During the summer of 2001, I was commissioned to write a book in defence of enterprise. For reasons that I cannot quite decide—I think the client wanted something more decidedly Austrian and more resolutely damning of the Chicago School than I am able to be—this project ran out of steam, and I was left with a mass of unpaid words on my hard disk. I have just found these, and, reading them for the first time in over a year, find that the first three chapters are probably worth publishing more ofr less as they stand. I am particularly interested in publishing them because, while I earn part of my income from teaching Economics, I have never yet published anything on the subject. So here is a (slight) change from my usual moans about how the country is going to the dogs, and how it is all the fault of the politicians. I am still saying this, but with economic rather than legal and political arguments.

Of course, if anyone would like to commission me to update these chapters and finish the whole book, you know where I am!

Sean Gabb
December 2002

Introductory

In June 2001, following its re-election, the Labour Government announced that it wanted to create a "culture of enterprise" in Britain. Gordon Brown, Chancellor of the Exchequer, explained that this ambition would be at the heart of Government economic strategy for the next four years. There would be cuts in the rate of capital gains tax and a reduction in the incidence of corporation tax. There would be proposals for lowering the rate of value added tax for small businesses, and other tax changes to make Britain more attractive to foreign investors. At the same time, there would be proposals to simplify the planning laws to enable businesses to expand more easily.⁽¹⁾

These are steps in the right direction—big steps, bearing in mind the sort of party Labour used to be. It seems now to be the consensus among the main political parties that wealth is most surely created and traded by private firms and individuals following their own self-interest as they conceive it within a framework of just laws.

This being said, Mr Brown took perhaps a larger step in the wrong direction. He also promised "tough new powers for watchdogs" to protect consumers. There is to be a new unit set up in the Office of Fair Trading to seek out anti-competitive practices. This body has so far been limited to investigating complaints of unfair practices, not seeking them out. Mr Brown also said the Government was considering tougher penalties for businessmen found guilty of price-fixing and involvement in cartels, and that it might even follow the United States in imposing jail sentences and heavy fines for breaches of competition law.⁽²⁾

Of course, there can be no justification for anyone who gets ahead in business through force or fraud. Yet, while most people think of consumer protection as the deterrence of such acts, its actual application is much wider. In the name of consumer protection, governments throughout the civilised world have put enterprise in chains. For all its talk of celebrating and promoting enterprise, the British Government tries to regulate enterprise with one of the most intricate patterns of laws and executive bodies that ever existed. There is the Trade Descriptions Act 1968, the Misrepresentation Act 1968, the Consumer Credit Act 1974, the Unfair Contract Terms Act 1977, the Office of Fair Trading, the Competition Commission, the Food Standards Agency, and hundreds of other laws and bodies. Add to this a tax system that, even with Mr Brown's promised improvements, is only reasonable in comparison with those in most other European Union countries. Entrepreneurs are watched and controlled at almost every step. They must give full details of their doings and plans to those in authority. They must seek permission for most of what they do, and be careful in what they say about their products. If they do eventually make a profit, this is regarded variously as luck or as the fruits of exploiting workers or consumers or both; and efforts are made to seize the lion's share of it either by taxes or by regulatory charges and compliance costs.

The stated purpose of all these is to make life safer for the consumer without harming "responsible business". The actual effect is to make even the most honest entrepreneurs into a persecuted minority. If the Government did to any racial or sexual minority what it does to entrepreneurs, there would be an international outcry. As it is, the smallest promise of lightening these burdens on enterprise lets a government call itself friendly to business and be believed.

Describing and commenting on the burdens listed above—and all those many more not mentioned—would need a textbook in itself. But as a sample of the whole, take the law that came into effect in June 2001, introducing Stop Now Orders.⁽³⁾

Stop Now, Think Later

A Stop Now Order is an injunction granted on application to the courts. It requires a business with immediate effect to stop doing what the authorities consider to be a breach of the trading laws. It adds nothing to the substance of these laws, but allows them to be more easily enforced. It covers: "misleading" advertising, doorstep selling, consumer credit, broadcasting, package travel/package holidays and package tours, advertising of medicinal products, "unfair" contract terms, distance selling, the sale of goods in general. Failure to obey a Stop Now Order is treated as a contempt of court, and is punishable by unlimited fine or imprisonment for up to two years or both. Businesses receive a two week warning that an Order is being sought—though in some cases, this requirement may be waived. If a business wants to contest an Order, it must go into court, but until it is quashed, a wrong Order stays in force.

