Chapter 38: Regulation
Updated: 4/13/20
Do I not have the right to do as I want with what belongs to me? Or are you envious because I am generous? (Matthew 20:15).If a man opens a pit, or if a man digs a pit and does not cover it, and an ox or a donkey falls into it, the owner of the pit must repay the loss. He must give money to the dead animal's owner, and the dead animal will become his (Exodus 21:33–34).
Here we have what appears to be rival principles of ownership. The first asserts the autonomy of the property owner to whatever he wants with his property. The second places limits on his use of his property. If his property inflicts loss on someone else, the property owner is liable.
These are not rival principles. Private ownership establishes a tight legal link between ownership and responsibility, both legal and economic. The rule against an uncovered pit reinforces this strict liability. It establishes a clear guideline regarding the nature of this responsibility.
1. Ownership
The passage in Matthew is the conclusion to one of Jesus’ pocketbook parables. I have discussed this version of the parable and the one in Luke in extensive detail in my commentaries. Jesus' pocketbook parables conveyed theological truths in a context that would be easily grasped by His listeners: economics. This parable dealt with the need of His followers to accept the gentile converts as equals. Despite the fact that they entered the kingdom of God late, they had equal standing. That was the meaning of equal pay for those field workers who were hired at the beginning of the work day and those who went into the field later. He ended with these words: “So the last will be first, and the first last” (v. 16). [North, Matthew, ch. 47]
The passage conveys a theological principle: God is legally sovereign in offering an invitation to serve Him in His kingdom. He decides what offer to make to the workers. He owns the field. He has money to pay them. He decides the terms of exchange. The workers do not have to accept the offer, but God is in charge of the offer. It is His field. It is His business. It is His money.
The workers who were hired early complained at the end of the day: the final reckoning. They had worked all day in the blazing sun (v. 12), yet they were being paid only what late arrivals were paid. This was not fair, they implied. The owner of the field reminded them that they had agreed to the terms. He was upholding his side of the bargain, but they were demanding more money. It was his money. It was their labor. They had come to an agreement. Now they were trying to revise its terms. He replied: ““Friend, I do you no wrong. Did you not agree with me for one denarius?” (v. 13) The issue was ethical: right vs. wrong. He made this clear. He was in the right. They were in the wrong.
He invoked two legal rights: the right of ownership and the right of contract. But these are really the same. The right of ownership implies the right of disownership. He had disowned his money. They had disowned their labor services. That is the legal foundation of every exchange. He made it plain that they were calling into question his right to negotiate an exchange. They were in the wrong. They were trying to get out of the agreement retroactively. Why didn’t he have the right to pay them less than he had agreed to? Because this would have been a violation of contract. All parties to the transactions possessed legal sovereignty over their property.
Jesus was making a point about God’s sovereignty in paying men for their services. On what legal basis does God possess such sovereignty? On the basis of His creation of the world. “The earth is the Lord's and the fullness thereof, the world and those who dwell therein, for he has founded it upon the seas and established it upon the rivers” (Psalm 24:1–2). [North, Psalms, ch. 5] All people belong to Him, as surely as all aspects of the creation do. God possesses original ownership.
Jesus made this point by having the field owner ask the complaining field hands a pair of rhetorical questions. “Do I not have the right to do as I want with what belongs to me? Or are you envious because I am generous?” (Matthew 20:15). If His listeners had not understood the judicial validity of both questions, they would have been unable to draw the correct theological conclusions regarding God’s sovereignty in men’s election to eternal life. The field owner possessed the right to offer the early morning workers whatever he chose. He could not lawfully force them to agree to supply labor on his terms. They possessed the right to turn down his offer. But once they agreed to his terms, he did them no wrong at the end of the day by paying them what they had agreed to.
There is no clearer statement in the Bible regarding property rights than this: “Am I not allowed to do what I choose with what belongs to me?” Property rights are human rights. There must be theologically and ethically compelling reasons for the civil government to infringe on these rights.
The foundation of private property is God’s delegation of specific property to specific people and institutions. He is the original owner. He delegates property to people so that they can fulfill the terms of the dominion covenant (Genesis 1:26–28). [North, Genesis, chaps. 3, 4] He then holds them accountable for the administration of this property. This is the New Testament doctrine of the final judgment (Matthew 25). The warning is here.
Then Jesus told them a parable, saying, "The field of a rich man yielded abundantly, and he reasoned with himself, saying, 'What will I do, because I do not have a place to store my crops?' He said, 'This is what I will do. I will pull down my barns and build bigger ones, and there I will store all of my grain and other goods. I will say to my soul, "Soul, you have many goods stored up for many years. Rest easy, eat, drink, be merry."' But God said to him, 'Foolish man, tonight your soul is required of you, and the things you have prepared, whose will they be?' That is what someone is like who stores up treasure for himself and is not rich toward God" (Luke 12:16–21).
This tight connection between legal ownership and personal responsibility for the administration of this property is the heart of the biblical doctrine of private property. Because God holds people legally responsible, He grants them legal sovereignty over their property.
