Chapter 12b—The Economics of Violent
Intervention in the Market (continued)
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Chapter
12—The Economics of Violent Intervention in the Market (continued)
6.
Triangular Intervention: Product Control
Triangular interference with an exchange can alter the terms of the
exchange or else in some way alter the nature of the product or the
persons making the exchange. The latter intervention, product
control, may regulate the product itself (e.g., a law prohibiting all
sales of liquor) or the people selling or buying the product
(e.g., a law prohibiting Mohammedans from selling—or
buying—liquor).
Product control clearly and evidently injures all parties
concerned in the exchange: the consumers who lose utility
because they cannot purchase the product and satisfy their most urgent
wants; and the producers who are prevented from earning a remuneration
in this field and must therefore settle for lower earnings elsewhere.
Losses by producers are particularly borne by laborers and landowners
specific to the industry, who must accept permanently
lower income. (Entrepreneurial profit is ephemeral anyway, and
capitalists tend to earn a uniform interest rate throughout the
economy.) Whereas with price control one could make
out a prima facie case that at least one
set of exchangers gains from the control (the consumers whose buying
price is pushed below the free-market price, and
the producers when the price is pushed above), in
product control both parties to the exchange
invariably lose. The direct beneficiaries of product control,
then, are the government bureaucrats who administer the regulations:
partly from the tax-created jobs that the regulations create, and
partly perhaps from satisfactions gained from wielding coercive power
over others.
In many cases of product prohibition, of course, inevitable pressure
develops, as in price control, for the re-establishment of the market
illegally, i.e., a “black market.” A black market
is always in difficulties because of its illegality. The product will
be scarce and costly, to cover the risks to producers involved in
violating the law and the costs of bribing government officials; and
the more strict the prohibition and penalties, the scarcer the product
will be and the higher the price. Furthermore, the illegality
greatly hinders the process of distributing information about the
existence of the market to consumers (e.g., by way of
advertising). As a result, the organization of the market will
be far less efficient, the service to the consumer of poorer quality,
and prices for this reason alone will be higher than under a legal
market. The premium on secrecy in the “black”
market also militates against large-scale business, which is likely to
be more visible and therefore more vulnerable to law enforcement.
Paradoxically, product or price control is apt to serve as a
monopolistic grant (see below) of privilege to
the black marketeers. For they are likely to be very different
entrepreneurs from those who would have succeeded in this industry in a
legal market (for here the premium is on skill in bypassing the law,
bribing government officials, etc.).
Product prohibition may either be absolute, as in
American liquor prohibition during the 1920’s, or partial.
An example of partial prohibition is compulsory rationing,
which prohibits consumption beyond a certain amount. The clear
effect of rationing is to injure consumers and lower the standard of
living of everyone. Since rationing places legal maxima on
specific items of consumption, it also distorts the pattern of
consumers’ spending. Consumer spending is coercively shifted
from the goods more heavily to those less heavily rationed.
Furthermore, since ration tickets are usually not transferable, the
pattern of consumer spending is even more distorted, because
people who do not want a certain commodity are not permitted to
exchange these coupons for goods not wanted by others. In short, the
nonsmoker is not permitted to exchange his cigarette coupons for
someone else’s gasoline coupons which have been allocated to
those who do not own cars. Ration tickets therefore cripple the entire
system by introducing a new type of highly inefficient quasi
“money,” which must be used for purchasing in
addition to the regular money.
One form of partial product prohibition is to forbid all but certain
selected firms from selling a particular product. Such
partial exclusion means that these firms are granted a special
privilege by the government. If such a grant is given to one
person or firm, we may call it a monopoly grant; if
to several persons or firms, it is a quasi-monopoly
grant.
Both types of grant may be
called monopolistic. An example of this type of
grant is licensing, where all those to
whom the government refuses to give or sell a license are prevented
from pursuing the trade or business. Another example is a protective
tariff or import quota, which
prevents competition from beyond a country’s geographical
limits. Of course, outright monopoly grants to a firm or
compulsory cartelization of an industry are clear-cut grants of
monopolistic privilege.
