The Need for Regulations

Thou shalt not steal; an empty feat,
When it’s so lucrative to cheat.
Arthur Hugh Clough

 

The advocates of laissez-faire capitalism believe that government regulations hamper the operations of the free market by restricting, penalizing, and otherwise hindering the beneficial actions of businesses and entrepreneurs who would, if they were only allowed to do as they see fit, benefit society by increasing both the quality and quantity of the products and services which they make available to consumers, while constantly developing new and useful products. In addition to this practical argument, some of these advocates argue that government restrictions are unjustified infringements on the liberty of a society’s members to do as they please, provided they do not harm others. Let us consider the argument presented by one of these mighty advocates of deregulation, former U.S. Federal Reserve Chairman Alan Greenspan, who was an avowed Randophile, that is, a devoted disciple of Ayn Rand:

But it is precisely the “greed” of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer.

What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product. Since the market value of a going business is measured by its money-making potential, reputation or “good will” is as much an asset as its physical plant and equipment. For many a drug company, the value of its reputation, as reflected in the salability of its brand name, is often its major asset. The loss of reputation through the sale of a shoddy or dangerous product would sharply reduce the market value of the drug company.[1]

Physicians have to be just as scrupulous in judging the quality of the drugs they prescribe. They, too, are in business and compete for trustworthiness. Even the corner grocer is involved: he cannot afford to sell unhealthy foods if he wants to make money. In fact, in one way or another, every producer and distributor of goods or services is caught up in the competition for reputation.[2]

So, according to Greenspan and others who think like him, the government does not need to regulate businesses and industries because the overriding concern that all business owners, managers, and employees have to protect the reputation of their company is sufficient to ensure that they will never do bad things; and even if they do, they will be swiftly punished for their bad actions by a loss of reputation and a consequent reduction in their sales and profits. This, according to the free-market gurus, is how the free market acts to ensure that the products and services which are sold to consumers are safe, genuine, beneficial, and everything else that their producers claim they are. The naive opinion of Greenspan and company is that, just like murder, economic mistakes, crimes, blunders, and misdemeanours will always out; but this overly optimistic view of human behaviour in the real world is not always supported by the facts.

What Greenspan and company are advocating on the part of ordinary people in regard to business people is a sort of primitive form of worship: we are not to interfere with the liberty and free volition of business people, and we are to place our unbounded trust in their wisdom and honesty, as well as in the mysterious operations of the free market, with which we should never interfere, to protect us from harm.

The erroneous assumption made by the advocates of laissez-faire capitalism is that the interests of the producer or seller of a product or service and the interests of the customer always coincide with each other. But clearly this is not always true. There are many situations where these two different interests diverge, or where the seller or producer can accomplish one’s interests without necessarily fulfilling the customers’ interests. The assumption, therefore, that these market forces and incentives are sufficient, by themselves, without any government intervention, regulation, or punishment, to ensure that all the participants in the market will behave in a fair, honest, and proper manner at all times is simply not justified by the facts. Here is an excerpt from Adam Smith’s The Wealth of Nations, which work the proponents of laissez-faire and deregulation are so fond of quoting to support their extreme – and extremely foolish – ideological position:

The proposal of any new law or regulation of commerce which comes from [dealers], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.[3]

The advocates of laissez-faire have made the mistake of confounding the desire to make money with the desire to excel in a profession, the desire to provide a new product or service, or the desire to create a new and successful company. For these two things are not identical. Although the latter may be rewarded with economic success, clearly there are numerous less-than-honest means by which one can accomplish the first objective – that is, to make money – but without accomplishing the second of these two different objectives.

Before I begin my critique of the free-market arguments against government regulations, I wish to declare that I am most certainly not saying that I approve of all government regulations, for some of them are inefficient, unfair, or just plain stupid. Moreover, regulations can become excessive, and some regulations are unnecessary or do more harm than good. In such instances, they should certainly be criticized and, when possible, modified or revoked. But to conclude from these bad instances, as Greenspan, Friedman, Rand, and many others do, that all regulations are bad or unnecessary, is a ridiculous, illogical, dangerous, and wholly unwarranted inference or generalization.

If only things were as simple and straightforward in the real world as they are in the fantasy world of these laissez-faire advocates. To begin, let us consider the tobacco industry. It is now known that smoking cigarettes or using other tobacco products such as chewing tobacco can cause serious health problems, including emphysema, heart disease, and lung, mouth, and throat cancer. In other words, the tobacco industry manufactures, markets, sells, and promotes a product that makes its consumers and others sick and, in the long run, kills a large number of them.

For decades, executives of tobacco companies knew the harmful effects of their products, and yet they continually denied the links that scientists and researchers found between smoking and the incidence of these and other diseases, while also denying that nicotine was addictive. They spent many millions of dollars in misleading advertising and to discredit those who made such damaging accusations about their product. Furthermore, they added ingredients to their products to make them more addictive, and therefore harder for their customers to stop using them. In other words, tobacco companies did everything they possibly could to protect their industry and maintain or increase the total sales of their products. And it was precisely the greed of tobacco company executives that led them to behave in this manner – the same greed and self-interest in which Alan Greenspan and others say that we consumers should put our unbounded trust to protect us from harm.