This delegation of ownership rests on a presupposition: the most accurate knowledge of economic cause in a person’s life is possessed by this person. This is why God holds him responsible for the administration of His property. Jesus said that an individual is responsible for his thoughts and deeds. "I say to you that in the day of judgment people will give an account for every idle word they will have said. For by your words you will be justified, and by your words you will be condemned" (Matthew 12:36–37). If this applies to careless words, how much more does it apply to men’s administration of God’s property! This is the message of the parable of the talents (Matthew 25:14–30).
2. Liability
We come now to this passage: “If a man opens a pit, or if a man digs a pit and does not cover it, and an ox or a donkey falls into it, the owner of the pit must repay the loss. He must give money to the dead animal's owner, and the dead animal will become his. ” (Exodus 21:33–34). [North, Exodus, ch. 41] This is one of the case laws of Exodus 21–35. These laws are clarifying cases of the general laws, known as the Ten Commandments, presented in Exodus 20. This law makes it clear than people are responsible for injuries to others caused by property they own. This passage establishes legal liability. This is the biblical judicial principle of restitution. The law went on. “When an ox gores a man or a woman to death, the ox shall be stoned, and its flesh shall not be eaten, but the owner of the ox shall not be liable. But if the ox has been accustomed to gore in the past, and its owner has been warned but has not kept it in, and it kills a man or a woman, the ox shall be stoned, and its owner also shall be put to death. If a ransom is imposed on him, then he shall give for the redemption of his life whatever is imposed on him. If it gores a man's son or daughter, he shall be dealt with according to this same rule” (Exodus 21:28–31). [North, Exodus, ch. 40]
The penalties here are different. In the first case, the owner of the ox gets off lightly: the loss of his ox. The ox is brought under public judgment. There is no other payment. In contrast, the penalty is far greater if the owner knew that the ox was dangerous. This knowledge increased his responsibility. He is at risk of his life or a penalty payment comparable to his execution. The threat of the negative judicial sanction encourages him to find ways to restrain the ox if he does not kill it and eat it. This is a high-risk beast. Biblical law pressures the owner to act responsibly in order to protect potential victims.
It is important to understand that this law does not authorize the creation of a mandatory program of ox inspection by state officials. God deems it sufficient that the owner is warned of the threat to him if he allows the ox to move without restraint. The owner has the responsibility of deciding which form of restraint is appropriate. If the beast kills someone, then judges in a court decide retroactively what would have been appropriate. This law identifies the locations of judicial sovereignty. Before the event, it lodges with the owner. After the event, it lodges with the court. It is a misunderstanding of biblical law to lodge this authority with a bureaucratic agency prior to the event.
This principle of interpretation applies to another case law. “If fire breaks out and catches in thorns so that the stacked grain or the standing grain or the field is consumed, he who started the fire shall make full restitution” (Exodus 22:5–6). [North, Exodus, ch. 44] The person who possesses the greatest knowledge of cause and effects of fire in a field is made responsible for these effects. This person is the owner of the field. The biblical judicial principle is clear: ownership establishes legal responsibility. Ownership establishes lawful control over property. Control establishes legal responsibility.
Biblical law establishes a link between knowledge and responsibility. Knowledge of local events and local resources is overwhelmingly local. The farther away geographically that the locus of judicial authority is, the less reliable is the knowledge appropriate to the administration of property.
The Mosaic law required that the law be read every seven years in the central city.
Moses wrote this law and gave it out to the priests, the sons of Levi, who carried the ark of the covenant of the Lord; he also gave copies of it to all the elders of Israel. Moses commanded them and said, "At the end of every seven years, at the time fixed for the cancellation of debts, during the Festival of Shelters, when all Israel has come to appear before the Lord your God in the place that he will choose for his sanctuary, you will read this law before all Israel in their hearing. Assemble the people, the men, the women, and the little ones, and your foreigner who is within your city gates, so that they may hear and learn, and so that they may honor the Lord your God and keep all the words of this law. Do this so that their children, who have not known, may hear and learn to honor the Lord your God, as long as you live in the land that you are going over the Jordan to possess" (Deuteronomy 31:9–13).
The Mosaic law provided the general principles and case law applications necessary to exercise self-government. The case laws could be read publicly before the assembled nation. There was no body of laws and enforcing rules totaling a million pages. In the United States, the national government publishes new rules issued by federal agencies that govern the application of laws passed by the government. This is the Federal Register. It is published daily. For decades, the annual edition totaled over 80,000 pages of three-column fine print. The pages are cumulative. They do not replace the previous year’s output of rules. They add to it. This enormous volume of rules is not coordinated. It would be impossible to coordinate it. It would require omniscience. The laws on which they rest are not coordinated. Some laws total 2,000 printed pages. No politician reads even one of these laws. They are written by lawyers for the government who create these laws in the name of Congress. They are written in jargon that can be deciphered only by highly specialized lawyers.
This is why civil governments grow more invasive and less coordinated. These laws cannot be understood by the voters. They establish rules governing production and distribution. The outcomes of these laws are not known in advance. There is a phenomenon known as the law of unintended consequences. It applies to modern legislation and enforcement.
