Limited Government and its Effects on People’s Welfare

“Liberty – the mother, not the daughter of order”
When we look at the changes that have swept our life over the past years, we see that less and less room is left for the government. It is not only private bread on our tables that we enjoy. People increasingly use private medicine, send children to private schools and hire private babysitters.
In many cases, however, private property and private services exist in name only. Private health care services, for example, are subject to extensive price controls and ceilings. Many “free” prices are controlled indirectly, by various roundabout regulations. Government-imposed restrictions on market processes inhibit the development of a normal price system whereby prices are determined by market demand rather than calculation of costs. Thus, the market we have is in fact an administrative economy garnished with market ingredients.
State control extends to many other spheres of life. Take, for instance, employment regulations. The labour market is regulated to an extent that people are not free to work for as much as they are ready to work under voluntary contracts with employers. This prevents employment and forces mostly low-skilled workers to drop out of the labour market.
At the same time, however, the market is full of demands. Each and every one of us can point out a whole range of needs which remain to be satisfied. This means that there are a lot of things people can do and offer one another. Sadly, the market is blocked off. Government-imposed regulations make it hard to start up a business. People are deterred by the ingrained principle that initiative is punished. Many ideas are thus abandoned, ambitions restrained and efforts destroyed. All this has a measurable economic expression: we fail to create as much wealth as we could.
The government’s concern with enhancing people’s welfare and Lithuania’s competitiveness has turned into political rhetoric. But competitiveness is not a fanciful indicator estimated by economists but an elementary reality of life. If a company is shouldering such a burden of bureaucracy and taxes that it is in no position to manufacture a competitive product, that company is not competitive and no artificial measures nor government spells can make it competitive. The only way to achieve it is by freeing people’s initiative so that they waste as little time and energy as possible filing bureaucratic reports or performing other preposterous tasks inflicted by the government. The above-mentioned “efforts” do not generate any wealth. Nor can they be offered to others, exchanged or sold. Moreover, those who work and create also carry the burden of maintaining those who order them about..
So why are we advocating free market solutions and what makes us believe that Lithuania can and ought to adopt them? It is in a free market that the overall wealth is the greatest. I trust we are past those times when people believed that in a free market every transaction benefits only one party. Today people realise that voluntary exchange is mutually beneficial and that this is the cornerstone of the market.
The cornerstone of regulations, or state interventions, is quite the opposite. Regulations are designed to force on one party conditions which are beneficial only to another one. In other words, interventions result in one group of people benefiting at the cost of others.
Of course, people and companies are not free from concerns in a free market, nor is a free market a perfect order. But what distinguishes a free market from a regulated one is that in the former people seek to solve their problems through voluntary agreement and exchange. The latter is based on compulsion and coercion.
At the conference, much has been said about consumer protection. What happens when consumers, for instance, lack information and cannot tell good products from bad? Some people opt for free market solutions. They understand that a lack of information is a specific market niche to fill. If people wish to know which product to buy and where to find it, there you go – start an information service.
The evaluation of restaurants by Alan Austin in Lithuania’s largest daily, Lietuvos rytas, is one of the best known examples in Lithuania. Being a restaurant expert and a food connoisseur, Mr. Austin shares his knowledge with others. I don’t know how much his business pays, but normally it would pay very well. Publications that feature restaurants, hotels and other services are very popular around the world. When abroad, one relies not on governments but on guidebooks like this to act upon in choosing what places to go or what food to eat. Obviously, such businesses spring up very quickly in the absence of government-erected barriers.
An alternative to such private solutions would be a law instructing governmental agencies to evaluate hotels, restaurants and other services and to provide tourists with special guidebooks. Although the government of Lithuania has not appraised restaurants so far, it has instituted a multitude of requirements ostensibly supposed to protect consumers. Before a restaurant is registered, it must have a menu approved in the minutest detail. Such “advance” regulations are unacceptable in all respects. They fail to safeguard consumers against food poisoning but create an illusion of safety, encouraging people to suspend their own judgement.