It is obvious that a monopolistic grant directly and
immediately benefits the monopolist or quasi monopolist, whose
competitors are debarred by violence from entering the field.
It is also evident that would-be competitors are injured and are forced
to accept lower remuneration in less efficient and
value-productive fields. It is also patently clear that the
consumers are injured, for they are prevented from purchasing
products from competitors whom they would freely prefer. And this
injury takes place, it should be noted, apart from any effect of the
grant on prices.
In chapter 10 we buried the theory of monopoly price; we must now
resurrect it. The theory of monopoly price, as developed
there, is illusory when applied to the free market, but it applies
fully in the case of monopoly and quasi-monopoly grants. For here
we have an identifiable distinction: not the spurious distinction
between “competitive” and
“monopoly” or “monopolistic”
price, but one between the free-market price and
the monopoly price. The
“free-market price” is conceptually identifiable
and definable, whereas the “competitive price” is
not. The theory of monopoly price, therefore, properly contrasts it to
the free-market price, and the reader is referred back to chapter 10
for a description of the theory which can now be applied here. The
monopolist will be able to achieve a monopoly price for the
product if his demand curve is inelastic above the free-market
price. We have seen above that on the free market, every
demand curve to a firm is elastic above the
free-market price; otherwise the firm would have an incentive to raise
its price and increase its revenue. But the grant of monopoly privilege
renders the consumer demand curve less elastic, for the
consumer is deprived of substitute products from other
potential competitors. Whether this lowering of elasticity
will be sufficient to make the demand curve to the firm inelastic
(so that gross revenue will be greater at a price higher than the
free-market price) depends on the concrete historical data of the case
and is not for economic analysis to determine.
When the demand curve to the firm remains elastic (so that gross
revenue will be lower at a higher-than-free-market price), the
monopolist will not reap any monopoly gain from his
grant. Consumers and competitors will still be injured because their
trade is prevented, but the monopolist will not gain, because his price
and income will be no higher than before. On the other hand, if his
demand curve is inelastic, then he institutes a monopoly price
so as to maximize his revenue. His production has to be restricted in
order to command the higher price. The restriction of
production and higher price for the product both injure the consumers.
Here the argument of chapter 10 must be reversed. We may no longer say
that a restriction of production (such as in a voluntary cartel)
benefits the consumers by arriving at the most
value-productive point; on the contrary, the consumers are now
injured because their free choice would have resulted in the
free-market price. Because of coercive force applied by the State, they
may not purchase goods freely from all those willing to sell. In other
words, any approach toward the free-market
equilibrium price and output point for any product benefits
the consumers and thereby benefits the producers as well. Any departure
away from the free-market price and output injures
the consumers. The monopoly price resulting from a grant of
monopoly privilege leads away from the free-market price; it
lowers output and raises prices beyond what would be established if
consumers and producers could trade freely.
And we cannot here use the argument that the
restriction is voluntary because the consumers make their own demand
curve inelastic. For the consumers are only fully
responsible for their demand curve on the free market;
and only this demand curve can be fully treated as
an expression of their voluntary choice. Once the government steps in
to prohibit trade and grant privileges, there is no longer
wholly voluntary action. Consumers are forced, willy-nilly, to deal
with the monopolist for a certain range of purchases.
All the effects which monopoly-price theorists have mistakenly
attributed to voluntary cartels, therefore, do
apply to governmental monopoly grants. Production is
restricted, and factors are released for production elsewhere. But now
we can say that this production will satisfy the consumers less than
under free-market conditions; furthermore, the factors will earn less
in the other occupations.
As we saw in chapter 10, there can never be lasting monopoly profits,
since profits are ephemeral, and all eventually reduce to a uniform
interest return. In the long run, monopoly returns are imputed to some factor.