Civil governments make individuals responsible for adhering to these rules. But no one knows what these rules are. There has been a legal separation of ownership and responsibility. Control has steadily been transferred from property owners to distant bureaucrats. The judges who enforce these laws are not part of the judiciary. They are employed by the agencies that enforce the law. They serve as judge and jury. They are part of the executive. They are not a check on executive power. They extend executive power. This is why legal historian Harold Berman in 1983 identified the rise of administrative law in the twentieth century as a challenge to the Western legal tradition. I discuss Berman’s insights in Chapter 54.
Rule-making and their enforcement are transferred to bureaucrats who have no personal stake in the outcome of their decisions. This separation creates a disruption of the prices-based production/distribution process, which is a unified process. It breaks the connection between buyers and sellers. Buyers and sellers have the best knowledge of local conditions. They also have an economic stake in the outcome of their decisions. But they do not establish the terms of exchange. Bureaucrats who cannot easily be fired for their own bad decisions possess this authority. In the words of the title of a profound book by Nassim Taleb, to avoid economic breakdowns and crises, decision makers must have “skin in the game.” This is why lenders insist on down payments and collateral from borrowers. Borrowers must face a negative outcome if they make mistakes: the forfeiture of their down payments to lenders. This is why the Bible warns us: "Do not be one who strikes hands in making a pledge, or who puts up security for debts. If you lack the means to pay, what could stop someone from taking away your bed from under you?" (Proverbs 22:26–27). [North, Proverbs,, ch. 69] Even worse, do not co-sign a note for another person’s debt. You will have skin in the game, but without control over the use of the money. You will have responsibility without ownership. "My son, if you set aside your money as a guarantee for your neighbor's loan, if you gave your promise for a loan of someone you do not know, then you have laid a trap for yourself by your promise and you have been caught by the words of your mouth. When you are caught by your words, my son, do this and save yourself, since you have fallen into the hand of your neighbor; go and humble yourself and make your case before your neighbor. Give your eyes no sleep and your eyelids no slumber. Save yourself like a gazelle from the hand of the hunter, like a bird from the hand of the fowler. Look at the ant, you lazy person, consider her ways, and be wise" (Proverbs 6:1–6). {North, Proverbs, ch. 11]
Economic regulation by the state assumes that distant politicians and bureaucrats possess knowledge of economic cause and effect that no human being possesses. Committees do not possess it. There is no way that bureaucrats with neither proximity nor a personal stake in the outcome of their economic decisions can coordinate the rules that will shape the decision-making process. Whenever they attempt to do this, we lose some of our liberty. Owners do not set the terms of exchange; politicians and bureaucrats do. This is the inherent nature of all government economic regulation.
The more detailed a law or a regulation, the more subject it is to arbitrary rulings by bureaucrats. The complexity comes from the attempt by the lawyers who write the laws and the regulations to specify specific applications of the law. But the greater the specificity, the greater the possibility of arbitrary interpretations. This is the result of the division of intellectual labor. The bureaucrats devote their lives to interpreting and enforcing regulations in the agency’s jurisdiction. They become specialists in the past rulings of their agency. The organizations that fall under their jurisdiction must deal with a wide range of decisions, most of which are not related to the law. Unless an organization is large enough to hire expensive legal talent who have specialized in this area of the law, they find it too expensive to defend themselves. Most organizations fall under the jurisdiction of dozens of government agencies, both national and local. The degree of knowledge required to match the specialized talent available to a tax-funded enforcing agency is high. It must be paid for.
The greater the complexity, the larger the number of precedents. The agencies are aware of these precedents. The precedents favor the agency’s interpretation. This provides the agency with additional power. Under administrative law, the agencies’ in-house judges make the rulings. Defendants must overcome these precedents. If they lose, the defendants must take the case into the civil courts. This costs additional time and money. Few companies can afford this expense. The agencies know this. So, they sue small, underfunded companies. The companies capitulate. Each capitulation reinforces the precedents.
The greater the complexity, the greater the likelihood that a company will violate a rule. There are limits to human knowledge. The complexity of running an organization is high. Managers make decisions constantly. There is no way that any manager can know the law if the law is 1,000 pages long. There will be constant violations. The enforcing agency can pick and choose from among a wide range of violations. It can harass a company constantly, bringing lawsuits against it. The costs of defense keep rising. If a company gains the animosity of a bureaucrat whose agency has jurisdiction over it, the agency has the funds to prosecute. The complexity of the law favors the government. Private firms must have profits sufficient to defend themselves in two sets of courts: administrative law courts and civil courts.
The costs of defense are great. They are also unpredictable. The costs of compliance are lower because they are more predictable. The company has an economic incentive to capitulate. The greater complexity of defense favors large, established firms that can afford legal talent. The costs of meeting regulatory requirements fall more heavily on smaller, newer firms. These costs serve as barriers to entry into the industry. This favors established firms that have established working relationships with the enforcing agencies. These firms face reduced competition from innovative firms that would otherwise be able to gain market share at the expense of older firms. This is why the expansion of regulation favors larger firms. They must pay more to do business, but this payment reduces competition. The enforcement of the rules weighs more heavily on newer firms than older ones. In this sense, the system of regulation is arbitrary. In the early twentieth century in the United States, large firms favored the creation of national regulatory agencies. They understood that national government regulation would favor their interests.
