17. Is There a Bias Toward Overregulation?

CHAPTER 17

Is There a Bias Toward Overregulation?^*

WHAT IS “TOO MUCH” GOVERNMENT?

Often it is appropriate to consider the question of government regulation industry by industry or problem by problem, focusing on specific facts. Heaven knows there has been enough of the opposite: adopting regulations lightheartedly as if good intentions were justification enough. On the other hand, sometimes it is appropriate to step back from a narrowly factual focus and consider a broader question. Preoccupation with the immediate and specific is part of the problem with government action.¹

A broader view suggests that our political system harbors a bias toward overactivity. Regulation is just one of several things that government does probably too much of. Such a bias, if it does exist, argues for seeking—or restoring—constitutional restraints on regulatory activity and for not letting each particular issue be decided on its own narrow apparent merits. Despite the scorn of hard-nosed positivists, human rights belong in the discussion.

Strictly speaking, perhaps, what argues for restraint is not an incontestable bias toward too much regulation but a structure of government decisionmaking in which prospective costs and benefits escape accurate confrontation. The result may be too much regulation in some directions and, in some sense, too little in others. Errors of omission do not cancel out errors of hyperactivity, though, and a case for restraint remains.

What might the ideal amount of government mean? Even without being able to say (and without facing the anarchists’ challenge to any government at all), one can still recognize aspects of decisionmaking processes that tilt the outcome toward too much government. Some utterly familiar facts suggest this conclusion. Admittedly, I may have overlooked some powerful and even overriding biases working in the opposite direction. As a contribution to discussion, though, I report the biases I see and challenge the reader to explain any opposite ones that might override them.

FRAGMENTED DECISIONS AND AGGLOMERATED ACTIVITIES

Almost everyone who plays a part in governmental decisionmaking, from the average citizen on up, has a fragmentary view. No one has, or has reason to seek, a full view of the prospective costs and benefits of a contemplated activity. (Just one kind of relatively specific and obvious example concerns federal sharing in the costs of many state and local projects, with the result that the local authorities are deciding on expenditure of what, from their points of view, are “ten-cent dollars” or “fifty-cent dollars.”) Nothing in government corresponds to the market process of spontaneous coordination of decentralized decisions; nothing corresponds to its way of bringing even remote considerations to the attention of each decentralized decisionmaker in the form of prices.² Knowledge, authority, incentives, and responsibility are largely fragmented and uncoordinated in the political and governmental process. Far-reaching and long-run consequences of decisions receive skimpy attention.

One aspect of this fragmentation, noted by Samuel Brittan, is that “the cost of a political decision is borne by people other than the voter. A customer buying a suit or a washing machine has to bear the cost himself.” Someone voting for a candidate who makes some attractive promise, however, usually—and realistically—assumes “that others will bear the cost” (Brittan 1978, pp. 165-166).

Any number of government activities might each seem desirable by itself in the absence of most of the others, but it does not necessarily follow that the whole agglomeration of them is also desirable. To suppose so would be to commit the fallacy of composition, of supposing that anything true of the part or individual must also be true of the whole or group. Adding any particular government function to all the others complicates the tasks of choosing, operating, and supervising those others.³ The more functions the government takes on and the more complicated they are, the more they must be left to the “experts”; and the people’s elected representatives, let alone the people themselves, are less able to exercise close and informed control. The elected representatives, who supposedly should monitor the experts, must largely depend on them for information; and the experts have their own special views about their work.

Particular government programs, and especially agglomerations of them, have remote, unforeseen consequences. The current inflation is one example. Burgeoning programs—including, ironically, ones intended to help make the citizens economically secure—have led to federal deficits, government borrowing, upward pressures on interest rates, Federal Reserve actions to restrain their rise, consequent excessive expansion of the monetary base and money supply, price inflation, further allowance for inflation in interest rates, further short-run efforts to restrain their rise by monetary expansion, establishment of a momentum in prices and wages such that an antiinflationary turn in monetary policy would not bring quick success but would bring a recession, monetary accommodation of the rising wages and prices, and so on. The result is all the insecurity that inflation brings, and all the disruption of economic calculation. A still more pervasive example—so one might argue—is that the accumulation of government activities and their repercussions brings a drift in the whole character of our social, political, and economic system; yet that drift was never squarely faced and decided on as a political issue.

THE “FLAW” AND THE CASE FOR LIMITS

Overregulation stems from a “basic flaw” in our political system closely related to the flaw noted in current arguments for a constitutional limit to government taxing or spending.⁴ Because of its close relation to the present topic, the central argument is worth reviewing. The alternative to such a limit—letting total spending emerge as the sum of individually enacted appropriations—is biased upward. Some people are especially interested in government spending on rivers and harbors and military installations, others in spending for schools and teachers, others in housing subsidies, and still others in energy-research contracts. Because of its special interest, each group is well informed about the government action it wants and has arguments for it readily at hand. Furthermore, since the benefits of its favorite program will be relatively concentrated on itself rather than diluted over the entire population, its members have incentives to incur the trouble and expense of pressing the group’s views on the legislators. A candidate or legislator, for his part, knows that each special interest cares intensely about what concerns it and fears that losing the support of only a few such interests could cost him election or reelection; so he tends to be responsive.⁵

The links between particular government expenditures and particular tax collections are loose. No one really knows who will ultimately pay for a government program. The voter can drift into thinking that someone else, perhaps “the rich” or the big corporations, will pay or ought to pay. (Not even economists know who ultimately pays the corporate income tax.) It is easy to drift into thinking that the government gets resources out of some sort of fourth dimension. Politicians will not hasten to disabuse voters of this “fiscal illusion.” Nowadays, with taxes and inflation being what they are, this illusion is evaporating; but the very fact that the present state of affairs could develop suggests that some such illusion has been at work until recently.

An art-loving journalist has unwittingly illustrated the sort of attitude that expands government activity—and thereby also illustrated the logic of the sort of limit he was complaining against (Sansweet 1978, p. 11). State and local government actions taken after passage of Proposition 13 in California reveal, he complained, that many officials see the arts as an expendable elitist pursuit. The recent tremendous growth in public funding for the arts had suddenly been thrown into reverse. A 60 percent slash in the budget of a state agency making grants to art programs and individual artists had lowered California to 44th place among all states in per capita funding for the arts. Yet, he continued, the arts pay the wages of hundreds of thousands of people, directly and indirectly. How many restaurants near the Music Center in downtown Los Angeles would remain open without the audiences that the Center draws? The arts offer pleasure and entertainment and stimulation. State and local governments have made too much of a commitment to them to back out now without seriously retarding their progress. “A society that considers it a frill to nourish its soul is in deep trouble.” In reply, a reader asked: “What kind of trouble can be expected by a society that depends on government to nourish its soul?” (Beaver 1978, p. 12). The journalist tacitly accepts the notion that not to finance particular activities by taxes—by compulsion—is to be neglectful of them. Also noteworthy is his misuse, regarding downtown Los Angeles, of the overworked theoretical argument about externalities—here, spillover benefits.

