WEBVTT NOTE 12.06. Triangular Intervention: Product Control 1 00:00:00.000 --> 00:00:21.000 6. Triangular Intervention. Product Control. Triangular interference with an exchange can alter the terms of the exchange, or else in some way alter the nature of the product or the persons making the exchange. 2 00:00:21.000 --> 00:00:41.000 The latter intervention, product control, may regulate the product itself, for example a law prohibiting all sales of liquor, or the people selling or buying the product, for example a law prohibiting Mohammedans from selling or buying liquor. 3 00:00:41.000 --> 00:00:48.000 Product control clearly and evidently injures all parties concerned in the exchange, 4 00:00:48.000 --> 00:00:56.000 the consumers who lose utility because they cannot purchase the product and satisfy their most urgent wants, 5 00:00:56.000 --> 00:01:01.000 and the producers who are prevented from earning a remuneration in this field, 6 00:01:01.000 --> 00:01:05.000 and must therefore settle for lower earnings elsewhere. 7 00:01:05.000 --> 00:01:16.300 Losses by producers are particularly borne by laborers and landowners, specific to the industry, who must accept permanently lower income. 8 00:01:16.300 --> 00:01:25.500 Entrepreneurial profit is ephemeral anyway, and capitalists tend to earn a uniform interest rate throughout the economy. 9 00:01:25.500 --> 00:01:36.500 Whereas with price control, one could make out a prima facie case that at least one set of exchangers gains from the control. 10 00:01:36.500 --> 00:01:45.500 The consumers whose buying price is pushed below the free market price, and the producers when the price is pushed above. 11 00:01:45.500 --> 00:01:51.500 In product control, both parties to the exchange invariably lose. 12 00:01:51.500 --> 00:01:59.500 The direct beneficiaries of product control, then, are the government bureaucrats who administer the regulations, 13 00:01:59.500 --> 00:02:04.500 partly from the tax-created jobs that the regulations create, 14 00:02:04.500 --> 00:02:12.500 and partly, perhaps, from satisfactions gained from wielding coercive power over others. 15 00:02:12.500 --> 00:02:18.500 In many cases of product prohibition, of course, inevitable pressure develops, 16 00:02:18.500 --> 00:02:26.300 as in price control for the re-establishment of the market illegally, that is, a black market. 17 00:02:26.300 --> 00:02:31.380 A black market is always in difficulties because of its illegality. 18 00:02:31.380 --> 00:02:37.700 The product will be scarce and costly to cover the risks to producers involved in violating 19 00:02:37.700 --> 00:02:43.780 the law, and the costs of bribing government officials, and the more strict the prohibition 20 00:02:43.780 --> 00:02:50.140 and Penalties, the scarcer the product will be and the higher the price. Furthermore, 21 00:02:50.140 --> 00:02:56.340 the illegality greatly hinders the process of distributing information about the existence 22 00:02:56.340 --> 00:03:03.680 of the market to consumers, for example by way of advertising. As a result, the organization 23 00:03:03.680 --> 00:03:10.340 of the market will be far less efficient, the service to the consumer of poorer quality, 24 00:03:10.340 --> 00:03:15.780 and prices for this reason alone will be higher than under a legal market. 25 00:03:15.780 --> 00:03:22.700 The premium on secrecy in the black market also militates against large-scale business, 26 00:03:22.700 --> 00:03:28.140 which is likely to be more visible and therefore more vulnerable to law enforcement. 27 00:03:28.140 --> 00:03:35.700 Paradoxically, product or price control is apt to serve as a monopolistic grant of privilege 28 00:03:35.700 --> 00:03:42.900 to the black marketeers, for they are likely to be very different entrepreneurs from those who would 29 00:03:42.900 --> 00:03:50.580 have succeeded in this industry in a legal market, for here the premium is on skill in bypassing the 30 00:03:50.580 --> 00:03:57.860 law, bribing government officials, etc. It was notorious, for example, that the bootleggers, 31 00:03:57.860 --> 00:04:05.380 a caste created by prohibition, were one of the main groups opposing repeal of prohibition in 32 00:04:05.380 --> 00:04:11.100 in America Product Prohibition may either be absolute, 33 00:04:11.100 --> 00:04:16.700 as in American Liquor Prohibition during the 1920s, or partial. 