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How to Think About Regulation

Downsizer Dispatch

The following is an educational service of the Downsize DC Foundation. https://secure.downsizedc.org/users/newsletter

How to think about regulation

Millions of people believe . . .

We need the government to regulate business people, otherwise theywill run wild, laying waste to the environment, and selling us badfood, bad drugs, and harmful products.

It would be silly to claim that business people never do thesethings. After all . . .

* Not all people are good.

* Neither are people who are mostly good, consistently good.

* And sometimes goodness has nothing to do with it -- sometimespeople simply make mistakes, out of ignorance or carelessness.

But politicians and bureaucrats are people too, and subject to thesesame failings. Do we really solve the problem of human imperfection bygiving one small group of imperfect people vast power over all theothers?

That last sentence is so important that it bears constant repeating:

Do we really solve the problem of human imperfection by giving onesmall group of imperfect people vast power over all the others?

To this we might add, "Is there any form of human being moreimperfect than the politician?"

To give this question its proper weight, do not think only aboutpoliticians you love (if there are any). Do not cherry-pick theevidence. Instead, think also of the politicians you hate. Should suchpeople have great power over other people?

We think a strong case could be made that the worst politicians, andthe worst bureaucrats, have done far more harm to humanity than theworst business people. In fact, this simply has to be true for thesimple reason that the power scales are so vastly different . . .

* Politicians and bureaucrats have a monopoly over the use ofcoercion.

* They also have access to vastly greater resources than even thelargest businesses.

* And they cannot be easily fired, unlike a business.

You can refuse to trade with Wal-Mart, or Microsoft, or Exxon, butyou cannot refuse to submit to anything that the politicians andbureaucrats tell you to do. You can easily walk out of Wal-Mart and goto K-mart or Target, or a host of other stores, but you cannot easilyfire a bureaucrat or a politician.

Given this, isn't it reasonable to ask . . .

* Can anything other than politicians and bureaucrats regulate howbusiness people behave, and if so . . .

* How do these non-state sources of business regulation compare tothe regulations politicians and bureaucrats provide?

Consider the following points . . .

Consumers regulate businesses.

Consumers punish every business that provides a bad product orservice. They also spread the word about bad companies to otherconsumers. Many consumers will even refuse to do business withcompanies that harm the environment. This form of regulation isenshrined in the proverb "The customer is always right."

Because "the customer is always right" investors and lenders alsoregulate business owners.

They do this to protect their investments from potential retaliationby dissatisfied customers. Sometimes this regulation involves directoversight, and sometimes it involves the purchase of insurance, whichthen leads to this . . .

Regulation by insurance companies.

Unlike the politicians and bureaucrats, insurance companies havetheir own money at stake. This motivates them to regulate thecompanies they cover. One approach to this is product-testing throughorganizations like Underwriter's Laboratory. Insurance companies willonly cover products that test safe.

Legal liability also regulates businesses.

This liability is determined through due process in a governmentcourt, but it differs from government regulation in a crucial way.Government regulation attempts to prejudge which products and servicesmay be harmful, and to dictate how this danger must be mitigated, inadvance.

This sounds good, but there are serious problems with it, as you willsee below. By contrast, legal liability presumes that a product orservice is innocent until there is evidence of harm. This is thecommercial equivalent of the principle we know so well from ourcriminal law, innocent until proven guilty.

The above points expose a bit of commonly believed mythology, that acompletely free market is also completely free of regulation. Clearly,nothing could be further from the truth. A free market actually hasmultiple levels of regulation. In fact . . . https://secure.downsizedc.org/users/newsletter

It is inherently impossible to have a de-regulated society, for thesimple reason that consumers, investors, lenders, and insurancecompanies will always take steps to control what businesses do, evenif the state does nothing.

Taking notice of these overlooked facts allows us to think moreclearly, and to refine the questions we need to answer . . .

* Does the state have a role to play, beyond providing a court systemfor determining legal liability when there is evidence that a productor service causes harm?

* Do we really need politicians and bureaucrats to craft regulationsthat prejudge whether a product or service is potentially harmful, andthat dictate how this risk must be mitigated?

Answering these questions depends on how you respond to concerns thatare even more fundamental . . .

* Will the politicians and bureaucrats who devise these regulationsbe liable for the mistakes they make, in the same way that businessesare held liable by consumers, investors, lenders, insurance companies,and courts of law?

* Can you fire politicians and bureaucrats who regulateincompetently?

* Will politicians and bureaucrats have to personally pay the cost ofany harm they cause, the way businesses must?

* What do you do if politicians and bureaucrats abuse their power ofregulation in order to reward friends and punish enemies?

* What recourse do you have if politicians and bureaucrats use theirvast power and resources to serve their own selfish interests?

These are powerful questions. But they are really only a moredetailed way of asking the question we began with:

Do we really solve the problem of human imperfection by giving onesmall group of imperfect people vast power over all the others?

