I recall when I was 17 or 18, I think, sometime when I was either an apolitical semi-hippie, interested in Krishnamurti, Idries Shah and Crowley, or maybe a bit later, when I had become something of a follower of Bakunin, I stumbled across Jeremy Rifkin's Entropy. My memory of the first time I read it is rather dim, and that only makes sense, as at first I was not impressed. But something about the book must have made an impression, as it is was one of those few books which I read a second time only a month or two after first discovering it. (Socialism, Omnipotent Government and The Failure of the "New Economics" were three others. So were The Tree of Gnosis and  The Guide of the Perplexed, to move outside of politics and economics. Human Action would be one more, but it was such an impressive work, I actually took several months to work through its implications before I could think about reading it again.) And after that second reading, I recall thinking that the book was something noteworthy. Even then, even with a very liberal, and ascetic, belief system which agreed with the book on many points, I could see there were some arguments which were flawed. (Eg. Seeing the Earth as a closed system. The choice of what to define as order and entropy in context of human society.) But it was a novel approach, and one which opened a new way of looking at human interaction. (As I mentioned it above, I should say The Tree of Gnosis did something similar for my view of historical events. Again, the model is flawed, but despite those flaws it provides an interesting perspective.) And that impression remained with me, as I continued to return to it, even after I abandoned my anarcho-communist beliefs in favor of Objectivism, and then left Objectivism for my more traditional conservative -- and later federalist/libertarian -- beliefs. ("Reticent To Adopt a Title", "A Possible Designation", "The Right Identity") As I came to object more and more to the growing environmental movement, for example, rather than argue against the fashionable thinkers of the day, I frequently found myself instead arguing against the environmental nihilism that Rifkin had put forth. Similarly, when faced with trendy movements based upon simplification (eg. the "local food" movement), again I did not argue against the mundane versions being put forth, but instead the more comprehensive theories Entropy had proposed. In short, the book, by being so effective, became my touchstone for understanding the ideas underlying many of the modern environmental and liberal beliefs.

For those who have not read the book, its premise is simple, though, as I said above, badly flawed in many respects. I won't go into it in detail now, as I am likely to eventually write an essay on the book itself in the near future. (I would also like to read it a few more times before taking it on in detail.) The fundamental argument is that the second law of thermodynamics ("Entropy never decreases in a closed system."¹) is a universal constant, and not just in problems belonging purely to physics. In fact, one can view almost any grouping as a physical system and apply the laws of thermodynamics. For example, a society can be seen as the flow of goods, energy and information through various channels. And we can then look at the way the energy lost is directly proportional to the size and complexity of the system. From this, Rifkin concludes that, while we believe technology and information improve our lives, in reality they increase size and complexity, making our losses ever greater, increasing waste, and speeding our eventual collapse. There is much more to his argument, but the basic conclusion is that the least destructive choice, the system which can be sustained longest, and which will cause the least loss of resources, is a very simple system, with local control, minimal government² and very simple economies. In other words, the second law of thermodynamics demands we adopt environmentalist minimalism.

The reason I mention this whole topic is that it came to mind today while I was reading my post "Pro Hoc, Ergo Propter Hoc". In that post, I discussed the reasons that the financial and services sectors might grow in an economy. (A topic I also addressed in "Bad Economics Part 13" and "Science and Government Intervention".)  While reading my discussion of the ways in which growth of the financial and services sector can be an indication of problems, I was struck by how similar it was to some of the arguments used by Rifkin. And while I disagree with Rifkin's conclusions, and think many of his assumptions are invalid, I am not opposed to using his basic approach if it helps to understand the effects of government on the economy.

And so, I think it might be useful to take another look at interventionist government policies, this time not so much to see how the interventions themselves fail to produce the desired results ("The Inevitability of Bureaucratic Management in Government Enterprises", "Bureaucracy Revisited", "Bureaucratic Management and Self-Policing", "How the Government Corrupts Relationships", "The Inherent Disappointment of Authoritarianism", "Redundancy as a Protective Measure", "The Importance of Error"), but instead to examine the interventions using a model akin to Rifkin's, and using that model to try to understand how intervention by the government, whatever other ill effects it may produce, inherently produces inefficiencies, which cannot be cured or avoided³.

I was originally going to write this in terms similar to Rifkin's, but having started along those lines, I realized it was needlessly artificial and confusing. Instead, let us think of things in the most simple terms, which will produce an approach parallel to Rifkin's, though not identical.

Looking at the economy this way, we can see the entire economy as a series of bidirectional⁴ exchanges between two parties. As I have described before ("Saving Us From Lower Prices", "In Praise of Contracts", "Greed Versus Evil", "Fairness and the Free Market", "Fear of Trade", "Exploiting Workers?", "Clarifying a Reality of Capitalism",  "Put Your Money Where Your Mouth Is, Or The Logical Implications of Price Gouging Laws", "Capitalism and Its Consequences", "Moral For Me, But Not For Thee", "The Triumph of Good"), all trade is mutually beneficial, that is trade only takes place when each party sees the exchange in question as beneficial to them. It may be simply because one values a given good more than the other, or perhaps because one has a use for a good the other does not, maybe because one has information the other does not possess, or it may even be because one is mistaken and values a good more highly than he should, given the satisfaction he will actually receive. Whatever the reason for the differing valuations, trades only take place when both parties expect to receive benefit from the exchange^5,6.

As every exchange is desired by the parties, they will take pains to make sure each exchange is as simple, rapid and cheap as possible. In terms of direct exchange of goods or services, this is not significant, as there is very little involved in making a direct exchange. But when we consider complex sets of exchanges, such as establishing a new factory or leasing the rights to a patent, arranging the purchase of naming rights to a new office building or distributing television earnings through professional athletic revenue sharing agreements, there are many steps that must be taken, many exchanges that must happen, and a host of individuals involved, and so these three factors, simplicity, speed and cost, all become very significant.

Simplicity is actually not a requirement in itself, but a requirement if an exchange is to be fast and cheap. As every exchange must be beneficial to those involved, and we cannot count on every individual having a scale of values sufficiently different from his trade partner to make an exchange without inducement, not to mention that almost all modern exchanges are carried out in monetary terms, we find that each exchange that takes place represents a small addition of cost, as well as time. As a result, the more direct an exchange can be, the fewer individuals that are involved, the more rapid and cheap the trade can be. As we shall discuss next, both of those traits are essential due to the mutually beneficial nature of trade, and so, in a free market, individuals will strive to make every set of exchanges as direct as possible, keeping the number of exchanges to a minimum⁷.

