Chapter 3--Triangular Intervention (continued)
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Chapter
3—Triangular Intervention
(continued)
C.
Standards of Quality and Safety
One of the favorite arguments for licensing laws and other types of quality
standards is that governments must
“protect” consumers by insuring that workers and
businesses sell goods and services of the highest quality. The answer,
of course, is that “quality” is a highly elastic
and relative term and is decided by the consumers in their free actions
in the marketplace. The consumers decide according to their own tastes
and interests, and particularly according to the price they wish to pay
for the service. It may very well be, for example, that a certain
number of years’ attendance at a certain type of school turns
out the best quality of doctors (although it is difficult to see why
the government must guard the public from unlicensed cold-cream
demonstrators or from plumbers without a college degree or with less
than ten years’ experience). But by prohibiting the practice
of medicine by people who do not meet these requirements, the
government is injuring consumers who would buy the services of the
outlawed competitors, is protecting “qualified” but
less value-productive doctors from outside competition, and also grants
restrictionist prices to the remaining doctors.
Consumers are prevented
from choosing lower-quality treatment of minor ills, in exchange for a
lower price, and are also prevented from patronizing doctors who have a
different theory of medicine from that sanctioned by the state-approved
medical schools.
How much these requirements are designed to
“protect” the health of the public, and how much to
restrict competition, may be gauged from the fact that giving medical
advice free without a license is rarely a legal offense. Only the sale
of medical advice requires a license. Since someone may be injured as
much, if not more, by free medical advice than by purchased advice, the
major purpose of the regulation is clearly to restrict competition
rather than to safeguard the public.
Other quality standards in production have an even more injurious
effect. They impose governmental definitions of products and require
businesses to hew to the specifications laid down by these definitions.
Thus, the government defines “bread” as being of a
certain composition. This is supposed to be a safeguard against
“adulteration,” but in fact it prohibits improvement.
If the government defines a product in a certain way, it prohibits
change. A change, to be accepted by consumers, has
to be an improvement, either absolutely or in the form of a lower
price. Yet it may take a long time, if not forever, to persuade the
government bureaucracy to change the requirements. In the meantime,
competition is injured, and technological improvements are blocked.
“Quality”
standards, by shifting decisions about quality from the consumers to
arbitrary government boards, impose rigidities and monopolization on
the economic system.
In the free economy, there would be ample means to obtain redress for
direct injuries or fraudulent “adulteration.” No
system of government “standards” or army of
administrative inspectors is necessary. If a man is sold adulterated
food, then clearly the seller has committed fraud, violating his
contract to sell the food. Thus, if A sells B breakfast food,
and it turns out to be straw, A has committed an illegal act of fraud
by telling B he is selling him food, while actually selling straw. This
is punishable in the courts under “libertarian
law,” i.e., the legal code of the free society that would
prohibit all invasions of persons and property. The loss of the product
and the price, plus suitable damages (paid to the victim,
not to the State), would be included in the punishment of fraud. No
administrator is needed to prevent nonfraudulent sales; if a man simply
sells what he calls “bread,” it must meet the common
definition of bread held by consumers, and not some arbitrary
specification. However, if he specifies the
composition on the loaf, he is liable for prosecution if he is lying.
It must be emphasized that the crime is not lying per se,
which is a moral problem not under the province of a free-market
defense agency, but breaching a contract—taking
someone else’s property under false pretenses and therefore
being guilty of fraud. If, on the other hand, the adulterated product
injures the health of the buyer (such as by an inserted poison), the
seller is further liable for prosecution for injuring and assaulting
the person of the buyer.
Another type of quality control is the alleged
“protection” of investors. SEC regulations force
new companies selling stock, for example, to comply with certain rules,
issue brochures, etc. The net effect is to hamper new and especially
small firms and restrict them in acquiring capital, thereby conferring
a monopolistic privilege upon existing firms. Investors are prohibited
from investing in particularly risky enterprises. SEC regulations,
“blue-sky laws,” etc., thereby restrict the entry
of new firms and prevent investment in risky but possibly successful
ventures. Once again, efficiency in business and service to the
consumer are hampered.
