TCS Daily


The Big Business of Blocking Entry

By Craig S. Marxsen - April 3, 2007 12:00 AM

Panelists on the program Fox News Sunday recently discussed Al Gore's March 21 global warming "planetary emergency" address to Congress, in which Gore urged a freeze on carbon dioxide emissions. At the end of the news summary, a discussion ensued in which Fortune Magazine's Nina Easton explained that several firms in the business community are getting greener and perceive these proposals to be cost saving. She emphasized that Fortune was coming out with material elaborating that theme.

It is likely that many viewers interpret the alleged growing corporate advocacy of actions to limit carbon admissions as prima facia evidence of the basic validity of Gore's alarmism. Would business be willing to acquiesce to harmful regulation if corporate leaders were not persuaded that a real emergency exists?

Ms. Easton, and most viewers, likely fail to perceive that businesses are illustrating Nobel Prize winning economist George Stigler's 1971 theory of government regulation.* Incumbent businesses seek legislation impeding the entry of competitors into their product markets.

Suppose, for example, petroleum refining is the main activity of an American corporation. This corporation cannot obtain legislation to outlaw the expansion of the petroleum refining industry, especially in the face of rising gasoline prices grieving the American public.

However, if citing a new refinery, or expanding a competitor's existing one, involves an increase in the emission of carbon dioxide, which it almost certainly would, then a cap on carbon emissions will covertly serve the same purpose. In a March 6 article in TCS Daily, Arnold Kling explains that "cap and trade" legislation is being proposed as a method of limiting carbon dioxide emissions - a method that would exempt some or all of the existing levels of emissions from present-day refineries by capping them. Permits licensing some or all emissions at the enactment date's levels would be given to established firms which could then sell them to other firms. What that legislation would do, in addition to providing a valuable permit windfall, is make it more costly for competitors to expand their refining capacity or to enter the refining industry at all.

In 1999, the economist Bruce Yandle discussed the mechanisms by which the Kyoto Treaty previously gained business support. For example, he described how the American Automobile Manufacturers Association refused to help pay for Global Climate Information Project television ads opposing Kyoto, citing proposed legislation providing advanced carbon-reduction credits for actions then underway to reduce emissions as a possible ulterior motive.

Environmental regulation is not always the outcome of a tug-of-war between environmentalists and businesses. Incumbent businesses that advocate regulations can often gain at the expense of the public. Regulations can create, in a roundabout way, monopoly power of the kind business cartels are formed to seek; but regulations create it hidden from public perception. The loser can be the consumer, not the corporation selling products at higher prices because of restrictions. The alleged improvement of the environment gives the consumer the impression that she or he has, on balance, benefited. The declining purchasing power of inflation adjusted wages, such as happened for decades following the original passage of the Clean Air and Clean Water Acts of the early 1970s for example, is a great and concealed effect that the consumer just doesn't see. The anti-competitive potential of global warming legislation helps give this "planet emergency" its surprising political traction.

The author is Associate Professor of Economics, University of Nebraska at Kearney.

References

Stigler, George J. 1971. The Theory of Economic Regulation. The Bell Journal of Economics and Management Science 2, no. 1 (spring) [Retrieved March 29, 2005 through University of Nebraska at Kearney's access to JSTOR]


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24 Comments

no penetration allowed
Another good article showing how it is government intervention and abuse of power that distorts economies and free markets. Only goverments can enforce monopolies and block penetration by competitors.

The orthographer strikes by night

I am disappointed that Mr. Marxsen, like so many lesser mortals of these lesser days, does not know the difference between "site" and "cite."

Enron
Enron lobbied hard for Kyoto in order to sell more green natural gas.

It is too bad so many socialists want to use the government to control corporate behavior.

They are no different than the corporations themselves who want to use government to control their competitor's behavior.

If people like Ralph Nader would embrace the free market he would find that markets can control corporate behavior more efficiently than government.

But then Nader would not have a political constituency to lead nor would he have any political power.

Socialism is all about power.

Kind of like Alcoa
A company that has a lock on the Northwest's hydro power, seeking a reduction in gas and coal fired electricity production.

