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TRIANGULAR INTERVENTION

 

A triangular intervention, as we have stated, occurs when the invader compels a pair of people to make an exchange or prohibits them from doing so. Thus, the intervener can prohibit the sale of a certain product or can prohibit a sale above or below a certain price. We can therefore divide triangular intervention into two types: price control, which deals with the terms of an exchange, and product control, which deals with the nature of the product or of the producer. Price control will have repercussions on production, and product control on prices, but the two types of control have different effects and can be conveniently separated.

1. Price Control

     The intervener may set either a minimum price below which a product cannot be sold, or a maximum price above which it cannot be sold. He can also compel a sale at a certain fixed price. In any event, the price control will either be ineffective or effective. It will be ineffective if the regulation has no current influence on the market price. Thus, suppose that automobiles are all selling at about 100 gold ounces on the market. The government issues a decree prohibiting all sales of autos below 20 gold ounces, on pain of violence inflicted on all violators. This decree is, in the present state of the market, completely ineffective and academic, since no cars would have sold below 20 ounces. The price control yields only irrelevant jobs for government bureaucrats.

     On the other hand, the price control may be effective, i.e., it may change the price from what it would have been on the free market. Let the diagram in Figure 1 depict the supply and demand curves, respectively SS and DD, for the good.

     FP is the equilibrium price set by the market. Now, let us assume that the intervener imposes a maximum control price 0C, above which any sale becomes illegal. At the control price, the market is no longer cleared, and the quantity demanded exceeds the quantity supplied by the amount AB. In the ensuing shortage, consumers rush to buy goods that are not available at the price. Some must do without; others must patronize the market, revived as “black” or illegal, while paying a premium for the risk of punishment that sellers now undergo. The chief characteristic of a price maximum is the queue, the endless “lining up” for goods that are not sufficient to supply the people at the rear of the line. All sorts of subterfuges are invented by people desperately seeking to arrive at the clearance provided by the market. “Under-the-table” deals, bribes, favoritism for older customers, etc., are inevitable features of a market shackled by the price maximum.[1]

     It must be noted that, even if the stock of a good is frozen for the foreseeable future, and the supply line is vertical, this artificial shortage will still develop, and all these consequences ensue. The more “elastic” the supply, i.e., the more resources will shift out of production, the more aggravated, ceteris paribus, the shortage will be. If the price control is “selective,” i.e., is imposed on one or a few products, the economy will not be as universally dislocated as under general maxima, but the artificial shortage created in the particular line will be even more pronounced, since entrepreneurs and factors can shift to the production and sale of other products (preferably substitutes). The prices of the substitutes will go up as the “excess” demand is channeled off in their direction. In the light of this fact, the typical government reason for selective price control—“we must impose controls on this product as long as it is in short supply”—is revealed to be an almost ludicrous error. For the truth is precisely the reverse: price control creates an artificial shortage of the product, which continues as long as the control is in existence—in fact, becomes ever worse as resources continue to shift to other products.

     Before investigating further the effects of general price maxima, let us analyze the consequences of a minimum price control, i.e., the imposition of a price above the free-market price. This may be depicted as in Figure 2.

     DD and SS are the demand and supply curves respectively. 0C is the control price and FP the market equilibrium price. At 0C, the quantity demanded is less than the quantity supplied, by the amount AB. Thus, while the effect of a maximum price is to create an artificial shortage, a minimum price creates an artificial unsold surplus. AB is the unsold surplus. The unsold surplus exists even if the SS line is vertical, but a more elastic supply will, ceteris paribus, aggravate the surplus. Once again, the market is not cleared. The artificially high price attracts resources into the field, while, at the same time, it discourages buyer demand. Under selective price control, resources will leave other fields where they serve their owners and the consumers better, and transfer to this field, where they overproduce and suffer losses as a result.

     This illustrates how intervention, by tampering with the market, causes entrepreneurial losses. Entrepreneurs operate on the basis of certain criteria: prices, interest rates, etc., established by the free market. Interventionary tampering with these criteria destroys the adjustment and brings about losses, as well as misallocation of resources in satisfying consumer wants.

     General, overall price maxima dislocate the entire economy and deny the consumers the enjoyment of substitutes. General price maxima are usually imposed for the announced purpose of “preventing inflation”—invariably while the government is inflating the money supply by a large amount. Overall price maxima are equivalent to imposing a minimum on the purchasing power of the money unit, the PPM (see Figure 3).