According to Greenspan and company, it is unnecessary to regulate the tobacco industry – such as by prohibiting the sale of tobacco products to minors, restricting or banning advertising by tobacco companies, taxing the sale of tobacco products to raise their price and collect revenue which will be used, among other things, to pay for the significant health costs of this pernicious habit, limiting the areas where people can smoke, and other measures which are meant to discourage people from smoking, restrict its usage, and protect consumers – because the industry will regulate itself. Clearly, at least in the case of the tobacco industry, such credulous, naive, wide-eyed optimism is wholly unjustified.

If markets truly operated in the ideal manner that the laissez-faire fanatics believe, then what should have happened in the case of tobacco is that people would no longer smoke, since smoking is detrimental to people’s health and it causes many premature deaths. But the fact that many people who want to stop smoking are unable to do so shows that there is something wrong with their arguments against the need for government regulations to protect consumers from greedy or unscrupulous individuals and companies.

There are several important lessons we can draw from this example: individuals and companies will sometimes do everything they possibly can, including lying, deceiving the public, and harming people’s health, in order to accomplish their ends, which, in a capitalist society, means being successful and making as much money as possible. In other words, individuals and companies cannot always be trusted, as Alan Greenspan and company would have you believe, to act in the best interests of their consumers, since it is possible to have a good reputation even when it is not deserved. Moreover, some companies try to silence or intimidate their critics, whether by bribery, such as by making campaign contributions to politicians, firing employees, lawsuits or the threat of lawsuits, and physical violence.

Of course, not all products are harmful like tobacco. The majority of products, instead of being harmful, are beneficial and improve people’s lives rather than harm or destroy them. But even in these cases, mistakes can be made, mistakes that can cause considerable harm to consumers if they are not corrected or prevented.

Friedrich Hayek was immensely proud of his observation that, in a market economy, no single individual possesses the knowledge that, together, all the participants in the economy posses.[4] Hence, the communist or socialist belief that a centrally planned economy which is run by a few or even by a large number of individuals will be able to achieve what an undirected and unplanned free market economy can achieve in terms of total output, the variety and quality of the products and services which are available, and their delivery to precisely those places where they are wanted or needed most – and, what is more, at competitive prices – is completely mistaken. In other words, the serious economic inefficiencies produced by communism and socialism are inherent flaws of those systems – flaws which cannot be corrected because of the rulers’ attempts to control prices rather than letting them be decided by the free market.

This is all very well and true. But there is an application of this observation in the realm of regulations that Hayek failed to make, most likely because it would have contradicted his free-market, libertarian, laissez-faire, anti-regulation beliefs. The same fact – that no one individual or company can possibly know everything – means that no single individual or company can possibly know all the effects that a product or procedure will have on people, the environment, and everything else on which it can have an effect. Often, these consequences are discovered only after a food or drug is consumed by many people, a car is driven, a product is used, a bridge or building is built, or a pesticide or herbicide is sprayed for many years.

For example, a person who starts a new construction company may not be aware of all the numerous rules that he must follow if he wants his constructions to be durable, well-built, and safe. Due to inexperience, he may decide that this or that rule, feature, or safety procedure is unnecessary and therefore, in order to reduce costs and save money, he will simply ignore it, or is not even aware of it. By doing so, he may be able to offer a lower estimate for a project than his competitors, who have been in the industry longer than he has and so understand the reasons for following these rules. If there were no rules or regulations, an unsuspecting customer may hire his company, based solely or primarily on his lower estimate. As a result of this combination of inexperience on the part of the builder and the desire to save money on the part of the customer, the resulting construction may collapse or fail in other significant ways. This is a recurring event in developing countries where regulations are lax, non-existent, or they are not enforced.

What is true of construction is true of many other industries. There are reasons for the rules and regulations that have been adopted in every industry. In a very real sense, the total body of these rules and regulations – which no one single individual or company could possibly acquire through one’s own personal knowledge and experiences – represents the cumulative wisdom that is derived from a combination of scientific research, carefully controlled trials or experiments, real-world experience, and efforts to remedy past problems and fatal accidents so that they do not happen again. This body of regulations summarizes the way that things should be done in order to prevent potentially harmful events. It is the same trial-and-error method that free markets use to determine which products and services are beneficial or popular with customers, and therefore succeed, and which are not, and therefore fail. In this case, this trial-and-error method is used to prevent harm in order to protect consumers from injury, sickness, and death.

A number of these regulations are adopted only after a tragic event, such as the collapse of an improperly-designed building or a fire that kills a large number of people who are trapped inside the building. These were common occurrences before the adoption of measures such as, in the case of fires, mandatory alarms and fire extinguishers, multiple exits including clearly marked emergency exits, water sprinkler systems, and rules against overcrowding in the case of nightclubs, theatres, and other venues. Clearly all these measures add to the cost of building or, in the case of rules against overcrowding, reduce the owner’s potential revenue and profit, and the necessary inspections and approval by government authorities to ensure that new buildings comply with these regulations add to the time required to construct them; but the inhabitants of the great majority of societies have decided collectively through their democratically elected representatives that they want these safeguards in place to protect them when emergencies or accidents occur, or to prevent them from occurring. If, in wealthier countries, these tragic events occur much less frequently than they did in the past, it is precisely because of the adoption and enforcement of these kinds of regulations. In contrast, in poorer countries which either have not adopted them or do not have the means to enforce them, these sorts of tragedies continue to occur on a regular basis.[5]

If, as Greenspan and Friedman advocate, any individual should be allowed to start any business without any licensing or government approval, there would be a very great increase in the number of failures, accidents, deaths, sicknesses, and other undesirable consequences as a result of inexperienced, ignorant, incompetent, and otherwise unqualified providers of goods and services. Certainly the morass of bureaucratic regulations can hinder or delay new businesses from starting, or prevent or discourage existing businesses from expanding their operations; but there is a very good reason why they are there and why they must be followed.