Not only the authorities can apply for Stop Now Orders. Other bodies can as well. The Consumers' Association and Shelter, plus an unknown number of other private bodies, trade unions, environmental campaigning groups, and charities, can go into court and apply. These bodies need not even identify any individuals harmed by an alleged breach of the trading laws.⁽⁴⁾ And they can seek Orders and defend them at any hearing without necessarily having to pay legal costs if they eventually lose.

Commenting on the new law, John Vickers, Director General of Fair Trading said:

We welcome the new powers which will enable behaviour that damages consumers to be stopped more quickly. We intend to use the powers both proportionately and robustly. To this end, we are writing today to businesses that we believe are harming consumers by infringing consumer protection laws in a range of markets. These suspected breaches range from the supply of defective goods and materials to breaches of rules on credit advertising. These new powers will help the OFT in its task of making markets work well for consumers.⁽⁵⁾

Also commenting, Nick Cull, Executive Director at the Local Authorities Co-ordinating Body on Food and Trading Standards, said:

Local authorities want local markets that are fair, safe and thriving. Businesses and consumers must have confidence in the ability and desire of local and central government to maintain a clean and competitive trading environment. The new Stop Now law will certainly help in taking rogue traders out of the market and better protect shoppers and the great majority of good UK businesses.⁽⁶⁾

In the name of consumer protection, therefore, businesses are to be deprived of due process of law. They can be stopped from trading without a fair hearing in court. They can be accused of offences where no identifiable victim need be produced. Instead, they can be harried and even destroyed by a swarm of special interest pressure groups with no direct interest in a case. They can be prevented from recovering their legal costs even if they win a case. To repeat, the acts covered are much wider than the sort of dishonesty that is condemned by nearly every moral code, and that possibly ought to be illegal in any system of law. They include acts that are not wrong, and that ought not be illegal. Inevitably, even those businesses that are scrupulously honest, and even those that try to comply with the existing laws, will be caught in this new enforcement process. Just as inevitably, it will not be long before these Stop Now Orders open businesses to attack from any jealous competitor who knows how to draft an appropriate complaint.⁽⁷⁾

Some "enterprise culture" the rulers of this country are trying to promote!

Now, it is worth asking why enterprise is so feared. Why treat entrepreneurs like dangerous wild animals, that cannot be safely left to their own inclinations, but must instead be caged, or only allowed out under close restraint? The answer is that we do not live in a civilisation that has a fixed hostility to enterprise and progress. Entrepreneurs do not in this country or in this age face the deadly hostility that they sometimes faced in other civilisations.⁽⁸⁾ Nor, as said, are they regarded any more as redundant. When they do succeed within the narrow bounds permitted, they are sometimes admired and even honoured—see, for example, Sir Richard Branson and Sir Terence Conran, among many others. Why, then, this almost instinctive suspicion and fear?

The Analysis of Public Choice

The first answer can be found in public choice economics. According to James Buchanan and Gordon Tullock⁽⁹⁾, there are forces at work in politics analogous to those at work in economics. Among the most common desires of individuals are wealth and status, usually in some combination. Businessmen in a free market are driven, by the promptings of self-interest, to offer new products to their customers, and to cut costs and prices. They do this not because they love their customer, but because this is only way in which they can struggle through to fortune and perhaps a place in the history books. In politics, these things are achieved by gaining and keeping office. This is most easily done in a democracy by promising the electors benefits for which others must bear the costs. These others may be later generations or a minority of the present generation. In either event, the benefits will be offered; and politics becomes a competitive auction for votes with other people's money.