Much the same points that apply to spending apply also to regulation. Some economic interest groups benefit from regulation (perhaps it protects them against competition) and automatically have the information and incentives to press candidates and legislators for what they want. The latter, for their part, are rationally more responsive to special-interest pressures than to the general interest of the average voters, who are rationally ignorant and apathetic about the details of public policy. Furthermore, citizens who identify themselves with some cause—protecting the environment, cracking down on health and safety hazards, developing exotic energy sources, fostering the arts, remedying supposedly unjust inequalities, suppressing (or facilitating) abortion, improving the eating habits of school children, or whatever—take on the political characters of special interests and, like them, tend to have disproportionate influence with politicians or the relevant bureaucrats. The much discussed “new class” of activist intellectuals and publicists belongs in the story. Legislators, bureaucrats, and other members of the government themselves have personal stakes in government activism, though many of them are no doubt sincerely motivated to do good as they conceive of doing good in their own special niches in life.

METHODOLOGICAL INDIVIDUALISM IN ANALYZING GOVERNMENT

None of this amounts to casting aspersions on the moral characters of the people who take part in deciding on government activities. I am simply drawing implications from the fact that these people decide and act within particular frameworks of information, incentives, tests of performance, and rewards.⁶ Economists, long successful with methodological individualism in their own field, are now applying that approach to understanding how people behave in the governmental framework. We, the analysts, project ourselves into the role of businessman, consumer, bureaucrat, legislator, political candidate, or whoever it is whose decisions and actions we are trying to understand. We consider his motivations and incentives, perhaps even including the circumstances affecting his self-esteem, as well as the opportunities and constraints he faces. We can draw relevant information from our own personal thoughts, actions, and experiences. Such an approach does not depend on the profundities of psychology. It draws inferences from familiar facts about human nature and about decisionmaking situations.

CIRCUMSTANCES AND IDEAS OF THE AVERAGE VOTER

The “average voter” is the voter considered at random, otherwise than as a member of any special interest group. (To take account of nonvoting, perhaps the term should be “average citizen.”) He does not automatically possess the information needed to weigh the pros and cons of more or less spending on each special group’s favorite project. Furthermore, obtaining such information would cost him money, time, and trouble better devoted to other purposes. He profits more from a day spent learning the strong and weak points of different makes of car or refrigerator, when he wants to buy a new one, than from a day spent trying to learn the advantages and disadvantages of increased government spending on aircraft carriers or urban renewal.

Acquiring and acting on information about public issues has a low payoff because it is a “public good.” The standard rationale for having any government at all is that it is necessary to provide public goods, such as national defense, police protection, and the legal system. Their benefits cannot be confined to people who voluntarily contribute money or effort for them. Each person might as well sit back and enjoy a free ride on the expenditures or efforts of others. So government sells public goods compulsorily, for taxes. But no such solution, imperfect as it may be, has been found for the public good of monitoring the government itself.⁷ If an average voter should go to the trouble of keeping informed and politically active, most of the benefits, in the form of sounder policy, would accrue to others. While reaping only a very minor share of these benefits, he would have to bear all of his own costs. He has about as little reason to incur them as he would have to stop driving his car to hold down air pollution. He has little incentive to work for what is in the general interest.⁸

Exhorting citizens to study the issues and take an active role in politics largely ignores these facts. It tacitly regards concern with governmental affairs as a noble activity holding a special claim on each citizen’s attention. Actually, badgering him to divert his money, time, and energy from work or recreation to political studies that perplex or bore him will contribute little to wise policymaking. It is an imposition, too, if holding down the range of government decisions in the first place could have held down these demands on his attention.

Even if, implausibly, the voter should become well informed and vote accordingly, he cannot express himself on each program separately. If he is voting on issues at all when choosing between candidates, he is voting on policy positions all jumbled together in vaguely specified packages, along with the candidates’ actual or advertised personalities. Furthermore, his own monitoring of the government through informed voting (and lobbying) would do little good unless other voters joined him. He is only one out of many, and his own informed vote would hardly be decisive for the outcome of an election or for the decision on some program. It is rational for him to content himself with superficial notions about election issues, voting for a party label out of habit or for a well-packaged personality out of whim.⁹ His position is different from that of people who would reap concentrated benefits from particular programs and have good prospects of promoting government activism in their favor. Average and special-interest voters alike, though, enjoy an apparent freedom from personal responsibility in the voting booth; each is acting anonymously along with many others.

It is doubtful that businessmen, as such, have any strong interest in working to limit government intervention. Just because they are the key actors in a free-market economy, it does not follow that the individual businessman finds it in his self-interest to work to preserve such an economy. Businessmen can cope with regulation. Its burdens may not be much worse than those of competition, which, anyway, some kinds of regulation restrain. The prospects for businessmen of ordinary ability relative to the prospects of the most dynamic entrepreneurs may even be better in a highly regulated economy than under substantial laissez faire; enjoying the quiet life may be easier. Hence the pointlessness of businessmen exhorting each other to do a better job of communicating their case to the public. Businessmen as such, rather than simply as human beings, are not the main beneficiaries of a free economy.

With little personal incentive really to understand public affairs, the average voter tends to work with ideas that are in the air. The attitude does seem to prevail widely these days that if anything is bad—pornography, or small children’s eating medicine that they shouldn’t have, or junk food in the schools—then it is the government’s job to suppress it. Similarly, if anything is good—housing, arts, effective drugs, good nutrition—then government ought to promote or subsidize it. This attitude parallels the doctrine of altruism, which receives wide lip service, the doctrine that one ought to be primarily concerned with the (supposed) interests of other people. It is wickedly selfish, then, to oppose a program for doing good, even if it does cost tax money. (Government programs in one’s own special interest can readily be rationalized in altruistic terms, as good for other people also. It is a routine theoretical exercise for economists to concoct “externality” arguments for government interventions.) The altruist doctrine meshes well with the idea that it is slightly indecent to be a rightist and the presumption that the decent and humane position on any issue is at least a little left of center (Ellul 1968, pp. 215-219).

The psychological roots¹⁰ of interventionism include people’s tendency to believe what they want to believe and the readiness of politicians to exploit this tendency. In political argumentation, plausibility counts. Mere slogans and name-calling sometimes work. The acceptance of merely plausible arguments is aided by a trait of contemporary thought roughly equivalent to what F.A. Hayek has called “scientism.”¹¹ Just as Chanticleer thought his crowing made the sun rise, so voters and politicians seem to think that their laws are what make good things happen. People are unaccustomed to conceiving of how good results will occur unless they are explicitly sought; the invisible hand is not universally appreciated. When a problem has become politically fashionable, to suggest leaving its solution to private initiative seems callous.¹² Action is considered “positive” and therefore good, while opposition is “negative” and therefore bad.