Safety codes are another common type of quality standard. They
prescribe the details of production and outlaw differences. The
free-market method of dealing, say, with the collapse of a building
killing several persons, is to send the owner of the building to jail
for manslaughter. But the free market can countenance no arbitrary
“safety” code promulgated in advance of any crime.
The current system does not treat the building
owner as a virtual murderer should a collapse occur; instead, he merely
pays a sum of monetary damages. In that way, invasion of person goes
relatively unpunished and undeterred. On the other hand, administrative
codes proliferate, and their general effect is to prevent major
improvements in the building industry and thus to confer monopolistic
privileges on existing builders, as contrasted with potentially
innovating competitors.
Evasion of safety codes
through bribery then permits the actual aggressor (the builder whose
property injures someone) to continue unpunished and go scot free.
It might be objected that free-market defense agencies must wait until after
people are injured to punish, rather than prevent,
crime. It is true that on the free market only overt acts can be
punished. There is no attempt by anyone to tyrannize over anyone else
on the ground that some future crime might possibly be prevented
thereby. On the “prevention” theory, any sort of
invasion of personal freedom can be, and in fact must be, justified. It
is certainly a ludicrous procedure to attempt to
“prevent” a few future invasions by committing
permanent invasions against everyone.
Safety regulations are also imposed on labor contracts. Workers and
employers are prevented from agreeing on terms of hire unless certain
governmental rules are obeyed. The result is a loss imposed on workers
and employers, who are denied their freedom to contract, and who must
turn to other, less remunerative employments. Factors are therefore
distorted and misallocated in relation to both the maximum satisfaction
of the consumers and maximum return to factors. Industry is rendered
less productive and flexible.
Another use of “safety regulations” is to prevent
geographic competition, i.e., to keep consumers from buying goods from
efficient producers located in other geographical areas. Analytically,
there is little distinction between competition in general and in
location, since location is simply one of the many advantages or
disadvantages that competing firms possess. Thus, state governments
have organized compulsory milk cartels, which set minimum prices and
restrict output, and absolute embargoes are levied on out-of-state milk
imports, under the guise of “safety.” The effect,
of course, is to cut off competition and permit monopoly pricing.
Furthermore, safety requirements that go far beyond those imposed on
local firms are often exacted on out-of-state products.
D.
Tariffs
Tariffs and various forms of import quotas prohibit,
partially or totally, geographical competition for various products.
Domestic firms are granted a quasi monopoly and, generally, a monopoly
price. Tariffs injure the consumers within the
“protected” area, who are prevented from purchasing
from more efficient competitors at a lower price. They also injure the
more efficient foreign firms and the consumers of all areas, who are
deprived of the advantages of geographic specialization. In a free
market, the best resources will tend to be allocated to their most
value-productive locations. Blocking interregional trade will force
factors to obtain lower remuneration at less efficient and less
value-productive tasks.
Economists have devoted a great deal of attention to the
“theory of international trade”—attention
far beyond its analytic importance. For, on the free market, there
would be no separate theory of “international
trade” at all—and the free market is the locus of
the fundamental analytic problems. Analysis of interventionary
situations consists simply in comparing their effects to what would
have occurred on the free market. “Nations” may be
important politically and culturally, but economically they appear only
as a consequence of government intervention, either in the form of
tariffs or other barriers to geographic trade, or as some form of
monetary intervention.
Tariffs have inspired a profusion of economic speculation and argument.
The arguments for tariffs have one thing in common: they all attempt to
prove that the consumers of the protected area are not
exploited by the tariff. These attempts are all in vain. There are many
arguments. Typical are worries about the continuance of an
“unfavorable balance of trade.” But every
individual decides on his purchases and therefore determines whether
his balance should be “favorable” or
“unfavorable”; “unfavorable” is
a misleading term because any purchase is the action most favorable
for the individual at the time. The same is therefore true for the
consolidated balance of a region or a country. There can be no
“unfavorable” balance of trade from a region unless
the traders so will it, either by selling their gold reserve, or by
borrowing from others (the loans being voluntarily granted by
creditors).
