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Wednesday, March 14, 2012

8. Regulation

The Concise Guide To Economics

by Jim Cox

8. Regulation

The conventional, but mistaken, understanding of regulation is that consumers or workers need protection from unscrupulous big businesses and that Congress wisely and compassionately responds to those needs to rein in nefarious businesses.  Actually, business regulations were and are instigated at the behest of and for the benefit of the businesses so regulated.  In effect, regulation is a teaming of business and government to the detriment of potential competitors--which the established businesses prefer not to face--and to the detriment of the consuming public. 
On a purely theoretical basis this has to be the anticipated fundamental status of regulation.  This is because any business regulated by a government agency has a focused interest in the activities of that agency and will therefore spend a great deal of time and money making sure the regulations are enacted in such a way as to benefit the business.  Consumers, on the other hand, have a myriad of interests and only a minor or passing concern about any particular industry and the regulations affecting it. Businesses in other words will naturally out-compete the consumer in the political realm where regulation originates.
A few examples:  The grandfather of regulatory bodies in the U. S. is the Interstate Commerce Commission established in 1887 to regulate railroads.  The railroads had for years attempted to fix prices among themselves, only to find that each individual company found it to its individual benefit to cheat on such an agreement--each individual railroad firm hoping the others would stand by the agreed-upon higher price while it cut its own prices to increase business. 
Finally, the railroads themselves arranged for Congress to establish the I.C.C. so that the power of law would guarantee that the prices were not cut.  When the new technology of trucks was available to compete--to the benefit of the consumers--with the railroads, the I.C.C. began regulating trucks in such a manner as to benefit the railroads.  These truck regulations consisted of mandated routes (making trucks behave as if they were operating on tracks!), minimum prices and limits on what the trucks could carry and where they could carry it.
Airlines were regulated beginning in 1938, and in the 40-year period from then until 1978 no new trunk airlines were granted a charter.  These four decades saw a huge change in the airline business as airplane technology advanced from propellers to jets, from 20 seaters to 400 seaters, from speeds of 120 mph to speeds of 600 mph.  Yet, the Civil Aeronautics Board found no need to allow new competitors into the growing industry.  This fact alone makes it quite clear that the purpose of the regulation was not to protect the consumer but to protect the market of the established airlines. 
The word regulation, properly understood, should evoke thoughts such as protection of businesses from competitors, special privileges for established firms, and government efforts to exploit consumers.

Concise Guide to Economics, The

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