ENVIRONMENTALISM naturally leads to rules and regulations. Automobile producers are to meet emission and fuel standards. Electrical generating plants are to control sulfur and fly-ash emissions. Industrial firms are to stop discharging wastes into streams. The list of environmental regulations is not endless but covers thousands of pages. And these regulations can be matched page for page by regulations in other areas. Individuals often worry about the growth of government expenditures, but government’s greatest growth has undoubtedly been in the area of regulations.
While regulations have grown dramatically in the United States, we probably have fewer regulations than any other industrial country. But we impose regulations in an advisory legal system that makes what regulations we do have much more, difficult to implement. Long-time delays are common as we fight our way slowly through the court system to find out what the regulations really require. Once a goal has been legislated into law, the fight has just begun. To a great extent the time delays and uncertainty that this process creates have a more adverse effect on the economy than the regulations themselves.
Occasionally regulations are overtly imposed to raise the income of some group (farmers) and to lower the income of some other group (consumers of food), but more often they are proposed on the grounds that they will accomplish some worthwhile social objective. Trucking regulations are defended by truckers since they raise the income of truckers, but the defense is based on the grounds that the regulations will provide cheaper or more reliable transportation to small communities. Steel producers would not have lobbied for steel import restrictions if these restrictions had not resulted in higher incomes for producers, but their rationale for doing so was “national defense.” But whatever the overt objective, the implicit objective is always to alter the distribution of income and this is almost always the real reason for the existence of any regulation.
Because economic regulations are designed to raise the income of someone (and therefore lower the income of others), no one can say that a regulation is good or bad without a vision of what distribution of income should exist, and how this distribution ought to be created. In the abstract deregulation is a popular cause. Everyone is for it. In practice each of us opposes deregulation when it will lower our own income.
A large number of factors have contributed to the growth of economic regulations. To some extent they spring from our lack of other kinds of government involvement. In Japan, where industry is heavily dependent upon the Bank of Japan for its financing, government can issue marching orders to steel mills to stop air pollution without detailed regulations. The firms know that if they do not “voluntarily” perform the desired task they will have trouble with their “friendly” banker. In contrast, U.S. steel mills can only be persuaded to stop pollution with a host of complicated, cumbersome legal restrictions which must be legislated, drafted, enforced, and arbitrated in court over a substantial period of time. The same phenomenon is visible in Europe where governments own many industries (Volkswagen, Renault, British Steel), and firms need government’s help in the capital market. When government owns or controls, it obviously does not need to write rules and regulations in the way we write rules and regulations.
Historically, there have been three great bursts of regulatory activity in the United States. The first occurred around the turn of the century. Antitrust laws were adopted to control man-made monopolies (oil, steel), and government regulations were invented to control natural monopolies (railroads, electrical power). In both cases the aim was to keep monopolists from extracting monopoly rents from the incomes of either consumers or other producers. The second burst of regulatory activity occurred during the 1930s. Various ineffectual schemes for curing the Great Depression by raising prices were adopted, but with the exception of agricultural price supports, the long-lasting regulations focused on constructing a legal environment that would make it easier for workers to form unions. The thirties essentially accepted the idea of large businesses but sought to limit their power with the countervailing power of large unions. The third burst of regulatory activity occurred during the late 1960s and early 1970s, and we are still in the process of digesting its effects. While the most recent burst has a number of facets, it essentially focuses on the problem of eiternalities and economic security.
In the case of externalities such as pollution, one individual can impose costs (dirty air) on another individual without having to pay:coinpensation. The natural response of the second individual is to demand government regulations prohibiting the acts of the first Individual, and this is exactly what has been happening.
Externalities have become important in our society for a number of reasons. As our society becomes more technologically advanced and more congested, one group’s actions much more frequently impact another group’s welfare—airport noise. But our technology has also exposed long-standing externalities that we previously did not recognize—the cancer danger of asbestos fibers. As we have seen, the rise in real incomes has also played a role. Environmental interests systematically depend upon our income. In the fate 1960s the United States reached an income level where many people were rich enough to be concerned about a clean environment.
This economically Induced shift in concerns was heightened by the fact that nature has some self-cleaning capacity. As long as the level of pollutants stays below this limit, Mother Nature cleans up the environment for us. If that limit is exceeded, however, the self-cleaning capacity often decreases. In the case of water, dissolved oxygen is the critical factor. When pollution rises above the level where self-cleaning is possible, the level of dissolved oxygen rapidly falls and water’s self-cleaning capacity falls with it. The result is a situation where a small addition to the total amount of pollutants can lead to drastic increases in the amount of pollution. In the case of water pollution, most rivers were polluted well before the current interest in clean water; but in the case of automobile-induced air pollution, the effects are often recent. The city of Denver is a good example of a city that shifted from relatively clean air to heavily polluted air in a very short period of time. Air pollution is also, of much more general concern. Water pollution can be avoided by staying away from polluted water, but it is much harder not to breathe than not to swim or boat.
We have already investigated the rising interest in income security. In most circumstances, regulations are seen as the best means for preserving or obtaining this security; foreign steel is to be kept out, set-aside programs are to raise the price of agricultural commodities, and entry is to be restricted into the trucking industry. But to provide economic security, rules and regulations must be issued. Farmers must be told what and how much to plant Government ends up setting the price of steel depending upon its trigger-price regulations. To keep entry restricted in trucking detailed regulations must be written as to who can carry what, “Unroasted peanuts are not roasted peanuts.”
The demands for protection have grown because, in a real sense, we have abandoned our belief in the virtues of a competitive, unplanned economy. Political speeches are still offered up to the totem of unplanned, competitive economies, but at the first sign of trouble everyone runs to the government looking for protection. The same steel executives who can give speeches about the virtues of competition ask for protection when competition arises. When deregulation of the airlines industry is proposed, the industry leads the opposition. Truckers may be in favor of competitive economics for others, but they want regulations for themselves. In some sense we have the worst of both worlds. We have a centrally .regulated economy without the virtues of central planning. We won’t admit what we are in fact doing, and thus every regulation is set up in isolation as if it were the only regulation in the system. We might gain in efficiency if we moved in either direction—toward more competition or toward more central planning.
At one time it was thought that all problems could be solved if the economy were only made competitive. It is this belief that lies behind both antitrust legislation and government regulatory agencies. The first is supposed to ensure that the basic conditions of competition exist, and the second is supposed to ensure that natural monopolies act as if competition did exist. For a number of reasons this vision has faded, but the regulations still exist and are now used to protect and raise incomes rather than to ensure competitive actions.