34 00:04:16.700 --> 00:04:23.540 An example of partial prohibition is compulsory rationing, which prohibits consumption beyond 35 00:04:23.540 --> 00:04:25.180 a certain amount. 36 00:04:25.180 --> 00:04:30.820 The clear effect of rationing is to injure consumers and lower the standard of living 37 00:04:30.820 --> 00:04:32.320 of everyone. 38 00:04:32.320 --> 00:04:39.340 Since rationing places legal maxima on specific items of consumption, it also distorts the 39 00:04:39.340 --> 00:04:42.320 pattern of consumer spending. 40 00:04:42.320 --> 00:04:48.700 Consumer spending is coercively shifted from the goods more heavily to those less heavily 41 00:04:48.700 --> 00:04:49.700 rationed. 42 00:04:49.700 --> 00:04:56.420 Furthermore, since ration tickets are usually not transferable, the pattern of consumer 43 00:04:56.420 --> 00:05:09.420 The non-smoker spending is even more distorted, because people who do not want a certain commodity are not permitted to exchange these coupons for goods not wanted by others. 44 00:05:09.420 --> 00:05:22.420 In short, the non-smoker is not permitted to exchange his cigarette coupons for someone else's gasoline coupons, which have been allocated to those who do not own cars. 45 00:05:22.420 --> 00:05:37.420 Partial tickets, therefore, cripple the entire system by introducing a new type of highly inefficient quasi-money, which must be used for purchasing in addition to the regular money. 46 00:05:37.420 --> 00:05:44.180 A form of partial product prohibition is to forbid all but certain selected firms from 47 00:05:44.180 --> 00:05:47.020 selling a particular product. 48 00:05:47.020 --> 00:05:53.960 Such partial exclusion means that these firms are granted a special privilege by the government. 49 00:05:53.960 --> 00:06:00.580 If such a grant is given to one person or firm, we may call it a monopoly grant. 50 00:06:00.580 --> 00:06:06.420 If to several persons or firms, it is a quasi-monopoly grant. 51 00:06:06.420 --> 00:06:12.660 We might well call the latter an oligopoly grant, but this would engender hopeless confusion 52 00:06:12.660 --> 00:06:16.100 with existing oligopoly theory. 53 00:06:16.100 --> 00:06:20.080 Both types of grant may be called monopolistic. 54 00:06:20.080 --> 00:06:26.680 An example of this type of grant is licensing, where all those to whom the government refuses 55 00:06:26.680 --> 00:06:33.340 to give or sell a license are prevented from pursuing the trade or business. 56 00:06:33.340 --> 00:06:39.660 Another example is a protective tariff or import quota, which prevents competition from 57 00:06:39.660 --> 00:06:42.900 beyond a country's geographical limits. 58 00:06:42.900 --> 00:06:50.060 Of course, outright monopoly grants to a firm or compulsory cartelization of an industry 59 00:06:50.060 --> 00:06:54.860 are clear-cut grants of monopolistic privilege. 60 00:06:54.860 --> 00:07:01.740 It is obvious that a monopolistic grant directly and immediately benefits the monopolist or 61 00:07:01.740 --> 00:07:08.460 Quasi-Monopolist, whose competitors are debarred by violence from entering the field. 62 00:07:08.460 --> 00:07:14.420 It is also evident that would-be competitors are injured and are forced to accept lower 63 00:07:14.420 --> 00:07:19.360 remuneration in less efficient and value-productive fields. 64 00:07:19.360 --> 00:07:25.420 It is also patently clear that the consumers are injured, for they are prevented from purchasing 65 00:07:25.420 --> 00:07:29.940 products from competitors whom they would freely prefer. 66 00:07:29.940 --> 00:07:35.880 And this injury takes place, it should be noted, apart from any effect of the grant 67 00:07:35.880 --> 00:07:38.060 on prices. 68 00:07:38.060 --> 00:07:42.580 In Chapter 10 we buried the theory of monopoly price. 