What is the factor being monopolized in this case? It is obvious that
this factor is the right to enter the industry. In
the free market, this right is unlimited to all and therefore unowned
by anyone. The right commands no price on the market because everyone
already has it. But here the government has conferred special
privileges of entry and sale; and it is these special
privileges or rights that are responsible for the extra monopoly gain
from a monopoly price, and to which we may impute the gain. The
monopolist earns a monopoly gain, therefore, not
for owning any truly productive factor, but from owning a
special privilege granted by the government. And this gain does not
disappear in the long-run ERE as do profits; it is permanent, so long
as the privilege remains and consumer valuations continue as they are.
Of course, the monopoly gain may well be capitalized into the asset
value of the firm, so that subsequent owners, who
invest in the firm after the capitalization took place, will be earning
only the equal interest return. A notable example of the
capitalization of monopoly (or rather, quasi-monopoly) rights
is the New York City taxicab industry. Every taxicab must be licensed,
but the city decided, years ago, not to issue any further licenses, or
“medallions,” so that any new cab owner must
purchase his medallion from some previous owner. The (high)
price of medallions on the market is then the capitalized
value of the monopoly privilege
As we have seen, all this applies to a quasi monopolist as well as to a
monopolist, since the number of the former’s competitors is
also restricted by the grant of privilege, which makes his
demand curve less elastic. Of course, ceteris paribus,
a monopolist is in a better position than a quasi monopolist, but how
much each benefits depends purely on the data of the particular case.
In some cases, such as the protective tariff, the quasi monopolist will
end, in the long run, by not gaining anything. For since
freedom of entry is restricted only to foreign firms, the
higher returns accruing to firms newly protected by a tariff
will attract more domestic capital to that industry. Eventually,
therefore, the new capital will drive the rate of earnings down to the
interest rate usual in all of industry, and the monopolistic gain will
have been competed away.
Monopolistic grants can be either direct and evident, such as
compulsory cartels or licenses; less direct, such as tariffs; or highly
indirect, but nevertheless powerful. Ordinances closing businesses at
specific hours, for example, or outlawing pushcart peddlers or
door-to-door salesmen, are illustrations of laws that forcibly
exclude competition and thereby grant monopolistic privileges.
Similarly, antitrust laws and
prosecutions, while seemingly designed to “combat
monopoly” and “promote competition,”
actually do the reverse, for they coercively penalize and repress
efficient forms of market structure and activity. Even such a seemingly
remote action as conscription has the effect of forcibly withdrawing
young men from the labor market and thereby giving their competitors a
monopolistic, or rather a restrictionist, wage.
Unfortunately, we have not
the space here to investigate these and other instructive cases.
7.
Binary Intervention: The Government Budget
Binary intervention occurs, we have seen, when the intervener
forces someone to transfer property to him. All government
rests on the coerced levy of taxation, which is therefore a prime
example of binary intervention. Government intervention, consequently,
is not only triangular, like price control; it may also be binary, like
taxation, and is therefore imbedded into the very nature of government
and governmental activity.
For years, writers on public finance have been searching for the
“neutral tax,” i.e., for that system of taxes which
would keep the free market intact. The object of this search is
altogether chimerical. For example, economists have often
sought uniformity of taxes, so that each person, or at least each
person in the same income bracket, pays the same amount of tax. But
this is inherently impossible, as we have already seen from
Calhoun’s demonstration that the community is
inevitably divided into taxpayers and tax-consumers,
who, of course, cannot be said to pay taxes at all. To repeat the keen
analysis of Calhoun (see note 6 above): “nor can it be
otherwise; unless what is collected from each individual in
the shape of taxes shall be returned to him in disbursements,
which would make the process nugatory and absurd.” In short,
government bureaucrats do not pay taxes; they consume
the tax proceeds. If a private citizen earning $10,000 income pays
$2,000 in taxes, the bureaucrat earning $10,000 does not really
pay $2,000 in taxes also; that he supposedly does is simply a
bookkeeping fiction.