Support for activism intertwines with the idea that democracy is a good thing. That idea slides into the belief that doing things democratically, that is, through democratic government, that is, through government, is a good thing.

Another reason for the widespread appeal of government intervention is disregard of the incompleteness of knowledge and the costs of information, transactions, and decisionmaking in the public sector while emphasizing such “imperfections” of the private sector. Tacitly, the government is regarded as a philosopher-king, totally benevolent, omniscient, efficient, and effective.¹³ Handing over a problem to such an entity seems like solving it.

SPECIAL INTERESTS AND SYNTHETIC MAJORITIES

So far we have been considering the average voter, his circumstances and attitudes, and the appeals directed toward him. Next we turn to special interests and then to “hobbyists.” Politicians are tempted to appease each clamoring interest by helping it get what it wants and to compensate the others by doing the same for them. Under these circumstances, logrolling (explicit in legislatures and implicit in political platforms) assembles majorities out of essentially unrelated minorities. “Minorities rule”¹⁴ (Dahl 1963, pp. 125—130)—not the minority, but an implicit coalition of several minorities. Suppose that for each of three programs, 25 percent of the voters favor it so intensely that they would vote for whichever candidate supports it, regardless of his position on other issues. Seventy-five percent of the voters oppose each program, but only mildly. Suppose, further, that the minority favoring each of the three programs is a distinct group. (To recognize that two or three of the groups have some members in common would complicate the example without affecting its point.) A candidate supporting all three programs would be elected overwhelmingly and be put in a position to work for their enactment, even though 75 percent of the electorate opposed each program. The same sort of implicit logrolling operates, though less clearly than in this example, in the growth of government budgets. As the example suggests, by the way, the political process affords scope for political entrepreneurship and not just for passive response to existing demands.

Particularly as the vote-trading process spreads out over time and over numerous separate ballots, spurious consensus becomes possible. Policy combinations get adopted that could not have commanded a majority if considered as a whole. The procedure of making decisions year by year leads to commitments to the future growth of spending that are not seen or not appreciated when made, yet are hard to reverse later. Furthermore, the automatic growth of revenue as the economy grows and as inflation proceeds, pushing taxpayers into higher brackets, allows the government to avoid an explicit decision to raise taxes to cover increased spending (Stein 1978, p. 20).

The politics of abortion illustrates the influence of intensely concerned minorities. The California and Massachusetts legislatures were so embroiled in controversy over public funding of abortions in July 1978 that they failed to finish their budget work in time for the new fiscal year. A single issue fought over intensely by small but well-organized groups can distract politicians’ attention from matters of broad but unfocused public concern. Similarly, a vast majority may grumble about high taxes, but its concern is so diffuse (or has been, until recently) that it can seldom counterbalance powerful minority pressures working for specific spending programs (Wall Street Journal 1978, p. 20).

HOBBYISTS

Activists on all sides of the abortion issue are examples of what I call “hobbyists,” who engage in political study and activity not so much for obvious material gain as because they have identified themselves with some mission or are seeking an outlet for their energies or a sense of participation in admirable causes. Hobbyists include people who want a federal crash program to cure a disease that killed a relative, or who have lost a child in a boating accident and therefore seek federal regulation, or want subsidies for art or music, or want preservation of the unspoiled wilderness. People acting out of disinterested public spirit count among the hobbyists; the term is not meant disparagingly. Stretched a bit, the term also covers “consumer advocates,” who, for the publicity they thrive on, require “a constant supply of new charges against new villains ... suitably printed in the hot ink of outrage” (Stigler 1975, p. 188).

By the very nature of their “hobbies,” just as by the very nature of special economic interests, most hobbyists are pressing for more government activity. A belief in laissez faire or limited government is itself a hobby for some people, to be sure; but it is just one among a great many hobbies, most of which do tend toward interventionism. It is no real embarrassment for this argument that some intellectuals do take an antiinterventionist stand. Of course some are libertarians, but psychological factors and aspects of the democratic process make it difficult for their view to prevail in practice.

Hobbyists are charmed at having one central focus, Washington, for their persuasive efforts and charmed by the prospect of using the force of government to impose what they want. Success seems easier along that route than along the route of persuading myriads of individuals voluntarily to observe, for example, stricter standards of boating safety. Hobbyists seeking entertainment or a sense of participation are inclined to want to be in fashion. If altruist and interventionist doctrines prevail, they will go along.

THE POLITICIAN

The politician, to thrive in his career, must recognize the voters as they are—the average voters with their susceptibilities, the special interests and hobbyists with their particular concerns. Like most people, he wants to think well of himself; he wants to think he is accomplishing something. His particular mission in life is to perceive problems and get government programs enacted to solve them.¹⁵ Even when out of office, the politician does not typically strive to limit the scope for doing good in the office he hopes to win at the next election.¹⁶ In office, he wants to carry forth his uncompleted programs and continue serving the public better than his opponents could do.

Publicity is helpful in the quest for votes. (So is having patronage with which to reward supporters, and to which government expansion contributes.) One way to gain favorable publicity is to become identified with one or more problems and with proposals for their solution—pollution, unemployment, the urban crisis, the energy crisis, the expenses of medical care, poverty, inequality, or whatever. It may even count as a solution that the proposed legislation merely creates a new agency assigned to deal with the problem.¹⁷ One reason for delegating work to regulatory agencies is that the legislature has too much to do to consider problems and solutions in detail; legislating, along with the bargaining necessary for it, is a high-cost activity with steeply rising marginal costs (Posner 1974). Furthermore, the vagueness inherent in handling a problem by turning it over to a new agency can itself be helpful in lulling possible opposition, just as vagueness in the wording of a proposed international agreement may be helpful in getting all parties to accept it.

The individual advocate of one particular bit of government expansion has little personal incentive to consider the external diseconomics that may result in the form of the enhanced role of inadequately supervised experts and the worsened difficulties of monitoring government. Neither he nor the voters will recognize any responsibility of his for such long-run consequences. Later on, after such pseudosolutions have enhanced the power of administrators, reduced the relative power of the people and their elected representatives, increased the difficulties of monitoring the government, and expanded the scope for court cases, these unintended results will hardly be traced to and blamed on the original sponsors of the legislation. Meanwhile, they get credit for being concerned with problems.

Politicians and government officials tend to have short time horizons. Unlike corporation executives, who may hold stock or stock options of their companies and whose performance tends to be assessed and reported on the stock market anyway, government officials hold no shares of stock whose current prices might reflect assessments of the long-run consequences of their actions; hence, short-run electoral concerns tend to prevail. How much incentive, for example, do mayors have to mount strong resistance to the demands of unionized city employees? Mayor John Lindsay of New York “took the attitude that he would not be around in ten years. He thought he would be either in the White House or doing something else, so he decided to pay people off with promises of pensions that would come due when he was no longer mayor” (Bork 1978, p. 13).

