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Regulations on business

Good intentions, bad results

Sam Dugan, Special to the Quad

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In a time of political polarization, it can be reassuring when the left and the right actually agree on an issue. One such consensus on a problem is the recognition of crony capitalism, where big business and government work together in their own interests through systems of reciprocal favors.

A great example of crony capitalism is the relationship between Monsanto and the government. Monsanto began as a chemical company, and during World War II, they helped the U.S. government develop nuclear weapons. They also helped the government in the Vietnam War by developing Agent Orange, which was a defoliant used to clear out jungles.

Monsanto is now rewarded handsomely by a requirement for family farmers to buy Monsanto’s expensive, genetically engineered seeds. In addition, excess seeds cannot be saved by farmers for the next season; new seeds must be bought from Monsanto each year. And if these rules are not followed by a farmer, Monsanto buries them in litigation.

Although both sides of the political spectrum agree that a relationship like this is a problem, we often disagree on the solution.

The solution usually proposed by the left is to give the government more power to regulate business. The theory is that if we can increase the scope of the government, then government can clamp down on big business. But although this may sound good initially, it ignores the incentives created by government regulations.

When government has more power to regulate business, businesses will respond by shifting more of their resources towards influencing the government to intervene in their favor. Businesses are incentivized to twist the law to their own advantage. Put simply, when the government has the power to control businesses, businesses will end up controlling the government.

Increasing the scope of government over business accelerates the problem of crony capitalism in a cyclical manner which resembles a positive feedback loop. The government is given more power to regulate business, so businesses shift more resources towards gaining advantages using government power; on and on it goes. Although many people who want the government to regulate business may have good intentions, in reality this proposal ends up contributing to the very problem it seeks to solve.

Another pernicious effect of regulations is that they disproportionately harm small businesses. Bigger businesses often have the resources to deal with costs from regulations (or to twist regulations to their own advantage), but small businesses frequently do not. Regulations impose costs on businesses in the forms of both time and money, neither of which small businesses can afford to reallocate if they want to remain competitive in their market.

Regulations, then, decrease competition and shift the market towards monopoly in two ways. Not only do they incentivize companies to use government power to their own advantage and to the detriment of competitors, but regulations also bury small businesses in compliance costs.

Government regulations lead to what economists call “rent-seeking.” Rent-seeking in this case is when businesses divert their resources towards capturing a bigger portion of the existing wealth in a market instead of using their resources to create new wealth.

One of the defining characteristics of a free market is that it allows for the creation of wealth instead of merely the spread of existing wealth. In a free market, people can trade resources in a way that is mutually beneficial and produces a net gain for each party. But, the introduction of government force into the equation shifts things towards a zero-sum game, where one party benefits at the expense of another.

Government force in the form of regulations incentivizes this zero-sum, rent-seeking behavior. What this then leads to in a market is less competition, inefficiency and corruption.

Economist Frederic Bastiat may have summed it up best when he said, “As long as it is admitted that the law may be diverted from its true purpose—that it may violate property instead of protecting it—then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder.”

The solution to crony capitalism that logically follows from all of this is quite simple. The solution is to decrease and limit the scope of government power. The less power the government has to regulate business, the less incentive businesses have to get in bed with the government. If government intervention is decreased and limited to only what is absolutely necessary, we will see the problem of crony capitalism radically diminish in both frequency and severity.

If one wants to evaluate a proposed policy, one of the best ways to do so is to consider the incentives that it will produce. Considering the incentives created by a policy can then lead to the prediction of the actual results of that policy. American economist Thomas Sowell called this the importance of “thinking beyond stage one.”

Proposals for government regulations are a classic case of why policies must be based on more than merely their good intentions. Policies with good intentions often have negative results, which is why the true measure of a policy is not the intentions behind it, but its effects. Government regulations are a case where although unintended, the results are very often negative.

Sam Dugan is a fourth-year student majoring in economics with a minor in philosophy. They can be reached at [email protected]

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Regulations on business