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Got Choices?

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Is there really a group of “Bad guys” out there who have unfairly taken the wealth of the working class? Is there someone we need to send government after to get back what has been stolen from us? Or is this just fancy packaging intended to perpetuate power for those in a ruling class and to get Good people to agree to Bad policies?

This is where advocates of choice should hope to appeal to Good people all across the political spectrum. We need to form a new kind of governing majority that transcends the traditional divisions currently defined by the party politics of left and right. Our Democrat friends like to say big business is the problem, and everyone knows Republicans are the ones who support big business. So Republicans are the enemy–that’s who the Bad guys are. Our Republican friends like to say big government is the problem and everyone knows that Democrats are the ones who support big government. They are the Bad guys.

The truth is, all our Good friends are right, and wrong at the same time–on both sides of the political divide. The real problem is not just business or just government. But it is big business and big government. And the two go hand-in-hand. Too often we fall for the false idea that the only choice we have is to select one of the two teams: Democrat or Republican. Once we have allied ourselves with a team, our new leaders can demonize the other side and rally us to battle. We are too often then content to wage a battle where we imagine big business and big government competing against each other. We falsely believe they are each others’ enemy just as Democrats and Republicans are political rivals.

But the truth is, big government loves big business and big business loves big government.

The enemy is not business and the enemy is not government. The enemy is “big.”

Big means powerful. And power means force. Force means a lack of freedom and choice for those of us who are just trying to produce and live our lives the best we can. Big business often uses the power of big government to exploit those of us who are Good producers. Big government often relies on the support of big business to fund the marketing of its agenda to Good people so they will vote for big government to retain its power. It is a symbiotic relationship in which Good people become both the enablers and the victims.

Does this sound extreme to you? Are you sure the people on your political “team” are all good guys and the ones on the other side are all bad guys? Take a closer look.

Businesses, in and of themselves, are not bad. Practically everything we consume is the product of a business somewhere. The food we eat, the clothes we wear and the houses we live in were nearly all produced by businesses, large or small. And the people who work in those businesses to produce those goods and services are paid for their work. They use their wages to buy more goods and services, creating more jobs, starting more businesses, and producing more of what everyone needs in order to stay comfortable during our earthly stay. Business is at the heart of the way we cooperate together to bring a high standard of living to people all across the globe.

So what makes a business good or bad? Businesses are subject to some of the same pressures as individuals. In fact, at their core, they are just people. A business may be owned by one person or by many. But the business, or company just represents the interest of those owners, combined together in a cooperative enterprise. Just like an individual person, a business will try to survive by collecting as much economic energy as possible and expending the least amount necessary.

Normally, businesses are under continual pressure to provide a quality product at the best possible price. If they don’t, at least in a free market, people won’t purchase their goods and services. Instead they buy from a competitor and the business will lose revenues and eventually fail. Every business owner has dreamed at some point of being able to avoid these market forces. Wouldn’t it be easier if you could just make your product at whatever cost was comfortable and then charge your customers whatever you want to without having to worry about being undercut by cheaper competitors?

Some businesses have figured out how to do this. Sometimes we call it “cornering the market.” In business terms, this means you buy up all the supply facilities and resources for your particular type of product. You then control those suppliers, routing materials only to the outlets you profit from. Therefore the products people need are only available from a single source, or a group of sources all controlled by a single interest. Now you can raise the price as much as you want and people will just have to pay it because they don’t really have any other choice.

This method is recognized by Good people all over the world as being wrong. Intuitively, we know it is Bad because it deprives people of the choices they would otherwise be free to make. It is clearly not fair that someone can tie up a resource everyone wants or needs and then charge more than it would cost under normal, free and competitive conditions.

The common term for this type of business operation is called a “monopoly.” As unfair as a monopoly is, we should recognize that, it is a natural outgrowth of certain economic forces that are natural to our existence. But just as important, we should also recognize there are other natural economic forces which will break down monopolies, if we can just be patient enough to allow them to function. As with so many other stable systems in our universe, economies include natural systems of negative, or corrective feedback. While any given producer may try to corner the market in his particular product sector, the natural result of such a monopoly is to raise prices and reduce options or choices for the consumer.

Consumers typically do not appreciate this. They would rather enjoy a diversity of choices in quality products at an affordable price. So as prices rise above a comfortable level, this creates a demand for more producers. More people see the opportunity to make money by competing against the monopoly and so begin to find ways to do so in spite of the efforts by the business to monopolize its sector.