     0F is the money stock in the society; DmDm the social demand for money; FP is the equilibrium PPM (purchasing power of the monetary unit) set by the market. An imposed minimum PPM above the market (0C) impairs the clearing “mechanism” of the market. At 0C the money stock exceeds the money demanded. As a result, the people possess a quantity of money GH in “unsold surplus.” They try to sell their money by buying goods, but they cannot. Their money is anesthetized. To the extent that a government’s overall price maximum is upheld, a part of the people’s money becomes useless, for it cannot be exchanged. But a mad scramble inevitably takes place, with each one hoping that his money can be used.[2] Favoritism, lining up, bribes, etc., inevitably abound, as well as great pressure for the “black” market (i.e., the market) to provide a channel for the surplus money.

     A general price minimum is equivalent to a maximum control on the PPM. This sets up an unsatisfied, excess demand for money over the stock of money available—specifically, in the form of unsold stocks of goods in every field.

     The principles of maximum and minimum price control apply to all prices, whatever they may be: consumer goods, capital goods, land or labor services, or the “price” of money in terms of other goods. They apply, for example, to minimum wage laws. When a minimum wage law is effective, i.e., where it imposes a wage above the market value of a type of labor (above the laborer’s discounted marginal value product), the supply of labor services exceeds the demand, and this “unsold surplus” of labor services means involuntary mass unemployment. Selective, as opposed to general, minimum wage rates create unemployment in particular industries and tend to perpetuate these pockets by attracting labor to the higher rates. Labor is eventually forced to enter less remunerative, less value-productive lines. The result is the same whether the effective minimum wage is imposed by the State or by a labor union.

     Our analysis of the effects of price control applies also, as Mises has brilliantly shown, to control over the price (“exchange rate”) of one money in terms of another.[3] This was partially seen in Gresham’s Law, but few have realized that this Law is merely a specific case of the general law of the effect of price controls. Perhaps this failure is due to the misleading formulation of Gresham’s Law, which is usually phrased: “Bad money drives good money out of circulation.” Taken at its face value, this is a paradox that violates the general rule of the market that the best methods of satisfying consumers tend to win out over the poorer. Even those who generally favor the free market have used this phrasing to justify a State monopoly over the coinage of gold and silver. Actually, Gresham’s Law should read: “Money overvalued by the State will drive money undervalued by the State out of circulation.” Whenever the State sets an arbitrary value or price on one money in terms of another, it thereby establishes an effective minimum price control on one money and a maximum price control on the other, the “prices” being in terms of each other. This, for example, was the essence of bimetallism. Under bimetallism, a nation recognized gold and silver as moneys, but set an arbitrary price, or exchange ratio, between them. When this arbitrary price differed, as it was bound to do, from the free-market price (and such a discrepancy became ever more likely as time passed and the free-market price changed, while the government’s arbitrary price remained the same), one money became overvalued and the other undervalued by the government. Thus, suppose that a country used gold and silver as money, and the government set the ratio between them at 16 ounces of silver to one ounce of gold. The market price, perhaps 16:1 at the time of the price control, then changes to 15:1. What is the result? Silver is now being arbitrarily undervalued by the government, and gold arbitrarily overvalued. In other words, silver is forced to be cheaper than it really is in terms of gold on the market, and gold is forced to be more expensive than it really is in terms of silver. The government has imposed a maximum price on silver and a minimum price on gold, in terms of each other.

     The same consequences now follow as from any effective price control. With a maximum price on silver (and a minimum price on gold), the gold demand for silver in exchange exceeds the silver demand for gold. Gold goes begging for silver in unsold surplus, while silver becomes scarce and disappears from circulation. Silver disappears to another country or area where it can be exchanged at the free-market price, and gold, in turn, flows into the country. If the bimetallism is worldwide, then silver disappears into the “black” market, and official or open exchanges are made only with gold. No country, therefore, can maintain a bimetallic system in practice, because one money will always be under- or overvalued in terms of the other. The overvalued will always displace the undervalued from circulation.

