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How Government Meddling Makes Us Poorer

Summary:
The Austrian (TA): At mises.org, we’ve focused a lot on how monetary policy can increase inequality and impoverishment. But the same could be said of many other non-central-bank interventions in the economy. What are some of these interventions that are making us worse off? Per Bylund (PB): I think what is important to remember is that any change in the economy implies a shift in the production structure and thus in how resources are used. This includes innovations and entrepreneurship ventures, which outbid other producers and therefore replace other production. While we can use more or less natural resources, we don’t actually add much to the economy—we figure out new ways of doing things and new things to do. This is why it is so important that such changes are

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The Austrian (TA): At mises.org, we’ve focused a lot on how monetary policy can increase inequality and impoverishment. But the same could be said of many other non-central-bank interventions in the economy. What are some of these interventions that are making us worse off?

Per Bylund (PB): I think what is important to remember is that any change in the economy implies a shift in the production structure and thus in how resources are used. This includes innovations and entrepreneurship ventures, which outbid other producers and therefore replace other production. While we can use more or less natural resources, we don’t actually add much to the economy—we figure out new ways of doing things and new things to do. This is why it is so important that such changes are directed toward value creation, so that resources are shifted toward creating more value. What was is replaced by the promise of facilitating greater consumer satisfaction.

Interventions also cause similar changes, but they do so not in order to facilitate greater satisfaction but to shape production or consumption by imposing restrictions. So instead of shifting production from value creative to more value creative, what interventions do is shift from value creative to less value creative. It then follows that we get less investment in value-creative types of productions that are affected by the restriction and more investment where there would otherwise not be as much. This of course distorts the production structure. Investments in production are not about directing capital amounts, but about creating productive capital: building factories, laying railways, constructing machines, etc.

Investments in pursuit of consumer satisfaction are perfectly fine and the means of progress—they are how we improve our standard of living. But investments in pursuit of something else in fact lower our standard of living by shifting production and the capital structure toward lesser value creation. So we’re missing out on what we otherwise would have and getting more of what entrepreneurs would otherwise not have chosen to produce. Both are negative from a consumer and general prosperity perspective.

What’s worse—which I discuss in my book The Seen, the Unseen, and the Unrealized—is that these changes aren’t just temporary losses that we then recover from. The reason is that there are long-lasting consequences for the structure of production: real resources do not go to their highest-valued uses but are instead made into factories, machines, and goods of lower value. And other entrepreneurs follow up on those creations cumulatively.

So, for example, the US space program, which is often hailed as something that caused a lot of growth, directed resources away from where consumers wanted them toward developing space travel capability, which in turn facilitated other innovations based on those discoveries. Fake economists point to these discoveries, such as the GPS navigation system, as a “free lunch” that we received only because of the space program.

This may be, but it means nothing unless we compare it with the opportunity cost: what otherwise would have been. The enormous resources that were directed into placing a man on the moon were directed away from what would have benefited consumers more. And we also lost the follow-up investments that entrepreneurs would have made based on those now-lost discoveries and production capabilities.

We got GPS navigation, but what did we not get? It would most likely have been much more valuable than GPS because it would have been entrepreneurial value creation building on higher-value production. We would be on a much higher value-creative trajectory overall.

TA: A lot of these government regulations and interventions, like minimum wage laws, are supposed to help “the little guy.” Do these actually make people better off?

PB: On net, no. Regulations imposed on production or consumption place the economy on a lower value-creative trajectory and therefore a lower standard of living. But there will of course be relative winners and losers among producers (including workers).

Some will benefit from a regulation by either seeing less competition or an artificial inflow of capital to their industry. They will expand their production capabilities and output, which is part of the distortion of the production structure.

Others will not see or will be restricted from pursuing the opportunities affected by the regulations. They will either pursue other, lower-value opportunities or not pursue any at all. It’s possible that we get less innovation and entrepreneurship overall.

That hardly benefits the “little guy.”

I think it is important to not lose track of the littlest of guys in production, who are not—at least not in the developed world—entrepreneurs or small business owners. They’re the workers. And they get jobs where jobs are made and offered by entrepreneurs. So if entrepreneurs are restricted to pursuing lower-value opportunities, then they will hire workers at lower salaries. And probably fewer workers too.

TA: We hear a lot about big corporations and how there isn’t enough competition in the economy. What role has government intervention played in the amount of competition in the marketplace?

PB: What matters is not really the number of producers of something, but the potential for an industry or business to be disrupted. It is not because of Pepsi and Jolt Cola that Coca-Cola increases productivity, keeps prices low, and creates sodas with new flavors. It is because of the threat that someone, whether incumbents or new entrepreneurs, will introduce a drink that pulls the rug from under their feet that they have to innovate and invest in producing new goods.

