Capitalism
Part 3 – Regulations – good or bad?
I recommend reading Parts 1 and 2 before reading this essay
Corporations exist because two heads are better than one. The total production of two people working together will be greater than their independent, isolated efforts. Often, a particular task is impossible for one person to complete, but becomes easy with the additional efforts of a second person, third person etc. The whole is greater than the sum of its parts.
The key feature of the corporate structure is its ability to attract investment capital from multiple sources (shareholders). This allows the company to employ a large quantity of labour and other resources focused on specific goals, thereby increasing the division of labour exponentially. As the division of labour expands, production rises, and the masses enjoy a higher standard of living. As long as the State does not interfere with this process in any manner whatsoever, then this is capitalism, and it is to be celebrated, not criticized.
Any improvement to this state of affairs can only come through the operation of the market. Inefficiencies are naturally corrected because owners have skin in the game, which incentivises them to make profits, not losses. Thus, the market is self-regulating. The State cannot improve on the efficiency and standard of living produced by the market. It can only take what the market offers, and diminish it.
GOVERNMENT REGULATIONS DIMINISH CAPITALISM
Definition of ‘regulation’: the imposition of rules by a government, backed by the use of penalties, that are intended specifically to modify the economic behaviour of individuals and firms in the private sector.[1]
Numerous regulations are enacted because the State says it can correct market inefficiencies, while the real intent is to reduce competition for various corporations and industries, often by imposing regulatory costs on all companies within a particular industry. The large company(s) which lobbied for the law can easily absorb these costs, while their smaller competitors and potential start-up companies, lacking the financial wherewithal for regulatory compliance, are eliminated.
When a corporation(s), or an industry, or some other interest group, lobbies government for a new regulation, they are the intended beneficiaries, and they often write the regulation themselves. Politicians promoting a new regulation also act out of self interest, collecting rewards from the regulatory beneficiaries – political campaign contributions, corporate jobs after departure from political office etc.
Capitalism is diluted through numerous regulations prohibiting competition, which lowers the standard of living for the masses. This is manifest in declining production and employment, lower paying jobs, higher taxation, declining freedom, and consumer products which are lower in quantity, lower in quality, and higher in price. Thus, the government facilitates a transfer of wealth from the masses to the favoured corporations who have captured a larger share of the smaller market. This is NOT capitalism. This is coercive government interference with capitalism.
Many other regulations are enacted, we are told, out of concern for public safety. However, as Laura Jones and Stephen Graf of the Fraser Institute wrote in their report on Canada’s Regulatory Burden:
Concern over smaller and smaller risks, both real and imagined, has led us to demand more regulation without taking account of the costs, including foregone opportunities to reduce more threatening risks. If the costs of policies intended to reduce risks are not accounted for, there is a danger that well-intentioned policies will actually reduce public well-being.[2]
The report included these comments from editor Kristin McCahon:
. . . there is a rule regulating just about every conceivable human activity or enterprise. But often, we don’t realize just how invasive—and costly— those rules and regulations are. . . . Because of regulations and their cost, there are a lot of things I won’t replace or build. I would rather cook in a smallish kitchen with older appliances than invite city inspectors in to cluck and fuss over my outdated wiring and unfortunately situated plumbing. By not undertaking my renovations, I don’t employ the tradesperson who would do the work, and I don’t buy the necessary supplies at the building centre. In fact, a lot of activity doesn’t take place in my life because of regulations. By extrapolation, a lot of productive activity doesn’t happen in Canada because of regulations.[3]
McCahon is correct. A lot of productive activity is prevented by government regulations. Once again, this is NOT capitalism. This is coercive government interference with capitalism.
COMPLIANCE COST OF REGULATIONS
What is the cost of all these regulations in Canada? This was addressed by Jones and Graf in their report:
Over the 24-year period between 1975 and 1999, over 117,000 new federal and provincial regulations were enacted, an average of 4,700 every year.