To illustrate what I mean, let us consider the case of thalidomide. In the United Kingdom, thalidomide was manufactured and sold in the 1950s by a spirits company named Distillers.[6] Previously, the company had had no experience in the manufacture and sale of pharmaceutical drugs. Consequently, the company’s executives, who wanted to market the drug as quickly as possible in order to increase the company’s revenues in a new market, did not understand the need to conduct long and costly clinical trials to ensure the drug’s safety for human use; in other words, they failed to follow the generally accepted protocol that is followed by established pharmaceutical companies who understand the significant risks in selling a new drug without proper testing. The drug was marketed as a preventative for morning sickness in pregnant women, with the result that it produced severe birth defects in many of the children of the women that used it – children who were born without arms and legs, and other deformities.

When the link between thalidomide and the severe birth defects it caused became clear, how did the company react? Did it readily admit its guilt and pay a just restitution to the families that had suffered as a result of its grave mistake? Far from doing so, the company offered the affected families a ridiculously low sum of money, which would have done little to help them care for their damaged children for the remainder of their lives; its executives did everything they could, including seeking legal injunctions, to prevent news of their mistake from reaching the general public; and they stonewalled those individuals who sought financial restitution through the legal system. In essence, they behaved just as tobacco-industry executives did in order to protect their companies’ interests and reputation, which meant paying as little as possible to the victims of their mistake and trying to prevent the negative publicity which they knew would result from the widespread knowledge of their grave mistake.

Unlike the idealized and dream-like world presented by the advocates of laissez-faire capitalism, this is how things happen in the real world, and how rich and powerful individuals and companies behave when their interests are threatened. The extremely naive assumption – for it is nothing more than an assumption – made by Greenspan, Rand, Friedman, and the many other deregulation dummies is that mistakes, deceptions, bad practices, cases of negligence, dishonesty, and other forms of economic wrongdoing will inevitably be exposed and become public knowledge. However, the strong fear of shame and embarrassment motivates people to lie and conceal things. When we make mistakes or commit crimes, we do not want others to find out about them, and even people who are generally honest sometimes lie or go to considerable lengths to hide their mistakes from others. In other words, there is a strong innate human tendency to want to prevent others from knowing about one’s mistakes and wrongdoings in order to preserve one’s reputation. As any student of economics knows, in order for the free market to function efficiently, it is absolutely vital that consumers know about such mistakes so they can avoid buying faulty, defective, or criminally-irresponsible products, or avoid dishonest individuals and companies. This is another example of how the ignorance of a common, innate, non-rational human tendency has led economists to present their students and others with a highly distorted picture of human behaviour.

Even if there were sympathetic executives in Distillers’ management or board of directors who were in favour of paying larger sums to the victims of thalidomide, their sympathy was overruled by the prevailing corporate model of behaviour, which forces executives to pledge allegiance to and protect the corporate interests of their company and the interests of their shareholders, which means maximizing the company’s profits, often at the expense, and to the exclusion, of all other considerations.

Greenspan’s overly simplistic argument, not to mention his idealized conception of human beings, fails to recognize the effects that human selfishness can have on people’s behaviour. When greed, or the desire for money, is strong, as it is in capitalist societies – where it has become the primary aim in life for many people – it can overcome all other considerations, including the consideration for one’s reputation. This is clear in the case of thieves. In essence, Greenspan is saying that there are no thieves or individuals with dishonest tendencies in corporations, companies, and individual enterprises; or that, even if there are, they will be dissuaded from committing illegal actions and practices because of the damage that such actions would do to their reputations.

Let us consider the matter of regulations from another perspective. Regulations are rules and laws that individuals and companies must follow in certain areas of economic activity. As is true of ordinary laws, those who fail to follow these regulations are liable to fines, the suspension of their license, such as in the case of doctors, lawyers, and restaurants, or, in cases of extreme negligence or wrongdoing, imprisonment. If, in the context of ordinary laws, we were to reframe Greenspan’s argument that regulations are not necessary because individuals’ and companies’ paramount concern for preserving their reputation is sufficient to prevent them from doing bad things, we arrive at the following conclusion: laws, such as those against theft, murder, rape, assault, and other crimes, are not necessary because the overriding concern that all people have to preserve their good reputation as members of society and in the opinion of those who know them is sufficient to prevent them from committing these and other criminal actions.

In the case of ordinary laws, I do not know if there is anyone who would seriously advocate adopting such an absurd course of delegislation.[7] And yet, this is precisely what Gullible Greenspan the Greenhorn and all the other advocates of deregulation are saying in the case of economic crimes, mistakes, and improprieties. Although the great majority of people do indeed refrain from committing crimes such as murder, rape, theft, and assault, both because they find them repellent and also because they are solicitous to preserve their reputations, there are clearly some individuals who are not dissuaded from committing these and other crimes by the overriding concern to preserve their unsullied reputations, which, according to Alan Greenspan, is the sole protection that we need to protect ourselves from the criminal intentions of bad people.

