Bonfire of regulators and their champions

First published in the Financial Times on 26th June 2012.

Some regulations are necessary, but too many are gold-plated to suit favoured parties

I used to think the most dangerous enemies of free enterprise were bureaucrats, union bosses and socialists. Now I’m not so sure. Perhaps an even greater threat to open markets and invention are those business owners who exploit regulation to prey on entrepreneurs.

How about the many companies that thrive on the back of health and safety, employment, planning, environment, building or transport laws? They work alongside government agencies to suffocate small companies with training, manuals, forms, tests and costs that divert money and management time from serving customers. Each new rule provides these suppliers with more lucrative work – and entrepreneurs have no choice but to buy, or they get fined or shut down.

Businesses that serve the state have only one master, so instead of offering lower prices or greater efficiencies, they become adept at bidding and gaming the tender system. As government crowds out the private sector, taking an ever larger slice of the economy, it perverts the very principles of capitalism. Cronyism and pressure groups dominate, rather than supply based on quality, service and price.

I include the financiers and farmers who exploit the taxpayer in the US by producing biofuels instead of food. This diversion of agricultural land has helped to push up the price of many commodities, but enriched those who take advantage of misguided green subsidies. These vested interests lobby hard to protect distortions that deliver energy inefficiently and contribute to famine.

Politicians, civil servants and their co-conspirators – lawyers – justify their existence by endlessly passing new legislation that restricts free trade. They are aided in this task by parasites who subcontract to government, exploiting monopolies, grabbing licences and restricting new rivals. There is always some spurious rationale for fresh edicts – harmonisation, protecting consumers, preventing abuses and so forth. The effect of such interventions is often stifled competition and unintended consequences that damage the public.

As government has become bigger, it polices every area of commercial activity ever more intimately. There are more than 650 regulatory bodies in Britain, each making the entrepreneur’s life just a little harder, and many levying fees on the business they regulate so they can argue the cost is not borne by the taxpayer. But the costs are passed on to consumers in higher prices, so we all pay one way or another.

Regulations tend to help big companies. They act as barriers to small newcomers. Be it broadcasting, pharmaceuticals, banking or insurance, my experience has been that the rules favour incumbents. Established businesses have permissions and licences that newcomers might struggle to obtain, they have connections to regulators and they also often capture the very watchdogs that are meant to oversee them. This big business establishment resists innovations because they might undermine their oligopoly, margins or special privileges. And regulators move too slowly to keep up with new technology and changing behaviour: just look at the confusion across the media industry. For example, lax supervision of the internet means traditional media businesses are disadvantaged.

But technology does help smash obstacles and allow start-ups to crash the party. Government procurement is at least now more transparent, which is helping to expose cosy deals.

Meanwhile, the debt crisis is forcing governments to cut their spending, so there is less crowding out of the private sector and thus a chance of real choice. Moreover, most experts accept that to remain competitive the west must cut regulation and boost entrepreneurship to create jobs.

The regulators will fight for their livelihoods, however, and those organisations that implicitly win under regulation will whisper in ministers’ ears. Some regulations are necessary, but too many are gold-plated to suit favoured parties. Regulators by their nature proliferate and develop a morbidly symbiotic relationship with certain businesses that stifles choice, innovation, job creation and competitiveness.

Political leaders who want to foster world-beating companies must act decisively and, as with any transformation, slash off the gangrenous limbs without mercy.