The personal qualities useful in gaining favorable publicity and in political wheeling and dealing are not likely to coincide with the personal qualities of a competent, far-sighted, and courageous statesman. Neither are the qualities of a successful campaigner, which include adroitness in projecting an appealing personality and in cleverly stating or obscuring issues.¹⁸ Similarly, a competent and devoted public servant would have rather different qualities than a personally successful bureaucrat, whose abilities might run more toward cultivating superiors by promoting their personal ambitions.

Exceptions do occur. Why can’t a politician see it as his mission in life to do good by resisting and reversing the trend toward ever more government? If that resistance really is in the interest of the average citizen, why can’t the politician both serve his self-esteem and win votes by campaigning on such a platform?

Conceivably he might. But these questions, instead of refuting the argument about activist biases, merely note a possible offset. For several reasons, this offset is unlikely to be strong. (The exceptional politician to whom the following remarks do not apply stands at a disadvantage in winning elections and wielding influence.) First, a political career would generally have been less appealing in the first place to a skeptic about government than to a man who saw great opportunities in it for doing good. Opportunities for also gaining personal success in that endeavor are greater for a politician, as for a bureaucrat, if government is big and growing than if it is kept small. Secondly, winning elections on a platform of restricting government activities depends on a greater degree of sophisticated understanding among voters than they are likely to have (although hope on this score is now emerging). Even if a politician is concerned with enlightening the citizens over the long run, he must realize that his chances of providing enlightenment are poor if the voters remove him from political life. He directs his campaigning to the citizens as they are and as they think, not to the economists and political philosophers that they are not.

A third line of rebuttal denies the common idea that politicians try to sell their programs to voters for votes quite as businessmen try to sell their wares to consumers for dollars. The analogy is defective in many respects. For example, candidates go beyond direct appeals to the electorate. They also seek votes indirectly by appealing to influential opinionmakers and to other politicians. Alliances are essential for getting nominations, getting allocations of party funds and other help in campaigns, and logrolling the enactment of one’s favorite projects (and thereby gaining in personal status). The individual politician has to tailor his appeal partly to other politicians, most of whom incline toward an activist government for the reasons under discussion. Even the exceptional politician is restrained, then, from advocating as much limitation of government power as he might otherwise personally favor.

Our amateur psychologizing about politicians should pay some attention to the members of legislators’ staffs. With government expansion and legislative burdens making increasing demands on their employers’ time and ability to absorb information, staff members have growing influence. They further their own careers by helping their employers gain prominence. Bright ideas help. Although a few ideas may focus on repealing laws and abolishing agencies, activism generally offers more scope for brightness, as well as for maintaining political alliances, especially in an intellectual atmosphere predisposed to activism.

THE BUREAUCRAT

The bureaucrat, like the politician, may well see his mission in life as doing good through the agency of government. He is likely, though, except at the highest levels, to be a specialist. (At the highest levels, he is likely to be mobile between government positions and to be judged more by his reputed abilities and performance in the short run than by the long-run consequences of how he runs any particular agency.) The specialist identifies with the mission of his bureau, appreciates the value of its services, but appreciates less clearly the alternative results obtainable from devoting the necessary money and resources to other purposes, public or private. Like most people, he wants to think that his job is important and demanding and that he is doing it well. With a bigger budget and a larger staff, he could serve the public still better. Fortunately for his ambitions, the legislators must depend largely on what he and his fellow experts tell them about the benefits and costs of his agency’s activities. Because his job is specialized and complicated and because they have other tasks also, the legislators cannot monitor him closely. Furthermore, alliances tend to form among the agency, the members of the legislative committee monitoring it, and the constituency in the private sector that benefits from the agency’s services or regulations.¹⁹

THE COURTS

Judges, like other government decisionmakers, are often in a position to take a narrow view, doing what seems good or benevolent in the particular case at hand without having to weigh costs against benefits carefully and without having to exercise adequate foresight about the long-run repercussions of a particular decision. Of course, judges are under an obligation to decide according to the law, including precedent; but when legislation, administrative decrees, lawsuits, and court decisions have vastly proliferated, the judge—cued by the litigants’ attorneys—has all the more decisions to hunt among for the precedent that will rationalize the decision he wants to make.

Nathan Glazer (1975) describes several factors contributing to a tide of judicial activism. Powerful new interests are at work, including public-advocacy law centers supported by government or foundations. “Law—for the purpose of the correction of presumed evils, for changing government practices, for overruling legislatures, executives, and administrators, for the purpose indeed of replacing democratic procedures with the authoritarian decisions of judges—became enormously popular” (p. 123). Second, the courts must work out the logic of positions once taken and cannot easily withdraw from their implications. New decisions create precedents whose applications and extensions cannot be fully foreseen; case law evolves with a momentum of its own. Examples concern the concepts of “standing” to sue, of due process, and of equal protection. Third, expansion of government activity provides all the more subject matter for court cases. The “facts” relevant to court decisions become all the more numerous and complex. Social science becomes relevant; and as it changes, so may the law. The judges acquire all the more opportunities for second-guessing not only ordinary citizens but also the legislative and executive branches of government.²⁰ In short, the courts well illustrate the main theme of this paper: the fragmentation, on the governmental scene, of cost-benefit calculation, decisions, and responsibility.

A POSSIBLE COUNTERARGUMENT

Considering the circumstances and incentives of voters, politicians, bureaucrats, and judges does seem to reveal a bias toward hyperactive government. Yet Anthony Downs (1960), who had lucidly explained the rationality of voter ignorance, went on to offer a supposed explanation of “why the government budget is too small in a democracy.” The core of his argument is that the rationally ignorant voter does not appreciate all the remote and problematical benefits that government programs would provide. As society becomes wealthier and more complex, the potential scope for remote and poorly understood but genuine government benefits expands. Public goods do not enjoy the advertising that private goods do. The average voter is highly aware, however, of the costs of government programs as reflected in his taxes. Catering to such voters, politicians hold taxing and spending down to levels at which the benefits of additional spending would still exceed the costs.

Several things are wrong with this argument. First, taxes are not all that evident to the individual voter. Excise taxes are concealed in the prices of products, and just which persons ultimately bear the burden of the corporation income tax is even more obscure. Even personal income taxes can be made less conspicuous by withholding. Downs does not take adequate account of these tax concealments. He does not adequately recognize the several distinct ways in which inflation can bring what amounts to hidden tax increases. He does not recognize how easy it is for government to spend the incremental tax revenues generated by economic growth. He does not take “fiscal illusion” seriously enough. Second, politicians have discovered the beauties of deficit spending; and working as they do with short time horizons, they do not agonize over an ultimate day of reckoning. Third, Downs gives only unconvincing examples of government activities that have thin but widespread benefits, or benefits that are great in the long run but unnoticed in the short run. In fact, his chief example seems to be foreign aid. Although he notes the coercive nature of dealings with government, he seems not to recognize that private activities carried out with resources not taxed away might themselves have remote benefits and that the coercive nature of the expansion of government activity makes that expansion less likely to leave a net excess of benefit over cost than the alternative of voluntary expansion of private activity. He does not recognize the differential incentives that special private interests have to press exaggerated claims about the benefits of the government programs that they are seeking.

