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Friday, July 1, 1988

Government Regulation of Business: The Moral Arguments

Tibor Machan is professor of philosophy at Auburn University where he also teaches a graduate seminar in the College of Business. This essay is based on a presentation he gave at the Southwestern University School of Law, in Los Angeles, in March 1988.

Throughout the world, governments engage in social and economic regulation of their citizens’ lives. Economic regulation, in particular, has come into focus during the past decade, mainly because such regulation has been associated with falling productivity rates in many industrialized countries. But social regulation by government also is being discussed when drug abuse legislation, censorship of pornography, and similar matters are considered.

Most types of government regulation involve the setting up and enforcement of standards for conducting legitimate activities. My concern here is with government regulation of business or economic affairs by municipal, county, state, and Federal politicians and bureaucrats.

During the past few years, the case for such regulation has been spelled out in fairly clear and general terms. I wish to examine the arguments which are based on moral considerations, since it is such arguments that matter in the defense of the authority of the state to treat its citizens in various ways.

Government regulation differs from government management. Management involves the administration of the properties and realms which the government owns. For example, the national parks and forests are managed by government, not regulated. So is the interstate highway system. In contrast, toy manufacturing, which is an activity of private business, is regulated by government, as are the manufacture and sale of many foods and drugs, the production of cars, and the practice of law, medicine, and other occupations.

There are some gray areas, to be sure. The government regulates broadcasting, but it also manages the airwaves. The electromagnetic spectrum was nationalized in 1927, and the federal government has been leasing out the frequencies which private broadcasters use. So there is a combination of management and regulation which is carried out by the Federal Communications Commission.

In addition, there is government prohibition, mainly in the criminal law, in which some actions are regarded as intrinsically evil, such as murder, theft, embezzlement, and fraud. These activities are forbidden, not regulated, while toy production or mining is regulated, but not forbidden. The writing of novels, news reports, and scientific articles, in turn, is left fairly free of government interference.

But here, too, there are some gray areas, such as the prohibition on the sale of certain drugs over the counter. Nevertheless, for all practical purposes, the three categories are clearly distinguishable—regulation, management, and prohibition.

I will first present the main arguments in support of government regulation of business. Then I will consider some responses. (One could ask whether government should manage forests, beaches, parks, or the airwaves, as well as whether there should be any prohibition of any human activity at all, as anarchists might ask, but our concern here is with regulation.)

Creature of the State: This argument for government regulation of business, made prominent by Ralph Nader and others, holds that because corporations are chartered by states, corporate commerce should be regulated. In this view, the state charter actually “creates” the corporation, and government should regulate the behavior of its “dependent,” the corporation.

Market Failure: The second moral argument for government regulation of business recognizes that a free market usually enables people to do the best that can be done. On the one hand, free markets encourage maximum efficiency. On the other hand, free markets foster responsible conduct, and encourage the production of goods and services which are of value to members of the community.

But advocates of the “market failure” approach contend that there are some serious exceptions. They assert, following John Stuart Mill, that the free market often fails to achieve maximum efficiency—that it sometimes wastes resources. They often cite the example of utility services. If there were free competition among utilities, “market failure” advocates hold, there would be much duplication—different companies putting up telephone and electric poles, waterlines, etc., side by side, which would be a waste. So it is argued that it is important for government to restrict competition and thus correct market failures.

The second type of market failure, identified by John Kenneth Galbraith in The Affluent Society, is that markets misjudge what is important. To wit, markets often don’t respond to real needs—for medical care, libraries, safety measures at work, health provisions, fairness in employment and commerce, and so on. There fore, governments should remedy market failures with regulatory measures. Such measures include zoning ordinances, architectural standards, safety standards, health codes, minimum wage laws, and the whole array of regulations which have as their expressed aim the improvement of society.

Rights Protection: Another “justification” for government regulation of business is the belief that government is established to protect our fights, and that there are many rights which go unprotected in a free market. How do we know there are such fights? Different sources for these rights have been provided in the philosophical community.

Some, for example Alan Gewirth of the University of Chicago, rely on a Kantian deduction of both freedom and welfare fights from the very nature of human action. Some make use of intuitive moral knowledge—e.g., John Rawls of Harvard University and Henry Shue of the University of Maryland. Others, such as Steven Kelman of Harvard University, use a theory of benevolent paternalism. Some thinkers, such as A. I. Melden of the University of California at Irvine, even make use of a revised Lockean approach.

The substantive position of all these philosophers is that employees, for example, are due—as a matter of right—safety protection, social security, health protection, fair wages, and so on. Consumers, no less, should be warned of potential health problems inherent in the goods and services they purchase. In short, these thinkers contend, it is the fight of all those who deal on the market to receive such treatment. It should not be left merely to personal caution, consumer watchdog agencies, or the goodwill of traders. Government, having been established to protect our fights, should protect these rights in particular. Thus, it is held, government regulatory activities are the proper means by which this role of government should be carded out.

Judicial Inefficiency: The last argument for regulation that we will consider rests on a belief in the considerable power of the free market to remedy mistakes in most circumstances. But advocates of regulation point to one area where this power seems to be ineffective—pollution. Kenneth J. Arrow of Stanford University has most recently spoken about the need for regulation to overcome judicial inefficiency. His case goes roughly as follows:

Usually one who dumps wastes on the territory or person of another can be sued and fined. Alternately, the permission of the potential victim of such dumping can be obtained, payment for the harm can be made, and so on. But in a wide variety of cases, this is not a simple matter or even possible. Pouring soot into the atmosphere, chemical wastes into lakes, and so forth, may cause harm to victims who cannot be identified. Nor would just a little emission usually cause anyone harm, so it is a matter of the scope and extent of the emission—there is a threshold beyond which emission becomes pollution.

