I wrote before that once the government intervenes in an area, that expansion will inevitably require another, and another, and another, until the government effectively controls that area of the economy. ("The Endless Cycle of Intervention") Perhaps the best example of this is in the area of railroads, where small scale local regulation eventually led to massive federal subsidy and regulation of cross-country railways, then the setting of prices, and finally the outright nationalization of most passenger rail, along with huge involvement in freight ( "Killing the Railroads") A similar pattern has prevailed in banking, going from state regulation, to federal, to federal centralization under the federal reserve, to today's first steps in outright nationalization. ("The Inflation Engine", "The Free Market?", "Explaining Past Crashes")

However, there is a second side to this argument I failed to discuss in the original post. While I covered quite well the inevitability with which the government takes over a single area, I failed to discuss the way government regulation tends to expand form one area to another. In other words, the way regulation does not only grow, but also spreads.

The problem, from the regulator's perspective, is that the economy is interconnected. When a single facet is changed, everything else changes. However, regulators often think in a vacuum, engaging in what I have called "keyhole thinking". They look at  a very narrow aspect of the problem and fail to foresee any other implications outside of their focus.

For example, thinking the price of wheat is too high, they place price caps on wheat. Predictably, wheat production drops. They failed to recall that no one has to grow wheat.

And that is where the government begins to expand its scope. They could simply subsidize wheat production, but why, when they can simply mandate that bread must use a fixed percentage of wheat flour? And so the government comes to enter a second area of business. And, when bread production falls as wheat prices make bread too expensive, then they can put minimum prices in place for competing products such as rolls, bagels, etc, making bread competitive, despite the higher rpice of wheat. And so on.

Of course that is just a hypothetical example, but the reality is still there. Whenever the government intervenes in business, it distorts the market. If it makes a particular field more profitable, it draws investment to that industry, away from others. If it makes as industry less profitable, it drives investment to other alternatives. And at the same time, it can drive up or down demand for the components and labor that go into that product, and can change the market conditions for products which use the regulated good or service.

Of course this is true of any market change, be it from the free market or from the government. But the difference is, in the free market, price changes are expected and are allowed to occur freely. The government, when enacting laws, is hoping that all conditions remain the same except those they hope to modify. And so these consequences are entirely unwanted.

Unfortunately for the government, as I described in  "The Limits of "Scientific" Management", "Planning For Imperfection",  "Greed Versus Evil" and elsewhere, there is simply no way to predict what the market will do with mathematical certainty. The government can try, but no matter how hard they work at it, every regulation will have unforeseen consequences, and, as the government wants to avoid them, will mandate additional intervention, most often in yet another area of the economy*.

And that is it. It isn't very complicated, but sometimes the truth is simple. And in this case it is very simple. The state can't foresee what the consequences will be of economic meddling. As they will always produce unanticipated consequences, and unanticipated consequences are unwanted, any meddling with require both expanded involvement in the original area and involvement in other, unexpected areas of the economy.

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* The alternative is to roll back the law enacted to reverse the changes it brought about, and when was the last time you heard of a government program being repealed?

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POSTSCRIPT

In some ways our current crisis in an example of this. A combination of inflationary bank policies and mortgage lending policies resulted in collapses leading to the government partly nationalizing both insurance (AIG) and the auto industry. While not exactly what I am discussing here, it does show how changes can ripple through the economy touching industries no one would anticipate and requiring the government to involve itself in diverse areas.