Is Laissez-Faire Fair

Don Boudreaux, Ph.D., is the President of the Foundation For Economic Education (FEE), a member of our Brain Trust, and one of our free market experts. FEE is devoted to, among other things, educating people on how a free market works, as well as the dangers of government intervention in the marketplace.

Don tells us that a free market is the economic arrangement where private property rights are widely respected and secure from government intrusion and criminal activity. Can't read that definition without thinking of laissez faire. As you probably know, laissez faire in society is the practice of letting people act without interference. While in the marketplace, laissez faire is the practice of letting the participants set the rules of competition.

Don't use a rattlesnake for rat control!
With regard to laissez faire, I suppose I'm somewhat of a moderate. My liberal friends will love hearing what I'm about to say. I believe government should play a limited role in both society and the marketplace. The problem with this philosophy, however, is that it's like keeping a rattlesnake around the house to protect you from rats. You'll get rid of an irritating and creepy pest, but you will have to live with a non-discerning and dangerous enforcer. Here are a few examples.

Air, air everywhere, but not a molecule to breathe
Here's a success story where state government did well (I think Don agrees with me on this one). The emissions standards that were placed on automobiles in California kept parts of that state from becoming virtually uninhabitable. Cars cost more in California as a result, but you can sort of breathe the air in southern California now. Gooood rattlesnake. Good boy.

Don't forget to flush
But here's where the government went too far: Toilet tank water capacity. In truth, there are water shortages in parts of the western U.S., but for the rest of the country, water is abundant. Nonetheless, we now have a national law preventing the manufacturing and selling of any toilet that uses more than 1.6 gallons per flush. One size fits all, as Don laments. OUCH!! *@#!! Where's that antivenin?

Laissez faire fits all?
Laissez faire true believers think there is NO role for government in the marketplace. Period. If you've been listening to my show for very long, you know two things about me: 1) I don't want the government interfering in the marketplace where it doesn't belong; 2) I think the Big Box guys should not be able to use predatory practices to run us Little Box guys out of business. But how do you discern predatory practices from good old fashion competition and the resulting natural selection? Shouldn't the government have a role in this decision? I'm afraid I don't like my own answer.

U.S. v Microsoft v Market Velocity
At least with respect to the Information/Technology industry, market velocity is becoming the paradigm shift for anti-trust law (would someone tell the government?). I think the marketplace will render mute whatever bad acts Microsoft is found to have committed long before the anti-trust process is finished. But shouldn't there be someplace to turn for those who believe they were harmed? The irony here is that the rattlesnake, I mean government, was sicked on MS by IT industry participants. Now everyone in that household has to live with the snake. And once it's in, it stays.

Small Business v Minimum Wage
Don and I are in lock-step on this issue, as we both believe that a Federal minimum wage is a political assault on the marketplace. There is no economic basis for the government to legislate a national minimum wage. It is a 100% political toy. As another member of our Brain Trust, Burt Folsom, has explained on our show, minimum wage was born in early 20th century as a political tactic to prevent southern states from stealing industry from the north. Politicians were more concerned about their "deep pocket" constituents than about the workers.

Again, there is irony in this example. Ever since these northern industrialists brought in the rattlesnake to get rid of those pesky southern rats, the entire marketplace has had to live with the snake's solution.

Today there is no economic basis for an increase in minimum wage. Indeed, current economic conditions in the U.S. have created a more dramatic argument against a minimum wage increase than at any other time in my memory or studies. Unemployment is at record lows resulting in a sellers' (employees') market. Research has shown that, relatively speaking, few full-time breadwinners would benefit from an increase, because most people who are beyond the trainee/entry level stage already earn more than minimum wage.

Politicians 7, Small Business 0, Game Over
A minimum wage increase disproportionately hurts the market segment that employs the most workers and the most minimum wage earners; the same segment that is responsible for 100% of the net jobs created in the U.S. in the past 10 years, small businesses:

1. Small businesses employ over 60% of all U.S. workers. (NFIB)

2. We have to pay the direct increases, plus the increased payroll burden, plus the upward ripple affect on other wages.

3. We have to pay more for money as the FED raises interest rates to fight the inflation that they are sure is coming, largely as a result of wage increases.

Tension between wage levels and productivity is reaching a dangerous point with regard to inflation. If you ask members of the Federal Reserve, which made four rate increases between June, 1999 and February, 2000, to list their top three inflationary concerns, wage levels would not only be on the list, but likely on top. (If you want the chance to ask that question of someone at the FED, and I have, check my show schedule. I have those guys on, and will continue to do so.)

Obviously, the FED and the government are not watching the same game? One focuses on economics and the other on getting votes. Unfortunately, small business must buy a ticket at both games.

So the answer to the question, "Is laissez faire fair?" is, no, it's not fair. Can true laissez faire exist in our current world? I think not. I believe in the purity of the marketplace, and in it's ability to solve it's own problems, but even I am guilty of wanting someplace to turn for redress when small businesses are being unnaturally selected. Perhaps I'm not as conservative as I sometimes profess. (Did I say that out loud?)

Write this on a rock... Sometimes the rats get so bad that you have to call in an exterminator. But be careful when you bring in the ultimate rat killer. Remember, a rattlesnake's ultimate solution is a venomous bite, and it does not discriminate.