THE PROS AND CONS OF

GOVERNMENT REGULATION

J.L. PORKET

3rd IEA DISCUSSION PAPER

23 JANUARY 2003

Institute of Economic Affairs

2 Lord North Street,

London

SW1P 3LB

WWW.IEA.ORG.UK
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THE PROS AND CONS OF GOVERNMENT REGULATION

J.L. PORKET has doctorates from Charles University, Prague, and the

University of London. He has been associated with the Prague School of

Economics, Brunel University, and St. Antony's College, Oxford.

ABSTRACT
Regulation of human behaviour and human social interaction is a

universal feature of both traditional and modern societies. In the latter, on

account of their complex structure, regulation inevitably takes place at

different levels, albeit within a framework set by government. Consequently,

these societies are characterised by a web of formal as well as informal

regulation and self-regulation, in other words by a plurality of regulatory

systems. And this plurality of regulatory systems is an important source of

tensions and conflicts in society.

RULES AND COMMANDS

Societies have to regulate human behaviour and human social

interaction in order to maintain a system of ordered relationships, allowing

maximisation of the probability of survival and the attainment of their material

avoid disorder and disintegration and to survive and prosper.

Regulation is a process consisting of the making, application, and

adjudication of rules governing human behaviour and human social

interaction. A rule is a norm which prescribes or proscribes what a specified

category of social actors should or should not do on all occasions of a

specified kind or on all occasions without qualification.1 Since prescriptions

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and proscription are expected to be observed, the only alternative the

addressees have is to break them.

Rules must be distinguished from commands. In contrast to a rule which

is a norm applying to a general type of situation, a command is not a norm in

this sense. It is an authoritative order addressed to a particular social actor or

a particular group of social actors, defining what the addressee(s) should or

should not do on a particular occasion.

To be effective, both rules and commands must be enforceable.

Consequently, if it were evident a priori that in practice a particular rule or

command would be neither observable nor enforceable, it would be politic to

refrain from making or applying that rule or from giving that command.

LEVELS OF REGULATION

Although the survival and prosperity of modern societies require

government regulation, regulation is not exclusively by government. Formal

and/or informal regulation takes place in various spatial social systems (such

as subnational units, localities, neighbourhoods, and households) as well as

in various functional social systems (such as formal organisations, informal

groups, and families). Hence, different levels of regulation and self-regulation

are to be found in modern societies, which means that the state is not a

monopoly rule-maker and rule-enforcer.2

The individual therefore tends to be simultaneously subject to different

and, not infrequently, conflicting regulatory systems. Individuals hold

membership of a number of spatial and functional social systems, each of

which has a regulatory system specific to it.

Regarding specifically the difference between regulation and self-

regulation, a social system is self-regulating if it can make, apply and

adjudicate the rules governing the behaviour of and the interaction between

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its members, as well as its behaviour toward and its interaction with its social

environment. In contrast, a social system is not self-regulating if these rules

are imposed on it and enforced from the outside by another social actor. So,

while in capitalist market economies private firms are self-regulating systems,

in socialist command economies state enterprises are regulated systems.

Naturally, there are degrees of regulation and self-regulation. Even in

free-market economies private firms' self-regulation is constrained by the

legal framework within which they operate. Even societies are not completely

self-regulating systems, because government regulation tends to be

constrained by international law, treaties and conventions.

TYPES OF RULES

Irrespective of the level at which regulation and self-regulation take place

within societies and between them, several types of rules may be

distinguished.3 The fundamental distinction is that between formal rules

(such as statute laws, by-laws, and charters) and informal rules (such as

common law, customs, and conventions). The difference between them lies

in that the former are designed, enacted, and formally stated (made known in

written form), whereas the latter come into existence spontaneously.

As the case of traditional societies and that of informal groups in modern

societies indicate, informal rules can be effective even in the absence of

formal rules. In contrast, formal rules do not put an end to informal rules, as

evinced by the persistence in modern societies of traditions, customs, and

conventions, as well as by the occurrence in formal organizations of informal

rules which support, supplement, obstruct or supersede formal rules.

Whether formal or informal, rules are either constitutive or regulative. The

former are concerned with the structure of the system and the acquisition and

exercise of power or influence, as well as with the system's boundary and

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membership. If they did not exist, there would be no systems and no

institutions. The latter are then rules regulating those instances of behaviour

and interaction which are independent of them in the sense that they would

take place even without them.