So, why do voluntary trades emphasize speed and cost?

The reason cost is significant should be obvious. Yes, trades take place because I value A more than B, while you value B more than A. However, if the exchanges involved spread over several steps, we might both find we have overhead costs which more than consume the benefit we received in the trade. (One example of this would be the closing costs, title searches, realtor's fees and the rest involved in selling a house. While the transaction between buyer and seller is the same and has fixed values on either end, both end up paying other costs to make the transaction take place, eating into the benefit they received in the central transaction.) Even if the benefit I receive in the trade is such that no costs could dissuade me, I would still like to keep costs as small as possible in order to either receive the most I can from the exchange, or in order to keep my personal cash reserves as great as possible.

Speed should be equally obvious, though it is not always. The basic concept is that of "time preference". It is an economic term of art over which there is much debate⁸, but, in its most basic form, it means that people would rather have something now rather than in the future. In this case, having found someone willing to give me a desired item for an item I desire less, I anticipate an improvement in my well being. That being the case, I want that improvement to take place as quickly as possible. The longer it is delayed, the less real benefit I enjoy from the transaction. And so, again to provide myself with the maximum benefit, I would try to make the transaction as rapid as possible, and that is true whether it is a simple exchange between individuals, or the establishment of a new corporation. Delay reduces the total benefit of a transaction.

This is probably much more detail than anyone needs, and it certainly has covered a number of topics which should be nothing more than common sense. Then again, I have discovered in the realm of economics, "common sense" often seems to have little to do with real common sense. People believe the strangest things when proposed by economists, and so I feel the need to point out the obvious, just in case it is less obvious than I imagine. ("Individual and Aggregate ", "Bad Economics Part 14", "Jobs, Jobs, Jobs, and More Jobs", "War Stimulates the Economy? Let's Nuke San Francisco!", "Fear of Trade", "Saving Us From Lower Prices", "Price Gouging", ""True" Prices" , "Excuse Me?", "What Is A Dollar?", "Real Life and Regulation") In fact, very soon we will be discussing one of those very topics where people believe theories about the behavior of businesses which they would never believe concerning the behavior of individuals.

Which brings me to the reason I have been going into this in such detail. As I said at the start, this essay was inspired, in part, by reading an old post on the way in which we can view the growth of the financial and services sectors as a response to government intervention in the economy⁹. In that essay I discussed the way that the economy accumulates various financial enterprises, lawyers, middle men, lobbyists, and others as the government intervenes more and more in the economy. I was at first tempted to call it the arteriosclerotic model of government intervention, seeing the growth of such clusters of "fixers" as an analogue to the many cases in which a diseased body will respond to improperly functioning systems by either enlarging certain systems, or else growing new physical structures in an effort to deal with them. It is a good analogy, as the response to government often resolves the immediate problem, just as the body's makeshift responses "work", but in both cases the additional structures are much less efficient than the original, and produce a weaker system, one which may eventually fail under its own weight.

But after thinking of Rifkin's book, and his tendency to describe all social systems in terms of "throughput" and "flow", I decided that the best model might be to describe the economy in terms of hydraulics. Every transaction is a pipe connecting two points. It may lie dormant for a long time, it may only be used once, but whether used routinely or rarely, when it is active, the same thing happens, that is the valve is opened and pressure moves the fluid through the pipe. (In this case, I view the goods as the fluids, while turning the valves is the equivalent of payment. Though I only adopt this model as pipes make for a bad model of bidirectional flows.) Or, perhaps there is an even better analogy, that of circuits. Each exchange is a pair of wires. From the perspective of each point, voltage is high, that is the relative value of the good owned by the other is more than the good held by me. And so, when the circuit is closed, the current flows.

Both models also allow us to easily conceptualize the effect of government intervention in physical terms. In the hydraulic model, the intervention is a full or partial blockage, which keeps the fluid from flowing, or restricts its flow. And the responses to that intervention are added pipes, tacked on to the system in an effort to circumvent the blockage. Similarly, in the electrical model, intervention is either a break in the circuit, or maybe just a strong resistor, which either prevents current from flowing at all, or else reduces total current relative to voltage. And again, the efforts made to circumvent this obstacle are jury-rigged wires, tacked on to the system, perhaps with some additional resistors, transformers, and other modifications intended to keep the current constant and correct.

Whatever model we choose, there are three truths we must recognize. First, that any intervention represents an obstacle, which must be avoided, eliminated or otherwise overcome. Second, with a few exceptions¹⁰, the efforts taken to overcome that obstacle tend to produce a system more complex, more slow, more costly and much more fragile than the original.  And finally, it is in the nature of government, and the public's response to government action, that any method found to circumvent government regulation will produce a government response which will necessitate another solution, and so very rarely will we find a system built in response to government intervention which is stable. In nearly every case, these solutions will be in constant flux as the government responds to solutions, and the government's response spawn a new effort at finding ways around the new regulations¹¹.

Before we move on, let us discuss something that should be obvious, but often is not. That is the simple truth that government regulations, excepting the very rare instances we discussed before where regulations ban acts no one commits or demands people do what they already intend to do, are impediments, and are seen as such by those effected. Nor is it only a case of forgoing unfair profits, as many think, the imposition of these regulations actually impedes the achievement of goals by both parties to the effected transactions, harming not just the "fat cats", but the "little guy" as well. ("Problematic Arguments", "Passing Thought on Green Energy", "War Stimulates the Economy? Let's Nuke San Francisco!", "Jobs, Jobs, Jobs, and More Jobs", ""Fair Trade"" , "An Example of Inertia", "In Praise of Contracts") This is often not recognized, even by those so harmed, as the rhetoric of populism tends to obscure the truth ("Beware Populist Deception", "Fear of the "Big"", "Moral For Me, But Not For Thee"), most often by blaming the other party to the transaction for any problems the regulations have caused ("Authoritarian Oil Talk", "The Nature of Evil", "Life Without Villains", "Enemies Into Villains", "Rethinking My Earlier Position", "Antibiotics, Automobiles and the Free Market"). However, despite all the blame tossed about, and the many absurd assertions, the truth is that regulatory intervention does not simply "level the playing field", in fact it fails to do so, instead it simply makes performing desired actions more difficult, more costly, and in some cases, impossible. ("Anti-Business Businesses", "Transparency, Corruption and Reform", "Katrina and BP", "Clarifying an Earlier Post", "The Inevitable Corruption of Protectionism")

