How Government Regulation Makes Us Poorer

Tyler Durden's picture

Submitted by Per Bylund via The Mises Institute,

This year, Mises Institute Associated Scholar Per Bylund released The Seen, the Unseen, and The Unrealized: How Regulations Affect Our Everyday Lives. We recently spoke with Professor Bylund about his book and how the effects of government regulation are more far-reaching and more damaging than many people realize. 
 
MISES INSTITUTE: Why is the concept of the “unseen” so important to understanding the effects of regulation?
 

PER BYLUND: It is essential for understanding regulation, but the “unseen” is actually fundamental for economic understanding and analysis in general. What’s “unseen” is the proper benchmark. We need to consider both what didn’t happen but would have happened.

Oftentimes people, including so-called experts, compare apples and oranges by looking at data “before” and “after” an event, for instance, when discussing the effects of raising the minimum wage. So they might say that employment before was similar to after the hike, and then conclude that the change had no effect. But this is wrong, because there are plenty of changes in the economy that took place between the before and after — not only the minimum wage. So in order to figure out the effect of the minimum wage specifically, we must compare the “after” situation with what would have been had there been no minimum wage hike — the unseen.

This of course applies to any change in the economy, and not only regulation. Bastiat, in his classic essay on the broken window fallacy, discusses the effects as a boy smashes a window. But in modern state-planned economies, regulation is by far the most common and most destructive change, so that’s where we also find most analysis. As economic analysis is used to assess the effects of regulations before they’re implemented, it’s important to use the proper comparisons — the seen and the unseen, not the seen at different times (before and after).

MI: You also employ the concept of “the unrealized.”

PB: The unrealized is really my own extension to Bastiat’s famous analysis, and it is intended to redirect our attention from the macro level of the economy to how changes affect individuals — and especially what options they’re presented with. The point of the book is to show that regulating one part of the economy will have effects throughout the economic system, and that this type of artificial restriction will lead to some people being stripped of the choices they otherwise would have.

I exemplify this with the sweatshop, which is often argued against using only “the seen.” The working conditions are terrible in a sweatshop, especially compared to our cushy jobs in the West. Ben Powell and others have done great work pointing out that there’s also the unseen in the sense that without the sweatshop those workers would be in even worse shape. In fact, they are very eager to get jobs in the sweatshop because they’re so much better than all other options they have.

With the “unrealized,” however, I think we get a more nuanced picture. I argue that the reason the sweatshop workers make a choice between the hard work in a sweatshop, and something that is much worse, is regulation. Had this been a free market, then there would likely have been many businesses offering jobs in sweatshops, and they would probably compete with each other by offering higher pay, better work conditions, and so on. There’s obviously money to be made from running sweatshops, so why don’t more businesses do this?

The existence of a sweatshop shows that the market is sufficiently developed to support it: the technology and capital structure, including transportation and supply chains, are obviously there. The economic conditions also speak in favor of sweatshops over toiling in the fields and the other much worse options sweatshop workers are presented with. The workers are more productive in sweatshops. So there’s really no reason why there wouldn’t be competition for their labor by several sweatshops. But, the many options that should be there aren’t.

So it’s likely that something is restricting the creation of these other options. Those other businesses that never came to be are the unrealized alternatives, and the argument in the book is that these options would have been available had it not been for regulation.

Moreover, those regulations can really be very distant from these workers, since a restriction redirects economic actors to other, and comparatively less valuable, actions. In turn, the regulations have ripple effects — a type of Cantillon effect, you might say — throughout the economy as seen actions replace the unseen, or what should have been.

These other things happen instead of what should have happened, if actors had not been arbitrarily restricted by regulations. But, these “other things” are suboptimal and harm people since they’re not what people would have chosen to do in the absence of the regulations. In this sense, a regulation anywhere in the economy causes harm, and this harm primarily affects those with little or no influence over policy or the means to avoid it. So the major harm is on poor people in poor countries, even where regulations appear to be limited to relatively rich people in rich countries.

MI: In the case of a business being regulated, how much of that burden falls directly on that business? Are other groups — such as the customers — affected by the regulations also?

