Monday, August 05, 2013

Tim Worstall Thinks Outside the Box and Looks Outside His Window

Tim Worstall does it again over at The Pin Factory Blog for the Adam Smith Institute:
What regulation does is favour both the incumbents in any activity and also large companies in anytihng at all. For what worries business is not whether they're allowed to do something or not: but that other people will find a better way of doing it and thus compete. More regulation means that fewer upstarts can enter the market and any that do are hobbled by that regulation. The more regulation the more the current large companies can continue to be capitalist without having to worry about their practices being tempered by that market competition.”
Counter-intuitive it may be but Tim often thinks that way and its good for economics that he does.
Too much is taken for granted about regulation being a negative influence in markets and that business has good reason to oppose all regulations, or at least to resist adding to those that exist. 
There certainly is a general presumption against regulation among the centre-right, and beyond, people whom I also meet and contra-wise, a presumption favouring more regulations to keep capitalists honest among centre-left, and beyond, whom I also meet (I am student of abnormal political beliefs and fantasies).
Adam Smith showed both sides on state initiated regulations.  He advised regulations as a sub-set of laws where they were appropriate as in weight and measures, assay testing, postal services, firewalls, and interest limits, foe example.   He opposed regulations when they interfered in competitive markets, or supported monopolistic and anti-competitive measures.   Both of these were lobbied for by business interests, supported by employees, or, to a lesser extent, consumer interests.
Tim Worstall raises a relevant and observable point (see the above link).  Business is much more highly stratified in terms of the range from smallest to largest in today’s market economies compared to business enterprises in the 18th-century - not all capitalist businesses think and act alike (nor do all consumers think alike or have identical notions of their self-interests.  This has consequences, which incidentally were present in nascent form in Smith’s days and before.  He described how some Merchants and Manufacturers could and did lobby legislators for regulations that created forms of protection for them by narrowing the competition.
So today markets are lumbered with various trade associations, which recruit businesses to serve their common interests. Thus, small groceries and related business might form a trade association, hiring a number of fulltime employees to press the interests of the members, each of whom pay subscriptions to the association.  In time, small, local trade associations may join similar local associations to form a national association, raising more substantial funds to professionise its national officers, widen its administrative staff, and eventually afford more plush headquarters, and develop contacts with legislators to promote its agenda.
The personnel at the top of the numerous trade associations may themselves form their own trade association to represent their own agenda with the government.  This agenda need not be at variance with the agendi of the managers’ individual parent trade associations.   They could be joining together to give their own parent bodies more political weight, given that these bodies have common interests.
Consider the protection aspects of these trends.  The definition of who is a ‘member’ also defines who is not a member.  
Adam Smith saw the Apprentices Statutes from Elizabethan times as a major impediment of competition; skilled tradesmen could not practise their trade in a town where they had not served their apprenticeship, thus severely cutting potential competition that would have benefited consumers.
We also see similar anti-competitive measures from trade associations that persuade legislators to make rules defining their products or the minimum size of their plants or farms or turnover to qualify for official recognition, which have the side-benefit (assuming it isn’t their main purpose!) of restricting competitors to existing established larger businesses.  
Smith, of course, drew attention to this phenomenon in Wealth of Nations in his remarks about men of the same trade "seldom meet together for merriment or diversion" without the conversation turning into a conspiracy to raise prices. Local and national trade associations have long provided a respectable facility for such meetings.
Tim Worstall provides a cogent argument for why big businesses supports such lucrative lobbying for more regulations, and the costlier they are to comply with, monitor, and report, the better. These costs act as a barrier to entry for new, inevitably smaller start-ups and innovators across industry (thus undermining the Hayekian economy and sheltering big business from Schumpeter's "perennial gale of creative destruction".  I think Tim is on to something anomalous here, contrary to the regular political agitation to reduce the gale of regulation in business against which, supposedly, big business is opposed. I’ve certainly have not yet met a capitalist bureaucrat who supports competition that threatens to damage her business. 
Not so strange when you think of it.  Business moguls are seldom libertarians, moderate like me or  extreme like others.  And scratch below the surface, those that claim to support laissez-faire are more than a little selective in just who should enjoy laissez-faire.  In the 18th century, town merchants in France demanded laissez-faire from the heavy hand of state sponsored regulations for themselves, not their customers.  M. Le Gendres' speech to Minister Colbert was 'laissez-nous faire" (leave us - the merchants - alone).  Similarly with the employers' laissez-faire agitation against the Factory Acts limiting the 12-hour + working days in the mills and mines for employees, or the laissez-faire  agitation against the Corn Laws by urban business interests, though not by the farmers who would be affected by falling food prices (good news for Manchester mill owners, though less so for their workers whose wages would be cut in consequence).  Which is probably why Adam Smith never argued for laissez-faire or even use the words.  He was a universal principled libertarian, never an ideologue.


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