Front Page Titles (by Subject) IV: Regulation - Literature of Liberty, July/September 1978, vol. 1, No. 3
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IV: Regulation - Leonard P. Liggio, Literature of Liberty, July/September 1978, vol. 1, No. 3 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
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Government regulation casts a wide net, covering the diverse areas of business, agriculture, land use, scientific research, stocks, and banking. Although government justifies regulation with the claim that it promotes the common good and protects individuals from the deficiencies of the market, regulation frequently produces economic dislocations, shortages, gluts, political centralization, vested interests, and bureaucracy.
Historically, the inequities of regulation, by causing class conflict, give rise to criticism and revolutionary ferment in the classes adversely regulated.
The study of regulation embraces its origins, history, justifications, motivations, bureaucratic personnel, and varied consequences. Studies of government planning and regulation may often transcend institutional analyses of the stated goals and techniques to scrutinize the political, economic, and social dimensions.
The Regulating Class
“Regulation, Social Policy and Class Conflict.” Public Interest 50 (Winter 1978): 45–63.
The politics of regulatory agencies, as one widely discussed theme in social science asserts, is dominated by an “iron triangle” consisting of the regulated industry, the regulatory agency, and the congressional subcommittees with jurisdiction over the agency. The domination arises, according to this theme, because the interest of these parties in regulation is intense and direct, whereas that of the public is weak and diffuse, and therefore generally unrepresented in policy-making. A competing argument developed by such scholars as Louis Jaffe and James Q. Wilson holds that the real bias of regulatory agencies is not that they favor the regulated industry, but that they have an enormous stake in regulating per se, and that the “special interests” the agencies really serve are those involved in the regulatory process itself.
We can challenge the validity of the “iron triangle” theme by contrasting the older regulatory agencies (ICC, CAB, or FCC) with some of the newer regulatory agencies such as OSHA and the EPA. Since 1974 there has been a movement to reform and sometimes even to abolish the older regulatory agencies, and this reform movement has consequently severely weakened the “iron triangle.” Much of the literature on the “iron triangle” is misleading because it tends to focus exclusively on these older regulatory agencies. It ignores the more recent emergence of a fundamentally different type of regulatory agency, reflecting a major expansion of the field of regulation into such areas as health, safety, and the environment.
These new agencies are fundamentally different from the older variety and they now far exceed the importance of the older variety in terms of their scope of power, expenditures, and personnel. Most significantly, these new agencies are deliberately organized along functional lines, transcending individual industries, and therefore resistant to cooptation by regulated companies.
The new agencies are controlled by a new “iron triangle” consisting of public interest groups, the press, and the federal government as a whole (but especially the courts and Congress). In the view of this new “iron triangle,” government regulation of business is not primarily an instrument of economic policy, allegedly correcting the deficiencies of the market, but rather it is social policy seeking to transcend markets altogether.
Government regulation of this new type asserts a world view. Policy of this large sort is never created by mere interest groups but by classes—groups that possess a distinctive culture and relationship to the means of production and that intend to dominate and “define” societies, that is, to rule. The real animus of the new class is not so much against business or technology but against the liberal values served by corporate capitalism, and the benefits that these institutions provide to the broad mass of American people: economic growth, widespread prosperity, material satisfaction, and a belief in an open and self-determined future. We should be concerned over the fate of the traditional private sector, which has failed to aggressively defend itself against this new challenge to its values.
Regulation and Revolution
“The Social Composition of the Mau Mau Movement in the White Highlands.” Journal of Peasant Studies (UK) 1 (July 1974): 486–505.
Does state regulation spawn its own destroyers?
To answer this question we need to ask another, drawing on a recent example from Africa of the late 1940s and the 1950s: what social strata in Kenya's White Highlands supported the native revolutionary and independence movement known as the Mau Mau? This question highlights the key conflicts between the native peoples and the British colonial state.
Citing existing historical-sociological literature, including government surveys and reports, we can sketch out the policies of the white European settler regime which bore hard on the natives. A pattern of state intervention becomes transparent—measures gradually drive native entrepreneurs, peasant farmers, and artisans to the margin, as the whites reduce them to wage laborers by state coercion.