A competitive economy is without a doubt an economy filled with a great deal of potential opportunities, but many of these opportunities are bad. They result in income losses, risks, and uncertainties. We want opportunities for higher incomes (competition) but security for our present income (protective regulations). And as our consumption rises, the size of this desired, secure base has a habit of rising just as fast as our income. Unfortunately, we cannot have both. One man’s security is another man’s lack of opportunity. Thus we usually end up prescribing competition for others and security for ourselves. When we all do this, however, we end up with an economy full of regulations that prevent us from growing as fast as we should.
The attraction of the competitive ideal has faded for a number of other reasons as well. Individual firms and unions are so large that even if they are, in fact, competitive, the whole system-does not have the attraction that it did when individuals were seen as the principal economic actors. General Motors versus Toyota may be real competition, but it is hardly a form of competition that wins the emotional support of the average man.
We also now realize that many of our problems would not be solved with more competition. To the extent that we have problems with externalities, competitive markets are no solution at all. A competitive firm will generate as much, or more, smoke than a noncompetitive one. There is also the suspicion that the virtues of small-scale competition Ignore the problem of research, development, and economic progress over time. Without the research and development of oligopolistic firms, the economy might not grow as. fast as it does. We pay a short-run price for some long-run gains.
Finally we now have historical experience demonstrating that the antitrust laws do not, in fact, produce competitive industries. At best the laws break one very large firm into two or three large firms after a very lengthy and costly legal battle, and the industry becomes slightly less oligopolistic. But slightly increasing the number of oligopolistic firms does not seem to make much difference in market behavior. The costs of enforcement are high and the benefits small. Antitrust laws have taken on a legal life of their own, but from the perspective of economics, they have little meaning or rationale. But with the intellectual heartbeat of antitrust dead, regulation remains as the only alternative. Instead of creating competition, we get Into the business of trying to control oligopolistic behavior.
As new problems develop and conditions change, it is not surprising that new regulations have been written. This does not by itself, however, explain why the economy is becoming more regulated. If new regulations were matched by the abolition of old regulations, the economy would not become more regulated over time, Why aren’t antitrust regulations abolished or substantially overhauled? Why aren’t regulatory agencies abolished when conditions change? The failure of deregulation is central to understanding the regulatory process. To understand it, however, is to come right back to the problem of income protection.
Regulations persist since regulations affect Incomes after they have been in place for any period of time. Someone’s income is higher than it would be if the regulations did not exist. Deregulation, as a result, always poses economic losses for someone. Often the people who lose are not those who made the original income gains when the regulations were imposed. These are long dead or they long ago sold out the capital values that relected die value of the regulations.
Workers have the same vested Interest. They enter an Industry expecting some wage, but that wage depends upon the existence of regulations. Regulations make, the trucking industry profitable so that it can afford to pay its workers high wages. With deregulation, profits would fall and wages would be reduced. Over time, workers have acquired some of the benefits from charging higher prices to consumers, and over time they would lose some of those benefits if forced to give consumers lower prices. As a result, it is not surprising that both firms and employees resist deregulation strenuously. If the rest of us were to get cheaper products, they must earn less money. Politically, there may be more consumers than producers, but the per capita income losses to producers are much larger than the per capita income gains to consumers. Intensity overwhelms numbers, and the resistance to deregulation may be much stronger than the pressures for it.
Regulations are held in place by economic self-interest. In the case of airlines, this was true even when it was clear that profits would be higher after airline deregulations than before them. Total profits may be up, but some individual airlines will undoubtedly find themselves losing out in the new environment. Their profits will eventually fall. In addition, the new world is a world of uncertainty, and most are willing to trade some reduction in income for an increase in income security. In this, airlines are no different than the rest of us.
While it is relatively easy to chart the coniicting pressures that have led us into the current regulatory morass, it is much more difficult to chart a way out of the morass. What is the appropriate role for regulation? What goals can it not achieve? What goals must be achieved by other means? Before this task can be undertaken, it is necessary to clear the decks of some old intellectual baggage. Most of the debate surrounding regulation is encrusted in a set of issues and positions not relevant to the real problem. I have organized the cobweb-sweeping process under eight fundamental propositions about rules and regulations.
Often discussions of government regulations are posed in the form of a debate between the virtues of regulated versus unregulated economies. While debates are good clean fun, there is nothing to be debated if the issue is cast in this format. There simply is no such thing as the unregulated economy. All economies are sets of rules and regulations. Civilization is, in fact, an agreed upon set of rules of behavior. An economy without rales would be an economy in a state of anarchy where voluntary exchange was impossible. Superior force would be the sole means for conducting economic transactions. Everyone would be clubbing everyone else.
All market economies depend upon a set of rules and regulations that define how property rights are acquired and the conditions under which these property rights can be exchanged. One can have, and we have had, a market economy with or without the right to have slaves. Under current law one cannot even sell oneself into slavery. The elimination of slavery does not make the economy any more or less a market economy. It simply changes the domain over which individuals can enter into market transactions. In one case the market can deal in human bodies; in the other it cannot.
Before a market can be organized, the government must establish a set of rules and regulations specifying property rights. Without these regulations there is no theft (the illegal seizure of property rights), and without theft there is no room for a market. No one owns anything that can be exchanged for any other ownership claim. Therefore, the whole issue of property rights and transfer mechanisms must logically be considered prior to any debate about the merits or demerits of the market. Without government regulations there are no property rights, and without property rights there is no free market.
While property rights of long historical lineage often seem intuitively obvious, they are not. If my neighbor throws his garbage on my lawn, I have the right to call the police to stop him and the right to seek damages. If my neighbor throws his garbage in the air (burns it), I typically do not have the right to call the police and collect damages. I have property rights to land but no property rights to air. Yet clean air is probably more vital to my existence than clean space.
Each of us could give a good historical explanation as to why air property rights have not been developed. In a rural environment, air pollution is so unimportant that the ownership of air rights is simply not important enough to worry about. Clean air has a zero market price. But as society becomes more industrialized and heavily populated, clean air starts to have a positive market value, and its ownership becomes a real issue of concern. A similar change can be seen in the Law of the Sea Conference. It meets to delne property rights to the ocean floor. But this issue only becomes worth discussing when we have the technology to mine the ocean floor. We do not debate the ownership of the planet Pluto since no one has the ability to appropriate it.
