The Rewards of Regulation

Government Regulations MonsterThe current political rhetoric in the United States (and other countries, to a lesser extent) is all about government regulations vs. the free market. Republican candidates have been spending much time making promises about budget cuts, removal of regulations, and untying the hands of “job creators.” Government regulation is said to be “inefficient” and an impedance to the progress of the country. The rhetoric here in Canada over the past few years has been similar, focusing on “stimulating the economy” and creating jobs.

Amongst all this language about business and economies, it is important to clarify the goals or end-state that one wishes for society to achieve. Certainly, people have different ideas about what society should be like, but in general I think it is fairly uncontroversial to state that society should benefit the people within it. I would submit that a good goal for society to have is to be just and equitable, and to work toward the well-being of its citizens. It is only after we set this goal that we can start to clarify whether government regulations and policies are truly a good thing. Do they achieve this goal?

Now of course, some policies, regulations, and businesses do not help us to work toward this goal. It is relatively easy to point to examples of government policies which made society worse off. But of course, such evidence does not help to make the argument against government regulations as a whole. Nobody is on the other side of that argument; those in favour of government regulations are only in favour of good┬áregulations—ones which actually benefit society. But at any rate, each policy can be properly evaluated by asking the questions, “Is this beneficial?” and “To whom are the benefits directed?” Both these questions are important in order to make a proper assessment.

Vying for Value

Investment Assets by Wealth ClassBusinesses are essentially middlemen. They do not create wealth directly; rather, they merely connect existing capital with the labour of others in order to create a product or service that is sold to consumers. In other words, businesses are a tool that society can use in order to extract value out of resources.1 Capitalist businesses, however, come with a cost: Some of the value that is generated benefits only a small segment of society. And let’s be clear: in the US, 88% of investments are held by the top 10% of households.2

Taken this way, capitalist businesses (the collection of which is known as “the economy”) do not maximize the value that could be generated for the good of society as a whole. Instead, their explicit goal is to maximize profits for shareholders, with the creation of value for society merely an incidental goal, a means to an end. As such, despite the rhetoric about efficiency, capitalist enterprises are vastly inefficient—a large portion of the wealth they create is siphoned off to a small percentage of the population. Instead of being used to benefit the lives of those who had a hand in generating it, that wealth is used to enrich the lives of a select few. At best, it has a slight indirect effect on society as a whole, but it is a clumsy way of achieving the goal of benefiting society.

The point of government regulations, then, is to adjust the parameters of the business “tool” so it provides more value to society as a whole. Certainly not all regulations are successful at this, and not all are necessary, but these are issues that can be addressed empirically, by assessing how well each regulation achieves the intended goal. Instead of questioning how regulations support “job creation” or “economic growth” (which are themselves merely means to an end), we can assess how they increase practical measures of societal well-being: mortality, education, health, equality, productivity, and happiness. The economy is simply a tool to be used to achieve these ends, not an end in itself. Regulations can help to direct these tools in appropriate ways, so they do not stray from their proper objectives. But the more we focus on “stimulating the economy” or “creating jobs”, the less we focus on the needs and desires of real people. After all, who wants jobs that create no value? We could create thousands of jobs by having people dig holes and then fill them again, but it offers us nothing. Instead we need ways to create value, done in a way which works to equalize the opportunities afforded to all people.

A Step Further

Of course, some might argue that more can be done than just government regulation of business. If capitalist businesses are just middlemen, why not give ownership of businesses to the workers themselves? Or to the consumers that use the end products? That way, the maximum amount of profit is going to the people who actually had a part in the process, or who have a vested interest in the amount of value produced. To do this would actually reduce the need for government intervention, as businesses would themselves work toward the common good without much need for outside direction. Governments would also never need to step in to mediate disputes between businesses and labour unions, as the two entities would now be one and the same. I’ve written about the benefits of worker co-operatives previously, and I still advocate them as a better solution.

But at the very least, government regulation must not be the terrible spectre it is made out to be. And in the process of arguing about government and business, we must be clear about the goals and priorities we wish to set for society. Without this, we will continue to be propelled in the current direction, which generally serves the wishes of the wealthy and powerful and leaves the rest of us behind.

Regulations comic

Notes:

  1. Economists use the word “wealth” to mean something similar to “value”. It encompasses more than just money, but in a colloquial sense, “wealth” is used to refer to money. Because of this ambiguity, I have chosen to talk about “value”, which might be equally vague, but at least vague in the right direction. []
  2. Wolff, E.N. (2010).┬áRecent trends in household wealth in the United States:┬áRising debt and the middle-class squeeze—an update to 2007. Levy Economics Institute, p. 51. The article can be found here or here. []

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