He is actually acquiring
an income of $8,000 and paying no taxes at all.
Not only bureaucrats will be tax-consumers, but, to a lesser degree,
other, private members of the population as well. For example, suppose
that the government taxes $1,000 away from private people who would
have spent the money on jewels, and uses it to purchase paper for
government offices. This induces a shift in demand away from jewels and
toward paper, a decline in the price of jewels, and a flow of resources
from the jewelry industry; conversely, paper prices will tend to
increase, and resources will flow into the paper industry.
Incomes will decline in the jewelry industry and rise in paper.
Hence,
the paper industry will be, to some
extent, beneficiaries of the government budget: of the
tax-and-expenditure process of government. But not just the paper
industry. For the new money received by the paper firms will be paid
out to their suppliers and original factor-owners, and so on
as the ripples impinge on other parts of the economy. On the other
hand, the jewelry industry, stripped of revenue, reduces its demands
for factors. Thus the burdens and benefits of the tax-and-expenditure
process diffuse themselves throughout the economy, with the strongest
impact at the points of first contact—jewelry and paper.
Everyone in the society will be either a net taxpayer or a tax-
consumer and this to different degrees, and it will be for the data of
each specific case to determine where any particular person or industry
stands in this distribution process. The only certainty is that the
bureaucrat or politician in office receives 100 percent of his
governmental income from tax proceeds and pays no genuine taxes in
return.
The tax-and-expenditure process, therefore, will inevitably
distort the allocation of productive factors, the types of
goods produced, and the pattern of incomes, from what they
would be on the free market. The larger the level
of taxing and spending, i.e., the bigger the government budget, the
greater the distortion will tend to be. And moreover, the larger the
budget in relation to market activity, the greater the burden of
government on the economy. A larger burden means that more and more
resources of society are being coercively siphoned off from the
producers into the pockets of government, those who sell to government,
and the subsidized favorites of government. In short, the higher the
relative level of government, the narrower the base of the producers,
and the greater the “take” of those expropriating
the producers. The higher the level of government, the less resources
will be used to satisfy the desires of those consumers who have
contributed to production, and the more resources will be used to
satisfy the desires of nonproducing consumers.
There has been a great deal of controversy among economists on how to
approach the analysis of taxation. Old-fashioned Marshallians
insist on the “partial equilibrium” approach of
looking only at a particular type of tax, in isolation, and
then analyzing its effects; Walrasians, more fashionable today
(and exemplified by the late Italian public finance expert,
Antonio De Viti De Marco), insist that taxes cannot be considered at
all in isolation, that they may be analyzed only in
conjunction with what the government does with the proceeds. In all
this, what would be the “Austrian” approach, had it
been developed, is being neglected. This holds that both
procedures are legitimate and necessary to analyze the taxing
process fully. In short: the level of taxes-and-expenditures may be
analyzed and its inevitable redistributive and distortive
effects discussed; and, within this
aggregate of taxes, individual types of taxes may then be
analyzed in isolation. Neither the partial nor the general approaches
should be overlooked.
There has also been a great amount of useless controversy about which
activity of government imposes the burden on the private sector: taxation
or government spending. It is actually futile to
separate them, since they are both stages in the same process of burden
and redistribution. Thus, suppose the government taxes the betel-nut
industry one million dollars in order to buy paper for government
bureaus. One million dollars’ worth of resources are shifted
from betel nuts to paper. This is done in two
stages, a sort of one-two punch at the free market: first, the
betel-nut industry is made poorer by taking away its money; then, the
government uses this money to take paper out of the market for
its own use, thus extracting resources in the second stage. Both sides
of the process are a burden. In a sense, the betel-nut industry is
compelled to pay for the extraction of paper from
society; at least, it bears the immediate brunt of payment. However,
even without yet considering the “partial
equilibrium” problem of how or whether such taxes are
“shifted” by the betel-nut industry onto other
shoulders, we should also note that it is not the only one to pay; the
consumers of paper certainly pay by finding paper prices raised to them.