The punishment of ordinary crimes has a number of important purposes: among these are the removal, in the case of imprisonment, of the offenders from society for a period of time so they cannot commit more crimes, and to prevent their example from adversely influencing others by inciting them to imitate them; another is the public declaration that this kind of action is considered unacceptable in the society in which one lives. Crimes like rape would become more common if they were not occasionally denounced publicly and punished, as they are when a rapist is apprehended, charged, and convicted. These public denunciations make clear the demarcation between those behaviours that are deemed acceptable and those that are deemed unacceptable in the society one lives in.

But if the punishment of these and other crimes were removed following a wave of delegislation, then both of these salutary effects would be lost. In other words, criminals would be free to commit more of the same crimes, not to mention other crimes, and their examples would embolden others to copy them. As certain crimes become more and more common, the moral disapprobation attached to committing them would diminish and quite possibly disappear, so that this important societal restraint against committing them would be weakened. When many people commit a bad action, even if it is murder, theft, or rape, then more and more people will feel little or no guilt in doing the same thing. This phenomenon is observable in wartime, when soldiers, many of whom may never have killed anyone before, can usually kill others without being overwhelmed by guilt because they see their fellow soldiers doing the same thing. This is also true of the young, who are more likely to be corrupted by bad examples: if they see or hear of others doing bad things with impunity, then they are more likely to imitate them.

Similarly, in sports, the desire to excel and do better than one’s adversaries can motivate one to cheat and violate the rules. Many are the athletes who have taken performance-enhancing drugs, adulterated their equipment, used banned substances, or done other things to gain an illegal advantage over their rivals. Without regular testing, monitoring, and punishment, such practices would become much more common. But according to Greenspan and company, such regulations and punishments are not needed in sports because the athletes’ overriding concern to preserve their reputation is sufficient to dissuade them from ever employing such illicit stratagems. Those who follow sports know that such naive optimism is not at all justified in the case of athletes. And yet, the same human motivations that exist in sports also exist in the economic realm, since today many professional athletes are able to earn large amounts of money. Moreover, in both sports and business, the desire to win at all costs can override all other considerations.

Without regulations and punishment, bad behaviours are sometimes adopted gradually, as those who commit them become emboldened to repeat or magnify their crimes. A person who steals a small amount and gets away with it may then be emboldened and proceed to steal a larger amount. This phenomenon was visible in the events that led up to the financial crisis in 2008, as some employees of investment companies essentially stole money from their clients in order to enrich themselves, or they were completely indifferent to their clients’ financial well-being, so long as they continued to earn large salaries and bonuses. Because they were not punished, they became more and more emboldened, and so they increased the scope of their financial crimes, irregularities, and bad practices, all the while feeling no guilt at what they were doing because many others in their company or industry were doing the same thing. The deregulation of the financial sector, which was due in no small part to the actions, or rather the inactions, of deregulation dummies like Alan Greenscam during his tenure as Chairman of the U.S. Federal Reserve Bank, led to dishonest and unscrupulous practices among financial executives and their employees that became widespread precisely because they were not punished.

In all of these cases, whether we consider ordinary or economic crimes, the fact that human beings are selfish explains much better the culprits’ motivations and behaviour than any notions about their supposed rationality, as economists naively assume about people’s behaviour. The financial executives and employees experienced their pleasure, satisfaction, and sense of accomplishment when they made large amounts of money by stealing from their clients, or by selling worthless or high-risk financial instruments that led to the 2008 financial crisis, but they did not experience the shock, anxiety, anger, dismay, and other emotions that were experienced by the clients they had cheated and deceived.

There is another similarity with ordinary crimes which we have not yet considered: most criminals do not believe they will get caught and be punished for the crimes they commit. Similarly, there exist dishonest owners or employees who do not believe they will be caught and suffer a loss of, or reduction in, their reputation as a result. And if there are no government inspectors to make sure that companies are following the laws and regulations that have been adopted to protect consumers, then how are the consumers to find out that companies are violating these regulations?

Restaurants are subjected to regular inspections by health inspectors to ensure that they maintain minimum sanitary and other health-related practices – to keep their premises clean, not to use food products that are harmful or have spoiled, to ensure that their employees practice good hygiene and proper food-handling techniques, and other measures. If there were no government inspectors, the only way that customers could find out that a restaurant was not following the rules is if either an employee alerted the public or someone became sick after eating there. But an employee that followed this course would run the risk of being fired, which means that employees have an incentive not to inform the public or authorities. Again, the purpose of such rules and their regular enforcement is to prevent people from becoming sick or possibly dying.

Let us consider the very simple equation for profits: Profits = Revenue – Costs. As we can see, there are only two ways that an individual or company can increase its profits: either by increasing its revenue or by decreasing its costs. In both cases, there are, for some individuals, numerous tempting ways to increase revenue or decrease costs through shady, illegal, unscrupulous, dishonest, exploitative, or other undesirable means. Only an extremely naive person would suppose that these means have never been – or never will be – employed. In the past, for example, before strict food and health regulations were adopted, the adulteration of food products was a common practice.

In the mid-1800s the Society for the Diffusion of Useful Knowledge, publishers of educational pamphlets for the working class, tested 215 beers and found chemical adjuncts in more than half.