In fiscal year 1997/1998, the private sector spent an estimated $103 billion to comply with federal and provincial government regulation . . . The cost of regulatory compliance— though often imposed on businesses — is borne largely by consumers since businesses pass on much of the cost of regulatory compliance as higher prices for goods and services. In 1997, regulatory compliance cost individual Canadians an estimated $3,425, or $13,700 per family of four . .
. . . The embedded costs of regulatory compliance thus exceeded spending on every item except shelter in Canadian households’ [average] after-tax budgets in 1997.[4]
If that makes you angry, try to relax. Pour yourself a drink, sit down, and take a deep breath, because it gets worse. A lot worse! Whiskey would be a good idea. A double. Maybe a triple.
OPPORTUNITY COST OF REGULATIONS
Even though all firms, large and small, may pass their regulatory compliance costs onto consumers/workers through higher prices/lower wages, small firms operate at a disadvantage. Smaller firms have fewer employees and a smaller customer base, compared to larger firms. Therefore, the dispersal of compliance costs for small firms can produce larger wage reductions and/or larger price increases, as compared to larger firms. Thus, many small businesses are unable to compete, not because the entrepreneurs, managers, and workers are not good enough, but because they are compelled to obey authoritarian laws favouring firms with more political influence.
Opportunity cost represents lost opportunities for entrepreneurs to create wealth because of the high cost of regulatory compliance. This effectively prevents many of them from competing with their richer counterparts who (a) wrote the regulations, (b) lobbied politicians to pass the regulations into law, (c) can absorb the compliance costs, and (d) benefit from higher prices for their products because of this coercive suppression of competition. Less competition = less wealth creation, which is reflected in fewer jobs and lower incomes for the 99%.
When we grant governments the power to interfere in the marketplace, there will be no end to the interference, at the expense of overall economic growth. What is the cost?
In January, 2013, John Dawson (Dept. of Economics, Appalachian State University) and John Seater (Dept. of Economics, North Carolina State University) published a long term study of the effects of U.S. Federal Regulations on economic growth. They say “our estimates indicate that annual output by 2005 is about 28 percent of what it would have been had regulation remained at its 1949 level.” Their sample period ends in 2005, but under the assumption that the ratio of 28 percent carries forward to 2011, they say that nominal GDP in 2011 would have been $53.9 trillion instead of $15.1 trillion, and “an annual loss of $38.8 trillion converts to about $277,100 per household and $129,300 per person.” (Dawson/Seater assigns 2.14 persons per household)
Let’s be sure we understand this – the Dawson/Seater study estimates the amount of economic output which has been prevented by all U.S. Federal Regulations implemented since 1949. This brings to mind the comment from Fraser Institute editor Kristin McCahon: “a lot of productive activity doesn’t happen in Canada because of regulations.”
Thus, in 2011, each U.S. household was legally denied the opportunity to increase their income by an average of $277,100 ($129,300 per person). Imagine this happening each year, because that is the reality. For those who would disbelieve, Dawson and Seater simply point out that “Our estimates are consistent with previous estimates obtained from both aggregate and disaggregate data. In fact, our estimates are on the low side compared to many previous results.” Remember, this calculation captures data only at the federal level.
We can safely assume the opportunity cost of Canadian federal regulations would be similar to the U.S. figure. As Jones and Graf noted in their report “Canada and the United States have similar regulatory regimes.”[5]
Furthermore, for the year under consideration – 2011 – Canada and the U.S. had similar levels of economic freedom, which is directly related to government regulations. Consider “Economic Freedom of the World” (EFW), a report co-published by the Cato Institute, the Fraser Institute, and more than 70 think tanks around the world. The report tells us: “The foundations of economic freedom are personal choice, voluntary exchange, and open markets. . . . Without exchange and entrepreneurial activity coordinated through markets, modern living standards would be impossible. Economic Freedom of the World seeks to measure the consistency of the institutions and policies of various countries with voluntary exchange and the other dimensions of economic freedom.”