For example, in one of those cases I mentioned earlier where people believe absurd statements, so long as they are about "economics", many imagine that minimum wage laws are capable of raising wages overall, without doing any harm. Similarly, they believe that interest rates can be set arbitrarily, and that lenders will comply without otherwise changing behavior. In short, in both cases they believe that lenders or employers, as well as those borrowing and being employed, generate such numbers arbitrarily, and can change them at will as well, without any impact upon the market or their enterprise. ("To Correct Debra Saunders") As I said, people who understand human behavior well enough, knowing they pay for goods and services based upon their assessment of the value of that purchase, and who understand that other people behave in the same way, will imagine that such careful behavior goes out the window when it comes to business, and believe businessmen pull numbers out of thin air, and that customers and employees simply accept them. (We saw a bit of this absurd attitude in the nonsensical debate over "excessive" CEO salaries. See "A Really Foolish Idea", "Greed", "Greed Part 2", "A Little More On CEO Salaries" and "Another Bad Idea".)

Let us look at the minimum wage to help us understand the absurdity of the common belief, as well as the way in which the politicians tend to present the issue, which will then help us see how such regulations act as impediments to all of the parties trying to complete a transaction, in this case, employees seeking jobs and employers seeking to hire them.

Politicians and the public, thanks to a few tireless supporters of the free market (and the uncomfortable fact that unemployment tends to rise whenever the minimum wage rises), have begun to develop a slightly more complex position on the minimum wage, admitting to some shortcomings, but they still basically try to sell it with a variation on the original premise, tacking on a few token nods to economic realities, while still quietly promising the moon¹². And what is that original premise? How do they try to push the minimum wage? With the old line that wages are simply arbitrary numbers, set by employers at their whim, usually at a level intended to create the maximum profit¹³. None of this is stated explicitly  outside of orthodox Marxist or anarchist camps¹⁴, nor is it even hinted at too strongly. Instead, the message is usually one of indignation and optimism combined. Basically the argument is that wages are too low, but fear not, increasing minimum wage will remedy the problem. It is only when opposition arises to this argument that the rest becomes obvious, as they begin to blame any opponents for supporting those who would exploit labor and keep them in poverty, making it clear that the low wages are the fault of none other than the employers, who obviously can set wages at their whim.

Beyond that argument, the waters are much muddier, as even the proponents seem pretty uncertain how the minimum wage works economically. The whole of their argument seems to be captured in the description above. Employers keep wages low, but if forced by the state they will relent and return to workers some of that money they once hoarded for their own benefit. It is a simplistic vision of business, the populist-Marxist version of Robin Hood, with the greedy "robber barons" keeping the workers in poverty until the noble government comes and grants them economic justice. Left unexplained is the way that employers manage to keep wages artificially low, why employees accept these low wages, where employers will find the money for these higher wages, and what economic effect such changes will have.

Now, I have written on wages, specifically the impossibility of keeping wages below market value, many, many times ("Exploiting Workers?", "Fairness and the Free Market", "Capital Investment", "Exploited Labor", "What Is Fair? or, How Game Theory Leads Us Astray"), even discussing the many allegations of wage disparities being unfairly imposed upon women ("Pay Disparities"), as well as the difficulty of keeping similar disparities based on race, at least in a free market ("Utopianism and Disaster", "In Defense of Discrimination", "Private Versus Public Racism", "How to Handle Idiots"). So I will make this brief, and suggest anyone who finds it too brief follow some of the links I just provided for a better description.

My basic argument is that even granting the assumptions¹⁵ of those who imagine exploiter bosses trying to pay substandard wages, the free market, and even many somewhat regulated markets, work in such a way that the least admirable traits of those bosses would still result in an optimal outcome. Actually, let me start over here. What the critics call a disreputable trait is, in reality, simply normal human behavior, sound economic thinking, a behavior we engage in every day without imagining it in any way worthy of criticism, but when practiced by bosses, we suddenly become quite critical. ("Symmetry and Greed", "Moral For Me, But Not For Thee") Yes, employers would wish to pay absolutely nothing for labor, and charge a fortune for their products, and they will try to pay as little as necessary for any given employee, and will charge the rate which produces the maximum profit. But before anyone calls that a sin, let me ask when was the last time you turned down a pay raise, asked the grocer to charge you more as the food is too cheap, or looked for a higher price for a product you were interested in buying? We all try to get as much as possible for what we sell, including for our labor, and pay as little as possible for what we buy. That is not criminal or sinful, it is simple common sense. To take less than we can get is to simply surrender part of the value we now possess and get nothing in return. And so we routinely try to get the most for our dollar, as well as get the most money for our services¹⁶. And so, I should not say that the negative attributes of employers make them prone to create a market for labor where prices are set close to the market value, but instead I should say that each actor, in pursuing his own interest, creates an environment which pushes wages toward the point where an employee's income is close or equal to the amount of benefit he provides to the enterprise.

I have gone into too much detail already, so let me make this quick. Let us assume a greedy employer runs the only factory in town. And he pays only 10% of what the workers are worth. This will generate massive profits, and those profits will tend to attract investors, who will either create their own firms, or fund potential competitors. The competitors, being interested in their own earnings, could collude with the existing firm to keep wages low, but they will also realize that if they do so, someone else will eventually come along, pay 15% or 20% of what the workers are worth, earn their gratitude (and likely best efforts for some time), and get to pick and choose the best workers to steal. And so, rather than collude, he will raise wages, and enjoy profits slightly lower than the original employer, but still quite high, and farther enhanced by the productivity increases associated with grateful employees. However, as long as wages remain below market, others will be attracted by above normal profits, and so this process will repeat until wages are close to market values¹⁷.