One implicit lesson is that peasants, when allowed to compete, rapidly develop “market rationality” and produce a surplus. The major conclusion is that in this agrarian struggle it was precisely from the discontented, talented, native Kikuyu strata—petty bourgeiosie, or the natural capitalists, artisans and petty traders (especially the latter two groups)—that the revolutionary cadres recruited themselves. These cadres gave leadership and coherence to the efforts of hard-pressed squatters, the dispossessed peasants, against the mercantilism of the British rulers.
This example illustrates the natural capitalism of peoples once introduced to world markets and their ability to compete unless suppressed by law.
“Mozambican Nationalist Resistance: 1920–1949.” Civilisations (Belgium) 3 (1977): 332–344.
Mozambique, one of Portugal's former African colonies, illustrates how foreign state imperialism intertwined with the indigenous state ruling elite, to economically subjugate a native population.
In Mozambique, nationalist resistance had a long history before the founding of FRELIMO in 1960. Particularly revealing is the period of Mozambican nationalist struggle from 1920 through the 1940s. During these years the ruling class of European settlers suppressed all nationalist challenges to the colonial system. The ruling class promoted dissension within the movement and censored the nationalist press. To control natives, the state achieved a pattern of oppression that linked a politics of native disenfranchisement with economic regulation and land expropriation.
For many years prior to 1935, the colonial government in Mozambique enjoyed virtual self-rule without interference from the Portuguese metropolitan government. The colonial government, however, was a government by and for the European settler population which deprived virtually the entire native population of their political rights.
This governmental political oppression rapidly translated itself into economic exploitation. One example is the “shibalo”—essentially a system of slave labor—a system which conscripted blacks, officially classified as idle, to work as the government directed for six months of the year with little or no compensation. This system was a major source of the cheap labor which was necessary to maintain the profitability of the European-owned plantations.
Another aspect of the economic exploitation of the native population derived from Mozambique's relationship with South Africa. Southern Mozambique was a major source of cheap labor for the mining industry of the Transvaal, and was the major transit route connecting Transvaal to the sea. The Rand Mines paid the Mozambican government in gold for its laborers. On returning to Mozambique, native laborers were paid in less valuable Portuguese escudos from which their hut tax had been subtracted. This hut tax and other revenues derived from the Transvaal trade were the major economic resources of the colonial government. Compulsory payment of the hut tax thus subsidized the European settlers' expropriation of native lands. The process, in turn, had created the class dependent upon migrant labor in the Transvaal by destroying their economic position in their own native land.
After 1935, the metropolitan government exercised tighter control over colonial affairs, but this served only to reinforce the policies that promoted the settler interests. From 1920 to 1949, native opposition to these policies was expressed in legal channels: demands for political rights for blacks and for equality before the law. Increasingly fierce repression of these movements forced them to disband or to stifle their political demands. By the late forties all overt expressions of opposition had been restricted to artistic and cultural channels.
“How Practical is National Economic Planning?” Harvard Business Review 56 (1978): 131–145.
Economists of nearly every persuasion are dissatisfied with the chaotic outcomes of U.S. government fiscal and monetary policies. Despite this prevalent agreement, no harmony exists regarding alternatives. Free-marketers contend that Keynesian-inspired manipulations (or any public economic intervention scheme, for that matter) must produce irrational systemic economic performance. An opposing view, however, insists that the ultimate fault lies not with the theory of macroeconomic policy, but with its inconsistent forms.
The latter viewpoint has spearheaded recent drives for alleged “consistency,” known as national economic planning (NEP). The Humphrey-Javits bill proposal embodies such ideology. Advocates claim that NEP would be as rational as managing a business.
However attractive such a businesslike analogy may be, it fails to be persuasive. Whereas a business is legally responsible only to stockholders, government is answerable to a much broader range of interest groups. And although corporate plans can be confidential, government is, at least in theory, a public servant.
