measures such as Governor Sam Brownback’s current school reform proposal, which is really just small adjustments as to how the existing system will be paid for. The governor has yet to propose any meaningful reform.

  • Myth: Markets only work when an infinite number of people with perfect information trade undifferentiated commodities

    When thinking about the difference between government action and action taken by free people trading voluntarily in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The fifth myth — Markets Only Work When an Infinite Number of People With Perfect Information Trade Undifferentiated Commodities — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

    Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

    Myth: Markets Only Work When an Infinite Number of People With Perfect Information Trade Undifferentiated Commodities

    Myth: Market efficiency, in which output is maximized and profits are minimized, requires that no one is a price setter, that is, that no buyer or seller, by entering or exiting the market, will affect the price. In a perfectly competitive market, no individual buyer or seller can have any impact on prices. Products are all homogenous and information about products and prices is costless. But real markets are not perfectly competitive, which is why government is required to step in and correct things.

    Tom G. Palmer: Abstract models of economic interaction can be useful, but when normatively loaded terms such as “perfect” are added to theoretical abstractions, a great deal of harm can be done. If a certain condition of the market is define as “perfect” competition, then anything else is “imperfect” and needs to be improved, presumably by some agency outside of the market. In fact, “perfect” competition is simply a mental model, from which we can deduce certain interesting facts, such as the role of profits in directing resources (when they’re higher than average, competitors will shift resources to increase supply, undercut prices, and reduce profits) and the role of uncertainty in determining the demand to hold cash (since if information were costless, everyone would invest all their money and arrange it to be cashed out just at the moment that they needed to make investments, from which we can conclude that the existence of cash is a feature of a lack of information). “Perfect” competition is no guide to how to improve markets; it’s a poorly chosen term for a mental model of market processes that abstracts from real world conditions of competition.

    For the state to be the agency that would move markets to such “perfection,” we would expect that it, too, would be the product of “perfect” democratic policies, in which infinite numbers of voters and candidates have no individual impact on policies, all policies are homogenous, and information about the costs and benefits of policies is costless. That is manifestly never the case.

    The scientific method of choosing among policy options requires that choices be made from among actually available options. Both political choice and market choice are “imperfect” in all the ways specified above, so choice should be made on the basis of a comparison of real — not “perfect”– market processes and political processes. Real markets generate a plethora of ways of providing information and generating mutually beneficial cooperation among market participants. Markets provide the framework for people to discover information, including forms of cooperation.

    Advertising, credit bureaus, reputation, commodity exchanges, stock exchanges, certification boards, and many other institutions arise within markets to serve the goal of facilitating mutually beneficial cooperation. Rather than discarding markets because they aren’t perfect, we should look for more ways to use the market to improve the imperfect state of human welfare.

    Finally, competition is better understood, not as a state of the market, but as a process of rivalrous behavior. When entrepreneurs are free to enter the market to compete with others and customers are free to choose from among producers, the rivalry among producers for the custom of customers leads to behavior favorable to those customers.

  • Myth: Markets depend on perfect information, requiring government regulation to make information available

    When thinking about the difference between government action and action taken by free people trading freely in markets, we find that many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The fourth myth — Markets Depend on Perfect Information, Requiring Government Regulation to Make Information Available — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

    Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

    Myth: Markets Depend on Perfect Information, Requiring Government Regulation to Make Information Available

    Myth: For markets to be efficient, all market participants have to be fully informed of the costs of their actions. If some have more information than others, such asymmetries will lead to inefficient and unjust outcomes. Government has to intervene to provide the information that markets lack and to create outcomes that are both efficient and just.

    Tom G. Palmer: Information, like every other thing we want, is always costly, that is, we have to give something up to get more of it. Information is itself a product that is exchanged on markets; for examples, we buy books that contain information because we value the information in the book more than we value what we give up for it. Markets do not require for their operation perfect information, any more than democracies do. The assumption that information is costly to market participants but costless to political participants is unrealistic in extremely destructive ways. Neither politicians nor voters have perfect information. Significantly, politicians and voters have less incentive to acquire the right amount of information than do market participants, because they aren’t spending their own money. For example, when spending money from the public purse, politicians don’t have the incentive to be as careful or to acquire as much information aspeople do when they are spending their own money.