The absurdity of the protariff arguments can be seen when we carry the
idea of a tariff to its logical conclusion—let us say, the
case of two individuals, Jones and Smith. This is a valid use of the reductio
ad absurdum because the same qualitative effects take place
when a tariff is levied on a whole nation as when it is levied on one
or two people; the difference is merely one of degree. Suppose
that Jones has a farm, “Jones’ Acres,”
and Smith works for him. Having become steeped in protariff ideas,
Jones exhorts Smith to “buy Jones’
Acres.” “Keep the money in Jones’
Acres,” “don’t be exploited by the flood
of products from the cheap labor of foreigners outside Jones’
Acres,” and similar maxims become the watchword of the two
men. To make sure that their aim is accomplished, Jones levies a
1,000-percent tariff on the imports of all goods and services from
“abroad,” i.e., from outside the farm. As a result,
Jones and Smith see their leisure, or “problems of
unemployment,” disappear as they work from dawn to dusk
trying to eke out the production of all the goods they desire. Many
they cannot raise at all; others they can, given centuries of effort.
It is true that they reap the promise of the protectionists:
“self-sufficiency,” although the
“sufficiency” is bare subsistence instead of a
comfortable standard of living. Money is “kept at
home,” and they can pay each other very high nominal
wages and prices, but the men find that the real value of their wages,
in terms of goods, plummets drastically.
Truly we are now back in the situation of the isolated or barter
economies of Crusoe and Friday. And that is effectively what the tariff
principle amounts to. This principle is an attack on the
market, and its logical goal is the self-sufficiency of individual
producers; it is a goal that, if realized, would spell poverty for all,
and death for most, of the present world population. It would be a
regression from civilization to barbarism. A mild tariff over a wider
area is perhaps only a push in that direction, but it is
a push, and the arguments used to justify the tariff apply equally well
to a return to the “self-sufficiency” of the jungle.
One of the keenest parts of Henry George’s analysis of the
protective tariff is his discussion of the term
“protection”:
Protection
implies prevention. . . . What is it that protection by tariff
prevents? It is trade. . . . But trade, from which
“protection” essays to preserve and defend us, is
not, like flood, earthquake, or tornado, something that comes without
human agency. Trade implies human action. There can be no need of
preserving from or defending against trade, unless there are men who
want to trade and try to trade. Who, then, are the men against whose
efforts to trade “protection” preserves and defends
us? . . . the desire of one party, however strong it may be, cannot of
itself bring about trade. To every trade there must be two parties who
actually desire to trade, and whose actions are reciprocal. No one can
buy unless he finds someone willing to sell; and no one can sell unless
there is some other one willing to buy. If Americans did not want to
buy foreign goods, foreign goods could not be sold here even if there
were no tariff. The efficient cause of the trade which our tariff aims
to prevent is the desire of Americans to buy foreign goods, not the
desire of foreign producers to sell them. . . . It is not from
foreigners that protection preserves and defends us; it is from
ourselves.
Ironically, the long-run exploitative possibilities of the protective
tariff are far less than those that arise from other forms of monopoly
grant. For only firms within an area are protected;
yet anyone is permitted to establish a firm there—even
foreigners. As a result, other firms, from within and without the area,
will flock into the protected industry and the protected area, until
finally the monopoly gain disappears, although misallocation of
production and injury to consumers remain. In the long run, therefore,
a tariff per se does not establish a lasting
benefit even for the immediate beneficiaries.
Many writers and economists, otherwise in favor of free trade, have
conceded the validity of the “infant industry
argument” for a protective tariff. Few free-traders, in fact,
have challenged the argument beyond warning that the tariff might be
continued beyond the stage of “infancy” of the
industry. This reply in effect concedes the validity of the
“infant industry” argument. Aside from the utterly
false and misleading biological analogy, which compares a newly
established industry to a helpless new-born baby who needs protection,
the substance of the argument has been stated by Taussig:
The
argument is that while the price of the protected article is
temporarily raised by the duty, eventually it is lowered. Competition
sets in . . . and brings a lower price in the end. . . . This reduction
in domestic price comes only with the lapse of time. At the outset the
domestic producer has difficulties, and cannot meet the foreign
competition. In the end he learns how to produce to best advantage, and
then can bring the article to market as cheaply as the foreigner, even
more cheaply.
Thus, older competitors are alleged to possess historically acquired
skill and capital that enable them to outcompete any new rivals. Wise
protection of the government granted to the new firms, therefore, will,
in the long run, promote rather than hinder competition.
