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What are the main Austrian criticisms of government regulation?

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WallStreetAce posted on Sat, Mar 12 2011 1:08 AM

Hi all,

I'm relatively new to Austrian economics, but truly believe in all of its principles and have come to love it. Most of the time, I am able to state the reasons why government shouldn't set price controls, minimum wages, inflate the money supply etc. However, as of late I've been at a loss as to how to explain from an Austrian POV why government regulations aren't needed and cause more harm to the economy than good.

With that said, I was recently debating a friend of mine who was vehemently in favor of nearly all government regulations. He said that without them businesses would create shoddy products to cut costs, causing death and injury to their customers in the process. He went on to say that without government regulations there would be no industry standards, and that nothing would be uniform across certain sectors and lines of business, again causing injury and chaos. After he said these things, I used Rothbard's argument that regulations impose a cost on a producer that has yet to do anything wrong, and as a result are illegitimate. I also told him that in a completely free society without government controls, the market would regulate itself and those companies with shoddy products killing people would be weeded out because consumers would shift to the ones who don't create such products. He told me that such a world view is a fantasy, and that firms can't be trusted to make good products if all they're relying on is cutting costs to make a profit, and that you can't wait for people to die in order to do something. He ended by saying: "If you can save people's lives with a simple safety standard why wouldn't you be in favor of that? What, you don't want to save people's lives? What's wrong with you?".  I then just lost it and threw up my arms in disgust.

So, with that said, can someone please educate me further on the Austrian criticisms of government regulations, why they are not needed in a free market and why they cause more harm than good? Because every time I tell people that I'm against regulation of any kind, they look at me like I need to be put into a mental institution. Like the guy I just quoted, they then say how bad things were before the regulatory state we now live in and give the usual stupid arguments in favor of them. Any links to works by either Mises, Rothbard or Hayek on the subject would be great. I could really use some study materials.

Thanks a lot!

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WallStreetAce:
He went on to say that without government regulations there would be no industry standards, and that nothing would be uniform across certain sectors and lines of business, again causing injury and chaos.

This makes no sense, of course there would be standards, it is in the interests of every company to come up with basic standards in which they can all agree upon.  A basic example to give is BluRay.  Hundreds of companies all agree on a set standard, and make players which can handle said format.  No need to have the government forcing BluRay down everyone's throats.

WallStreetAce:
He told me that such a world view is a fantasy, and that firms can't be trusted to make good products if all they're relying on is cutting costs to make a profit, and that you can't wait for people to die in order to do something.

Cutting costs is not the only way to make profits, another way to compete is to make A SUPERIOR PRODUCT, which is what naturally happens through competition.  It is him who is living in the fantasy land of evil entrepeneurs around every corner wanting to put razor blades in your food, sell you poison when you asked for a cup of coffee, and sell you exploding toasters (because they will CLEARLY make more money than the one who sells you a toaster which works).

WallStreetAce:
He ended by saying: "If you can save people's lives with a simple safety standard why wouldn't you be in favor of that? What, you don't want to save people's lives? What's wrong with you?"

Because these standards come at a cost.  Most of these are indirect (lower worker wages), or unseen (nonexistant product, unhired workers, nonexistant project).. therefore your friend would probably throw them out the window.  I would recommend reading this article by George Reisman:

http://mises.org/daily/1143/media.aspx?action=author&ID=112

Here is another article covering "consumer protection":

http://mises.org/freemarket_detail.aspx?control=142

And here is an article on Underwriters Laboratories (private inspection agency):

http://mises.org/daily/3440

WallStreetAce:
Because every time I tell people that I'm against regulation of any kind,

Be careful with the way you word it, you are not against regulation of any kind, just forced government regulation.  Private regulations exist, and would continue to exist if the government regulations were not there.

WallStreetAce:
they then say how bad things were before the regulatory state we now live in and give the usual stupid arguments in favor of them.