     It is possible to move, by government decree, from a specie money to a fiat paper currency. In effect, almost every government of the world has done so. As a result, each country has been saddled with its own money. In a free market, each fiat money will tend to exchange for another according to the fluctuations in their respective purchasing-power parities. Suppose, however, that Currency X has an arbitrary valuation placed by its government on its exchange rate with Currency Y. Thus, suppose five units of X exchange for one unit of Y on the free market. Now suppose that Country X artificially overvalues its currency and sets a fixed exchange rate of three X’s to one Y. What is the result? A minimum price has been set on X’s in terms of Y, and a maximum price on Y’s in terms of X. Consequently, everyone scrambles to exchange X’s for Y’s at this cheap price for Y and thus profit on the market. There is an excess demand for Y in terms of X, and a surplus of X in relation to Y. Here is the explanation of that supposedly mysterious “dollar shortage” that plagued Europe after World War II. The European governments all overvalued their national currencies in terms of American dollars. As a consequence of the price control, dollars became short in terms of European currency, and the latter became a glut looking for dollars without finding them.

     Another example of money-ratio price control is seen in the ancient problem of new versus worn coins. There grew up the custom of stamping coins with some name designating their weight in specie in terms of some unit of weight. Eventually, to “simplify” matters, governments began to decree worn coins to be equal in value to newly minted coins of the same denomination.[4] Thus, suppose that a 20-ounce silver coin was declared equal in value to a worn-out coin now weighing 18 ounces. What ensued was the inevitable effect of price control. The government had arbitrarily undervalued new coins and overvalued old ones. New coins were far too cheap, and old ones too expensive. As a result, the new coins promptly disappeared from circulation, to flow abroad or to remain under cover at  home; and the old worn coins flooded in. This proved discouraging for the State mints, which could not keep coins in circulation, no matter how many they minted.[5]

     The striking effects of Gresham’s Law are partly due to a type of intervention adopted by almost every government—legal-tender laws. At any time in society there is a mass of unpaid debt contracts outstanding, representing credit transactions begun in the past and scheduled to be completed in the future. It is the responsibility of judicial agencies to enforce these contracts. Through laxity, the practice developed of stipulating in the contract that payment will be made in “money” without specifying which money. Governments then passed legal-tender laws, arbitrarily designating what is meant by “money” even when the creditors and debtors themselves would be willing to settle on something else. When the State decrees as money something other than what the parties to a transaction have in mind, an intervention has taken place, and the effects of Gresham’s Law will begin to appear. Specifically, assume the existence of the bimetallic system mentioned above. When contracts were originally made, gold was worth 16 ounces of silver; now it is worth only 15. Yet the legal-tender laws specify “money” as being an equivalent of 16:1. As a result of these laws, everyone pays all his debts in the overvalued gold. Legal-tender laws reinforce the consequences of exchange-rate control, and the debtors have gained a privilege at the expense of their creditors.[6]

     Usury laws are another form of price control tinkering with the market. These laws place legal maxima on interest rates, outlawing any lending transactions at a higher rate. The amount and proportion of saving and the market rate of interest are basically determined by the time-preference rates of individuals. An effective usury law acts like other maxima—to induce a shortage of the service. For time preferences—and therefore the “natural” interest rate—remain the same. The fact that this interest rate is now illegal means that the marginal savers—those whose time preferences were highest—now stop saving, and the quantity of saving and investing in the economy declines. This results in lower productivity and lower standards of living in the future. Some people stop saving; others even dissave and consume their capital. The extent to which this happens depends on how effective the usury laws are, i.e., how far they hamper and distort voluntary market relations.

     Usury laws are designed, at least ostensibly, to help the borrower, particularly the most risky borrower, who is “forced” to pay high interest rates to compensate for the added risk. Yet it is precisely these borrowers who are most hurt by usury laws. If the legal maximum is not too low, there will not be a serious decline in aggregate savings. But the maximum is below the market rate for the most risky borrowers (where the entrepreneurial component of interest is highest), and hence they are deprived of all credit facilities. When interest is voluntary, the lender will be able to charge very high interest rates for his loans, and thus anyone will be able to borrow if he pays the price. Where interest is controlled, many would-be borrowers are deprived of credit altogether.[7]

     Usury laws not only diminish savings available for lending and investment, but create an artificial “shortage” of credit, a perpetual condition where there is an excessive demand for credit at the legal rate. Instead of going to those most able and efficient, the credit will therefore have to be “rationed” by the lenders in some artificial and uneconomic way.

     Although there have rarely been minimum interest rates imposed by government, their effect is similar to that of maximum rate control. For whenever time preferences and the natural interest rate fall, this condition is reflected in increased savings and investment. But when the government imposes a legal minimum, the interest rate cannot fall, and the people will not be able to carry through their increased investment, which would bid up factor prices. Minimum interest rates, therefore, also stunt economic development and impede a rise in living standards. Marginal borrowers would likewise be forced out of the market and deprived of credit.

