A nation can become rich by splintering economic regulatory power among competing autonomous authorities to frustrate the foolishness associated with monopolies.
In the business sphere, competition is a stimulant and monopoly, a narcotic to efficiency and innovation that advances consumer welfare. Scotsman Adam Smith instructed more than two centuries ago, “Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” The latter includes an invisible hand that guides sellers to maximize consumer satisfaction to enrich themselves; and, antitrust laws to prevent monopoly or collusion among competitors.
Smith’s instruction, however, fails to account for the natural course of politics to confound rather than to permit the natural course of economics. His description of the problem in “The Wealth of Nations” is faultless:
“What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
But economic folly is no deterrent to politicians. Their paramount objective is power and re-election. National wealth is subservient. The two routinely diverge because political math is not economic math.
Politicians naturally incline toward economic regulation to curry favor with special interests and to gain power and status. The benefits of regulation are concentrated among a few, which provide them an incentive to actively support their political benefactor. The costs, however, are spread across the entire voting public, which discourage them from expending the political energy necessary to retaliate against the author of their small injury.
Economic regulation also means bigger government, which raises the social status and power of government officials. The bigger the government, the more regularly politicians are courted by business, labor and consumers to alleviate the economic distortions, perversities or hardships that they have created. Even during the heyday of the Reagan Revolution, the total size of the federal government predictably grew.
What is needed to prevent the natural course of political things from ruining the economy is competition in enlightened government. That was one of the happy incidents of the U.S. Constitution as initially conceived and followed. It enshrined a system of federalism in which the several states competed among themselves to attract business, labor and consumers. A prohibition on discriminating against non-residents or out-of-state businesses thwarted the natural tendency of states to favor their own for political reasons.
The taxing and regulatory powers of the federal government were sharply limited. James Madison, father of the Constitution, elaborated in Federalist 45: “The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce; with which last the power of taxation will, for the most part, be connected.”
But the Constitution has become no more than a homonym of the genuine article. Largely through the income tax amendment and wretched interpretations of the Commerce Clause by the U.S. Supreme Court, Congress and the Executive Branch have come to monopolize economic regulation. Competition for good government among the states has been eclipsed. The unhappy results speak for themselves.
Political interference with Adam Smith’s natural course of economic things has mushroomed. According to the National Association of Manufacturers, the annual cost of the federal regulatory state has soared past a staggering $2 trillion. The Competitive Enterprise Institute estimates the figure at $1.9 trillion.
The remedy is in Article V of the Constitution. Two-thirds of the states should vote to convene a convention exclusively to consider the following amendment: “States rather than the federal government shall be entrusted with exclusive, non-discriminatory economic regulatory authority over domestic commerce.”
If the federal government retains its monopoly of economic regulatory authority, even the best of reforms will prove trifling.
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