Technology may also lead to different specifications of property rights. Air moves around and is not easily appropriable in the way that land is appropriable. Do I own the air over my space or do I own some set of molecules? What happens if my air wanders? Air property rights have to be collective property rights father than individual property rights. If they are collectively owned, then a set of rules and regulations for their collective use must be written. If they are individually owned, then a set of roles and regulations setting out the conditions of individual ownership must be written. But in either case, there are going to be numerous rules and regulations. The issue is one of writing a set of. rules and regulations, which society can live by, in an area that has not previously been important enough to merit a set of rules and regulations setting out collective or individual property rights. This is not the place to argue whether the current clean air rules and regulations are the right roles and regulations. It is the place, however, to point out that no matter how the issue is decided, there are going to be more rules and regulations than there were in the past.
Without the rules and regulations, the strong will simply seize what they want from the weak and then the strong will have to invest real resources in defending what they have just seized. Property rights exist to establish a just (or at least a widely agreed upon) set of rules for acquiring and exchanging property and to then reduce the costs of production and consumption by agreeing not to seize each other’s property.
Thus the question of property rights is central to any economy, regardless of its degree of allegiance to market concepts. Property rights are, however, nothing but a set of rules and regulations. A private property economy is by definition a regulated economy. If the state owned everything and there were no private property, there would be no need for government regulations spelling out the nuances of property rights. There would need be only one regulation. All property belongs to the state, and it can do with it what it wishes. The real question and ihe real debate revolves not around the virtues of the regulated versus the unregulated economy, but around the question of what constitutes a good set of regulations.
Gleefully finding silly government regulations has almost reached the status of a national parlor game. And nowhere is it easier to play the game than in the domain of OSHA—the Occupational Safety and Health Administration. Whenever silliness arises, it is well to ask why. It could arise because we are chasing after silly ends, or it could arise because we are using inappropriate means to achieve perfectly respectable ends. In the case of OSHA, the latter is clearly true. No one questions the virtues or the seriousness of reducing industrial deaths and injuries. The question is one of means.
Basically the problem is not one of stupid bureaucrats but one of trying to write universal regulations in an area where it is impossible. A regulation that makes sense in one context may not in another. Take the problem of providing toilet facilities for farm workers. A regulation that may be eminently sensible in a densely populated truck-farming area (a toilet every forty acres) with hundreds of farm laborers may not make sense on a Montana ranch where it is miles to the nearest person, and where there are hundreds of thousands of empty acres that seldom, if ever, see an agricultural worker. Yet for a set of regulations to be sensible in every section of a country as large as the United States, it would have to be so lengthy that it would be equally silly. Suppose that someone were to report that it took the government ten thousand pages of regulations to spell out the appropriate toilet facilities for every conceivable condition. Each of those regulations could be sensible, yet the aggregate effect is nonsense. The problem is using an inappropriate means to achieve a respectable objective.
It is also well to remind ourselves that silliness is not limited to public actions or to other individuals. Every example of stupid government action could be matched by a private example. The Edsel, for example, has entered our language as the paradigm example of a stupid action that wasted millions of dollars worth of resources. Boston’s John Hancock building, with its falling panes of glass, was a fiasco from the day it was built. What would have happened if some government bureaucrat had built it? The U.S. steel industry misinvested millions on open-hearth furnaces when it should have been building oxygen furnaces. Most of us would have to admit, at least to ourselves, that we have made stupid mistakes in our own budgets.
We tend to excuse stupid private actions on the ground that the agents making the mistakes are wasting their own resources and that therefore their mistakes are their business. To some extent this is true, although it does not change the fact that all decision makers make mistakes. But to a very substantial extent, it is also not true. Managers of large corporations are not making mistakes with their own money. Both they and the government bureaucrats are playing the economic game with someone else’s money. Whenever private or public managers make mistakes, they are going to be wasting someone else’s money. And in general, it is much easier for a voter to replace a poor public manager than it is for a shareholder to replace a poor private manager.
Recounting examples of silly stupid actions is good clean fun, but in the end it doesn’t prove anything about the virtues of regulation. No one doubts that there are both sensible and senseless regulations. The problem is to maximize the proportion of regulations that fall into the sensible category.
What holds the regulations in place? The answer is simple—income security. Any long standing set of regulations ends up raising the income of someone. And usually this someone includes some capitalists, some workers, and some consumers. When regulations are repealed, those individuals stand to suffer income losses. Other individuals stand to make gains, but the principle of territorial imperative applies in such cases. People fight harder to protect what they have than they fight to get something they do not have and have never had. Often this is compounded by the fact that the income gainers are widely diffuse while the income losers are highly concentrated. One fights much harder to protect a large sum than one fights to get a small sum. In addition, those who have been receiving help are usually well aware of this fact and have thoroughly entrenched themselves to repel attacks on their privileges long before anyone thinks of mounting an attack.
Consider the simplest case of a taxi medallion. Suppose these medallions (a permit giving one the right to operate a taxi) sell for $ 20,000. What gives these permits their value is that some agency holds the supply of taxis below the competitive level, and this leads to high profits. If medallions were simply issued to every potential taxi that met the required safety standards, medallions would have no value. They have a value because there is a monopoly supplier of medallions (the city) that is not issuing more medallions (is holding the number of taxis below the competitive level) and thereby is generating extra profits.
Suppose the city were now to deregulate taxis and shift to a free entry system. The value of the medallions would go to zero. Obviously, if you have purchased the right to operate a taxi for $20,000 you do not want someone destroying your $20,000 asset. True, there are more passengers than there are taxi operators. But each of them would only receive a small reduction in fares if the system were deregulated. The customer does not have enough financial interest to spend the time and money fighting for deregulation, but the provider has a very substantial interest in spending the time and money fighting for regulation.
Or take the more important case of general transportation. Transportation is probably the best example of an area that should be deregulated from the point of view of economic efficiency. The Interstate Commerce Commission was set up in 1887 when the railroads were a genuine natural monopoly. Not only were they monopolies, but they were run by individuals who believed in extracting their full measure of monopoly rents. Regulations and regulatory agencies were necessary to protect consumers and other producers.
But as time passed and we invented or perfected planes, autos, trucks, pipelines, and a host of alternative transportation systems, an industry that was at one time a natural monopoly has become one that could potentially be one of our most competitive. Instead of gradually abolishing the regulations that made sense in 1887, we gradually expanded them to include these new forms of transportation. Regulations which at one time had been used to hold prices below the monopoly prices which would have been charged in an unregulated market became regulations that were used to hold prices above the competitive prices that would have been charged in an unregulated market.
