Does the Existence of the State Cause Conflicts of Interest?

My phone is tapped. My mail is read.
They know the thoughts inside my head.

The money I deposited
is now reported to the Fed.

They chip my hand, dispense my bread.
I think they watch me go to bed.

I don’t object. I’m glad instead
to be controlled until I’m dead.

- G. Edward Griffin, from “It’s All for My Security“

As I listened to a classic speech from Murray Rothbard, entitled, “The History of Taxation” something he said struck me. (Often,when listening to Rothbard, this happens.) He mentioned the obvious connections between people who worked inside the banking elite and those who worked, or seemed to work, outside of it, in the regulatory realm. There seemed to be, at that time and now, a cross-pollination between the two bodies, even though one is supposed to oversee the other.

Given that I used to work in regulated medical devices, I wondered if the same was true of the Food and Drug Administration (FDA). Were there obvious conflicts of interest between those the FDA ostensibly regulates and the organization itself? Let me be honest. I didn’t wonder. I was almost certain of it. (I left regulated medical devices after 7 years due in no small measure to my growing disgust with the FDA, and what I saw as the inevitable negative effects of regulation and control implemented by that government central planning body.) If what I’ve seen over the years is any indication, my suspicions were correct.

My hypothesis back then (and now) was simple: all the FDA did was make everything they regulated more expensive and not necessarily safer. (I’d argue that the possibility for payola, graft, deception, and other financial and/or ethical shenanigans virtually guarantee that many items are, in fact, more likely to be dangerous than safe.) No hypothesis is complete without data. This essay is my attempt at providing just a few examples of those who build the henhouse (industry) and those who ostensibly protect it (government) working in tandem. While one likely cannot draw any firm conclusions from what I present here, I’d say the indications are that, as with that old saying, having the fox guard the henhouse is a losing proposition.

This Is Your Government on Drugs

The FDA assumes all regulatory functions for food and drugs in the U.S. and, in doing so, creates a one-stop-shop for anyone who wants to use government guns to take advantage of that market. If one examines the people who work for the FDA and the people who work for “big pharma” all too often, it appears to be the same people, in varying stages of their careers.

For example, the video, “Your Milk on Drugs – Just Say No” which covers the somewhat suspicious approval of rBGH, recombinant Bovine Growth Hormone, is illustrative in this regard. To wit:

The person in charge of policy at the FDA when rBGH was approved was Michael Taylor. Before he became Deputy Commissioner for Policy at the FDA, he was Monsanto’s attorney. He would later become a vice president at Monsanto.

One of the people who did research on rBGH at Monsanto was Margaret Miller. She later became FDA Branch Chief for Hormones and Pharmacological Agents, in the division that evaluated her previous research on rBGH.

While a graduate student, Susan Sechen did research on rBGH at Monsanto, only later to become the Primary Review Officer for the FDA, actually becoming one of the evaluators on rBGH.

That’s a lot of cross-talk and this is but one example. While I will certainly stop short of accusing these people, one would have to be very trusting to not see the conflict of interest waiting to flower in some negative way. The State, with its perverse incentives, leads to the regulated and the regulators sucking a teat on either side of the same fat cow.

The taxation victims – the citizenry – pay for all the feed.

War: Nice Work if You Can Get It

The same phenomenon is visible with regard to the military. In fact, it has been identified and chronicled for many years. One such chronicler is Carroll Quigley, identified by people like G. Edward Griffin as Bill Clinton’s mentor. (Clinton himself referred to Quigley as such more than once.) Says Quigley, quoted directly from his classic Tragedy and Hope: A History of the World in Our Time:

Most high officers of the American armed forces in the war and postwar period retired before the fixed age of sixty-two, often on a disability basis (which exempted retirement pay from income taxes), and then took consultant jobs with industrial firms whose chief business was in war contracts.

Thus, four-star general Brehon B. Somervell, chief of Army Service Forces in World War II, retired on a disability salary of $16,000 a year at the age of fifty-four to join a number of industrial firms, including Koppers, which paid him $125,000 a year; three-star general L. H. Campbell, chief of ordnance in World War II, retired on disability at $9,000 a year at age fifty-nine and became an executive, at $50,000 a year, of firms from whom he had previously purchased $3 billion in armaments. Four-star General Clay retired at fifty-two on $16,000 a year, but signed up at once with General Motors and Continental Can at over $100,000 a year. Three-star air-force General Ira C. Eaker left the service at age fifty with $9,000 a year and joined Hughes Tool Company at $50,000. Another three-star air-force general, Harold C. George, went with Eaker to Hughes, at $40,000. General Joseph T. McNarney, in 1952, took his four stars, and $16,000 a year, to join Consolidated Vultee at $100,000. (Emphasis from original.)

