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Regulation and the Stock Market

August 16, 2002

No private enterprise, whatever its size, can ever become bureaucratic as long as it is entirely and solely operated on a profit basis. --Ludwig von Mises, Liberalism

The Dow Jones Industrial Average would be several thousand points higher, were it not for government regulation that causes corporations to divert immeasurable resources to pandering to government regulators rather than pursuing profits. Since a major ingredient of stock prices is expected profitability, regulation destroys stock values.

Regulation has transformed American corporations from entrepreneurial enterprises to sluggish bureaucratic behemoths. As Ludwig von Mises wrote in Liberalism: In the Classical Tradition (p. 102):

"The bureaucratization of privately owned enterprises that we see going on about us everywhere today is purely the result of interventionism, which forces them to take into account factors that, if they were free to determine their policies for themselves, would be far from playing any role whatsoever in the conduct of their business. When a concern must pay heed to the political prejudices and sensibilities of all kinds in order to avoid being continually harassed by various organs of the state, it soon finds that it is no longer in a position to base its calculations on the solid ground of profit and loss."

Mises wrote that passage in 1962, when government was minuscule compared to today’s Leviathan state. The budgets for federal regulatory agencies alone have more than tripled in just the past 20 years; there are 10,000 more federal regulators now than there were in 1980.

A blizzard of government regulation has transferred much of the decision-making authority of private enterprise to government bureaucrats. The courts and regulatory agencies have eviscerated three of the most important ingredients of capitalism: private property, freedom of contract, and freedom of association. Genuinely private property rights barely exist any more in the corporate world, thanks to pervasive government regulation. Consider just a few examples of relatively recent laws that interfere with private property, freedom of contract, and freedom of association:



Law

Property Rights Obstruction

1974 Warranty Improvement Act Allows feds to mandate consumer warranties
1975 Energy Policy and Conservation Act Greater government control over energy

1976 Hart-Scott-Rodino Antitrust Amendments

Requires companies to notify Department of Justice of planned mergers
1976 Toxic Substances Act Restricts use of chemicals
1977 Energy Act Created the Department of Energy
1977 Surface Mining Control and Reclamation Act Federalizes regulation of mining
1978 Age Discrimination Act Federalizes the retirement age
1980 Superfund Act Socializes cost of environmental cleanups
1984 Insider Trading Sanctions Act Criminalizes securities trading with "nonpublic information," whatever that is
1986 Superfund Amendments Requires companies to "report inventories emissions" to the government
1986 Age Discrimination Act Further federalizes employment policy by abolishing 
1990 Clean Air Act Amendments Broadens powers of the EPA
1990 Americans with Disabilities Act Defines over 70 new categories of "disability," leading to myriad absurdities such as forcing strip clubs to have wheel chair access for "disabled" strippers
1990 Pollution Prevention Act Ludicrously named law mandates mountains of additional paperwork on corporations
1991 Civil Rights Act Allows for further legal discrimination in employment and mandates more paperwork
1993 Family and Medical Leave Act Gives employees an "entitlement" to take time off with job reinstatement "rights
Source:  Murray Weidenbaum, Business and Government in the Global Marketplace (Englewood Cliffs, N.J.: Prentice Hall, 1995), pp. 48-52.

These are just a few examples of how the federal government (not to mention state and local governments) has relentlessly granted itself more and more decision-making powers over corporations. Consequently, corporations must spend inordinate amounts of time complying with government paperwork, rules, and regulations instead of concentrating on making better and cheaper products. Profits are reduced, and stock prices are subsequently lower than they would otherwise be. The instability of property rights caused by government regulation leads investors to be much less certain about the value of the contracts they enter into, since rules and regulations are constantly changing.

As a rule, most of this regulation produces very little, if any, benefit to the consumer while imposing enormous cost burdens on business and consumers. That is the conclusion of Nobel laureate Ronald Coase, who for many years edited the prestigious Journal of Law and Economics, published by the University of Chicago Law School. After publishing hundreds of peer-reviewed studies of the effects of regulation, Coase concluded that:

"There have been more serious studies made of government regulation of industry in the last fifteen years or so, particularly in the United States,than in the whole preceding period.  These studies have been both quantitative and nonquantitative . . . .  The main lesson to be drawn from these studies is clear:  they all tend to suggest that the regulation is either ineffective or that when it has a noticeable impact, on balance the effect is bad, so that consumers obtain a worse product or a higher-priced product or both as a result of regulation.  Indeed, this result is found so uniformly as to create a puzzle:  one would expect to find, in all these studies, at least some government programs that do more good than harm." (Ronald Coase, "Economists and Public Policy," in J. F. Weston, editor, Large Corporations in a Changing Society (New York Univ. Press, 1975).

The cost of diverting a corporation’s managerial workforce from producing better-quality and less-expensive products to catering to the whims of regulators is impossible to measure precisely, but it is bound to be huge. 

Universities with schools of business rarely teach much of anything about entrepreneurship, but offer numerous courses on "business law," "administrative law," and "corporate social responsibility," which are all about how to become a corporate bureaucrat who ignores profit-making and panders to the state instead. Teaching about enterepreneurship is so rare that Babson College in Massachusetts has gained a unique reputation among schools with graduate business education simply  because it emphasizes the study of entrepreneurship rather than corporate bureaucracy. Even accounting is taught in business schools according to the dictates of the Securities and Exchange Commission.

More and more top business executives have backgrounds as lawyers, lobbyists, or publicists, as opposed to engineers and genuinely skilled managers, because of their "expertise" in dealing with or manipulating the political/regulatory system. 

With so much regulation, there is no free speech in the business world, either. Very few business people will speak out against government regulation for fear of retribution by the regulators. In fact, they will often support harmful and counterproductive regulations for fear that they may get something worse if they don’t. As Paul Weaver wrote in The Suicidal Corporation, many corporate executives delude themselves into thinking that if they support an onerous and economically destructive regulation, they will win points with their regulatory and political masters while using their "skills" as lobbyists to get a loophole for themselves. Of course, it rarely turns out that way, but many corporate executives nevertheless continue to delude themselves. 

American corporations are so intimidated by regulators and politicians that they give away billions of dollars to activist groups that lobby for even more interventionism. For more than a decade, the Capital Research Center in Washington, D.C., has studied corporate philanthropy and has found that for every one dollar American corporations donate to  pro-free-enterprise organizations like the Mises Institute, they donate three dollars to anti-free-enterprise organizations. Some of them think they are buying the good graces of regulators, but they are only giving away the "rope" that is being used to "hang" them economically. Others are simply the victims of extortion, as Ken Timmerman argues in his new book, Shakedown

German Economic Minister Ludwig Erhard created the postwar German "economic miracle" by deregulating the German economy literally overnight. A similar economic miracle would occur in the U.S. if we would only abolish the FTC, EPA, OSHA, SEC and the Departments of Energy and Labor--for starters.


Thomas DiLorenzo is a professor of economics in the Sellinger School of Business and Management at Loyola College in Baltimore, and is senior fellow of the Mises Institute. Dr. DiLorenzo is the author of The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War (Forum/Random House, 2002). See his Mises.org Articles Archive, and send him MAIL. Also, listen to Dr. DiLorenzo's recent book discussion on The Real Lincoln (in MP3 format).


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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