Economic Legislation

What It Means

Most governments in the world today regulate the affairs of private businesses with the intent of protecting consumers, small businesses, and the overall health of their economies. This regulation is based on a variety of economic legislation, or laws concerning the economy, passed primarily since the late nineteenth century.

In the United States governments at the local, state, and federal level all make and enforce laws concerning the economy. Policies toward businesses differ considerably from city to city and state to state, but the federal government has historically taken the lead in crafting the most important pieces of economic legislation. Specifically, the U.S. government has established important ground rules for businesses relating to competition in the marketplace, the protection of ideas and inventions, the rights of workers, trade with people and companies located in other nations, and the environment, among other areas. The federal government also sometimes intervenes in cases of economic crisis, or when the side effects of economic activity cause problems for society.

When Did It Begin

Government involvement in the economy predates the rise of capitalism, the economic system that came into being in the sixteenth to eighteenth centuries and that is built on private ownership of property and the free competition of buyers and sellers in markets (the places or systems that bring buyers and sellers together). Some forms of economic legislation that existed in the ancient and medieval worlds still exist today. In ancient Egypt, Babylon, and Greece, for example, rulers established maximum prices for such necessities as grain, ensuring that they would remain affordable. Though most economists frown on these policies today, as recently as the 1970s price controls on oil were a major part of U.S. economic policy, and many politicians continue to call on the government to set maximum prices for oil, prescription drugs, and other products. Additionally, intellectual property law, which protects creative ideas as embodied in such forms as books and inventions, dates back to the 1400s, when printing presses first allowed writers to reproduce their works and sell them in large quantities. Intellectual property law today is still developing and being redefined in response to such technologies as the Internet, which have revolutionized the distribution of creative ideas as radically as did the printing press in its day. Likewise, protectionism (the use of high taxes or limits on imports, which protect domestic industries from foreign competition) was almost universally practiced in the pre-capitalist world, and the practice persists today despite the general consensus of economists that it is a bad idea.

Other forms of economic legislation were slow in developing, in part because of the strong arguments of early economists such as the Scottish philosopher Adam Smith (1723–90). Smith believed that market-based capitalism was self regulating and worked best when government stayed completely out of economic affairs. Thus, as capitalism gained steam in the eighteenth and nineteenth centuries, governments took what is known as a laissez-faire approach to the economy: they left businesses free to pursue profits in almost any way they wanted. By the early nineteenth century, in England and other parts of Europe, this had begun to result in miserable working conditions, workdays of 14 or 16 hours, and the widespread employment of children as young as six or eight years old. The first labor laws were passed in early nineteenth-century England in response to public concern for workers.

The United States generally lagged behind Europe in the realm of economic legislation, in part because the laissez-faire approach to the economy was (and still is) part of the nation’s identity. By the end of the nineteenth century, however, the rise of trusts (large numbers of companies united under one common owner) that dominated entire national markets, such as the oil and steel industries, posed obvious threats to consumers and small businesses and led to major pieces of antitrust legislation. But it was not until the Great Depression of the 1930s, during which business activity ground to a halt and roughly 25 percent of American workers lost their jobs, that the U.S. government began to intervene in the economy on the scale that it does today. The Depression seemed to many Americans evidence that capitalism could not work properly without government regulation. President Franklin D. Roosevelt’s New Deal programs (wide-ranging legislation meant to spur recovery from the Depression) included new regulations of the banking and financial industries, supported workers’ rights to form unions, set a minimum wage and a maximum workday length, and in numerous other ways asserted the government’s authority and responsibility to oversee the economic life of the nation.

More Detailed Information

Some of the most important pieces of economic legislation in the United States concern a handful of basic subjects: competition between businesses, which is regulated according to a variety of antitrust legislation; intellectual property rights, which are established by copyrights, patents, and trademarks; labor laws, some of which are federal and some of which vary from state to state; trade policy, which pits the desire for protectionism against the desire for global economic development and unity; price controls, minimum and maximum prices for certain products; and externalities, the side effects of economic activity to which government often must respond for the well-being of society.