There are any number of factors at work here in addition to wages. For example, government involvement can make this work more or less efficiently. If there are, say, regulations which make entry into the market more difficult or costly, that will tend to exclude competitors, making it more likely the few existing employers will be able to collude to keep wages low. Likewise, remote and unpopular locations may make it harder to attract outside employees, so if establishing a new firm requires some part of the staff be brought in, it may be too costly in certain places. However, in general, if the market is not impeded by government action, even the most remote location, and the most unpopular place will not support a closed labor market for long. It may take a higher wage disparity to attract enough cash from the outside, but eventually such a disparity will cause outside money and talent to flow in and destroy the closed market. It is only government which can keep such a situation in existence.

Which helps us to see such regulatory steps in terms of their effect on the flow of commerce. While many may believe the firms in question will simply stop taking "too much" in profits and pay the wage, in reality the command they pay no less than a set amount in wages is an obstacle to all those who would attempt to either seek employees for find employment. Whether I am an employer seeking entry level staff to train, or I am an unskilled worker seeking a job which will fit my very limited skills and job history, or maybe a training opportunity which would still pay me something, this regulation may keep us from reaching an agreement we could have reached easily under the free market. And hopefully the reason why it harms everyone is obvious. While the traditional view sees it only harming greedy employers, the harm hardly stops there. Take, for example, my unskilled worker. He may be happy working for $2 an hour while he learns how to do a job, or proves he is reliable despite his lack of work history, or any other dozen reasons. Now, his choices are to try to get a job paying a wage far higher than his skills would support, or else taking an internship without pay, essentially giving away his time, trying to live on nothing, while training so that he might eventually be worth the minimum wage. ("Hope You Like Unpaid Internships")

It is a problem I mentioned in an essay on a different topic ("Price Gouging"). In many cases the government mandates something seen as "fair", be it the payment of a "living wage", or restrictions against supposed "price gouging", the action sounds good for those who get increased pay, or buy something in short supply for the regular price¹⁸. But while it may be beneficial to the few who get something from the regulation, in most cases there are far more who cannot buy the goods in short supply, or cannot find a job, and so the new law has, far from improving their wages, has instead eliminated their opportunity at all. (Not to mention removed their choices, by denying them the option of deciding for themselves. See "When Help Hurts", "Who Will Decide", "Capitalism and Its Consequences", "Exploiting Workers?", "The Citizen Dichotomy", "The Essence of Liberalism", "Appealing to Arrogance" and "Liberalism, Its Origins and Consequences - Chapter 6 - Us and Them".) And that is the case in all regulatory matters. For example, you might wish to use a drug known to have side effects, and I may be willing to sell it, but the government prevents its sale despite your willingness to accept the risks and my willingness to sell the good. Similarly, as an employer I want to pay you a given wage, and you want to receive that wage, but the government may force me to instead divert part of that wage to Social Security, Medicare, retirement, worker's comp and so on. Instead of allowing us to negotiate a wage as we see fit, the government demands that its wishes by honored or we will suffer for it.

All of which makes it easy to see how government intervention is best seen as nothing but an impediment, a barrier to doing what we would do otherwise, an attempt to deny us certain options. Unfortunately, it does not provide us with as many illustrations of the complex ways in which we respond to such impediments, the byzantine structures we develop to avoid these impositions. I suppose the tendency in some industries to describe employees as "independent contractors", both to avoid minimum wage laws, and legal requirements to pay part or all of various employee benefits is one such solution, and it does tend to create some bizarre and convoluted results, as the fiction of every employee being a small business produces some strange results, requiring odd accounting practices, but even there the response is nowhere near as convoluted as in many other areas¹⁸.

Perhaps the best example is to be found in the corporate world. Especially publicly traded companies. In those cases, the regulations coming from dozens of entities, from the SEC to OSHA to various state boards to industry regulatory bodies to government panels which approve mergers to the FASB and others all demand actions which flow counter to the natural way businesses wish to carry on their affairs, and sometimes even contradict one another. Worse, as companies try to respond to these laws, they tend to find ways to do things that allow them at least a bit of the freedom they need¹⁹, but, having done so, when something goes wrong, it is often these practices which are then blamed, and the businesses are pilloried for their accounting or business practices, the government portraying their efforts to continue working despite the impediments government imposes as being, instead, an attempt to steal from the public.

So why have I mentioned all this? Why bring it up at all? Because, to put it simply, the truths I have listed here are often overlooked in discussions of government regulations. While we look at the direct outcomes of those regulations, or complain about the loss of freedom, even decry them as gradually imposing socialism upon us, we very rarely look at these outgrowths of the impediments regulations create. Just as in  "The Limits of "Scientific" Management" -- as well as "The Limits of Technocracy",  "The Limits of Econometrics" and "Knowing Our Limits" --  I pointed out the often overlooked truth that it is impossible to obtain the information government would need to truly run the economy as they imagine they can, or in "Bureaucratic Management" (also "The Bureaucratic Mind", "Bureaucracy Revisited", "The Inevitability of Bureaucratic Management in Government Enterprises" and "Bureaucratic Management and Self-Policing") where I described how bureaucratic management inevitably produces a pattern of behavior which is incapable of running businesses in an efficient manner, or even in "The Inherent Disappointment of Authoritarianism" (and earlier in "Reforming Education", "My Censorship Is Your Discretion" or "The Right Way") where I talked about the problems arising from basing political theory upon the belief in a single "right" set of preferences (which also led to the conclusions in "The Most Misleading Word" and "Luxury and Necessity"), when we look at intervention in these terms, we can see something very significant.

As I said at the start, in a free and voluntary economy, when all trade is carried out without outside interference, all trade is seen as mutually beneficial, and is carried out as efficiently as possible by the parties involved. ("Greed Versus Evil", "In Praise of Contracts") And as their sole interest is in seeing the transaction take place, these voluntary trades take place as quickly and efficiently as possible.  The free market, whatever else we may say about it, does tend to produce the most efficient individual trades, or discrete sets of trades. We can argue whether the economy as a whole is more or less efficient ("Bad Economics Part 10", "Pro Hoc, Ergo Propter Hoc", "Cutting "Costs"", "Misunderstanding Profits",  "Two Examples of "Inefficiency" in Capitalism", "The Threat of Perfection", "Redundancy as a Protective Measure"), but in terms of the transactions themselves, I doubt anyone will argue a bureaucrat, regulator or other government agent would be more inclined to streamlining transactions than someone who sees personal gain in the exchange. If you doubt me, go to the worst fast food place and the most well staffed motor vehicle office. Or compare a private attorney to a public defender²⁰. Or the worst cab driver to the best bus driver on a state owned route²¹. Clearly there are individual exceptions, as some people, even when enjoying the profits from their work, just do not know how to behave, but in general a personal stake in the profits, and the different incentives between profit-based management and bureaucratic management("Bureaucratic Management and Self-Policing") will almost always favor the profit driven management.

