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Enough With Potted History

I thank Neera Badhwar for alerting me to this Bloomberg piece.

Editor, Bloomberg


Mark Gongloff bemoans the U.S. Fifth Circuit’s recent ruling that might signal a reining in not only of the Securities and Exchange Commission, but of the entire administrative state (“Enjoy Safe Markets, Food and Workplaces While They Last,” May 19). In Gongloff’s telling, Americans are protected from the likes of securities fraud, toxic drugs, and lethal home appliances only by the stalwart work of federal bureaucrats who, since the New Deal, thankfully have been largely free to regulate us Americans as they see fit.

Gongloff’s potted version of history, alas, would embarrass a fifth grader. Were he actually to study the relevant history and economics, Gongloff would discover that most of the fraud and hazards that allegedly plagued Americans until the New Deal are fictional, and that much of the government-imposed regulation suppressed competition and, thus, likely reduced rates of improvement in consumer welfare.

Consider, for example, financial markets. As summarized by University of Virginia law professor Paul Mahoney, “evidence offered in support of widespread fraud in early twentieth-century securities markets is extremely thin.”* Securities regulation – first by states and then by the national government – was crafted to protect politically powerful banks and houses from competition. As Mahoney concludes his detailed study of the much-revered Securities Act of 1933, “a closer look at the statute, in light of the competitive conditions in the underwriting market in the 1920s, shows that even the Securities Act was a likely source of rents for the firms it subjected to regulation.”**

As for our physical well-being, Americans’ death rate began an extended and precipitous fall long before the courts set Congress free, in violation of the Constitution, to delegate its legislative powers carte blanche to administrative agencies.***

The bulk of the protection we enjoy from fraud and dangerous products comes not from bureaucratic diktats but from competitive markets. Firms compete to build solid reputations through brand names, which become far more valuable to their owners than any short-run gains these owners might squeeze out of fraudulent actions.**** In addition, retailers – who also care about their reputations – inspect the goods they offer to their customers.

In markets, businesses and consumers spend only their own money for their own purposes, thus giving each person strong incentives to choose wisely and not be shanghaied by political fads or frenzies. Bureaucrats, in contrast, spend other people’s money for other people’s purposes, and so are ever-tempted to subject the populace to the latest intellectual craze or ideological fever.

By reining in the administrative state, national legislative power will be restored to where it constitutionally belongs – Congress – and, in the process, individuals will gain what Thomas Sowell describes as “a refuge from the rampaging presumptions of their ‘betters.’”*****

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Paul G. Mahoney, “The Origins of the Blue-Sky Laws: A Test of Competing Hypotheses,” Journal of Law & Economics, Vol. 46, April 2003, page 233.

** Paul G. Mahoney, “The Political Economy of the Securities Act of 1933,” Journal of Legal Studies, Vol. 30, January 2001, page 31.

*** See, for example, Stanley Lebergott, The Americans: An Economic Record (New York: W. W. Norton & Co., 1984), Figure 40.3, page 516.

**** See, for example, Daniel B. Klein, ed., Reputation: Studies in the Voluntary Elicitation of Good Conduct (Ann Arbor: University of Michigan Press, 1997).

***** Thomas Sowell, Knowledge and Decisions (New York: Basic Books, 1980), page 383.

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