Besides being either constitutive or regulative, formal and informal rules

are either permissive or restrictive concerning social actors' behaviour and

interaction. Although explicitly or implicitly both simultaneously prescribe

what social actors should do and proscribe what they should not do,

permissive rules are by their nature process-orientated and, hence, goal-

independent, whereas restrictive rules are by their nature goal-orientated

and, hence, goal-dependent.

Since rules may be more or less permissive or restrictive, they may be

located on a spectrum ranging from highly permissive (confining themselves

to defining broad parameters within which social actors are free to make their

own choices) to highly restrictive (specific as to both goals and means). The

more permissive they are, the higher the autonomy of social actors, and vice

versa.

Not only rules, but regulatory systems too are more or less permissive or

restrictive. As a result of simultaneous membership of a number of social

systems, individuals are simultaneously subject to a number of regulatory

systems, some more permissive, others more restrictive. In this respect, the

distinction between compulsory and voluntary membership is of importance:

when their membership in a particular social system is compulsory,

individuals have no choice but to be members, irrespective of how permissive

or restrictive it is; in contrast, when their membership in a particular social

system is voluntary, their choice depends less on how permissive or

restrictive it is and more on how it contributes to the satisfaction of their

needs and wants.

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GOVERNMENT REGULATION

Like regulatory systems in general, the state may be more or less

restrictive or permissive. How restrictive or permissive it is, depends on the

extent and intensity of government regulation. At the same time, the extent

and intensity of government regulation may vary from one sphere of human

behaviour and human social interaction to another. Thus, the extent and

intensity of government regulation may be located on a spectrum ranging

from highly restrictive at one extreme to highly permissive at the other.

Irrespective of its extent and intensity, government regulation is a source

of tensions and conflicts in society, because while some members of society

may favour the existing extent and intensity of government regulation, others

may favour its expansion either generally or in a particular sphere, and still

others may favour its contraction, again either generally or in a particular

sphere. For example, one British report distinguished five categories of

voters. Depending on their attitudes towards economic and personal

freedom, voters consisted of conservatives (who favoured economic freedom

but wanted state regulation of personal freedom, i.e., of individual choice in

moral and social issues), socialists (who distrusted economic freedom but

favoured personal freedom), authoritarians (who favoured neither economic

nor personal freedom), libertarians (who favoured both economic and

both economic and personal freedom).4

Permissive government regulation is conducive to the autonomy

(freedom) of the members of society and, hence, to self-regulation as well.

However, it is not possible to determine in advance whether and how social

actors will use their autonomy (freedom): while on the one hand they need

not make full use of all the opportunities available to them, on the other they

may show lack of self-restraint and take undue advantage of others. And

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while permissive regulation is conducive to self-regulation, simultaneously it

cannot dispense with it, albeit on condition that self-regulation is constrained

by conventions, customs and traditions and does not endanger society's

cohesion and performance.

Restrictive government regulation, in contrast, circumscribes the

autonomy (freedom) of the members of society and, hence, also self-

regulation. Being extensive and intensive, it tends to have an adverse impact

on flexibility, innovation, and efficiency; to increase the costs connected with

rule-making, rule-application, and rule-adjudication; and to lessen respect for

rules and contribute to covert and overt non-compliance on the part of the

members of society, one reason for non-compliance being compliance costs.

Moreover, when government regulation is extensive and intensive, rules are

prone to be specific rather than general, to suffer from inconsistencies, and to

breed uncertainty because, besides often creating confusion, they have to be

frequently modified or changed in response to both changing conditions and

contingencies.

In sum, while permissive government regulation is a sign that the state is

process-orientated, restrictive government regulation is a sign that the state

is goal-orientated in the sense of being concerned with an end-state or final

outcome. To use Giovanni Sartori's terminology, the former is characterized

by the rule of law, whereas the latter is characterized by the rule by laws

which nears, albeit in disguise, the rule by men.5 Expressed differently, the

latter is characterised by a flow of ad hoc political and bureaucratic decisions

and ad hoc rules.

When government regulation is extensive and intensive and it becomes

apparent that it neither works nor can work as expected, calls for

deregulation are likely to materialise and grow. The purpose of de-regulation

is to increase the autonomy (freedom) of the members of society by curtailing

government intervention in the economy and society. This requires a

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reduction in the existing amount of rules and/or a change in the content of the

existing rules, as well as a check on ad hoc (discretionary) political and

bureaucratic decisions. In brief, this requires the substitution of general and

abstract rules for specific and ad hoc rules or, in other words, process-

orientated (goal-independent) rules of conduct for goal-orientated (goal-

dependent) rules.

