Saturday, September 15, 2007

The History of Government Regulation and Big Business

The "Progressive Movement" aka the History of Big Business getting in Bed with Big Government

Murray Rothbard (an economic historian) et al, have shown that the "Progressive" movement of 1890-1920, the beginning of big government regulation of big business, was influenced by big business themselves. This is from his book "The Case Against The Fed".

He said that the so-called government regulation was lobbied for by the giant corporations of the time, in order to make entry more difficult for startup competition. The classic case is Meat- Packing regulation:

From --
Today's history books credit muckraking novelist Upton Sinclair with the reforms in meatpacking. Sinclair, however, deflected the praise. "The Federal inspection of meat was, historically, established at the packers' request," he wrote in a 1906 magazine article. "It is maintained and paid for by the people of the United States for the benefit of the packers."

Gabriel Kolko, historian of the era, concurs. "The reality of the matter, of course, is that the big packers were warm friends of regulation, especially when it primarily affected their innumerable small competitors." Sure enough, Thomas E. Wilson, speaking for the same big packers Sinclair had targeted, testified to a congressional committee that summer, "We are now and have always been in favor of the extension of the inspection, also of the adoption of the sanitary regulations that will insure the very best possible conditions." Small packers, it turned out, would feel the regulatory burden more than large packers would.

Consider the story of one of the most famous "trusts" in American folklore: U.S. Steel.
In the 1880s and 1890s, rapid steel mergers created the mammoth U.S. Steel out of what had been 138 steel companies. In the early years of the new century, however, U.S. Steel saw its profits falling. That insecurity brought about a momentous meeting.
On November 21, 1907, in New York's posh Waldorf-Astoria, 49 chiefs of the leading steel companies met for dinner. The host was U.S. Steel chairman Judge Elbert Gary. The gathering, the first of the "Gary Dinners," hoped to yield "gentlemen's agreements" against cutting steel prices. At the second meeting, a few weeks later, "every manufacturer present gave the opinion that no necessity or reason exists for the reduction of prices at the present time," Gary reported.

The big guys were meeting openly— with Teddy Roosevelt's Justice Department officials present, in fact—to set prices.

But it did not work. "By May, 1908," Kolko writes, "breaks again began appearing in the united steel front." Some manufacturers were undercutting the agreement by dropping prices. "After June, 1908, the Gary agreement was nominal rather than real. Smaller steel companies began cutting prices." U.S. Steel lost market share during this time, which Kolko blames on "its technological conservatism and its lack of flexible leadership." In fact, according to Kolko, "U.S. Steel never had any particular technological advantage, as was often true of the largest firm in other industries."

In this way, the free market acts as an equalizer. While economies of scale allow corporate giants more flexible financing and can drive down costs, massive size usually also creates inertia and inflexibility. U.S. Steel saw itself as a vulnerable giant threatened by the boisterous free market, and Gary's failed efforts at rationalizing the industry left only one line of defense. "Having failed in the realm of economics," Kolko writes, "the efforts of the United States Steel group were to be shifted to politics."

Sure enough, on February 15, 1909, steel magnate Andrew Carnegie wrote a letter to the New York Times favoring "government control" of the steel industry. Two years later, Gary echoed this sentiment before a congressional committee: "I believe we must come to enforced publicity and governmental control . . . even as to prices."

When it came to railroad regulation by the Interstate Commerce Commission, the railroads themselves were among the leading advocates. The editors of the Wall Street Journal wondered at this development and editorialized on December 28, 1904:

Nothing is more noteworthy than the fact that President Roosevelt's recommendation recommendation in favor of government regulation of railroad rates and[Corporation] Commissioner [James R.] Garfield's recommendation in favor of federal control of interstate companies have met with so much favor among managers of railroad and industrial companies.

Once again, big business favored government "curbs" on business...

In his book "The Case Against The Fed", Murray Rothbard showed that the Federal Reserve Act of 1913 (which created the Federal Reserve), resulted in cartelization of the banking industry, the same way the regulation of the steel and the meat industries produced cartels in their respective industries.

And of course, it gets much worse than that - the worst thing about it is the Compound Interest Paradox.

The Founding Fathers were hostile towards corporations - they could be dissolved by the state; in the late 1800s there was a landmark court "precedent" that declared corporations as having "the rights of a person" that got around this:

Every time there is perceived "corporate malfeasance", the public cries out for more regulation.

One other thing the public doesn't realize, is that whenever there is some kind of "boom industry" due to artificially low interest rates, there is malinvestment, and a subsequent bust.

Again FSK has touched on this. A Good Explanation of the Housing Bubble:
When the newly printed money starts accumulating in one part of the economy, prices skyrocket. Newspapers and television tout it as being the new "hot investment area". Eventually, everyone is investing in this "hot area". At this point, the Federal Reserve is concerned about inflation and jacks up interest rates, causing a crash. The insiders start buying at the start of the bubble, and sell before the crash. You don't know how long the boom cycle or bust cycle will last, because you don't know what the Federal Reserve is going to do.
What he didn't mention in this post, is the subsequent government bailout, at taxpayers' expense, and the predictable reaction of "We need more government regulation to prevent this from happening again".

He did touch on the bailout phenomenon: Distributed Costs and Concentrated Benefits

Today's housing bubble and subprime mortgage meltdown was caused by 2 things: The Federal Reserve kept interest rates artificially too low for too long, creating artificial demand for homes due to cheap loans, and the 1977 Community Reinvestment Act (CRA). I can't summarize it in 2 sentences so here's the link:

The Government-Created Subprime Meltdown:

It seems whenever the government sticks its fingers in the free market, it's either to benefit Big Business, and/or it creates undesireable unintended consequences.

It's been suggested that Benito Mussolini said, "Fascism should more properly be called corporatism because it is the merger of state and corporate power."


Anonymous said...

good post. Lets say you live in a mythical place where people are encouraged to trade, produce and make their own things which they take to market. Lets say competition is encouraged but not beyond some prices (because too much competition results in monopoly, oligopoly), and also individuals themselves follow a religion which tells them to be generous in trade, to even aid competitors if they are in trouble (because there is plenty for everyone and everyone is guaranteed a pre-determined livelihood by God who is the Most Generous). would this be a good society in your opinion?

I can see some people may be lazy because "God provides", but they are taught that God provides for those who help themselves and who work.

For instance I have heard cases of shop traders in Egypt refusing to serve a customer and asking them to go to a neighboring 'competitor' shop to buy the item 'because he has not had allot of business today'.

Nelia said...

Thanks for writing this.

Anonymous said...

Redpill Guy, Im late on all this, mosts posts here are old but I wanted to let you know this is a great site. Some fascinating articles, links are brilliant too, I literally get lost in it all, tabs and tabs of it. Good work.

and anonymous above, I see where you're going with this indoctrination business. I guess ultimately the grass is always greener on the other side. But that just seems to be human nature.