PB: It really depends on the business. Regulations make it costlier to act — and therefore some actions are no longer profitable when they would have been otherwise. So, for those businesses that lack political influence and aren’t the most effective, a regulation may decide whether there is a business or not. At the same time, businesses that survive the regulation might benefit from a protected situation because the regulation raises barriers to entry. This is why, for instance, it is rational for Walmart to support a high minimum wage — it will hurt Walmart’s competitors more than it hurts Walmart.

The real losers are common people who, as consumers, do not get the valuable goods and services they otherwise would have, and, as producers, cannot find the jobs they otherwise would. The winners are the incumbents, at least short-term, and — as always — the political class.

MI: You refer to markets using terms like “messy,” “approximate,” and “imperfect.” Isn’t this an argument against markets? Can’t government regulation give us more rational results?

PB: On the contrary, the messiness is an argument for markets. Rational government planning might be doable in an economy with fixed boundaries. That is, where there is no growth, no new value creation, and thus the “extent” of the market stays the same. But there are no such economies in the real world, and I’m not sure it is even possible long-term. An economy is really the combined uses of resources devoted to satisfying wants. So, it is inconceivable to have an economy that doesn’t get better over time — or which malfunctions and declines. In an entrepreneurially driven and creative market process, there is no basis for planning an economy through a governmental central plan. I elaborate on how this process of market expansion happens in my previous 2016 book, The Problem of Production: A New Theory of the Firm (Routledge).

Growth and entrepreneurship in a market is not so much about allocating existing resources within the market as it is about speculating about how resources can be created and used in more valuable ways. The market is a creative enterprise always aiming for the future and satisfying more wants and newly discovered wants. Thus, a governmental regulator or central planner has no data to use in making a “rational” plan because the data doesn’t exist yet. That’s the problem with central planning — you cannot plan with only unknowns and unknowables. That’s also why markets are messy, but decentralized decision-making within a profit-and-loss system generates the very structure needed for such decision-making.

MI: But in a purely unregulated economy, won’t businesses exploit workers?

PB: I conclude exactly the opposite in the book. There’s a case to be made for Marxist-type exploitation of workers in factories, perhaps more so in countries where there are sweatshop-style factories than elsewhere. But, the reason for this exploitation is regulation. Had the workers not been stripped of their choices — the unrealized — they wouldn’t be satisfied with the sweatshop jobs they’re relatively content with as things are today. Exploitation is not so much a result of capitalists paying workers less than they otherwise could have been paid. It is a result of the workers’ options having been taken away. The business with a sweatshop in a poor country isn’t the party taking away workers’ options. The business is the one giving workers an option. It’s not as good as it otherwise would’ve been, but that’s not necessarily the fault of the business. What hurts the workers — and keeps them poor by not putting sufficient competitive pressure on the business — is regulation, which restricts competition, and thus empowers business at workers’ expense.

So the issue of exploitation, and especially how to get rid of it, is a matter of finding the real and ultimate cause of the situation. It’s usually not a matter of employers having “power” over the worker. Such power does not occur naturally, but is caused by something, and my argument suggests that the employers’ economic power is a symptom, but not the cause. The real cause is government regulation.  

 

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VonPumperDic's picture

 

 

Step One: Remove Obama from the WhiteHouse along with extended Family

Step Two: Pass Law the forbids Obama from speaking with Teleprompter.

Step Three: Place Live Microphone in front of Obama and let his talk about why his Executive Orders that produce these Regulations are so good.

 

Step Four: Unleash Americans

Stan Smith's picture

+1 and many more.

Until Democrats keep being under the impression that my money is theirs, its hard to 1) vote for them, 2) take them seriously.   Nothing more than common thieves.

Holy hand grenade of Antioch's picture
Holy hand grenade of Antioch (not verified) Stan Smith Dec 28, 2016 5:58 PM

Step 4:

 

Bring in SERV PRO to get rid of the smell of KFC & Wookie in the White House.

Say What Again's picture

trump - doing his part to #MakeExecutivesRichAgain.