Besides these measures, deregulation may need a revision of the

established rules governing rule-making. The need arises when the

established rules governing rule-making enable a proliferation of ad hoc

rules, so that goal-driven governments are able arbitrarily to enact ad hoc

rules while nominally abiding by the established rules of rule-making.

RULE ENFORCEMENT

Rules are expected to be observed, not broken. In the real world, though,

they are not always observed, but often intentionally or unintentionally

broken, sometimes even by the rule-makers themselves. In modern

societies, which are state societies, this applies to rules at any level of

regulation and, consequently, also to legal and bureaucratic rules.

If rules are to be observed by their addressees, they must be enforced,

and their enforcement is to be achieved by the use of both positive sanctions

(and the promise thereof) and negative sanctions (and the threat thereof). In

other words, to encourage as well as reward compliance with rules on the

one hand and to deter as well as punish non-compliance with rules on the

other, rule-enforcement has to rely on a combination of physical, material and

symbolic means.

Although rules must be enforced if they are to be observed, some are

more flexible (less rigorously applied and enforced) than others. Two main

approaches to rule-enforcement may be distinguished, namely, the zero-

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tolerance approach (which punishes any violation of rules, however slight)

and the zone-of-indifference approach (which tolerates minor violations of

rules). The more extensive and intensive government regulation, the more

problematic is the zero-tolerance approach and the more necessary is the

zone-of-indifference approach.

Whether flexible or inflexible, rules may permit or require exceptions,

exempting certain social actors from compliance with them. According to

Robert B. Edgerton, it is possible to identify four general categories of rule

exceptions: exceptions based on temporary conditions, such as temporary

incapacity; exceptions arising from a specific status, such as infancy,

disability, or old age; exceptions connected with special occasions, such as

harvest or initiation rituals or funerals; and exceptions that apply only in

certain settings, such as sanctuaries.6

Since government-made rules must be enforced if they are to be

observed, effective rule-enforcement presupposes that rules are enforceable

and that government, besides being determined to enforce them even in the

face of opposition and resistance, has at its disposal the requisite physical,

material and symbolic resources. At the same time, the less compliance with

rules is based on normative grounds (commitment), the greater the

importance of material and physical means in rule-enforcement. Yet,

compliance based on utilitarian (calculative, instrumental) grounds is more

fragile than that based on commitment, because it has a tendency to decline

when the performance of the state declines, when its ability to gratify and

enforce falls.

Thus, rule-making and rule-enforcement incur costs, which have to be

covered by the revenue extracted by the state from the economy by means

of taxation, direct and indirect. Inevitably, the more extensive and intensive

government regulation, that is, the more formalised and bureaucratised the

economy and society, the more revenue the state needs and has to extract

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from the economy. In any case, revenue extraction incurs extraction costs,

depends on the state's not unlimited extractive capabilities, and can give rise

to tax avoidance (which remains within the law), tax evasion (which breaks

the law), and other forms of tax resistance (such as delays in tax payment or

tax revolts).

It follows that government regulation should take into consideration not

only its expected short-term and long-term benefits, but also its expected

short-term and long-term costs, trying to maximise the former and minimise

the latter.

CONSTRAINTS ON GOVERNMENT REGULATION

The extent and intensity of government regulation depend on the

orientation of government, on whether it is process-orientated or goal-

orientated in the sense of being concerned with an end-state or final

outcome. In any case, though, there are limits to effective government

regulation, so that the state is constrained in what it can do and attain.

Besides being constrained by the available resources and the costs of

rule-making and rule-enforcement, effective government regulation is further

constrained by three major factors. The first is universally valid economic and

other laws, which no government regulation can put out of operation. The

second is the existing political, economic and civic structures: if they are to

be preserved, government regulation must not encroach on them. And the

third is the values of society: the more government regulation is at odds with

the values of society, the greater the likelihood of covert and overt non-

compliance.

Hence, there is an important difference between effective government

regulation and nominal government regulation. The difference lies in that the

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former leads to compliance with the designed, enacted and formally stated

rules, whereas the latter does not. That is to say, while the former regulates

human behaviour and human social interaction, the latter fails to do so.