     To the extent that the market illegally reasserts itself, the interest rate on the loan will be higher to compensate for the extra risk of arrest under usury laws.

     To sum up our analysis of the effects of price control: Directly, the utility of at least one set of exchangers will be impaired by the control. Further analysis reveals that the hidden, but just as certain, effects are to injure a substantial number of people who had thought they would gain in utility from the imposed controls. The announced aim of a maximum price control is to benefit the consumer by insuring his supply at a lower price; yet the objective result is to prevent many consumers from acquiring the good at all. The announced aim of a minimum price control is to insure higher prices for the sellers; yet the effect will be to prevent many sellers from selling any of their surplus. Furthermore, price controls distort production and the allocation of resources and factors in the economy, thereby injuring again the bulk of consumers. And we must not overlook the army of bureaucrats who must be financed by the binary intervention of taxation, and who must administer and enforce the myriad of regulations. This army, in itself, withdraws a mass of workers from productive labor and saddles them onto the backs of the remaining producers—thereby benefiting the bureaucrats, but injuring the rest of the people. This, of course, is the consequence of establishing an army of bureaucrats for any interventionary purpose whatever.

2. Product Control: Prohibition

     Another form of triangular intervention is interference with the nature of production directly, rather than with the terms of exchange. This occurs when the government prohibits any production or sale of a certain product. The consequence is injury to all parties concerned: to the consumers, who lose utility because they cannot purchase the product and satisfy their most urgent wants; and to the producers, who are prevented from earning a higher remuneration in this field and must therefore be content with lower earnings elsewhere. This loss is borne not so much by entrepreneurs, who earn from ephemeral adjustments, or by capitalists, who tend to earn a uniform interest rate throughout the economy, as by laborers and landowners, who must accept permanently lower income. The only ones who benefit from the regulation, then, are the government bureaucrats themselves—partly from the tax-created jobs that the regulation creates, and perhaps also from the satisfaction gained from repressing others and wielding coercive power over them. Whereas with price control one could at least make out a prima facie case that one set of exchangers—producers or consumers—is being benefited, no such case can be made out for prohibition, where both parties to the exchange, producers and consumers, invariably lose.

     In many instances of product prohibition, of course, inevitable pressure develops for the reestablishment of the market illegally, i.e., as a “black” market. As in the case of price control, a black market creates difficulties because of its illegality. The supply of the product will be scarcer, and the price of the product will be higher to compensate the producers for the risk of violating the law; and the more strict the prohibition and penalties, the scarcer the product and the higher the price will be. Furthermore, the illegality hinders the process of distributing to the consumers information (e.g., by way of advertising) about the existence of the market. As a result, the organization of the market will be far less efficient, the service to the consumer will decline in quality, and prices again 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. The advantages of efficient large-scale organization are thus lost, injuring the consumer and raising prices because of the diminished supply.[8] Paradoxically, the prohibition may serve as a form of grant of monopolistic privilege to the black marketeers, since they are likely to be very different entrepreneurs from those who would succeed in a legal market. For in the black market, rewards accrue to skill in bypassing the law or in bribing government officials.

     There are various types of prohibition. There is absolute prohibition, where the product is completely outlawed. There are also forms of partial prohibition: an example is rationing, where consumption beyond a certain amount is prohibited by the State. 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. The unrationed, or less stringently rationed, goods are bought more heavily, whereas consumers would have preferred to buy more of the rationed goods. Thus, consumer spending is coercively shifted from the more to the less heavily rationed commodities. Moreover, the ration tickets introduce a new type of quasi money; the functions of money on the market are crippled and atrophied, and confusion reigns. The main function of money is to be bought by producers and spent by consumers; but, under rationing, consumers are estopped from using their money to the full and blocked from using their dollars to direct and allocate factors of production. They must also use arbitrarily designated and distributed ration tickets—an inefficient kind of double money. The pattern of consumer spending is particularly distorted, and since ration tickets are usually not transferable, people who do not want brand X are not permitted to exchange these coupons for goods not wanted by others.[9]

     Priorities and allocations by the government are another type of prohibition, as well as another jumbling of the price system. Efficient buyers are prevented from obtaining goods, while inefficient ones find that they can acquire a plethora. Efficient firms are no longer allowed to bid away factors or resources from inefficient firms; the efficient firms are, in effect, crippled, and the inefficient ones subsidized. Government priorities again basically introduce another form of double money.