The expansion of regulation by government agencies has pressured businesses to restructure their decision-making to consider the threat of government sanctions in addition to customers’ sanctions. This process is governed by the threat of negative sanctions. But also important is the promise of positive sanctions. Most regulations serve as barriers to entry against newer, more efficient firms that cannot afford large legal staffs. The government’s creation of barriers to entry is a positive sanction, net, for established firms.
In matters of market exchange, there is always an issue of specialized knowledge. In any industry, the regulatory agencies are dependent on specialized expertise of existing firms in an industry. These firms are represented by trade associations. These associations serve as lobbying organizations. They influence politicians. They suggest additional laws. They sometimes write these laws. This influence is used to benefit established firms. These trade associations also supply regulatory agencies with specific information. They also supply suggestions. This means that the regulated companies want to gain influence inside enforcing bureaucracies.
One way for them to gain influence over politicians and regulatory agencies is to hire retired politicians and retired senior officials in the agencies. These people are paid high salaries. They know how the two systems, legislative and executive, operate. They have former colleagues who are still in office (politicians) or in senior positions inside the agencies. They can contact these former colleagues and arrange for informal meetings. For politicians, these meetings may lead to campaign contributions. For politicians and senior bureaucrats, these meetings may lead to job lucrative offers when they retire from their government jobs.
Through these lobbyists, trade associations can plead their case politically for the modification of specific laws. This sometimes happens. But the original laws are almost never repealed. So, the trade associations argue for the revocation of the most burdensome regulations. They do not waste time pleading for repeal of the whole law. Their members have adjusted to the new system of sanctions. New competitors from outside the association will find that it costs them a higher percentage of their profits to comply.
Regulatory agencies are increasingly the arms of large established firms. The interests of both the regulators and the regulated industries become increasingly synchronized. This is called “agency capture.” Initially, the agencies give orders to members of the industry. But, over time, the industry finds ways to resist. The connections between the industry and the regulators are strengthened by the self-interest of the regulators in securing official control. But they are also strengthened by the self-interest of the regulated firms in establishing an operational cartel. Detailed regulations accomplish this task. Wikipedia’s entry on Regulatory Capture expresses this clearly.
The idea of regulatory capture has an obvious economic basis, in that vested interests in an industry have the greatest financial stake in regulatory activity and are more likely to be motivated to influence the regulatory body than dispersed individual consumers, each of whom has little particular incentive to try to influence regulators. When regulators form expert bodies to examine policy, this invariably features current or former industry members, or at the very least, individuals with contacts in the industry. Capture is also facilitated in situations where consumers or taxpayers have a poor understanding of underlying issues and businesses enjoy a knowledge advantage.
The specialization of knowledge helps to explain both the free market’s process of exchange and the bureaucratic process of inhibiting free market exchange. This is a battle over authority: paying consumers’ authority, which is based on their possession of money, the most marketable commodity, vs. regulatory authority, which is based on the threat of negative government sanctions and the creation of positive government sanctions.
In 1850, the year of his death, Frédéric Bastiat published his long essay, “Ce qu'on voit et ce qu'on ne voit pas” (That Which We See and That Which We Do Not See). He came up with what has been called the broken window fallacy. When someone throws a stone through another person’s window, the window owner must replace it. He must spend money. This creates employment. Is this a plausible justification for throwing stones through each other’s windows? No, he argued. He offered an answer based on economic logic. The money that the window owner spends on installing a replacement window would have been spent on something else, either production goods or consumption goods. If we see only spending on the replacement window, we lose our understanding of economics. In 1946, Henry Hazlitt revived this long-forgotten argument and applied it to two dozen contemporary cases of government intervention. His book became a best-seller: Economics in One Lesson. I use a Christian version of this analytical approach in my book, Christian Economics in One Lesson (2nd ed., 2020).
The same argument applies to economic regulation. People see a violation of a person’s property rights, either through violence or fraud. They want politicians to pass a law against this practice broadly defined. They think that politicians and bureaucrats are capable of understanding the full ramifications of this legislation. They believe that the law will reduce the extent of such practices. The problem is this: the law of unintended consequences, i.e., the things not seen in advance by citizens, politicians, and bureaucrats who enforce the written law by means of more regulations. One of these unintended consequences is an increase in the power of the state. The bureaucracies expand their definitions of violations of specific laws. They thereby extend their turf in the name of these laws. Politicians will copy these laws and apply them to other kinds of transactions. The precedents of regulatory laws extend outward judicially and forward through time, multiplying the number of laws and regulations.
The voters do not perceive that both their wealth and their liberty are threatened more by the expansion of the state’s regulatory apparatus than by individual property-threatening acts of profit-seeking companies that have little independent power to control people’s access to competing products and services. This reduces the authority of consumers. It does so in the name of protecting consumers.