Yet, although it is easier to make rules than to enforce them, even rule-

making faces constraints. One group of them is political constraints: by

definition, rule-making is politically less constrained in authoritarian political

systems than in democratic ones, and in democratic ones it is politically less

constrained in the case of one majority party government than in the case of

a coalition or a minority government.7

In democratic political systems, another constraint on rule-making is the

constitution, which defines the parameters within which rule-making is to take

place. In other words, constitutional rules are designed to control, inter alia,

the exercise of political power and, consequently, rule-making as well. For

that reason, they are also intended to be more costly to amend, modify, and

replace than are operating rules.8

A further constraint on rule-making in democratic political systems is

judicial review. It means that courts are explicitly or implicitly empowered to

invalidate laws and administrative actions: while in the case of constitutional

review they rule on the constitutionality of laws and regulations, in the case of

administrative review they rule on the legality of administrative actions.

Besides, in democratic political systems rule-making is affected by the

demands and activity of pressure groups9 and social movements,10 as well

as by public opinion and the mood of the time. They can block change in

government regulation on the one hand and enforce it on the other.

COMPLIANCE AND NON-COMPLIANCE

Although there are limits to effective government regulation, governments

may develop a regulatory mentality, characterised by a belief that they are

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the best judges of what is good for society and that, by means of regulation,

they can solve any problem and attain any political, economic, social, and

cultural objective. The inevitable result of this belief in their omniscience and

omnipotence is then extensive and intensive government regulation.

Being inimical to spontaneity, extensive and intensive government

regulation noticeably circumscribes the autonomy (freedom) of the members

of society. At the same time, it gives rise to uncertainty, because it undergoes

perpetual change. The reason is that whenever the existing rules do not

produce the officially desired outcomes, the remedy is sought either in their

modification or in their replacement by new ones, not in their relaxation or

In any case, government regulation affects all spheres of human

behaviour and human social interaction. In the economic sphere, for

instance, it has an impact on productivity, competitiveness, competition,

profitability, hiring and firing, unemployment, prices and consumers' choice.

Outside the economic sphere, it has an impact on, inter alia, access to

information, communication, political activity and processes, marriage,

divorce, provision of health care and education, social inclusion and

exclusion, individuals' opportunities, privileges, crime and immigration.

For society, the impact of government regulation may be beneficial or

harmful, depending on its extent and intensity. In principle, government

regulation is beneficial if it contributes to economic, political, social and

cultural development by being process-orientated and, thus, allowing

spontaneity, albeit within the framework of general and abstract rules. In

contrast, government regulation is harmful if it retards economic, political,

social and cultural development by being goal-orientated and, thus, putting

fetters on spontaneity.

Yet, whether process-orientated or goal-orientated, government

regulation is a source of tensions and conflicts in society. At the same time,

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the choice between compliance and non-compliance is affected by the

perception of their costs, which need not be exclusively economic.

By definition, goal-orientated government regulation is more conducive to

covert and overt non-compliance than process-orientated government

regulation, because the former is by its nature detached from reality.

Consequently, in order to avoid paralysis, at least some of the rules applying

to particular situations must be broken. Thus, goal-orientated government

regulation contributes to the emergence and persistence of a culture of rule-

breaking.

PITFALLS OF GOVERNMENT REGULATION

It follows from the foregoing that goal-orientated government regulation

can fail to attain its objectives and/or produce unintended consequences. In

other words, it can fail to solve existing problems, exacerbate them, and/or

create new ones. Empirical evidence is not difficult to come by, as

demonstrated by the selected cases presented below.

One example of the failure of government regulation is Prohibition in the

United States. In this liberal democracy, the production, sale, and transport of

alcohol were outlawed between 1920 and 1933. However, the ban did not

stop people drinking. It merely drove them underground, giving rise to

organised crime engaged in smuggling, illicit distilling, and bootlegging.

These activities, not surprisingly, involved the use of violence.12

Another example is the case of the communist systems established in

the former Soviet-bloc countries. As variants of totalist authoritarianism

characterised by authoritarian politics and political control over the economy

and society, they were highly formalized and bureaucratised. Nevertheless,

they had an informal dimension too, which was an unintended product of the

formal system and deviated from it, in some respects complementing it, in

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others eroding it. Among its elements was the second economy, brought

about by the bureaucratisation of the economy and chronic shortages

affecting consumers and state enterprises alike.

Illegal second economy activities were not confined to communist

systems, though. They are to be found in any established modern economic

system, irrespective of its type. In capitalist market economies, for instance,

they have increased considerably since 1960, their major causes being the

tax burden, the complexity of the tax system, and restrictive government

regulation. They are also far from absent in the developing countries,13 as

well as in the post-communist ones.