The infant industry argument reverses the true conclusion from a
correct premise. The fact that capital has already been sunk in older
locations does, it is true, give the older firms an advantage, even if
today, in the light of present knowledge and consumer wants, the
investments would have been made in the new locations. But the point is
that we must always work with a given situation, with the capital
handed down to us by the investment of our ancestors. The fact that our
ancestors made mistakes—from the point of view of our present
superior knowledge—is unfortunate, but we must always do the
best with what we have. We do not and never can begin investing from
scratch; indeed, if we did, we should be in the situation of Robinson
Crusoe, facing land again with our bare hands and no inherited
equipment. Therefore, we must make use of the advantages given us by
the sunk capital of the past. To subsidize new plants would be to
injure consumers by depriving them of the advantages of historically
given capital.
In fact, if long-run prospects in the new industry are so promising,
why does not private enterprise, ever on the lookout for a profitable
investment opportunity, enter the new field? Only because entrepreneurs
realize that such investment would be uneconomic, i.e., it would waste
capital, land, and labor that could otherwise be invested to satisfy
more urgent desires of the consumers. As Mises says:
The
truth is that the establishment of an infant industry is advantageous
from the economic point of view only if the superiority of the new
location is so momentous that it outweighs the disadvantages resulting
from abandonment of nonconvertible and nontransferable capital goods
invested in the older established plants. If this is the case, the new
plants will be able to compete successfully with the old ones without
any aid given by the government. If it is not the case, the protection
granted to them is wasteful, even if it is only temporary and enables
the new industry to hold its own at a later period. The tariff amounts
virtually to a subsidy which the consumers are forced to pay as a
compensation for the employment of scarce factors of production for the
replacement of still utilizable capital goods to be scrapped and the
withholding of these scarce factors from other employments in which
they could render services valued higher by the consumers. . . . In the
absence of tariffs the migration of industries [to better locations] is
postponed until the capital goods invested in the old plants are worn
out or become obsolete by technological improvements which are so
momentous as to necessitate their replacement by new equipment.
Logically, the infant industry argument must be applied to interlocal
and interregional trade as well as international. Failure to realize
this is one of the reasons for the persistence of the argument.
Logically extended, in fact, the argument would have to imply that it
is impossible for any new firm to exist and grow
against the competition of older firms, wherever their locations. New
firms, after all, have their own peculiar advantage to offset that of
existing sunken capital possessed by the old firms. New firms can begin
afresh with the latest and most productive equipment as well as on the
best locations. The advantages and disadvantages of a new firm must be
weighed against each other by entrepreneurs in each case, to discover
the most profitable, and therefore the most serviceable, course.
E.
Immigration Restrictions
Laborers may also ask for geographical grants of oligopoly in the form
of immigration restrictions. In the free market the
inexorable trend is to equalize wage rates for the same
value-productive work all over the earth. This trend is dependent on
two modes of adjustment: businesses flocking from high-wage to low-wage
areas, and workers flowing from low-wage to high-wage areas.
Immigration restrictions are an attempt to gain restrictionist
wage rates for the inhabitants of an area. They constitute a
restriction rather than monopoly because (a) in the
labor force, each worker owns himself, and therefore the
restrictionists have no control over the whole of the supply of labor;
and (b) the supply of labor is large in relation to
the possible variability in the hours of an individual worker, i.e., a
worker cannot, like a monopolist, take advantage of the restriction by
increasing his output to take up the slack, and hence obtaining a
higher price is not determined by the elasticity of the demand curve. A
higher price is obtained in any case by the restriction of the supply
of labor. There is a connexity throughout the entire labor market;
labor markets are linked with each other in different occupations, and
the general wage rate (in contrast to the rate in
specific industries) is determined by the total supply of all labor, as
compared with the various demand curves for different types of labor in
different industries. A reduced total supply of labor in an area will
thus tend to shift all the various supply curves for individual labor
factors to the left, thus increasing wage rates all around.
Immigration restrictions, therefore, may earn restrictionist wage rates
for all people in the restricted area, although
clearly the greatest relative gainers will be those who would
have directly competed in the labor market with the potential
immigrants. They gain at the expense of the excluded people,
who are forced to accept lower-paying jobs at home.