Here is a few Jeff Tucker articles on how the government makes our toilets not work, showers feel puny, and allowing bugs to invade everyone's home:

http://mises.org/daily/3997

http://mises.org/daily/2007

http://mises.org/daily/4725

I would also recommend reading Jeff Tucker's book Bourbon For Breakfast:

http://mises.org/resources/5509/Bourbon-for-Breakfast

And one more article to throw in for good measure on Child Labor (since these people you are debating probably believe the myth that the government got rid of that as well):

http://mises.org/daily/2858E

Edit: Also just thought of this speech by Jeff Tucker:

http://mises.org/media/5382/How-Government-is-Unraveling-Civilization-by-Force

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Consumer Product Regulation (by Timothy D. Terrell)

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Goods and services that one wishes to buy contain a degree of uncertainty about their quality. Competing third parties can offer their services by gaining and providing information about certain offerings in the market. They can review samples, they can collect ratings from previous customers, or they can ask for access to the production process of the producers. To persuade customers to buy, producers have a strong incentive to get such information out. It is up to consumers to evaluate what degree of uncertainty about the quality of the product they are willing to risk and what price they are willing to pay for a lower uncertainty.

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My favorite criticism: George Stigler's theory of regulatory capture. (Of course, neither he nor the theory is Austrian.)

"I'm not a fan of Murray Rothbard." -- David D. Friedman

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WallStreetAce,

IMO the main Austrian criticism is predicated on monopoly theory: with the existence of government (a monopolist and fount of all monopolies) systematic error exists rather than purely unsystematic error in the free market.

As such I'd suggest reading Chapter 10 of Man, Economy and State for an in depth theory regarding monopoly and for an application of this Hulsmann's General Error Cycle Paper which locates the Austrain Business Cycle as being a symptom of monopoly and Machaj paper on the Calculation problem which is intriniscally a result of monopoly.

Quite a bit of reading there but it's definitely worthwhile.

The atoms tell the atoms so, for I never was or will but atoms forevermore be.

Yours sincerely,

Physiocrat

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You(and more importantly, your friend) should read Economics in One Lesson.

-- --- English I not so well sorry I will. I'm not native speaker.
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Oh yeah, I should have said that. I'm all for the private sector regulating itself, largely because I know that it works.

To divulge more of his point of view: he also tells me constantly that without labeling regulations consumers would have no idea what is in the products and food they buy, and in turn would not have all the information required to make a good decision on their purchase, possibly leading to safety hazards after the fact. He says that simple regulations like labeling, which according to him don't cost much, can't be that much of a pain for producers to abide by. I begged to differ.

Speaking of industry standards, the other day he gave me electrical outlets as a prime example of a beneficial standard that companies and houses must abide by when putting the electrical systems in buildings. He uses this as a platform to transition into arguing that without government building and safety codes, people would be extremely unsafe inside apartments, restaurants and the like because there would be no check on contractors trying to make a buck by using crappy building materials.

Oh yeah, he also drags out environmental regulations on the smokestack industry and cars (catalytic converters, scrubbers etc.) as an example of good regulations that protect people from the harmful effects of the byproducts of production. He says that without them, our air and environment would look like China's and we’d need masks and be prone to poor respiratory health. The Austrian answer to environmental regulation is one of the hardest for me to defend. Any thoughts on this issue as well?

With that said, thanks a lot for all the links and replies everyone! They are much appreciated. If anyone has something to add, please do.

 

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He seems to be under the impression that people are braindead idiots that place no value whatsoever on their health and safety, but suddenly are very concerned about their health and safety in the presence of labeling, if only some activist white knights of everything good and holy would come and force people to label their stuff. If they wanted a label so they know what is in their product, why wouldn't they pay the extra tiny fee (according to him labeling doesn't cost much anyway) to be sure they were getting what they wanted? Building codes are the same way; if people give a crap they will pay an inspector. In fact, your insurance will probably require you to have an inspector so they can gauge your risk.

As for electrical outlets/building codes: The National Electrical Code was written and published by the NFPA, which is a private insurance company-funded organization. There are so many examples of privately organized standards you have to be completely ignorant to make an argument that there'd be product "chaos" without government.

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I honestly didn't know that those types of private regulatory institutions existed, other than Underwriters Laboratories that is. You really never hear about them, at least I don't. Thanks for the reply.

 
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Wibee replied on Mon, Mar 14 2011 6:02 PM

"government" regulations.  That's the main criticism.  :)

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WallStreetAce:
Oh yeah, I should have said that. I'm all for the private sector regulating itself, largely because I know that it works.