    A common argument for state intervention rests on the informational asymmetries between consumers and providers of specialized services. Doctors are almost always more knowledgeable about medical matters than are patients, for example; that’s why we go to doctors, rather than just curing ourselves. Because of that, it is alleged that consumers have no way of knowing which doctors are more competent, or whether they are getting the right treatment, or whether they are paying too much. Licensing by the state may then be proposed as the answer; by issuing a license, it is sometimes said, people are assured that the doctor will be qualified, competent, and upright. The evidence from studies of licensure, of medicine and of other professions, however, shows quite the opposite. Whereas markets tend to generate gradations of certification, licensing is binary; you are licensed, or you are not. Moreover, it’s common in licensed professions that the license is revoked if the licensed professional engages in “unprofessional conduct,” which is usually defined as including advertising! But advertising is one of the means that markets have evolved to provide information– about the availability of products and services, about relative qualities, and about prices. Licensure is not the solution to cases of informational asymmetry; it is the cause.

  • Kansas and Wichita quick takes: Wednesday April 25, 2012

    Income growth in Kansas and Sedgwick County. Emily Behlmann of Wichita Business Journal reports: “Personal income in Kansas grew by 2.71 percent from 2009 to 2010, or by 1.76 percent per capita, according to estimates released Wednesday by the U.S. Bureau of Economic Analysis. That’s slower than the national growth rate of 3.7 percent overall, the bureau reports. And as the database below shows, Sedgwick County’s growth rate was slower than both the national and state averages.” (Database: Kansas counties post slower-than-average personal income growth). This is more evidence that our current economic development policies in Wichita and Sedgwick County are failing. See Wichita economic development isn’t working.

    Tax reform is needed in Kansas. A message from Americans for Prosperity, Kansas: “Kansas has the second highest top marginal individual income tax rate amongst neighboring states. Is it any wonder that the state had a net loss of over 17,000 taxpayers between 2000 and 2009? Americans for Prosperity is advocating for aggressive tax reform that includes two key elements: An aggressive and immediate reduction in the individual income tax rate, and a ‘trigger’ that sets aside future state tax revenue growth above three percent to fund future reductions in the income tax. Passage of a tax bill containing these two ingredients will help slow government spending and encourage investment and job-creation. … The economic indicators show that our state needs aggressive tax reform. Key measurements of Kansas’ stagnant growth show: From 2001 to 2010, Kansas ranked 40th in the country in net domestic population migration, representing the smallest growth amongst neighboring states. (Source: U.S. Census Bureau). Kansas lost more than 39,000 private sector jobs from 2001 to 2010. (Source: Bureau of Labor & Statistics). From 2000 to 2009, Kansas ranked 43rd in the United States in taxpayer net migration, resulting in a net loss of 17,574 tax filers. (Source: Bureau of Labor & Statistics). … The longer Kansas waits to enact meaningful tax reform, the further we’ll fall behind. Kansas legislators have a tremendous opportunity to pass a tax bill that lowers the individual income tax burden and establishes a growth trigger to fund future reductions.” AFP has a system to help citizens to contact their legislators by clicking here.

    Protect us from onion prices. Specifically, volatility in onion prices, as according to CNN the onion is the only commodity for which futures trading is banned. Futures contracts are the mechanism by which speculation is accomplished. Tim Cavanaugh explains in How Will Obama Protect Us From Onion Speculators? at Reason.