These examples are from a time long-forgotten (or never noticed) by many who now prowl the Internet, but I would put down good money that there are just as many examples from last year as Quigley lists in his 1975 book.

Unsatisfied to just assume, I did just a little checking. I’ve no idea about his compensation, but I don’t figure General Richard D. Hearney (USMC, ret) is joining Defense Industries’ (a major defense contractor) Board of Directors because he’s bored. The most basic premise in having a successful business is obtaining a steady stream of paying customers. If one can help an enterprise find customers who not only pay top dollar, but also, who aren’t even spending their own money, that’s all the better.

These examples hint at possible conflicts of interest, but basic logic illustrates why such connections will generally lead to negative outcomes. (I guess “negative” is relative. If you’re the one making good money, it’s probably not negative for you.) One only need examine a simple small business example to see what I mean.

A Tale of Two Pizza Shops

Let’s say you own a pizza shop, and your shop falls far short of sales goals. (Let us assume for now that these goals are based upon being able to operate successfully at a break-even point.) If your shop is to succeed, your incentive is to change something about what you do. You have to change, but you also have to support the business while doing so. You cannot require your customers to buy more pizza, producing more profit in the interim, and yet, if you do not make the needed changes, or if you make them too slowly, you will eventually go out of business. Hey, crap happens. This represents the classic dilemma that a business faces.

Now, let’s say the same pizza shop is owned by the State, along with all other pizza shops. (A state-run enterprise in direct competition with a private sector business would eventually, and likely very quickly, fail. That’s why there aren’t any!) If the “business” falls short of sales goals, the incentives remain the same as the prior case, particularly if the operators – notice I didn’t say “owners” – are ethical. They will want to change something. However, due to the funding paradigm of the State, the income remains constant while those changes are being made. In fact, if the operators of the enterprise can convince the right people, they might receive an infusion of additional cash despite the prior poor performance of the enterprise. (After all, one needs to keep the “business” going while the changes take hold, right? Pizza is a critical public need!)

At no point is the government pizza shop in danger of going out of business since its customers have no competitor to which to turn. In fact, if the changes are not made or are made too late, is really doesn’t matter, since the income remains constant. Actually, since the “business” has just as good a chance of getting more money when it performs poorly as when it does well, there is little, if any incentive to improve in any measurable, substantive way. Even worse, the previously poorly-run pizza shops could also be absorbed into a larger, even less efficient, even more buffered-against-market forces pizza oversight organization. (Hint: The Department of Homeland Security.) Adding irony to misery, the money used to infuse the failing enterprise or create the new pizza behemoth is taken from the customers as well! Welcome to government services.

Conclusion

So what does all this mean? It means that the incentives that drive human action – the praxeology about which Mises so eloquently spoke – operate with Swiss watch efficiency in all endeavors whereby a man can be rewarded by his own efforts, which is generally, well, everywhere. Without the feedback mechanism of the free market creating a positive response feedback system – the more happy customers, the more money – one is left with a negative response feedback system of the state-controlled market – no matter what is done, the money remains the same. Ergo, the natural tendency is for doing less, or for interacting more strongly with the regulatory body than with those who should be receiving the benefits, the customers.

I am also saying one other thing: In any case where one might identify inefficient behavior in such a case as the scenario above, up to and including unethical behavior, the agents of the State are simply performing as one should expect. This also applies to thoseoperating in ostensibly private enterprises that interact with the State in any manner outside the pull of the market. While one could certainly find a way to be disgusted at the actions of the people of whom I speak, the bottom line is this: They did exactly what we’d predict, and what self-interest would lead them to do. Even if their initial behaviors are ethical but misguided, eventually, as the feedback incentive mechanisms reward unethical behavior at the same (or higher) rate as ethical behavior, ethical behavior
(and/or the people who endeavor to act ethically) will be crowded out. As a result, the system will eventually and unavoidably be overrun with shiftless, trifling, arrogant, thieving, their-own-rear-end-protecting bureaucrats.

Such is the inescapable result of people operating in the teeming cesspool of theft-financed self-interest known as the coercive state.

August 29, 2008

Wilt Alston [on LinkedInl]

Post originally from Lew Rockwell Click Here for original post. Used with permission of Wilt Alston