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Producer Interest vs. The Public Interest: The Origin of Democratized Privilege

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In The Wealth of Nations, Adam Smith constructed some of the most devastating arguments against the then-prevailing system of economic policy — mercantilism. In practically every country in Europe, governments regulated, controlled and planned the economic activities of their subjects. In France, the regulations were so detailed that they specified how many stitches should be used in attaching a button to a shirt. In Austria, the state limited the period in which people could be in mourning so that the dye-makers would not lose the business of selling colored cloth.

Adam Smith demonstrated that rather than bringing prosperity, mercantilism had retarded economic progress. Governments, he argued, had neither the wisdom nor the ability to plan the economic affairs of a multitude of people. If governments primarily limited themselves to the protection of life, liberty and property, Smith said, men could be trusted to manage their own affairs. And when left to do so in an open, competitive market the natural forces of supply and demand would generate a rising prosperity for all. Free men in free markets were the ultimate source of the wealth of nations.

But having presented the case for free markets, Adam Smith was not optimistic about the future. To expect that a regime of free trade would ever be established was, he said, as likely as the establishment of a utopia. “Not only the prejudices of the public,” he despaired, “but what is much more unconquerable, the private interests of many individuals irresistibly oppose it.” Governments had turned over many industries and trades to private monopolies, whose interests were clearly opposed to open competition. Special-interest groups, with their government-bestowed privileges, were too strong ever to be defeated.

Within one lifetime, however, Smith was proven to be wrong. By the middle of the 19th century, England was a free-trade nation and many other nations were following its path.

But in our century, governments once again use their power to regulate the marketplace, protect various industries from foreign and domestic competition, and limit entry into markets through licensing procedures. Mercantilism has returned; and it has returned stronger than ever. The older mercantilism was a system that benefited a few privileged producers at the expense of most of the society. But in our era of democratic government, it is the many who lobby and politick in the political arena. Almost every group in society now does battle for a piece of the economic pie — not through open competition for consumer business, but through the political process to gain a greater share by manipulating the market. Ours is the era of democratized privilege.

Why have free societies all around the world become battlegrounds for political privilege and economic plunder?

The answer is to be found in one of Adam Smith’s most famous ideas: the division of labor. “The division of labor,” Smith explained, “so far as it can be introduced, occasions in every art a proportionate increase of the productive powers of labor.” By specializing in various lines of production, the members of society are able to improve and increase their skills and efficiency to do various things. Out of these productive specializations comes an increased supply of all kinds of goods and services. The members of society trade away the large quantities of each commodity they respectively produce for all the other goods offered by their fellows in the market arena.

Society’s members give up the independence of economic self-sufficiency for the interdependence of a social system of division of labor. But the gain is a much higher standard of living than any one of them could ever hope to attain just by using his own capabilities to fulfill all his wants and desires through his own labor.

Each individual is now dependent upon others in the society for the vast majority of the goods and services he wishes to use and consume. But in a competitive market setting, this works to this advantage. Sellers vie with one another for his consumer business.

They underbid each other and offer him attractively lower prices; they devise ways to produce and market new and improved products. As consumer, the individual is the master of the market whom all sellers must serve if they are to obtain his business.

Viewed from the perspective of the consumer, the competitive market serves the public interest. The resources of society are effectively applied and put to work to satisfy the various wants and desires of the individuals of that society. The products which are manufactured are determined by the free choices of all of the demanders in the marketplace. Production serves consumption.

But the market looks totally different from the perspective of the individual producers. They, too, are dependent upon the market: they are dependent upon buyers willing to purchase what they have for sale. While the market serves every one as a consumer, no one can be a consumer unless he has been successful as a producer. And his success as a producer depends upon his ability to market and sell his products or to find willing buyers for his particular labor skills and abilities.

As a consequence, for each producer the price of his own product or labor service tends to be more important than the prices of all of the multitude of consumer goods he might purchase. Because unless he earns the necessary financial wherewithal in his producer role, he cannot be a consumer.

Being the consumer of many things, but the producer of usually one thing, each seller tends to view competition as a financial threat to his position in the market as well as to his specific share of the market. The incentive for each producer, therefore, is to want to limit entry into his comer of the market, or to reduce the amount of competition currently existing in his industry or profession.

The only avenue for limiting competition, however, is the government. Only the government has the ultimate authority to permanently prohibit those who think they could do better in the market and who desire to try. Producers, therefore, have incentives to use portions of the resources and wealth at their disposal in the political arena to gain or protect the market position that they feel themselves unable to obtain or maintain in an open field of competition. And as long as the costs of acquiring political privileges and protections from the government to secure profits are less than the costs of earning profits by making better and less expensive products, producers will resort to lobbying and politicking to achieve their ends.

The dilemma for the society is that when producers lobby in the political process for profits via government privilege, this results in a using-up of resources that otherwise could have been invested in making products desired by consumers. Furthermore, existing producers, sitting behind their walls of political protections and privileges, have fewer incentives for making product improvements. Therefore, the normal, competitive forces that over time would result in better and greater supplies of goods are retarded.

When government is viewed as the means for acquiring income “entitlements,” job “guarantees” and “fair” (rather than open) markets, producer interests will always win over the public, i.e., consumer, interest Because most individual sellers will view that they have more to lose from competition as producers than they have to gain from competition as consumers.

Unfortunately, the pursuit of producer-protection Policies through government has a perverse outcome: the society as a whole is poorer than it otherwise would be. Every privilege and protection raises the prices, narrows the variety and lowers the quality of the goods available to all of us as consumers.

How, then, do were verse our age of democratized privilege, in which politics is reduced to a free-for-all for mutual plunder and economic power? The answer is not an easy one nor one that offers a “quick fix.”

A turn from our era of neo-mercantilism, with its philosophy of privileges for all who can win on the political battlefield, requires a moral revolution on the part of each of us. It requires each and every one of us to apply the rules of personal conduct to the arena of politics.

In our personal conduct, few of us would feel morally right in forcibly preventing a buyer from leaving our respective business establishment until he paid the price we wanted him to pay. Nor would we feet morally correct in taking a sum of money out of another’s pocket without his consent simply because he wasn’t willing to pay the price or wage we insisted upon.

Yet this is done all of the time through the political process. Not until we come to accept that the rules of morality that apply in personal conduct must be the same rules we follow in politics will the age of democratized privilege and plunder come to an end. And, alas, we seem a long way off from seeing that day!

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).