Usually when you word it like that though, these sorts of people you are debating just think that the evil inspectors with curly mustaches are going to allow exploding electronics, poison in your food, and houses to implode on themselves.  Which is just the complete opposite of the actual incentives that exist.  I would maybe bring up a third party inspector you would hire to inspect your house while it is being built.  It would be in the inspectors interests to make sure the quality of the work is up to par with a given set of guidelines (or if you want to call them, "regulations").

WallStreetAce:
To divulge more of his point of view: he also tells me constantly that without labeling regulations consumers would have no idea what is in the products and food they buy, and in turn would not have all the information required to make a good decision on their purchase, possibly leading to safety hazards after the fact. He says that simple regulations like labeling, which according to him don't cost much, can't be that much of a pain for producers to abide by. I begged to differ.

Labelling comes at a cost, and the money can be better spent elsewhere.  Maybe I want to save all the money printing labels, and put it on my site instead, then I can create that much more product to serve my customers.  Instead I am forced, at gunpoint, to put labels on or else not be able to sell my food at all.

- You are free not to buy a product without a label (or a label from a "shady" company which you do not approve of), and if he believes the labels are so important, than ONLY buy products with labels.  This reminds me of an article posted a while back about a 10 year old who made salsa, and was coerced into forking over money for labels:

http://blog.mises.org/12306/compliance-is-universal/?replytocom=681363

- You are free to look up information on sites you trust, perhaps there would be (and I bet they already exist), a website in which they run their own nutrition tests, and then you can look up all this information in a database.

- As was already mentioned, people who do not care about labels in the first place and who do not look at the nutritional value, will not magically start caring about labels just because the governmnent decrees to put them on every bottle.  Leave it up to the market, those who believe it is important will only buy goods with labels, or use third parties to keep track of these things.

WallStreetAce:
Speaking of industry standards, the other day he gave me electrical outlets as a prime example of a beneficial standard that companies and houses must abide by when putting the electrical systems in buildings.

Then come back with USB (Firewire, headphone jacks, BluRay, or the multitude of other plugs which are not forced on by the government).  You do not need a government to come up with standardized plugs and force them on everyone.

WallStreetAce:
He uses this as a platform to transition into arguing that without government building and safety codes, people would be extremely unsafe inside apartments, restaurants and the like because there would be no check on contractors trying to make a buck by using crappy building materials.

Well then if you are building a house/building for a business, hire a third party inspector to make sure they do not do such a job.  It would be in the interests of the construction company to default to building it correct the first time, than to get part way through a project to then have to redo it because it does not pass certain specifications.

WallStreetAce:
Oh yeah, he also drags out environmental regulations on the smokestack industry and cars (catalytic converters, scrubbers etc.) as an example of good regulations that protect people from the harmful effects of the byproducts of production. He says that without them, our air and environment would look like China's and we’d need masks and be prone to poor respiratory health.

Again, look at those regulation articles I pointed to earlier.  These come with a cost.  Here is another great speech by Timothy Terrell given at MU2010, if I remember correctly one of his examples was the "close to infinitely" safe car (APC), and although it would be extremely safe, no one would buy it because it would be too expensive (because more safety is a tradeoff between everything else, one example being gas mileage):

http://mises.org/media/5258/Consumer-Product-Regulation

WallStreetAce:
The Austrian answer to environmental regulation is one of the hardest for me to defend. Any thoughts on this issue as well?

I would just not even argue over this point with someone who has views so far apart.  They cannot even get the easy stuff, let alone fathom how enforcement of Property Rights protects the environment better than any government (who are the first ones to toss out Property Rights).  What I would recommend reading is For A New Liberty, that is the book that really strengthened my views on how enforcement of Property Rights protects the environment:

http://mises.org/resources/1010/For-a-New-Liberty-The-Libertarian-Manifesto

http://blog.mises.org/4939/law-property-rights-and-air-pollution-by-murray-rothbard/

http://mises.org/daily/1760

There are a lot more articles/speeches on the topic, just look up "environmentalism" or "pollution".

WallStreetAce:
I honestly didn't know that those types of private regulatory institutions existed, other than Underwriters Laboratories that is. You really never hear about them, at least I don't. Thanks for the reply.

