Regulation Is Central Planning

Command economies don’t work and government regulation follows the same principles
March 12, 2018 Updated: March 12, 2018

There was a time when many academics and members of the press in the West believed a Soviet-style command economy was the better system. After the Soviet bloc collapsed, these people still exist but find themselves in the minority—central planning was dead and buried.

And yet, when it comes to government regulation in the United States and other Western countries, there exist near unanimity that private sector activity needs to be regulated by the state and more is better than less.

This intellectual dichotomy is baffling, as government regulation is nothing else than central planning and suffers from the same warped incentive structure, even though the means of production remain in private hands.

As Nobel laureate F.A. Hayek pointed out, a command economy does not work because of two reasons. The most important one is that the bureaucrat who decides the allocation of resources can never have all the information necessary to make the right decision to service his constituents. Hayek called this the “local knowledge problem.”

While bureaucrats at lower levels of government still have a chance to meet and learn about their constituents, especially federal bureaucrats could never learn about the wishes and needs of millions of people. And this is assuming they care.

Because the second problem with central planning and bureaucratic power is corruption which means nothing less than the abuse of power vested in the state for private gain.

While corruption was rampant in communist countries because nobody could get anything done without special favor from well-placed apparatchiks, and the bureaucrats could line their pockets, this phenomenon is not unknown in Western countries on the local level especially when it comes to building permits and the federal level, when massive campaign contributions funneled to politicians often buy the right legislation irrespective of the benefit to the public.

President Barack Obama received $22.5 million in campaign contribution from the health sector and another $43.7 million from the finance, insurance, and real estate sector, where health insurance companies are included. Knowing this, is it a surprise that his signature initiative was forcing people to buy health insurance and subsidizing this with government money?

Although this is one of the more blatant and underreported “regulation for sale” instances in recent history, one doesn’t have to look far to find plenty of examples on both sides of the aisle.

Warped Incentives

Both of these issues are exacerbated by the fact that neither the communist bureaucrat nor the government regulator has the incentive to produce a good outcome for his constituents. If they make a mistake, they don’t lose their own money like a private business or individual would. In fact, they hardly even get fired.

Even defining a mistake becomes a rather vague exercise when the affected people or business don’t have any say in the matter and the only thing that counts is enacting what someone higher up in the communist hierarchy wanted to have done or what some elected politicians thought was a good idea at the time.

Politicians supposedly get punished by being voted out of office but even that seldom happens because regulatory blunders often affect only a minority in a very strong way or affect a majority in a very light way so they don’t notice the difference.

Obamacare, in this case, is a good example of where a majority was actually affected enough to use their votes to make sure a candidate would win who campaigned to repeal the act.

Allocation of Resources

The command economy and regulation incentives also don’t differ much when determining the allocation of resources.

First, neither the communist apparatchik nor the bureaucrat in a democracy can have enough information to decide for private individuals and businesses what is best for them and, again, this is assuming that they care.

In the case of the communist central planner, he decides which products are produced and where and how many, and he is supposed to know what millions of consumers are going to demand and at what price and how much. He is allocating labor and capital resources according to the central plan, which cannot possibly reflect the wishes of millions.  

The federal regulator has the same problem because he has to know the best way of producing a product or a service if he issues a regulation regarding a specific production process. Or he must know how many people need or want health insurance and at what price.

The fact of the matter is that he cannot know either and therefore prevents private businesses and individuals from making the right choices about what resources to allocate where. Like this, millions of hours are wasted on producing paperwork, and time and money is spent on complying with regulations rather than investing them in making better products.

The cost of regulation is also one of the biggest hurdles to new innovative companies coming into the market and this is why the most heavily regulated markets like health care and finance see the least innovation and the highest price increases.  

Both regulation and a command and control economy also operate with some sort of punishment system, where noncompliance is costly. Don’t produce what the apparatchik tells you? Off to Siberia.

Didn’t sign up for Obamacare? Pay a 2.5 percent penalty tax on household income or $695 per adult, at least that was the rule until the recent tax reform package canceled the penalty as part of President Donald Trump’s sweeping anti-regulation campaign.

And although there are worlds between the degree of the punishment, the principle is the same.

Power Corrupts

Many have heard the British politician Lord Acton’s saying “power tends to corrupt and absolute power corrupts absolutely,” and it’s worth repeating here.

At every point of the command economy process and the regulatory process, the incentives are skewed for the apparatchik, the bureaucrat, or the politician to abuse power to line their own pockets.

The story of the apparatchik is told easily and can be witnessed all the time in today’s China. They don’t make a lot of money but have the power to decide over projects undertaken by people with a lot of money. Case closed.

Politicians in the West also don’t make a lot of money, relatively speaking, but need to spend millions on their campaigns to get re-elected so they can keep their perks and privileges. Private businesses are happy to help in exchange for favorable regulation, of course.

The bureaucrat, on the other hand, can only remain in his position or get promoted if he maxes out his budgets or appears to be active in some way or another, which means enacting more regulation than necessary and spending more resources than necessary.

Western bureaucrats also receive their payoffs when they join private institutions with big compensation packages after their tenure is over. We see this most often in the financial sector with the SEC and big banks here in the United States but the same principle applies to all other industries and it is called the “revolving door.”

It is important to note here, that many people blame capitalism for this system but it does not resemble real capitalism in the slightest. Capitalism respects property and individual rights and therefore limits state interference in private business and the life of individuals.

This means that large corporations cannot protect their competitive position by buying political favors that punish smaller players. Smaller players are allowed to compete on a level playing field and if they are good they eventually outcompete the big incumbent.

In a real competitive market without much regulation, consumers vote with their money to force companies to produce the best products. In this system, the local knowledge problem and the corruption problem don’t exist.

Consumers know which products they want, and companies know better than the bureaucrats which ones to supply and how. By definition, there cannot be corruption because both consumers and producers are deciding over the use of their own resources and although the decision may not always be rational, they can do as they please.

Last but not least, the fact that producers and consumers have skin in the game, incentivizes them to make good decisions that are sustainable in the long run, or they will be taken out of the game because they run out of resources. This is the only regulation necessary.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Follow Valentin on Twitter: @vxschmid