"Regulating" Business - the Good and the Bad

Laissez-faire capitalism is hardly understood today. At its mention, a usual response centers on the sentiment that you’ve got to have government. You’ve got to have rules and laws, otherwise you’ll have chaos and anarchy. You can’t just let people, especially business people, “run wild” and do whatever they feel like doing. “Running wild” sums up what “laissez-faire” means to most people. This is a thoroughly false understanding of it. (For a primer on the basics of laissez-faire capitalism, I refer you to The Capitalism Site. For a moral defense, I refer you to the works of Ayn Rand, especially Atlas Shrugged, and to the Ayn Rand Center for Individual Rights.)

Of course you have to have rules of conduct and laws. No civil society can exist for long without a government. The confusion arises not on the question of whether or not you need government, but on what political principles should govern the conduct of a government, its laws, and its enforcement of those laws.

The confusion is exemplified in an op-ed by a professional arbitrator, Barry Goldman, published in the Los Angeles Times. In this article, Mr. Goldman asserts that the interests of the seller of a product or service necessarily conflict with that of the buyer, leading to the end result of a fraudulent or at least less than optimum outcome for the buyer. “You are not their friend;” says Mr. Goldman, “you are their customer. They are not the same.”

He then goes on to cite three ways to protect yourself against what he seems to be claiming is rampant unscrupulous behavior on the part of producers. The first is not worth commenting on. The second exposes the source of the confusion. Mr. Goldman encourages us to support government regulation of business. But, since he never defines just what he means by “regulation”, he conflates two separate and distinct issues – the prosecution of people who violate the rights of others, and the bureaucratic shackling of people who did not.

Let me start with an analogy.

Suppose that as a person of Italian decent, I relayed the following story to you:

I was sitting in the living room of my home with my wife, when there came a knock on my front door. When I opened it, I was confronted with two officials from the district attorney’s office, who declared that they would search my premises and inspect my personal files and belongings. This will, I am informed, become a regular occurrence with which I must legally comply, or face the penalties of fines or jail.

Further, they declared that from here on new regulations required that I submit periodic documentation, including documentation that can be “requested” on demand by government bureaucrats. This documentation must contain information as to my whereabouts, my personal associations, my career contacts, etc. I am also told that I am hereby forbidden to act in ways not allowed by government bureaucrats, or be required to act according to their rules, regardless of my own wishes or judgements. Their edicts carry the force of law.

When I ask what this is all about, I am told that because of recent illegal Mafia activity, I was to submit to extensive new government regulations for the purpose of monitoring the activities of all Italians. When I protest that I am a law-abiding citizen who has nothing to do with the Mafia and have done nothing wrong – I have violated no one’s rights and have initiated force against no one – I am told that this doesn’t matter, because I am held to a standard of presumption of guilt by virtue of my being Italian. This is necessary, I am told, because if Italians remain “deregulated” – to paraphrase Barry Goldman - you get Al Capone or Joe Gotti, the Genevese crime family, dead bodies swimming with the fishies, and worse.

Would you be outraged? I used this analogy because I am Italian. What if I substituted Italian with blacks, Jews, Orientals, or some other ethnic group. Would you also be outraged? Or how about some other group such as teachers, Protestants, or people with red curly hair? Still outraged?

How about businessmen? They are the Italians in my story. Mr. Goldman calls for regulation of business because “That's what government is for” and “if you reduce [its] regulation you get … Bernie Madoff, Enron, E. coli and worse.” (The supreme irony here is lost on Mr. Goldman. Madoff, Enron, and the occasional food contamination instance all occurred under an already heavily regulated business environment.)

But exactly what is meant by government regulation of business? The terms must be defined. First of all, the proper function of government (“what government is for”) is to protect individual rights – which means, to protect the individual against the initiation of physical force (i.e., from criminals). This includes prosecuting crooks, including fraudsters. To commit fraud a la Bernie Madoff amounts to the seizure of another’s property under false pretenses, a form of theft not essentially different from armed robbery. His victims are physically separated from their property without receiving, in exchange, the promised benefits in what they were led to believe were honest contractual agreements. If by regulation Mr. Goldman means the prosecution of fraud under a regime of objective criminal laws, then I am in full agreement.

So, there is no argument against Mr. Goldman’s call to “punish crooks”. This type of “regulation”, which belongs to the field of criminal law, is a valid governmental function that is perfectly consistent with laissez-faire capitalism. But Mr. Goldman’s line of thinking blurs the distinction between appropriate criminal law and non-criminal regulations – i.e., restrictions on the freedom of businessmen in the absence of rights violations. There is a crucial difference between governmental regulation that monitors fraud and [that which] punishes crooks.

The government’s prosecutorial powers are governed by the principle “innocent until proven guilty”. To “punish crooks”, the state must bring charges based upon a body of evidence, then prove its case in a court of law under an extensive array of objective rules and criteria. Suspicion that a crime has actually taken place is the starting point.

But Mr. Goldman’s advocacy of regulation to “monitor fraud” is based upon the opposite principle – the principle of presumption of guilt and it’s sinister companion, preemptive law. There is no suspicion or evidence of wrongdoing, yet the business and its owners are to be shackled under coercive rules that presume that criminal activity may occur. Neither principle has any place in a free society, and neither do any regulations based upon those principles. The idea that, left free to think and act upon his own judgement in the pursuit of profits and money, businesses will defraud and loot and poison is a profoundly un-American and unjust idea. It amounts to a declaration that men are incapable of freedom – the right to think and act upon one’s own judgement in pursuit of one’s own interest, goals, and happiness. This is an attack on America’s founding principles, the views of the Founding Fathers, common sense, and experience.

