The Enemies of Production; R. Ream

This important debate involves the question of growth versus no growth. It is a question of economic progress and material prosperity versus stagnation, unemployment and poverty. Is it time for sacrifice; time to pursue policies of zero economic growth; time to write an Roger Ream Is Director of Seminars of The founda tion for Economic Education. Roger Ream obituary for the American Dream? Or can we continue to have an ex panding economic pie, with a larger share for everyone? More importantly, however, this debate boils down to the question of human liberty. Proponents of the no-growth mentality are siding with the collectivists in the historic struggle between individual free dom versus government control. It is imperative, therefore, that those who cherish liberty understand the issues involved in this latest at tempt to expand the power of the state. Ironically, Big Business Day 1980 occurred on the eve of the anniver sary of Lexington and Concord the shot heard round the world.

Some of the most vocal advocates for increasing the role of government in business and consumer decisions 591 592 THE FREEMAN October selected a week that celebrates the beginning of the American Revolu tion to voice their views. A New Tyranny One of the reasons for severing the ties with England was that King George III and Parliament were try ing to tax and regulate commerce and industry-business. In the De claration of Independence, Thomas Jefferson charged that George TIl had ((erected a multitude of offices and sent hither swarms of officers to harass our people and eat out their substance." This is exactly what we see happening today, only there is a new tyranny in the place of George III. This new tyranny is being im posed through the implementation of proposals espoused by ((the new adversary class." They ((have erected a multitude of offices" OSHA, the EPA, FTC, CPSC, DOE, CSA, FDA, ad infinitum-and ((sent hither swarms of officers"-agents, inspectors, lawyers, and the like ((to harass our people and eat out their substance" -our productivity and our wealth.

The danger posed by this new class is that they are using the power of the state to bring about the changes they desire. They want to force compliance with what they de termine are the right policies to pur sue and the proper way to live one's life. They are statists. As a result, government is playing a much greater role in our lives. Even aside from the massive increase in public sector consumption of private sector wealth, the extent of the regulatory activities of government is alarm ing. We have almost totally aban doned the original concept of a gov ernment of limited and enumerated powers. Anyone not convinced of this ominous trend need only pick up the daily newspaper, particular ly one that covers business news. Without making any value judgment as to whether a particular government activity is good or bad, just notice the extent to which government is involved in every economic transac tion. For example, here are a few of the stories in a recent issue of the Wall Street Journal: • FAA May Go to Court Over Limits Set on Use of California Airports • Auto Warranty Services Are Studied by the FTC • TWA Seeks Authority from CAB for New Route • California Utility Fined for Safety Violations • Oklahoma G&E Wins Temporary Rate Boost • Revenue From Carter's Import Fee on Oil is $10 Billion Prize Sought by Everyone • More Banks Take Steps to Place Restrictions on Loans to Consum ers to Stay Within Federal Re serve Guidelines 1980 THE ENEMIES OF PRODUCTION 593 This increase in the power and especially the scope of government is a major change which warrants attention.

Special Interest Legislation There are two major causes for this trend toward big government. The first occurred very early in U.S. history as individuals, often busi nessmen, realized they could obtain special privileges from government. Special interests sought grants, sub sidies, exclusive licenses and vari ous forms of protective legislation. This was the history of most early regulatory agencies. They were created to protect the ttpublic inter est" but soon fell into the hands of the special interests. They were Ucaptured" by the very industries they were supposed to regulate. As a result, they aided and protected var ious vested interests. One need only visit the halls of Congress and ob serve trade associations, labor lead ers, and businessmen lobbying for various types of special interest legislation to realize that this factor in the growth of government con tinues today.

The reason this type of plunder has been so successful and is still going on is because, as Milton Friedman and others have pointed out, the benefits are concentrated in the hands of a few, while the costs are diffused among millions of tax payers. For example, a particular industry lobbies in Washington, D.C., for a subsidy of ten million dollars. This benefit is concentrated. With $10 million at stake, the in dustry will hire lobbyists to wine and dine Congressmen; they may form a political action committee to distribute thousands of dollars to the reelection campaigns of Con gressmen favorable to their subsidy. In short, the benefit is concentrated so potential recipients will go all out to obtain it. On the other hand, the dollar costs are diffused. The subsidy will be collected from taxes, both direct and hidden, levied on millions of tax payers. A subsidy of $10 million to a special interest is not much to excite a taxpayer, since his share of the $10 million is, on average, less than a dime. It would cost a taxpayer more than that to write a letter or telephone his Congressman to pro test this subsidy. The cost is diffused.

This is why there has never been much vocal opposition to the specific subsidies granted special interests; taxpayers simply, and quite natu rally, don't feel the added burden of each specific program. This scheme is even more effective when the subsidy is in a non monetary form-a protective tariff, a licensing law, an increase in the minimum wage, and so forth. In these cases not only are the dollar costs diffused, but they are hidden, usually in the prices of goods and 594 THE FREEMAN October services. These are ideal subsidies from the standpoint of politicians since the dollar costs are usually in the form of higher prices, not higher taxes. Furthermore, the costs are often in terms of what is unseen goods which are never produced or tasks which are not profitable to complete. This is the first reason for the growth of government-special interests engage in legalized plun der because the benefits are concen trated, while the costs are diffused and hidden.

