If You Don't Know What's Wrong, Think Competition

More than 25 years ago, I was asked by my friendly banker to represent one of his small banking clients who was seeking to raise capital publicly to finance a fledgling software company. At a meeting in the bank, I said I wanted $20,000 and some shares of stock in the company. Upon being asked what number of shares I wanted, I paused for a few moments and then said, with an all-knowing demeanor, 100,000 shares.

The new client readily agreed, and left the board room where we were meeting. Tim, the banker, as soon as we were alone, said to me Carl, I know how you came to the figure $20,000, but tell me how did you come up with the figure of 100,000 shares?.

Tim, I said, anytime I don't know what to say in a situation like that, I say 100,000. This is how you should think of what's wrong with anything which you believe is wrong in our economy. Think about the lack of competition, and round up the usual suspects, which will be some variants on the lack of competition.

The main problem with our economy is that someone (meaning government at the federal, state or local level) has tampered with a free market thereby causing restraints which have favored a few at the expense of the many. Or, the government or courts have failed to enforce the federal and/or state antitrust laws, for reasons which relate to favoring and protecting the rich (and significant campaign contributors) as against the others.

The activities of government in giving away the economy are often skillfully hidden from the public, by insertion of special benefits as small footnotes in lengthy bills; by the regulation of an entire industry (a favorite technique); and by the grant of exclusives in one way or another. In New York State, for example, the insurance laws define what types of insurance organizations there can be, and goes on to outlaw all other types, thereby building into the state's economy the lack of any new developments in the insurance field unless someone is powerful enough to lobby the state legislature for a change in the statute, which I don't think has happened in the insurance area in 40 years or so (but I could be wrong).

Another example. What do the federal securities and state blue-sky laws require for a small business person to be able, lawfully, to advertise or solicit publicly for business financing (capital)? I'm a securities lawyer (having represented perhaps 50 companies seeking capital and perhaps 15 different underwriters over the years (and I have taught securities law and have written a textbook on securities law) and I can't tell you without doing several hours of legal research to brush up on current laws.

The laws including the rules and regulations promulgated thereunder are constantly changing and the laws, rules and regulations are too complex to remember with the accuracy needed to be able to ensure compliance with the law in many situations.

Due to these reasons, small businesses do not raise money publicly (and I'll bet you haven't seen more than a handful of the nation's 10,000,000 or more businesses try over the years) and the nation's savings are not able to be invested in small business (unlike the wealthy investors who gave startup financing to Microsoft and Federal Express), to the financial detriment of the middle class savers, small businesses themselves, and the U.S. economy generally.

The United States has protected itself right out of its fabulous economy, causing the economy to go to other countries or to monopolies in this country by not permitting capital to be allocated on competitive terms, which creates monopolies, higher prices, fewer jobs, and a lower standard of living for all but the owners and top managers of the monopolies. The others are now becoming downsizees.

Competition would cure this, by eliminating the federal securities and state blue-sky laws and relying on enforcement of the nation's laws prohibiting fraud instead.

This is a really simple solution to the problems caused by a complex set of laws, but since most people don't know the extent of the regulation of securities or the effect of such regulation, and are not aware that small business cannot raise capital, and are not interested in going into small business themselves, or don't want to be bothered with all the antitrust and economic rigmarole, the economic problems for the middle class and poor continue, in essence brought on by themselves.

If people know about the problem and understood how their standard of living has been lost because of the problem, they would communicate this to their legislators and other elected officials and demand that the problem be cured, or they'll vote for someone who will do the job.

Education is another problem created by the lack of competition. The cost of higher education is too much (on the order of 17 times more costly than it should be if competition were allowed) because of the lack of competition in education; and the quality of public education in grades K-12 in many major cities is outrageously poor, because of the government monopoly at the state and local level, where government collects tax dollars for education and refuses to let parents spend the money at schools of their own choice.