At the same time, the personal interest of most administrators will lie in welcoming and even proposing such schemes, because they must be put in charge of delivering the benefits. This will mean an increase in their budgets, in the number of their subordinates, and in the status that they possess in the public mind.

The public choice trinity is completed by pressure groups. Typically, though not always, these will have a personal motive. Political and administrative reformers nearly always stand to benefit from the adoption of their "reforms". And for all they may celebrate private enterprise in their public utterances, few businessmen really like having to operate in a free market. It means competition in which they might lose, but in which they must always be acting against their own convenience. Even if they are not complete cynics, it takes little persuasion to make themselves believe in "market rationalisation" or "safeguarding the national interest", or "protecting consumers", or whatever.⁽¹⁰⁾ Other things being equal, these groups and their demands will be taken up by the politicians and administrators in proportion to how well their schemes require a bigger and more active state.

Quite often, opposition will fail even when what is proposed is not remotely in the public interest as conceived in the wider sense. The reasons for this have been most rigorously explained by Mancur Olson in his writings on collective action.⁽¹¹⁾ All voluntary associations involve their members in costs and benefits. When the actual or potential benefits to each member are large, the members will be happy to incur heavy costs. When the benefits to each are small, there will not be the same incentive to incur costs. Typically, producer groups in search of market privilege fall into the first category, and consumer groups into the second. The first will have the money to buy the best and most intensive publicity in favour of their desired privilege. They can hire economists to draw up the relevant graphs or tables of statistics, and to make the worse appear the better case. The second are compelled by lack of finance to reply with general arguments that do not seem actually to address the main points at issue. The first will be helped by politicians and civil servants who see their own interests served thereby. The second can rely, at best, on the support of political outsiders who have no interest in the present state of affairs, but who also have little popular or party support.

Today, examples of how we are ruled by this public choice trinity are beyond counting. Look at the de facto marriage between the Ministry of Defence and the arms companies, between the Department of Transport and the road building companies, between the Police and the moral purity campaigners. Look at the rigging of the gas market, at the professional closed shops, at the Common Agricultural Policy. These are marriages obviously against the public interest; but few members of the public have an interest great enough to spend money and effort on trying to annul them. There is a similar process at work with consumer protection laws. According to Stan Mendham, of the Forum for Private Business, the Stop Now Orders are

a measure by big business for big business, and they will never be caught by it⁽¹²⁾

Big businesses can always afford the compliance costs with such laws. It is their smaller competitors who suffer—and this is part of the intention.

However, the analysis of public choice is not by itself sufficient to explain what it happening. It explains the enabling mechanism, but not why some laws are made while others are not. For example, there are wealthy and well-organised groups that would benefit from all manner of other laws which are not made. We do not have the death penalty for drinking and driving, or the licensing of books, or bans on alcohol and cigarettes. We do not have these because there are good counterbalancing arguments against any interest group that might want them, and these arguments are accepted by those in power. Where restraints on enterprise are concerned, though, the arguments in favour are not counterbalanced. Instead, the arguments are mostly in the other direction. Let us examine these.

Envy

First, there is envy. This is not so much an idea as an emotion. But it is a powerful influence on policy in this country. Britain is on the whole a very pleasant country. It is a democracy with free elections and freedom of the press. Its people are admired for their sense of fairness and moderation. A big fault, though, is our tendency to envy those who get ahead by their own efforts. Wealth in itself is not condemned. There is little envy of big lottery winners. That is a matter of luck in which we all might share if only we bought the right numbers one Saturday afternoon. Inherited wealth is not really envied outside a small circle of committed egalitarians. Though most of us will never inherit anything, inheritance also is seen as a kind of luck, and those who win this lottery are not seen as in any real sense wrongdoers. Even certain kinds of enterprise are universally admired. When we learnt that Elton John is so rich that he can spend £1 million a year on flowers, there was laughter and some contempt, but no calls to stop him from making any more money. It was the same with the Beckham wedding early in 2000. We mostly thought that tasteless, but no worse.