The EFW report assesses the level of economic freedom for more than one hundred countries. According to their 2013 annual report, which compiles data for 2011, on a scale of 1 to 10, Canada tied for 8th place with a score of 7.93. Hong Kong took first place with a score of 8.97, considerably higher than Canada. The U.S. scored 7.74, only slightly behind Canada – the difference is not significant. So, the U.S. and Canada were at comparable levels of economic freedom in 2011. The EFW report also provides data which supports the opportunity cost calculated by Dawson/Seater:
Nations in the top quartile of economic freedom had an average per-capita GDP of $36,446 in 2011, compared to $4,382 for nations in the bottom quartile in 2011 current international dollars.
In the top quartile, the average income of the poorest 10% was $10,556, compared to $932 in the bottom quartile in 2011 current international dollars.
Interestingly, the average income of the poorest 10% in the most economically free nations is more than twice the overall average income in the least free nations.
Canada tied for 8th place, which is pretty good compared to most other countries, but it is all relative. This does not mean Canada is a free country. It simply means Canada is ‘more free’ compared to most other countries. In other words, Hong Kong, which is in 1st place, is simply the best of the worst – the lesser of all the evils. No country came close to a perfect 10. When we consider the GDP and income gaps in the EFW report, the Dawson/Seater calculation should not shock us . . . but it should wake us up!
We have reasonably established the comparability of U.S. and Canadian data. Thus, the Canadian cost is $129,300 per person, but this reflects opportunity cost only at the federal level.
According to Jones/Graf, total regulatory administrative costs in the provinces, territories, and municipalities ($1.9 billion) equaled 57% of federal costs ($3.3 billion). In the absence of a detailed study, let’s assume that the opportunity cost of regulations in the lower levels of government are also 57% of the federal opportunity cost. Thus, $129,300 x .57 = $73, 701. Therefore, the opportunity cost in Canada for all levels of government is $203,001 (129,300 + 73,701).
Regulatory Opportunity Cost: $203,001 annually, per person
Feel like another drink?
TOTAL COST OF REGULATIONS
Let us now add the Regulatory Compliance Cost to the Regulatory Opportunity Cost. $3,425 + $203,001 = $206,426. We will be conservative by rounding this off to two hundred thousand even.
Total Cost of Canadian Government Regulations: $200,000 annually, per person
Ladies and gentlemen, this is NOT capitalism. This is coercive state interference with capitalism. In the absence of government regulations, all Canadians would be much wealthier, with the possible exception of today’s top income earners – the top 1%, or maybe 1/10th of 1%. This small group might see their wealth decline because they are the prime recipients of the dishonest, immoral transfer of wealth intentionally facilitated through government regulations by complicit politicians and bureaucrats at all levels of government.
We would be far more prosperous if Canada was a free country. It is no coincidence that incomes are higher in the freer countries. More freedom is synonymous with more capitalism, which produces higher prosperity for the middle class and the poor. To illustrate how un-free Canada is, consider this: it is not unusual for a small business (less than ten employees) wishing to expand its operations within the physical boundaries of its own property, to spend five years and hundreds of thousands of dollars to comply with numerous government regulations. These are severe impediments to economic progress and job creation, yet politicians continue to assure us they are champions of economic-growth-oriented-policies.
WHAT ABOUT THE “BENEFITS” OF REGULATIONS ?
What benefits? Benefits for who? At whose expense?
The state claims to enact regulations in order to improve economic efficiency and public safety, though such claims are usually ill-defined, unsubstantiated, and not cost effective. Nevertheless, we are assured the benefits to the public are much greater than the attendant costs. The state expects the public to accept these assertions at face value, even as it continues to demonstrate extreme incompetence in the provision of services which are of far more importance to the public, namely the protection of the lives and property of citizens. Here are some of the facts I have written about elsewhere (see here):
79% of homicides are NOT solved
96% of attempted murders are NOT solved
90% of robberies are NOT solved
91% of sexual assaults are NOT solved
84% of major assaults are NOT solved
97% of thefts are NOT solved
97% of break and enters are NOT solved
These statistics reflect only those crimes which are known to the police. This dismal performance of the police and justice system explains why a majority of crimes are never reported to the police. In light of the government’s ineptitude, it is not surprising that a majority of Canadians surveyed do not have a great deal of confidence in the police or the justice system (see here).