Spell Check error
That's a typical Spell Check error, The Web suffers from a lack of proofreaders. The article could have just as easily "sighted" a reference.

I leave mine off. Too much of a nuisance to have to correct behind it.

Not that our leftist friends would think ill of a ecologically enlightened CEO
But where was the outcry when Jeff Imelt of GE admitted "ecomagination" was a brand without specific meaning.

Be very assured that GE and others will use environmental regulations to impose burdensome design requirements on (potential) rivals in order to erect "barriers to entry". You can bet whatever pollution mitigation the rivals come up with will be challenged under IP laws.

Love to see how much GE options Al Gore is buying.

State corporatism...
aka economic fascism, is alive and well in the land of the (once) free. Just wait until they get a grip on the supreme court's idiotic ruling that carbon dioxide is a pollutant. Could be time to start regulating human reproduction--after all, more people breathing means more co2 emissions. Come to think of it, we may have to restrict human breathing time, perhaps euthanizing all of us over 60 types would help. While we're at it let's protect the earth's plants from absorbing too much of the gastly gas.

Nope, not socialism
Not that I disagree with the spirit of your posting, but I do feel a need to comment on the terminology used in it.
"It is too bad so many socialists want to use the government to control corporate behavior....is all about power."
Actually, what is being practiced (as described in the article and elucidated further in your posting) is fascist economics. Yes, kiddies! Fascism wasn't just about having killer icons and salutes. There was an economic philosophy behind it as well. Here is what it is and how it differs from socialism.

While the goal of socialist economics is to appropriate most industries under the ownership and management of the State, the goal of fascist economics is to retain private ownership of property -- but place it at the service of the State.
According to sociologist Stanislav Andreski, fascist economics "foreshadowed most of the fundamental features of the economic system of Western European countries today: the radical extension of government control over the economy without a wholesale expropriation of the capitalists but with a good dose of nationalisation, price control, incomes policy, managed currency, massive state investment, attempts at overall planning (less effectual than the Fascist because of the weakness of authority)."[36] Politics professor Stephen Haseler credits fascism with providing a model of economic planning for social democracy. (source: http://en.wikipedia.org/wiki/Fascism#Economic_planning)


So, political-definitionally speaking, basically fascist economics as practiced by Peron, Hitler and Mussolini were obviously an implementation of totalitarian fascism. Whereas, the US Clean Air Act, US labor laws, etc. are technically a practice of democratic fascism. So are the local zoning ordinances that say what you can or can't build on your lot of land. When the government just condemns your land and takes it, that's socialism in action though.

It has also been argued by many economists that in the US, democratic fascism was practiced so heavily during WWII (ultra-centralized war planning & control of industries) that the US economy became even more centralized into service to the state than its German counterpart ever was.
Of course, saying that goody-tooshoos government regulation constitutes 'anything' fascist is heresy by the PC crowd (and the spin doctors of the political left). Unless it is government action even remotely attributed to George W. Bush -- then it's deemed a more vile act than exterminating Jews, it seems. But facts are facts. Even political economists back that one up. The truth sure does hurt that way, eh?

All the same
"When one remembers that the word "Nazi" was an abbreviation for "der Nationalsozialistische Deutsche Arbeiters Partei — in English translation: the National Socialist German Workers' Party — Mises's identification might not appear all that noteworthy. For what should one expect the economic system of a country ruled by a party with "socialist" in its name to be but socialism?

Nevertheless, apart from Mises and his readers, practically no one thinks of Nazi Germany as a socialist state. It is far more common to believe that it represented a form of capitalism, which is what the Communists and all other Marxists have claimed.

The basis of the claim that Nazi Germany was capitalist was the fact that most industries in Nazi Germany appeared to be left in private hands.

What Mises identified was that private ownership of the means of production existed in name only under the ***** and that the actual substance of ownership of the means of production resided in the German government. For it was the German government and not the nominal private owners that exercised all of the substantive powers of ownership: it, not the nominal private owners, decided what was to be produced, in what quantity, by what methods, and to whom it was to be distributed, as well as what prices would be charged and what wages would be paid, and what dividends or other income the nominal private owners would be permitted to receive. The position of the alleged private owners, Mises showed, was reduced essentially to that of government pensioners."

http://www.mises.org/story/1937

During WWII, US became a socialist state.