It is different with most other enterprise. Plain businessmen are envied if they grow rich. Their successes are taken as the proceeds of something approaching dishonesty. If they fail, they are ever after defined by their failure. Look at the case of Sir Clive Sinclair. He was one of the great geniuses of post-War British consumer electronics. He developed the first electronic calculator. He developed the first home computer and sold over a million, clearing the way for how that market developed in the 1980s. Mention his name nowadays, however, and it will be heard with a sneering laugh. Was he not the man, it will be asked, who spent all his money on that electric car that no one wanted to buy? The answer is yes. He made what in retrospect was a foolish mistake. His electric car was too small and too weak to compete with conventional engines. He did not do his marketing homework, and that project was a disaster that brought his career to a sudden and probably final end. But he was more than the C5 electric car. It is a sad reflection on how we view enterprise in this country that he remains famous only for that failure.

We can see this tendency to envy in virtually all the comment made in this country on the problems faced by Bill Gates and Microsoft. No one seems to reflect on the immense wealth enabled for all of us by MSDos and MSWindows and the other software applications created by Microsoft. It is because of that company and its founder's vision that there are now so many computers around the world, and that these can so seamlessly speak to each other. Everyone seems to have forgotten the immense compatibility problems and the haphazard working of most applications before Microsoft brought order into the market. All we hear instead is how Bill Gates made himself into the first or second richest man in the world by creating a "monopoly"—as if he had put armed guards round every computer to forbid us from using DRDos or OS2 or Linux or Netscape or WordPerfect or whatever. For every hundred admiring words published in the British media about his achievement, there must be ten thousand that are hostile.

Or look at Geoffrey Archer. He lied in court to win a case that was being fairly tried. This was wrong, and he deserved to be punished—even if four years imprisonment does sound excessive bearing mind that some people get less for armed robbery. What is relevant here, though, is the great cry of joy that went up across the nation when he was sentenced. Would people have been so happy if he had not been a very wealthy best-selling novelist? Probably this was envy at work again.

Look even at popular culture. The BBC Television soap Eastenders is watched by millions. Its moral outlook at every level is hostile to enterprise. Any character who tries to get rich through business or otherwise to improve his or her life is almost certain to be rotten to the core. The few exceptions are only redeemed by going bankrupt—always be forces beyond human control - or by suffering some other misfortune. The most sympathetic characters are invariably the poorest and least enterprising. On the one hand, this is disgraceful lifestyle propaganda by the media establishment in this country. On the other, it only reinforces an already existing bias in the public mind.

The regulation of enterprise is in part another manifestation of envy. People do not want all these labour and consumer protection laws prey because they are supposed to protect, but because they make it harder to become rich, and can be used to strike down those who become rich even so.

Protections Against Folly

Second, there is the growing distrust of the ordinary people to make decisions for themselves. Look at this news story from July 2001:

TRADING standards officers have renewed their pleas for people to be wary about cut-price holidays being offered in Coventry for £29.50.

They say families will be paying a lot more than £29.50, which doesn't take into account airport taxes and other hidden extras.

Holidays Direct, one of the main purveyors of the special offers, is not a member of the Association of British Travel Agents, which means it has no insurance if a travel agent goes out of business or holiday- makers have any accommodation problems.⁽¹³⁾

Or look at this from the same month:

The Department of Trade and Industry (DTI) is investigating an all-female pyramid investment scheme running rampant throughout Britain.

DTI Secretary Patricia Hewitt warned women to steer clear of the "Women Empowering Women" scheme, and added the government is investigating ways to outlaw the group, which is estimated to have attracted 150,000 participants. Hewitt said: "This is a nasty scheme which preys on vulnerable women, many of whom can least afford to lose their hard-earned savings."⁽¹⁴⁾

Every month, the newspapers and television consumer programmes are filled with similar stories. Sometimes, it is double glazing, sometimes cheap or high risk loans, sometimes burglar alarms, but always some complaint about things that people should have seen coming. Why should freely consenting adults be protected against their own greed or stupidity? Surely any reasonable person offered a foreign holiday for £29.50 should check before signing the contract. Equally, anyone getting involved in a pyramid selling scheme—other than at the top, where serious money can be made - deserves pity at best, not legal protection.