In addition to this, consumers themselves provide negative, or regulating feedback. When a given commodity becomes too expensive, people begin to use less of it or they begin to adapt their lives so they can use other alternatives instead. If wheat becomes too expensive, people may begin to eat more corn. If gas becomes too expensive, people will begin to ride bikes or take public transportation. People will adapt themselves to optimize their freedom to choose. This means it can require a lot of effort to maintain a monopoly.

So monopolies may form, and they may persist for a time. But the same economic forces that entice one person to form a monopoly, given the time and opportunity, will entice a second person to break down that monopoly and provide a second set of choices for consumers and at a more reasonable price. We just have to make sure the system does not become artificially biased toward the monopolist and against his smaller, new competitor. In order to properly regulate itself, the system of negative feedback has to maintain full freedom and opportunity for small business to compete with the largest, more established businesses. Otherwise monopolies may be allowed to persist to a much greater degree and for a much longer time.

In most countries, we typically look to the government to prevent monopolies or to break them up where they may already exist. For example, in the United States, it is the job of the Federal Trade Commission to seek out and break up businesses who become too powerful and threaten to corner some particular market. Where two or more existing businesses seek to join together, the FTC may prevent such a merger if it determines the resulting entity might control too much of any given market.

Unfortunately, government tends to have certain blind spots when it comes to monopolies. While it is fairly good at identifying players in the free market who become dominant in their industry, it pays virtually no attention to what we might call “government sponsored monopolies” or even “government operated monopolies.” Indeed, there are a number of monopolies or virtual monopolies that operate in the private sector and do so with the blessing and support of government. There are also businesses that run with complete and monopolistic power within the government itself. These businesses are not only free from the threat of competing businesses, but they are often able to harness the power of government, an instrument of force, to require people to buy their product when those people might otherwise choose not to.

One of the chief mechanisms by which government sponsors and supports private monopolies is regulation. Finally understanding this principle typically comes as a shock to many people. After all, regulations are meant to limit businesses and keep them from misbehaving, right? Don’t businesses hate regulations? Without regulations, wouldn’t businesses run amok and do all kinds of bad things?

Admittedly, it is appropriate for a certain amount of regulation to exist in order to keep businesses from engaging in unscrupulous operations. However, whether that regulation is best administered by a central government, and how much of it is a good thing are very different questions. After all, negative feedback itself is a very effective form of regulation. In other words, the laws of economics themselves do a great deal of regulating. Does centralized government do well by attempting to replace or subvert that function? Or is it possible we could do a better job by simply recognizing, supporting and enhancing the regulatory nature of natural economic feedback systems that already exist just as a part of human nature?

In order to better understand this, consider the axiom: Regardless of its intent, the primary result of government regulating an industry is to protect bigger, existing businesses from the competition that would otherwise be provided by newer, smaller businesses. Again, we must understand that the problem is not business, it is “big.” This applies equally to big business and big government.

For example, a parallel corollary might be: the primary result of government taxation on income is to protect people who are already wealthy from less affluent people who would otherwise be in the process of also becoming wealthy. In other words, income taxes do not take money from the rich–they take money from people who are trying to become rich.

This may not be intuitive to you but it is true. We think government should protect the weak from the strong, but all to often, it does just the opposite, allowing powerful people and businesses to become entrenched in their power, creating a barrier to entry for smaller concerns who would otherwise introduce competition and its associated wealth of new choices and opportunities for consumers.

In the normal course of commerce, as businesses begin to enjoy success, they also begin to earn more and more money. As they do so, they begin to grow in both financial and market strength. As they get stronger, they naturally expand, hiring more employees and taking on new markets and new products.

But as it turns out, there is an optimal size for everything. And sometimes a business can grow to a size that is actually too big to be efficient anymore. This occurs for a variety of reasons. Often management chains become very deep and it becomes more difficult to communicate effectively throughout the organization. Large organizations can also take on a great deal of inertia making it more difficult to change direction and adapt to changes in market demands.

One good thing about being big, however, is that you have lots of money and power. If a big business wants to hire a lobbyist to work full-time in Washington, to enact legislation to enhance its sales, this might only represent a tiny fraction of its overall operational costs. It is much less feasible, or even impossible, for a small business to hire such a lobbyist. Big businesses have other economies of scale as well.

For example, it is easier for a big business to have a full-time personnel department to manage employee benefits like sick leave, employer-paid health insurance and paid vacations. Imagine how minor the impact would be on a large business to grant several months of maternity leave to a new mother who works in a department of 100 people, all doing the same job.