Obviously, not every geographic area will gain by immigration
restrictions—only a high-wage area. Those in relatively
low-wage areas rarely have to worry about immigration: there the
pressure is to emigrate.
The high-wage areas won
their position through a greater investment of capital per head than
the other areas; and now the workers in that area try to resist the
lowering of wage rates that would stem from an influx of workers from
abroad.
Immigration barriers confer gains at the expense of foreign workers.
Few residents of the area trouble themselves about that.
They raise other problems,
however. The process of equalizing wage rates, though hobbled, will
continue in the form of an export of capital investment to foreign,
low-wage countries. Insistence on high wage rates at home creates more
and more incentive for domestic capitalists to invest abroad. In the
end, the equalization process will be effected anyway, except that the
location of resources will be completely distorted. Too many workers
and too much capital will be stationed abroad, and too little at home,
in relation to the satisfaction of the world’s consumers.
Secondly, the domestic citizens may very well lose more from
immigration barriers as consumers than they gain as workers. For
immigration barriers (a) impose shackles on the
international division of labor, the most efficient location of
production and population, etc., and (b) the
population in the home country may well be below the
“optimum” population for the home area. An inflow
of population might well stimulate greater mass production and
specialization and thereby raise the real income per capita. In the
long run, of course, the equalization would still take place, but
perhaps at a higher level, especially if the poorer countries were
“overpopulated” in comparison with their optimum.
In other words, the high-wage country may have a population below the
optimum real income per head, and the low-wage country may have
excessive population over the optimum. In that
case, both countries would enjoy increased real
wage rates from the migration, although the low-wage country would gain
more.
It is fashionable to speak of the “overpopulation”
of some countries, such as China and India, and to assert
that the Malthusian terrors of population pressing on the food supply
are coming true in these areas. This is fallacious thinking, derived
from focusing on “countries” instead of the world
market as a whole. It is fallacious to say that there is overpopulation
in some parts of the market and not in others. The
theory of “over-” or “under-population
(in relation to an arbitrary maximum of real income per person) applies
properly to the market as a whole. If parts of the market are
“under-” and parts “over”
populated, the problem stems, not from human reproduction or human
industry, but from artificial governmental barriers to migration. India
is “overpopulated” only because its citizens will
not move abroad or because other governments will not admit them. If
the former, then, the Indians are making a voluntary choice: to accept
lower money wages in return for the great psychic gain of living in
India. Wages are equalized internationally only if we incorporate such
psychic factors into the wage rate. Moreover, if other governments
forbid their entry, the problem is not absolute
“overpopulation,” but coercive barriers thrown up
against personal migration.
The loss to everyone as consumers from shackling the inter-regional
division of labor and the efficient location of production, should not
be overlooked in considering the effects of immigration barriers. The reductio
ad absurdum, though not quite as devastating as in the case
of the tariff, is also relevant here. As Cooley and Poirot point out:
If
it is sound to erect a barrier along our national boundary lines,
against those who see greater opportunities here than in their native
land, why should we not erect similar barriers between states and
localities within our nation? Why should a low-paid worker . . . be
allowed to migrate from a failing buggy shop in Massachusetts to the
expanding automobile shops in Detroit. . . . He would compete with
native Detroiters for food and clothing and housing. He might be
willing to work for less than the prevailing wage in Detroit,
“upsetting the labor market” there. . . . Anyhow,
he was a native of Massachusetts, and therefore that state should bear
the full “responsibility for his welfare.” Those
are matters we might ponder, but our honest answer to all of them is
reflected in our actions. . . . We’d rather ride in
automobiles than in buggies. It would be foolish to try to buy an
automobile or anything else on the free market, and at the same time
deny any individual an opportunity to help produce those things we want.
The advocate of immigration laws who fears a reduction in his standard
of living is actually misdirecting his fire. Implicitly, he believes
that his geographic area now exceeds its optimum population point. What
he really fears, therefore, is not so much immigration as any
population growth. To be consistent, therefore, he would have to
advocate compulsory birth control, to slow down the rate of population
growth desired by individual parents.
F.