The federal government currently has access to most of the information it needs to implement NEP. In addition, the Council of Economic Advisors provides a convenient skeleton structure for NEP. However, several radical economic changes would accompany national economic planning. Not surprisingly, they are viewed with disdain by free-market advocates.
Four broad approaches could be embodied by NEP. “Coherence planning” would attempt to centrally plan supply and demand by industry. This would require forecasting demand by a planning agency, followed by various degrees of economic interference. “Structural planning” would utilize the efforts of federal, state, and local regulatory agencies to restructure industries to achieve some previously-determined level of better social performance. An “incomes policy” would institute explicit guidelines of wage regulation designed to link wages more clearly to productivity increases. Finally, the “indirect approach” would generate changes to produce specific and inevitable corporate adaptations.
National economic planning, in any of its potential forms, would be a political instrument readily manipulated by national leaders for public relations purposes. The European experience illustrates how, once in place, NEP tends to remain intact despite changing economic conditions. It is questionable whether the proper prescription for current economic maladies should utilize such ingredients.
Hoover as Regulator
“Hoover's Agricultural Policies, 1921–1928.” Agricultural History 51 (April 1977): 335–361.
Was Herbert Hoover an exponent of laissez-faire or an arch-regulator of the market?
Judged by standard works and recent monographs, historians have not given Hoover his due as an advanced regulator and liberal-corporatist in farm matters. Hoover's policies as Secretary of Commerce under Presidents Harding and Coolidge were part of the general “search for order” (i.e., cartelization) and central planning of the economy characteristic of Progressivism. Viewing Hoover as a Progressive, we can discern the underlying ideological unity and continuity of Hoover and the New Deal in farm policy.
Unlike the narrow farm bloc spokesmen, including Henry C. Wallace, Hoover understood that simply propping up domestic prices and “dumping” (so-called) surpluses abroad could lead to complications. The disputes between Hoover and Wallace, and Hoover's criticism of the McNary-Haugen bill, reflected Hoover's relative sophistication on the limitations of simple government price supports, resulting from his wartime frustrations as Food Administrator under Woodrow Wilson.
Hence, Hoover tried to build up piecemeal a sort of decentralized corporatism based on government licensed marketing boards—the Federal Farm Board—to cartelize agriculture at the lowest level and avoid creating large bureaucratic entities. Another clash with Wallace reflected Hoover's belief that the Department of Commerce, and not the Agriculture Department, had the duty of promoting farm exports. Hoover's farm policies were designed to cut so-called “overproduction,” just as were his proposals in other sectors of the economy. Believing in U.S. self-sufficiency, Hoover—unlike some farm advocates—sought to rig the domestic market, rather than have U.S. farmers dependent on ever-expanding foreign markets.
This interpretation supports revisionist economic history by showing that the same basic impulse united Hoover and his opponents: the desire to sidestep markets and somehow circumvent Say's Law (by postponing consequences) through farm cartels as part of an overall system of government sponsored corporatism. Hence the 1920s were not laissez-faire or isolationist, and those policies were not tested and discredited by the Depression. This interpretation also shows why Hoover did not become so full-blown a corporatist imperialist in pursuit of foreign markets—because of his belief in domestic statist solutions and U.S. self-sufficiency.
State Science Research
“The National Science Foundation and the Debate over Postwar Research Policy, 1942–1945: A Political Interpretation of Science—The Endless Frontier.” Isis 68 (May 1977): 5–26.
What role, if any, should the federal government exercise in advancing science for the general welfare?
This major policy issue, still hotly debated, becomes clearer when we consider the highly political context that begot America's National Science Foundation (NSF). It was Vannevar Bush's famous report, Science—The Endless Frontier (1945) that primarily influenced and shaped the subsequent National Science Foundation. The politicized nature of this report is intimated by Bush's government post as the director of the wartime Office of Scientific Research and Development (OSRD). He also voiced his concern to President Roosevelt that science, lacking government involvement, might languish in the postwar United States.
Through a survey of the documentary record (congressional hearings, correspondence, and publications), we can appreciate the political developments leading up to Bush's 1945 report and the ultimate political form of the NSF.