The process can be seen more clearly if we consider what
happens when taxes and government expenditures are not
equal, when they are not simply obverse sides of the same coin. When
taxes are less than government expenditures (and omitting
borrowing from the public for the time being), the government
creates new money. It is obvious here that government expenditures
are the main burden, since this higher amount of resources is
being siphoned off. In fact, as we shall see later when
considering the binary intervention of inflation,
creating new money is, anyway, a form of taxation.
But what of that rare case when taxation is higher than
government spending? Say that the surplus is either hoarded in
the government’s gold supply or that the money is liquidated
through deflation (see below). Thus, assume that $1,000,000 is taken
from the betel-nut industry and only $600,000 is spent on paper. In
this case, the larger burden is that of taxation, which pays not only
for the extracted paper but also for the hoarded or destroyed money.
While the government extracts only $600,000 worth of resources
from the economy, the betel-nut industry loses $1,000,000 of potential
resources, and this loss should not be forgotten in toting up the
burdens imposed by the government’s budgetary process. In
short, when government expenditures and receipts differ, the
“fiscal burden” on society may be very
approximately gauged by whichever is the greater total.
Since taxation cannot really be uniform, the government in its
budgetary process of tax-and-spend inevitably takes coercively from
Peter to give to Paul (“Paul,” of course, including
itself). In addition to distorting the allocation of resources,
therefore, the budgetary process redistributes incomes or, rather, distributes
incomes. For the free market does not
distribute incomes; income there arises naturally and smoothly out of
the market processes of production and exchange. Thus, the very concept
of “distribution” as something separate
from production and exchange can arise only from the
government’s binary intervention. It is often charged, for
example, that the free market maximizes the utility of all, and the
satisfactions of all consumers, only “given
a certain existing distribution of income.” But this
common fallacy is incorrect; there is no “assumed
distribution” on the free market separate from the
voluntary activities of every individual’s production and
exchange. The only given on the free
market is the property right of every man in his
own person and in the resources which he finds, produces, or creates,
or which he obtains in voluntary exchange for his products or
as a gift from their producers.
The binary intervention of the government’s budget, on the
other hand, impairs this property right of every one in his own product
and creates the separate process and the
“problem” of distribution. No longer do income and
wealth flow purely from service rendered on the market; they now flow
to special privilege created by the State and away from those
specially burdened by the State.
There are many economists who regard the “free
market” as only being free of triangular interference; such
binary interference as taxation is not considered intervention
in the purity of the “free market.” The economists
of the Chicago School—headed by Frank H.
Knight—have been particularly adept at splitting
man’s economic activity and confining the
“market” to a narrow compass. They can thus favor
the “free market” (because they oppose such
triangular interventions as price control), while advocating
drastic binary interventions in taxes and subsidies to
“redistribute” the income determined by
that market. In short, the market is to be left
“free” in one sphere, while being subject to
perpetual harassment and reshuffling by outside coercion. This concept
assumes that man is fragmented, that the “market
man” is not concerned with what happens to himself as a
“subject-to-government” man. This is surely an
impermissible myth, which we might call the “tax
illusion”—the idea that people do not
consider what they earn after taxes, but
only before taxes. In short, if A earns $9,000 a year on the market, B
$5,000, and C $1,000, and the government decides to keep redistributing
the incomes so that each earns $5,000, the individuals, apprised of
this, are not going to keep foolishly assuming that
they are still earning what they did before. They are going to take the
taxes and subsidies into account.