Child Labor Laws
Child labor laws are a clear-cut example of
restrictions placed on the employment of some labor for the benefit of
restrictive wage rates for the remaining workers. In an era of much
discussion about the “unemployment problem,” many
of those who worry about unemployment also advocate child labor laws,
which coercively prevent the employment of a whole
body of workers. Child labor laws, then, amount to compulsory
unemployment. Compulsory unemployment, of course, reduces the
general supply of labor and raises wage rates restrictively as the
connexity of the labor market diffuses the effects throughout the
market. Not only is the child prevented from laboring, but the income
of families with children is arbitrarily lowered by the government, and
childless families gain at the expense of families with children. Child
labor laws penalize families with children because the period of time
in which children remain net monetary liabilities to their parents is
thereby prolonged.
Child labor laws, by restricting the supply of labor, lower the
production of the economy and hence tend to reduce the standard of
living of everyone in the society. Furthermore, the laws do not even
have the beneficial effect that compulsory birth control might have in
reducing population, when it is above the optimum point. For the total
population is not reduced (except from the indirect effects of the
penalty on children), but the working population
is. To reduce the working population while the consuming
population remains undiminished is to lower the general standard of
living.
Child labor laws may take the form of outright prohibition or of
requiring “working papers” and all sorts of red
tape before a youngster can be hired, thus partially achieving the same
effect. The child labor laws are also bolstered by compulsory
school attendance laws. Compelling a child to remain in a
State or State-certified school until a certain age has the same effect
of prohibiting his employment and preserving adult workers from younger
competition. Compulsory attendance, however, goes even further in
compelling a child to absorb a certain
service—schooling—when he or his parents would
prefer otherwise, thus imposing a further loss of utility upon these
children.
G.
Conscription
It has rarely been realized that conscription is an
effective means of granting a monopolistic privilege and imposing
restrictionist wage rates. Conscription, like child labor laws, removes
a part of the labor force from competition in the labor
market—in this case, the removal of healthy, adult members.
Coerced removal and compulsory labor in the armed forces at only
nominal pay increases the wage rates of those remaining, especially in
those fields most directly competitive with the jobs of the drafted
men. Of course, the general productivity of the economy also decreases,
offsetting the increases for at least some of the workers. But, as in
other cases of monopoly grants, some of the privileged will probably
gain from the governmental action. Directly, conscription is a method
by which the government can commandeer labor at far less than market
wage rates—the rate it would have to pay to induce the
enlistment of a volunteer army.
H.
Minimum Wage Laws and Compulsory Unionism
Compulsory unemployment is achieved indirectly through minimum
wage laws. On the free market, everyone’s wage
tends to be set at his discounted marginal value productivity. A
minimum wage law means that those whose DMVP is below the legal minimum
are prevented from working. The worker was willing
to take the job, and the employer to hire him. But the decree of the
State prevents this hiring from taking place. Compulsory unemployment
thus removes the competition of marginal workers and raises the wage
rates of the other workers remaining. Thus, while the announced aim
of a minimum wage law is to improve the incomes of the marginal
workers, the actual effect is precisely the reverse—it is to
render them unemployable at legal wage rates. The higher the minimum
wage rate relative to free-market rates, the greater the resulting
unemployment.
Unions aim for restrictionist wage rates, which on a partial scale
cause distortions in production, lower wage rates for nonmembers, and
pockets of unemployment, and on a general scale lead to greater
distortions and permanent mass unemployment. By enforcing restrictive
production rules, rather than allowing individual workers voluntarily
to accept work rules laid down by the enterpriser in the use of his
property, unions reduce general productivity and hence the living
standards of the economy. Any governmental encouragement of unions,
therefore, such as is imposed under the Wagner-Taft-Hartley Act, leads
to a regime of restrictive wage rates, injury to production, and
general unemployment. The indirect effect on employment is similar to
that of a minimum wage law, except that fewer workers are affected, and
it is then the union-enforced minimum wage that is being imposed.
I.
Subsidies to Unemployment
Government unemployment benefits are an important
means of subsidizing unemployment caused by unions or minimum wage
laws. When restrictive wage rates lead to unemployment, the government
steps in to prevent the unemployed workers from injuring union
solidarity and union-enforced wage rates. By receiving unemployment
benefits, the mass of potential competitors with unions are removed
from the labor market, thus permitting an indefinite extension of union
policies. And this removal of workers from the labor market is financed
by the taxpayers—the general public.
