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Friday, February 16, 2007

The Rent-Seeking Habit

Wal-Mart’s CEO and his chief nemesis, the head of the Service Employees International Union, have joined forces. They recently appeared together at a news conference to endorse universal health care, sugared words for medicine by coercive bureaucracy.

No, this is not another article about why a government-based medical system is a terrible idea. This is an article about a business leader looking to the state for a bailout.

It is not the first time CEO Lee Scott has endorsed interventionism. In 2005 he called for an increase in the minimum wage. It wasn’t hard to figure out why. Wal-Mart pays more than the minimum wage. So why not stick it to your competitors who don’t? No one, not even Wal-Mart, is so secure that a little drag on the competition wouldn’t be of help.

Scott’s jumping on the health-care bandwagon is equally transparent. He certainly isn’t the only businessman to join this unholy crusade. Big business everywhere is creaking under the weight of their medical benefits, and they see only one way out: the taxpayers. It’s the same reason Big Steel would like the government to take over its pension obligations.

Socializing costs while keeping the profits private — that’s the ticket.

Only myopia would cause anyone to be shocked by such conduct. A fuller appreciation of American history is the cure for that particular malady.

Business’s looking to the state for protection is as American as apple pie. I’d hardly be surprised to learn that the apple industry was subsidized and protected by trade restrictions from its inception. (Dissertation topic!) After all, in 1789 the first real act of the first Congress was to pass a protective tariff. Want the precise date in 1789? July 4!

Whereas it is necessary for the support of the government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise imports:

Be it enacted by the Senate and the House of Representatives of the United States of America in Congress assembled….

The list of protected products — ranging from wax to galoshes to playing cards to pickled fish — fills two pages, but in fact virtually all goods were covered. (Exceptions: saltpeter, tin in pigs, tin plates, lead, old pewter, brass, iron and brass wire, copper in plates, wood, cotton, dyeing woods and dyeing drugs, raw hides, beaver, and all other furs, and deer skins.) American shipping interests were also protected through lower tariffs on the imports they carried.

President Washington signed the bill. Newspapers dubbed the Hamilton Tariff the second Declaration of Independence. Go figure. The Wealth of Nations was only of bar mitzvah age.


Special-Interest Legislation


Why this tariff bill was passed should mystify no one. As the late Jonathan R. T. Hughes wrote in The Governmental Habit Redux, “A history of American government limited to those laws that sprang pure from the brains of the nation’s politicians with no special interests as their objects would be a very short history indeed.”

Hughes, who favored the free market, makes a crucially unappreciated point in his book: the record of government intervention in the economy extends without interruption from medieval England through the colonial period and right on through the history of the American republic. He wrote,  ”There was no time in American history free of nonmarket controls over economic life….”

Most studies of modern nonmarket controls consider that the relevant history extends back to the New Deal. A few go back further, into the late nineteenth century. But in fact the powerful and continuous habit of nonmarket control in our economy reaches back for centuries….

Thus, during the colonial period virtually every aspect of economic life was subject to nonmarket controls. Some of this tradition would not survive, some would become even more powerful, while some would ascend to the level of federal control. The colonial background was like an institutional gene pool. Most of the colonial institutions and practices live on today in some form, and there is very little in the way of nonmarket control that does not have a colonial or English forerunner. American history did not begin in 1776.

Hughes described the typical interventionist regime: “What was controlled traditionally were four crucial points in the flow of economic transactions: (1) number of participants in a given activity, (2) conditions of participation, (3) prices charged by participants either for products or services and (4) quality of the products or services.”

Reviewing several studies of the extensive regulations and subsidies that existed in the states and towns of early America, historian Robert Lively concluded in 1955, “King Laissez Faire, then, was according to these reports not only dead; the hallowed report of his reign had all been a mistake.”

How can this be? The answer is the universal phenomenon known as rent-seeking, the quest for returns over and above normal market returns through the acquisition of political privilege. It is ubiquitous because short-term economic interest more often than not trumps ideology. Indeed, one could be excused for wondering if the real purpose of government is to facilitate rent-seeking, with security merely a necessary adjunct to this primary function. (If you want a steady supply of golden eggs, you have to make sure no one steals the hen.)


State and Local Government


At the beginning of the American republic, the locus of intervention was the states and lower levels of government. Although the Federalists were able to overthrow the decentralist Articles of Confederation for the far more centralist Constitution, public sentiment still held an admirable suspicion of concentrated power. Thus most regulation at the national level had to wait until the revolutionary generations had died off and that suspicion had faded late in the nineteenth century. Nationalization can be seen as creation of a regulatory cartel. If regulation were left to the individual states, competition and the power of exit might have put downward pressure on the level of intervention.

Hughes identifies the 1877 Supreme Court ruling in Munn v. Illinois as a watershed. Even though Chief Justice Morrison Waite and the rest of the Court majority upheld a state law licensing and regulating grain warehouses, they did not do so for federalist reasons. On the contrary, the Tenth Amendment was not mentioned. Rather, Waite affirmed the state’s position on the grounds that governments in America have a power to regulate private property open to the public that dates back to their English forebear:

When the people of the United Colonies separated from Great Britain, they changed the form, but not the substance, of their government. They retained for the purposes of government all the powers of the British Parliament, and through their State constitutions, or other forms of social compact, undertook to give practical effect to such as they deemed necessary for the common good and the security of life and property.

…Under these powers the government regulates the conduct of its citizens one towards another, and the manner in which each shall use his own property, when such regulation becomes necessary for the public good. In their exercise it has been customary in England from time immemorial, and in this country from its first colonization, to regulate ferries, common carriers, hackmen, bakers, millers, wharfingers, innkeepers, amp;c., and in so doing to fix a maximum of charge to be made for services rendered, accommodations furnished, and articles sold. To this day, statutes are to be found in many of the States upon some or all these subjects; and we think it has never yet been successfully contended that such legislation came within any of the constitutional prohibitions against interference with private property.

…[W]hen private property is devoted to a public use, it is subject to public regulation. [Emphasis added.]

The libertarians among America’s founders might have been surprised to read that the point of the Revolution was to change the form but not the substance of the regnant mercantilist government. Bear in mind that Waite, not a Marxist but appointed by President Grant, was writing during the supposed heyday of laissez faire. Yet here he endorses activist government as consistent with both history and the Fourteenth Amendment. His ruling would later provide authority to ambitious New Dealers.

The next step toward centralization came in 1886. In Wabash, St. Louis amp; Pacific Railway v. Illinois, the Supreme Court struck down a state regulation of railroad rates on grounds that under the Constitution’s Commerce Clause, only the federal government has that power. (Waite dissented.) This was the dawn of the new age of federal control, Hughes wrote. Predictably, a year later the Interstate Commerce Commission, the first independent regulatory agency, was created. Signed into law by President Cleveland, also not a Marxist, it regulated many aspects of the railroads, including rates. According to historian Gabriel Kolko, “The first regulatory effort, the Interstate Commerce Commission, had been cooperative and fruitful; indeed, the railroads themselves had been the leading advocates of extended federal regulation after 1887.”

The rest, as they say, is history.

Two points must be briefly added. Despite widespread intervention, by historical standards Americans still enjoyed a liberal degree of personal and economic freedom. Second, it would be a mistake to conclude that America’s unprecedented prosperity was the fruit of that intervention. Here economic theory must underpin our understanding of history. One entrepreneur’s privilege is another’s burden. Any subsidy withdraws resources from where consumers would have directed them. Post hoc ergo propter hoc is a fallacy, and even less than total freedom goes a long way.

The proper question to ask then is: how much richer would America be had King Laissez Faire actually reigned?

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.