Not surprisingly, when in trouble, people turn to the state as a last resort. They don’t think they need to insure against death in order to protect their children. They don’t think they need to insure their houses so as not to become homeless or to insure their cars in order to prevent car accidents from ruining their lives. The belief that the government will attend to all such needs is not simply demoralising. It is also misleading, for in case of a misfortune the public welfare system fails to give expected compensation.
In a free market, people learn how to take care of themselves, and private insurance plays an important role here. Here we have talked a lot about tourism. Insurance of travel businesses would benefit both tourism agencies and tourists. However, the government impedes the rise of private insurance services by imposing artificial financial requirements.
The development of the insurance market is instrumental in securing safety of the banking sector. Before the massive banking crisis which hit Lithuania late in 1995, LFMI argued that information about commercial banks should be accessible not only to the Bank of Lithuania. Being a monopolistic recipient of this kind of information, the central bank failed to use it to prevent financial losses. We insisted that banking information should be freely available so that private valuers, known as credit rating agencies world-wide, would enter the market and provide information about the credibility of Lithuanian commercial banks. As a result of LFMI’s efforts, financial disclosure was mandated by law but it happened too late to avert the crisis.
It is not accidentally that I mentioned information services in relation with insurance. Rating agencies would undertake full responsibility for their valuations if they acted as insurers at the same time, that is if they not only disseminated information about banks’ financial status but insured people’s deposits. The insured would be confident that those who accept their insurance premiums would do their best to make correct assessments of banks.
The need for deregulation seems to be obvious. Now the question is how to deregulate. First of all, it is essential to expand privatisation in its true sense, by deregulating different sectors of the economy alongside the transfer of property from public to private hands. The removal of price controls and macroeconomic regulations should be top priority. Regulations which affect the movement of capital and have a multiplying effect on people’s well-being should be addressed first.
Equally important is to scrap all micro-regulations, at the level of every sector and every industry. Such regulations are stipulated by law but they are also commanded at lower levels. Whatever their source, deregulation may be effected only by those in position of power.
We at LFMI have expertise and confidence to propose deregulation policies, but decision makers are sometimes unpredictable. When we exposed the defects of stamp duty, we took much pride in our success. The authorities accepted our arguments that stamp duties should not exceed the cost of state-provided services and that stamp duties should not be used to strip businesses of an unfairly large portion of profits. Yet, while abolishing stamp duties, the government came up with a law on state levies. Under this law, that which had been expropriated through stamp duties will be collected as state levies. One regulation was replaced by another one.
Almost every Wednesday the cabinet institutes new governmental agencies, charging them functions contrived in most cases by the very institutions concerned. Life is thus being encumbered with superfluous, unjustified undertakings and costs. True, we can console ourselves with the fact that in Lithuania, just like in Italy, another method of deregulation is becoming increasingly popular. This method consists in sabotaging state regulations and thus softening their damaging effects. Another form of sabotage is corruption, when people know the price of official signatures, permissions, or approvals. The easier it is for people to buy official favouritism, the fewer problems they face in fulfilling state requirements. And the easier the burden of ill-considered regulations.
I wouldn’t like sabotage or corruption to become our salvation. After all, there is a true alternative, a system in which there is no need to collect or buy official signatures and approvals, a system which does not make it its goal to pursue something mystical and unattainable. Such a system benefits everyone alike – consumers, producers, and employers. It provides the best possible opportunities to create and to enjoy the full benefits of labour.
To sum up, when the state interferes between producers and consumers, market signals, which come in the form of prices, are suppressed. The system rejects essential market information and the market ceases to operate. Today we are living in a heavily regulated system, which distorts market processes, cripples morality and reduces people’s well-being. If we want to undo this damage, we should create a system in which the path to success will lead not through government but through individual abilities to work and win on the market.