Where brewing failed, chemistry tried to cure, with its chest of shiny new toys: salicylic acid and saltpeter for preservation, sulfate of lime for bitterness, hyposulphurous acid for clarity. Brewers led the charge, but the larger food industry soon followed. Shoppers saw their pickles colored green with iron sulfate crystals; their bread whitened with alum, chalk, and ammonium carbonate; their candy dyed red with arsenic; their Gloucester cheese rind made bright orange with lead; their milk laced with lime. This exuberant chemistry experiment finally led, in 1876, to Prime Minister Benjamin Disraeli passing the Sale of Food and Drugs Act and starting the modern practice of food inspection.[8]

Here I shall address only one of the most fundamental, the undermining of nutrition by the use of dangerous substances in food. The addition of poisonous chemicals to food in the early nineteenth century had serious effects upon both individual health and society as a whole. It was also less detectable then, since many of the industrial and chemical processes were new – created by the industrial revolution itself – and had not been fully analysed. Frederick Accum published in 1820 his treatise on Adulterations of Food and Culinary Poisons. Among the practices he described were the adding of chalk, plaster of Paris or powdered stone to flour, the use of alum for lightening the colour of poor-quality flour, or the substitution of cheaper potato flour, while ammonium carbonate was used to improve the appearance of bread made with spoiled flour.

Tea-leaves were readily replaced by other dried leaves – ash or elder leaves dried and artificially coloured on copper places [plates?]. Used tea-leaves could be treated with ferrous sulphate and dyed Prussian blue with ferric ferrocyanide. Cheese rinds were coloured with vermilion and red lead, and pepper was adulterated by the sweepings of dust from floors. […] Ale and porter (beer) were coloured and flavoured with copperas, quassia, hartshorn shavings, orange powder, caraway seeds, ginger and coriander. Milk was often diluted with water, while pickles (preserved vegetables) were often coloured with copper. Jellies and sweets were contaminated with lead, copper or mercury, to produce bright colours that would attract children. Chicory (itself sometimes adulterated) and ground beans were added to coffee. Coffee grounds were reused, and there was a brisk sale of stale grounds from the kitchens of hotels and coffee houses. Cocoa was altered with flour, sulphuric acid was added to vinegar, while potted meats may have been made from animals that had died from disease. Iron oxide was used to colour sauces.[9]

The number of tricks, stratagems, deceptions, ploys, accounting schemes to avoid paying taxes, and other measures that have been used by merchants, businesspeople, corporations, con men, shysters, tricksters, and even by businesses that are generally honest and reputable are far too numerous to enumerate. In all likelihood, deception, dishonesty, and other disreputable practices have been a part of business for as long as people have been doing business with others. The traditional theatrical figure of the shady merchant was not just a fictional or stock character that was meant to amuse audiences. This character represented a reality that was sometimes all too common in real life.

“When I returned home I went to the library and fed my worries from back issues of the newspapers.” He flourished a sheet of notes. “Reports of embezzlements; false advertising; fraudulent labeling; dishonest accounting; collusive bids; false business-tax returns; workers’ time sheets cooked up to defraud buyers, pad their bills; kickbacks to union officials in return for wage contracts cheating workers; dishonest repair shops; insider trading and other illegal stock manipulations; unauthorized use of customers’ bonds for collateral on the part of a broker (that one came out in bankruptcy proceedings); a big patent-infringement case, which the infringer lost; pretenses at conforming with factory safety regulations involving bribes to inspectors; lies about toxic-waste disposal by factories and also waste-disposal service companies; cover-ups of dangerous reportable accidents by managements of chemical factories and also nuclear power plants; sales of condemned meat and tainted fish; a mail-order house that takes the money and doesn’t always ship the goods; insurance frauds including falsified appraisals.

“With the exception of some of the embezzlers who were individuals victimizing their employers, these were all crimes committed by business owners or managers, bent on victimizing other enterprises, or else their own workers, their own customers, their own suppliers, or the public at large.”[10]

We can formulate something that I will call the Rule or Law of Scoundrels: it is a pretty general rule of human behaviour that, sooner or later, whenever it is possible to gain an illegal advantage, whether pecuniary or otherwise, over others, someone will take that course. Innumerable are the instances where human ingenuity, rather than being used in productive, beneficial, and licit channels, has been used in illicit ways to enrich oneself at the expense of others. And when this kind of behaviour becomes widespread, it is more and more difficult, and sometimes impossible, to correct or eradicate it. Mafias that control criminal activities like gambling, prostitution, extortion, and the sale of illegal drugs are only an extreme, organized example of these kinds of undesirable behaviours.

Fraudsters, tricksters, and con men are like the hydra: when you cut off one of its heads, another will inevitably grow to take its place. Fraudsters, or those who have the mindset of the fraudster, are not in business for the long run – at least not in the sense that economists mean, which is to make money honestly by building a reputation for honest and reliable dealing. Rather, their aim is for short-term gain. Thus, they do not care about the bad reputation they may earn, since they can always move elsewhere where they can find new victims who are unaware of their past misdeeds. The world is far too busy a place for its inhabitants to pay attention only to those who do wrong, especially when their victims are ordinary people who are not interesting and whom one doesn’t know personally.