As a result, the president of the American Trucking Association defends regulations in an interview in Fortune, magazine.1 A similar reaction occurred in the deregulation of airlines. Who objected in an op-ed article in the New York Times? Not some fool who wanted to regulate everything for the sake of regulating everything, but the president of American Airlines.
Conventional wisdom maintains that rules and regulations have been used to stop railroads from effectively competing with these other modes of transportation, and that the impact of the system has basically been a transfer of income from the railroad industry to these other forms of transportation, and to trucks in particular. The regulations have certainly hurt railroads and helped trucks, but not in the way it is commonly envisioned. Railroads have been hurt not by regulations that stop them, from competing with trucks, but by regulations that stop them from dropping unprofitable branch lines and services. Railroads are asking for the right to drop these activities, but they are not asking for general deregulation. They also like monopoly pricing under the protection of a regulatory agency.
Trucks and railroads have characteristics that make them optimal for carrying very different types of commodities. Railroads are optimal for bulk commodities (coal, grain, lumber, and so forth) that must be hauled over long distances. Trucks are optimal for packaged goods where door-to-door delivery and greater speed is important. When goods have some of the characteristics of both, we simply use truck-trains that take advantage of both sets of characteristics. The big gains going to truckers come not from protection from railroads, but from protection from farm trucks. There are millions of farm trucks that are only used part of the year in farming and could be used in commodity transportation if it were not for regulations preventing their use. If farm trucks were used in this way, interstate trucking firms would be forced to charge lower prices and live with lower incomes. Since this extra income has over time become divided between the owners of trucking firms and the Teamsters driving the trucks, both labor and capital have a vested interest in fighting deregulation.
If one asks why the regulations are used to stop railroads from dropping unprofitable services or from raising the prices on these services, there is a simple answer. Since railroads are the most efficient and cheapest mechanism for transporting bulk commodities, any community that loses its railroad service is going to find bulk commodities much more expensive. Communities fight to protect their real incomes, and this means opposition to deregulation. These particular consumers will suffer real income reductions when deregulation occurs, even though consumers in general will gain real income increases.
Regulations often cause cross subsidies where profits on one set of activities are used to finance losses on another set of activities. In this case, consumers in major population centers pay higher freight rates in order to lower freight rates in small population centers. Other examples of cross subsidies occur in the post office, (rural areas and magazines are subsidized) and, if AT&T can be believed, in the telephone industry. Long-distance calls subsidize local calls. Business charges are used to cross subsidize residential charges.
While there may have been small income gains for some forms of transportation at the expense of other forms of transportation, the real income gains have come from setting up an industrial structure that makes it possible for all forms of transportation to raise prices above the competitive level and thereby extract some extra income from consumers—not from each other. Recognizing that any such system is always vulnerable to political attack, the transportation industry has for generations been active politically. Through campaign contributions and past favors, it has established a deeply entrenched position in both political parties that would require a lot of political capital to overturn.
On the other side, transportation charges are small enough and hidden in other prices so that no consumer thinks be stands to make a large gain in real incomes with deregulation. The aggregate gains spread across 220 million consumers may be very large, but no single one of these 220 million consumers may have enough of a financial interest to make it worth the time and effort to fight for deregulation.
As a result, the fact that there are many areas that should be deregulated does not lead to the conclusion that there are many areas that will be deregulated. General economic welfare may increase, but if our incomes were being threatened we also would be fighting deregulation. Efficiency is never a virtue when our incomes are being threatened.
In many countries there are strong political parties committed to central planning, nationalization of basic industries, and regulatory control. Not in the United States. Here there are no strong political forces arguing for regulation for the sake of regulation. Regulations occur because the market fails to perform some task that the population wants performed or because our tolerance for failure has changed and we are no longer willing to tolerate long standing failures. This principle can be seen in the infamous troika of EPA, 0SHA, and ERISA (the Environmental Protection Agency, Occupational Safety and Health Act, and Employee Retirement Income Security Act).
The EPA arose because the automobile brought air quality standards to the top of the public health agenda in many parts of the country. Air quality levels were reaching intolerable levels. When school recesses have to be abandoned because the air is dangerous to health, as is the case in Los Angeles, it does not take a skilled political prognosticator to predict that there will be demands to do something. In this case the formation of the EPA was also helped by dramatic proposals to cut down the redwoods and flood the Grand Canyon. Air pollution was the catalyst that started the EPA, but once it was in place other long-smouldering issues such as water quality, endangered species, and wilderness areas bubbled to the top. Once some force is strong enough to break a political logjam, other issues will float downstream in the same current. The resistance to change has been broken and the advocates of clean air have a political interest in looking for allies.
Given some important issue around which the public can be mobilized, the nature of the system changes dramatically. Some new legislation and anew agency are put in place; but more importantly a professional cadre of individuals interested in, and dependent upon, environmental protection conies into being. Some of these people work for government, but many of them work for the lobbying groups (Sierra Club, Audubon Society, and so forth) that supported the original legislation. Others are volunteers who have made this activity into a central concern of their lives. The industries that produce air and water-pollution control equipment start to have an important stake in the regulations. High-sulfur coal producers in the eastern part of the United States help lobby to make those utilities burning low-sulfur western coal install stack scrubbers, since this will eliminate the competitive advantage of western coal. (More eastern coal will be burned and the incomes of the eastern coal industry will be higher.) The public’s attention will inevitably turn to some other issue, but this professional cadre can keep part of the public mobilized for a long fight and can sound the alarm whenever a dramatic issue surfaces. When it is necessary to mobilize the public to save the Grand Canyon, the system does not go back to the status quo ante when the Canyon is saved.
OSHA arose in the context of dramatic industrial accidents (mine disasters in West Virginia, kepone in Virginia), and the development of new technologies that were able to determine the long-run effects of asbestos, cotton dust, and the industrial pollution. A wide variety of substances could be shown to cause cancer in animals. Individuals were no longer willing to tolerate the black lung and silicosis that their fathers had tolerated. Occupational health and safety standards were not getting worse, but they were not keeping pace with our expectations. Here again, once in place, the regulators are going to address issues other than the dramatic issues that led to the regulations in the first place.
The ERISA regulation arose for the same reason. A very substantial number of elderly American workers were not going to receive a pension check they had been counting on because the firm (and hence the pension fund) into which they had contributed had gone broke before they reached retirement age. Others found themselves fired right before retirement so that firms could avoid paying their pension. Any of us who had been similarly treated would feel equally aggrieved and would demand that the government do something. As a result, it is not surprising that the government did do something.