Thus, we see that the government budgetary process is a
coercive shift of resources and incomes from producers on the
market to nonproducers; it is also a coercive interference
with the free choices of individuals by those constituting the
government. Below, we shall analyze the nature and consequences of
government spending in more detail. At this time, let us
emphasize the important point that government cannot be in any way a
fountain of resources; all that it spends, all that it
distributes in largesse, it must first acquire in revenue,
i.e., it must first extract from the “private
sector.” The great bulk of the revenues of
government, the very nub of its power and its essence, is
taxation, to which we turn in the next section. Another method is
inflation, the creation of new money, which we shall discuss
further below. A third method is borrowing from the public, which will
be discussed briefly in Appendix A below.
8.
Binary Intervention: Taxation
A.
Income Taxation
Taxation, as we have seen, takes from producers and gives to others.
Any increase in taxation swells the resources, the incomes,
and usually the numbers of those living off the producers, while diminishing
the production base from which these others are drawing their
sustenance. Clearly, this is eventually a self-defeating process: there
is a limit beyond which the top-heavy burden can no longer be carried
by the diminishing stock of producers. Narrower limits are
also imposed by the disincentive effects
of taxation. The greater the amount of taxes imposed on the
producers—the taxpayers—the
lower the marginal utility of work will be, for the returns from work
are forcibly diminished, and the greater the marginal utility of
leisure forgone. Not only that: the greater will be the incentive to
shift from the ranks of the burdened taxpayers to the ranks of the tax-consumers,
either as full-time bureaucrats or as those subsidized by the
government. As a result, production will diminish even further, as
people retreat to leisure or scramble harder to join the ranks
of the privileged tax-consumers.
In the market economy, net
incomes are derived from wages, interest, ground rents, and profit; and
in so far as taxes strike at the earnings from these sources, attempts
to earn these incomes will diminish. The laborer, faced with a tax on
his wages, has less incentive to work hard; the capitalist, confronting
a tax on his interest or profit return, has more incentive to
consume rather than to save and invest. The landlord, a tax being
imposed on his rents, will have less of a spur to allocate
land sites efficiently.
It has been objected that since a man’s marginal utility of
money assets increases as he holds less of a stock of money, lower
money income will mean an increased marginal utility of income. As a
result, a tax on money incomes creates both a “substitution
effect” against work and in favor of leisure (or against
saving in favor of consumption) and an “income
effect” working in the opposite direction. This is true, and
in rare empirical cases, the latter effect will predominate. In plain
language, this means that when extra penalties are placed upon
man’s efforts he will generally slacken them; but in
some cases, he will work harder to try to offset the burdens. In the
latter cases, however, we must remember that he will lose the valuable
consumption good of “leisure”; he will have less
leisure now than he would have if his choices were still free. Working
harder under penalty is only a cause for rejoicing if we regard the
matter exclusively from the point of view of those living off the
producers, who will thereby benefit from the tax. The standard of
living of the workers, which must include leisure, has fallen.
The income tax, by taxing income from investments, cripples saving and
investment, since it lowers the return from investing below what
free-market time preferences would dictate. The lower net interest
return leads people to bring their savings-investment into line with
the new realities; in short, the marginal savings and investments at
the higher return will now be valued below consumption and will no
longer be made.
There is another, unheralded reason why an income tax will particularly
penalize saving and investment as against consumption. It
might be thought that since the income tax confiscates a certain
portion of a man’s income and leaves him free to allocate the
rest between consumption and investment, and since time preference
schedules remain given, the proportion of consumption to
saving will remain unchanged. But this ignores the fact that the
taxpayer’s real income and the real value of his
monetary assets have been lowered by paying the tax. We have
seen in chapter 6 that, given a man’s time-preference
schedule, the lower the level of his real monetary assets, the higher
his time-preference rate will be, and therefore the higher the
proportion of his consumption to investment. The taxpayer’s
position may be seen in Figure 86, which is essentially the reverse of
the individual time-market diagrams in chapter 6. In the
present case, money assets are increasing as we go
rightward on the horizontal axis, while in chapter 6 money assets were
declining. Let us say that the taxpayer’s initial position is
a money stock of 0M; tt is his
given time-preference curve. His effective time-preference
rate, determining his consumption/investment
proportion, is t1. Now,
suppose that the government levies an income tax, reducing his
initial monetary assets at the start of his spending period to 0M'.