The New Adversary Class The second major cause is the ad vocacy and lobbying by the ((new adversary class." This trend is re sponsible for much of the regulation of recent years. Self-proclaimed con sumer, environmental, and worker interests have managed to use gov ernment to force compliance with goals they view as socially desirable. These are generally sincere, well motivated individuals. They want Americans to drive safe cars; they want our energy sources to be envi ronmentally safe; and they want to eliminate hazards in the work place-all laudable goals. These ad vocates of economic democracy even claim to support competition and human liberty. The tragedy of this is that while many of them seek such lofty objectives, the policies they ad vocate would take us in the opposite direction. Their proposals would lead to an increased centralization of power, reduced production, less competition, and greatly diminished human liberty, not only for busi nessmen but also for consumers, workers, and shareholders. In short, we would be further down the road to serfdom.

A brief look at some of the so called evils of big business demon strates that advocates of economic democracy have faulty powers of ob servation and little understanding of the free market process. Fur thermore, most seem to lack any fundamental principles that might serve as restraints against unlim ited expediency. They are horrified by giant corpo rations because they are giant. Big is bad, they claim. Yet they fail to understand how-in a free mar ket-a corporation becomes a giant corporation. It can grow only if consumers voluntarily buy the pro duct it offers, only if workers volun tarily work for the wages it can pay, and only if individuals with savings will voluntarily invest their capital in the corporation. In short, it achieves bigness only by convincing individuals that it is in their self interest to voluntarily associate with the corporation. In his excellent book, In Defense of the Corporation, Robert Hessen de scribes the situation as follows: uCombining the capital of millions 1980 THE ENEMIES OF PRODUCTION 595 of investors and talents of millions of workers, giant corporations are a testament to the ability of free men, motivated by self-interest, to engage in sustained, large-scale, peaceful cooperation for their mutual benefit and enrichment. As a result, Ameri cans today enjoy a standard of living-of luxury, leisure and longevity-that is unprecedented in world history and unparalleled in contemporary socialist societies."

But not only is big business bad simply because it is big, we are told, but also because it is powerful. Big ness means power, critics claim. This view indicates a poor under standing of the role of consumers in a free market and how they deter mine profit and loss. The charge that businessmen are primarily after profit is generally accurate. For most, this is true. However, this should not be considered a deroga tory remark. It is precisely the desire for profit that drives businessmen into the never-ending effort to fulfill consumer desires. The Consumers Are In Charge Rather than consumers being at the mercy of giant corporations, as uconsumerists" charge, it is the other way around. In a free society, it is consumers, through their everyday purchasing decisions, who hold life and death power over cor porations. This is true consumer sovereignty. Businesses spend millions of dollars every year trying to determine what consumers want.

It is consumers who ultimately decide what products are brought to the market, which sellers will make a profit, and how high that profit will be. This is another complaint of many critics of capitalism-that profits are too high or that they come at the expense of workers and consumers. Most businessmen try to defend their profits with all sorts of figures showing that profits are being mis reported or misunderstood-that they are really very low. However, this ignores what profit is. Profit is an indication of the efficient use of scarce land, labor and capital. Loss es are an indication of the ineffi cient use ofthese resources. The way to increase profit is to use resources more efficiently. Those best served by the efficient use of scarce re sources are the consumers. More ef ficient use of resources means more for less-more goods from a given or smaller amount of resources. Those who criticize profits, especially high profits, are criticizing consumers for casting their dollar votes in the marketplace for producers who employ resources most efficiently in serving consumers. In other words, those who attack profits are attack ing consumers, not businessmen.

Just as important, from the standpoint of consumers, as the freedom to make a profit is the free596 THE FREEMAN October dom to make mistakes-the freedom to fail. Ours is a profit and loss system. Only producers who respond to consumer demands in an efficient manner will survive. As Dr. Bertel M. Sparks wrote in the June, 1975 Freeman, CC •••every time the gov ernment intervenes to prop up a failing business or to restrain the operation of a successful one, the government is using the consumer's hard-earned tax dollars to veto the consumer's wishes that have al ready been registered in the market place." The Responsibility of Management toward Shareholders Shareholders and workers also have a veto power over business, despite charges to the contrary by critics of the system. Proponents of corporate democracy charge that shareholders are not involved in the everyday decisions of corpora tions-they propose shareholder plebiscites on any action involving 10 per cent or more of the corpora tion's assets. The reality they over look is that most shareholders do not desire to make the management de cisions of a corporation. They buy stock because they don't have the time, talent, or desire to manage that portion of their savings. If they don't like what the corporation is doing they can sell their share of ownership. If enough other share holders do likewise it is the corporation that will suffer and be subject to takeover or possible bankruptcy.