J.
Penalties on Market Forms
Any form of governmental penalty on a type of
market production or organization injures the efficiency of the
economic system and prevents the maximum remuneration to factors, as
well as maximum satisfaction to consumers. The most efficient are
penalized, and, indirectly, the least efficient producers are
subsidized. This tends not only to stifle market forms that are
efficient in adapting the economy to changes in consumer valuations and
given resources, but also to perpetuate inefficient forms. There are
many ways in which governments have granted quasi-monopoly privileges
to inefficient producers by imposing special penalties on the
efficient. Special chain store taxes hobble chain
stores and injure consumers for the benefit of their inefficient
competitors; numerous ordinances outlawing pushcart peddlers
destroy an efficient market form and efficient entrepreneurs for the
benefit of less efficient but more politically influential competitors;
laws closing businesses at specific hours
injure the dynamic competitors who wish to stay open, and prevent
consumers from maximizing their utilities in the time-pattern of their
purchases; corporation income taxes place an extra
burden on corporations, penalizing these efficient market forms and
privileging their competitors; government requirements of
reports from businesses place artificial restrictions on
small firms with relatively little capital, and constitute an indirect
grant of privilege to large business competitors.
All forms of government regulation of business, in fact, penalize
efficient competitors and grant monopolistic privileges to the
inefficient. An important example is regulation of insurance
companies, particularly those selling life insurance.
Insurance is a speculative enterprise, as is any other, but based on
the relatively greater certainty of biological mortality. All that is
necessary for life insurance is for premiums to be
currently levied in sufficient amount to pay benefits to the
actuarially expected beneficiaries. Yet life insurance companies have,
peculiarly, launched into the investment business, by contending that
they need to build up a net reserve so large as to be almost sufficient
to pay all benefits if half the population died immediately. They are
able to accumulate such reserves by charging premiums far higher than
would be needed for mere insurance protection. Furthermore, by charging
constant premiums over the years they are able to phase out their own
risks and place them on the shoulders of their unwitting policyholders
(through the accumulating cash surrender values of their policies).
Moreover, the companies, not the policyholders, keep the returns on the
invested reserves. The insurance companies have been able to charge and
collect the absurdly high premiums required by such a policy because
state governments have outlawed, in the name of
consumer protection, any possible competition from the low rates of
nonreserve insurance companies. As a result, existing half-insurance,
half-uneconomic “investment” companies have been
granted special privilege by the government.
It is hardly remarkable that we
hear continual complaints about a “shortage” of
doctors and teachers, but rarely hear complaints of shortages in
unlicensed occupations. On licensing in medicine, see
Milton Friedman, Capitalism and Freedom (Chicago:
University of Chicago Press, 1963), pp. 149–60; Reuben A.
Kessel, “Price Discrimination in Medicine,” Journal
of Law and Economics, October, 1958, pp. 20–53.
For an excellent
analysis of the workings of compulsory quality standards in a concrete
case, see P.T. Bauer, West
African Trade (Cambridge: Cambridge University Press, 1954),
pp. 365–75.
For case studies of the effects of
such “quality” standards, see
George J. Alexander, Honesty and Competition
(Syracuse: Syracuse University Press, 1967).
On adulteration and fraud, see
the definitive discussion by Wordsworth Donisthorpe, Law in a
Free State (London: Macmillan & Co., 1895), pp.
132–58.
Some people who generally adhere
to the free market support the SEC and similar regulations on the
ground that they “raise the moral tone of
competition.” Certainly they restrict
competition, but they cannot be said to “raise the moral
tone” until morality is successfully defined. How can
morality in production be defined except as efficient service to the
consumer? And how can anyone be “moral” if he is
prevented by force from acting otherwise?
The building industry is so
constituted that many laborers are quasi-independent entrepreneurs.
Safety codes therefore compound the restrictionism of building unions.
We might add here that on the
purely free market even the “clear and present
danger” criterion would be far too lax and subjective a
definition for a punishable deed.
See Stigler,
Theory of Price, p. 211.