Thus these regulations serve as nothing but impediments to those wishing to carry out transactions. As a result, unless the transaction is relatively unimportant, or any alternative is too costly to even consider, businesses, customers and others tend to find ways to work around these regulations, leading to situations which are much like the original, before the regulation was imposed. However, there are two other things to consider.

First, if the solution is too successful, allowing everyone to effectively ignore the regulation, or carried out too openly, and thus embarrasses the regulators, the government will respond by imposing more stringent regulations, creating even greater impediments -- or perhaps simply preventing the current solution from working -- driving the firms to carry out even more complex responses to the regulations.

Second, the solutions themselves, while allowing both parties to avoid the regulations, do not come without cost. Each additional step, as I described above, is costly, and slow, making the transactions slower and costlier. Beyond that, the additional steps also impose additional costs and risks. For example, every step in a system makes it less flexible, less able to weather change. When a very simple system encounters change, it is trivial to respond, as a single step or two either will not be touched by change, or will fail, but being only a single step, can be easily adjusted to account for the change. On the other hand, the more steps, the more likely a new solution will either be impossible to find, or will take a long time to impose. And so, as these interventions are carried out, the system itself becomes slower, more costly, less flexible²², more fragile and ever more likely to break under stress.

And that is my entire point, and one we so often overlook. There are many problems with government intervention, but one that is rarely considered is how that intervention touches the market itself. We know it can make the firm less efficient by imposing goals that do not match those of the business, but, though it should be obvious, we very rarely mention that such regulations also impose inevitable costs in the form of jury-rigged responses to work around regulations, and make the system less adjustable, resulting in a firm less likely to change as the market changes, and far more likely to fail when encountering larger changes in the market itself.

I could probably go on, but this seems a natural stopping point. We have drawn a picture of how I have chosen to look at businesses and the regulations imposed upon them, and discussed how such regulation inevitably imposes costs and inefficiencies on those firms, adding also the threat of collapse, and a tendency toward stagnation and inflexibility. That should be more than enough to keep the attention of readers. Not to mention that, by stopping here, I have left myself a few juicy topics on the subject of regulations and corporate behavior, and so I still have topics left to write a few essays over the next few weeks should I not manage to come up with a half dozen topics of my own.

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1. It is often written in many alternate forms. "Entropy always remains the same or increases in a closed system." Or, in a more concrete form: "In a closed system, over time, order will never increase." And, probably most practically: "In a closed system, energy will always move from a more usable to a less usable form." All mean the same thing, though the last needs numerous caveats, regarding the term "usable", as well as addressing the identity of matter and energy. This law has also lead to a number of silly philosophies, mostly of a technocratic or positivist nature, when it was observed in the early days of information theory (as well as during work on radio during World War II) that the formula for the maximum amount of information in a system is the inverse of the formula for the entropy within a system. There are good reasons for this fact, and it is of importance to mathematical theories of encryption and other disciplines, but many without a firm grounding in mathematics and science have drawn from this discovery all manner of absurd conclusions about information being the "cure" for entropy, and imagining there is some way to escape the laws of thermodynamics. But, again, that is probably something I will write about on its own, as it interests me and is a good example of bad science (cf "An Interesting Mistake", "Problematic Arguments", "The Plural of Anecdote is Not Data"). So, for now, let me say only that entropy can be defined in any number of ways, but in every case, the popular interpretation given is wrong much more often than it is right, and that includes Mr. Rifkin's interpretation.

2. I know many hear "minimal government" and "local control" and think it sounds like my dream state. And, if that were all he proposed, I probably would. But Mr. Rifkin is far from a federalist, or proponent of freedom. His local government is not a federalist system, but something like feudalism, or maybe socialist city states obsessed with sustainability. He does not have much room for individual freedom, as freedom opens up the possibility of "dangerous" growth, of increasing complexity, of technology, and all those other things he fears. I hate to admit it, but I don't recall what his government position was on larger structures. Clearly, his beliefs would suggest any larger coordinating structure would do harm, and so he would want the individual tiny states independent, and so, until I can find my copy and check, I will assume that is the case. In theory, there is nothing wrong with this, though I think, practically, we would do better with some larger entities to make cooperation between states, as well as commerce, easier. But, even if there were nothing objectionable about a multitude of fully independent minute states, Rifkin's plan does not create true federalism, and does not allow for the benefits I find in federalism ("Why I Am Not A Libertarian", "The Benefits of Federalism", "Redundancy as a Protective Measure"). Because he wishes each state bound by stringent rules about minimizing energy loss, each state will be the same, so whether there is one or one hundred, it makes no difference. The benefits of federalism is found in the many options available. if all states are the same, it is as if there were but one state, there is no advantage.

3. To be completely accurate there is one unusual case where intervention behaves differently, having none of the ill effects that intervention normally has. And that is the case where the interventionist policies ban practices no one desires to enact, mandates actions everyone was already undertaking and otherwise order people to behave as they already would. For instance, if price controls create a minimum price far below market price, or a cap far above market, it will be as if there were not controls. However, even this case only fits this description so long as no one in the market wishes to violate the regulations, and prices remain in such a position that caps and minimums do not apply. As we have learned with the ever broader pool of AMT payers, what seems a pointless price cap can become quite stifling in the future if not adjusted for inflation and other factors. So, while regulations which do not apply to the current market can be seen as insignificant, we must bear in mind changing conditions might alter that situation, so this is only a temporary situation. (In addition, if even one individual wants to do something banned by regulation, or not do something required by the same, it is still a burden. Yes, it is less of a burden, but in that single case, it has introduced some additional cost, and so is not a trivial law any longer.)