In each of these cases it is fair to ask whether the rales and regulations actually adopted were the best solutions to the problem; but this does not alter the fact that there was a problem that had to be solved in some manner. The moral of the story is that it is not very useful to be for or against regulations in the abstract. Something is going to be done to meet a clear and present need. The real trick is to find a set of regulations which solves the basic problem without creating a host of subsidiary problems that did not previously exist.
Sometimes the regulation debate is cast as if it is an issue of Left versus Right with the Left demanding regulation and the Right resisting it. In fact, the Left and the Right regularly switch sides depending on exactly what is being discussed. Consider the issue of drug regulation. What, if any, drags should be banned? What, if any, drugs should be limited to prescriptions? We tend to think of drug regulations as if they date back to antiquity, but in fact they have been in place in the United States only since the late 1920s.
If we talk about deregulating marijuana, the issue is generally seen as a left-wing issue with the Left arguing for personal freedom while the Right argues for regulation. In fact, the issue is probably one that cuts across both conservative and liberal factions, with more than a few conservatives liking their occasional joint while puritanical liberals hold out for controls. If you take another drug such as laetrile, the issue is seen as right-wingers demanding the deregulation of the drug with left-wingers holding out for regulation. The Left holds that people should be protected from ineffective drugs, while the Right holds that personal freedom should reign. Here again, I suspect that in fact there are some of both on either side. And neither Left nor Right knows how to address our most dangerous and widely used drugs—tobacco and alcohol. Where do we enforce no smoking regulations? Should we subsidize tobacco farmers? What is the appropriate legal drinking age? Can blood tests be administered to automobile drivers? None of these questions can be solved in the context of Left versus Right.
Is the fifty-five-mile-per-hour speed limit a left wing or a right-wing issue? In fact it seems to be a geographic issue. Are the rales and regulations protecting the U.S. steel industry a left-wing or a right-wing issue? In fact they are supported by everyone (Left, Right, and center) in steel-producing communities. Such questions could be multiplied many times. But the point is hopefully made.
There is no consistent left-wing or right-wing position on regulation versus deregulation. They are both for regulation under certain circumstances (often different circumstances, but sometimes the same), and they are both for deregulation under certain circumstances. Neither is consistent in its positions and neither has a irm grip on deregulatory virtue.
Despite the vocal complaints, the United States is by far the least regulated of all the industrialized countries. In other countries there typically is a large nationalized government sector (or sectors)—railroads and telephones everywhere, Volkswagen in Germany, steel and autos in England, Renault in France, and so forth). Elements of central planning are common. The Japanese have their MITI and the French have indicative planning. Government is often the principal source of capital investment funds and can control as it lends. The most extreme example of this is in Japan, where most investment funds directly or indirectly low through government channels. Social welfare legislation and environmental protection are typically more advanced. Germany has its codetermination where union members must be represented on the board of directors. Italy is famous for its complex rules and regulations. When it comes to the degree of regulation, the United States is a follower, not a leader.
Yet, as, we have already seen, these economies are outperforming us and our own performance since the onset of the New Deal is better than our performance prior to the New Deal. Regulations can be deliberately used to promote economic growth, as in Japan, or they can be used to stop economic growth, as has been suggested by the ZEG forces. Either is possible.
Since individual economic actions occur in an integrated economy, the adoption of regulations in any one sector of this economy is apt to have effects in other parts. If you protect the steel industry and raise the price of steel, you are raising the costs of building cars in the United States and reducing the competitiveness of the U.S. car industry. Thus a regulation designed to protect one group is apt to hurt another group and lead to new regulations protecting the second group. If you protect steel, you are much more likely to have to protect autos. We have already examined the spreading wave of regulations in the energy area. Each new regulation forced us to yet add another regulation.
Increasingly in our efforts to prevent redistributional changes from coming about, both liberals and conservatives are asking for price controls, protection, and subsidies for institutions—all in the name of protecting individuals. While price controls can be made to work in some economic systems, they cannot be made to work in our mixed economy with its openness to political pressures.
Basically, price controls should be avoided whenever society is addressing any long-range problem. Controls are only useful when society faces a temporary situation (such as a war or an embargo) that is going to cause a severe short-run disruption but will quickly end at some time in the future. This is a lesson that needs to be learned by both liberals and conservatives alike. Oil controls were imposed in 1957 to hold prices up and in 1973–74 to hold prices down. They were appropriate in neither case since the problem being addressed was long run in both cases.
First, let us consider the case where price controls are used to hold prices below the level that would occur in competitive markets. Such controls are almost always instituted to prevent some dramatic price increases that threaten to cause major reductions in the real incomes of some group. For some reason, there has been a sudden shift in supply, and demand relationships, and people respond to the threat of real income reductions with demands for protection. Examples would include oil controls, natural gas regulations, and rent control. In the short run, price controls can mitigate the real income reductions, but at the expense of stopping someone else’s income from rising.
If the situation causing the rapid escalation in price is temporary, a crop failure for example, then there may be a case for preventing the sharp temporary shift in the distribution of real income. Extra price incentives are not necessary to restore production in agriculture, and industrial wages might be disrupted if agricultural prices were allowed to rise.
If the problem is a long-run problem, however, a very different set of considerations prevails. Consider the regulations on natural gas. Because of OPEC and declining U.S. production, prices are not going to return to the old levels. Controls can be used to break one large real income shock into several smaller real income shocks over time, but they cannot restore the previous price level. When they are used to hold prices down for long periods of time, they cause perverse effects on both the supply and demand sides of the market. On the supply side, the incentive to look for new natural gas is reduced, and incentives are created to hoard old natural gas in expectation of higher prices in the future. The technique for alleviating the painful symptoms of the short-run shortages makes the long-run shortage worse and thereby increases the long-run pain. On the demand side of the market, the incentive to conserve is reduced. If other forms of energy (coal) are not regulated, there is in fact an incentive to use more natural gas since it is cheaper than competitive fuels. Once again this exacerbates the long-run problem.
Since the demands for natural gas exceed the supplies of natural gas at the controlled price, the system also requires rules and regulations for allocating the existing supplies. These rules and regulations usually end up allocating most of the available supplies to those users who have gotten natural gas in the past. But these are often not the people who can most efficiently use the now relatively scarcer supplies of gas. Industrial users (glass making) and home users who need clean sources of energy may not be able to get it while electrical power plants, who can use any form of energy, have it. As a result, the gas is not being used in the places where it could create the most value. The longer the price is held below its competitive level, the worse such inefficiencies become.
