Economics, Politics, Business, and Regulation

To begin with, economics and business are not the same, although they share much of the same terminology, because the economics of business center on business, while the study of economics, at least in theory, encompasses all of society, and just not business, even though some business types have trouble comprehending that a nation’s economy consists of more than business, or more than government and business.

And no matter what they claim, most business people really don’t understand economics, or choose not to. Likewise, very few economists really understand business. Politicians, for the most part, understand neither, and most Americans understand even less than the politicians. This is, I submit, one of the fundamental problems facing the U.S. today.

Let’s just look at why in terms of fundamentals. Supposedly, the basis of economics and business rests on the interaction of supply and demand. In general terms, “supply” means the amount of a good sellers are willing to provide at a given price. Demand is what buyers will purchase at a given price. In a relatively free market [there are no totally free markets, and never can be, a point too many business types fail to acknowledge publicly], the going price of a good or service is set when supply and demand meet. If there is greater demand or a lesser supply, usually prices rise. If demand falls, or supply increases significantly, prices usually fall, again in a relatively free economy.

Of course, no economy is completely free because to have a working economy requires a working society, and human beings have yet to create a working society without government, and government, for various reasons, always imposes restrictions on the market. Some of those restrictions, given human nature, are necessary. Why? Because of the intersection of the way business operates and human nature.

As some have pointed out, the price of a good or service is not necessarily its cost plus remuneration to the supplier, but over time, price has to consist, at the least, of the amount necessary to cover costs of production plus enough above that to keep the supplier or business going. But the devil is in the details, and one of those details is how one defines “costs of production.”

There are all sorts of costs – fixed costs, marginal costs, operating costs, external diseconomies [otherwise known as negative externalities], etc. The cost that matters most to a business is whatever costs the business is required to pay by both the demands of the marketplace (i.e., supply and demand) and the government. If a business has to pay taxes, that’s a cost imposed by government. So are wage, benefit, safety, and environmental standards.

So… by what right, in a supposedly free market economy, is government imposing those costs on business?

The reason for government action is because: (1) the marketplace doesn’t include all the costs of production and (2) a totally “free” marketplace creates wage levels and working conditions virtually all western governments have declared unacceptable, and, therefore, governments have set minimum standards for wages, safety, and worker health conditions.

In addition, some of those government taxes provide for the highways and airways on which business goods are transported, for the national defense which protects business and everyone else from enemies from coming in and seizing businesses and properties and which allows U.S. businesses to conduct operations elsewhere in the world, for regulation and continuance of a stable banking system, for public safety, and so forth, all of which make the operation of businesses possible.

One of the reasons that, years ago, the Cuyahoga River next to the Republic steel mill in Cleveland caught fire was because the marketplace cost, and thus the price of a good, didn’t include costs passed on to others in society in the form of polluted air or water, and thus, any manufacturer who did restrict the emissions of pollutants incurred higher costs compared to producers who didn’t. Consequently, marketplace “discipline” effectively encouraged pollution, or at the very least, certainly didn’t discourage it. Costs inflicted on others are usually termed negative externalities [the older term is external diseconomies], but such terms tend to gloss over the fact that pollution and other degradation of the environment caused by manufacturing is not reflected in the cost of production unless government requires it.

So, when a manufacturer claims that environmental or worker safety regulations are stifling the economy, what that manufacturer really is saying is that he or she can’t compete with manufacturers in other countries that have fewer environmental regulations, and thus, often lower costs of production… and when that manufacturer demands less regulation, it is a demand to allow more pollution so that the manufacturer can make more money – or even stay in business.

Balancing economic output and worker and environmental health and safety is a trade-off. Although some regulations have been ill-thought-out, in general, stricter regulations result in a better environment for both workers and society, but if the rest of the world has lower levels, those U.S. industries competing in a global market will suffer higher costs, unless they have other cost advantages, such as better technology or far more productive workers. Because environmental control technology is expensive, most industries tend to oppose regulations requiring more technology.

In certain industries, workers, such as coal miners, often oppose environmental rules because those rules raise costs, and higher costs may result in the loss of their jobs. The question in such cases is whether continuing such jobs is worth the environmental and health damage, both to workers and to others. The Trump administration is working to remove an Obama administration rule that put stricter limits on how close to watercourses coal mining and chemical wastes could be placed, claiming that the rule will cost jobs, which it likely would to some degree. But the rule would also cut the number of coal and chemical industrial storage and waste disposal sites near rivers and streams in an effort to eliminate slurry and waste accidents such as the one along the Elk River in West Virginia in 2014 that fouled miles of streams and rivers, poisoned hundreds of people who drank the water unknowingly, and left more than 300,000 people without drinkable water for months.

History has shown, convincingly, for all who are willing to look at the facts, actual deaths, poisonings, and worse, that, without government regulations, a significant proportion, sometimes all, manufacturers in an industry will commit unspeakable wrongs in the search to maximize profit. Remember when the Ford Motor Company tried to cover up the faulty design of the gas tank in the Ford Pinto, deciding that it was cheaper to pay legal costs for deaths [which Ford estimated at $49 million] rather than produce a more expensive gas tank, which would have cost $113 million. Ford decided against the fix on a cost-benefit basis, then ended up paying out much more in legal settlements, in addition to a costly recall.

