Though he’s best known for his powerful metaphor of “the invisible hand,” philosopher and proto-economist Adam Smith saw a role for government in setting market conditions.
The founding father of economic liberalism believed government force was necessary to structure the conditions for a market economy, to create the conditions where people could trade freely. Confidence in trade required a legal system that could reliably punish violation of property rights, to enforce the terms of voluntarily entered contracts, and to adjudicate disputes. People are generally only willing to work hard to earn money and accumulate property if they can be reasonably assured their property won’t then be immediately stolen. Citizens empower government with a monopoly on enforcing property rights by force. Maintaining property rights involves punishing theft, fraud, and extortion, and to a lesser extent, poaching and trespass.
Smith also believed certain limited interactions between government actors and market players maximized the amount of wealth that could be generated by the individuals living under it. The key was to limit oligarchs’ ability to restrict ordinary people’s ability to improve their lives and communities by changing careers, acquiring skills, and providing services.
In his best-known work The Wealth of Nations, Smith condemns a long series of disastrous partnerships between monopoly interests and government interventionists.
But Smith was no friend to corporations or professional guilds of his day, memorably remarking, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
The backroom cabal is an article of faith Adam Smith shares with his most left-learning critics, including political and literary iconoclast Noam Chomsky. One scholar paraphrased, “the rich will do their utmost to prevent encroachment upon their wealth, and any reduction in the power it gives them.”
What Smith saw in his detailed study of the British and French governments was this same self-interest at work among bureaucrats and political entrepreneurs, willing to do whatever they must to remain in power, and to maintain the wealth and advantages that power accumulates.
In Mercantilist Europe, and in the ever-murkier swamps of Washington, DC, cozy relations between industry and government result in such price-fixing contrivances and anti-public conspiracies being issued by regulation as well.
Under the mercantilist system and modern special-interest lobbying, the currently wealthy and powerful derive ever more wealth and power by designing a system to work just for them. More precisely, lobbying and special interest contributions to politicians’ campaigns allow the currently wealthy to ensure all regulations passed either benefit or exempt them.
Lobbying is cost-effective because it is relatively inexpensive to provide, even lavishly, for the self-interested happiness to a few regulators and Congressional committee members. To provide for the happiness of the many consumers, a corporation must innovate, cut costs, or open new markets, all of which lower profit margins.
Competitive markets with low costs of entry mean businesses can’t raise prices without offering extra value to the consumer. Competition — even potential competition that would leap into the market for the right minimum price — keeps prices low. If an industry leader, or even a few large brands, “conspired to raise prices,” a startup would quickly gain market share. Market leaders, instead, protect themselves from competition and creative destruction by blocking new competitors through regulation.
In 2011, GE, Philips, and Sylvania manufactured more incandescent light bulbs than all other companies combined. But lightbulbs were 100-year-old technology with low material costs and little difference between manufacturers, so store brands and imports were flooding the market with indistinguishable 25-cent bulbs.
Alternative bulbs, now familiar as corkscrew-shaped compact fluorescents, use less energy and last longer for certain uses. Fluorescent lights were common in brightly-lit places where energy savings paid off and bulbs were changed very infrequently, like grocery stores and office buildings. But making them ‘compact’ wasn’t the barrier to practical household use: fluorescents give off tinted light, have to ‘warm up’ when switched on, and contain toxic mercury gas. Most people don’t live in the same home long enough to realize 20-year energy savings, and taking $20 light bulbs with us when we move is impractical. Consumers didn’t want CFLs even for a price comparable to traditional bulbs, and they were vastly more expensive.
CFLs had some remarkable advantages, however, for Philips, Sylvania, and GE. Higher technical barriers to engineering and manufacturing (compared to very simple traditional bulbs) and more expensive materials kept potential competitors out of specialty bulbs. But the barriers weren’t high enough that brands could hike prices, even for existing users of fluorescents, without inviting a start-up into the game. Here, where leading brands faced no serious competition, was where they wanted to ‘compete’ for customers.
Philips Electronics formed a coalition with environmental groups, including the Natural Resources Defense Council, to lobby for “higher energy efficiency standards” — special regulation to ban traditional bulbs and force consumers to buy higher-cost bulbs that only the three market giants could make. Rather than offer consumers free choice in which bulbs made economic sense for their own homes, corporate interests authored regulation to choose for us.
Regulation passed by Congress, and worse, by unaccountable bureaucratic agencies, is subject to manipulation by those with the most to gain. A rapidly expanding lobbying industry exists solely to influence policymakers, and the still-shadowier public affairs and policy fields disguise that corporate influence as public good.
Such restrictions are rarely influenced by the priorities and relative values of average citizens. The costs of lobbying are simply too high for us, and the returns too small. Even if we were successful, the average American stands to gain less than $100 annually by having cheaper light bulbs available — major manufacturers can gain billions in market share by removing consumer choice.
No human, whether employed by the federal government or otherwise, possesses the cognitive empathy or emotional imagination to make good choices for hundreds of millions of citizens. Lobbying to limit access to lightbulbs is costly and frustrating, but it is trivial when compared to the catastrophes of mismanaged veterans’ care, a hogtied medical innovation, the disastrous housing bubble, or a lengthy foreign occupation.
Regulatory capture and rent-seeking trace for us explicitly the modern American mercantilists’ self-interest in limiting trade and replacing individual consumer choices with regulatory force. Licensing and tariffs, permits and inspections and certifications: elites have found many names for the permission we must seek to operate businesses and trade as we wish.
The post DC’s Dim-Witted Lightbulb Moment was first published by the American Institute for Economic Research (AIER), and is republished here with permission. Please support their efforts.