Antitrust legislation arises out of the theory that the market for any product functions best when there are a large number of sellers competing for consumers’ business. When this is the case, no business is able to raise prices in order to inflate profits, because other businesses would be positioned to lure the first business’s customers away by offering lower prices. Likewise, companies tend to produce enough goods to satisfy consumer demand, and they tend to produce high-quality goods to avoid losing customers. By contrast, when one firm is the only seller of a good (this situation is called a monopoly), it can raise prices, cut production, and offer inferior goods without risking failure. Though true monopolies are rare, the U.S. government has, since the late nineteenth century, sought to promote competition by preventing monopolies from forming or by dismantling monopolies and near-monopolies into separate entities.

Intellectual property laws are meant to protect the intangible products of the creative mind. Three basic forms of intellectual-property protections are available in the United States: copyrights, patents, and trademarks. Copyrights protect the works of artists, writers, composers, moviemakers, and others who produce original creative content. Patents protect the rights of those who invent new products, technologies, or processes for making products. Trademarks protect those who come up with original names, symbols, or other elements that are used to identify a brand or organization in the marketplace. Each of these forms of protection allows the individuals responsible for creative ideas to reap the benefits of originating those ideas. In the absence of intellectual property rights, the originator of an idea would have no more right to profit from it than anyone else. Theoretically this would result in a diminished amount of creative effort across society.

Labor laws arose in response to the widespread mistreatment of workers in the eighteenth, nineteenth, and early twentieth centuries. Some of the most important labor laws outline the responsibilities that employers have to their employees (and vice versa), provide standards for workplace safety, and prevent or punish discrimination (on the basis of race, religion, sex, color, and national origin) in hiring and on the job. Another major focus of labor laws at the state and national levels is the accommodation of labor unions, organized groups of employees empowered to uphold workers’ interests and bargain with employers for improvements in working conditions. Prior to the Great Depression the U.S. government generally sided with employers in refusing to negotiate with organized labor unions.

Protectionism has always been a fact of life in the realm of international trade. Since World War I the United States has generally followed a policy of reducing tariffs (taxes on imports) and quotas (limits on the number of imports), but some protectionist trade restrictions still exist. Economists generally argue that protectionism reduces economic efficiency and does more harm than good in the long run, but the U.S. government continues to protect certain industries for various reasons, ranging from national security to the lobbying of special-interest groups.

Price controls, likewise, are an old, global phenomenon about which economists generally have little good to say. Although Americans may feel cheated when, for instance, gas prices rise to record highs at the same time that oil company profits are at record highs, economists argue that putting a ceiling on oil prices will infallibly result in an imbalance between supply and demand. With their profits limited, oil companies will produce less gas than Americans want, and shortages of gas will result.

Finally, the government makes laws concerning side effects of economic activity, known as externalities. Externalities either harm or benefit third parties not involved in the transaction at issue. For example, a positive externality would be present when one person in a neighborhood pays to have her house renovated, and property values on the whole block rise. Government is often more concerned, however, with negative externalities. For example, a paper manufacturer pollutes the air around its factory, resulting in a diminishment of the quality of life, and possibly even medical problems, for those who live nearby. Governments therefore set standards for pollution, monitor companies’ compliance with the standards, and fine those who violate the standards.

Recent Trends

Attitudes toward government involvement in the economy are often subject to political beliefs. In the United States today, conservatives and liberals tend to disagree about the need for economic legislation and its enforcement. Conservatives typically believe that the economy works best, and produces the best results for society, when the government imposes minimal restrictions on it. Liberals, on the other hand, typically have less faith in an unregulated economy, and believe that the government should intervene in some economic matters in order to produce socially beneficial results.

Economic legislation in the United States has, since the beginning of the twentieth century, come in waves depending on which political party is in power. The largest wave of legislation came under Democratic President Roosevelt in the wake of the Depression, and government involvement in the economy generally grew from that time until the 1970s. There was a substantial backlash to government regulation under Republican President Ronald Reagan, who encouraged some government agencies to slack off in their enforcement of existing economic legislation. President Bill Clinton’s administration reversed this trend somewhat during his eight years in office, but he was significantly hampered in this for six of those years by a Republican-controlled Congress. His successor, Republican George W. Bush, encountered no such opposition for the first six years of his tenure as president, and he followed Reagan’s example of combating what he saw as excessive regulation of the economy.