This kind of business cost-benefit analysis continues today, and that’s why the “business model” can’t be allowed without oversight and regulation. The question is not whether to regulate or not to regulate, but how much regulation is appropriate in what circumstances. Or put another way, is your business more important than my health? Except that business owners would say, an increase in regulations will kill my business and probably won’t measurably improve your health. Both are likely exaggerating, and that’s why verifiable science and facts – scientific, financial, and economic – are critical, and why political slogans and political pressure brought by outside interests have no place in determining whether a regulation is necessary, and if so, the degree of regulation required.

7 thoughts on “Economics, Politics, Business, and Regulation”

  1. Derek says:

    Lately, I’ve become more concerned with what seems to be the rise in ‘libertarians’ that are effectively just anarchists who began their political journey identifying with the right wing.

    Businesses have always claimed government regulation hurts their bottom line, that’s just business as usual to me. It is less frightening than this whole ‘if it pleases the crown,’ meme that a growing number of conservatives are using when referring to even the most basic functions of government. The most basic regulations for a functioning society are insufferable to them.

    It’s honestly terrifying.

  2. DArcherd says:

    I’m sorry I can no longer remember the author for proper attribution, but here is something that has stuck with me over the years…

    Economics consists of three great principles:
    1) You can’t get something for nothing
    2) There’s no such thing as a free lunch
    3) If supply and demand can’t be balanced by price adjustments, you get shortages

    Politics consists of systematically denying these principles.

    Public policy consists of applying these denials to the marketplace until the economy collapses, at which point a search for designated villains ensues.

    Business consists of seeking profits in a marketplace distorted by public policy without becoming a designated villain.

    1. All of that’s largely true, if cynical, but incomplete, because the closer the economy is to an economically free market, the greater the poverty and income inequality. The greater the poverty and income inequality, the more likely social unrest becomes, and widespread social unrest leads either to social change, governmental repression, or revolution (and repression if continued long enough will also lead to revolution). Revolution against a market system always leads to greater control over the marketplace by government.

      All of which illustrate the danger of extreme positions by market purists [and there’s a whole set of other dangers from extreme positions by social justice purists].

      1. Frank says:

        LEM: Some questions –

        You state that”…the closer the economy is to an economically free market, the greater the poverty and income inequality.”

        Is that based on historical (anecdotal) observation and/or on a causal connection between the condition and the effects? In your post, you seem to be saying that there is a “balance” needed between no regulations and too many. This seems very reasonable, and, as you state, the real issue (devil) is in the details of that balance. If I have this correct, it appears to be out of sync with the statement extracted, above. I would be interested in where I’ve gone wrong.

        The next (set of) syllogisms “…The greater the poverty and income inequality, the more likely social unrest becomes, and widespread social unrest leads either to social change, governmental repression, or revolution…” seem intuitively correct, but the premise upon which they depend is the original issue.

        As always, I appreciate and enjoy your books. Thanks.

        1. It’s based on both historical data, which I consider more than anecdotal [although there is always the question of the interrelation of causation and correlation], and the causal conditions, i.e. market forces.

          I have to say that I don’t see how the statement you quoted is out of synch with anything. The “ideal” free market has no regulations. Therefore, under those conditions businesses will operate in a way to minimize their costs, but since they are not required to include external costs [such as pollution], costs borne by workers [health and safety costs], or social costs [a living wage for the lowest paid employees], their efforts to maximize their returns will result in greater poverty and income inequality.

          Ideally, not that this will ever occur, government regulations should merely ensure that businesses bear the full costs of production, not merely their internal costs of production. I’ve seen regulations that require both cities and businesses to do even more than that in terms of social and environmental good, largely to remedy problems caused by others. Again, ideally, in a perfect world, no individual or entity should be required to clean up after others. Realistically… we don’t live in such a world, and compromises are necessary.

          1. darcherd says:

            Absolutely correct. In a very lightly-regulated economy, such as that of the early years of the Industrial Revolution, business owners are financially incented to pay their workers just marginally above starvation-level wages. Any less, and the workers can no longer function. Any more, and a competitor undercuts your costs.

            Of course, that’s not absolute, because there are a lot of other factors that come into play. In a business that required skilled workers, a business owner might consciously choose to pay above the going market rate in order to reduce employee turnover and minimize the costs associated with hiring and training. But if all they need are unskilled workers, as long as the supply of workers is plentiful, then sorry, starvation-level wages are going to be the norm.

  3. John Prigent says:

    I don’t remember who said (or wrote ) this but there’s a saying: ‘if all you need are monkeys, only pay them peanuts’. Or, to put it a different way, why should unskilled people be paid more than a rock-bottom minimum? What gives them any right to expect higher pay? We do seem to have a problem with those who refuse to study and gain qualifications and experience, but still expect to get enough money to afford better housing, better food, fancy holidays abroad, etc. But even the unskilled _can_ progress if they bother to try – a skilled ditcher is worth paying more than somebody who produces a ragged trench that collapses a few days later.

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