The political emphasis coloring Bush's report sprang from the headiness of success with the federal mobilization of research efforts during World War II. Other political factors included: allegations of big industry monopolistically controlling patents and research, to the detriment of small business and universities; concern over the justice of industries' obtaining patents for products produced under federal contract and at taxpayers' expense; and national security concerns over corporate patent arrangements with foreign corporations.
The debate behind the Bush report centered around the belief of a necessary disparity between research dictated by market forces as opposed to that dictated by “national needs,” social, economic, and military. In this vein, Waldemaer Kaempffert, liberal science editor of The New York Times, testified that American research had “grown up, like Topsy,” without “concentrated social purpose in planning..., direction..., organization.” Kaempffert advocated abandoning laissezfaire in scientific research as well as in economics.
The series of bills that culminated in establishing the NSF began with one to centralize various wartime production efforts. The focus, however, gradually shifted to the peacetime coordination of science “to serve the public interest.”
The Costs of Research
“Peirce and the Economy of Research.” Philosophy of Science 43 (1977): 71–98.
Economic “costs” of research are important considerations in estimating the value of potential research.
It is worthwhile to resurrect the neglected idea of Charles S. Peirce that the economics of research plays a crucial role in the methodology of science. Peirce observed that perhaps an infinite number of alternative hypotheses or theories might account for a given set of data. He therefore proposed the following economics of research. In deciding among rival hypotheses during the inductive process of hypothesis testing, we should weigh cost considerations (time, effort, energy, and money) along with the traditionally valued scientific approach of benefit considerations (closeness of data fit, explanatory scope, and simplicity).
In the light of the economics of research, we can detect a shortcoming in the decision theory approach. Although the decision theory focuses on the expected cognitive value of the results of scientific inquiry and research, it fails to consider the practical and important factor of the cost of the inquiry.
Peirce's economics of research is relevant so long as science policy and research depends on political determination and largesse rather than on free market signals in allocating limited research funds.
“For Whom the Antitrust Bell Tolls.” Harvard Business Review 56 (1978): 125–130.
Some economists content that “concentrated” industries (defined as those composed of a few dominant firms) are undesirable because they lead to socially harmful noncompetitive pricing and shared monopoly profits. These critics challenge any market structure which departs from the theoretical economic state of purity known as perfect competition.
Numerous economists recognize that perfect competition (where large numbers of buyers and sellers preclude control over price by any single economic participant) can exist only in theory. Apparently, however, the U.S. government disagrees. For its most recent antitrust crusade to stimulate “competition” is being sponsored by Attorney General Griffin Bell in the belief that concentration is inherently evil.
Specifically, the government's Antitrust Division is investigating whether it should be unlawful (and thus subject to civil suit or criminal prosecution) for those individual companies belonging to concentrated industries (such as steelmakers) to publicly announce proposed price changes. This represents the latest government attempt to extend the scope of the Sherman Antitrust Act.
Companies, of course, may choose either to fight or to cooperate with civil investigations. If they elect to resist, they could seek to sway court opinion with the assistance of economists who are antagonistic to government economic interference.
Those who cherish liberty detect a danger inherent in government encroachments on the freedom of producers to maintain control over deciding and announcing prices. An unhindered pricing mechanism is thus viewed as a central component of the capitalist system.
As with other examples of government behavior, a ludicrous degree of inconsistency prevails. If Washington sincerely strives to promote competition, why does it continue to burden small businesses with a myriad of regulations? Perhaps the government, the nation's largest monopoly, is suffering from schizophrenia.
“The Efficient Capital Market Hypothesis, Economic Theory and the Regulation of the Securities Industry.” Stanford Law Review 29 (May 1977): 1031–1076.
The American Securities and Exchange Commission (SEC) is a government regulatory agency which distrusts the free market's ability to protect investors and achieve optimal resource allocation. With its goal to protect investors, the SEC wants to make certain that all investors trade on the basis of equal market information. The means it has chosen to implement this goal is intervening in the market by mandating the disclosure of comprehensible securities information and by regulating “insider” trading.