Here is a thing not seen by the public. Consumers are not helpless victims of fraudulent or deceptive practices. They have ways of imposing retribution: in the civil courts and also in the court of public opinion. When buyers impose these negative sanctions, they reinforce the free market’s principle of consumers’ economic authority. Sellers have economic incentives to please buyers. In a free market, sellers are not distracted by the demands of permanent regulatory agencies that operate in terms of complex rule books. In contrast to buyers, bureaucrats do not act in terms of achieving their personal goals through owning products they intend to use. Buyers have the best knowledge of what they want. They also have the greatest responsibility. Why? Because they spend their own money. They evaluate product performance in terms of their priorities. Bureaucrats do not possess this kind of immediate, highly personal knowledge of specific individual conditions. They substitute their personal evaluations for those of buyers. They impute economic value that judicially supersedes the economic value imputed by resource owners to their own resources.
Licensing is a form of government regulation that restricts the sale of goods and services to people or companies that have been formally authorized to do so by the state. Politicians pass enabling legislation. Then the government establishes regulatory agencies to administer the general restrictions established by law. There is no case law in the Mosaic law that authorizes licensing by the state. I have been unable to discover a biblical principle that would authorize licensing by the state.
The primary assumption that undergirds such legislation is this: consumers do not have sufficiently accurate information to buy a product or service without placing themselves at risk or serious disadvantage. The secondary assumption is this: the civil government can and should hire bureaucrats to enforce legislation drawn up by legislation-drafting government lawyers who act as unseen agents of politicians. These lawyers are assumed to be capable of wording legislation is such a way that (1) the courts will uphold it; (2) the language will enable bureaucrats to enforce terms of trade that will protect consumers from making mistakes so serious that their welfare might be threatened. Politicians, legislation-drafting lawyers, enforcement agency lawyers, and enforcing agents are assumed to be in possession of specialized information that will enable the enforcing bureaucrats to draw up lists of restrictions on sales that will, when enforced under threat of negative sanctions, overcome these threats to the public. Such laws are passed and enforced in the name of consumers. They are supposedly laws that consumers would authorize if they understood what is good for them. Since consumers do not and cannot understand what is good for them, agents of the state tell them what is good for them. What is good for them is this: the only sellers who will be allowed to sell will have been screened by the enforcing agencies before they are licensed to make sales.
1. Lower Economic Growth
A major effect of this legislation is the restriction of choices available legally to consumers. This effect is not secondary. It is the primary goal of the legislation. Politicians write legislation legislation to limit the number of sellers legally allowed to deal with consumers. The goods and services allowed to be offered for sale is determined in advance by politicians and bureaucrats. They believe that consumers must be protected from themselves by the state. Otherwise, they will be taken advantage of by sellers of substandard goods and services. In this outlook, consumers have too many choices for their own good. They will be better off with reduced options.
Analytically speaking, the best definition of economic growth is this: “more choices than before at the same price.” Most people assume that they will be better off with a greater number of affordable choices. Therefore, they assume that economic growth improves their welfare. Almost all academic economists assume this. But some economists make an exception: licensing. Licensing reduces economic growth by reducing the number of choices at the same price. This is not how proponents of licensing publicly position licensing legislation. By positioning it in this way, the legislation would gain greater opposition. It would be seen by voters and some politicians as operating against the interests of consumers.
2. Exemptions
Licensing officially establishes bureaucratic criteria for sellers. These criteria are justified in the name of consumer welfare. Politicians who favor licensing argue that by allowing all sellers continued access to a market, sellers of substandard goods will cut their prices. This will enable these sellers to undercut established sellers. This is an accurate assessment of the effects of competition. Price competition is the primary means of competition used by newcomers to take business away from established sellers. Less important is advertising. If a seller can sell for less money, he will have more money available for advertising. The goal of both strategies is the same: to reduce sales by established sellers. This gains opposition from existing sellers. This opposition may be political.
Existing sellers understand that laws that restrict legal access to their markets will reduce competition from newcomers. This will enable them to sell at higher prices than would otherwise prevail if the market remained open to all sellers. Existing sellers create a political pressure group to persuade politicians to pass laws restricting access. They know that new licensing laws usually exempt existing suppliers from the screening requirements. Why is this the case? Because those politicians who are willing to vote for such laws do not want to gain opposition from any existing sellers who fear being screened out of the market by the new law. If existing sellers are exempted, they may donate money to the political campaigns of those politicians who support the legislation. Politicians also understand that existing sellers will gain a competitive advantage from the legislation. It will restrict competition from sellers who have not been licensed. So, they write the laws in such a way that existing sellers are allowed to remain in the market without having to go through a formal screening process based on the legislation. Newcomers will be screened out. This offers existing sellers protection from future competition by unlicensed sellers.