We would humbly submit to you that the answer is no. The real problemis NOT how to better regulate businesses, but rather, how to betterregulate the politicians and the bureaucrats.

* They are the monopoly.

* Their power of coercion is inherently dangerous.

* They have vastly more resources than businesses.

* They are vastly more difficult to control.


The myth of "The Jungle" by Upton Sinclair. Millions of Americans believe we need the government to regulate business people, otherwise they will run wild, laying waste to the environment, and selling us bad food, bad drugs, and harmful products.

One big reason people believe this is because they attended government schools and were taught about a famous book, "The Jungle" by Upton Sinclair. Mr. Sinclair's book supposedly demonstrated that . . .

* Once upon a time, before government regulation, meat packing plants were endangering Americans with poison food

* The motivation for this poisoning was profits.

But here's what most people don't know . . .

* "The Jungle" was a novel, not a factual report

* Most of what Sinclair wrote was pure fiction, un-connected to reality

This is your chance to learn the truth.

"The Jungle" was intended to dramatize working conditions, NOT food safety. In fact, Sinclair's fictional claims about food safety were limited to a mere 12 pages, but these pages got all the attention, leading Sinclair to later write, "I aimed at the public's heart, and by accident I hit it in the stomach." (Source: Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916, Chicago: Quadrangle Books, 1967, p. 103.)

Sinclair's novel caused a sensation, and led to Congressional investigations, even though many politicians were skeptical of Sinclair. For instance, here's what President Theodore Roosevelt wrote about him in July 1906 (even though he shared Sinclair's distrust of big business):

"I have an utter contempt for him. He is hysterical, unbalanced, and untruthful. Three-fourths of the things he said were absolute falsehoods. For some of the remainder there was only a basis of truth." (Source: letter to William Allen White, July 31, 1906, from "The Letters of Theodore Roosevelt," 8 vols, Cambridge: Harvard University Press, 1951-54, vol. 5, p. 340.)

Sinclair's fictional characters talk of workers falling into vats and being turned into "Durham's Pure Leaf Lard," which was then sold to the public. This was supposedly made possible by the alleged "corruption of government inspectors." (Source: "The Age of the Moguls" by Stewert H. Holbrook, Garden City, N.Y.: Doubleday & Company, Inc., 1953, pp. 110-111)

Yes, you see, there were government inspectors, even back in 1905, so does it really make sense that the solution to this supposed food safety problem was . . . government inspectors?

In fact, there were hundreds of inspectors. They came from all levels of government, federal, state, and local, and had been at work for more than a decade. As for their supposed corruption, and Sinclair's other claims, a Congressional investigation found little evidence. Instead . . .

The 1906 report of the Department of Agriculture's Bureau of Animal Husbandry refuted the worst of Sinclair's charges point-by-point. The report labeled his claims . . .

* "willful and deliberate misrepresentations of fact"

* "atrocious exaggeration"

* And "not at all characteristic (of the meat packing industry)"

(Source: U.S. Congress, House, Committee on Agriculture, Hearings on the So-called "Beveridge Amendment" to the Agriculture Appropriation Bill, 59th Congress, 1st Session, 1906, pp. 346-350.)

Meanwhile, as Congress went through the time-consuming process of investigating Sinclair's fictions, the free market was regulating the meat packing industry in its own harsh way. Meat sales plummeted.

This led the meat packing industry to lobby Congress for increased regulation!

The industry actually wanted the government to protect them from the consumer backlash by imposing regulations that would restore consumer confidence, even though new regulations were totally unneeded! The result was the passage of the Meat Inspection Act of 1906.

But this was not a triumph for the idea of government regulation. Instead, it was a victory for corporate welfare . . .

* Taxpayers picked up the $3 million price tag for the new regulations

* Big meat packers benefited because small packers had a more difficult time complying with the new regulations

Upton Sinclair himself actually recognized this, and opposed the law! (Source: Upton Sinclair, "The Condemned-Meat Industry: A Reply to Mr. J. Ogden Armour," "Everybody's Magazine," XIV, 1906, pp. 612-613.)

The myth of "The Jungle" has had a terrible impact on the American mind. It has led millions of people to believe that regulation by politicians and bureaucrats is superior to regulation by the free market forces of consumers, investors, lenders, insurance companies, and legal liability.

* If the meat packing industry wanted government regulation, then it should have paid for it, not the taxpayers

* And all packing companies should have been free to reject government regulation, especially small producers

* This would have allowed consumers to decide what they preferred, and what they were willing to pay for -- meat inspected by the government, or meat regulated by the self-interest of the meat packers.

In other words, government coercion was completely unjustified, even if Sinclair had been writing fact, instead of fiction.

We would like to thank Lawrence W. Reed, President of the Foundation for Economic Education. The facts used in this Dispatch were drawn from an article he wrote for the The Freeman: "Ideas and Consequences: Of Meat and Myth." http://www.thefreemanonline.org/columns/ideas-and-consequences-of-meat-and-myth/

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