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How Regulation Protects Established Firms

How Regulation Protects Established Firms
Profile photo of Peter Klein

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Reprinted from Mises.org

In various talks (long and short) and articles about big business, I’ve stressed the point that established companies frequently lobby for more regulation, give generously to politicians on all sides, and benefit from an environment in which government plays a large role in the economy. Regulation makes many firms larger and more bureaucratic than they would otherwise be. Murray Rothbard, building on earlier scholars such as Gabriel Kolko, made this a major theme of his work on the history of regulation.

It’s nice to hear the argument that regulation helps large, politically connected firms from the horse’s mouth — that is, from one of the regulated firms. And in the US there’s no bigger horse than Goldman Sachs, which is so closely tied to Washington, DC that it’s practically a fourth branch of the US government. Here’s Goldman’s CEO Lloyd Blankfein from a 2015 interview:

Now I’ll tell you something interesting else about our industry: That all industries are being disrupted to some extent by new entrants coming in from technology. We, again, being, you know, technology-oriented ourselves, try to disrupt ourselves and try to figure out what’s the new thing, and come up with new platforms, new forms of distribution, new products. But in some ways, and there are some parts of our business, where it’s very hard for outside entrants to come in, disrupt our business, simply because we’re so regulated. You’ll hear people in our industry talk about the regulation. And they talk about it, you know, with a sigh: Look at the burdens of regulation. But in some cases, the burdensome regulation acts as a bit of a moat around our business.

Regulation, in other words, can serve as a very effective barrier to entry. Don’t understand these highly complex rules? Don’t know the right people in government? Don’t know how the game is played? Too bad, this industry’s not for you!

Articles
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Peter G. Klein is Associate Professor in the Division of Applied Social Sciences at the University of Missouri and Director of the McQuinn Center for Entrepreneurial Leadership.

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