As their own purpose for being, institutions are desirous of maintaining the status quo which they represent. As such, they find enforced standardization of behavior essential for limiting the responses they 0entry of competitors; the establishment of product, employment, and trade practice standards; the imposition of wage and price controls; import restrictions on foreign products; and zoning laws and land-use restrictions; or other inhibitions upon innovation, to name but a few.
Regardless of whose immediate interests are being served by any particular government regulation, the practice invariably increases the costs and inefficiencies of marketplace activities. Not only do such regulations increase transaction costs, their mandate often increases the prices of goods and services.30 By its very nature, imposing requirements upon marketplace participants beyond what they would otherwise have freely negotiated, increases the costs of productive human action, and limits the options that facilitate the creative and efficient use of resources.
Government regulation fosters inflexibility and increases structuring of economic activity by restricting the uses owners can make of their property. For instance, it is easier for larger firms to distribute the fixed costs of regulation over a greater volume of products than it is for smaller firms with a lesser output. The added per unit production costs resulting from compliance with such regulation will be lower for the larger firm, giving it a comparative advantage when it comes to the pricing of its products. For the same reason, someone who develops a fundamentally new or innovative product might first have to satisfy a lengthy and expensive process of government-mandated testing or licensing before being allowed to produce and sell the product. Unless this person is financially capable of absorbing such up-front costs, he or she might be inclined to sell the creation to a large firm that could more easily bear such costs. In such ways have government regulatory practices promoted both increased concentration within industries as well as disincentives for generating the creative alternatives that keep a civilization vigorous.
State-mandated conservation practices are another form of government regulation designed to protect established firms from energetic competition. While the avowed purpose of such programs has been to “preserve natural resources,” they have had the actual and intended effect of maintaining higher prices for products in such industries as petroleum, lumber, and coal by restricting increased supplies. Again, conservation programs are usually directed against the owners of resources in order to stabilize the interests of existing firms.31
Another factor that contributes to a weakening of the dynamics necessary to sustain a vibrant economy is found in Joseph Schumpeter’s analysis of the development of business organizations. He shows the significance of how property is owned and controlled by distinguishing between “owner”— and “manager”—controlled systems. The perspectives of owners, he posits, tend to be more long-term oriented, as contrasted with the shorter-term outlooks of managers. In his view:
[T]he modern businessman... is of the executive type. From the logic of his position he acquires something of the psychology of the salaried employee working in a bureaucratic organization.... Thus the modern corporation, although the product of the capitalist process, socializes the bourgeois mind; it relentlessly narrows the scope of capitalist motivation; not only that, it will eventually kill its roots.32
Capitalism, in the course of its development, “tends to automatize progress,”33 he adds. An owner-entrepreneur risks his energies and financial resources in the uncertainties of the marketplace, an undertaking that proves disappointing to most who try. In the course of developing his enterprise, the successful entrepreneur will likely get funding from investors and lending institutions who are now more concerned with preserving the value of their interests than with further venturesome pursuits by the firm’s creator. Accordingly—and particularly as ownership of the firm increasingly comes into the hands of passive investors—the entrepreneur’s control is replaced by that of hired managers, attuned to practices designed to help preserve existing interests.
With management divided from ownership, an emphasis on cautious and conservative policies becomes separated from the risky practices that could either further enhance the profitability of the firm, or bankrupt it. Although the dynamics of chaos would emphasize the need for any vibrant system to remain resilient to changing conditions by altering its existing practices, the voices of prudence and hesitancy more often prevail. With preservation of the organization now an ascendant principle, corporate interests—whose concentrated nature provides them more political influence than that of other market participants—seek governmental restraints and other state-conferred benefits designed to reduce the risks of additional, more innovative, or more aggressive competition. In such ways does the widespread institutionalization of the “instruments of expansion” begin to erode the creative processes that sustain a civilization, and contribute to its collapse.
The metamorphosis identified by Schumpeter found reinforcement in the classic work by James Burnham, The Managerial Revolution.34 A system of private capitalism—with the control of enterprises exercised by their owners—was being replaced by managerial hierarchies that would centrally direct economic decision-making. This transformation would have profound significance not only for traditional business and political institutions, but for what is implicit in the personal and social meaning of property.
As we shall discover in subsequent chapters, conflict is likely to emerge whenever ownership is divided from control. In the case of a business firm, a manager may have purposes of his own that differ from those of an owner. As an employee with shorter time-preferences, he may be more interested in having a greater portion of company earnings directed to salaries than to plant expansion. Likewise, as in so-called “hostile takeovers,” the hostility that often arises is between the managers and the owners. The acquiring firm may pay a sizeable amount of money to the managers, whose jobs would be jeopardized by the merger, in order to elicit their cooperation in the merger process. Such payments become part of the acquirer’s cost of purchasing the enterprise, an amount that would otherwise be available to the stockholders.
In the same way, conflict occurs whenever the state, through its regulatory practices designed to enforce standardized conduct, insinuates itself into an owner’s control over his or her property. With ownership and control fragmented, it becomes increasingly difficult for an individual or a firm to make creative adaptations to a constantly changing world. Such difficulties are greatly exacerbated when, as now, the speed of both communication and technological innovation demand swifter responses than are otherwise allowed by bureaucratically-structured mandates. When decision-making authority is unified in the hands of an owner, however, symmetry—not conflict— tends to prevail. Whether the owner is then able to make appropriate responses to a constantly inconstant world will depend upon his or her creative talents that are unhindered by formal restraints.
One other area of human activity the state has always insisted upon controlling is the definition and enforcement of standardized rules of law governing transactions and personal disputes. For instance, people will always have disputes with one another, as well as a need to resolve them. The question needs to be asked: must resort be had to governmental court systems or, as the increasing use of arbitration, mediation, collaborative/holistic practices illustrate, might marketplace processes satisfy these needs as effectively as they provide for other goods and services? Such an inquiry calls into question the concept of “judicial review,” which is premised on the state’s court system defining legal principles and standards of conduct to be made uniform within a given jurisdiction. In marketplace transactions, individually-driven preferences of buyers and sellers generate a multitude of transactions of diverse terms and conditions, without presuming a need for definitive and uniformly enforced standards for food, music, household products, clothing styles, etc., or their prices. For the same reasons, we may discover the value of competition in the resolution of disputes, without a need for superintending authorities to review such decisions. If auto mechanics, building contractors, grocers, and orthodontists are capable of providing their goods and services without a presumed need to have their transactions reviewed and approved by others, might not disputes get peaceably and efficiently resolved by a variety of independent means? What we may discover is that judicial review is but one of the methods by which the institutionalization of society has come about, by centralizing and standardizing the rules that operate among people.