Fourth, while Downs applies the approach of methodological individualism to the voter, he does not apply it consistently to bureaucrats, politicians, judges, and litigants. In some passages, he refers to “the governing party” or even “the government” as if it were a monolithic entity making coordinated choices rather than an assemblage of individual persons each working with his own drives, motives, opportunities, incentives, constraints, and special point of view. He does not take heed of how individual legislators or candidates can call for particular spending programs without calling for the taxes to pay for them. He supposes that each bureau would submit its budget requests to, in effect, “the directors of the governing party,” who, anxious for votes, would develop suitable checks on the bureau’s expansionism. He does not recognize, as William Niskanen (1971) later explained, that self-aggrandizing bureaus are in fact not supervised by a sufficiently authoritative central budgeting agency. On the contrary, they are likely to develop cozy relations with the congressional committees that are supposed to monitor them. In short, Downs fails to grasp the full implications of fragmented government decisionmaking.

POLICY DRIFT

The fragmentation of decisions over time contributes to an unintended drift of the character of the whole economic and political system. Especially under a two-party system, platform-builders and campaigners often avoid drawing issues in a clear-cut way.²¹ A candidate opposed to protective tariffs would not call for complete free trade for fear of losing some protectionist voters who would support him on other issues. He realizes that many a voter will choose the lesser evil rather than “waste his vote” on a third party even if one happened to mirror his own set of views more accurately. Political straddling, together with the jumbling together of unrelated issues (and even the candidates’ personalities) in every election, water down the issue of interventionism versus the free market into an uninspiring choice between parties leaning just a little more one way or a little more the other. Incentives and prejudices favoring a middle-of-the-road position leave the direction of cumulative policy drift to whoever are most active in locating the two sides of the road, or even just one side. The kinds of choices that voters and politicians consider feasible (and, similarly, the positions they consider unrealisticalfy extreme) are conditioned by how policy has been drifting. Resistance to drift weakens when not only politicians but even scholars make a fetish of recommending only policies they consider politically “realistic.”²² Under such circumstances, discussion does not adequately consider long-run repercussions and long-run compatibilities and clashes among various goals and measures. Major choices, such as ones affecting the general character of the economic and social system, may get made by default as the cumulative result of piecemeal decisions whose combined tendencies were not realized when they were made.

FRAGMENTATION BAD AND GOOD

Closely related to dispersion of decisionmaking among persons and over time is dispersion of responsibility. Things that would be considered morally reprehensible if done by a single decisionmaker escape moral condemnation when done by government, since it is not apparent where the responsibility lies. Examples are our inflation mess, the quasi-repudiation of government debt, the taxation of phantom earnings and phantom capital gains, even when the taxpayer has suffered a real loss and even when he has suffered it on bonds of the government itself, and the government’s continued pushing of its savings bonds.

Fragmentation of decisionmaking is not to be condemned tout court. In many cases, keeping decisions close to the affected level will improve the cost-benefit confrontation. Furthermore, it helps preserve freedom. In fact, this is one of the chief arguments for the market as opposed to government control.²³

CROWDING OUT

Another disadvantage of routine reliance on government to suppress all bad and promote all good is that it tends to freeze out alternative solutions to the problems tackled. It can hamper diverse initiatives and experimentation. It can crowd out private activity by taxing away funds that people would otherwise spend themselves on satisfying their wants, by transferring real resources from the private to the public sector, by creating or threatening subsidized competition with private approaches, and by stifling imagination with the thought that the problem in question is already being taken care of. It is instructive to ponder what the state of affairs in education, health and retirement programs, housing, transportation, the mails, and other fields would be today if government had not gotten so heavily involved as it has in fact. One frequent advantage of private over government financing is that it can take better account of how strongly people desire an activity on the whole and in its various possible forms. Far from the importance of an activity arguing for its being taken over by the government, one should think that its importance argues against its being dominated by one big supplier. It is all the more regrettable when various monopolized activities are monopolized by the same monopolist and when economic and political power are combined, with all that implies about potentialities for coercion.

What crowding out means is illustrated in the field of energy. Proposals abound for government action and subsidies to develop non-conventional sources. Taxpayers would in effect have to pay the difference between the high cost and lower price of subsidized fuels; and they could not, acting individually, escape this burden by energy conservation. Production from conventional sources and potential production from unsub-sidized new sources will suffer as producers find it easier and less risky to take government handouts. Not only money but also talent and ingenuity will be diverted from other types of production, exploration, and research into those favored by the government. Business firms and investors will shy away from risky, expensive, long-term-oriented projects not only for fear of future government-subsidized competition but also for fear of future infringements on property rights. The history of energy policy, together with current demogogy, provides ample grounds for the latter fear: firms and investors must recognize the prospect that even after risking heavy losses, they will not be allowed to collect exceptionally large profits from successful hunches and good luck.²⁴ Government reassurances, even if made, would nowadays not be credible. This example bears on a broader point about remote repercussions—remote in time and in sector affected. A violation of property rights—perhaps restrictions on use of property rather than outright public purchase—may seem the economical and expedient thing to do in the individual case. Yet in contributing to an atmosphere of uncertainty, it can have grave repercussions in the long run.

An advocate of limited government cannot specify just what non-governmental solution to a problem might have been found if it had not been crowded out. An economist sympathetic to the market can explain how entrepreneurs have incentives to seek unfilled wants and ways of filling them, but he cannot predict what unfilled wants are going to be filled, and how and when.²⁵ Hence his position seems complacent; it reeks of the ivory tower. In contrast, the interventionist position looks concrete, active, practical, and down-to-earth.

Here I am in danger of being misunderstood. While I deplore regulating voluntary transactions that are not immoral and that adults are undertaking with their eyes open, the case is different with hidden safety or health hazards or with the imposition of costs onto innocent third parties. I have qualms about cold-turkey deregulation in such cases. Yet over the long run, phasing out government regulation could open the way for entrepreneurial discovery of alternatives that we can hardly imagine in advance. Such alternatives might, for example, include inspection and certification by specialist firms, as well as regulations imposed by insurance companies as a condition of insurance. My emphasis, however, is not on predicting alternative approaches but on their unpredictability and on how central control can forestall their discovery²⁶

STILL BROADER COSTS OF REGULATION

Costs (and conceivably benefits) of regulatory measures include effects on the whole social, political, and economic climate and on people’s attitudes. One example of what I have in mind concerns how even the vaguest hints about discriminatory enforcement of myriad regulations can be used to encourage “voluntary” compliance with the wage and price controls decreed by the president, without legal authority, in October 1978.²⁷ Another hard-to-fathom cost is the danger (already alluded to in the section on “The Courts”) of undermining the rule of law and the law’s objectivity, predictability, and worthiness of respect.