    Silencing ALEC. Fred Smith of the Competitive Enterprise Institute contributes this letter to the Wall Street Journal, criticizing those who attempt to shut down debate through intimidation, the target being American Legislative Exchange Council (ALEC): “The attack on the American Legislative Exchange Council (ALEC) is part of a broader attack by those seeking to drive all market voices from the marketplace of ideas. (“Shutting Down ALEC,” Review & Outlook, April 18). As the Founders realized, ‘factions’ — what we now call ‘special interests’ — are an unavoidable aspect of democracy. The Founders’ solution was not to suppress factions, but to ‘set faction against faction’ to ensure vigorous debate. The attack on ALEC runs counter to that spirit. It is a concerted effort to silence one faction by driving productive economic voices from the policy debate. … When businesses seek to expose and reduce the harmful consequences of capricious legislation, that is both their right and good for democracy. When market voices are excluded from the policy debate, the only voices left are those motivated purely by ideology. And as history shows, the greatest harm to nations comes from ideologues who believe they know what’s best for everybody. … Our Founders gave us a system based on the battle of ideas. If critics of the free market believe they have a strong case, they should seek to win that battle openly, rather than by silencing the opposition through intimidation. What ALEC’s opponents seek is nothing less than the sabotage of democracy. It is especially unfortunate when businesses retreat from backing free-market groups like ALEC when they come under pressure. America needs more CEOs willing to stand up for free enterprise. Readers who agree should let those CEOs know now.”

    TSA in Wichita, and in general. Wichita meteorologist Mike Smith mentions an incident at the Wichita airport involving TSA handling of a young girl. It’s a nationwide story now. See Latest TSA Outrage — In Wichita This Time . … Speaking of TSA, John Stossel recently had a segment on his television show. Did you know that the security screening at the San Francisco airport is not handled by the TSA? Makes me want to go there. Stossel reports: “A leaked 2007 TSA study found that San Francisco’s private screeners were twice as good at detecting fake bombs as TSA screeners.” More from him at The TSA Just Won’t Let Go: Governments cling to power even when private solutions work best.

    An extra comma. A recent article in the Lawrence Journal-World illustrates the harm of using too many commas, a problem, I fear, I have, myself. The article started with this sentence: “A proposal to reduce the Kansas Earned Income Tax Credit would throw thousands of working families into poverty, religious and social service, advocates said Tuesday.” A literal reading of this sentence would indicate a boom in people participating in “religious” and “social service.” That’s not what happened. The unintended use of the last comma changed the meaning of the sentence.

    If I wanted America to fail. Americans for Limited Government has a new site named FreeMarketAmerica. Its video If I wanted America to fail is being viewed thousands of times, and is the subject of some controversy. I suggest viewing this powerful statement. In a press release, ALG writes: “The success of Free Market America’s launch shows that Americans are still very interested in the ideals of free markets and limited government, and stopping the Big Government environmentalists nationwide. Our video, ‘If I wanted America to fail,’ has more than half a million views on YouTube in just a few days,’ said Bill Wilson, president of Americans for Limited Government. … ‘The widespread success of this project shows that Americans are willing to stand up and fight for freedom and prosperity and against the heavy hand of big government. With many in the conservative media and conservative bloggers spreading this message and taking our content viral, the Big Green agenda will soon be facing an uphill battle.’”

  • Regulation for the sake of business

    There are many examples of how the conventional wisdom regarding regulation is wrong, That wisdom being Republicans and conservatives are in bed with government, seeking to unshackle business from the burden of government regulation. Democrats and liberals, on the other hand, are busily crafting regulations to protect the middle class from the evils of big business. As it turns out, both Democrats and Republicans love creating regulations, and big business loves these regulations. Business often uses government regulation as way to harm its competitors or gain advantage for itself, which is contrary to the principles of free markets and capitalism.

    Holman W. Jenkins., Jr. explains how regulation works in the real world: “When some hear the word “regulation,” they imagine government rushing to the defense of consumers. In the real world, government serves up regulation to those who ask for it, which usually means organized interests seeking to block a competitive threat. This insight, by the way, originated with the left, with historians who went back and reconstructed how railroads in the U.S. concocted federal regulation to protect themselves from price competition. We should also notice that an astonishingly large part of the world has experienced an astonishing degree of stagnation for an astonishingly long time for exactly such reasons.” (Let’s Restart the Green Revolution, Wall Street Journal.)