His effective time-preference rate, the intersection of tt
and the M' line, is now higher at t2.
He shifts to a higher proportion of consumption and a lower proportion
of saving and investment.
We have now seen two reasons why an income tax will shift the social
proportion toward more consumption and less saving and investment. It
might be objected that the time-preference reason is invalid, since the
government officials and the people they subsidize will receive the tax
revenues and find that their money stock has
increased just as that of the taxpayers has declined. We shall
see below, however, that no truly productive savings and investments
can be made by government, its employees, or the recipients of
its subsidies.
Some economists maintain that income taxation reduces savings
and investment in society in yet a third way. They assert that income
taxation, by its very nature, imposes a “double”
tax on savings-investment as against consumption.
The reasoning runs as follows: Saving and
consumption are really not symmetrical. All saving is directed
toward enjoying more consumption in the future; otherwise, there would
be no point at all to saving. Saving is abstaining from
possible present consumption in return for the expectation of increased
consumption at some time in the future. No one wants capital goods for
their own sake. They are only the embodiment of increased consumption
in the future. Saving-investment is Crusoe’s building the
stick to obtain more apples at a future date; it fructifies in higher
consumption later. Hence, the imposition of an income tax is a
“double” tax on consumption, and excessively
penalizes saving and investment.
This line of reasoning correctly explains the
investment-consumption process. It suffers, however, from a
grave defect: it is irrelevant to problems of taxation. It is true that
saving is a fructifying agent. But the point is that everyone knows
this; that is precisely why people save. Yet, even though they know
that saving is a fructifying agent, they do not save all their income.
Why? Because of their time preferences for present consumption. Every
individual, given his current income and value scales,
allocates that income in the most desirable proportions
between consumption, investment, and additions to his cash balance. Any
other allocation would satisfy his desires less well and lower his
position on his value scale. The fructifying power of saving is already
taken into account when he makes his allocation. There is
therefore no reason to say that an income tax doubly penalizes
saving-investment; it penalizes the individual’s entire
standard of living, encompassing present consumption, future
consumption, and his cash balance. It does not per se
penalize saving any more than the other avenues of income
allocation.
This Fisher argument reflects a curious tendency among
economists devoted to the free market to be far more concerned
about governmental measures penalizing saving and investment than they
are about measures hobbling consumption. Surely an economist
favoring the free market must grant that the market’s
voluntary consumption/investment allocations are optimal and
that any government interference in this proportion, from
either direction, is distortive of that market and
of production to meet the wants of the consumers. There is nothing,
after all, particularly sacred about savings; they are simply
the road to future consumption. But they are, then, clearly no more
important than present consumption, the allocations
between the two being determined by the time preferences of
all individuals. The economist who balks more at interference
with free-market savings than he does at infringement on free-market
consumption is therefore implicitly advocating statist
interference in the opposite direction. He is implicitly
calling for a coerced distortion of resources to lower
consumption and increase investment.
It was notorious, for example,
that the bootleggers, a caste created by Prohibition, were one of the
main groups opposing repeal of Prohibition
in America.
The workings of rationing (as well
as the socialist system in general) have never been more vividly
portrayed than in Henry Hazlitt’s The Great Idea.
We might well call the latter an oligopoly
grant, but this would engender hopeless confusion with existing
oligopoly theory. On the latter, see chapter 10 above.
Monopoly privilege is granted by a
government, which has power only over its own geographic area.
