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Quotation of the Day…

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… is from page 302 of the late Thomas McCraw’s excellent 1984 volume, Prophets of Regulation [2]:

On balance, however, it seems clear that the concern about legal process has controlled the outcome of regulation more often than has the concern about the substance of economic efficiency.  In economists’ language, this means that the concern for equity has generally triumphed over the quest for efficiency….

Overall, the conclusion appears inescapable that regulation in America has more often functioned as a protective device rather than as a promotional or developmental one.

The above observation from McCraw appears in his summing up of his conclusions from a study of over a century of regulatory policy in the United States.  McCraw found, I believe correctly, that regulators and regulatory policies focus on identifiable parties – people with existing functions within existing institutions, people whose ‘roles’ in the economy are known and describable.  The legal and political process weighs and responds to the interests of these various concrete people in their concrete roles.  The regulatory process might in some instances favor consumers, while in other instances favor producers, but in all instances what is being favored (and what is being disfavored) are known, identifiable, and existing sets of activities (e.g., “freight shipment by railroads”), each represented by people who can appear before a judge, an administrative body, or a legislature to make his or her case for why regulatory policy ought to be changed or not changed.

Yet even the most publicly spirited regulatory official cannot help but be biased by what he or she actually sees, by the pleas and assertions and arguments that he or she actually hears, and by the empirical reality that he or she is actually familiar with – that is, biased by the status quo.  (Behavioral economists [3] should study this phenomenon more intensely.)  Government regulators and judges can imagine small changes from the status quo, but nothing more than that.  While he or she can easily see that which might well be destroyed over time by an economy made more dynamic by less government regulation, he or she never sees – and cannot ever see – that which would be created over time by this more dynamic competitive process.  The beneficiaries of sustained economic growth are mostly not even yet born, and the fruits of this growth don’t yet exist.  The beneficiaries and the products of a more competitive, more entrepreneurial, more innovative, faster growing, and less ‘protected’ economy are simply unseen today.  These beneficiaries don’t exist to plead their case in government office buildings or in courtrooms.  So when government has discretionary power to regulate economic activities, the bias is in favor of protecting the interests of known, existing groups at the expense of unknown, future groups.

It’s among the most difficult yet most important tasks of the economist to make visible these unseen future benefits (and costs).  The details of these benefits and costs are, of course, speculative: no one can know today what they are.  A competitive entrepreneurial process is required to discover what they will be because a competitive entrepreneurial process is required to create these benefits and to ‘assign’ their costs.  But history provides ample evidence that, left free of government meddling, a society with bourgeois values [4] will generate enormous and wonderful economic growth.

Russ’s first book, The Choice [5], remains my very favorite effort to make the future of open, entrepreneurial competition visible.

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