Speaking generally, if adult beings of common intelligence smoke themselves into lung cancer, or drink themselves to death, or overdose on paracetamol, or borrow £500 without calculating that they must repay £30,000, or believe that a few herbal supplements will undo the natural effect of eating 10,000 calories a day, they have only themselves to blame. It is simply wrong to punish those who make these things possible with bankruptcy, or fines, or imprisonment, or advertising controls that amount to censorship. It is wrong so far as it is an inappropriate use of law. It is wrong also because regulations made to stop these things affect all business of whatever kind.

This may sound a hard attitude to take when people have lost money or suffered some other damage. But the alternative, of offering legal protection, is far worse. It treats people as if they were children. And let it be fully granted that people cannot be trusted to run their own lives without going wrong, and what future does that offer democracy? If someone cannot be trusted to sign a loan agreement without having his hand held by the authorities, why should he be trusted to vote for a government to rule the whole country—and that has the power to launch nuclear weapons against other countries?

Of course, this infantilising approach to human choice is not general. Even without AIDS, the mechanics of gay sex involve potential and actual harm. The evolution of our species has not given us bodies able to do in safety all that the mind might desire. But we have not shut down the gay clubs or criminalised sexual acts between consenting adults of the same sex—and rightly so. There is a serious debate opening up about the legalisation of drugs—and no one really believes that recreational drugs are entirely without danger. No one is locked up for trying to get others to cross the Atlantic in a barrel or eat 500 boiled eggs on live television. These are seen as matters of personal choice in which the State has no legitimate function. Only when business is involved does belief vanish in the right and duty of consenting adults to choose for themselves and take the consequences.

Bad Economics

Third and lastly, there is the faulty structure of mainstream economic theory. This is not to say that mainstream economics is worthless. It was developed by men of undoubted genius - men like Marshall and J.M Clark and Pareto—who were often strong defenders of the free market. It contains many insights of permanent value. Indeed, economics as a subject has from its beginning been largely a set of meditations on the benefit of free markets. Adam Smith, J.B. Say, Ricardo, J.S. Mill, Jevons, Marshall, and the other early developers of the subject, were all to some extent believers in market freedom and were hostile to detailed regulation of markets by the authorities. We can even read The Wealth of Nations as an extended attack on the British mercantile system of the 18^th century.⁽¹⁵⁾ Today, economics remains overwhelmingly a study of how the apparently uncoordinated actions of individuals combine into the highly rational and progressive structure of the commercial world.

The problem is that mainstream theory—especially relating to the firm and enterprise—is faulty. Just as an almost invisible split in an asphalted flat roof will let in water, so this fault in the theory has allowed economics in practice to be made into a systematic attack on the right of freely consenting adults to choose between alternatives, and on the right of other adults to offer these alternatives in the manner and at the prices they personally desire.

This matter will be the subject of the next Free Life Commentary.

1. "Chancellor's plans to help firms and close loopholes", The Evening Chronicle, Newcastle, 18^th June 2001. See also Chancellor of the Exchequer's Speech to the British Chambers of Commerce on Wednesday 5 April 2000, available on the Internet at http://www.hm-treasury.gov.uk/speech/cx050400.html

It seems that Mr Brown is in step with public thinking. According to Kevin Brown of The Financial Times:
"In 1970, 53 per cent [of the British public] agreed that big companies' profits helped "make things better" for everyone, and fewer than 25 per cent disagreed. By early 1999, the proportions had reversed, with 25 per cent supportive of profits and 52 per cent against.

"The proportion that backs profits is now up four points to 29 per cent, and the proportion against is down nine points to 43 per cent. That still gives a negative balance of 14 points, but at least suggests an easing of hostility."

("Britain's change of heart on profit: Public hostility to capitalism wanes", published in issue of 16^th August 2001

2. "Chancellor's plans to help firms and close loopholes", The Evening Chronicle, Newcastle, 18^th June 2001.