In contrast, a small business with one office manager who wants to take such a leave of absence would potentially be devastated by such a loss. So if a big business can get government to enact legislation forcing all businesses to provide such a benefit, the result is to punish smaller competitors and make it harder to compete with their larger, more established counterparts.

Often, we imagine the process of new regulation working like this: A group of stake-holders might get together to lobby government for legislation designed to improve conditions in some way. This would presumably be adversarial toward the relevant business or industry.

For example, let’s assume employees in the construction industry want to see increased wages and safer working conditions. They might press for legislation and a government operated regulatory structure to mandate minimum wages for each particular trade and to specify what types of tools and equipment need to be made available to each worker. Hopefully, the new regulatory structure would keep businesses acting more responsibly and would improve safety for their employees. This seems very well intentioned, if that’s how it really worked.

But more typically, the process works as follows: The work of lobbying government requires a lot of time and money. Who can afford to do that work and spend that money? Big business. Such businesses often find themselves at a growth point where two things are happening: They have lots of success, with a lot of money available for further development of the business to increase profits and growth. But due to their increased size, they are battling new inefficiencies and having a hard time keeping their prices down. This provides an opportunity for smaller competitors who have less overhead, less inertia, and can begin to take away market share dearly won by the older, better established business.

At this point, big business may take the occasion of worthy grievances duly brought by legitimate interests such as labor or consumers. Or they may initiate the process on their own either by lobbying directly or by funding advocacy groups already established for the purpose of lobbying. In either case, big business has a regular, well-funded seat at the table as negotiations are conducted over what new regulations will be put in place and how they will be defined and administered. Typically, small business and individual consumers and/or employees are completely out of the loop and therefore incapable of influencing the process.

The result is, new regulations end up being crafted to be compatible with improvements and practices big business is already putting into place, is already prepared to make, or can implement with a minimal disruption to its profitability. Where possible, regulations will be crafted in such a way as to make it much more expensive and more difficult for smaller, less well funded competitors to implement those same changes.

As a personal example, some years ago, legislation was put forward in my state requiring certain minimum standards for tattoo shops. As an interested observer of government, I was surprised by this. First of all, I wasn’t aware there were even that many tattoo establishments around in such a socially conservative state. Secondly, I wondered if we really needed to be seeing more incremental growth of government and wondered if this was the best thing to be spending tax dollars and legislative time on.

I contacted my representative, whom I knew to be an advocate for limited government. He assured me that in this case, there was no cause for concern over this additional layer of regulation since it was “the industry itself” that had asked to be regulated. As he described it, a coalition of tattoo business owners had come to him and a few other legislators and had asked to be regulated. The regulation involved the payment of fees and a licensing process that would require periodic inspections to see that proper equipment and health conditions were being observed in the applicable establishments. Anyone performing a tattoo without such licensure would be breaking the law.

Why would established businesses not only submit to, but even ask for this additional intrusion by their government? Apparently, in this case it was because more and more people were beginning to perform tattoo work out of their homes. This was cutting into profits for the established businesses who actually paid rent for a commercial space to do the work on a larger scale. It was becoming more difficult for larger concerns to compete. Paying a license fee and submitting to the quality control processes was a very small burden for the larger concerns who were already prepared to submit to such standards. But it was enough of a barrier to convince many people to quit doing the work informally out of their homes. As designed, it fulfilled its intended purpose. It protected the larger, established businesses from their smaller, would-be competitors.

The stated purpose of the regulation was, of course, to protect the public from the dangers of “unqualified” tattoo artists. Presumably the larger “more responsible” shops requested the regulation in order to keep the smaller, “less responsible” operators from exposing the public to undue risk. But it is a leap of illogic to assume conditions will be safer for consumers simply because a licensing fee has been paid. It is also not valid to assume businesses are more responsible, just because they are larger and more established. In some ways, the exact opposite can often be true. A sole proprietor may take a great deal of pride in the quality of his product simply because his reputation is on the line and he deals with each of his customers personally. A larger business may have to rely much more on employees who might not share the same level of commitment to the business or may not have as much experience as the owner.

When we rely solely on government to ensure businesses are providing a safe and effective product, we often ignore, or even suppress the natural feedback mechanisms already at work in the economy. One of the most effective of these is the power of consumers to communicate with each other and identify the quality and reliability of businesses with which they have had prior transactions. Bad news travels fast. And information about businesses who have dangerous or useless products is no exception. When people know an industry is highly regulated, there can be a perception that someone in government is looking after our safety so we don’t need to worry ourselves about researching the reputation and history of a particular company before doing business with it.