There are numerous ways that individuals and companies can gain or increase their revenue by fraudulent means. A common method is to make misleading claims or employ false advertising. Whenever and wherever there is money to be made, there will inevitably be those who claim that their product or service is like whatever happens to be in demand, or is something that it isn’t. Examples of this tendency are artists or art dealers who sell fake copies or counterfeited originals of a famous artist, jewellers and vendors of gemstones who sell cheap substitutes that they claim are authentic precious metals or gems, those who hawk inexpensive copies of luxury goods of all kinds, and food companies that market their products as organic or something else when they are not. And when dishonesty prevails in an industry, a situation that can easily arise without enforced regulations, even honest business owners may be forced to adopt dishonest practices to remain solvent.

For instance, many wood and paper products that are offered to consumers for sale carry labels making pro-environmental claims such as “for every tree felled, at least two are planted.” However, a survey of 80 such claims found that 77 could not be substantiated at all, 3 could be only partially substantiated, and almost all were withdrawn when challenged. Understandably, the public has learned to dismiss such claims made by companies themselves.[11]

Milton Friedman was adamantly opposed to the licensing of professionals and businesses in order to ensure minimum standards of competence, safety, and honesty. If his foolish proposal were ever adopted, it would open the floodgates to all sorts of fraudsters, con men, and other unscrupulous imposters who are more than willing to take advantage of the public’s ignorance and gullibility in order to make money. In the past, there really did exist snake-oil salesmen who roamed the country looking for new victims to whom they could sell their worthless or dubious products. Today, their modern-day counterparts do not limit themselves to such laborious and small-scale methods of deceiving the public. When the regulators are away, the criminals – and cheats and swindlers – come out to play.

I do not believe I exaggerate when I say that most of us, when we find ourselves in a situation where, perhaps because of someone else’s mistake or oversight, we are able to profit at another person’s expense simply by remaining silent or by committing a dishonest action, have succumbed to such temptations. We are all of us – even those who are honest most of the time – susceptible to performing such selfish actions. When such behaviours are repeated, they can easily become a habit, and when more and more people perform them, they become a custom that is difficult to change. This is how corruption arises and becomes established. And it is foolish to suppose that the mere concern for their good reputation is sufficient to prevent all or most people from performing such actions, especially when they believe that no one will find out about them. There are all sorts of ways to justify or rationalize such dishonest behaviours to oneself so that one can maintain the illusion that one is honest or upright, while one continues to profit by one’s dishonesty.

The efforts to reduce the other element in the profit equation, namely costs, have been equally numerous, varied, and ingenious. Of course, many of these efforts are legitimate endeavours that benefit customers by reducing the costs of products and services which they purchase. But not all of them are legal, moral, fair, or desirable from the customers’ perspective. The desire to increase one’s profits or reduce one’s losses by reducing costs can manifest itself in numerous ways. Some examples are not paying taxes, obtaining the necessary license or certificate by illegal means, employing child labour, hiring illegal immigrants and underpaying them, underpaying or failing to pay one’s employees, making them work in unsanitary or dangerous conditions or workplaces, using intimidation to force them to work harder or work extra hours for which they are not paid, denying them the benefits to which they are entitled, using food products – in the case of restaurants and food companies – that are past their expiry date, not fit for human consumption, or not correctly labelled, ignoring safety regulations that would increase costs, bribing inspectors for their approval because this is cheaper than complying with safety and other regulations, using cheaper materials than those specified in the contract or ingredient list, substituting a cheaper alternative for a more costly one, selling used products as new, attempting to conceal mistakes when they are made, continuing to use equipment that is no longer safe because it would be expensive to replace it, failing to make necessary repairs, using measuring devices that overstate the quantity of goods sold by weight, and so forth. Here is an example that occurred during World War Two, with serious consequences for the sailors on board the ship:

But when a newly launched ship, a tanker called Schenectady built by Henry J. Kaiser, broke in two at Portland, Oregon, in January 1943, the question of steel plate became one of vital importance.

At the Irvin Works, the Carnegie-Illinois rolling mill at West Mifflin, Pennsylvania, investigators for the Truman Committee found that at least 5 percent of the plant’s production, or about 3,000 tons of steel per month, failed to meet Navy specifications, yet was being labeled and delivered as up to standard. The results of quality tests—chemical analysis conducted in the mill to determine the quality of carbon and other elements in the steel—were simply altered (as were other tests for tensile strength) “to conform to what the customer expected to receive,” in the words of the chief specifications examiner, a man named Murray Stewart. If the chemical analysis of a “heat” of steel wasn’t known, he said, then they would just make one up for the record book.[12]

This list could easily be lengthened. The temptation to reduce costs by illicit means in order to increase one’s profit or decrease one’s loss is ever-present. And, in many of these cases, the consumer may never find out about the wrongdoing. Thus, the incredibly naive belief – or perhaps it were better to call it the blind faith – of Greenspan, Friedman, Rand, and others that an unregulated market will prevent such abuses is completely false. Far from preventing them, an unregulated market would make such abuses all the more likely. In terms of hygiene, it is like saying that, since everybody has one, the human immune system is sufficient to protect all people from harmful germs and disease, and therefore there is no need to wash our bodies and take medicines to protect ourselves from their corrupting effects. The act of washing one’s body regularly in order to reduce the number of bacteria on one’s body is like the existence of regulations that are meant to prevent the development of undesirable behaviours. And taking medicines when we are sick is like the punishment of serious wrongdoings in order to prevent the corruption of business and society in general.