    Another example of a big business using regulation as a competitive weapon comes from 2005 when Walmart came out in favor of raising the national minimum wage. Providing an example of how regulation is pitched as needed for the common good, Walmart’s CEO said that he was concerned for the plight of working families, and that he thought the minimum wage level of $5.15 per hour was too low. If Walmart — a company the political left loves to hate as much as any other — can be in favor of increased regulation of the workplace, can regulation be a good thing? Had Walmart discovered the joys of big government?

    The answer is yes. Walmart discovered a way of using government regulation as a competitive weapon. This is often the motivation for business support of regulation. In the case of Walmart, it was already paying its employees well over the current minimum wage. At the time, some sources thought that the minimum wage could be raised as much as 50 percent and not cause Walmart any additional cost — its employees already made that much.

    But its competitors didn’t pay wages that high. If the minimum wage rose very much, these competitors to Walmart would be forced to increase their wages. Their costs would rise. Their ability to compete with Walmart would be harmed.

    In short, Walmart supported government regulation as a way to impose higher costs on its competitors. It found a way to compete outside the marketplace. It abandoned principles of free markets and capitalism, and provided a lesson as to the difference between capitalism and business. And it did it while appearing noble.

    Many, particularly liberals and progresives, make no distinction between business and capitalism. But we need to learn to recognize the difference if we are to have a thriving economy based on free-wheeling, competitive markets that foster innovation, or continue our decline into unproductive crony capitalism.

    In the following excerpt from his book The Big Ripoff: How Big Business and Big Government Steal Your Money, author Timothy P. Carney explains that big business is able to use regulation as a blunt and powerful tool against competitors, and also as a way to improve its image, just like Walmart asking for a higher minimum wage.

    How does regulation help big business?

    Excerpt from The Big Ripoff: How Big Business and Big Government Steal Your Money, by Timothy P. Carney

    If regulation is costly, why would big business favor it? Precisely because it is costly.

    Regulation adds to the basic cost of doing business, thus heightening barriers to entry and reducing the number of competitors. Thinning out the competition allows surviving firms to charge higher prices to customers and demand lower prices from suppliers. Overall regulation adds to overhead and is a net boon to those who can afford it — big business.

    Put another way, regulation can stultify the market. If you’re already at the top, stultification is better than the robust dynamism of the free market. And according to Nobel Laureate economist Milton Friedman:

    The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.

    There is an additional systemic reason why regulation will help big business. Congress passes the laws that order new regulations, and executive branch agencies actually construct the regulations. The politicians and government lawyers who write these rules rarely do so without input. Often the rule makers ask for advice and information from labor unions, consumer groups, environmental groups, and industry itself. Among industry the stakeholders (beltway parlance to describe affected parties) who have the most input are those who can hire the most effective and most connective lobbyists. You can guess this isn’t Mom and Pop.

    As a result, the details of the regulation are often carefully crafted to benefit, or at least not hurt, big business. If something does not hurt you, or hurts you a little while seriously hindering your competition, it is a boon, on balance.

    Another reason big business often cries “regulate me!” is the goodwill factor. If a politician or bureaucrat wants to play a role in some industry, and some executive says, “get lost,” he runs the risk of offending this powerful person. That’s bad diplomacy. Bureaucrats, by their nature, do not like to be told to mind their own business. Supporting the idea of regulation but lobbying for particular details is usually better politics.

  • Myth: Reliance on markets leads to monopoly

    When thinking about the difference between government action and action taken by free people trading freely in markets, many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The third myth — Reliance on Markets Leads to Monopoly — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

    Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

    Myth: Reliance on markets leads to monopoly

    Myth: Without government intervention, reliance on free markets would lead to a few big firms selling everything. Markets naturally create monopolies, as marginal producers are squeezed out by firms that seek nothing but their own profits, whereas governments are motivated to seek the public interest and will act to restrain monopolies.

    Tom G. Palmer: Governments can — and all too often do — give monopolies to favored individuals or groups; that is, they prohibit others from entering the market and competing for the custom of customers. That’s what a monopoly means. The monopoly may be granted to a government agency itself (as in the monopolized postal services in many countries) or it may be granted to a favored firm, family, or person.

