Who's the Boss?

The highway's jammed with broken heroes on a last chance power drive
Everybody's out on the run tonight but there's no place left to hide
--Bruce Springsteen

A popular view (and one promoted by many politicians) is that, in a free market system, power is held by the producers. Through this lens, capitalists are seen as antagonists and in need of government intervention and control.

Such perspective is misguided. In a truly free market, power is held by the buyers (Mises, 1949; Rothbard, 1962). Buyers decide what to purchase, and their purchasing decisions provide critical feedback to producers on what constitutes value. Through free exchange, customers steer economic activity towards innovation and efficiency (Schumpeter, 1942).

Bureaucratic intervention distorts this mechanism. Perversely, government regulation and control often hands more power to producers. For instance, regulation commonly erects entry barriers that discourage prospective entrepreneurs with potentially compelling value propositions from entering industries, thus protecting the franchises of incumbent firms (Porter, 1980).

Moreover, regulation atrophies the decision-making process of buyers. For example, bank accounts backed by federal government insurance (e.g., FDIC) has blunted the critical assessment process necessary for customers to determine the health of financial institutions they patronize.

Reduced due diligence by buyers increases the error in purchasing decisions. Inevitably, society's scarce resources will be mis-allocated as producers respond to distorted signals emanating from buyers.

Quite paradoxically, by seeking government-sponsored intervention and control over producers, buyers cede power that was originally theirs in a free market system.

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References

Mises, L. (1949). Human action. New Haven: Yale University Press.

Porter, M.E. (1980). Competitive strategy. New York: Free Press.

Rothbard, M.N. (1962). Man, economy, and state. Princeton, NJ: D. Van Nostrand Co.

Schumpeter, J.A. (1942). Capitalism, socialism, and democracy. New York: Harper & Bros.