Are Businesses Really Opposed to Big Government?

Actions speak louder than words


Does the business community love laissez-faire? The famous answer "It depends" applies all too well. The popular wisdom is that businesses would like nothing better than to be left alone by government and that this prompts their increasingly vociferous denunciations of environmental, energy, safety, and consumer regulations. OSHA and EPA, it would seem, are agents of the devil.

In fact, however, much government interference in the marketplace is inspired by business requests. Producers frequently seek tariffs, subsidies, licensing requirements, and so on to shore up their markets, boost their prices, or enhance their finances. If those who have been verbally stoning Chrysler were asked who is without sin in this regard, few could raise their hands.

The American textile industry offers a clear case of the business community's ambivalence here. When it comes to regulation that will reduce industry profits—such as efforts by the Occupational Safety and Health Administration to impose expensive requirements for reducing cotton dust in the workplace—the textile industry denounces government interference. Industry groups point out, quite accurately, that the proposed rules, by raising the cost of labor relative to the cost of machines, will surely reduce employment opportunities in the industry.

Yet those same groups ignore the side effects of government interference that will increase industry profits. The textile industry has in the past frequently sought—and obtained—import quotas to provide relief from the competition of foreign fabrics. Quotas do, of course, cause some domestic employment opportunities to expand—but they also mean higher prices and fewer choices for consumers.

Although it would be difficult to argue that import quotas are ever a boon to the consumers of the controlled products, in other cases it is easier to make that claim. In fact, however, much legislation that has come to be seen as protective of consumers actually was introduced to benefit producers. A good example of this is meat inspection.

Writing in the September 1978 issue of the Journal of Economic History, Charles W. McCurdy points out that states such as Minnesota passed meat inspection laws almost a century ago. Consumers were the touted beneficiaries of these laws, but in 1890 the Supreme Court struck them down. As counsel for the defense argued, fresh meat had not been inspected prior to passage of the Minnesota law, "and yet population has increased and the death rate has been low."

The inspection laws actually sought to protect local butchers from the competition of meat "imported" across state lines. Nor was this Argentine or Australian beef. Swift and Armour had outfitted refrigerated railroad cars and were shipping dressed meat from Chicago at savings running up to 35 percent. What a marvel these economies were for consumers! And no wonder the local butchers were distraught!

McCurdy argues that it was the growth of national producers such as Swift, Armour, Singer, and others that helped develop the doctrine of a truly free internal market. But small (and small-minded) local producers doggedly opposed this by advocating restrictive legislation.

In a market economy, of course, competition is the rule. Yet profits may be greater if producers can achieve some control over the market. Sometimes they establish such control, at least for a time, without recourse to government. This is what some of the railroads did in the late 1880s, combining into an effective cartel to set rates and share markets.

Although passage of the Sherman Antitrust Act in 1890 undermined the ability of the railroad cartel to function, Congress had, coincidentally, already set up the Interstate Commerce Commission to regulate the railroads. Presumably, ICC regulation was intended to benefit the general public, especially farmers who suffered from monopolistic rate making. But following a series of new laws, especially the Transportation Act of 1920, the ICC obtained broad new powers, including the ability to set minimum rates, to allow pooling activities among the railroads, and even to limit entry into and exit from the industry. In short, the ICC served to keep in place a cartel that, without government support, would no doubt have been plagued by the disintegration that cartels normally suffer at the hands of market forces. Regulation via the ICC was more clearly in the interest of the industry itself than of the public.

Even the rationale for state regulation of electric power companies has now been thrown into question. It was once generally believed that utility commissions were designed to keep rates down and output high in a situation of "natural monopoly"—that is, to promote the public interest. But Gregg A. Jarrell, in the Journal of Law and Economics for October 1978, disputes this view.

Jarrell turns up some interesting history. Just after the turn of the century, many municipalities allowed competing firms to supply electricity, instead of designating a single supplier for an area. As a result, power companies' prices—and profits—were low. But then state governments took over from the municipalities the role of regulation, and they often eliminated competition, whereupon (the remaining) power companies' prices and profits rose. The public, it appears, would have been better served without state regulation.

It is worth noting here, of course, that the customers of both power companies and railroads are not just households. Business enterprises need electricity and transportation, also. While one segment of the business community gains from a particular form of regulation, other segments lose. They and their customers must foot the bill that government regulation regularly imposes.

One should never be deluded into believing that regulations sought by business and industry are inherently desirable for society as a whole. It doesn't even work out that way, says economist George Stigler, if the benefits to the regulated industry are considered benefits to society, to be weighed alongside the costs to the public of regulation. "When an industry receives a grant of power from the state, the benefit to the industry will fall short of the damage to the rest of the community," notes Stigler. In short, the public costs will outweigh the private benefits.

Although the effects of the visible hand of government regulation may often be unseen and unrecorded, they are there. Consumers will end up paying higher prices, workers will enjoy fewer job opportunities, or enterprising new producers will be prevented from entering the restricted industry.

Nor have we suddenly become aware of this problem only recently. Adam Smith called our attention to it back in 1776. His Wealth of Nations is, in fact, essentially an argument against the prevailing philosophy and policies of "mercantilism," a system of extensive government control of the economy in an attempt to increase national wealth. Regulation, Smith noted, is almost sure to be a boon to producers and a bane to the public. Instead of government control, Smith urged reliance on the "invisible hand" of self-interest and competition to facilitate the best use of all the resources available to a society.

Producers stand much to gain under such a system. But this doesn't mean, warned Smith, that their appeals for government regulation of this or that reflect their interest in such a system. His views are expressed succinctly and vividly in a famous passage:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

In the end, what is at stake here is far more than a matter of hypocrisy, of business people trying to eat their cake and have it too. They need to learn the wisdom of leading by example. If, strong and resourceful as they are, producers use political power to further their goals, then how can they object to other groups using such avenues? If producers clamor for protection, how can they expect consumers not to cry out for protection too? If they try to keep the air free from competition so their profits will be healthier, how can they criticize workers and environmentalists who seek to use government powers to clean up the air so their lungs will be healthier? If businessmen continue to seek to use government to gain an advantage in the short run, then—to paraphrase John Maynard Keynes—in the long run, free enterprise will surely be dead!

Russell Shannon teaches economics at Clemson University and coordinates a weekly series of editorial columns on economic issues for newspapers in the Carolinas and Georgia.