See Henry
George, Protection or Free Trade (New York: Robert
Schalkenbach Foundation, 1946), pp. 37–44. On free trade and
protection, see Leland B. Yeager and David Tuerck, Trade
Policy and The Price System (Scranton, Pa.: International
Textbook Co., 1966).
The impact of a tariff is clearly
greater the smaller the geographic area of traders it covers. A tariff
“protecting” the whole world would be meaningless,
at least until other planets are brought within our trading market.
The tariff advocates will not wish
to push the argument to this length, since all parties clearly lose so
drastically. With a milder tariff, on the other hand, the
tariff-protected “oligopolists” may gain more (in
the short run) from exploiting the domestic consumers than they lose
from being consumers themselves.
Our two-man example is similar to
the illustration used in the keen critique of protection by Frederic
Bastiat. See Bastiat, Economic Sophisms
(Princeton, N.J.: D. Van Nostrand, 1964), pp. 242–50,
202–09. Also see the “Chinese
Tale,” and the famous “Candlemakers’
Petition,” ibid., pp. 182–86,
56–60. Also see the critique of the
tariff in George, Protection or Free Trade, pp.
51–54; and Arthur Latham Perry, Political Economy
(New York: Charles Scribners’ Sons, 1892), pp. 509ff.
George, Protection or
Free Trade, pp. 45–46. Also on free trade and
protection, see C.F. Bastable, The Theory
of International Trade (2nd ed.; London: Macmillan &
Co., 1897), pp. 128–56; and Perry, Political Economy,
pp. 461–533.
F.W. Taussig, Principles
of Economics (2nd ed.; New York: Macmillan & Co.,
1916), p. 527.
Mises, Human Action,
p. 506.
See also W.M.
Curtiss, The Tariff Idea (Irvington-on-Hudson,
N.Y.: Foundation for Economic Education, 1953), pp. 50–52.
Many States have imposed emigration
restrictions upon their subjects. These are not monopolistic;
they are probably motivated by a desire to keep taxable and
conscriptable people within a State’s jurisdiction.
It is instructive to study the
arguments of those “internationalist” Congressmen
who advocate changes in American immigration barriers. The changes
proposed do not even remotely suggest the removal of these barriers.
Advocates of the “free
market” who also advocate immigration barriers have rarely
faced the implications of their position. See
Appendix B, on “Coercion and Lebensraum.”
Oscar W. Cooley and Paul Poirot, The
Freedom to Move (Irvington-on-Hudson, N.Y.: Foundation for
Economic Education, 1951), pp. 11–12.
For a brilliant discussion of the
anti-child-labor Factory Acts in early nineteenth-century Britain, see
Hutt, “The Factory System.” On the merits of child
labor, see also D.C. Coleman, “Labour in
the English Economy of the Seventeenth Century,” The
Economic History Review, April, 1956, p. 286.
A news item illustrates the
connection between child labor laws and restrictionist wage rates for
adults—particularly for unions:
Through
the co-operation of some 26,000 grocers, plus trade unions, thousands
of teenage boys will get a chance to earn summer
spending money, Deputy Police Commission James B. Nolan, president of
the Police Athletic League, disclosed yesterday. . . . The program was
worked out by PAL, with the assistance of Grocer Graphic,
a trade newspaper. Raymond Bill, publisher of the trade paper,
explained that thousands of groceries can employ one and in some cases
two or three boys in odd jobs which do not interfere with union jobs. (New
York Daily News, July 19, 1955; italics mine)
See
also Paul Goodman, Compulsory Mis-Education and
the Community of Scholars (New York: Vintage Books, 1964),
p. 54.
See also James
C. Miller III, ed., Why the Draft? (Baltimore:
Penguin Books, 1968).
On minimum wage laws, see
Yale Brozen and Milton Friedman, The Minimum Wage: Who Pays?
(Washington, D.C.: The Free Society Association, 1966). See
also John M. Peterson and Charles T. Stewart, Jr., Employment
Effects of Minimum Wage Rates (Washington, D.C.: American
Enterprise Institute, August, 1969).
The withholding tax is an example
of a “wartime” measure that now appears to be an
indestructible part of our tax system; it compels businesses to be tax
collectors for the government without pay. It is thus a type of binary
intervention that particularly penalizes small firms, which are
burdened more than proportionately by the overhead requirements of
running their business.
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