This situation also creates further distortions in the economic system. Since more natural gas is needed, gas suppliers sign contracts to bring in LNG (liquified natural gas) at prices far above the competitive price. They are allowed to pass imported prices along to tihe consumer, and thus the consumer ends up paying more for gas in the long run than if prices had been allowed to rise in the first place.
The same problems can be seen in rent control. Since New York City is the only major city that has had rent control for a long period of time, the problems are most visible there. First, those in controlled apartments have an incentive to hold onto the cheap controlled apartments even after family needs have changed. Large apartments are occupied by elderly couples or single individuals because they are cheaper than smaller apartments suitable to their needs. Thus, the effective supply of apartments is reduced and the upward price, pressures on the noncontrolled part of the market is increased. On the supply side, landlords have neither the incentive nor the resources to maintain their buildings. Every price is appropriate to some quality level, and if the price controllers will not allow a landlord to raise his price to correspond to the current quality level, he can simply lower his quality level to correspond to the allowed price. Regulations can be written to try to stop this adjustment, but they are difficult or impossible to enforce. Other options also exist. If new buildings are not rent controlled, the appropriate strategy is for the landlord to let his building deteriorate (let the tenante gradually tear it down) and milk it for all of its cash flow during a period of deterioration. Once it has gone beyond the bounds of human habitation, it is torn down and a new uncontrolled building is erected. Or the building can be converted to condominiums. Renters are forced to become buyers at the market price or move out.
Since housing is subject to strong neighborhood externalities (the price of any one house depends upon the quality of the neighborhood in which it is located), any incentives to let housing quality fall can have large effects on others. Rents will fall in a neighborhood of deteriorating houses even if some of the houses are not deteriorating. And falling rents will mean that maintenance is not financially possible in the previously well-maintained buildings, and they will begin to deteriorate also. Long-run rent control is not the sole cause of New York City’s housing problems, but it certainly has made these problems worse.
But there also is a question of equity involved. Price controls can, only stop real income reductions by stopping real income increases for someone else. To hold down the price of natural gas or rents it is necessary to hold down someone’s income. Let’s suppose that we have decided to cushion the income shocks of market-priced natural gas or rents. This leads to the question of what is the fair way to raise the necessary revenue. Should we all have to pay through general taxation or is it fair to levy a tax on the owners of natural gas or apartments? They may be richer than the average consumer, but there also are many other even richer people who’ do not own natural gas or apartments. Why should they be excused from paying?
If price controls are effective in holding down prices, they end up creating even greater shortages and higher prices in the long run. Assets are frozen into efficient uses (LNG tankers). Efforts to legally evade the regulations generally lead to a set of perverse actions that host subsidiary problems (deteriorating neighborhoods). The effective tax that is levied to pay for the income protection is generally an unfair tax in accordance with neither horizontal equity (the equal treatment of equals) nor vertical equity (the correct distribution of tax burdens between rich and poor).
Using price controls to hold prices above competitive levels is probably even more common than the reverse. Farm price supports transportaton regulations, import restrictions, and minimum wages are only a few. In the long ran, they create an equal set of problems.
Firms that benefit from controlled prices often do not have higher rates of return on capital than those that do not benefit. Initially proit rates are up, but this attracts more resources into the industry. Since price competition is prevented, these resources are typically used in various forms of nonprice competition—advertising, number of lights—or in excessive capital investments (too many oil wells, too many trucks). This use of assets is not completely useless, but it also is not the most efficient use of assets. The result is some net reduction in our rate of growth and real living standards.
If extra profits do emerge, these also lead only to a one-shot gain. The extra profits get capitalized into the price of the controlled assets, and any new purchasers receive a competitive rate of return on their investment. Taxi medallions have a value because they have succeeded in raising the profits of running a taxi cab, but the regulations do not help any new entrant into the taxi business since he must purchase a medallion as well as a taxi. When both costs are considered, taxis earn a competitive rate of return. But here again, no one who owns medallions wants their value reduced even if they do not raise long-run profits. The same is true in every other industry that enjoys protection.
The post office is another example. Since postal rates have been set at a level far above the cost of delivering much of the mail, regulations must be issued and enforced thereby stopping others from going into the first-class mail business. We are all familiar with the news story of the post office suing to stop some child from delivering local mail, but the purpose is to stop real competition. The result is a situation where the post office and postal workers have-little or no incentive to cut mail delivery costs. As we have recently witnessed, this is true regardless of whether the post office is organized as a government department or as a profit-making corporation. Utilities, industrial mailing firms, and others would undoubtedly do to first-class rates what United Parcel and others have done to parcel post if given a chance. Undoubtedly there are routes in-the United States that could not be competitively serviced with fifteen-cent first-class letters. But if low-price mail deliveries are a national goal, then we ought to finance this goal nationally and not levy a tax on those who should be getting cheap mail deliveries because they live in places where mail can be delivered cheaply.
In the short run, price controls are always seductive. They seem a direct way of achieving some objective, but they end up causing enormous long-run costs to achieve some very limited short-run objective. And if this objective is desired, there are many other ways (direct income subsidies) in which it can be achieved.
Generally we do not follow the cheaper, more direct route of direct income subsidies for a simple political reason. Voters will not put up with large direct subsidies, but large indirect subsidies can be hidden from the voter if roles and regulations are used. Agricultural subsidies are worth hundreds of thousands of dollars to some large farmers, but no Congress would ever pass a law simply giving large fanners several hundred thousand dollars apiece. The same Congress will, however, pass price support legislation that does exactly the same thing. Along with their greater efficiency, this is one of the reasons why direct subsidies should be used rather than indirect subsidies. If we would not support them overtly, probably we should not support them covertly. This applies to both industrial subsidies and human subsidies. If we want to raise the income of low-wage workers, a wage subsidy is to be preferred to a minimum wage. We then know what higher wages for low-income workers cost us and can evaluate whether it is worth the cost.
If we are to establish a competitive economy within a framework of international trade and international competition, it is time to recognize that the techniques of the nineteenth century are not applicable in getting ready for the twenty-first century. The late nineteenth and early twentieth centuries witnessed a two-pronged effort to create and maintain competitive capitalism. Antitrust laws were developed to break up man-made monopolies, and regulations were developed to make natural monopolies act as if they were competitive. While both of these approaches have had their problems, the time has come to recognize that the antitrust approach has been a failure. The costs it imposes far exceed any benefits it brings.
