Regulation and the Wealth of Nations: The Connection between Government Regulation and Economic Progress

Abstract

Adam Smith’s main message is that when unregulated, undistorted rewards are higher in one activity than another, economic progress is usually promoted if resources flow toward the high-return use. And resources would flow that way if we are left alone to pursue our happiness. When regulators do things that change those market signals or prevent us from responding to them the nation as a whole usually ends up poorer. There is much wisdom in Smith’s view, but I shall argue that it gives an incomplete picture of the connection between regulation and the progress of opulence. Smith is emphasizing the conflict between regulation and economic progress. I would propose to add to Smith’s view an analysis of a way in which market forces and prosperity often undermine the effects of regulation. I shall discuss two ways in which this happens. One is that the regulation often induces changes in behavior that go against the intended effects of the regulation. The other, more subtle kind of undermining occurs because unregulated progress often produces the intended benefits of regulation, though more slowly and quietly. The last part of my paper tries to answer a question about the wealth-destroying regulation that troubled Smith. How does such regulation survive politically? The answer is that progress can often hide the bad effects for a long time and thereby immunize the regulation politically.