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<p>PRODUCER INTERESTS VS. THE PUBLIC INTEREST: THE ORIGIN OF
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DEMOCRATIZED PRIVILEGE</p>
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<p>By RICHARD M. EBELING</p>
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<p>In The Wealth of Nations, Adam Smith constructed some of the
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most devastating arguments against the then-prevailing system
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of economic policy--mercantilism. In practically every country
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in Europe, governments regulated, controlled and planned the
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economic activities of their subjects. In France, the
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regulations were so detailed that they specified how many
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stitches should be used in attaching a button to a shirt. In
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Austria, the state limited the period in which people could be
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in mourning so that the dye-makers would not lose the business
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of selling colored cloth.</p>
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<p>Adam Smith demonstrated that rather than bringing prosperity,
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mercantilism had retarded economic progress. Governments, he
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argued, had neither the wisdom nor the ability to plan the
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economic affairs of a multitude of people. If governments
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primarily limited themselves to the protection of life,
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liberty and property, Smith said, men could be trusted to
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manage their own affairs. And when left to do so in an open,
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competitive market, the natural forces of supply and demand
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would generate a rising prosperity for all. Free men in free
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markets were the ultimate source of the wealth of nations.</p>
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<p>But having presented the case for free markets, Adam Smith was
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not optimistic about the future. To expect that a regime of
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free trade would ever be established was, he said, as likely
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as the establishment of a utopia. "Not only the prejudices of
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the public," he despaired, "but what is much more
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unconquerable, the private interests of many individuals
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irresistibly oppose it."</p>
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<p>Governments had turned over many industries and trades to
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private monopolies, whose interests were clearly opposed to
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open competition. Special-interest groups, with their
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government-bestowed privileges, were too strong ever to be
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defeated.</p>
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<p>Within one lifetime, however, Smith was proven to be wrong. By
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the middle of the 19th century, England was a free-trade
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nation and many other nations were following its path.</p>
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<p>But in our century, governments once again use their power to
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regulate the marketplace, protect various industries from
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foreign and domestic competition, and limit entry into markets
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through licensing procedures. Mercantilism has returned; and
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it has returned stronger than ever. The older mercantilism was
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a system that benefited a few privileged producers at the
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expense of most of the society. But in our era of democratic
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government, it is the many who lobby and politick in the
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political arena. Almost every group in society now does battle
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for a piece of the economic pie--not through open competition
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for consumer business, but through the political process to
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gain a greater share by manipulating the market. Ours is the
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era of democratized privilege.</p>
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<p>Why have free societies all around the world become
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battlegrounds for political privilege and economic plunder?</p>
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<p>The answer is to be found in one of Adam Smith's most famous
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ideas: the division of labor. "The division of labor," Smith
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explained, "so far as it can be introduced, occasions in every
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art, a proportionate increase of the productive powers of
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labor." By specializing in various lines of production, the
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members of society are able to improve and increase their
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skills and efficiency to do various things. Out of these
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productive specializations comes an increased supply of all
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kinds of goods and services. The members of society trade away
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the large quantities of each commodity they respectively
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produce for all the other goods offered by their fellows in
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the market arena.</p>
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<p>Society's members give up the independence of economic self-sufficiency for the interdependence of a social system of
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division of labor. But the gain is a much higher standard of
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living than any one of them could ever hope to attain just by
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using his own capabilities to fulfill all his wants and
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desires through his own labor.</p>
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<p>Each individual is now dependent upon others in the society
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for the vast majority of the goods and services he wishes to
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use and consume. But in a competitive market setting, this
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works to his advantage. Sellers vie with one another for his
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consumer business.</p>
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<p>They underbid each other and offer him attractively lower
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prices; they devise ways to produce and market new and
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improved products. As consumer, the individual is the master
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of the market, whom all sellers must serve if they are to
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obtain his business.</p>
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<p>Viewed from the perspective of the consumer, the competitive
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market serves the public interest. The resources of society
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are effectively applied and put to work to satisfy the various
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wants and desires of the individuals of that society. The
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products which are manufactured are determined by the free
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choices of all of the demanders in the marketplace.