You are such a cynic...
The author seems to imply a lot more conspiracy in the strategic planning offices of major corporations than is probably actually there. Generally those jobs are entry level opportunites for upper management candidates from Booz-Allen, BCG, Bain or McKinsey. Those guys are busy learning the operation of the industry and posturing for promotions. No one else at the company would pay much more attention to new laws than to figure out how to comply. Public Relations statements are written by marketing.

Nevertheless, such barriers to entry do tend to favor players who are already in the arena. However, there are other rapidly growing venues where such restrictions will be meaningless.

America could be regulating itself out of the global game.

I'm not so sure
Super has a point here. After all, the reason that heavy corporate advertising budgets exist, such as the big soft drink companies, is that they constitute a barrier to competition. You can't sell soda if you can't compete on advertising budget.

For years, corporations have been using regulatory structures to block competition or the introduction of products which make their own products obsolete. It would then be hardly surprising that some have discovered that environmental protection regulations or anything of that ilk can serve as entry barriers irrespective of their environmental merit.

Greedy Greenies
Amusing how a rather staid essay on the dynamics of corporate rent-seeking elicits such off-the-wall responses. Everything from persickety spell-checkers to terminological obsessives. So, the spell-check didn't work. So what? Fascism? Is there anyone in touch with modern-day reality who doesn't know that the word fascism now means "something I don't like," and nothing else?

So far as the greedy greenies essay goes, it falls short in failing to note that the carbon dioxide emission issue is much ado about nothing.

Of course...
A barrier to entry is effective whether the players already inside the arena lean against it or even notice a shortage of competitors.

We are carbon based...
Living tissue is composed of high energy hydrocarbon molecules. Life as we know it starts and ends with carbon dioxide that is combined with water and sunlight to create hydrocarbons (and oxygen as the waste product of that reaction). Oxygen in our mitochondria combines with hydrocarbons to produce energy, carbon dioxide and water vapor again.

Without that energy captured from the sunlight and stored as hydrocarbons we would not be having this conversation.

There is far more water vapor in the air than carbon dioxide, of course, and water vapor is far and away the dominant greenhouse gas. It is also the gas that condenses into freshwater rain clouds. Maybe the Supreme Court would like nature to stop raining and to stop creating life.

Carbon dioxide is not a pollutant. Carbon dioxide is life. When there is more carbon dioxide in the air the oceans simply make more biomass.

socialist/fascist?
Good comments by you and Z just above. It's more a matter of semantics re those terms. No matter what they call themselves it's the same actuality, government controls all. So von Miese was right, the CEOs were just like every other beaurocrate, only better paid. I remember that the nazzis even had another term for this; 'Gleichschaltung'. But it's a good point that movern day leftists like western liberals see nazzis style facism as worse than communist totolitarian states. Part of it has to do with the fact they they mostly sided with the commies back then, and still do. In fact that's one of the things the ***** were worried about. They saw boshevik commies in the east, and then on the west they saw most of the intellectuals etc also siding them.

to QACJET
As a newcomer to this forum I guess you're not used to all teh off the wall, and wacko comments. But I like your posting so far and hope you keep writing. BTW, I'm the guy who's often vilified as a nazzi myself on this forum, presumably because I consistently advocate for more freedom; go figure.

More from the intolerant left.
" All of this is characteristic of leftist thinking -- that one's thought processes and values are shaped by one's race, sex or sexual orientation. Thus, one routinely hears from liberal spokesmen that a black person who opposes affirmative action based on race is a traitor to his race, an Uncle Tom, and probably a hypocrite since he or she must have benefited from affirmative action.

We are told by feminists that men should have no say on the morality or legality of abortion since men lack a uterus.

And a gay who does not hold liberal views on all matters pertaining to gays is a hypocrite.