(Of course, business is not the only segment of society that is under the state’s gun, although it is the foremost victim. Government regulation, which began as controls on business, has grown like a cancer and is reaching into our personal lives. So the issue is much broader than the subject here. We are told what foods to eat, which medicines to take, what schools our children must attend – the list is endless and growing. Once we accepted the precedent that government can regulate some area of our lives, we accepted the premise that government can regulate any area of our lives. One can witness the results all around us, and deduce where it is all leading us.)

Mr. Goldman seems to think that businesses thrive by doing bad things to their customers. He apparently discounts the possibility that good businessmen will arise to draw customers looking for quality, affordability, and honesty. They’re all presumed bad, and must be “monitored” to prevent what monitoring failed to prevent – “Bernie Madoff, Enron, E. coli and worse.” Well, Bernie Madoff and Enron were cozy with the regulators. And now, Bernie Madoff is in jail. Enron is no more, but we are left with the thousands of companies that didn’t cook the books burdened by Sarbanes-Oxley. SarBox, as it is called, was passed after the Enron scandals. It is an array of very costly new (and often redundant) regulations that were imposed on the innocent because of the wrongdoing of the few. Such is the nature of government business regulation.

As for his E. coli example, just ask Chi-Chi’s if poisoning your customers is a good business model for food companies.

Isolated instances of actual wrongdoing are the usual excuse for imposing on all businesses the kinds of shackles I’d had to put up with in my fictional story. Is this justice?

“Put simply,” says Mr. Goldman, “your stockbroker is not motivated by a desire to see that your kids have money for college. He is motivated by a desire to see that his kids have money for college.” Put simply, though, putting your kids through college is the path to putting his kids through college. A good businessman knows that his bread is buttered by satisfied customers. To be precise, a good businessman is not primarily motivated by money as such, but on doing the best he can at his chosen job. This is good for his customers, and leads to the attainment of his personal goals.

The third example is key, and in fact contradicts number two. In fact, the consumer “skepticism” that Mr. Goldman encourages is undercut by the false sense of security engendered by government regulators. He says, “The third way is to remember that the best defense against fraud is skepticism.” In other words, think. The thinking consumer is a key part of a free market. The idea that government bureaucrats can somehow supplant millions of thinking, discriminating, “skeptical” consumers is absurd and doesn’t work.

So, Mr. Goldman seems to be plugging two mutually exclusive ideas – that preemptive government regulation is necessary to protect us from potential fraud, because we aren’t capable of judging the products and services that business offers, and that government regulation is not our best defense against fraud, because we are.

Of course, the “consumer” is also a producer (leaving aside the issue of wealth redistribution). That stockbroker is also the consumer of bakery products, dental services, and so on. Mr. Goldman seems to be saying that the stockbroker who slyly chisels his clients becomes innocently clueless when he spends his own money.

There is an obscene assumption underlying the points Mr. Goldman is trying to make, which must be expunged if capitalism is to survive. The subtitle of Mr. Goldman’s article reads:

Businesses are in business to make money. Benevolence is not the guiding principle.

This implies a horrendous implication – that making money is dishonorable. “To make money”, properly understood, is to produce something of value to someone who is willing to pay for it with money that he made in the same fashion. The transaction is called a voluntary trade, in which each participant is left better off and no one received the unearned. An act of benevolence – if defined as the granting of the unearned by one to another – is indeed certainly not the aim of the businessman. The businessman’s aim is the mutually beneficial and enriching transaction between two producers offering value for value. Far from being a vice requiring preemptive government regulation or “monitoring for fraud”, the moneymaking aim of the businessman is the height of life-giving virtue: virtues like thinking independently, productiveness, honesty, long-term planning, and integrity. The virtues that undergird moneymaking, and give value to those pieces of paper in your wallet, are the virtues that make benevolence possible. To invert the two is a moral perversion.

Every act of material benevolence depends on and is preceded by the act of making money. To make money, in fact, is benevolence of the highest kind because it represents the product of human virtue. Until and unless we recognize that making money is the primary virtue, because it subsumes all of the virtues that make life-promoting production possible, we will continue to slide further toward the total regulatory state.

A free market doesn’t guarantee that everyone will act rationally or honestly. What it does allow is for good behavior to be rewarded and bad to be penalized. A free market thus is a great teacher. The best way is constantly demonstrated by people who practice it. If the government sticks to its job of protecting rights by punishing fraud and enforcing contracts, and otherwise leaves people free from expensive or silly or burdensome or harassing regulations, the best companies will be free to thrive while the bad are forced to improve their ways or fall by the wayside. But all people, including businessmen, must be free to think independently, act upon their own judgement in pursuit of their own rational self-interest, and contract freely with each other to advance toward his own goals. That is how both seller and buyer can concentrate on putting his own children through college. The mutual pursuit of each participant's different self-interest does not lead to conflicts in honest and mutually beneficial trades – the very kinds that flourish in a free market in which the government properly enforces those contracts.

When left free, the market constantly weeds out irrational, short-term oriented, incompetent and dishonest economic players. This leaves the rational, long-term oriented, competent, and honest to flourish and reap their rewards. The government, a necessary good in a laissez-faire capitalist society, should stick to vigorous pursuit of fraud, breech of contract, and other rights violating behavior. All regulations that seek to preempt rights-violating behavior, before any rights-violations have occurred, are unjust and should be repealed. That would eliminate “regulations [that] are silly or pointless and … onerous, burdensome and intended solely to harass” – the very thing Barry Goldman laments.