In.Sip.ient's picture

"The winners are the incumbents,
at least short-term,
and — as always — the political class."

Except, when the incumbents are dead beats,
like WS today... then the politcal class
loses out... slowly... like they are
today.

1980XLS's picture

"You didn't Build That"

Synoia's picture

Regulations make it costlier to act — and therefore some actions are no longer profitable when they would have been otherwise.

 

True, I can suggest some examples of actions which are considered candidates for unprofitability: 

1. Smoking Pot, or some other naturally occuing drud.

2. Protitution(selling one's boday)

3. Fraud - Immensly profitable as the Bankster of 2004 through to the present

4. At one time Driinking  - Prohibition was immensly profitable for bootleggers.

5. Hitting Wonen (Not hitting on Womem, but see the restriction at (2).

6. Foreign wars.

7. Slavery

And so on.

NoWayJose's picture

The photo on ZH sort of makes me think of the Wright Brothers - who would never have been able to obtain government permits to leave the ground.

snakehead's picture

Blanket statements about regulations are ridiculous.  Imagine if there were no regs about food safety, for example.  Would the food multinationals be richer? Of course.  Would we be collectively sicker?  Of course.  Would more of us die too soon? Of course.

techpriest's picture

This is also a blanket assumption about "safety." Here's a really great podcast that explains one such regulation and how a particular safety regulation makes people less safe in reality:

http://tomwoods.com/ep-656-how-the-wholesome-meat-act-gives-us-less-whol...

tl;dr version: there is no such thing as a law that says "All food of type X shall now be clean." That is impossible. Instead, you can create an agency that issues fines (of course, agents are corruptible and prone to personal bias), or you can mandate that companies perform certain processes or fill out certain reports. This does not guarantee food safety, but it does add expense. Indeed, the data show that foodborne illness outbreaks are far larger now, and the podcast gives all of the details on why that is. These regs are also the reason why the multinationals exist - if people had to actually think about whether their food was safe instead of putting blind faith into the USDA, the multinationals likely would not exist.

snakehead's picture

Keep your head in the sand. Corps are rapacious and exist to make their shareholders richer. That is all.

snakehead's picture

Where I live restaurants get shut down for insects, rodent shit, cross contamination and mold.  That is local government doing one of the few things it does well. Go move somewhere where they're free to keep operating and selling you sickness. But somehow if we get rid of regs your food will be cheaper and healthier despite insects, mold, cross contamination and rodent shit. Their workers will reap the benfits of increased shareholder value, for sure. Slap yourself awake out of your wet dream.

Fathead Slim's picture
Fathead Slim (not verified) snakehead Dec 28, 2016 10:19 PM

Apparently, people like you would rape children if there were no laws against it. Otherwise, you wouldn't think that everything should be regulated.

Here's a cheat sheet for you: The rest of humanity isn't like you.

Jack's Raging Bile Duct's picture

1. People have a duty to themselves, first. If the consumer cannot be expected to do their own due diligence, then nothing can be helped.

2. In a world without state certification, reputation is everything. That is how it always has been. Brands slowly gain trust and quickly lose it. Producers have strong incentives to treat their customers well. This weeding mechanism is far better than state regulation.

3. Regulations create barriers to entry, which gives advantages to early, now large, operators. This creates a situation where products are made farther and further removed from the customer, which makes a company less responsive and more difficult for the customer to investigate practices.

4. The centralizing effect that regulations incur, causes out breaks to be more severe and wide spread than would be otherwise. One megacorp processing massive tonnage at a single factory will endanger more people than many smaller, more isolated producers. This is why EColi outbreaks tend to be so big in the USA.

5. Retailers have great incentive to make sure the products they sell are safe and reputable. They have incentive not to endanger their customers nor do they want to be associated with dangerous products. Likewise, retailers have no desire to lose money purchasing, then discarding defective products.

More can be said, but that should quell any claims that we need the state to keep from being poisoned.

techpriest's picture

Real life example:

I know someone who is switching full/part time with someone at the same company. No net hiring/firing, not even a department change, just one full-time and part-time person exchanging.