So I think government plays two roles here.

First, it artificially raises the barriers to entry by imposing all sorts of restrictions. Very often these barriers take the form of higher costs of doing business, which of course affects new entrants—and potential entrants—more than those that have already established a positive cash flow.

Second, the government tries to “enforce” competition in industries by threatening those businesses that become “too large” (whatever that means). Imagine a business that invents a safe and effective cure for cancer and therefore quickly establishes a de facto monopoly on this market. (Let’s leave patents out of the story for now.) The government might step in to split the company into several in order to make the market competitive. But what they’re really doing is harming that company, and therefore those suffering from cancer. The result is not an improvement for consumers. Every innovation is necessarily introduced by a single seller to begin with. That’s not a problem. The problem is if others cannot compete or challenge the innovator by offering something of greater value to consumers.

So government’s attempt to make the market work better really is a double whammy on entrepreneurs, which means consumers lose out.

TA: Even if it were easy for new competitors to enter the marketplace and challenge big firms, wouldn’t those big firms just buy up all the competition? Why not?

PB: They could try. And we see this in, for example, Big Tech companies. Google, Microsoft, and other corporations with financial “muscle” buy out entrepreneurs. There are two problems with thinking this is a free-market issue. It is not.

First, if there are no barriers to entry, then the large corporation would need to buy up every entrant and there would be no end to new entrants. In fact, that they buy out new competitors is a reason for new entrants! Many new technology businesses are started today with the aim of being bought up. It’s the exit plan of the entrepreneur and investors.

Second, the large corporation can—and probably should—buy small businesses with promising innovations in order to extend its profitability.

It’s really a way of outsourcing research and development. And they’re also casting a much wider net in terms of imagination and ingenuity because they are not limited to the people they have employed. What’s wrong with that?

Nothing, except for things like patents, which create artificial monopolies of ideas. So large corporations might buy small businesses to get their hands on the patents, either to get the right to use them—or, probably more commonly, to kill the ideas. If there was no patent, it would not be possible to stop an idea because anyone could copy or adapt it and make new products.

TA: You have noted that an important aspect of government regulation—and the impoverishment it causes—is “the unrealized.” What do you mean by this and how does this affect individual workers?

PB: Thanks for bringing this up. The big problem with the “unrealized,” as I see it, is how it affects workers. Workers are employed by businesses, and in regulated markets there are fewer productive businesses producing things that consumers would have chosen to have more of were it not for the distortions imposed on the production structure. This means the jobs available pay lower wages and likely have overall worse working conditions. The workers could produce much more value for consumers in other jobs that remain unrealized “thanks” to regulations.

This, I think, in part is the explanation for why wealth is made in capital and financial markets rather than through employment. There are other things involved too, of course, but that better, more highly paid careers remain unrealized means the value of each worker is much lower than it otherwise would be. Regulations are a tax on labor as much as they are a detriment to consumers.

TA: Anticapitalists often suggest that government should impose regulations to keep “mom and pop” places in business. Is that really the best way to support small businesses?

PB: The whole argument is based on the flawed view that size— number of employees, revenue/sales, etc.—is what matters in business. It is not. Value creation matters. The offered “solution” to mom-and-pop businesses being outcompeted is to make sure no one can create more value. It is difficult to understand how that is a solution to anything—except for propping up those few businesses that benefit from it in the short run.

TA: Economists often tend to focus on costs and benefits that can be measured in monetary terms. But what are some of the nonmonetary costs of government regulatory intervention that affect consumers, employees, and entrepreneurs?

PB: This is really a simplification or proxy that has become a misunderstanding. It’s easier to measure in monetary terms than in terms of personal satisfaction, but money is a poor basis for analysis.

Just the simple calculus of a voluntary exchange shows how wrong this is. If Adam offers Beth $5 for six eggs and she accepts, then we know that to Adam the value of six eggs is greater than $5 and for Beth it is not—she values the $5 more than the six eggs. So they agree on an exchange rate between money and eggs where both benefit. To then treat that exchange as six eggs being equal to $5 is wrong for both Adam and Beth. And it gets even worse if you add up all the eggs in the economy at the rate they’re exchanged (or Adam and Beth’s rate) because we get even further from actual valuations.

The same is true with regulations, which of course are even trickier because they mean that valuable solutions that would have been created remain unrealized. So in order to assess the value loss of a regulation, you would need to not only guess what would have happened had entrepreneurs been allowed to pursue consumer satisfaction freely—and competitively—but also what satisfactions consumers would have gotten out of them. And then place a dollar value on this.

Needless to say, much of regulation research amounts to pure nonsense.


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