Indeed, it is an area I would really like to look into, and also Private Arbitration is an area you do not really hear about, but it is out there and exists even now... you just have to look.

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If you want to go on the offensive, ask him what incentive the government has to ensure safe food/products/environment, etc. How does having a legal monopoly on providing a good or service improve its quality? 

 

For me, it was the realization that the government is just a firm with a legal monopoly on goods and services that can extract payment by force. Would you expect McDonald's to make good hamburgers if there were no alternatives, and they could force you to pay for them? You wouldn't, and it's the same for the government.

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While opening up a can of pineapple juice, I noticed the Kosher label on the side, and then remembered that they are also an example of private food inspection agency.

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With that said, I was recently debating a friend of mine who was vehemently in favor of nearly all government regulations. He said that without them businesses would create shoddy products to cut costs, causing death and injury to their customers in the process.

This is magical thinking and it's important to point that out. Force them to explain how and why we should believe that the government cares about the public's interests whenever its interests are not aligned with the public's and why we should believe the government's interests are any more aligned with the public's interests than any other organization. Sure, the government wants to keep us hale and hearty so we can work hard and produce lots of tax revenues. But that's not because the government cares about us, it's because it cares about tax revenues and we are merely the means to that end.

Invariably, they will turn to democracy and elections but a quick brush-up on public choice theory should put you in good condition to dispel the Magical Majority Vote line. As if nobody ever tried taking a vote before the late 18th century... good god.

He went on to say that without government regulations there would be no industry standards,

I think there is such a thing as over standardization, something not often talked about. Software standards are a great example. Digital protocols and software standards are actually used by the big players to control competition. The big players get together, form a "standards committee" and then try to use their collective weight to ensure the market cannot escape their lobotomized, design-by-committee standards. Instead, customers should be free to choose whatever standard they like, including things like user-interfaces and so on. The hand-wringing leftist always assumes that chaos will ensue if nobody steps in to "stop the madness" and force everyone to use the same interface (think of driving interfaces, for example). But this is silly. Producers succeed by pleasing consumers and the interface features that consumers consistently demand will therefore be widely available. But without the attenuating effects of over-standardization and regulation, the consumer will have more options. Consumer sovereignty.

and that nothing would be uniform across certain sectors and lines of business, again causing injury and chaos. After he said these things, I used Rothbard's argument that regulations impose a cost on a producer that has yet to do anything wrong, and as a result are illegitimate. I also told him that in a completely free society without government controls, the market would regulate itself

Be careful not to engage in magical thinking yourself... to help avoid this, make sure you do not refer to the market in anthropomorphic ways. This is precisely the mistake that leftists/socialists make when reasoning about "society." They use words like "we" "us" "our" "society's" as if referring to an individual. This muddies the discussion and attributes telic action to uncoordinated individuals.

and those companies with shoddy products killing people would be weeded out because consumers would shift to the ones who don't create such products.

Product information is itself a product and demanded by consumers. Just not necessarily the product information that government mandates and sometimes information that government fails to mandate and sometimes even prohibits. As always, the central planner is like a blind bull raging in a China shop wreaking havoc over the free chocies that consumers would have preferred to make had coercion not been used to prevent them from doing so.

He told me that such a world view is a fantasy, and that firms can't be trusted to make good products if all they're relying on is cutting costs to make a profit, and that you can't wait for people to die in order to do something. He ended by saying: "If you can save people's lives with a simple safety standard why wouldn't you be in favor of that? What, you don't want to save people's lives? What's wrong with you?".  I then just lost it and threw up my arms in disgust.

The answer is strict liability and this identifies part of the problem with even minarchism... socialized law. Until we have a free market in law itself, the legal structure will always be distorted by power interests. Police departments, prosecutors, judges, elected leaders, child protective services, banks, the national military, etc. are explicitly exempt from strict liability for many of their actions. The problematic behavior of these individuals and organizations is the immediate and inevitable consequence of this fact. Yet the idea of a market of law is incomprehensible to most people and, therefore, pointing out that the problem lies in insufficient privatization of all goods and services, including law, strikes them as utter insanity.

Clayton -

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