3. The Stop Now Orders (E.C. Directive) Regulations came into effect on 1^st June 2001. The Regulations implement, in the UK, Directive 98/27/EC (the Injunctions Directive).

4. See Jean Eaglesham, "Under attack from blame and claim", The Financial Times, London, 23^rd Aril 2001:

"'Lawsuits could be launched—with the court's permission—even in cases where the individuals being represented were not identified. This could include "all the purchasers of a product or service who had been overcharged . . . for example customers of a public utility company serving a particular area'. It could also cover cases where the individuals represented were 'non-identifiable . . . for example where a consumer group has difficulty finding suitable individuals to run a test case'".

5. Quoted in "New powers to Protect Consumers", Office of Fair Trading news release, 31^st May 2001. See also: "Howells Launches International Crack Down on Rogue Traders", Office of Fair Trading news release, 10^th April 2001; "Partnership Needed to Make Sure Markets Work Well for Consumers", Office of Fair Trading news release, 19^th June 2001. All these news releases can be found on the Internet at http://www.oft.gov.uk/html/rsearch/press-no/

6. Quoted in "Howells Launches International Crack Down on Rogue Traders", Office of Fair Trading news release, 10^th April 2001.

7. See Michael Beckett, "Powers to halt trading under fierce attack", The Daily Telegraph, London, 17^th Aril 2001:

Stan Mendham, of the Forum of Private Business, said it provided a wonderful opportunity for malicious attacks on another business.

8. See, for example, this story rom the Roman Empire of the first century:

"Once upon a time, there was a workman who made a cup of unbreakable glass. He got himself an audience with the Emperor, and pretending to had over his invention, he allowed it to fall to the marble floor. The Emperor was astonished: the man picked up the unbroken cup—it was only dented as if it had been of bronze—and knocked it back into shape with a little hammer. He thought he had his fortune made. But the Emperor asked: 'Does anyone else know how to make such glass?' When told it was still a secret process, he had the man's head cut off, remarking that such a process, if generally known, would lower the price of gold, since it would no longer be used for making cups of the best quality."

(Petronius, Cena Trimalchionis, 51 (translated by Sean Gabb). This story is also told somewhere in Dio Cassius and in Pliny the Elder. The Emperor may have been Tiberius.)

9. See James Buchanan and Gordon Tullock, The Calculus of Consent, University of Michigan Press, Michigan, 1962. See also: Gordon Tullock, The Vote Motive, Institute of Economic Affairs, London, 1976; and James Buchanan, The Economics of Politics, Institute of Economic Affairs, London, 1978.

10. For a possible example of this tendency, see Cjou Freelance, "Scots builders to be licensed", Contract Journal, London, 1^st August 2001:

"Scottish building contractors and building specialists have reached agreement on a voluntary registration or licensing scheme in a bid to stamp out industry cowboys. They are aiming to launch the scheme at the beginning of October.

"Sid Patten, chief executive of Scottish Building, said...: "We are all of a mind that we want to set up a new, independent regulatory authority for the construction industry in Scotland.... It will be a registration body—in effect a licensing authority.....

"'We had been hoping for legislation to support the scheme in the short-term. We now believe that, in the longer term, some form of light-handed legislation is the way forward.'"

11. Mancur Olson, The Logic of Collective Action, Yale University Press, Connecticut, 1964, and The Rise and Decline of Nations, Yale University Press, Connecticut, 1982.

12. Quoted in See Michael Beckett, "Powers to halt trading under fierce attack", The Daily Telegraph, London, 17^th Aril 2001.

13. "Warning on cheap breaks", Coventry Evening Telegraph, Coventry, 31^st August 2001.

14. Leslie Kraf Burke, "Pyramid to get DTI probe", The Scotsman, Edinburgh, 31^st July 2001.

15. On this point, see Chris R. Tame, Against the New Mercantilism: The Relevance of Adam Smith, The Libertarian Alliance, London, 1979.