The last example concerns contemporary Britain. Since the 1997 general

election, the Labour government has been obsessed with regulation. New

regulatory measures have imposed additional compliance costs on business,

estimated to reach £15 billion by January 2002.14 They have also imposed

performance targets on the health service, social services, education, the

police and local government. Besides, they were becoming a threat to the

effectiveness of the armed forces as well as to individual freedom.

Despite the sharp increase in red tape, by mid-2001 Britain was still

regarded as having a more business-friendly environment than other

European Union countries. Nevertheless, since 1997 its global

competitiveness has been gradually falling. There have been troubles with

targets too, arising from their impact on behaviour: targets may encourage

cheating and rule-breaking, adversely affect performance in areas not

covered by them, and reduce responsiveness to real problems.15

A number of factors have contributed to the proliferation of rules and

targets. They have included the government's goal-orientation, its naive belief

in the inherent effectiveness of rules and targets, and its petty risk-aversion

manifesting itself in, inter alia, its safety fanaticism, as well as the influence of

regulation-demanding pressure groups and public opinion.

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CONCLUSION

Whether they are traditional or modern, societies need regulation if they

want to survive and prosper. Hence, regulation matters. More specifically, it

matters who regulates what, when, how and why on the basis of what title, at

what costs, and with what consequences.

In modern societies, one of the rule-makers and rule-enforcers is the

state. This raises the important question of its role in the economy and

society at large, because the role the state plays in the economy and society

has an impact on the degree of autonomy (freedom) enjoyed by the

members of society and, at the same time, is a source of tensions and

conflicts in society.

These tensions and conflicts arise from differences in social actors'

interests. Social actors, be they individuals or social systems, are motivated

first and foremost by their own interests, and the pursuit of self-interest then

determines social actors' attitudes towards the role of the state in the

economy and society and, thus, towards the extent and intensity of

government regulation. And since social actors' interests differ, also their

attitudes towards the extent and intensity of government regulation differ.

As a result of these tensions and conflicts, the extent and intensity of

government regulation undergo change. In fact, over the last five centuries

modern societies have experienced regulation-deregulation cycles, with

regulation-orientated periods (characterised by governments obsessed with

regulation) followed by spontaneity-orientated periods (characterised by

governments showing regulatory restraint) and spontaneity-orientated

periods giving way to regulation-orientated periods.

While temporary fluctuations in the extent and intensity of government

regulation tend to be triggered off by contingencies such as war or natural

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disasters, regulation-deregulation cycles reflect mood swings (change in

preferences) brought about by social actors' perception of a widening gap

between their expectations and reality. Regulation-orientated periods begin

to come to their end when the enforcement costs of government regulation

begin to exceed its benefits, when non-compliance begins to be common

rather than rare, and when government regulation begins to fail to attain its

objectives. In contrast, spontaneity-orientated periods begin to come to their

end when government regulation begins to be regarded as a panacea and

when security (protection against any contingency) begins to be valued more

than freedom.

Neither regulation-orientation nor spontaneity-orientation is peculiar to a

particular type of modern political system. That is to say, the extent and

intensity of government regulation do not depend on whether the established

political system is authoritarian or democratic. Both can be either restrictive

or permissive, albeit with the proviso that authoritarian political systems are

by their nature restrictive in the political sphere.

Although the extent and intensity of government regulation can give rise

to tensions and conflicts in any type of modern political systems, in

democratic political systems they can also give rise to a tension between

democratic procedures of governance and goal-attainment. The reason is

that in these systems the goal-orientation of the elected government can lead

to the subordination of democratic procedures of governance to goal-

attainment, to an authoritarian or control-freak style of governance which

discards those democratic procedures of governance that inhibit goal-

attainment.

In contemporary societies, not surprisingly, government regulation

continues to play an important role. Yet, and again not surprisingly, the state

is not a monopoly rule-maker and rule-enforcer. Inevitably, it has to compete

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with a wide range of other rule-makers and rule-enforcers, intrasocietal as

well as extrasocietal, who constrain its freedom of action.

Both permissive and restrictive government regulation continue to have

their ardent proponents and opponents. Nevertheless, belief in the inherently

beneficial effects of government regulation remains widespread in many

societies, and most governments still have a penchant for incessant

regulative activity.