69 00:07:42.580 --> 00:07:44.980 We must now resurrect it. 70 00:07:44.980 --> 00:07:50.900 The theory of monopoly price as developed there is illusory when applied to the free 71 00:07:50.900 --> 00:07:57.720 market, but it applies fully in the case of monopoly and quasi-monopoly grants. 72 00:07:57.720 --> 00:08:05.320 For here we have an identifiable distinction, not the spurious distinction between competitive 73 00:08:05.320 --> 00:08:13.640 and monopoly or monopolistic price, but one between the free market price and the monopoly 74 00:08:13.640 --> 00:08:14.840 price. 75 00:08:14.840 --> 00:08:23.300 The free market price is conceptually identifiable and definable, whereas the competitive price 76 00:08:23.300 --> 00:08:24.400 is not. 77 00:08:24.400 --> 00:08:31.680 The theory of monopoly price, therefore, properly contrasts it to the free market price, and 78 00:08:31.680 --> 00:08:37.080 the reader is referred back to chapter 10 for a description of the theory which can 79 00:08:37.080 --> 00:08:39.260 now be applied here. 80 00:08:39.260 --> 00:08:46.840 The monopolist will be able to achieve a monopoly price for the product if his demand is inelastic 81 00:08:46.840 --> 00:08:49.640 above the free market price. 82 00:08:49.640 --> 00:08:56.600 We have seen that on the free market, every demand presented to a firm is elastic above 83 00:08:56.600 --> 00:08:58.520 the free market price. 84 00:08:58.520 --> 00:09:04.840 Otherwise the firm would have an incentive to raise its price and increase its revenue. 85 00:09:04.840 --> 00:09:11.080 But the grant of monopoly privilege renders the consumer demand less elastic, for the 86 00:09:11.080 --> 00:09:17.680 consumer is deprived of substitute products from other potential competitors. 87 00:09:17.680 --> 00:09:23.440 Whether this lowering of elasticity will be sufficient to make the demand presented to 88 00:09:23.440 --> 00:09:30.400 the firm inelastic, so that gross revenue will be greater at a price higher than the 89 00:09:30.400 --> 00:09:37.080 free market price depends on the concrete historical data of the case and is not for 90 00:09:37.080 --> 00:09:40.480 economic analysis to determine. 91 00:09:40.480 --> 00:09:46.920 When the demand presented to the firm remains elastic, so that gross revenue will be lower 92 00:09:46.920 --> 00:10:08.920 The Monopolist will not reap any monopoly gain from his grant, consumers and competitors will still be injured because their trade is prevented, but the monopolist will not gain because his price and income will be no higher than before. 93 00:10:08.920 --> 00:10:18.920 On the other hand, if his demand is inelastic, then he institutes a monopoly price so as to maximize his revenue. 94 00:10:18.920 --> 00:10:23.920 His production has to be restricted in order to command the higher price. 95 00:10:23.920 --> 00:10:30.920 The restriction of production and higher price for the product both injure the consumers. 96 00:10:30.920 --> 00:10:34.920 Here the argument of Chapter 10 must be reversed. 97 00:10:34.920 --> 00:10:41.620 We may no longer say that a restriction of production, such as in a voluntary cartel, 98 00:10:41.620 --> 00:10:47.420 benefits the consumers by arriving at the most value-productive point. 99 00:10:47.420 --> 00:10:51.120 On the contrary, the consumers are now injured, 100 00:10:51.120 --> 00:10:56.320 because their free choice would have resulted in the free market price. 101 00:10:56.320 --> 00:11:00.120 Because of coercive force applied by the state, 102 00:11:00.120 --> 00:11:05.120 They may not purchase goods freely from all those willing to sell. 103 00:11:05.120 --> 00:11:19.120 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. 104 00:11:19.120 --> 00:11:26.120 Any departure away from the free market price and output injures the consumers. 105 00:11:26.120 --> 00:11:34.120 The monopoly price resulting from a grant of monopoly privilege leads away from the free market price. 106 00:11:34.120 --> 00:11:43.120 It lowers output and raises prices beyond what would be established if consumers and producers could trade freely. 107 00:11:43.120 --> 00:11:53.120 And we cannot here use the argument that the restriction is voluntary because the consumers make their own demand inelastic. 