When No Rule of Law Rules

Welcome to your life
There's no turning back
Even while we sleep
We will find you
--Tears for Fears

Ron Paul employs the Obama administration's oil drilling moratorium to illustrate two consequences when the rule of law is not followed.

The first is regime uncertainty. Regime uncertainty occurs when the people in charge make up their own rules rather than following existing law. The rules are arbitrary, grounded in the personal views of the rulers and subject to change when whims and moods change. This creates an uncertain environment for those in the marketplace. Both buyers and sellers are hesitant to take risk since government might intervene at any time to penalize action. So producers curtail investments, and customers curtail purchases.

Proposition 1a: The less government adheres to the rule of law, the higher the regime uncertainty.

Proposition 1b: The higher the regime uncertainty, the lower the level of economic activity.

The second consequence of not following the rule of law is regulatory capture. Regulatory capture occurs when organizations decide that it is better to join government in the arbitrary rule-making process. They hope that by taking the 'if we can't beat them, join them' approach that they can tilt the rules in their favor. As RP observes, a slick thing about regulatory capture is that people are lulled into a false sense of security. They think they are being protected from Big Business when the rules actually place incumbent firms in a more monopolistic position that squelches innovaton and entry. SIG city, baby.

Proposition 2a: The less government adheres to the rule of law, the higher the regulatory capture.

Proposition 2b: The higher the regulatory capture, the greater the monopoly power of incumbent firms.

These conditions are in play today. They don't improve standard of living.