Now since emission into the public realm can involve judicial inefficiency (culprit and victim cannot be brought into contact), when the activity which can lead to public pollution is deemed to be sufficiently important, regulation is said to be appropriate. This general idea derives from the moral viewpoint that some things important to the public at large must be done even if individuals or minorities get hurt. So long as general supervision of such harms is available—so long as cost-benefit analyses guide government regulation—then public pollution is morally permissible.

All these arguments can be elaborated upon, but let us proceed to outline the responses to them that favor deregulation.

In response to the creature of the state case, it is argued, perhaps most notably by Robert Hessen of the Hoover Institution (In Defense of the Corporation, Hoover Institution Press, 1979), that corporations did not have to be created by governments and, furthermore, they were so created only because the governments in power at the time were mercantilist states. In the kind of community that sees the individual as a sovereign being, corporate commerce can and does arise through individual initiative. Such commerce is merely an extension of the idea of freedom of association, in this case for purposes of making people economically prosperous.

If the creature of the state argument is a matter of historical accident, the moral case for corporate regulation based on the corporation’s dependent status disappears. Corporations are chartered by governments, but that is merely a recording system, not signifying creation. Their legal advantage of limited liability also could be made a contractual provision which those trading with corporations could accept or reject.

As to the market failure of inefficiency, there is the question of whether establishing monopolies, say, in public utilities, really secures efficiency in the long run and at what expense. For example, a strike is more crippling in the case of a public utility than in the case of a firm which doesn’t enjoy a legal monopoly. To pre vent inefficiency, strikes also must be prohibited. But that, in turn, infringes on the freedom of workers to withhold their services. So the market failure is “remedied” at the expense of a serious loss of freedom. It would be morally better to accept the inefficiencies, given that in any political system it is unreasonable to expect perfect efficiency.

A similar problem arises in the case of “market failure” to produce important, but commercially unfeasible goods and services. Government remedies embody their own share of hazards. Political failures are even more insidious than market failures, as has been amply demonstrated by James Buchanan and his colleagues at the Center for the Study of Public Choice, George Mason University. Bad laws are widespread, and it is difficult to remedy undesirable consequences. Bureaucracies, once established, are virtually impossible to undo. Regulators cannot be sued, so their errors are not open to legal remedy. The market failure case for government regulation, then, seems to fall short of what a defense of this government power requires.

In response to the argument that government regulation of business defends individual rights, we can reply that the doctrine of human rights invoked by defenders of government regulation is very bloated. I myself have argued, e.g., in my “Wronging Rights,” Policy Review (Summer 1981), and “Should Business be Regulated?” in Tom Regan’s Just Business (Temple University Press and Random House, 1983), that many values are mistakenly regarded by their adherents as something they have a right to. Protecting these “rights” violates actual individual rights.

Consider the “rights” to a fair wage or health care. For these to be rights, other people would have to be legally compelled to supply the fair wage or health care. But suppose that consumers would rather pay less for some item than is enough to pay workers a “fair” wage. If the fair wage were something workers were due by right, then consumers could be forced to pay it. Thus, consumers become captives of those claiming spurious rights, and not parties to free trade, as is required by a genuine theory of human rights.

Essentially, then, the rebuttal to the moral argument for government regulation based on human rights considerations holds that the doctrine of rights invoked to defend government regulation is fallacious. A sound doctrine would prohibit such regulation.

The rebuttal to the judicial inefficiency argument is, essentially, that whenever polluters cannot be sued by their victims or cannot pay for injuring others, pollution must be prohibited. In short, a policy of quarantine, not of government regulation, is the proper response to public pollution. As I have argued in “Pollution and Political Theory” (Tom Regan, Earthbound, Temple University Press and Random House, 1984), the courts, and not the legislators or regulators, must remedy the rights violations that pollution involves.

Obviously, this rebuttal sounds drastic. Adopting it would mean cutting back production in various industries, including transportation, at least until non-polluting ways can be found and paid for willingly. Yet, even though such production practices might be of value to millions of consumers, if innocent people are victimized in the process, it can be argued that these practices should be stopped.

A similar situation involves slavery or apartheid. Many Southerners benefited, at least at times, from this public policy, and many South Africans seem to benefit from apartheid. Nevertheless, from a moral point of view, these benefits are not decisive. The emphysema patient who chooses to do without many of the world’s technological wonders shouldn’t have to suffer the burdens which come from producing these wonders. Not, at least, unless it has been shown that these burdens justly fall on him.

Of course, the problem of pollution is complicated. For example, one car in the Los Angeles basin does not produce enough exhaust fumes to harm anyone because the fumes are diluted in the atmosphere. Likewise, one small factory with a tall stack might harm no one, thanks to dilution of its output. The same goes for liquid pollutants into a lake, river, or ocean.

Arguably, however, none of this changes the principle of the matter. Once a certain level of emission has been reached, any increase amounts to pollution. And permitting such pollution is tantamount to accepting as morally and legally proper the “right” of some people to cause injury to others who have not given their consent and who cannot even be compensated. A just legal system would prepare itself to deal with these complexities, as it does in other spheres where crime is a real possibility. The failure to do so is the root cause of our present pollution difficulties.

These, then, are the principal arguments for and against government regulation of business. What they show is that government regulation is not a legitimate part of a just legal system. Government regulation involves coercion over some people for reasons that do not justify such coercion. Of course, the practice also is highly inefficient. But is it all that surprising that something which lacks moral support also would turn out to be unworkable?

  • Tibor R. Machan is an Emeritus Professor in the Department of Philosophy at Auburn University and formerly held the R. C. Hoiles Chair of Business Ethics and Free Enterprise at the Argyros School of Business & Economics at Chapman University.