Heads, I win, tails, you lose

May 28, 2009 by Adam C. Powell, Ph.D.

It’s never fun to play games with small children whom lack a sense of fairness. Hearing a kid say, “Heads, I win, tails, you lose!” is one sure way for a competition to become less interesting. Imagine if in the middle of a game of chess, your opponent declared, “All pawns can now move two squares in any direction.” At its surface, this might seem fair, as both of you are bound by the same new rule. Upon further analysis, it is clear that your opponent only declared the rule because he felt it might be to his advantage. He used the turns he had before suggesting the rule to position himself so that he would succeed after implementing it. You, however, have had no time to prepare for the change. A fair game would have used one set of rules throughout.

What does this have to do with our government? The marketplace is a competition, like any other. Legislatively changing the rules of the marketplace is like changing the rules of any other game. While some may feel that there is no need for the competition in the market to be fair, they forget that frequent changes to the rules may cause players to leave the table. When we tilt (or as some say, level) the playing field to favor one group over another, the unfavored group may choose to leave the game.

Why is it bad if strong players leave? If the best players leave due to government harassment, the remaining players will be the weaker, favored players. These weaker players are less able to compete internationally, where they must face competitors not hobbled by our government.

Where will the unfavored players go? They will head to new competitions, either abroad, or in other industries domestically. This is an inefficient outcome, as they would have been in these markets in the first place had they thought it to be in their interest.

To conclude, I feel that the best thing the government can do for industry is to leave it alone as much as possible. While politicians feel pressure to act, sometimes change itself is harmful. When potential entrants see the rules of the game in flux, they may be more hesitant to enter out of fear that changes may not be in their favor. Thus, legislative change itself may be the enemy of any economic activity requiring long-term planning.