This lack of competition coupled with civil service rules and civil rights laws have made it impossible for incompetent or uneducated public school teachers to be fired, and for unruly (or weapon carrying or addicted) students to be kicked out of public schools. Competition can cure this, easily.

I know from personal experience. I owned and managed a career school for 18 years, and terminated bad teachers on the spot, as soon as they became known to students (who brought their complaints to the staff) or directly by the staff. In the case of unruly students, I had a more lenient policy of trying to warn and work with some students, and found that the main problem in the few cases I can recall was that the school was above the intellectual level of the problem student, who was a problem only in that he/she was asking stupid questions in an effort to acquire the education he or she wanted, and it was just a problem of being in the wrong school and not being unruly or trouble-making of the public-school type.

These two areas of economic restraint (capital allocation and education) are only two of the problems we face. We need more competition in primary and electoral process; in the area of licensing (to abolish all unnecessary licensing); in the area of other government regulation (to abolish all unnecessary laws, rules, regulations and government jobs); in the area of reducing excess concentrations of capital (which concentration we now see is accelerating in the media area, for reasons which should now be obvious to you after reading some of my articles); by having more competitive enforcement of law (having government start enforcing the antitrust laws and find ways of encouraging the nation's judiciary to deal with antitrust laws more judiciously and not with a decided tendency of resolving antitrust issues in favor of big business. This would take increased judicial funding, and perhaps should have a federal antitrust court of appeals similar to the single (federal) Court of Appeals in existence for patent cases, to ensure that federal district court judges do their job properly, and to ensure that the nation's antitrust laws are the same throughout the United States. As things stand now, the various (federal) Courts of Appeals in the United States are permitted to come up with decisions which differ from circuit to circuit, and the likelihood that the U.S. Supreme Court will step in to resolve the differences is remote in any one instance.

Bureaucratic reform can only take place after political reform, which needs voters to become aware and demand reform. Micro-economic restraints created by statute also require political reform to undo, particularly because the courts (too willing to follow the lead set by the political scene as it exists - in other words to go along with the status quo) are not willing in most cases to overturn excessive rules and regulations. They defer to the expertise of the political types who often have no significant experience in the field in which they become the regulators, and refuse to overturn what the regulators have done.

Really, what we see is that the deterioration of our economy is no more than the predictable results of the restraints against competition which have piled up by protecting favored groups from competition, and when we start eliminating these restraints through deregulation, the effects on the economy will be staggering, and create opportunities for untold millions and a higher standard of living for us all.

I want to note immediately that reasonableness is the rule and that some rules and regulations and safety nets are needed. It is the nation's political job to work out the new relationship between government and the people, with an emphasis upon competition rather than protection.

One or more websites could be created for each state to identify the laws, rules, regulations and regulators which need to be eliminated or softened; as a way of building up a body of information which is readily accessible to legislators, media and voters. Also, websites could develop in opposition to explain why proposed reform would be unwarranted - an electronic debate of political issues which enable the debate to take place over extended periods with everyone able to have access to and participate in the complete argument.

Website political debates can be far better for the public than a single newspaper or television news item, which is published in only a few seconds or lines of copy and read or seen by only a few hundred thousand persons in the entire country, and seldom if ever repeated for the rest of us to hear or consider.

Website political debates can create a history of the debate for everyone to access and consider.

The effect of this envisioned improvement in political debate will provide countless new opportunities by giving access to capital, education, markets, and ideas; create new businesses and jobs; provide new and improved products and services at lower prices; and create a larger economic pie and a larger slice for each of us.

Copyright © 1995 by Carl E. Person. Permission is given for non-commercial users to send a copy of the data processing file for this work by electronic means to a specific individual for his or her own use, and then only if the entire file is sent, including this copyright notice, but no permission is given for anyone to copy or transmit this file for or to any person for public viewing or downloading. It is intended by the author of this work that the work shall be made available in electronic form only through LawMall (tm).