My worries do not hinge on any particular one of the several theories of regulation that are in circulation.²⁸ I am not, for example, adopting as the central story the theory that regulated industries “capture” their regulatory authorities. No doubt some aspects even of the public-interest theory of regulation enter into the explanation of why we have so much of it. Numerous pressures, motivations, and governmental decisionmakers interact.²⁹

The issue of regulation falls under the broader question of whether policy should serve principle or expediency, the latter meaning to act on the supposed merits of each individual case, narrowly considered. Elements of an answer to that question argue for framing policy with prime attention, instead, to the general framework of rules within which persons and companies can pursue their own goals. (In philosophical terminology, the argument favors rules-utilitarianism over act-utilitarianism.)

Some types of regulation are even open to objection on ethical grounds. Notions of human rights properly belong in the discussion, including rights of people to make open-and-above-board voluntary transactions with each other and to use and deal in their own property.³⁰ It is a questionable view to accord equal respect to people’s use of their own property and forcible interference with that use. That view sets aside the question of who has a right to do what in favor of the question of which expected pattern of property use and resource allocation appeals more to politicians and other outside observers.

POLICY IMPLICATIONS

What implications follow from my argument, if it is broadly correct? Most generally, it recommends alertness to activist bias, and an appropriate constitutional attitude. Proposals have been made for a regulatory budget: included in the annual limit to each regulatory agency’s expenses would be not only its own cash outlays but also the estimated costs that compliance with its regulations would impose on the private sector. Admittedly, implementing such a proposal would run into practical difficulties, but it is mainly its spirit that concerns us here.

It is instructive to review the rationale for the analogous proposal of placing a constitutional limit on federal government taxing or spending. The opportunity to enact such a limit would give the public at large the hitherto lacking means to vote on the total of the government budget. By voting for a limit, a majority could override the spending bias that arises from the accumulation of smaller special-interest decisions.³¹ The people assign a budget to the legislature and require it spend the limited amount of money in the most effective way. (Supporters of a limit ask: if families have to operate within income ceilings, why shouldn’t the government also?) Overall limitation would force choices among the many spending programs that might be separately desirable. To argue persuasively in the face of a given budget total, a group wanting a particular program would have to point out other budget items that could and should be cut. Special interests would then be forced to work for the general interest rather than against it.

Regulatory activity is not as quantifiable as taxing and spending. But it would be premature to give up on ingenuity. Perhaps a quantitative specification will prove impossible and procedural restraints will have to serve as a substitute. A constitutional amendment might require that enactment of new regulatory measures be coupled with repeal of others of comparable scope (perhaps as judged by numbers of regulators involved, or number of persons or dollar volume of activities in the private sector directly affected). Perhaps it would be necessary to settle for some vaguer and more nearly only hortatory restraint. Anyway, good intentions would not be enough to justify a new regulation; the proposed measure would have to be shown to be not merely desirable but exceptionally so, desirable even against the background of an already overgrown government. The objective is a framework of constraints and opinion in which different government activities are seen to be in rivalry with one another, each costing the sacrifice of others. Ideally, advocates of each new regulatory measure would accept the obligation of showing it to be so desirable as to be worth the sacrifice of specified existing regulations.

Opponents sometimes charge that a budget limit would undemocrat-ically tie the hands of democratic government, and a similar objection would no doubt be made to constitutional restrictions on regulation. Yet the purpose of either limit is not to undercut democracy but to make it more effective by remedying a flaw that has so far kept the people from controlling the overall consequences of piecemeal decisions. A budget limit or a regulatory limit no more subverts democracy than the First Amendment does by setting limits to what Congress may do. Without that amendment, popular majorities might have placed many particular restrictions on freedom of speech, but our Founding Fathers rolled all these issues up together instead of letting each one be decided by a separate majority vote (Friedman 1978, pp. 8-10).

Just as proponents of tax cuts or budget limits face the supposedly embarrassing demand that they draw up lists of specific expenditure cuts, so proponents of limits to regulation might encounter a similar demand. This one might well be easier to comply with than the demand about spending cuts. Either demand, however, is unreasonable. It in effect invites the limitationists to shut up unless they exhibit detailed knowledge of government (and private) activities that they cannot realistically be expected to have. It tacitly denies that the principle of specialization and division of labor applies in public policymaking as in other areas of life. It tacitly supposes that general knowledge—namely, knowledge of bias in the current system—is worthless unless accompanied by detailed further knowledge on the part of the same persons. Yet the very purpose of an overall limit is to bring the detailed knowledge of its possessors to bear in coping with that bias.

SUMMARY

The private sector is routinely made the target of regulation because of externalities, meaning cases in which the persons who decide on some activity or its scale decide wrongly because they do not themselves bear or take full account of all of its costs and benefits.³² How ironic, then, routinely to expect a solution from government! Government is the prototypical sector in which decisionmakers do not take accurate account of all the costs as well as all the benefits of each activity. The fragmentation of decisionmaking and responsibility goes part way toward explaining this condition, along with the kinds of opportunities and incentives that bureaucrats, politicians, legislative staff members, judges, and citizens have.

It is difficult to compare even the relatively direct and obvious costs and benefits of an individual government policy action. It is practically impossible to assess the indirect and long-run consequences of individual actions and of their aggregate, including their effects on the drift of policy and on the character of the economic and social system. The aggregate of activities all appearing individually desirable may itself turn out quite undesirable. Hence the importance of frankly allowing considerations of political philosophy into policy discussions. Broad principles should count, including a principle of skepticism about government activity. Even when no strong and obvious disadvantages are apparent, there is presumption (though a defeasible one) against each new government function. The pragmatic, “realistic” approach of considering each individual function separately and narrowly, on its own supposed merits, is fatally flawed.

Our Founding Fathers accepted the concept of human rights that government should not violate. That concept need not be based on mysticism. It follows from a version of rules-utilitarianism (as distinguished from actutilitarianism). As John Stuart Mill argued (in Utilitarianism, chapter 5, writing when the word “justice” had not yet been stretched into uselessness for all but emotive purposes), unswervingly to put respect for justice ahead of what might be called narrow expediency is a rule of topmost utility (or expediency in a broad and deep sense). I believe it can be shown that respect for and basing policy on certain rights and values, like justice, accords with human nature and with the sort of society in which people have good chances for cooperating effectively as they pursue happiness in their own specific ways. Ludwig von Mises and Henry Hazlitt, following David Hume, have persuasively argued that social cooperation is such an indispensable means to people’s pursuit of their own diverse specific goals that it deserves recognition practically as a goal in its own right.³³Considerations like these merit respect again in appraisals of government regulation.

REFERENCES

Beaver, Roy A. Letter to Wall Street Journal, 26 July 1978.