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Production serves consumption.</p>
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<p>But the market looks totally different from the perspective of
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the individual producers. They, too, are dependent upon the
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market: they are dependent upon buyers willing to purchase
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what they have for sale. While the market serves every one as
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a consumer, no one can be a consumer unless he has been
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successful as a producer. And his success as a producer
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depends upon his ability to market and sell his products or to
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find willing buyers for his particular labor skills and
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abilities.</p>
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<p>As a consequence, for each producer the price of his own
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product or labor service tends to be more important than the
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prices of all of the multitude of consumer goods he might
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purchase. Because unless he earns the necessary financial
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wherewithal in his producer role, he cannot be a consumer.</p>
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<p>Being the consumer of many things, but the producer of usually
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one thing, each seller tends to view competition as a
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financial threat to his position in the market as well as to
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his specific share of the market. The incentive for each
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producer, therefore, is to want to limit entry into his corner
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of the market, or to reduce the amount of competition
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currently existing in his industry or profession.</p>
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<p>The only avenue for limiting competition, however, is the
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government. Only the government has the ultimate authority to
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permanently prohibit those who think they could do better in
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the market and who desire to try. Producers, therefore, have
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incentives to use portions of the resources and wealth at
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their disposal in the political arena to gain or protect the
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market position that they feel themselves unable to obtain or
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maintain in an open field of competition. And as long as the
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costs of acquiring political privileges and protections from
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the government to secure profits are less than the costs of
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earning profits by making better and less expensive products,
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producers will resort to lobbying and politicking to achieve
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their ends.</p>
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<p>The dilemma for the society is that when producers lobby in
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the political process for profits via government privilege,
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this results in a using-up of resources that otherwise could
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have been invested in making products desired by consumers.
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Furthermore, existing producers, sitting behind their walls of
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political protections and privileges, have fewer incentives
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for making product improvements. Therefore, the normal,
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competitive forces that over time would result in better
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and greater supplies of goods are retarded,</p>
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<p>When government is viewed as the means for acquiring income
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"entitlements," job "guarantees" and "fair" (rather than open)
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markets, producer interests will always win over the public,
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i.e., consumer, interest. Because most individual sellers will
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view that they have more to lose from competition as producers
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than they have to gain from competition as consumers.</p>
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<p>Unfortunately, the pursuit of producer-protection policies
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through government has a perverse outcome: the society as a
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whole is poorer than it otherwise would be. Every privilege
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and protection raises the prices, narrows the variety and
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lowers the quality of the goods available to all of us as
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consumers.</p>
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<p>How, then, do we reverse our age of democratized privilege, in
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which politics is reduced to a free-for-all for mutual plunder
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and economic power? The answer is not an easy one nor one that
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offers a "quick fix."</p>
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<p>A turn from our era of neo-mercantilism, with its philosophy
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of privileges for all who can win on the political battle
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field, requires a moral revolution on the part of each of us.
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It requires each and every one of us to apply the rules of
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personal conduct to the arena of politics.</p>
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<p>In our personal conduct, few of us would feel morally right in
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forcibly preventing a buyer from leaving our respective
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business establishment until he paid the price we wanted him
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to pay. Nor would we feel morally correct in taking a sum of
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money out of another's pocket without his consent simply
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because he considered our price for our products or labor
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services too high.</p>
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<p>Yet this is done all of the time through the political
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process. Not until we come to accept that the rules of
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morality that apply in personal conduct must be the same rules
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we follow in politics will the age of democratized privilege
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and plunder come to an end. And, alas, we seem a long way off
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from seeing that day!</p>
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<p>Professor Ebeling is the Ludwig von Mises Professor of
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Economics at Hillsdale College, Hillsdale, Michigan, and also
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serves as vice-president of academic affairs for The Future of
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Freedom Foundation, P.O. Box 9752, Denver, CO 80209.</p>
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<p>------------------------------------------------------------
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From the March 1991 issue of FREEDOM DAILY,
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Copyright (c) 1991, The Future of Freedom Foundation,
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PO Box 9752, Denver, Colorado 80209, 303-777-3588.
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Permission granted to reprint; please give appropriate credit
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and send one copy of reprinted material to the Foundation.
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</p>
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