And, therefore, such people can be treated with great cruelty. Liberals publicly humiliated Supreme Court Justice Clarence Thomas in ways no public figure of our generation had ever been humiliated because he was a conservative black. Recently, Bill Maher and gay activists decided to "out" a leading Republican, who may or may not be gay, because he had the audacity to dissent from the left's views on same-sex marriage and some other matters regarding gays.

Why do so many on the left believe it is OK to damage the lives of gay conservatives? Because they are certain that conservatives in general are bad people, not merely wrong on the issues. And because they particularly wish to punish any gay or black person who dissents from the liberal positions on gay and race issues.

For the left, it is a virtue for an American to differ with American leaders, a virtue for a Catholic to differ with Rome, a virtue for a Jew to differ with Israel. But it is utterly unacceptable for a homosexual to differ with gay organizations. Such a person must be crushed. And the way to achieve that is by exposing his sexual life to the world. And then justify it by declaring him a "hypocrite.""

http://www.realclearpolitics.com/articles/2007/04/on_outing_gay_conservatives.html

Blocking entry
Craig Marxsen and other economists are right that firms sometimes use government regulation to raise the barrier for potential competitors. But that doesn't mean that all regulation that has that effect is bad. Maybe in a given case the benefits outweigh the disadvantages to the consumer. A law that says that effluent from factories into rivers can contain no more than 10 parts per billion of purple crud might make it have health benefits that more than compensate for the downside of the regulation. Whether the regulation is justified involves a cost-benefit analysis, and can't be decided simply by talking about people's motives.

Declining real wages
Craig Marxsen writes "the declining purchasing power of inflation adjusted wages, such as happened for decades following the original passage of the Clean Air and Clean Water Acts of the early 1970s for example, is a great and concealed effect that the consumer just doesn't see."

That implies that inflation went on for decades after the early seventies. But in fact Fed tightening of the money supply in the early 80’s brought inflation under control.

It is true that real wage growth was slow from the early 70's to the mid nineties. But what evidence is there that that was caused mainly by environmental regulation?

Better to pull
UL did more for fire safety for consumer products than government regulation.

A private insurance company laboratory that crash tests cars does more for auto safety than does the US government.

A company that must be certified to ISO14001 to compete for contracts would be better than testing to a ppb spec.

Controlling purple crud would be better accomplished by those most affected.

Remember Clinton wanting to regulate As in NM water?

It would be interesting to see a cost benefit analysis for ALL government regulations.

Better to pull
Marjon writes:

"A company that must be certified to ISO14001 to compete for contracts would be better than testing to a ppb spec.

“Controlling purple crud would be better accomplished by those most affected."

Marjon, explain how that would work, and how your proposal would do a better job of reducing the impact of my hypothetical purple crud on public health.

Command-and-control regulation is notoriously inefficient. When anybody proposes an alternative I'm eager to listen and learn.

It is called a lawsuit.
How many companies will machine Be?

How many companies will use asbestos?

One significant modification to our tort system I would make is ALL out of court settlements MUST be made public.
An injured party can bring a lawsuit claiming damages from purple crud.
If the company really needs to use purple crud it will find ways to handle it properly and pass on that cost to the consumer, which may inspire safer alternatives to be developed.

"d-Limonene from Citrus Depot is a very effective, biodegradable solvent and degreaser, occurring in nature as the main component of citrus peel oil. Due to its attractive odor, versatility and GRAS rating (Generally Recognized As Safe) from US FDA, d-Limonene can be used safely & effectively in a wide range of products for and infinite number of applications."

http://www.citrusdepot.biz/applications.html

Purple crud
I would fear that people would sue the Acme Corporation for alleged harm from purple crud, and that slick lawyers would persuade juries that purple crud caused their clients harm even it didn't. If there are government standards Acme can say, hey, we followed the rules, what more can we do?

So I suggest that regulation may be needed more to protect businesses than harm to the consumer. Protect in a legitimate sense, not in the sense of raising the barrier to competition.

Business protection
This would lead to situations like Rocky Flats, CO.

Business would have license to pollute from the government.

How much protection did the government give silicone breast implant manufacturers?

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