The raison d’etre for democratic government is to protect the lives and property of citizens. The state is not doing its job. This is not debatable. The evidence is conclusive. There is no more important function in society than the protection of the lives and property of each member of society.
Despite their dissatisfaction with the performance of the police and justice system, consumers are forced to continue to support them – taxation. Forced taxation is the cause. Poor performance of these two institutions is the effect. When service is severed from payment, service declines. This is basic human nature. If you can get something for nothing, you take it, especially if it is legal. Since their revenues are guaranteed, bureaucrats have little incentive to provide services which satisfy the public (consumers).
In contrast, on the free market, entrepreneurs do not possess the legal right to seize money from consumers. Service and payment are inextricably linked. Thus, consumers hold the power. Entrepreneurs must persuade consumers to part with their money by offering them goods and services they desire; and if a consumer is unhappy with a particular purchase, he is not obligated to continue patronizing that particular vendor. That’s how consumers get what they want. If they want to stay in business, private firms must keep their customers happy. Entrepreneurs wishing to be successful must adhere to an adage which the State ignores: “The customer is always right.” As economist/historian Murray Rothbard wrote:
. . . the politician and the government expert receive their revenues, not from service voluntarily purchased on the market, but from a compulsory levy on the populace. These officials, therefore, wholly lack the pecuniary incentive to care about serving the public properly and competently. And, what is more, the vital criterion of “fitness” is very different in the government and on the market. In the market, the fittest are those most able to serve the consumers; in government, the fittest are those most adept at wielding coercion and/or those most adroit at making demagogic appeals to the voting public.[6]
Compared to the state, firms operating on the free market have done a far superior job of protecting the lives and property of paying customers, and they have done so at considerably less cost. I have written about this elsewhere (see my essay: Police, Courts, and Prisons, Part 8, but I recommend you start with Part 1). This is not surprising when we consider the incentives inherent in market operations, versus those inherent in government operations. As the great 20th century economist Ludwig von Mises noted, “Capitalism is the consummation of the self-determination of the consumers.”[7]
It is logical that all members of society would wish to devote sufficient resources to ensure their personal safety and security before they devote any resources to improving other aspects of their lives. However, authoritarian lawmakers insist – by their actions, not their words – that we sacrifice personal safety and security in order to devote resources to efforts which they undertake (regulations), ostensibly to improve other aspects of our lives.
Failure to solve the majority of homicides, attempted murders, robberies, and sexual assaults – this is the evidence which suggests politicians and bureaucrats have incentives which lie elsewhere. Resources are instead devoted to the creation and enforcement of regulations, in the public interest we are told – yet when these laws are violated, there are no victims. There are no victims because these laws are arbitrary rules of behaviour designed to benefit special interest groups. It has been decided by the State – again by its actions, not its words – that the creation and enforcement of regulations is a much higher priority than keeping citizens safe from murders, rapes, and robberies.
Thus, real victims are sacrificed to special interest groups. This is not meant to imply that politicians and bureaucrats intentionally make this trade-off. Maybe they do. Maybe they don’t. All we can know for certain is that inferior results are guaranteed when service is severed from payment.
Legislation which grants the state a monopoly over the provision of police and justice services has not produced significant benefits for the public. The government’s own statistics bear this out.
Meanwhile, thousands of regulations produce benefits only for special interest groups, while the rest of us are forced to pay the price – $200,000 annually per person.
Image source: iStockphoto
[1] Laura Jones, Stephen Graf Canada’s Regulatory Burden. How Many Regulations? At What Cost? (The Fraser Institute, 2001) p 7
[2] Ibid., p 6
[3] Ibid., p 2
[4] Ibid., pp 9, 24
[5] Ibid., p 27
[6] Murray N. Rothbard Man, Economy, and State, with Power and Market (Scholar’s Edition, Second Edition, Ludwig von Mises Institute, 2009) p 1,072
[7] Ludwig von Mises Human Action, A Treatise on Economics (Ludwig von Mises Institute, 1998) p 680
