Sunday, June 9, 2013

More Regulation, Less Prosperity

As I explain in the final chapter of my book, Foundations of Economics, sound economic theory tells us that
The only way to cultivate and fill the earth without descending into a barbaric struggle for survival is to take advantage of the social division of labor, capital accu- mulation, and wise entrepreneurship. Allowing these sources of economic progress to flourish requires the security provided by the christian ethic of peace and private property. . ."
Good social institutions, such as private property are essential for economic prosperity.
Man Controlling Trade by Michael Lantz

An excellent essay by Niall Ferguson claims that increases in business regulation has contributed to a recent decline in economic freedom. He cites several studies, including the annual "Doing Business" report published by the World Bank that indicates government regulation of the business environment has increased noticeably the past few years. Such expansion of regulation has merely making it harder for entrepreneurs to engage in productive activity, resulting in relatively less prosperity.

In this he agrees with what I wrote several years ago in Chapter 17 of my book. Whenever the state intervenes in the economy, it benefits some and harms others. Legal privileges are given to those firms who find it easiest to abide by the regulation (indeed may have had some say in crafting the legislation).

When legal privileges are given to some sellers, factors are allocated away from their most valued uses. From the perspective of people in society, too few producers are in those industries where entry is hindered and too many are in those other industries where the value of production is lower. Resources are directed away from their higher valued and more efficient uses. Consequently, resources are wasted and fewer goods are produced with the same quantity of land, labor, and capital goods. People are left with fewer means with which to attain their ends so fewer ends are satisfied.

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