    Do free markets promote monopolization? There’s little or no good reason to think so and many reasons to think not. Free markets rest on the freedom of persons to enter the market, to exit the market, and to buy from or sell to whomever they please. If firms in markets with freedom of entry make above average profits, those profits attract rivals to compete those profits away. Some of the literature of economics offers descriptions of hypothetical situations in which certain market conditions could lead to persistent “rents,” that is, income in excess of opportunity cost, defined as what the resources could earn in other uses. But concrete examples are extremely hard to find, other than relatively uninteresting cases such as ownership of unique resources (for example, a painting by Rembrandt). In contrast, the historical record is simply full of examples of governments granting special privileges to their supporters.

    Freedom to enter the market and freedom to choose from whom to buy promote consumer interests by eroding those temporary rents that the first to offer a good or service may enjoy. In contrast, endowing governments with power to determine who may or may not provide goods and services creates the monopolies — the actual, historically observed monopolies — that are harmful to consumers and that restrain the productive forces of mankind on which human betterment rests. If markets routinely led to monopolies, we would not expect to see so many people going to government to grant them monopolies at the expense of their less powerful competitors and customers. They could get their monopolies through the market, instead.

    It’s always worth remembering that government itself seeks to exercise a monopoly; it’s a classic defining characteristic of a government that it exercises a monopoly on the exercise of force in a given geographic area. Why should we expect such a monopoly to be more friendly to competition than the market itself, which is defined by the freedom to compete?

  • Myth: Markets promote greed and selfishness

    When thinking about the difference between government action and action taken by free people trading freely in markets, many myths abound. Tom G. Palmer has written an important paper that confronts these myths about markets. The second myth — Markets Promote Greed and Selfishness — and Palmer’s refutation is below. The complete series of myths and responses is at Twenty Myths about Markets.

    Palmer is editor of the recent book The Morality of Capitalism. He will be in Overland Park and Wichita in May speaking on the moral case for capitalism. For more information and to register for these events see The Morality of Capitalism.

    Myth: Markets promote greed and selfishness

    Myth: People in markets are just trying to find the lowest prices or make the highest profits. As such, they’re motivated only by greed and selfishness, not by concern for others.

    Tom G. Palmer: Markets neither promote nor dampen selfishness or greed. They make it possible for the most altruistic, as well as the most selfish, to advance their purposes in peace. Those who dedicate their lives to helping others use markets to advance their purposes, no less than those whose goal is to increase their store of wealth. Some of the latter even accumulate wealth for the purpose of increasing their ability to help others. George Soros and Bill Gates are examples of the latter; they earn huge amounts of money, at least partly in order to increase their ability to help others through their vast charitable activities.

    A Mother Teresa wants to use the wealth available to her to feed, clothe, and comfort the greatest number of people. Markets allow her to find the lowest prices for blankets, for food, and for medicines to care for those who need her assistance. Markets allow the creation of wealth that can be used to help the unfortunate and facilitate the charitable to maximize their ability to help others. Markets make possible the charity of the charitable.

    A common mistake is to identify the purposes of people with their “self-interest,” which is then in turn confused with “selfishness.” The purposes of people in the market are indeed purposes of selves, but as selves with purposes we are also concerned about the interests and well being of others — our family members, our friends, our neighbors, and even total strangers whom we will never meet. And as noted above, markets help to condition people to consider the needs of others, including total strangers.

    As has often been pointed out, the deepest foundation of human society is not love or even friendship. Love and friendship are the fruits of mutual benefit through cooperation, whether in small or in large groups. Without such mutual benefit, society would simply be impossible. Without the possibility of mutual benefit, Tom’s good would be June’s bad, and vice versa, and they could never be cooperators, never be colleagues, never be friends. Cooperation is tremendously enhanced by markets, which allow cooperation even among those who are not personally known to each other, who don’t share the same religion or language, and who may never meet. The existence of potential gains from trade and the facilitation of trade by well-defined and legally secure property rights make possible charity among strangers, and love and friendship across borders.