Chapter 3--Triangular Intervention
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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Ludwig von Mises, Human
Action (New Haven: Yale University Press, 1949), pp. 432 n.,
447, 469, 776.
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.
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).
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.
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.
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.”
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).
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.
See Man, Economy, and
State, chapter 10, for a refutation of monopoly theories on
the free market.
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.
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.
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.
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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