Think about how you might buy beef from a grocery store. Do you research your purchase ahead of time to find a store that has a good reputation for healthy, bacteria-free meat? Not likely. Chances are, you will assume that wherever you buy your meat, someone in the government is regulating the process to make sure you get a safe and quality product. But in an industry that is less regulated, like computer printers, for example, you might be more likely to first look up an article in a consumer report magazine to see which brands and models are going to provide you the best possible value.

Empowering government to regulate an industry might make us feel better. And in the short run, it may even improve quality and conditions. But in the long run, it doesn’t always make us safer, nor does it assure we will always get the best service, quality or value. It tends to limit the choices available to consumers for those products and services that are already available and established. It trains consumers to not discriminate between competing suppliers. It tends to prevent new technologies and options that might come along to displace the old way of doing things. And it keeps prices higher than they might otherwise be for comparable products and services in a freer, less regulated environment.

So government-managed regulation may help consumers a little bit, and in the near term. But mostly it just helps established businesses stay in business and making money without as much need to respond to new competition and disruptive new ideas coming from smaller, less established businesses.

It seems like we would figure this out and put a stop to it. But it continues on a huge scale all around us. The regulatory power of government continues to increase. The number of new regulations issued every year is staggering. And we can witness the effect in our economy as big companies continue to get bigger and more powerful while it becomes more and more difficult for new, smaller businesses to break into existing markets.

Have you ever wondered why there are only a relatively few oil companies in the world, and they are all huge, multi-national corporations? To find out why, try starting an oil company or a refinery. See how many regulations exist and what up-front costs you would incur just to get over the regulatory hurdle. Today it is virtually impossible.

Ever wonder why you see fewer and fewer community banks around these days while the big banks continue to get bigger and bigger? Try starting your own bank sometime. Just completing the regulatory requirements to start a new bank makes it virtually impossible for all but the most determined, best funded and most connected. It is cheaper and easier to buy a bank with an existing charter than it is to go through the process of starting a new one.

Ever wonder why it is so difficult for some family farmers to survive, and we see more and more of them going out of business? Look closer and you may find that the subsidies we provide to agriculture have skewed the economy. It has become more difficult to compete in agriculture unless you apply for and collect these subsidies. This has created a competitive advantage for farmers who structure their businesses to take advantage of government programs, and who become savvy enough to complete the necessary paperwork to tap available grants and credits.

Ever wonder why there are only a relatively few health insurance companies to choose from and they are all huge and expensive? In recent years, facing the threat of regulatory reform, the health insurance giants got into gear. Rather than being subjected to new legislation they might not like, they instead steered it to their advantage. They made sure it came out the way they wanted.

Here are the results today: It is virtually impossible to get into the business of health insurance as a new competitor because the market is protected for the existing players. It is now federal law that everyone must purchase the product–a product which previously was considered optional. Prices are continually rising as competitive forces are limited to only a few large businesses who all suffer from the same set of challenges of size and inertia. No truly new or fresh alternatives are allowed into the system, so innovation is no longer a threat to the established players.

In the partnership between big business and big government, it is commonplace for people to fulfill a career in government regulation and then retire with a pension to pursue a second career in the very industry they had previously regulated. In the best of cases, such employees are sought after by business because of their expertise in complying with difficult and complicated regulations. In more dubious cases, such employees are sought after in order to leverage their friendships and contacts with people still working within the regulatory arm of government. In the worst of cases, they are hired into high-paying, low-effort jobs as a reward for favors granted previously during their tenure as regulators. This is a kind of corruption that ranges from soft to hard, but is ever present where big government has the power to pick winners and losers in the market, and big business has the money to pay for that power and influence.

How does this turnabout happen? How do the very targets of our efforts to regulate end up spinning the regulation back to their own advantage? Another way of asking the same question is: how is it that the strong always end up subjugating the weak? It is simply because the strong are stronger and the weak are weaker. The natural world is ruled by force. And strength is more powerful than weakness. Those who are willing to use force against others in order to get what they want will naturally gravitate toward centers of power if we allow them to exist.

If we really want to stop big business from taking advantage of the public, we need to do two things:

  • Stop creating a weapon, in the form of large and powerful government, which will eventually end up in the hand of established corporate interests;
  • Make sure small businesses are not burdened with layers of useless regulatory overhead so they can more effectively compete with big business, bringing more choices, lower prices and improved quality to consumers.

Nearly everyone recognizes that we need to get the money out of politics. The only way to do that, is to get the money out of government.

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