The futility and obsolescence of the antitrust laws can be seen from a number of vantage points. First, with the growth of international trade it is no longer possible to determine whether an effective monopoly exists by looking at local market shares. Regardless of the share of domestic production held by General Motors, General Motors is part of a competitive industry and must deal with strong Japanese and European competitors. In markets where international trade exists or could exist, national antitrust laws no longer make sense. If they do anything, they only serve to hinder U.S. competitors who must live by a code that their foreign competitors can ignore.
One could debate whether international antitrust laws would make sense, but this debate would be completely irrelevant from a practical perspective. In the absence of anything resembling world government, and in the presence of widely differing views on the usefulness of antitrust legislation, no enforceable, international antitrust laws are going to come into existence.
If competitive markets are desired, the appropriate policy should be to reduce barriers to free trade. Whatever good competitive effects the antitrust laws have had on the behavior of the U.S. steel industry, they are completely dominated by the bad competitive effects of the reference price system designed to keep foreign steel out of the United States. Whatever good competitive effects the antitrust laws may have had on the behavior of U.S. auto makers, they are small in comparison with the competitive pressures brought by Japanese and European automobile producers. If one measures the potential gains to be made by enforcing the antitrust laws, as opposed to reducing real barriers to international trade, it is clear that the large gains exist in the area of more international competition.
Second, as incomes rise it becomes less and less clear as to what is the relevant market to determine whether a firm has acquired a monopolistic position. Most goods we buy are not physiological necessities but luxuries that could be substituted by other goods to produce just as high a real standard of living. Rolls Royces and Volkswagens are both cars, but the two products are in no sense competitive. For those who buy an expensive car, the real trade-off may be with a swimming pool, a summer home, or a wide variety of other products. Rolls Royce may have a virtual monopoly position in the production of very expensive cars yet still not have a position it can exploit. If it prices its product too high, people will shift to different products.
As an illustration of the same problem at the other end of the price spectrum, consider the antitrust case in the breakfast cereals business. Let us assume that a few companies have established an oligopolistic position with respect to dry breakfast cereals and are charging more than would be charged in a competitive market. Since any individual consumer can, if she or he chooses, buy no-name brand corn flakes at a much lower price, the brand names must be yielding some psychic utility or brand name corn lakes would not be sold. Consumers may have been convinced of this psychic utility because of advertising, but so what? At the income level of most Americans, most wants have been determined by some explicit or implicit form of advertising. Physiological needs determine very few of our expenditure decisions. Individual consumers may be making silly decisions (buying products at prices higher than they need to pay), but it is hardly the appropriate role of government, much less the antitrust laws, to stop people from making silly decisions that do not affect anyone but themselves.
But let’s suppose that the no-name brands did not exist. Since corn flakes are hardly a unique, patented, hard-to-produce product, the absence of no-name brand corn flakes could only mean that individuals are willing to pay for having brand name corn flakes. People are allowed to pay for the brand labels of clothing designers. Why stop brand labels here? If the brand premium gets too large, others can easily enter the no-name brand corn lakes market. But even if no-name brand corn iakes could not be produced, there are still a great deal of other breakfast alternatives (bacon and eggs, no breakfast). These other products make the market a competitive market even if there is no competition within the dry cereals business.
Third, monopoly rents are inherently limited in an economy full of large conglomerate firms. Since established market positions are usually easier to defend than to create, oligopolistic firms may be able to extract a small price premium from titeir customers, but this ability is inherently limited by the ability of other large firms to enter the market. Excessive rates of return attract competitors, and potential competitors have the ability to enter all those markets that are not natural monopolies. While the conglomerate movement may have lumped activities together that are not the most efficient sets of activities to be lumped together (to the same extent this is a product of the antitrust laws), it has also created a set of large firms that scan a wide range of products and markets to search for profitable investments. Firms with no actual or potential competitors are few and far between. As a result, this apparent monopolistic position is actually vulnerable from both the demand and supply side of the market. Potential customers have alternative uses for their incomes and potential competitors are almost always waiting in the wings if profits appear too high.
Fourth, it is not obvious that anything of economic value is accomplished even if an antitrust case is won by the government. Consider the current IBM case. Suppose the government were to win and IBM were to be broken into three or four large firms (an outcome that js highly unlikely given recent antitrust experience). What characteristics of the industry would change? By now we should have enough experience to know that a three or four-firm oligopoly does not act noticeably different from a one-firm monopoly faced with potential competition (the Japanese) in its main business and actual competition where it is weak (in small computers).
If you look at other industries where antitrust laws have resulted in the creation of new competitors (oil and aluminum) or where they have stopped inefficient producers from being absorbed by competitors (steel and autos), it is hard to argue that these industries are more efficient or less competitive than the computer industry. IBM has driven other large firms out of the industry (GE and RCA) through being able to provide a better product. If the case were to succeed, the most likely winners would not be computer customers but foreign computer manufacturers. No one questions that IBM has a dominant market position. But this is not to say that it has been able to extract crippling monopoly rente from computer customers. In some ways the case reads like a government sign saying, “It does not pay to be too efficient.” Yet in a larger context, this is certainly a slogan that we do not wish to issue if we are interested in long-run efficiency.
Fifth, the whole antitrust vision springs from a very narrow view of competition. Competition means price competition—nothing more and nothing less. Yet price is clearly only one of the many competitive weapons (advertising, product quality, and so forth) and in many areas not the most useful or used weapon. We have a vision in the backs of our minds that if we only create enough firms, firms will be driven to price competition and have to abandon other forms of competition.
There are several problems with this vision. Even if it were true, the required number of firms is so much larger than the number that would be created by an antitrust “win” that it has no relevance to antitrust legislation. But more fundamentally, it is not true. There are many industries with thousands of small-scale producers (real estate agents, lawyers, doctors, specialty shops) who do not compete based on price. Many customers would rather shop in elegant surroundings than buy at the lowest possible price. Shopping and the thrill of being enticed may be a major part of the enjoyment of buying goods and services. To look simply at the degree of price competition in the economy is to grossly underestimate the degree of real competition in the economy.
Somehow lurking in the backs of our minds is the puritan idea that if we could only strip away advertising, fancy surroundings, nonessential product characteristics, and the attractive salespersons, we would get back to true preferences that would create more enjoyment. Most of us think that we are clever enough to avoid being duped into doing anything that we do not really want to do, yet we think that we must act to protect someone else from being led astray. Why? Let me suggest that there is no reason. Nonprice forms of competition are just as useful and valid as price competition. When industries do not engage in price competition, there usually is a perfectly good reason (other than monopoly) as to why they do not. It simply isn’t the most efficient way to compete. As a result, we are not going to restore price competition and puritan simplicity through the antitrust laws.