     Maximum-hour laws enforce compulsory idleness and prohibit work. They are a direct attack on production, injuring the worker who wants to work, reducing his earnings, and lowering the living standards of the entire society.[10] Conservation laws, which also prevent production and cause lower living standards, will be discussed more fully below. In fact, the monopoly grants of privilege discussed in the next section are also prohibitions, since they grant the privilege of production to some by prohibiting production to others.

3. Product Control: Grant of Monopolistic Privilege

     Instead of making the product prohibition absolute, the government may prohibit production and sale except by a certain firm or firms. These firms are then specially privileged by the government to engage in a line of production, and therefore this type of prohibition is a grant of special privilege. If the grant is to one person or firm, it is a monopoly grant; if to several persons or firms, it is a quasi-monopoly or oligopoly grant. Both types of grant may be called monopolistic. It is obvious that the grant benefits the monopolist or quasi monopolist because his competitors are barred by violence from entering the field; it is also evident that the would-be competitors are injured and are forced to accept lower remuneration in less efficient and value-productive fields. The consumers are likewise injured, for they are prevented from purchasing their products from competitors whom they would freely prefer. And this injury takes place apart from any effect of the grant on prices.

     Although a monopolistic grant may openly and directly confer a privilege and exclude rivals, in the present day it is far more likely to be hidden or indirect, cloaked as a type of penalty on competitors, and represented as favorable to the “general welfare.” The effects of monopolistic grants are the same, however, whether they are direct or indirect.

     The theory of monopoly price is illusory when applied to the free market, but it applies fully to 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. For the free-market price is conceptually identifiable and definable, whereas the “competitive price” is not.[11] The monopolist, as a receiver of a monopoly privilege, will be able to achieve a monopoly price for the product if his demand curve is inelastic, or sufficiently less elastic, above the free-market price. 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 would-be competitors.

     Where the demand curve to the firm remains highly elastic, the monopolist will not reap a monopoly gain from his grant. Consumers and competitors will still be injured because of the prevention of their trade, 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 now 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 the higher price for the product both injure the consumers. In contrast to conditions on the free market, 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 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 movement 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.

     We cannot here use the argument that the restriction of output is voluntary because the consumers make their own demand curve inelastic. For the consumers are fully responsible for their demand curve only on the free market; and only this demand curve can be 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 that the monopoly-price theorists have mistakenly attributed to voluntary cartels do apply to governmental monopoly grants. Production is restricted and factors misallocated. It is true that the nonspecific factors are again 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.

     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 that is 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; here, however, the government has granted special privileges of entry and sale, and it is these special privileges or rights that are responsible for the extra monopoly gain from the monopoly price. The monopolist earns a monopoly gain, therefore, not for owning any productive factor, but from a special privilege granted by the government. And this gain does not disappear in the long run as do profits; it is permanent, so long as the privilege remains, and consumer valuations continue as they are. Of course, the monopoly gain will tend to be capitalized into the asset value of the firm, so that subsequent owners, who invest in the firm after the privilege is granted and the capitalization takes place, will be earning only the generally uniform interest return on their investment.

     This whole discussion applies to the quasi monopolist as well as to the monopolist. The quasi monopolist has some competitors, but their number is restricted by the government privilege. Each quasi monopolist will now have a differently shaped demand curve for his product on the market and will be affected differently by the privilege. Those quasi monopolists whose demand curves become inelastic will reap a monopoly gain; those whose demand curves remain highly elastic will reap no gain from the privilege. Ceteris paribus, of course, a monopolist is more likely to achieve a monopoly gain than a quasi monopolist; but whether each achieves a gain, and how much, depends purely on the data of each particular case.

     We must note again what we have said above: that even where no monopolist or quasi monopolist can achieve a monopoly price, the consumers are still injured because they are barred from buying from the most efficient and value-productive producers. Production is thereby restricted, and the decrease in output (particularly of the most efficiently produced output) raises the price to consumers. If the monopolist or quasi monopolist also achieves a monopoly price, the injury to consumers and the misallocation of production will be redoubled.

     Since outright grants of monopoly or quasi monopoly would usually be considered baldly injurious to the public, governments have discovered a variety of methods of granting such privileges indirectly, as well as a variety of arguments to justify these measures. But they all have the effects common to monopoly or quasi-monopoly grants and monopoly prices when these are obtained.

