Regulation and a National Market

In this anti-government time it’s worth remembering that a national market can’t exist without regulation from a strong and effective national government.  This has been true throughout history – there has never been a national market without a strong national government.

It’s easy to get misty eyed over the theory of a transparent, self-regulating free market but the theory has only passing connection to the world in which we live.  In the Wealth of Nations, written in 1776, Adam Smith used sheep markets as an example of self regulation within a market.  Self regulation was possible because the sheep markets were local and buyers had the ability to judge for themselves the health of the sheep and the accuracy of the seller’s claims before buying.  Buyers could physically inspect the sheep to decide for themselves its age, health and value.  They could also decide for themselves which local sellers misrepresented their animals and choose not to buy from those sellers.  Somebody buying grazing land from a neighbor could inspect the land to see how lush it was, its water sources.  A person buying mutton could see how clean the butcher’s shop was and choose not to buy meat that might be tainted or spoiled.

Self regulation is possible in a simple agrarian economy because buyers know the sellers and can judge for themselves the value of what is for sale.  This isn’t the reality of our modern industrial economy.  Industrialism, including industrial farming, drives prices lower through massive economies of scale.  Fewer and fewer factories or slaughterhouses are used to provide product to an ever larger geographic area.  The vast majority of the products we consume are typically produced hundreds or even thousands of miles from us.  Meat from Iowa gets sold on both coasts.  Tomatoes from California are eaten through the United States.  Massive economies of scale requires massive accumulations of capital.  IBM couldn’t have grown as large as it did if it were limited to investments from its home town of Armonk New York; its growth was dependent on selling shares to tens of thousands of people and institutions who lived hundreds or thousands of miles away.

Buyers looking at a shrink wrapped brisket in a grocery store have no way of knowing if the meatpacking facility in Iowa was clean and the meat disease free.  People buying IBM shares have no way of knowing if the company is actually producing and selling computers.  We don’t think about it but in our modern economy we regularly buy things from people we don’t know, without being able to judge for ourselves the quality of what we are buying or the accuracy of the seller’s claims.  We buy on a leap of faith, taking sellers at their word.

We make this leap of faith not because we trust the sellers but because the federal government serves as a guarantor of claims and standards – we trust that the government is making companies tell the truth about their products, whether packaged meat or common stock sales.  The government inspects the meatpacking plant and insures that the production facility and product meet certain standards, and that the claims on the meat label are accurate.  When someone writes a check to a broker in St. Louis to buy shares in New York of a company that is based in California they do so because they believe the government has caused the company to accurately report its financial condition and that the broker will actually complete and record the purchase in the buyer’s name.

Government regulations, whether for safe food production or to insure the accuracy of corporate financial statements, give consumers the confidence to buy things they can’t personally evaluate from people they don’t know.  Certainly government regulation can stifle growth and has been used as a tool of social engineering.  But without basic regulation – without government insuring the accuracy of claims and adherence to standards by manufacturers and capitalists operating hundreds or thousands of miles away – our modern consumer economy would not be possible.

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