Given our modern economic environment, antitrust regulations should be stripped back to two basic propositions. The first would be a ban on predatory pricing. Large firms should not be allowed to drive small inns out of business by selectively lowering their prices in submarkets while they maintain high prices in other sub-markets. The second proposition would be a ban on explicit or implicit cartels that share either markets or profits. Firms can grow by driving competitors out of business or by absorbing them, but they cannot agree not to compete with each other.
In an economy as complex as that of the United States, no one can with 100 percent certainty say exactly how competition and industrial structure would change if the antitrust laws were reduced to the fundamentals of prohibiting predatory pricing and cartel formation. Perhaps we would find that some unacceptable results would occur and that some additional regulations would be necessary. If so, the necessary regulations can be written when the abuses appear. This is an area that has become so complex and so little connected to economic goals that we need to start over and see what a modern economy needs in order to remain a competitive economy.
None of this is to deny that technological advances will from time to time require changes in the rules of industrial competition. With the development of microwaves and satellites, the long-distance transmission of messages may have changed from a natural monopoly to a potentially competitive industry. If so, roles and regulations governing the telephone business should be changed to reiect this development. Whatever should be done, however, the correct answer is not an antitrust case against AT&T. A regulated monopoly should be governed by regulatory procedures and not by antitrust procedures. If the goal is a competitive industry in longdistance transmission, an antitrust case is simply not the means for getting to this objective. Deregulation is best achieved by deregulation, not by a lengthy court case based on principles that have nothing to do with regulation or deregulation.
Basically, regulators have two sets of instruments. They can attempt to set regulations that influence the production of some good or service. These might be called q regulations since they are intended to affect quantities directly. Or, they can attempt to levy taxes or subsidies to encourage or discourage the production of some good or service. These might be called p regulations since they aie intended to affect prices. In general, we have relied too much on q-type regulations and not enough on p-type regulations. With p-type regulations the regulator tries to take advantage of market incentives rather than attempting to ight market incentives as is tile case with q regulations.
Effluent charges are p regulations that lead to less pollution. Insurance charges under the workman’s compensation system can be raised to cover the real costs of industrial accidents, to allocate those costs to industties with poor health and safety records, and to give those industries a real incentive to improve their health and safety performance. Private pension funds can be federally insured in a system that reflects the real probabilities of default. Or individuals could be allowed to buy extra pension benefits through the social security system. Such charges have the advantage that they encourage each individual economic actor to find the best method for reducing pollutions and accidents or for assuring future pension rights.
The virtues of p regulations over q regulations are something that the economics profession has stressed for decades. There are undoubtedly some areas where such market solutions would be difficult to implement (cancer agents with long-time delays might be one), but they could solve the problems in many areas where regulations are not rampant. Yet despite our professed social belief in the value of markets, such solutions are resisted by almost everyone involved. Society has almost universally employed q regulations when it sought to achieve some objective. Why? Understanding and curing these preferences is at the heart of the issue. Why are we as a society so resistant to the idea of p regulations? Is it simply ignorance or is there something we wish to achieve that cannot be achieved with p regulations?
If one goes through the list of objections to p regulations, it is clear that they spring from a set of coniicting visions of the economy. As we have already seen, those who want to protect the environment or industrial workers often falsely believe that firms will simply pay rather than reduce pollution or accidents. Q regulations seem more certain to achieve the desired objective than p regulations. Given our recent history, the basis for this latter belief is difficult to fathom. Many q regulations have been written, but the objectives have not been achieved. Loopholes have been found (trucks and vans replace cars) or the regulations have been junked (compulsory seat belts) when they prove unworkable or intolerable. Writing a regulation does not guarantee that some objective will be accomplished. And by now we should have had enough practical experience to convince anyone that this is true.
P regulations are also opposed on the ground that they will simply be passed on to the consumer. This is both true and desirable and does not in any case distinguish them from q regulations. From the perspective of those wishing to reduce pollution or accidents, there is a final charge that p regulations are unfair, since they allow the rich to buy the right to pollute or cause accidents. As we have already seen, this is right, wrong, and irrelevant all at the same time.
From the perspective of those who are resisting pollution or safety regulations, there is usually just resistance without any participation in the debate about appropriate means. To get into the debate between p and q regulations would be to undercut the arguments against both p and q regulations. The registers do not want regulations and they do not want to pay for something that they have always had free (the right to pollute). Blind resistance is only rational, however, if you believe that the programs can be defeated or avoided and frustrated at low cost.
Here again we have recently accumulated a massive amount of empirical experience. Whatever the original validity of the beief that the programs would go away or could easily be frustrated, the belief has been proven wrong by history. Regulations will be adopted since a majority wants to achieve the stated goals. These regulations can be frustrated so that the end results are not achieved, but very substantial costs will be imposed regardless of whether the regulations do or do not produce the desired results. And if the ends are not achieved, the result will not be a return to the status quo ante, but the adoption of a new and more stringent set of q regulations.
From the point of view of a resistor, it is obviously much easier to live with a p regulation than with a host of q regulations. Yet it is very difficult for a resister to play a constructive role in debates about appropriate techniques for achieving a goal that he or she was seeling to frustrate. Whatever they recommend will always be seen as a vehicle for frustrating the desired objective rather than as a technique for achieving the desired objective with fewer undesirable side effects. The business community would have been better off to abandon a policy of total resistance and instead concentrate on influencing the’means toward developing techniques with which they could more easily live. Getting to a set of p regulations after a set of q regulations has been adopted is going to be one of the major challenges of the 1980s.
Since the ultimate aim of every competitive firm is to establish a monopoly position so that it can earn more than Ac competitive rate of return, rules and regulations are needed to ensure that not too many competitive firms succeed in achieving their objective. At the same time rules and regulations can be, and in many cases have become, the means whereby competitive firms and industries achieve their monopolistic goals. By stripping industrial rules and regulations down to the bare essentials, there is much more to be gained than to be lost. If we go too far and abuses emerge, they can be corrected. If new abuses do not appear, this is in fact a piece of evidence showing that we have not stripped away enough of the rules and regulations encrusting our economy.
But in the end the central problem reemerges. Whatever technique is chosen to reach different social objectives, someone’s real income is going to go down. Rules and regulations are no exception to this dictum. The distribution transfers from one group of Americans to another group of Americans are not as overt and visible as they are in the area of direct income transfer payments, but they are undoubtedly larger. Without a vision of what constitutes an equitable distribution of income, it is not possible to say whether we have a good set of rules and regulations or how this set should be modified.