Tuesday, 12 January 2016

Why Government Meddling Does Harm Even When It Does Good

Politicians come up with all sorts of initiatives to meddle in the market in ways they think are helping - whether it's price controls, wage controls, legal requirements that limit profits, green levies, fat tax, selective subsidies, cronyism with big businesses, and many other examples. Their efforts culminate in a net loss for the nation, not a net gain. Apart from the necessary light regulation required to avoid monopolies, to protect our health, and to protect our individual rights, politicians should resist the temptation to meddle, because a lot of the harm they cause goes largely unnoticed. And of course, as well as hidden harm, there is also tangible failure, because, as I've explained before on this Blog, astute business executives can easily circumvent governmental strictures imposed on them.

For example, if they are forced to pay a minimum wage, they will recoup their losses by increasing prices; if they are forced to offer customers cheapest price plans, they will simply configure their price plans sufficiently to stay within the orbit of the law, and yet still return the same profits as before by locating further profits elsewhere. In fact, in looking to circumvent government impositions, businesses often find additional ways to generate more profits or pay less tax. So government meddling is not only externally harmful, it is usually beset with economic futility too, as company executives are much better at manipulating the system than politicians are spotting them. This is a slight oversimplification, but not in a way that impeaches the overall point.

That was the futility of meddling; now the harmful bit. The harm caused is in the indirect consequences of the government's actions in the stability of the market. Yes of course it's possible for government meddling to benefit certain people in business - that's not in question - the issue is that in benefiting certain people, two further things happen; firstly, others are directly artificially disadvantaged (a good rule of thumb: you can't usually artificially advantage one group without artificially disadvantaging another group), and secondly, doubt and uncertainty insidiously pervades the market, which hurts (in particular) small businesses and would-be business ventures (the two groups the government is always saying it is trying to help).

The reason doubt and uncertainty prevail upon the market to the detriment of businesses is because continual government meddling acts as rule-changers that diminishes confidence in investment and innovation. If a danger exists that in the coming months the government is going to impose price controls in the energy sector, or fat tax on fast food, or heavy green levies in the industrial sector, there is disincentive to invest or innovate in those markets because future profits might be decimated by further government meddling.

Let me illustrate with an analogy. Suppose you were tasked with bringing together an instrumental ensemble to play as an orchestra at a big event at the Royal Albert Hall. With your expert knowledge you know how to arrange the string, brass, woodwind and percussion sections, as well as arranging who plays what, and when each player is conducted to play each note and chord in a carefully sequenced arrangement. Suddenly, though, your task is made difficult, because God, being in a devious mood, decides to mess around with the laws of nature to have fun at your expense. After God's mischievous tinkering you find that brass now sounds like string, woodwind sounds like percussion, and some of the notes and chords have been altered to sound different to what they did. And after going to the trouble of learning the arrangements under the new messed-up system, God decides to have fun again by altering everything for a second time, leaving you and the players thoroughly despondent once again.

God's tinkering has messed up you and your orchestra's plans to perform the concert. Not knowing which instrument corresponds to which sound-types, or which chord and note creates which pieces of music, you'd have no idea how many members of each section to have performing on the night, or what sounds they'd produce. The concert would have to be cancelled.

Now, of course, government meddling in the market isn't quite that extreme, as things can still function in spite of their meddling, but to a lesser degree it creates the same kind of instability and uncertainty. By diminishing the stability of the rules, governmental meddling deplete private innovation and initiative, and makes the market less stable and harder to enter. And as a further consequence, the more governments assume control of market situations, the more indifferent to personal responsibility people in business become. If the government legislates to protect one kind of customer, then suppliers tend to take their eye off the ball when it comes to other customers (this is also true when it comes to incentives for future innovations too). As a consequence, businesses become too concerned about the authorities and less concerned about their customers, their efficiency and their competition.

Governments that favour a laissez faire approach to the market provides its citizens with confidence in the stability of their free actions and planning based on the ability to forecast. A government that meddles in a laissez faire market only erodes confidence, induces instability, and impedes free actions and planning.

What the UK badly needs is a huge dose of deregulation - everything from housing, social services, education, the police and small business are being negatively affected by too much regulation. Let's take two of those areas to illustrate the point - housing and small businesses - and see how there would be benefits from deregulation. 

Firstly, excessive regulation hurts small businesses and prospective businesses because it makes it harder for them to enter the market and turn a profit. But while smaller businesses and prospective businesses are being stifled, this hurts not just them but all consumers, because healthy competition creates greater incentives for innovation and efficiency in big businesses too. Bigger businesses enjoy the benefits of regulation roughly to the same extent that smaller firms or would-be businesses trying to enter the market lament them. Small businesses would benefit from deregulation by having a more open market into which they could more easily enter.

Secondly, excessive regulation on housing - such as restricting where houses can be built, and carbon emission targets, is contributing to a housing shortage, as supply is not able to match demand. Environmental controls imposed on the building industry meant that "every new home in Britain would have to be built to a zero carbon standard by 2016" - although thankfully common sense has prevailed and it looks like this idiotic regulation will be relaxed. Housing companies, building industries and people looking for somewhere to live would all benefit from deregulation.

This sort of economic myopia is causing so much social damage – but as long as most of the electorate continue to be blind to it there will be no selection pressure to change (ironically, and I hate to have to say this, but only UKIP and the Libertarian Party are the ones I’ve seen wise and courageous enough to challenge this). 

Why do governments regulate so excessively when such excessive regulation is bad for the economy, and in particular for the small businesses that most need to enter the market? Assuming they are not ignorant of this fact, it is usually either A) They know most of the electorate think the opposite of the truth - that excessive regulation is good because it stifles corporation power and helps small business get a foot hold in the market; or B) When courting popularity, politicians need to keep looking for ways to make people think the government is making a radical difference in their lives.  From what I can see, pledges for bigger government intervention go down well with lots of people who don't understand that the market induces innovation and efficiency much better than the State – so it’s no surprise that they are attracted to this like sharks to a blood-soaked limb.


* Picture courtesy of sodahead.com