One of my frustrations with today's so-called conservative leaders is that they too often concede the premise of an argument to our opponents on the left. For example, yesterday I had a conversation with a co-worker who qualified her endorsement of free market capitalism with a disclaimer that "we just need some rules that will keep people from being taken advantage of".
This is a position that I hear often, especially in the wake of recent corporate and financial scandals. The statement assumes that fraud and deceit are necessary characteristics of free markets – a patently false assumption that I rarely hear challenged. The only source of fraud and deceit in truly free markets comes from the government and the greedy politicians.
Capitalism is the process where people engage in mutually-beneficial transactions arrived at through peaceful cooperation with one another. In barter economies a farmer may trade a bushel of corn to his neighbor for ten gallons of milk. The price of a bushel of corn would be 10 gallons of milk; the price of a gallon of milk would be 1/10 a bushel of corn. These terms were arrived at through peaceful negotiation – not coercion. Nobody held a gun to their head. And the trade was mutually-beneficial. The corn farmer already had much more corn than he wanted, while the dairy famer's children can only drink so much milk.
Today we use money to determine the relative worth of goods and services. In our example a bushel of corn would be worth 10 times more dollars than a single gallon of milk. The use of money allows other capitalists and consumers to discern important information about the relative worth of all goods and services in the economy. Some capitalist will look at the price of corn, determine that he can produce it for less, and start planting corn. This drives down the market price of corn for everybody – which by definition means that producers of all other goods and services can now buy more corn. Everybody wins in true free market capitalism.
Did you notice what things were not necessary in the example? Fraud and deceit are most definitely not necessary for true free market capitalism. Sure they may exist, and should be dealt with appropriately by the legal system, but fraud and deceit are not required. And coercion is most definitely not a part of free markets. You are always at liberty to not transact, if the market price is higher than you want to pay.
Let's look what happens now when the government gets its greedy hands involved and regulates the free market. Assume that the government taxes corn to raise money for the military. Corn farmers must pass that tax on to consumers by raising the price of corn; but they won't be able to pass on the entire tax because there are close substitute products for corn (other vegetables) that consumers could switch to. So the price of corn goes up and profits for the farmers go down. You will eat less corn because it's more expensive, and instead eat more Brussels sprouts. (You really don't like Brussels sprouts, but at least you can afford them without having to cut something else out of your budget.)
As for the farmers, the smallest farmer will now go out of business because he can't produce and sell corn at a profit under the new regime. The average farmer stays in business but can't make as much money as before. Corporate farms will also be hurt, but not as bad because they will be better able to absorb the price hit.
The government, which is collecting money despite being a net negative to society, sees the price of corn rise and is now outraged. It decides to regulate corn prices and sets up a blue-ribbon panel to study the issue. The panel, comprised of politicians from corn-producing states, Ivy League economists and CEOs of large corporate farming companies, decides that the market needs a federal regulator to ensure that prices are "fair" and that the food supply is "safe" for consumers.
The new Department of Corn is headed by the former CEO of GoldCorn Sacks, a large farming conglomerate with close political ties to the current administration. It recommends increased safety procedures for corn production and new rules for marketing of corn. All farmers must make significant capital investment to meet the new rules. Many small farmers simply retire rather than deal with the hassle and added expense. They would like to continue selling corn, and their neighbors would like to continue buying it, but the law is the law.
More Unintended Consequences
Meanwhile the price of corn has increased again to reflect the cost of the new regulation. The corporate farmers can easily afford the new regulations and pick up even more market share from the little guys. You have to eat even more Brussels sprouts and less corn due to the new pricing. Society in total loses because corn is more expensive relative to all other goods and services.
The government has funded its army, and is now exploring the possibility of setting up a similar tax and regulation system for milk. The proceeds of that tax will be used to buy food (corn, not Brussels sprouts, which everybody HATES) for the former corn farmers to eat. And some money will also be used to create job training programs so displaced agricultural workers can perform administrative tasks at the Department of Corn.
The representative who chaired the blue-ribbon committee received record campaign contributions from political action committees associated with Big Corn. It's an election year, and he will have a primary challenger, but should be able to outspend her thanks to these donations.
The biggest campaign issue looks to be whether or not to put tariffs on imported corn. Corn is primarily imported from the nation of Cornutopia, which due to a number of factors including soil conditions and weather, can produce only corn and nothing else. The Cornutopians are the most efficient producers of corn on Earth by necessity. But, imported corn is being sold at less than the market price of domestic corn, so the representative believes that allowing "unfettered free markets" would cause small American farmers to go out of business. He supports the tariff because, in his words, "I stand with the little guy – not the big corporations."
Winners and Losers
The former family corn farmer now depends entirely on the government for basic subsistence through food stamps and other welfare programs. Society as a whole is worse off: because of the increased price of corn, many people that would otherwise prefer the tasty yellow vegetable have to eat other, less appealing vegetables. (Chicken-fried steak, mashed potatoes, gravy and…zucchini!)
The government has caused two things to happen. First it decreased the quality of life for society as a whole (because corn makes people happier than other vegetables). Then it made society poorer by taxing the corn that was consumed. So government was able to direct some of the people's money to itself, despite the fact that society as a whole was made worse off by government's actions.
Of course some people DID benefit from the new regulations. Big Corn certainly benefited because it now has less domestic competition. And after the elections, the tariff insulated corporate corn growers from Cornutopian corn as well. The politicians benefited because the campaign contributions ensured their entrenchment in office virtually indefinitely.
The young representative – now considering a run for Senate in two years – was recently appointed to the House Committee for Foreign Relations. The Committee has pressured key trading partners (all countries in which GoldCorn Sacks has operations) to institute corn regulations as well. This will allegedly protect consumers globally from "dirty, unregulated corn" which countries like Cornutopia produce.
Cornutopia, now unable to sell its corn in the world's 10 largest markets and unable to grow any other crops, experiences extreme civil unrest, famine, and eventually a military coup. The democratically-elected government has been overthrown and replaced by a socialist dictator. The U.S. begins mobilizing it's army, which was initially funded by corn taxes, to fight the dictator. The plan is to install a new, hand-selected replacement (although "elections" will be held because the goal is to spread democracy, and the new leader has to be viewed as legitimate). The new soon-to-be democratically-elected leader has already agreed to force the recommendations of the U.S. Department of Corn upon the Cornutopian growers in exchange for half a billion dollars in foreign aid.
Because the war to spread democracy to Cornutopia is so expensive, and because we must support the troops at all costs, the legislature is now considering increasing taxes on all food products, including increasing the tax on corn. A dollar just doesn't go as far as it used to.
And all of this happened because in the beginning our "leaders" did not challenge the assertion that free market capitalism needs regulation to operate fairly. To summarize:
Free market capitalism: Cooperative, mutually-beneficial, peaceful, resources allocated based on the value that you provide to other people
Government regulation: Coercive, benefits only the politically connected, violent, resources allocated based on arbitrary decisions made by bureaucrats
So the next time somebody argues with you that we need more regulation because "free markets get out of control" or "we need somebody to make sure everything is done fairly" – be sure to challenge them!