3. Cartels
Legislation that restricts access to markets has a tendency to create cartels. A cartel is a group of sellers who collude with each other. They agree not to offer products or services for sale below a jointly agreed-upon price. These agreements are expensive to enforce without government intervention. Why? Because outsiders who are not parties to the agreement can enter the market and underbid members of the cartel. This puts members at a competitive disadvantage. Some of them will be tempted to match the prices of the newcomers. This will put pressure on the other members to cut prices. The cartel may break apart. Licensing provides legal barriers to entry for sellers who might underbid members of the cartel. The cartel can continue to receive higher prices while selling fewer goods. This restricts the supply of goods available to consumers.
A cartel could be defended as a resource-conservation strategy, but defenders of cartels never raise this argument. People who favor resource conservation generally oppose high profits for private firms that are cartel members. They do not make the analytical connection between cartels and resource conservation. They do not see their own logical inconsistency: favoring resource conservation but opposing cartels. Most industrial nations have laws against cartels, yet also pass laws creating cartels.
Because licensing laws restrict legal sales and raise prices, unlicensed sellers may take advantage of opportunities to sell at a lower price. They sell in what are called black markets. These are illegal sales, but at some price, they may be profitable for buyers and sellers. The risk of participating in such markets are high for buyers and sellers. Sellers may get caught and prosecuted. Buyers find it difficult to ascertain the honesty, competence, and reliability of sellers. Information on them is not easily available. They do not openly advertise their operations.
Licensing assumes that consumers are helpless. Consumers supposedly cannot make informed judgments. The main problem with this argument is this: the consumer knows what he wants to buy. He does not want to be cheated. He has great incentive to inquire about sellers and products. With the World Wide Web, such information is readily available at a low monetary price or no price. He can conduct sophisticated searches. Sellers do not want to gain the reputation of dishonesty or incompetence. Furthermore, in some fields, insurance companies offer liability insurance to sellers. They investigate sellers’ credentials and past performance. They have an incentive not to write policies on charlatans. They are at risk of making payments. This risk is personal: losses. In contrast, enforcers in government agencies are not at major risk for a bad decision, especially a decision to prohibit a transaction. They are enforcing the law. They are beyond the reach of most courts. A seller in an unregulated market can be sued. In a regulated market, it is more costly for a buyer to sue a seller. The company will claim in court that it met government licensing standards. It is therefore much more difficult to get a conviction.
The word “monopoly” has no precise definition in terms of economic theory. The conditions that lead to a monopoly are imprecise, theoretically speaking. Despite this fact, monopoly has been a topic of heated debates for centuries. Critics of the private property system point to monopoly as a key ethical weakness of capitalism. A company that owns the major supply of a key resource can extract “monopoly returns” from buyers who cannot buy an equivalent product, and who are therefore compelled to pay a high price. If the seller would lower the price, more people would buy. But he finds that he can reap higher net returns by limiting production and selling this output to consumers who are willing and able to pay a higher price. The classic example would be an oasis in a desert. The traveler who needs water can find no other source. He must pay what the owner of the oasis asks.
Other critics of capitalism—or perhaps the same ones—also argue that capitalism suffers from another moral defect. It pursues mass consumption. This consumes raw materials. They complain that capitalism does not honor the principle of conservation. But this is the opposite argument. If capitalism is morally questionable because it restricts production and therefore production because of monopoly, then why is it also morally questionable for maximizing production? Monopoly can be defended as a defense of resource conservation. Defenders rarely if ever invoke this argument, but it makes sense. Capitalism attains mass production through price competition. The way that producers find willing buyers of this increased output is by cutting costs and then cutting prices, which is the opposite pricing strategy from the one adopted by monopolists.
There is no moral violation in either case. The Christian principle of buying and selling is this: “Am I not allowed to do what I choose with what belongs to me?” (Matthew 20:15a). When you buy, you sell. When you sell, you buy. Every market exchange involves both buying and selling on the part of each party to the transaction.
When there are few sellers to compete, the seller can price his output high. He can target people with money and high demand as his customers. They want what he has to sell more than what others have to sell. They have enough money to make the purchases. It pays the seller to conserve resources by limiting production. His goal is resource conservation. He owns the resource. If he limits sales by charging a high price, he can stay in business longer. He can generate income longer.
The key analytical question is this: What prevents rival sellers from entering the market and underbidding him? Is it a geographical barrier to entry? Is it a government-imposed restriction on entry? Is the seller the beneficiary of political and bureaucratic intervention into the market? If this is the cause, then the free market is not to blame. Government intervention is. The correct way, ethically speaking, to reduce monopoly in such a case is to repeal the legislation that granted favorable treatment to the monopolist. This restores private property rights.
Certain goods are called natural monopolies. They have to do with geographical barriers to entry. Politicians create government-operated or government-regulated producers of these products. Municipal water is a familiar one. So is a sewer system. Water and sewer lines must cross private property. The local government grants legal rights-of-ways to municipal monopolies. The production and distribution of electrical power is another example. It takes legal access across privately owned land to set up these systems. Until the development of cell phones, local telephone companies were granted monopoly rights for land lines. Signal distribution is still delivered in high-density regions by means of telephone land lines.