In evaluating the primary means of SEC regulation—disclosure requirements and insider trading regulation—we have to measure these against the goal: protecting investors through “egalitarian” distribution of market information. Evidence derived from the Efficient Capital Market Hypothesis (ECMH) questions the wisdom of both the goal and the means of state regulated securities. This evidence suggests that state regulation harms the important social and economic purpose of capital markets in efficiently allocating capital.
The Efficient Market Hypothesis contends that the prices of securities do, infact, fully reflect information about those securities and that the prices quickly adjust to new available information. The most widely discussed variant of the Efficient Market Hypothesis—the semistrong form—contends that security prices fully reflect all publicly available information regarding the securities. This implies that the average investor, by analyzing publicly available information, cannot hope to consistently identify and profit from undervalued or overvalued securities (since the prices are already accurate mirrors of security values).
Recognition of the ECMH in SEC policies would radically alter traditional securities regulation. The SEC's view of the function of information in the securities market and their understanding of its role in investor protection are inconsistent with the ECMH. For example, the SEC does not recognize that disclosure regulations may actually decrease the information available to investors in making their investment decisions, and it neglects the fact that an efficient market may itself provide the best possible protection for investors.
If the SEC recognized the implications of ECMH, it would encourage the use of all sources of information by those who are in the best position to do so; it would abandon trying to ensure that all information pass through its tightly drawn disclosure mechanism before reaching the public. SEC must reject the unattainable model of investor protection through egalitarian information disclosure; it should also reappraise its traditional role in the securities market in light of a goal that more realistically protects investors: ensuring maximum information flow in the securities market. More specifically, we can hope for the relaxation of disclosure regulation and an increasing reliance on market mechanisms. Also questionable is whether the regulation of “insider” trading is desirable. Such trading serves to increase the information flow to the market and thereby improves market efficiency.
The market can provide more effective protection to investors than the SEC can. Evidence suggests that SEC regulation merely serves to hinder the efficiency of the market.
“The False Dawn of the Sunset Laws.” Public Interest 49 (Fall 1977): 103–118.
Washington's “latest fad,” the so-called sunset laws provide that every government program should periodically end and continue only after an evaluation and legislative vote to reestablish it. Sunset laws do not promise a bright dawn in politics.
Legitimate concerns do underlie the growing support for sunset laws. Most notable is the concern and protest over the expansion of existing government programs required by the practice of automatic incremental budgeting. Next, many desire an opportunity to eliminate duplication and to encourage rationalization. Finally some desire to provide an incentive for government officials to improve performance. It is questionable, however, whether sunset laws are appropriate or effective remedies for those concerns.
More specifically, we may question whether sunset laws will create more meaningful program evaluation. Will they, in fact, represent a credible threat to terminate many, if not most, government programs? A fundamental paradox plagues sunset laws: the more programs that are subject to formal periodic review, the more superficial each individual evaluation will be because of the limited time and resources available to perform such evaluations. Thus, the more extensive the scope of the program, the less successful will be its results.
Most programs are instituted without a clear statement of objectives. They thereby fail to provide explicit criteria by which the success of the program may later be judged. Even if objectives are explicitly set forth, it is difficult to establish a cause and effect relationship between the existence of the program and subsequent trends or events. An example may be cited of the contention that: even when a periodic renewal requirement is combined with evaluations documenting that a program has no impact, there is no serious threat of termination. This appears in the record of the Law Enforcement Assistance Administration. The LEAA has been renewed several times by Congress despite official findings about its corruption and waste as well as its ineffectiveness. Would such long established government agencies as the FBI, IRS, and Postal Service ever seriously believe that they might be terminated?
People tend to fight harder to retain programs that directly benefit them than to terminate those that irritate them. Given this tendency, coalition politics in Congress will guarantee that the only programs threatened with termination will be those that have failed to cultivate a strong clientele.
Such observations reveal the enormous difficulties inherent in any gradualist approach to the removal of government intervention. There is a growing awareness that efforts like the sunset laws to “rationalize” the existing framework of government intervention will not even succeed in achieving their own limited objectives, much less provide a viable base from which to expand our opposition to government intervention.