     The important types of monopolistic grants (monopoly and quasi monopoly) are as follows: (1) governmentally enforced cartels which every firm in an industry is compelled to join; (2) virtual cartels imposed by the government, such as the production quotas enforced by American agricultural policy; (3) licenses, which require meeting government rules before a man or a firm is permitted to enter a certain line of production, and which also require the payment of a fee—a payment that serves as a penalty tax on smaller firms with less capital, which are thereby debarred from competing with larger firms; (4) “quality” standards, which prohibit competition by what the government (not the consumers) defines as “lower-quality” products; (5) tariffs and other measures that levy a penalty tax on competitors outside a given geographical region; (6) immigration restrictions, which prohibit the competition of laborers, as well as entrepreneurs, who would otherwise move from another geographical region of the world market; (7) child labor laws, which prohibit the labor competition of workers below a certain age; (8) minimum wage laws, which, by causing the unemployment of the least value-productive workers, remove their competition from the labor markets; (9) maximum hour laws, which force partial unemployment on those workers who are willing to work longer hours; (10) compulsory unionism, such as the Wagner-Taft-Hartley Act imposes, causing unemployment among the workers with the least seniority or the least political influence in their union; (11) conscription, which forces many young men out of the labor force; (12) any sort of governmental penalty on any form of industrial or market organization, such as antitrust laws, special chain store taxes, corporate income taxes, laws closing businesses at specific hours or outlawing pushcart peddlers or door-to-door salesmen; (13) conservation laws, which restrict production by force; (14) patents, where independent later discoverers of a process are debarred from entering a field production.[12][13]

A. Compulsory Cartels

     Compulsory cartels are a forcing of all producers in an industry into one organization, or virtual organization. Instead of being directly barred from an industry, firms are forced to obey governmentally imposed quotas of maximum output. Such cartels invariably go hand in hand with a governmentally imposed program of minimum price control. When the government comes to realize that minimum price control by itself will lead to unsold surpluses and distress in the industry, it imposes quota restrictions on the output of producers. Not only does this action injure consumers by restricting production and lowering output; the output must also be produced by certain State-designated producers. Regardless of how the quotas are arrived at, they are arbitrary; and as time passes, they more and more distort the production structure that attempts to adjust to consumer demands. Efficient newcomers are prevented from serving consumers, and inefficient firms are preserved because they are exempted by their old quotas from the necessity of meeting superior competition. Compulsory cartels furnish a haven in which the inefficient firms prosper at the expense of the efficient firms and of the consumers.

B. Licenses

     Little attention has been paid to licenses; yet they constitute one of the most important (and steadily growing) monopolistic impositions in the current American economy. Licenses deliberately restrict the supply of labor and of firms in the licensed occupations. Various rules and requirements are imposed for work in the occupation or for entry into a certain line of business. Those who cannot qualify under the rules are prevented from entry. Further, those who cannot meet the price of the license are barred from entry. Heavy license fees place great obstacles in the way of competitors with little initial capital. Some licenses such as those required in the liquor and taxicab businesses in some states impose an absolute limit on the number of firms in the business. These licenses are negotiable, so that any new firm must buy from an older firm that wants to go out of business. Rigidity, inefficiency, and lack of adaptability to changing consumer desires are all evident in this arrangement. The market in license rights also demonstrates the burden that licenses place upon new entrants. Professor Machlup points out that the governmental administration of licensing is almost invariably in the hands of members of the trade, and he cogently likens the arrangements to the “self-governing” guilds of the Middle Ages.[14]

     Certificates of convenience and necessity are required of firms in industries—such as railroads, airlines, etc.—regulated by governmental commissions. These act as licenses but are generally far more difficult to obtain. This system excludes would-be entrants from a field, granting a monopolistic privilege to the firms remaining; furthermore, it subjects them to the detailed orders of the commission. Since these orders countermand those of the free market, they invariably result in imposed inefficiency and injury to the consumers.[15]

     Licenses to workers, as distinct from businesses, differ from most other monopolistic grants, which may confer a monopoly price. For the former license always confers a restrictionist price. Unions gain restrictionist wage rates by restricting the labor supply in an occupation. Here, once again, the same conditions prevail: other factors are forcibly excluded, and, since the monopolist does not own these excluded factors, he is not losing any revenue. Since a license always restricts entry into a field, it thereby always lowers supply and raises prices, or wage rates. The reason that a monopolistic grant to a business does not always raise prices, is that businesses can always expand or contract their production at will. Licensing of grocers does not necessarily reduce total supply, because it does not preclude the indefinite enlargement of the licensed grocery firms, which can take up the slack created by the exclusion of would-be competitors. But, aside from hours worked, restriction of entry into a labor market must always reduce the total supply of that labor. Hence, licenses or other monopolistic grants to businesses may or may not confer a monopoly price—depending on the elasticity of the demand curve; whereas licenses to laborers always confer a higher, restrictionist price on the licensees.