These are sometimes called natural monopolies. Every society has a few of these. The Mosaic law set up nine cities of refuge, where civil courts dispensed justice (Deuteronomy 4:41, 19:2–3, 8–9). There were roads leading to these cities. Access to the civil courts was not based on payment, either to judges or to road owners. Such roads are representative cases of legitimate violations by the state of the market’s principle of high bid wins. By extrapolation we come to water and sewer systems. Only in the late nineteenth century did the issues of wire-based communications and power distribution arise. But public utilities are not judicial matters; they are economic matters. The justification of municipal public utilities is economic: more economic growth, greater wealth for almost all. The assumption is that all members of the community benefit, not just special interest groups. The vast majority of voters want these services. If the pricing of construction, delivery, and access were based on hook-up fees of users rather than taxes collected from all residents, these monopolies would be closer to the distribution principle of high bid wins. But because access to these services can be provided only by eminent domain, hook-up fees and delivery are controlled by law.
The profitability of a monopoly depends on the price sensitivity of buyers. In a needless borrowing of a term from physics, this sensitivity to prices is called elasticity. If a seller can make more net income by selling at a high price, the demand curve is said to be inelastic. First, there is no price curve. We assume that there is a series of discrete prices that buyers respond to. The lower the price, the more is demanded. Second, elasticity is a physical property. To use the word to describe people’s decisions is a conceptual mistake. It is misleading.
Critics argue that more people could buy the product if the seller were not selling it so that only the better-off buyers can afford to buy. But this is true of everything that gets sold. The buyer would have preferred to pay less. The seller could have earned income by selling it at a lower price. But if the low sales price did not generate enough sales to be profitable for the seller, he should charge more if he intends to keep producing this item. He may have been losing money on every sale. Such a pricing policy will drive the seller out of business.
There are times of crisis when buyers are at risk of losing their lives. Sellers then take on the characteristic feature of a priesthood. They are in control over life and death. Famines are examples of this situation. This is why the Bible teaches this: "People curse the man who refuses to sell grain, but good gifts crown the head of him who sells it" (Proverbs 11:26). This refers to a unique situation: famine. It is temporary. Suppliers of food cannot be found locally on short notice. But there is nothing in the Bible indicating that the state should intervene to confiscate food and ration it by non-price means. The allocation principle of high bid wins prevails in a free market. This is not a moral weakness of the system. It is a moral strength. It is a defense of private property.
The biblical solution to most practical economic problems and theoretical issues is the enforcement of the Bible’s laws protecting private property. When private property is enforced by civil law, church law, family law, and custom, it inescapably produces the free market economy.
Economic regulation in the Mosaic law was enforced by the courts. There were laws governing safety. The law requiring guard rails on roofs of the homes constructed after the conquest of Canaan (but not before) is an example. The Mosaic law established the house owner’s legal liability for injury or death or a guest or family member who fell from an unfenced roof. "When you build a new house, then you must make a railing for your roof so that you do not bring blood on your house if anyone falls from there" (Deuteronomy 22:8). [North, Deuteronomy, ch. 54] The law against open pits is another (Exodus 21:33–34). [North, Exodus, ch. 41] These laws did not mention the creation of a bureaucracy to enforce a building code, local or national. This implies that the courts were the agencies of enforcement. These laws made it clear to property owners that they would be held legally liable. This was a negative sanction, but only if there was actual damage. These laws served as permanent guidelines to judges of the civil court. It is possible that the priesthood through the assembly could threaten expulsion for refusing to build a railing. The law is silent on this. This threat would have been taken seriously. But this bureaucracy would not have had the authority to impose fines for a failure to obey. The sanction was all or nothing: expulsion or nothing.
These laws applied to life-and-death situations. They applied only after damage had occurred. The owners of property had to decide whether to take the risk. It was a gigantic risk. There was no insurance contract possible against the death of a human being that was the fault of the unsafe property. The Mosaic law had no other examples of economic regulation other than the general principle of honest weights and measures, which reduced fraud. These were laws against theft.
For non-life-threatening events, the Mosaic law had no prohibition against the principle of all insurance: shared risk. This is a statistical concept. Insurance contracts rely on the law of large numbers. Within any large group, the probability of a single event can sometimes be estimated in advance. Participants in a pool of insured people pay in advance to be compensated if such an event takes place. Most people are unharmed by the event. Those who are harmed receive compensation.
People want protection from harm that is caused by actions of third parties. If they are harmed, they can sue the person who caused the harm. But if the harm is minimal, it will not pay the victims to sue. This seems to benefit the person or company that caused the harm. But injured parties have ways to get even. Word of mouth and word of mouse can be effective. Another way is posting complaints in public places. The Web has made this easy. Product reviews by unhappy buyers allow them to vent their frustration. If a pattern of complaints emerges, shoppers are warned that a product or service is defective. The seller loses money. He has an incentive to fix the problem with his product. In short, the fact that buyers cannot gain restitution because their time is more valuable to them than appearing before a court does not make them impotent. It does not guarantee a seller unimpeded profits from the sale of defective products.