The responsibility of the officers and directors is to the owners-the shareholders-and this is usually a responsibility to maximize return on investment. If officers fail in this task they risk losing their positions in the business. The relationship of shareholders to a corporation is completely contractual and volun tary. Some social critics may not like it, but they have neither moral justification nor legal right to pro hibit it. A further criticism of big business is that because it is big and in terested only in profit, it will·over look quality, particularly in the area of safety. The consumer protection movement, growing out of Ralph Nader's attack on the Corvair, be lieves government should mandate standards of safety producers must follow. Yet this overlooks the fact that safety is a matter of degree and a function of cost. In a free market, consumers will purchase safety up to the point at which the additional cost for safety outweighs the value they place on alternative uses of their money. From an efficiency standpoint, mandated safety gener ally means higher prices and there fore is a burden which hits the poor especially hard.

But the real question is whether government should prohibit indi viduals from voluntarily purchasing 1980 THE ENEMIES OF PRODUCTION 597 relatively unsafe products. If con sumers do not desire to pay hun dreds of dollars extra for an au tomobile with seat belts, air bags, and bumpers that absorb 30 M.P.H. collisions, should government force them to do so? The so-called ((con sumerists" want to force consumers to buy extras they arbitrarily de termine consumers should have. But if consumers can't afford these extras, should they be forced to go without an automobile or continue driving older, less safe vehicles? Yet, the overlooked reality in this situation is that businessmen try to produce what consumers want-if consumers indicate a desire for added safety features in products by voting for them with their dollars, produc ers will respond. As Dr. Sparks asks in the previously quoted article: ((...

if the buyer is not permitted to exer cise his own judgment as to the suitability of a product for his pur poses, who is to make that judgment for him? That is the critical question too often ignored by those who would deprive the consumer of his dominant role in the market place. . . . The real question is whether or not a person of mature years should be free to make mistakes." The History of Capitalism The historical record of capitalism is one of the improvement of the material condition of mankind. More importantly, but less recognized, capitalism is the only economic system consistent with freedom. Capitalism is a system that has worked, that does work, and that can work. Consumer, worker, businessman-all have benefited from the ingredients of capitalism: private property, the di vision of labor, peaceful and volun tary cooperation, diversity, oppor tunity, self-reliance, and an expand ing economic pie. If you really have the interests of the consumer in mind, if you are truly concerned about the disadvantaged minorities, if you want to offer hope to the poor, then you must support the free market system.

But to say it has, it does, and it will work is not to say it is working. That is not a free market out there. We have adopted a mixed-economy, and it isn't working. Each regula tion that is enacted has its costs, in terms of both personal freedom and economic efficiency. We've saddled our productive, free sector with so much taxation, red tape, regulation and control that it is slowing down. We can see the effects. It threatens the future of the· American Dream and of our free society. It is important that we advance our understanding of how the free market system works. We must ac knowledge that profits are not some thing to apologize for-they are the mark of success. They indicate the efficient use of scarce resources in 598 THE FREEMAN supplying consumers with the goods and services they want. The busi nessman who makes a profit is the genuine servant of the consumers. Furthermore, it must be recog nized that government can only con trol people. Government cannot con trol automobiles, it can only control the people who manufacture au tomobiles, or the consumers who wish to purchase them. Government cannot control wages or prices, only people. Price controls are people controls. A wage control intervenes in the voluntary agreement between an employee and an employer, deny ing each a certain degree offreedom.

Attempts to use government to im plement political, social or economic goals, no matter how desirable they may seem to be, require the use of coercion and therefore diminish pre cious freedom. Consumers Choose In Defense of the Market The real consumer advocate is the individual who understands the free market process and is willing to defend it. A free market makes pro duction and economic progress pos sible. To be a genuine consumer ad vocate one must support this sys tem, for production is a necessary precedent to consumption. The pol icies of the self-proclaimed con sumerists have so saddled our pro ductive sector that they have im periled the ability of business to respond to consumer demand. It is the ultimate in folly that opponents of production and economic progress have appropriated the title of con sumer advocate. Their policies threaten the survival of our free, productive society and therefore make the consumer an endangered species. i IDEAS ON LIBERTY CAPITALIST SOCIETY has no means of compelling a man to change his oc cupation or his place of work other than to reward those complying with the wants of the consumers by higher pay. It is precisely this kind of pressure which many people consider as unbearable and hope to see abolished under socialism. They are too dull to realize that the only alternative is to convey to the authorities full power to determine in what branch and at what place a man should work.

In his capacity as a consumer man is no less free. He alone decides what is more and what is less important for him. He chooses how to spend his money according to his own will. LUDWIG VON MISES, Human Action RobertBearce AGAINST ttii !ttlll~ ALL ENEMIES PartII JOHN QUINCY ADAMS, sixth Presi dent. of the United States, once ob served: «Our Constitution pro fessedly rests upon the good sense and attachment of the people. This basis, weak as it may appear, has not yet been found to fail." Up until President Adams' admin istration and for many years after wards, our Constitution did indeed work in the manner it was meant to work. Times have changed, though. Although the principles of the Con stitution of the United States re main as strong as ever, we have se riously neglected and forsaken them. The Constitution itself is a rugged, foresighted document, but, as PresiIn this three-part series, Robert Bearce of Houston, Texas identifies the basic principles of limited gov ernment as set forth in the Constitution of the United States. He shows how we have forsaken many of the basics, and points the way toward a restoration of freedom.