Government Regulation (post #1 of 3)

The following post appeared on the blog: The Conspiracy to Keep You Poor and Stupid  by Donald Luskin

This was a guest post by Steven Hales: entitled, “A Marriage on the Rocks”. I have corresponded with Mr. Hales regarding this post and my comments are from that correspondence. Please note that the preceding post (Government Etiology) and comments are the prelude to this article. Steven’s article is a humorous look at the rationale for the development of government. 

My title is:  Government Regulation

Steven Hales:           “A Marriage on the Rocks”

Steven Hales:    Thanks for the response.  Let me address the first of several issues.  In a humorous manner, I hope.  What came first the relation or the law?  I posit that the relation came first or there would be no need for the law.  Disagreements and conflict form the basis of much of our legal code so it was the relation or the behavior that had to come first not the law.   If we can agree on that point we can agree that government arose from relations and as those relations grew more complex more conflicts arose and the law responded and grew more complex.  They are part of a symbiotic evolutionary process. 

RedSt8r:               I appreciate the humor. Obviously the chicken came first. In a more serious vein early government was the codification of the rules of kings albeit with great leavenings of common sense. What is called, “Common Law”. So far so good, I agree with you the relation came first. It is in the last part of the paragraph where I challenge the order. There is no rational conflict or relation that requires government to regulate smoking, ingestion of trans fats or any of a hundred thousand (hundred million?) little regulations strewn throughout government.

I posit that when government achieves a critical mass, which I suggest happened in the 1930’s in the US, it then becomes a self-sufficient organism that does not exist to adjudicate private relations but to ensure its own survival, growth and reproduction. There is the illusion of regulating private relations but it is a chimera to hide the survival mechanism of the governmental organism. 

Steven Hales:    I view all inventions as technology, ala Brian Arthur and other “new institutionalist” economists.  Government and the law are inventions and by definition are technologies.  They have all the elements of a technology.  They are assembled from other technologies and something new is created.  The last great evolution of government came in the 18th Century.  It was assembled from a variety of other ideas or technologies.  Liberty and Equality, Self Government, Representative Democracy and our greatest innovation, the separation of powers.  At about the same time as our evolutionary experiment began another great invention was born, Capitalism.  It was born out of the Industrialization of production and together our experiment in governing and capitalism became intertwined into a single system of production and governance. 

RedSt8r:               There’s nothing to argue here. However, I do believe the two experiments were actually one. That capitalism required limited government as presented by our well designed Representative Democracy and the reverse was equally true. A viable Representative Democracy required a privatized economic system, capitalism, to ensure its survival. Neither would succeed on its own. Often today, we seek to inculcate private economic rights as a prelude to democratic political rights. 

Steven Hales:    Shortly after the union of these great technologies a third invention was born, the corporation.  Not only did the organizing principles of the corporation extend to the production of goods but also to the government.  Our government began to look like a corporation with all the attendant complexities.  Like all transformative technologies it reached into every part of life.  This marriage of government and capitalism under a corporate governance structure is often in conflict and like all marriages each spouse, at times, wants a divorce.  Bad things are said but the marriage endures and grows stronger.  We see the current estranged spouse in the White House regularly throwing tantrums and hurling dishes in the direction of capitalism now symbolized by the corporation and its financiers, the evil bankers.  But this is just so much theater and the marriage will endure, it has to, each depends on the other.

RedSt8r:               Given that Thomas Jefferson was opposed to corporations I’m not so sure this was a unique technology to the US. And, given that a “Corporation” is truly a beast created by the law it may not fully fit your definition of “invention” or “technology”. But we can ignore all that. Yep, we got corporations and government seems to be organized like one. But then that organizational form was not original nor unique just useful. Is it not similar to a King and his council?

You may not have intended this meaning but the comment, “it reached into every part of life.” is exactly my point that government has long since ceased to be a partner and is now a master, a self-sufficient organism dominating our lives. 

Steven Hales:    Currently, our government is trying to get capitalism to do the dishes and take out the trash and like most stay at home spouses feels generally unappreciated.  It has also taken to comparing itself favorably to capitalism’s last spouse and is saying how good it is compared to that bitch and how messy she left the house and what a shamble the finances are, she was a spendthrift, blah, blah, blah.  It gets so bad that you have to tune her out.  What’s worse is that her sisters chime in from time to time to berate capitalism and give him a good talking to.  But like all dutiful spouses capitalism takes it and continues to support them.  

RedSt8r:               Yes, well put. Good humor here. I am a 37 year husband. 

Steven Hales:    My point here is not just humorous but informative when looking at the growth of government and the increasing complexity of our economic relations, they are intertwined and spring from a common heritage.   There is a dynamic tension between them but each needs the other to survive and thrive.

RedSt8r:               I regret my repetition but I don’t see government as intertwined with the private economy any longer.  It may have been at one time and indeed, surely was. Government was originally designed (in the US) to buttress and support the private economy and hence private relations. It no longer is the support but the controlling master abusing the power of law to effectively blackmail various (and shifting) sectors of the private economy to gain the financial support to continue its growth and ensure its survival. 

Steven Hales:    I’ll address some of your other points later.  But I want to know, what is your understanding of how the Federal Reserve operates?  Some of your comments indicate a misunderstanding, like the role of “lender of last resort.”  I am not being pedantic but I want our discussions to be in agreement on the facts.

RedSt8r:               What? You mean I can’t have my own facts? Grumble, grumble. What fun is that?

RedSt8r:               I understand the Fed as the institution responsible for the monetary policy of the US. It adjusts the money supply and by issuing or purchasing securities from its member banks. The two interest rates it controls, Fed Funds rate (rate paid on inter-bank lending) and the Discount rate (rate at which the Fed loans to member banks.) There are two other primary issues (I peeked at Wikipedia):  regulating financial institutions and protecting the financial system.

The phrase “lender of last resort” is of course colloquial but I understand it as meaning the Fed will print money (used to be literal paper money but today its electronic) and “loan” it to a member bank that is in need of liquidity. The Discount rate applies and if the bank is in trouble the Fed may require high quality assets as collateral. All of this is to minimize the moral hazard of the lending.

What the phrase does not mean is that the Fed will lend to investment banks, hedge funds, private equity, pension funds, industrial companies, and other non-bank financial institutions such as insurance companies. Ahem, not that they ever would mind you.

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