The free market allows independent publication to review products and services. The results can be sold to the public or in other ways monetized. Reviewers with large followings can have a positive or a negative impact on future sales and therefore profitability. Because these services make money because of their reputation for being independent, they are not receptive to bribes by offending companies. If word of bribery were to get out, these publications would lose subscribers.
Retail sellers do not want to sell products that their customers complain about. If an abnormally large number of customers bring back a product and ask for a refund, the store owner has an incentive to substitute a similar product that meets the demands of his customers. The store owner is a middleman. A middleman acts as an economic representative of his customers. He can impose a negative sanction on a wholesaler or producer: no further sales. This is a powerful incentive for change if the seller is a large purchaser of the producer’s output.
All this is to say that the market process has cost-effective ways of enabling consumers to pressure sellers to improve their products. The consumer as an individual may seem powerless to gain restitution from the seller of a substandard product, but he is not powerless. If he is part of a group of disgruntled buyers, he can join with them to bring a class-action lawsuit against the producer. Even when it costs too much to organize such a joint lawsuit, the individual buyer has ways to complain in such a way that it costs the seller to continue to sell substandard products. This is the thing that is not seen by voters and politicians. What they see is what appears to be deception by a handful of sellers. They think this: “There ought to be a law!” They really mean this: “There ought to be legislation.” Legislation can be seen. There is already a law: the free market’s law of competition. It is this: sellers compete against sellers.
Economic regulation of business by national governments began in Western Europe and North America late in the nineteenth century. This has led to an expansion of bureaucratic regulation in most areas of life. This encroachment has been steady and relentless. It has been worldwide. This is the expansion of administrative law. As Harold Berman argued in 1983, this substitution of administrative law constitutes the greatest single threat to the Western legal tradition, which relies on independent courts. He said this principle goes back to the Papal Revolution of 1076, but in fact it goes back to the Mosaic law. See the section on administrative law in Chapter 54.
The case laws of Exodus established minimal judicial principles that are consistent with the Ten Commandments. Civil courts and ecclesiastical courts were to honor these laws. Cases were brought before the courts. There was no administrative bureaucracy in the tribes that administered any of these specialized laws. The courts established legal precedents, and these guided future courts.
Jewish law after the fall of Jerusalem honored this system. Independent courts handed down decisions, and many of these decisions were written down. These are known as responsa. Jewish responsa constitute the oldest continuous body of court decisions in history. They cover 1,700 years. There are hundreds of thousands of these in almost a thousand collections.
Administrative law is steadily replacing the Western tradition of an independent judiciary. It is also replacing trial by jury. It is removing from the citizens their most important defense against judicial tyranny. The regulatory system rests almost entirely on administrative law.
The only way to reverse this is to shrink the budgets of national governments and state governments. The vast body of legislation, which is enforced by a far more vast body of administrative rules, seems impervious to any reform. But a reduction of the budgets of the agencies would in effect reduce the burden that has been placed on businesses and individuals. It is unlikely that the public will vote for such a reduction. But if the expansion of the unfunded liabilities of governments to retired people continues at the present rate, there will come a time in which there will be political battles between retirees and executive agencies. If the retirees are successful politically, the budgets of the agencies will be cut, and possibly cut dramatically. That will constitute deliverance, although in a form which subsidizes the largest categories of welfare in the modern welfare state. To use a familiar analogy, the regulatory state suffers from the cancer of administrative law. The cancer is likely to kill the host.
The regulation of the economy by the government rests on a series of assumptions. The first assumption is the most crucial one: consumers do not know what is best for them. Despite the fact that they have an economic incentive to investigate the best uses of their money, they are unable without help from the government to make choices. The second assumption is that the free market’s process of open competition offers too wide an array of consumer choices. Therefore, the government must restrict the number of choices available to consumers in order to make their decision-making more rational. By restricting the number of choices, according to theories of regulation, the government increases the welfare of the population. Despite the fact that economic growth is best defined as an increasing number of choices for the same amount of money, the defenders of government regulation implicitly assume that economic growth is best defined as a decreasing number of choices for the same amount of money, as long as administrative agencies are the source of the reduction in the number of choices.
Economists have analyzed what they call the capture of the regulatory agencies by the industries that the agencies were set up to regulate. Regulatory capture is a common phenomenon. Existing trade associations work with the regulatory agencies to establish criteria for the sale of goods and services. Then, over time, these industries hire senior members of the regulatory agencies. These senior members then lobby their former colleagues in the agencies to enforce specific laws in certain ways. The ways that these laws are enforced tend to restrict entry by newer, more competitive suppliers. This creates protection for the existing suppliers.
Economically speaking, this is the cartelization of production. The government restricts entry by newer, more competitive producers. This restriction on entry maintains existing profit margins of existing members of the cartel. Regulation of the economy is invariably accompanied by the strengthening of industrial cartels. Competition is reduced, prices do not fall, and innovation does not lead to a wider number of choices. This restricts economic growth.
All of this is done in the name of protecting the consumer. Supposedly, consumers need protection from unscrupulous producers. In effect, the consumers are being protected from themselves.
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The complete manuscript is here: https://www.garynorth.com/public/department196.cfm