Let us return to one of the main criticisms made of regulations, namely that they slow down and hamper economic growth, whether by increasing a company’s costs, delaying or preventing new medicines and other products from being sold to consumers, or increasing the time and aggravation it takes for individuals and companies to get things done. These criticisms are undoubtedly true. But the important point that these free-market fanatics fail to understand is that these same regulations which they vociferously condemn serve the very important function of maintaining people’s confidence in the operations of the free market. By maintaining consumer confidence in the products and services they purchase, it encourages people to keep buying them, since they know, or at least believe, that most of the products they buy are reliable, trustworthy, safe, and do what they claim to do, and that most of the licensed professionals whom they hire are qualified to perform the services for which they are paying them.

A government that took no measures to regulate business activities in order to ensure honesty, reliability, and safety is no different from a government that takes no measures to prevent counterfeiting and the debasing of its currency. Just as widespread counterfeiting and currency debasement have the harmful effect of reducing people’s confidence in money, deregulation has the harmful effect of reducing people’s confidence in certain economic sectors, activities, or products.

The idealized but unreal vision of capitalism that is presented by the advocates of laissez-faire, in order to convince others of its many virtues and advantages, overlooks these all-too human tendencies. It mistakes human beings for angels, rather than what they really are, which is flawed, selfish, ignorant, and often irrational creatures who are prone, when the opportunity arises, of succumbing to the temptation to make a profit at the expense of others. If human beings were angels, then of course there would be no need to regulate their behaviour. But regulations are needed because the majority of human beings are not so perfect.

Rational beings, unlike human beings, would never act in ways that are contrary to their best interests. Rational beings, unlike human beings, would never succumb to herd behaviour when it is harmful. Rational beings, unlike human beings, would not sacrifice long-term profits and growth for possible short-term gains which damage an individual’s or company’s long-term prospects, such as by bankrupting the company. Rational beings, unlike human beings, would not speculate on the stock market, as if they were mere gamblers hoping for a quick gain. And finally, rational beings, unlike human beings, would never commit crimes or other illegal or immoral actions that could lead to their imprisonment, along with a loss of reputation. But the fact that human beings frequently commit these and other irrational actions shows that, contrary to what economists assume, human beings most certainly are not rational creatures.

Capitalism is like a wild beast that must be tamed, muzzled, and guided, while it is occasionally punished for its misdeeds, otherwise it will bite, maim, and trample some people, behave foolishly or recklessly, run off in directions that one doesn’t want it to go, and, in extreme cases, even jump off the edge of a cliff or into the ocean and drown, when others must come to its rescue. When it is tamed, that is, when it is sufficiently but not overly regulated, capitalism can produce great benefits for humanity. But when it is not tamed, like a wild beast, it can wreck our dwellings and cause harm to many people. It is the assumption of human rationality that blinds free-market capitalism’s many zealous ideologues from recognizing this important truth about capitalism’s numerous defects and its potential for causing harm and disaster.

The belief that government regulations are not needed to check, restrain, correct, and punish bad behaviours, while they seek to prevent mistakes that are due to ignorance or incompetence, in the economic realm in order to protect people is just as foolish and absurd as the belief that laws are not needed to protect people from those who do bad things. The protection and preservation of civil society against those who would infringe its rules is the reason why we adopt laws, along with the legal system and police force that punish wrongdoers. For precisely the same reasons, the preservation of honest behaviour and the protection of customers and employees is why there exist government rules and regulations whose aim is to punish wrongdoing in the economic realm, so that undesirable behaviours do not multiply and proliferate, like a harmful virus, thereby infecting a greater and greater number of individuals with the dangerous disease of unrestrained, unscrupulous, and immoral greed.

 

[1] Capitalism: The Unknown Ideal by Ayn Rand, p. 112 (“The Assault on Integrity” by Alan Greenspan). The New American Library, New York, 1966.

[2] Ibid, p. 113.

[3] The Wealth of Nations, book 1, chapter 11, part 3.

[4] Keynes – Hayek: The Clash that Defined Modern Economics by Nicholas Wapshott, pp. 180-181. W. W. Norton & Company, New York, 2011.

[5] Another fairly common occurrence in poor countries is that the inspectors or government officials accept bribes to overlook violations of these regulations, as a way of supplementing their often meagre salaries.

[6] My knowledge of this case comes from the documentary film by David and Jacqui Morris, Attacking the Devil: Harold Evans and the Last Nazi War Crime.

[7] Apart from anarchists and libertarians, of course, those immoderate fanatics of individual liberty.

[8] The Brewer’s Tale: A History of the World According to Beer by William Bostwick, pp. 131-132. W. W. Norton & Company, New York, 2014.

[9] Cities by Jeremy Seabrook, pp. 170-171. Pluto Press, London, 2007.

[10] Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics by Jane Jacobs, pp. 6-7. Random House, New York, 1992.

[11] Collapse: How Societies Chose to Fail or Succeed: Revised Edition by Jared Diamond, chapter 15. Penguin, New York, 2011.

[12] Truman by David McCullough, chapter 7. Simon &Schuster, New York, 1992.

11 comments

  1. Even in Plato’s day economics over rode democracy. This dominance continues today. The belief is that capitalists thrive without rules, and of course this is true. Companies need profits, people need jobs and governments need tax revenues, and so companies are increasingly awarded with fewer and fewer regulations to encourage this recycling of economic stimulus.
    But society has a right to protect itself from the powerful. Third world countries have few regulations and the quality of life is much poorer. Is America turning into a Third World country?

