PRODUCER INTERESTS VS. THE PUBLIC INTEREST: THE ORIGIN OF
DEMOCRATIZED PRIVILEGE

By RICHARD M. EBELING

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 his 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 corner
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 we reverse 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 battle
field, 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 feel morally correct in taking a sum of
money out of another's pocket without his consent simply
because he considered our price for our products or labor
services too high.

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!

Professor Ebeling is the Ludwig von Mises Professor of
Economics at Hillsdale College, Hillsdale, Michigan, and also
serves as vice-president of academic affairs for The Future of
Freedom Foundation, P.O. Box 9752, Denver, CO 80209.

------------------------------------------------------------
From the March 1991 issue of FREEDOM DAILY,
Copyright (c) 1991, The Future of Freedom Foundation,
PO Box 9752, Denver, Colorado 80209, 303-777-3588.
Permission granted to reprint; please give appropriate credit
and send one copy of reprinted material to the Foundation.