[1]Bribing is made necessary by government outlawing of the exchange; a bribe is the sale, by the government official, of permission for the exchanges to proceed.

[2]Ironically, the government’s destruction of part of the people’s money almost always takes place after the government has pumped in new money and used it for its own purposes. The injury that the government imposes on the public is thus twofold: (1) it takes resources away from the public by inflating the currency; and (2) after the money has percolated down to the public, it destroys part of the money’s usefulness.

[3]Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949), pp. 432 n., 447, 469, 776.

[4]Perhaps one of the reasons was that State mint monopolies, instead of serving customers with desired coins, arbitrarily designated a few denominations that they would mint and circulate. A coin of slightly lighter weight was then treated as an intruder.

[5]A modern example of the impossibility of keeping undervalued coins in circulation is the disappearance of silver dollars, half-dollars, and other coins that circulated in the United States during the 1960’s. William F. Rickenbacker, Wooden Nickels (New Rochelle, N.Y.: Arlington House, 1966).

[6]On legal-tender laws, see Lord Farrer, Studies in Currency 1898 (London: Macmillan & Co., 1898), p. 43, and Mises, Human Action, pp. 432 n., 444, 447.

[7] In recent years, the myth has developed that usury laws in the Middle Ages were justifiable because they dealt with the consumer who had to borrow rather than with productive business. On the contrary, it is precisely the risky consumer-borrower (who most “needs” the loan) who is most injured by the usury laws because he is the one deprived of credit.

On usury laws, see Rudolph C. Blitz and Millard F. Long, “The Economics of Usury Regulation,” Journal of Political Economy, December, 1965, pp. 608–19.

[8]It is interesting to note that the bulk of “organized crime” occurs not as invasions of persons and property (in natural law, the mala per se), but as attempts to circumvent government prohibitions in order to satisfy the desires of consumers and producers alike more efficiently (the mala pro-hibita). Entrepreneurs of the latter kind constitute the generally despised “black marketeers” and “racketeers.”

[9]The workings of rationing (as well as the socialist system in general) have never been more vividly portrayed than in Henry Hazlitt’s novel, The Great Idea (New York: Appleton-Century-Crofts, 1951), reissued as Time Will Run Back (New Rochelle, N.Y.: Arlington House, 1967).

[10]On maximum hour laws, see W.H. Hutt, “The Factory System of the Early Nineteenth Century” in F.A. Hayek, ed., Capitalism and the Historians (Chicago: University of Chicago Press, 1954), pp. 160–88.

[11]See Man, Economy, and State, chapter 10, for a refutation of monopoly theories on the free market.

[12]For an interesting, though incomplete, discussion of many of these measures (an area largely neglected by economists), see Fritz Machlup, The Political Economy of Monopoly (Baltimore: Johns Hopkins Press, 1952), pp. 249–329.

[13]Subsidies, of course, penalize competitors not receiving the subsidy, and thus have a decided monopolistic impact. But they are best discussed as part of the budgetary, binary intervention of government.

[14]Ibid. On licenses, see also Thomas H. Barber, Where We Are At (New York: Charles Scribners’ Sons, 1950), pp. 89–93; George J. Stigler, The Theory of Price (New York: Macmillan & Co., 1946), p. 212; and Walter Gellhorn, Individual Freedom and Governmental Restraints (Baton Rouge: Louisiana State University Press, 1956), pp. 105–51, 194–210.

[15]A glaring example of a Commission’s role in banning efficient competitors from an industry is the Civil Aeronautics Board decision to close up Trans-American Airlines, despite a perfect safety record. Trans-American had pioneered in rate reductions for airline service. On the CAB, see Sam Peltzman, “CAB: Freedom from Competition,” New Individualist Review, Spring, 1963, pp. 16–23.

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