Therefore, monopoly prices achieved within an area are always, on the
market, subject to devastating competition from other
countries. This is increasingly true as civilization advances and
transportation costs decline, thus subjecting local monopolies
to ever greater threats of competition from other areas. Hence, any
domestic monopoly will tend to reach out to restrict foreign
competition and block efficient interregional trade: It is no
wonder that the tariff used to be called “The Mother of
Trusts.”
We
might note here that on a truly free market there would be no need for
any separate “theory of international trade.”
Nations become significant economically only with government
intervention, either by way of monetary intervention or barriers to
trade.
Monopolistic privileges to businesses
may confer a monopoly price, depending on the
elasticity of the firm’s demand curve. Privileges to
workers, on the other hand, always confer
a higher, restrictionist price at lower than free-market output. The
reason is that a business can expand or contract its production at
will; if, then, a few firms are granted the privilege of producing in a
certain field, they may expand production, if conditions are ripe, and not
reduce total supply. On the other hand, aside from hours worked, which
is not very flexible, restriction of entry into a labor market must always
reduce the total supply of labor in that industry and therefore confer
a restrictionist price. Of course, a direct
restriction on production such as conservation laws always reduces
supply and thereby confers a restrictionist price.
It will be more convenient to use
dollars rather than gold ounces in this section; but we still assume
complete equivalence of dollars and gold weights. We do not consider monetary
intervention until the end of this chapter.
This does not mean that resources
will flow directly out of jewelry and into paper. It is more likely
that resources will flow into and out of industries similar to each
other, occupationally and geographically, and that resources will
readjust, step by step, from one industry to the next.
In the long run of the ERE, of
course, all firms in all industries earn a uniform interest return, and
the bulk of the gains or losses are imputed back to the original
specific factors.
For a further discussion of the
economic effects of taxation, see the next section below.
A fourth method, revenue from sale
of governmental goods or services, is a peculiar form of taxation; at
the very least, to acquire the original assets for
this “business,” taxation is needed.
In the less developed countries,
where a money economy is still emerging from barter, any given
amount of taxation will have a still more drastic effect: for it will
make monetary incomes much less worthwhile and will
shift people’s efforts from trying to make money back to
untaxed barter arrangements. Taxation can therefore decisively retard
development from a barter to a monetary economy, or even
reverse the process. See C. Lowell Harriss,
“Public Finance” in Bernard F. Haley, ed., A
Survey of Contemporary Economics (Homewood, Ill.: Richard D.
Irwin, 1952), p. 264. For a practical application, see
P.T. Bauer, “The Economic Development of Nigeria,” Journal
of Political Economy, October, 1955, pp. 400ff.
If
any government taxes in kind, there is then no span
of time between taxation and the extraction of physical
resources from the private sector. Both take place in the same act.
For this shift to occur, the
individual’s real monetary assets must
decline, not just the nominal amount in terms of money. If, then,
instead of this tax, there is deflation in the society, and the value
of the monetary unit increases roughly proportionately everywhere, then
the nominal fall in each individual’s
money stock will not be a real fall, and hence
effective time-preference ratios will remain unchanged. In the case of
income taxation, deflation will not occur, since the government will
spend the revenue rather than contract the money supply. (Even in the
rare case where all the tax money is liquidated by the government, the
individuals taxed will lose more than others and hence will lose some
real monetary assets.)
Thus, cf. Irving and Herbert W.
Fisher, Constructive Income Taxation (New York:
Harper & Bros., 1942). “Double” is used in
the sense of two instances, not arithmetically
twice.
These economists generally
conclude that not income, but only consumption, should be
taxed as the only “real” income.
The bias in favor of investment,
or “growth,” as against present consumption, is
similar to the conservationist attack on present consumption. What is
so worthy about future consumption and so unworthy
about consuming in the present? Perhaps what we
have here is an illicit smuggling of the less rational aspects
of the “Protestant ethic” into economic science. Of
the many problems involved, we may mention one here: What nonarbitrary
quantitative standards for thrift can the economist establish once the
free market’s decision is overridden?
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