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    1. To reply to your question, I would say that although the United States is not a failed country, it is on its way to becoming one. And the reason for this is that, in the great majority of successful countries, there is a sense on the part of the inhabitants that we are in this together, which is illustrated by their willingness to help their less fortunate members through a variety of different measures and programs, such as universal health care, universal education, welfare payments and systems, and so forth. Of course, all these and other kinds of government programs cost a lot of money, which need to be paid for ultimately by taxes. The present unwillingness on the part of wealthy Americans to share a part of their income, in the form of taxes, with those who are less fortunate than they are is a clear indication that the care and consideration for their fellow citizens that characterizes all successful countries is on the wane in the United States.

      However, it is not too late to rectify this situation, although at the present time, there appears to be no political or social will to do so. In my opinion, this situation will not change until the American people free themselves from the false ideology that was espoused by free-market fanatics like Milton Friedman and Ayn Rand. Rand hated poor and ordinary people because it was this segment of society that was championed by the communists in her native country, the Soviet Union. There are many readers of Rand’s vitriolic works who have likewise come to scorn and despise the poor, with the result that, in the U.S., the poor are becoming increasingly impoverished, uneducated, sick, and marginalized, in some ways resembling the poor who live in third-world countries.

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      1. As a democratic nation it does appear to be a failed nation. 78% of the people opposed the Trump budget and the budget still passed. The NRA, the pharmaceuticals, the oil industry, and Monsanto all write the legislation that regulates them. The people, and the government are controlled by special interests. When the freedom to think critically does not exist, then there is no freedom!

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  2. You may be right to point out that I am being overoptimistic in my assessment of the present state of the American democracy. I do share a number of your beliefs about what is wrong with the system and society there. These flaws, shortcomings, and defects have several systemic causes, which I will try to discuss briefly.

    First, the presidential/congressional political system. Due to the direct election of the president and the existence of two congressional houses, there exists a hierarchy of electoral districts: the presidential district encompasses the entire country, while senatorial districts encompass the entire state, which vary considerably in population, while the congressional districts are roughly even in terms of population. Obviously, it takes a lot of money to reach all the voters in the country and in the more populous states, which makes fundraising of vital importance, and makes the winners highly beholden to those who have contributed to their campaigns. In the British parliamentary system, which does not have the direct election of the country’s leader, the prime minister, there exists no such hierarchy of electoral districts. To put this in the context of the U.S. system, it is as if the president had to run for election in one of the congressional districts, and once elected, by virtue of being the leader of one’s party, becomes the leader of the country because one’s party has won the largest number of seats in the election.

    Political parties in countries with a parliamentary democratic system spend significantly less money than parties in the U.S., which has by far the most expensive electoral system in the history of the world. The United Kingdom and Canada both have parliamentary systems, and even considered proportionately – the U.K. has a little less than 1/5 the population of the U.S., while Canada’s population is slightly more than 1/10 that of the U.S. – total spending on elections is much higher in the U.S. than in either of these other countries. The figures for the most recent elections are highly revealing about the influence of campaign contributions in these three countries. The 2016 U.S. election cost, for all races, a total of US$6.8 billion. During the 2015 federal election in the U.K. , a total of £37 million was spent by all parties in the two weeks prior to the election. In Canada, the 2015 federal election cost CAN$128 million, a fairly high figure due to the long electoral campaign. In 2011, total electoral spending was CAN$49 million. Even after converting currencies and taking their different populations into consideration, the figures on total campaign spending in these three Western democracies are highly incongruent: electoral spending in the U.S. is some 5 to 10 times higher than in the other two countries.

    Second, every member of the presidential administration is appointed by the president rather than elected by the people. In the parliamentary system, all ministers, or secretaries, as they are called in the U.S., must first stand for election. It is as if, in the context of the U.S. system, every federal secretary first had to stand for election in the House of Representatives and then, by virtue of being a member of the winning party, was eligible for being appointed secretary of a department. Although there is nothing that prevents a corporate executive from seeking election in a parliamentary system, it is much less likely that such an individual would win election in such a system, since one would have to convince the voters in one’s district that one really and truly has their interests at heart. In contrast, corporate executives are routinely appointed to important positions in the U.S. federal government, thereby completely bypassing the important democratic test of popular approval.

    Third, the rampant individualism and deregulation that is prevalent at the present time in the U.S. leaves the majority of people powerless. The free-market dictum that big government is bad has essentially left the majority of poor and even middle-class citizens powerless against the wealthy and the corporations. By seeking to dismantle and weaken all levels of government, the free-market fanatics have debilitated the primary defence that the weak have against the strong.

    There are of course other important issues besides these, but I will stop here for now.

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    1. I think the Greeks had a Senate with 1000 members for the sole intent of making it expensive to bribe enough of them to take control of an issue. The problem with the US is simply that the capital interests dictate policy by coercion, intimidation, threats, and promises of rewards. And that this can be done legally means that it will never change!

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  3. Of course, an author may not be the best person to ask about one’s own writings, but the essay “Art is Deception” makes the point that everything that we humans make out of non-living materials, including all our technological inventions and creations, will never become alive. This belief, and the belief that we humans will one day live on other planets in the Universe, are both widespread at the present time; however I believe they are completely wrong.

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