108 00:11:53.120 --> 00:12:06.120 For the consumers are only fully responsible for their demand on the free market, and only this demand can be fully treated as an expression of their voluntary choice. 109 00:12:06.120 --> 00:12:15.120 Once the government steps in to prohibit trade and grant privileges, there is no longer wholly voluntary action. 110 00:12:15.120 --> 00:12:22.120 Consumers are forced, willy-nilly, to deal with the monopolist for a certain range of purchases. 111 00:12:23.120 --> 00:12:35.120 All the effects which monopoly price theorists have mistakenly attributed to voluntary cartels therefore do apply to governmental monopoly grants. 112 00:12:35.120 --> 00:12:41.120 Production is restricted and factors are released for production elsewhere. 113 00:12:41.120 --> 00:12:50.120 But now we can say that this production will satisfy the consumers less than under free market conditions. 114 00:12:50.120 --> 00:12:55.760 Furthermore, the factors will earn less in the other occupations. 115 00:12:55.760 --> 00:13:03.220 As we saw in Chapter 10, there can never be lasting monopoly profits, since profits are 116 00:13:03.220 --> 00:13:09.360 ephemeral, and all eventually reduce to a uniform interest return. 117 00:13:09.360 --> 00:13:15.040 In the long run, monopoly returns are imputed to some factor. 118 00:13:15.040 --> 00:13:18.880 What is the factor being monopolized in this case? 119 00:13:18.880 --> 00:13:24.360 It is obvious that this factor is the right to enter the industry. 120 00:13:24.360 --> 00:13:31.020 In the free market, this right is unlimited to all, and therefore unowned by anyone. 121 00:13:31.020 --> 00:13:36.740 The right commands no price on the market, because everyone already has it. 122 00:13:36.740 --> 00:13:43.440 But here, the government has conferred special privileges of entry and sale, and it is these 123 00:13:43.440 --> 00:13:51.280 Special Privileges or Rights that are responsible for the extra monopoly gain from a monopoly 124 00:13:51.280 --> 00:13:55.560 price and to which we may impute the gain. 125 00:13:55.560 --> 00:14:03.840 The monopolist earns a monopoly gain, therefore, not for owning any truly productive factor, 126 00:14:03.840 --> 00:14:08.440 but from owning a special privilege granted by the government. 127 00:14:08.440 --> 00:14:14.660 And this gain does not disappear in the long run ERE, as do profits. 128 00:14:14.660 --> 00:14:21.280 It is permanent, so long as the privilege remains and consumer valuations continue as 129 00:14:21.280 --> 00:14:23.060 they are. 130 00:14:23.060 --> 00:14:30.080 Of course, the monopoly gain may well be capitalized into the asset value of the firm, so that 131 00:14:30.080 --> 00:14:37.240 subsequent owners who invest in the firm after the capitalization took place will be earning 132 00:14:37.240 --> 00:14:40.240 Only the Equal Interest Return 133 00:14:40.240 --> 00:14:47.160 A notable example of the capitalization of monopoly, or rather quasi-monopoly, rights 134 00:14:47.160 --> 00:14:50.480 is the New York City taxi cab industry. 135 00:14:50.480 --> 00:14:57.120 Every taxi cab must be licensed, but the city decided years ago not to issue any further 136 00:14:57.120 --> 00:15:04.920 licenses or medallions, so that any new cab owner must purchase his medallion from some 137 00:15:04.920 --> 00:15:06.600 previous owner. 138 00:15:06.600 --> 00:15:13.040 The high price of medallions on the market is then the capitalized value of the monopoly 139 00:15:13.040 --> 00:15:14.900 privilege. 140 00:15:14.900 --> 00:15:22.080 As we have seen, all this applies to a quasi-monopolist as well as to a monopolist, since the number 141 00:15:22.080 --> 00:15:28.600 of the former's competitors is also restricted by the grant of privilege, which makes his 142 00:15:28.600 --> 00:15:31.140 demand less elastic. 