Bork, Robert. Taxpayers’ Revolt: Are Constitutional Limits Desirable? American Enterprise Institute Round Table, July 1978. Washington, D.C.: American Enterprise Institute, 1978.

Brittan, Samuel. The Political Economy of Inflation. Edited by Fred Hirsch and John H. Goldthorpe. Cambridge, Mass.: Harvard University Press, 1978.

Dahl, Robert A. A Preface to Democratic Theory. Chicago: University of Chicago Press, 1963.

de Jouvenel, Bertrand. On Power. New York: Viking, 1949.

Downs, Anthony. An Economic Theory of Democracy. New York: Harper, 1957.

———. “Why the Government Budget is Too Small in a Democracy.” WorldPolitics 3 (July 1960 ): 541—563 .

Ellul, Jacques. The Political Illusion. Translated by Konrad Kellen. New York: Knopf, 1967.

———. A Critique of the New Commonplaces. Translated by Helen Weaver. New York: Knopf, 1968.

Etzioni, Amitai. “The Grand Shaman.” Psychology Today 6 (November 1972): 88—92, 142—143.

Fein, Leonard J., ed. American Democracy. New York: Holt, Rinehart and Winston, 1964.

Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press, 1962.

———. “The Limitations of Tax Limitation.” Policy Review 5 (Summer 1978): 7—14.

Glazer, Nathan. “Towards an Imperial Judiciary?” The Public Interest 41 (Fall 1975): 104—123.

Hayek, FA. “The Use of Knowledge in Society.” American Economic Review 35 (September 1945): 519—530.

———. The Counter-Revolution of Science. Glencoe, I11.: Free Press, 1952.

———. Rules and Order. Vol. 1 of Law, Legislation and Liberty. Chicago: University of Chicago Press, 1973.

Hazlitt, Henry. The Foundations of Morality. Princeton, N.J.: D. Van Nostrand, 1964.

Hirshleifer, Jack. “Comment” on “Toward a More General Theory of Regulation,” by Sam Peltzman. Journal of Law and Economics 19 (August 1976):242.

Hotelling, Harold. “Stability in Competition.” Economic Journal 39 (March 1929):41—57.

Joskow, Paul L., and Robert S. Pindyck. “Those Subsidized Energy Schemes.” Wall Street Journal, 2 July 1979.

Kirzner, Israel M. The Perils of Regulation: A Market-Process Approach. Law and Economics Center Occasional Paper. Coral Gables, Fla.: Law and Economics Center of the University of Miami, 1979.

Machan, Tibor R. “Some Normative Considerations of Deregulation.” Journal of Social and Political Studies 3 (Winter 1979): 363—377.

Mann, Thomas E. Unsafe at Any Margin. Washington, D.C.: American Enterprise Institute, 1978.

McClellan, James. “The Tyranny of Legalism.” A review of Bruno Leoni, Freedom and the Law. University Bookman (Spring 1974): 66.

Mises, Ludwig von. Bureaucracy. London: Hodge, 1945.

———. Human Action. New Haven, Conn.: Yale University Press, 1949.

———. Theory and History. New Haven, Conn.: Yale University Press, 1957.

Niskanen, William A. Bureaucracy and Representative Government. Chicago: Aldine-Atherton, 1971.

Olson, Mancur, Jr. The Logic of Collective Action. Cambridge, Mass.: Harvard University Press, 1965.

Peltzman, Sam. “Toward a More General Theory of Regulation.” Journal of Law and Economics 19 (August 1976): 211—240.

Philbrook, Clarence E. “‘Realism’ in Policy Espoused.” American Economic Review 43 (December 1953): 846—859.

Posner, Richard A. “Theories of Economic Regulation.” Bell Journal of Economics and Management Science 5 (Autumn 1974): 335—358.

Rickenbacker, William F., and Lewis K. Uhler. A Taxpayer’s Guide to Survival: Constitutional Tax-Limitation. Briarcliff Manor, N.Y.: National Tax-Limitation Committee, 1977.

Sansweet, Stephen J. “Proposition 13’s Impact on the Arts.” Wall Street Journal, 14 July 1978.

“Single-Issue Politics.” Newsweek, 6 November 1978.

Stein, Herbert. “The Real Reasons for a Tax Cut.” Wall Street Journal, 18 July 1978.

Stigler, George J. The Citizen and the State. Chicago: University of Chicago Press, 1975.

Wall Street Journal. Editorial. 12 July 1978.

Waltz, Kenneth N. Theory of International Politics. Reading, Mass., and Menlo Park, Calif: Addison-Wesley Publishing Company, 1979.

Webb, Roy H. “Wage-Price Restraint and Macroeconomic Disequilibrium.” Federal Reserve Bank of Richmond Economic Review 65, no. 3 (May/June I979).

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^* From Rights and Regulation, eds. Tibor R. Machan and M. Bruce Johnson (San Francisco and Cambridge, Mass.: Pacific Institute for Public Policy Research and Ballinger, 1983), 99-126.

¹ As FA. Hayek notes, “we are not fully free to pick and choose whatever combination of features we wish our society to possess, or to ... build a desirable social order like a mosaic by selecting whatever particular parts we like best.” Yet this idea “seems to be intolerable to modern man.” The suggestion draws scorn that unwanted developments may necessarily stem from earlier decisions. “I am myself now old enough,” Hayek continued, “to have been told more than once by my elders that certain consequences of their policy which I foresaw would never occur, and later, when they did appear, to have been told by younger men that these had been inevitable and quite independent of what in fact was done” (1973, pp. 59-60).

² Obviously, I have in mind Hayek 1945.

Of course, externalities, transactions costs, and all that keep the price system from operating with all imaginable perfection. But what is a fringe “imperfection” of the market economy is a central characteristic of governmental decisionmaking.

³ See, in part, Friedman 1962, p. 32. In the technical jargon, government activities have external diseconomies.

⁴ One presentation of the diagnosis appears in Rickenbacker and Uhler 1977, chap. 1.

⁵ See “Single-Issue Politics,” in Newsweek 1978, pp. 48-60, and, on congressmen’s feelings of insecurity, see Mann 1978.

⁶ Kenneth N. Waltz makes an analogous point, which illuminates this one, in his Theory of International Politics (1979). Almost regardless of the internal character of its regime, we can say much about how a country behaves in the arena of international politics in view of the situation confronting it—in particular, according to whether or not it is a dominant power and, if it is, whether it is one of several or one of only two dominant powers.

⁷ The concept of monitoring as a public good is due, I believe, to Roland McKean.

⁸ The weakness of personal incentives to seek collective rather than individual benefits is a leading theme of Mancur Olson, Jr., The logic of Collective Action (1965). The free-ride motivation of the average voter also characterizes the individual member of a special interest group. It operates, though, to a lesser degree. The group member belongs to a smaller group with a more intense and concentrated interest than the average voter does; his own interest is less diluted by being shared with others. Furthermore, as Olson notes, an organized interest group may be able to command the support of its members by supplying services of value to them individually, such as business information and other trade-association services, in addition to its collectively desired lobbying function.

