Regulation is a force of destruction

What made Milton Friedman so famous was not just that he was
smart, but that he had a way with words that made his views on market economics
so clear and easy to understand (often using pithy quotes), and once understood
they are very hard to argue against. Here is my attempt at a useful pithy
quote:

Regulations are a
force of destruction
. A business seeks to provide a product or service for
a price. Anything that drives up costs must be passed on to customers, or taken
out of profits. No profit, no business. If you are running a business, a
regulator can fine you, imprison you, or shut you down. All of those reduce your
productivity, meaning it destroys value.
Defensive actions in an effort to ensure compliance, such as hiring a CPA to
make sure the accounting is done right, hiring ANY sort of P to make sure Q is done
in accordance with the law that no normal person can know all of, destroys
productivity. Any decision to not
pursue a productive action because regulations will kick in forcing other
actions that will make the whole thing profitless or worse, is the corrosive
destruction of regulation.

That is where we are today. Regulations restrict, suppress,
repress, confine, compel, confuse, hold back – so many regulations that
business is stifled, dragged down, and killed. Why?

Cronyism – business with “friends in high places” shutting
out less connected folks who could provide a better deal, by “helping”
legislators write the regulations to favor them.

Protectionism – companies seeking regulations to block
others in the same business, or to block entry into the business by “grandfathering”
all the existing businesses.

Regulations as a business weapon – in too many places, it’s
not the company with the best product, or best price, but the best legal
departments to sue competitors, win.

When a company says the highest
ROI of any business investment is lobbying
congress,
it’s time to start cutting back on the number of laws and
regulations.

But, perhaps worst of all, Legal and OK get confused – Too many companies are so buried in regulations that
they get to the point where if the lawyers say something is legal to do, they assume it must be OK to do; they no longer have their conscious
constraining their actions, but only the technical letter of the law, and there
is a HUGE pressure to keep the business alive and profitable (kids, mortgage,
etc). This erodes and destroys two essential components of a free market
economy and a free society: trust and respect. So, not only does many regulations
destroy businesses, they destroy people and any culture of freedom and enterprise they have.

To be sure, some regulations are
needed – but I’m pretty sure we are well past the point of the necessary
minimum to ensure an operational economy and thriving culture.

4 thoughts on “Regulation is a force of destruction

  1. …or taken out of profits.

    And this is increasingly less and less of an option. Capital is like water…it follows the path of least resistance. A particular business has a required return…the amount of profit that it generates for a particular risk profile. When that ratio changes, the money goes elsewhere, and the business shutters. The idea that a business can just “take it out of profits” without consequence is a myth.

  2. “But, perhaps worst of all, Legal and OK get confused”

    This is in fact the worst possible result of regulation. “The lawyer said it was legal” differs only slightly in concept from “we were just following orders.”

    I was ruminating on something related to this as I drove to the office this morning. The purpose of laws are to put guidelines around the behavior of people who don’t have friendship or family ties to regulate their behavior. Without laws we are reduced to tribes, and whoever is outside my tribe may be treated as I wish with perceived impunity. Laws ideally should reflect the values of the people to whom the laws apply, which is why there is such wailing and gnashing of teeth when the law appears to make something legal that people think should be illegal. When the laws and mores differ, lawlessness abounds, whether it be through a black market in drugs, alcohol, cigarettes, or through the construction of a parallel system of enforcement as has occurred with the various Mafias (The original Sicilian Mafia was reputed to have been founded because the people of Sicily could not get justice from their various foreign rulers.

  3. The psychological impact of over-restriction and requirements on business is the most destructive, and the hardest to quantify. It’s relatively easy to say that when a business is required to install a $10K wheelchair ramp that it cost that business $10K. We fail, however, to see the real cost.

    The psychological impacts trickle all through the society, such that it becomes harder and harder to even imagine starting a business and being successful at it, when it is so vastly more simple to go to work for someone else, or to seek a government job with benefits. It has come to the point now where it is seen as foolish to start one’s own business– why take on all that grief deliberately?

    Then I would love for everyone to truly understand the lengths a person will go to save just a couple of percent on sales tax. Having a business in a border town, where our sales tax rate was only two or three percent lower than the other state, and living close to a state that has no sales tax, I could tell you a lot of stories, Little Grasshoppers.

    One example; You’re contemplating a purchase of $3K. Your state has an 8% sales tax, but the neighboring state has 5% tax. The prices are the same, but that’s a 90 dollar difference in tax—enough to pay for a hotel room, or a lift ticket at a ski resort, etc. Road Trip!

    Any added cost, no matter how small, will change the behavior and decisions of everyone affected, as they look for a work-around or just decide that that thing they were going to do, or that idea for a business they were thinking of, isn’t all that important, so just forget it. ”What the hell—it was probably just a silly idea anyway.”

    Having observed this for many years, I know for absolute certain, that if only one state in the U.S. would eliminate its income tax, reduce its sales tax to 1%, eliminate property tax, and reduce its restrictions and requirements, such that it had the closest thing to a truly free market, and if people generally believed that things would STAY that way in that state, that state would be the recipient of private capital from all over the planet on such a scale as to boggle the mind. I further submit that this is exactly why a lot of people would be against it.

  4. Lyle, GREAT point.

    To paraphrase my brother, “one of the best days of my life was quitting my job and starting my own company with a friend. Another of the best days was profitably selling it last year.”

    I’ve considered starting my own biz several times, but I hate paperwork and get frustrated with stupid bureaucrats and rules designed make everything impossible. (heck, they don’t even allow *swings* at my kids schools any more, because they are afraid someone will get hurt, and their parents will sue. But, of course, football is OK.) I could start my own school and be the sole teacher, but the headaches and overhead are ridiculous. I’ve had a lot of ideas for things over the years (like recently I had a good idea for a much improved web article/comment forum feedback widget, rather than the binary “thumb-up, thumb-down like / dislike” button, where there are a LOT more variations on opinions, and it’d be simple to capture a great deal of that w/o taking up more screen space; but, trying to deal with actually monetizing such an idea is more than I even want to get into, and I’ve been told no-one will want to just be “given” the idea because they are afraid of getting sued later for intellectual property theft or something. *shish* )

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