4. There are some exchanges where the bidirectional nature is confusing due to the structure of the parties on either side. To take a simple example, a drop shipment firm seems to have a set of monodirectional exchanges, rather than any bidirectional exchanges. The buyer pays a middle man, the middle man extracts his percentage and sends the rest to the seller, and the seller then ships to the buyer, often with labeling as if the middle man were the seller. What makes this puzzling is that the "seller" is really the whole complex of the middle man and seller. The buyer is dealing with that entity as if it were a single unit, making the exchange a simple bidirectional one. That the settlement of that exchange also involves an exchange between the two parties, that is the middle man sends money in exchange for the seller shipping goods to fulfill the original contract, does not matter. Think, if you will, of the horribly complex groups that often come together to buy sports teams, fund large construction projects, sponsor concerts, support racing teams, buy out publicly traded companies, and so on. In all of those cases, the purchase or sponsorship is, in essence, a single transaction. However, that single transaction involves dozens of parties on one side, engaging in hundreds of exchanges among themselves. And often the sellers are equally complex. And that is why I argue we should still view each exchange as a simple bidirectional deal between two parties. If we start digging into the minutia of the exchanges between partners, even the most basic purchase of dinner at a restaurant, for example, will become impossibly complex.

5. The benefit does not need to be immediate, nor does it have to flow directly from the exchange itself. For example, I could receive a good in an exchange (let us call it "X") which I will later exchange for a good I desire (call it "Y"). In that case, I may not directly value the good I receive more than what I give up, but it will bring me something I desire more, so it is a matter of indifference whether I say I value X highly due to its exchange value, and thus the benefit is always immediate, or I do not value X, but it will help me obtain Y, and so the benefit is sometimes indirect. It does not make any real difference which we choose, as in the end the outcome is the same. Either we carry out the exchange as if X were almost the same value as Y because we know we can exchange X for Y, or we value X slightly less than Y because of that possibility, and thus we trade for X on the strength of the value of X itself. In the end, they come to the same thing.

6. One final note on bidirectionality. All exchanges are bidirectional, but there are some rare exchanges where an individual gives to another without expecting anything in return. Such charity is rare, but it does happen, so not every exchange if wholly bidirectional, but the vast majority are. (I have heard some argue such charity is irrelevant, as they are "non-economic", not involving exchange, but that is absurd, and displays a pointlessly narrow view of economics. If I give money to an individual, that individual has that wealth and I do not, and each of us will behave differently as a result, that makes such charity clearly "economic". So, while such exchanges are not part of commerce, they are still economic and need to be examined, if only in a very cursory way, or, at the very least, mentioned and then ignored. -- See "Bad Economics Part 16")

7. It is conceivable that one could make an exchange less costly by adding steps, but it is not a situation which could persist.For a longer series of steps to bring a lower cost, there must be a disparity in the exchange rate between starting and final goods along each path. That is, if you can exchange 1 A for 2 B using 3 steps, and 1 A for 3 B using 5 steps,it means in one of those five steps one individual is exchanging goods, either the final good or an intermediate step, at a much higher rate. This means there is a potential for profit. For example, I take 10 A and trade for 30 B. I then find those seeking B and exchange my 30 B for 15 A, making a 50% profit. (Of course, in reality, you may see only a small increase, as the overhead would eat much of the profit. Still, there must be profit potential for a longer set of transactions to produce greater return.With that profit potential, it is certain every speculator imaginable would indulge in these transactions until either the stocks ran out or the price rose along the longer path.And so, in the real world, the rate of exchange along any given path will be identical, or so close to it there is not enough profit to exploit. And since there is some overhead for each exchange, a longer path will always cost more than a shorter path, making the shorter path always a superior choice.

8. What is behind time preference seems to be the topic which once received the most attention. (Present economists seem less interested in time preference than their counterparts at the dawn of the 20th century, so most writing on this subject is rather old.) Clearly, uncertainty plays a part, as anything which is to take place in the future may not happen, and so there is always a risk. And then there is availability. Anything you have in your possession can be used when desired. If you will not receive it until later, in the time between now and then you cannot use the possession whether you need to or not.And then there is, at least in some cases, the duration of your enjoyment. If you will not have an item until alter, then you cannot begin to enjoy it immediately, which means your total enjoyment will likely be less over its lifetime,again reducing value. Moderns, and some positivist types, also liked to propose innate psychological traits and other dubious theories to account for this observation, but, looking at the many rational explanations they seem superfluous to me, akin to coming up with an innate psychological drive to avoid lighting yourself on fire. There are enough reasons to avoid postponing satisfaction, at least without incentive, for anyone to understand the behavior, without the need for unproven psychological attributes.

9. For those who have not read "Pro Hoc, Ergo Propter Hoc", I do not make the argument this suggests, that is the popular thesis that the "service sector" is growing only because government is ruining our economy, and but for that we would instead have only agricultural and manufacturing jobs. In my essay, I argue that service jobs can grow for several reasons, some good and some bad. For example, once we have satisfied our agricultural needs very fully, we began to move into manufacturing, as we had unused labor, which could produce very little value in agriculture. Similarly, once we were happy with our material wealth, manufacturing began to stagnate, and we sought satisfaction of other wants, creating "service" jobs. However, service jobs can also arise for bad reasons, as we shall discuss soon. But, given that so many believe the service sector is a sign of illness in our economy, I would ask those who share such fears read "The Sky's Not Falling Part 2 ", "Jobs, Jobs, Jobs, and More Jobs", "Free Trade, Employment, Outsourcing, and Protectionism", ""Fair Trade"", "Small Business Fetish" and "Wrong on Every Point".

10. A few solutions to government intervention do not produce makeshift solutions. For example, lobbying to exempt one's industry from a given law does not require additional modifications to our ongoing enterprise. On the other hand, it does require at least the employment of a lobbyist to get the exemption passed, which is a temporary modification. And, in reality, it is unlikely, once we have an exemption, we would dismiss our lobbyists. Most likely, having obtained our legal relief, we would continue to employ lobbyists and otherwise try to manipulate lawmakers. And so we would end up changing our procedures. I could probably come up with one or two possibilities where we would be truly free of changes, but, when viewed as a practical matter, except for full compliance with the regulation, which itself requires serious changes to our behavior, the avoidance of a regulation almost inevitably causes changes.