⁹ “Rational ignorance” is a leading theme of Anthony Downs, An Economic Theory of Democracy (1957).

¹⁰ Here I am falling into temptation—into amateur psychologizing—and what follows should perhaps be discounted.

¹¹ His articles on “Scientism and the Study of Society” are reprinted in The Counter-Revolution of Science (Hayek 1952, Pt. 1).

¹² See below in the section on “crowding out.”

¹³ George Stigler quotes a pair of rather typical passages on the defects of a private market economy that could readily be overcome by “a socialist economy” (Oskar Lange) or by “the State” (A.C. Pigou). Then he substitutes “Almighty Jehovah” and “his Serene Omnipotence” for the words here in quotation marks—with amusing and telling effect. See Stigler 1975, pp. 112-113. The assumption illustrated is now being undermined by the application of methodological individualism to the study of government.

¹⁴ “Minorities Rule” is the title of the reprinted version of Dahl 1963, pp. 124-134, in Fein 1964, pp. 125-130.

¹⁵ “[T]he people’s representatives seem to be enchanted with the notion that they are not doing their job unless they are manufacturing laws” (McClellan 1974, p. 66).

¹⁶ See Benjamin Constant, Cours de Politique Constitutionnelle (1818-1820), as quoted in Bertrand de Jouvenel 1949, p. 384; and also de Jouvenel himself, p. 10.

¹⁷ Relevant here is Amitai Etzioni 1972, pp. 88-92,142-143. Headed “Got a problem...? ...call or write The Grand Shaman,” the article notes people’s propensity to look to the federal government for solutions to all sorts of problems. Its main concern, however, is the empty, symbolic character of many ostensible solutions. Speeches are made, conferences held, commissions appointed, bills passed, agencies established, funds appropriated, and programs launched, often doing little of substance to treat the problems involved.

¹⁸ See Ellul 1967, pp. 150-151: “The politician is generally not competent with regard to the problems that are his to solve, particularly if, as it is now inevitable, he has become a specialist in political affairs... The political leader must be a politician by trade, which means to be a clever technician in the capture and defense of positions.... desire for power clearly has priority ... because he cannot undertake just and desirable reforms or guard the common good unless he first obtains power and keeps it.... The two forms of politics... demand radically different personal qualities and contrary preoccupations. To be a clever maneuverer in arriving at the summit is no qualification for perceiving the common good, making decisions, being politically enlightened, or mastering economic problems. Conversely, to have the moral qualities and intellectual competence to be capable of genuine thought and of eventually putting a genuine political program into operation in no way ensures having the equipment to reach the top.”

¹⁹ William A. Niskanen (1971) argues that bureaucrats strive to maximize their budgets. Years earlier, Ludwig von Mises had stressed the contrast between a profit-seeking firm and a bureau. In a firm, the higher executives can monitor the performance of their subordinates by financial accounting and the test of profit and loss. Monitoring is more complicated in a nonprofit organization. Especially in one that gets its funds from budget appropriations rather than by selling goods or services to willing customers, the financial tests are necessarily weakened, and detailed “bureaucratic” rules and regulations must take their place as best they can (Mises 1945).

²⁰ Glazer cites numerous specific examples of judicial activism. I have rearranged and interpreted Glazer’s points.

²¹ An early explanation was provided by Harold Hotelling (1929) in an article basically dealing with economic matters.

²² On the harmfulness and even immorality of such “realism,” see Clarence E. Philbrook 1953.

²³ ”The system of direct regulation cannot allow flexibility in the application to individual cases because favoritism cannot be distinguished from flexibility and diversity of conditions cannot be distinguished from caprice. The price system, however, possesses this remarkable power: if we make an activity expensive in order to reduce its practice, those who are most attached to the practice may still continue it. It is the system which excludes from an industry not those who arrived last but those who prize least the right to work in that industry. It is the system which builds roads by hiring men with an aptitude for road-building, not by the corvée of compulsory labor” (Stigler 1975, p. 36).

The recent gasoline shortage and proposals to deal with it by rationing or by making everybody forgo driving one day a week, or the nonsystem of rationing by inconvenience, all illustrate Stigler’s points about regulation versus the market. Regulation cannot take into account the detailed personal knowledge that people have about their own needs and wants and circumstances.

²⁴ Paul L. Joskow and Robert S. Pindyck develop points like these in “Those Subsidized Energy Schemes” (1979, p. 12).

²⁵ See Hayek 1973, especially the section headed “Freedom can be preserved only by following principles and is destroyed by following expediency,” pp. 56-59. Hayek reminds us that the benefits of civilization rest on using more knowledge than can be deployed in any deliberately concerted effort. “Since the value of freedom rests on opportunities it provides for unforeseen and unpredictable actions, we will rarely know what we lose through a particular restriction of freedom.” Any restriction will aim at some foreseeable particular benefit, while what it forecloses will usually remain unknown and disregarded. Deciding each issue on its own apparent merits means overestimating the advantages of central direction.

²⁶ Israel M. Kirzner explains how regulation can impede the process of discovery. His concern, however, is not so much with alternative solutions to problems taken under the government’s wing as, rather, with discovery of new and better goods and services and production methods. Furthermore, regulation diverts entrepreneurs’ energies from seeking discoveries of these constructive kinds into coping with or circumventing the regulations themselves. See Kirzner 1979, esp. chap. 4.

²⁷ Referring to this program, one Federal Reserve economist has written as follows: “Violators are explicitly threatened with bad publicity and loss of government contracts. Implicitly, possible violators must be aware of potential retaliation by regulatory agencies not formally incorporated in the wage-price control program... Due to the magnitude of discretionary authority possessed by the Internal Revenue Service, Environmental Protection Agency, Federal Trade Commission, Occupational Safety and Health Administration, etc., a large potential for retaliation confronts any business” (Webb 1979, p. 14 n.).

²⁸ See Stigler 1975; Richard A. Posner 1974; and Sam Peltzman 1976.

²⁹ ”More generally, different types of constitutionally empowered agents on the political scene—bureaucrats, judges, legislators, and elected executives—each bring distinct motivations, authorities, and constraints into the process of political exchange that leads to the final regulatory outcome” (Hirshleifer 1976, p. 242).

³⁰ See Tibor R. Machan 1979.

³¹ See Wall Street Journal 1978 and, in particular, Milton Friedman 1978, pp. 7—14.

³²Externalities are due, anyway, not to the very logic of the market system but to difficulties and costs of fully applying that system, including property rights, to the cases in question.

³³ See Ludwig von Mises 1949 and 1957, esp. pp. 57—58; and Henry Hazlitt 1964. An emphasis on social cooperation as a near-ultimate criterion, if not the use of the term, traces back at least as far as Thomas Hobbes.