There are, however, compelling reasons for encouraging spontaneity,

albeit within a stable framework of general ex ante rules. Modern societies

are complex systems. Moreover, the world is currently in dynamic flux, which

creates problems calling for solutions. But different social actors face

different problems which need tailored solutions. Therefore, problems should

be solved at the ground level, where individuals have a vested interest in a

satisfactory solution.

Since extensive and intensive government regulation stifles spontaneity,

it retards societal development. On top of that, it can fail to attain its

objectives and/or produce unintended consequences. In other words, it need

not solve existing problems and can create new ones.

At the same time, government regulation takes place in a world which is

interdependent, made up of nation-states pursuing their own interests, and

differentiated in economic, political, social and cultural terms. This diversity of

national interests and conditions constitutes a constraint on the extent and

intensity of effective supranational (regional and global) regulation, even in

the case of the European Union. As are individual societies, the world too is

characterized by a web of formal and informal regulation and self-regulation,

by a plurality of regulatory systems.

NOTES

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1. In the formulation of F.A. Hayek, 'a rule refers to an unknown number of

future instances and to the acts of an unknown number of persons, and

merely states certain attributes which any such action ought to possess.'

(The Mirage of Social Justice, London, Routledge & Kegan Paul, 1976, p.

14.)

2. As put by Michael Laver, 'even in societies dominated by a Leviathan,

much day-to-day social interaction is beyond the purview of the state and

must perforce be governed along anarchistic lines.' (Private Desires,

Political Action: An Invitation to the Politics of Rational Choice, London,

SAGE Publications, 1997, p. 45.)

3. On the typology of rules see e.g. A.J.M. Milne, Ethical Frontiers of the

State: An Essay in Political Philosophy, Basingstoke, Macmillan, 1998,

pp. 51-58, and Francis Fukuyama, The Great Disruption: Human Nature

and the Reconstitution of Social Order, London, Profile Books, 2000,

Chapter 8.

4. John Blundell and Brian Gosschalk, Beyond Left and Right: The New

Politics of Britain, London, The Institute of Economic Affairs, 1997, IEA

Working Paper No. 1. See also David Smith, 'The ascent of political

man,' The Sunday Times, 7 December 1997, p. 4.10.

5. Giovanni Sartori, The Theory of Democracy Revisited, Chatham, New

Jersey, Chatham House Publishers, Inc., 1987, pp. 324-326.

6. Robert B. Edgerton, Rules, Exceptions, and Social Order, Berkeley,

University of California Press, 1985, pp. 33-34.

7. Some propositions concerning the impact of the electoral system and the

type of government on comprehensive public sector reforms and market-

oriented reform policies are to be found in Markku Olavi Harrinvirta,

Strategies of Public Sector Reform in the OECD Countries: A

2000, pp. 143-147.

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8. On flexible and rigid constitutions see Arend Lijphart, Patterns of

Democracy: Government Forms and Performance in Thirty-Six

9. J.L. Porket, Modern Economic Systems and their Transformation,

Basingstoke, Macmillan, 1998, pp. xvi-xvii, 36-37, 116-117 and 255.

10. According to Robert O'Brien et al., social movements are anti-systemic

and rely on mass mobilisation. (Contesting Global Governance:

Multilateral Economic Institutions and Global Social Movements,

Cambridge, Cambridge University Press, 2000, p. 12.) However defined,

though, they should be regarded as a subset of norm-setting pressure

groups.

11. J.L. Porket, Work, Employment and Unemployment in the Soviet Union,

Basingstoke, Macmillan, 1989, p. 186.

12. A less known case concerns off-course betting in Britain, which did not

disappear between 1853 and 1961, although legally prohibited.

13. In the developing world, according to some estimates, 50-75 per cent of

all working people participate in the second economy, the size of which

amounts to between one-fifth and more than two-thirds of the total

economic output of the Third World. (Hernando de Soto, The Mystery of

Capital: Why Capitalism Triumphs in the West and Fails Everywhere

14. David Smith, 'Labour's red tape strangles economy,' The Sunday Times,

6 May 2001, p. 3.4. For estimates of the total additional cost to business,

including tax increases, see Nicholas Boys Smith, No Third Way:

Interfering government and its cost to business, London, Politeia, 2001.

15. To give an example, the performance targets set by the rail regulator

have encouraged train operators to stretch journey times in their

timetables to minimise the risk of trains arriving late, so that some

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journeys now take longer than they did 100 years ago. (The Economist, 9

June 2001, p. 47.)

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