A friend in one of my political groups shared a quote culled from a Wall Street Journal comments-section discussion:

Government regulation also creates markets in the first place. Markets aren’t naturally occurring phenomena.

The quote, meant to rebut the proposition that regulation and corporatism are strangling small businesses, especially in rural areas, is, on its face, silly, but it offers an opportunity for economic education and the exposure of fallacies.

Lets flip the sentences around and consider “markets aren’t naturally occurring phenomena” first. This is, to put it succinctly, hogwash. Markets existed before government, they exist where there is no government, and they exist despite government. Even lawless countries and countries verging on collapse have people trading goods and services, and even communist China and socialist Russia had black markets where people would exchange goods and services.

That is all markets really are: people voluntarily exchanging goods and services, primarily nowadays with money as an intermediary.

Government can have a role in markets, even under the purest form of capitalism. Apart from anarchists and anarcho-capitalists, people generally accept that a system of property rights and a functioning legal system facilitate the functioning of markets. You’re more likely to contract with someone to build you a house if you can handle disputes in court rather than with clubs, knives, guns, etc. In the proper context of liberty, that’s as far as government should go.

Many believe, however, that government regulation beyond those basic functions is necessary, for the setting of standards, for safety, for consumer protection, for employee protection, and so forth. The reality is, however, that all these things can and do arise naturally, without government involvement. Companies collaborate on or comply with industry-wide standards, because it benefits them. Consumers express their preference for products by buying that which they believe best suits their needs. Organizations arise spontaneously to facilitate all this (American National Standards Institute, Underwriters Laboratories, United States Pharmacopeia, Snell Memorial Foundation, American Society for Testing and Materials, to name a few). Market pressures, including but not limited to unionization, further serve these ends. Whether it’s better for government to regulate is its own question, but it’s clear that government is not necessary for such order to arise.

Now, lets consider the first sentence, that government regulation creates markets. Yes, in context, the quote’s author was asserting that all markets are created by government, but I’ve just disproved that, so allow me to take the statement free of context.

Government regulation does create markets. It creates many markets: compliance assistance, expediting services, the trading of carbon credits, the trading of building air rights, etc. However, if these markets don’t arise naturally, apart from government regulation, there’s a reason.

The markets created by government regulation are leeches. They don’t create wealth, they sap it. Your tax preparer offers a service you are willing to pay for, and the living he makes preparing taxes puts food on his table and a roof over his head, but the money you spend on tax preparation is money you can’t spend on things you actually want. Government-created markets displace productivity and introduce inefficiency. If you start a company that makes, to borrow from Rodney and Back to School, “widgets,” and you need 10 employees to run that company, adding two more simply to comply with government regs drags everyone down. The money spent on those additional employees has to come from somewhere: reduced compensation for the workers, reduced profits for the employer, higher prices for consumers. Capitalism-haters might not have an issue with the reduced profit for the employer, because heaven forbid someone actually make money running a business, but in the aggregate, that inefficiency will make some businesses unviable, something the haters don’t ever seem to want to consider. This means that productive jobs go away, consumers lose options, and the economy suffers.

Studies 1 2 estimate that compliance with government regulation cost close to 2 trillion dollars per year. To put that in context, imagine that the entire nation of Italy (population: 60+ million people) existed merely to provide compliance services to America. Services, by the way, that create no wealth, that offer nothing that people would willingly pay for apart from the existence of those regulations. Imagine what people might do with that 2 trillion dollars were it not wasted on compliance. Imagine how much more productivity, more economic efficiency, and improved standards of living that 2 trillion dollars might create if used in a way that people actually chose to.

The economic principle at play here is that of opportunity cost. One of the great failings of our education system is its inadequate teaching of opportunity cost, and I fully believe that, once someone truly understands it, he or she cannot continue to believe that unfettered big-government is good for us. “At what cost” is the first question that we should ask when hearing an idea or proposal for government regulation, intervention, or action. Perhaps we might accept the cost if we deem the goal desirable (and, importantly, doable), perhaps not. Unfortunately, too many simply don’t ever ask the question, or even realize that there is always a cost. Robert Heinlein popularized the principle that “there ain’t no such thing as a free lunch.” It is the failure to accept that this economic reality is as irrefutable as gravity that leads to so many bad ideas, so much destruction of wealth, and so much human misery in societies all over the world.

Peter Venetoklis

About Peter Venetoklis

I am twice-retired, a former rocket engineer and a former small business owner. At the very least, it makes for interesting party conversation. I'm also a life-long libertarian, I engage in an expanse of entertainments, and I squabble for sport.

Nowadays, I spend a good bit of my time arguing politics and editing this website.

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