HR got back to them and it's going to take a month to do the paperwork.

NuYawkFrankie's picture

re How Govermant Regulation Makes Us Poorer...

Translantion: "How a blood-sucking, parasitic Mafia Shake-Down Operation makes us poorer..."

NO FCKING SH!T SHERLOCK!!!

HRH Feant's picture
HRH Feant (not verified) Dec 28, 2016 6:57 PM

I love what Reagan said about the nine most dangerous words: "I'm from the government and I'm here to help." Amen.

When I think of the government I get a headache because I know whatever they touch is going to be completely fucked up and basically useless.

peippe's picture

Regulations are enforced by regulators.

They don't work for free, or cheaply.

SunRise's picture

but they do smile as they don't heed you.

CompassionateConservative's picture

Regulations are good for America because they keep the goyim in check.  A place where more regulation is clearly needed is in the area of gun ownership by white working class males.  I'm not sure what the problem is with banning and confiscating their guns.  I'm disappointed in Obama on this issue but he still has time to issue executive orders. The Department of Homeland Security has clearly stated that white male gun owners are the most serious terrorist threat in the world.  Pick up that pen and phone Mr. President!

Crusader75's picture

Thanks for the corporate propaganda, great for my portfolio, but for 90% of America and the future of the country? Not so much.

Faeriedust's picture

More von Mises tripe.  An unregulated market is a chaotic market -- and chaos is not good for business or human society in general.  In fact, without rules and a rule-enforcer, THERE CAN BE NO MARKET (a Hobbesian free-for-all of loot, pillage, and banditry does not constitute a market).  Furthermore the conditions and terms of employment depend on the relative pricing power of each partner in the marketplace.  So long as population is increasing employers enjoy a "buyer's market" for labor and can force workers to accept terms which they would not accept given more equality of need.  This inequality can be addressed by actions removing excess labor from the market (child labor laws, immigration restrictions, guaranteed minimum incomes, or even plague).  Or we can regulate wages and working conditions to achieve the same ends more directly.

Regulation of business, labor, and virtually all productive activities has been practiced by virtually all states since recorded history began.  Far from sacrilegous, it has been proven to WORK.

Jack's Raging Bile Duct's picture

So I guess there was a law requiring people to stand in line at Starbucks? Are laws and regulations the only reason why you don't murder, rape, and extort your way to the front of any line you've ever been in? How many rapists, murders, and thieves do you associate with? Do the friends of your friends and family associate with murderers, rapists, and thieves?

You're saying a group of strangers need to empower a different group of strangers to guarantee our oppression in order protect us from a third hypothetical group of strangers who may hypothetically oppress us as some undefined point in time.

Did I get that right?

SunRise's picture

Free choices regulate markets.

bagpiper's picture

Where did common sense go?

When did extreme anal retentiveness take its place?

Oh, right, when everything was politicized...

 

We used to have common sense in this country. Common sense regulations keep the pirhanas at bay.

Its not just broken windows, its knives in the back... IBM got rich by being the most ruthless bunch of assholes on the planet. Google now says "Do no evil"...

What is evil? One man's evil, is another man's "Doing God's work"...

Why? Ah yes, the ultimate question... Everything is 'relative'?

No, it isn't. The question should be; To what result, and what harm?

When they allowed bureaucracies to write 'regulations' that implement 'laws', they lost their minds.

Take away the power of the executive bureaucrats to write 'administrative law', make congress do their f**king jobs.

Yeah.. the only laws written will be much shorter if every dot and tittle has to be debated... and while we're at it, make Congress a part time job... oh wait.... nevermind.

Oh, and give the Inspector General back their teeth... and give the GAO some fangs.

While dicussing the need for Government Employees Unions. They absolutely destroy everything they touch, the VA is a good example, I know... I know why a lot of guys just give up... I know a few VA employees I would like to hang, but, unfortunately, its illegal to kill somebody that needs killing.

(Don't know of any sweatshops in gubmint. But then, they're the absolute worst employers on the planet, aren't they?)