11. In many ways this is identical to the process I described in "The Cycle of Compassion", "Recipe For Disaster" and "The Endless Cycle of Intervention" . I also discussed it in "The Carrot and the Stick - Or How to Create a Fat, Lazy, Surly Donkey", "Bad Economics Part 18" and "The Irrationality of Government Redistribution".

12. The single exception, which has been true for a long time, is in the presentation of minimum wage to unions. While in all other cases the minimum wage is presented as a way to make employers pay a "living wage" without losing any jobs, to unions the minimum wage is presented as a way to prevent non-union labor from competing with high cost union labor. (Or, more euphemistically, presented as a way to "put the union on an even footing with non-union labor".) In other words, for a long time unions have been told the truth, that minimum wage does have economic impact, and that wages are not arbitrary, and changing them can bring about consequences. Then again, as unions exist entirely to elevate wages above market levels, unions, even if they publicly deny it, know very well what happens when wages are coercively raised, and so would not be fooled by claims to the contrary.

13. This is nothing but a revival (or reuse, as the original never truly died) of Marx's absurd "Iron Law of Wages", which supposes employers will act in such a way that the market will move wages toward a level just high enough to prevent workers from starving, and no more. All of history argues against this, and to make it even more absurd from a Marxist perspective, the more developed nations, who should be the worst exploiters, tend to have the wealthiest "proletariat". The increasing wealth of the lower and middle classes argues against the whole of Marxist theory, and yet it persists, and reappears in forms such as the non-Marxist use of the Iron Law to support minimum wage proposals.

14. This varies over time. Depending upon the degree of social activism present, and the hostility towards employers, these arguments may be more or less blatant. But no matter how much of the blame is explicitly applied to the employers, no matter how plainly it is stated that wages are arbitrary values, the argument always dissolves into indistinct fog at the edges, where the questions of economic details arise. Beyond the fundamental concepts of exploitation, employer greed and arbitrary wages, there is little in the theory that is known for sure.

15. I am speaking here of the assumptions that employers would seek to pay as little as possible, but would also wish to earn as much as possible, which is, in fact why they pay so little. I am not granting the more absurd assumptions. For example, that workers are unable to hear of jobs paying better wages, that a market exists which is so small or remote it is insulated against competition, or that every employer, and potential employer, could choose to consistently collaborate, even when it is against their own interest. But I cover much of this in the linked articles.

16. I feel the need to link to "Bad Economics Part 16" once again, as this paragraph is likely to be misinterpreted by those who do not understand the true nature of economics and think entirely in terms of cash. In addition, it is also a statement likely to be read as implying we are all purely economic creatures, chasing after nothing but the greatest bottom line. In truth, money is simply a convenient measure, as it is our universal medium of exchange. However, humans do not really chase money, but satisfaction. And, so, while we do seek to make as much as possible and pay as little as possible, we need to conceive of these in terms other than dollars, or at least not exclusively in terms of cash. For instance, a job may increase my salary, but the working conditions may be bad enough I would not take it. Or maybe it requires moving and I dislike the new locale so much the pay is not worth it. Similarly, it is possible to save a fortune by clipping coupons, buying at several different stores, purchasing only the brands and goods on sale, and buying in bulk. However, I may consider the lack of choice, the amount of labor involved, the consumption of storage space in my house and the rest enough of a burden it is not worth the labor. All of which is simply a long winded way of saying that we do not seek the best returns solely in monetary terms, but in terms of our overall satisfaction, though money often plays a very large part in this.

17. This is a bit of an excessive generalization. The wages of a given area may differ from even neighboring areas, not to mention areas farther away. And so, even if the wages only rise to 75% of the regional wage, that may be a fair price for the area. Perhaps, thanks to the isolated situation, the lack of capital investment, lack of education, or other factors, local labor is worth less than comparable employees in the region. Similarly, as mentioned in the essay itself, an unpopular area, an isolated location, a high cost of living, or dozens of other factors can make entering the market more costly, due to the cost of transportation of goods in and out, the cost of paying first rate managers to come to the area, the high cost of construction or expensive rents in the region, or any other reason. If that is the case, then wages may still be low, say 90% of market, but as the extra profit is rather small, it is not enough to draw in outside money. Likely, at some future time, a local firm will exploit this difference. Or one of the employers will decide to do so himself. Or maybe a change in conditions worldwide will make it profitable to bring in investors. But, for a time, it is possible to keep wages slightly below market. However, as I said, it will not be possible to maintain forever, the difference will of necessity be quite small, and the employees still have the ability to move to other areas, so employers will need to be very careful lest they harm themselves. In short (though I think it is a bit late to say that), the free market is not quite perfect, allows some smaller flaws to persist for a while, and does not cure every ill, but is better than the alternatives. Yet its imperfections are used as a criticism, though the alternative is even more flawed. ("Government Quackery", "You Gotta Have Faith", "The Threat of Perfection", "Non Sequitur Allegations", "A Brief Thought on Patience")

18. In an earlier draft, where I spent much more time on details I later decided were not worth the time, I described the possible responses to minimum wage laws in the following terms:

Let us look at this in the most simple terms. Imagine a system which mandates a minimum wage, and one which is above our lowest salary. When such a law is passed, the immediate effect is to impede our employment practices, to stop the transactions in which we engaged to secure labor. When this impediment arises, we have several possible responses. First, and least likely, we could ignore the law, continue as before, and suffer the consequences, which tend to be the loss of money in the form of fines, which would act as an impediment to all our undertakings. If low cost employees are essential, as, for example, in the manufacture of many hand sewn goods, we could try to find a way to keep paying low salaries by paying bribes to those in power. We could engage in the legal version of this bribery scheme, by paying lobbyists to try to get our industry exempted from this wage. If automating these jobs would cost less than the long term cost of the higher wages, we might consider that, and eliminate most of the low wage positions. Or, as a last resort, we could transfer those parts of our business that require low wages, overseas, which would impose new costs and burdens, but keep salary low. We would also have other options, especially if the low wages were not as significant to our firm as to others. If it was entirely a training wage, we could end internal training and instead hire only those who had proved themselves elsewhere, or convert paid training into unpaid internships. And finally, if there is no other option, we could simply accept the increased wage, adjust our profits to account for the higher wage cost, and scale back our operations as required.