143 00:15:31.140 --> 00:15:37.900 Of course, Ceteris Paribus, a monopolist, is in a better position than a quasi-monopolist, 144 00:15:37.900 --> 00:15:44.240 but how much each benefits depends purely on the data of the particular case. 145 00:15:44.240 --> 00:15:50.440 In some cases, such as the protective tariff, the quasi-monopolist will end in the long 146 00:15:50.440 --> 00:15:58.460 run by not gaining anything, for since freedom of entry is restricted only to foreign firms, 147 00:15:58.460 --> 00:16:05.860 The higher returns accruing to firms newly protected by a tariff will attract more domestic 148 00:16:05.860 --> 00:16:08.100 capital to that industry. 149 00:16:08.100 --> 00:16:14.020 Eventually, therefore, the new capital will drive the rate of earnings down to the interest 150 00:16:14.020 --> 00:16:22.100 rate usual in all of industry, and the monopolistic gain will have been competed away. 151 00:16:22.100 --> 00:16:28.860 Monopoly privilege is granted by a government, which has power only over its own geographic 152 00:16:28.860 --> 00:16:29.860 area. 153 00:16:29.860 --> 00:16:36.700 Therefore, monopoly prices achieved within an area are always, on the market, subject 154 00:16:36.700 --> 00:16:40.500 to devastating competition from other countries. 155 00:16:40.500 --> 00:16:47.540 This is increasingly true as civilization advances and transportation costs decline, 156 00:16:47.540 --> 00:16:54.540 Thus subjecting local monopolies to ever greater threats of competition from other areas. 157 00:16:54.540 --> 00:17:01.660 Hence any domestic monopoly will tend to reach out to restrict foreign competition and block 158 00:17:01.660 --> 00:17:04.380 efficient interregional trade. 159 00:17:04.380 --> 00:17:09.900 It is no wonder that the tariff used to be called the Mother of Trusts. 160 00:17:09.900 --> 00:17:16.380 We might note here that on a truly free market, there would be no need for any separate theory 161 00:17:16.380 --> 00:17:38.580 Monopolistic grants can be either direct and evident, such as compulsory cartels or licenses, 162 00:17:38.580 --> 00:17:46.260 less direct, such as tariffs, or highly indirect, but nevertheless powerful, ordinances closing 163 00:17:46.260 --> 00:17:52.180 Outlawing businesses at specific hours, for example, or outlawing pushcart peddlers or 164 00:17:52.180 --> 00:17:59.180 door-to-door salesmen are illustrations of laws that forcibly exclude competition and 165 00:17:59.180 --> 00:18:02.420 thereby grant monopolistic privileges. 166 00:18:02.420 --> 00:18:10.100 Similarly, antitrust laws and prosecutions, while seemingly designed to combat monopoly 167 00:18:10.100 --> 00:18:17.940 and promote competition actually do the reverse, for they coercively penalize and repress efficient 168 00:18:17.940 --> 00:18:25.140 forms of market structure and activity. Even such a seemingly remote action as conscription 169 00:18:25.140 --> 00:18:31.460 has the effect of forcibly withdrawing young men from the labor market and thereby giving 170 00:18:31.460 --> 00:18:39.140 their competitors a monopolistic or rather a restrictionist wage. Monopolistic privileges 171 00:18:39.140 --> 00:18:47.140 Privileges to business may confer a monopoly price, depending on the elasticity of the firm's demand. 172 00:18:47.140 --> 00:18:57.140 Privileges to workers, on the other hand, always confer a higher restrictionist price at lower than free market output. 173 00:18:57.140 --> 00:19:03.140 The reason is that a business can expand or contract its production at will. 174 00:19:03.140 --> 00:19:09.460 If, then, a few firms are granted the privilege of producing in a certain field, they may 175 00:19:09.460 --> 00:19:16.220 expand production if conditions are ripe, and not reduce total supply. 176 00:19:16.220 --> 00:19:22.200 On the other hand, aside from hours worked, which is not very flexible, restriction of 177 00:19:22.200 --> 00:19:30.380 entry into a labor market must always reduce the total supply of labor in that industry, 178 00:19:30.380 --> 00:19:37.440 and therefore confer a restrictionist price. Of course, a direct restriction on production, 179 00:19:37.440 --> 00:19:44.700 such as conservation laws, always reduces supply and thereby confers a restrictionist 180 00:19:44.700 --> 00:19:51.700 price. Unfortunately, we have not the space here to investigate these and other instructive 181 00:19:51.700 --> 00:19:52.460 of Cases.