What this shows, and what everyone should realize, is that regulatory interventions are seen as burdens, or impediments, and the response of the businesses upon which they are imposed takes the form of an effort to find the best way to work around the new burden. This should be self-evident, but sadly many seem not to grasp this. They imagine wages or interest rates are set arbitrarily, and if the government set a new rate, the businesses with just "take it out of profits" and pay the new wage, or offer the new interest rate. That ignores the simple fact that the practices of those business are not arbitrary but are established by that network of transactions I mentioned. The network always seeks the shortest route for any desire, and so the interaction of all those shortest routes creates the numbers of the current market. When the state attempts to alter those numbers, it is pushing the system away from the optimal path, and businesses begin to seek a way around that pressure, seeking as much as possible to return to that ideal situation.

Nor is that ideal, as many reformers imagine, ideal only for the employers, the big capitalists, the land owners or the other "fat cats". The numbers set may seem to be favoring one group or the other, but they are the numbers which produce the maximum benefit from the whole system. For example, when we raise wages, we think we are helping workers, and we do help those whose wages rise, but we also harm all those who can now find no jobs because they are being paid too much for an employer to hire them. Similarly, as I pointed out in "Hope You Like Unpaid Internships", our minimum wage laws have done quite a lot to destroy many entry level positions in most fields. Yes, there are now unpaid internships, but for anyone who needs to support himself while learning a trade, it is very hard to find a job which will provide that opportunity, as the laws mandate pay higher than many companies can afford to pay a trainee.

And I could go on. As I wrote in "Put Your Money Where Your Mouth Is, Or The Logical Implications of Price Gouging Laws", price caps and gouging laws serve to keep the price low for a few lucky souls, but by cutting off additional supplies and short circuiting the market signals, and the incentive, higher prices provide during a shortage, drawing additional supplies to the area with a shortage, they prolong the shortage, and ensure only a few will be able to buy at the artificially low price.

But that is a secondary point. It is the logical consequence of deviating from a optimal, efficient system, and it is sad that so few recognize that a well balanced system benefits all equally[.]

The one thing I overlooked in that quote was the possibility of full compliance. Of course that would, over time, lead to reducing employees as well, as even if we raised all employees to the minimum wage, we would eventually have to conduct employee reviews, and at that time we would discover many are not worth the new minimum salary. In addition, as we endured the higher wage costs from the increased minimum wage, our profits would decline, leading to our eventual reduction of the number of employees. As we would eliminate first those who produced the least benefit, in this situation we would end up eliminating the same employees we would in the scenario above, and so in both cases it would produce the same outcomes. (Apologies for the redundancy of posting both this quote and the current version, as both obviously cover many similar points, sometimes with nearly the same words. In this case I thought the old version was different enough, and made arguments I did not include in the new version, that it was worth ignoring the duplication to be able to read the original.)

19. Accounting actually is one of the few areas where the harm to both parties from government regulation is obvious, even though many still choose to ignore it. The accounting rules imposed by various agencies, especially the SEC, are often contrary to reasonable business practices. (Some are not, even though the results are misleading. For example, the unfortunate decision to use purchase cost and sale price to figure profits tends to produce very misleading results in an inflationary economy -- see "Inflation and Uncertainty", "The Inflation Engine", "Bad Economics Part 7 ",  "Bad Economics Part 8", "What Is Money?", "What Is A Dollar? " and "The Rubber Yardstick" -- but the alternatives are worse, either more misleading, or based on entirely arbitrary calculations, and so, while the current system is bad, it is the best possible.) One example is SOX, which, while supposedly reducing the possibility of "deceptive" accounting practices, tends to produce reports which either are misleading or useless. But the SEC and other agencies not only require certain reports be files, they also have a tendency to frown upon the publication of other reports, which might be more useful to investors. And so, while claiming to protect investors, the regulatory agencies actually deny them information they desire and the companies often want to provide. All in the name of protecting them. ("Liberalism, Its Origins and Consequences - Chapter 2 - Saving You From Yourself ", "When Help Hurts", "Perverse Incentives", "Who Does It Harm?")
 
20. Apologies to any good public defenders out there. As always when I make such an argument, be it about public school teachers, IRS staffers or public defenders, I realize there are the exceptions out there who do a good job for their own reasons and do not fall into the stereotype. Still, the stereotype exists for a reason, and in general the idea that public defenders are less zealous (and skillful) than hired defense attorneys is not without foundation. There are exceptions, and there are also private attorneys who also do pro bono defense work, and I realize they too do not fit the pattern described here. But even then a few exceptions are not enough to throw out the rule.

21. This is probably the weakest comparison for any number of reasons. First, taxis in many cities are not free market creations, but cartels protected from competition by government restriction of the number of cabs, number of "medallions" or by restricting the number allowed to enter desirable venues such as airports, hotels, train stations and the like. ("The Difference Between Public and Private, Or, The Real Monopolies and Cartels", "Bad Economics Part 16", "Anti-Business Businesses") In addition, in a number of cities the bus lines are contracted out to private contractors, and in a number of cases those firms have both government routes and private routes and charters, which means their staff have experience with both private and public ventures and thus behave more professionally than those who know only government employment. So, if you would complain about this comparison, please recognize that I know it is a weak comparison.

22. I did not go into this, but with more steps change also becomes more difficult. Thus, when we add more and more complexity to work around intervention we find the system is harder to change without breaking it.

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POSTSCRIPT

For a different look at economic regulation in general I recommend"The Inevitable Spread of Regulation", "Gun Control, The FDA and Regulating the Law Abiding", "Professional Education", "Licensing", "Business Licensing and Regulation", "Bad Economics Part 12", "Real Life and Regulation", "Insider Trading", "Worker Safety" and  "Who Is Safer?". I would also suggest my series of "Bad Economics" posts, a list of which can be found in "Bad Economics Part 18", as well as "Planning For Imperfection", "Greed Versus Evil", "In Praise of Contracts",  "Production and Consumption ", "Capitalism and Its Consequences ", "Clarifying a Reality of Capitalism", "The Irrationality of Government Redistribution", "Fairness and the Free Market", "The Cost of Big Government" and "The Inevitable Corruption of Protectionism".