6. Triangular Intervention. Product Control. Triangular interference with an exchange can alter the terms of the exchange, or else in some way alter the nature of the product or the persons making the exchange.
The latter intervention, product control, may regulate the product itself, 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.
Product control clearly and evidently injures all parties concerned in the exchange,
the consumers who lose utility because they cannot purchase the product and satisfy their most urgent wants,
and the producers who are prevented from earning a remuneration in this field,
and must therefore settle for lower earnings elsewhere.
Losses by producers are particularly borne by laborers and landowners, specific to the industry, who must accept permanently lower income.
Entrepreneurial profit is ephemeral anyway, and capitalists tend to earn a uniform interest rate throughout the economy.
Whereas with price control, one could make out a prima facie case that at least one set of exchangers gains from the control.
The consumers whose buying price is pushed below the free market price, and the producers when the price is pushed above.
In product control, both parties to the exchange invariably lose.
The direct beneficiaries of product control, then, are the government bureaucrats who administer the regulations,
partly from the tax-created jobs that the regulations create,
and partly, perhaps, from satisfactions gained from wielding coercive power over others.
In many cases of product prohibition, of course, inevitable pressure develops,
as in price control for the re-establishment of the market illegally, that is, a black market.
A black market is always in difficulties because of its illegality.
The product will be scarce and costly to cover the risks to producers involved in violating
the law, and the costs of bribing government officials, and the more strict the prohibition
and Penalties, the scarcer the product will be and the higher the price. Furthermore,
the illegality greatly hinders the process of distributing information about the existence
of the market to consumers, for example by way of advertising. As a result, the organization
of the market will be far less efficient, the service to the consumer of poorer quality,
and prices for this reason alone will be higher than under a legal market.
The premium on secrecy in the black market also militates against large-scale business,
which is likely to be more visible and therefore more vulnerable to law enforcement.
Paradoxically, product or price control is apt to serve as a monopolistic grant of privilege
to the black marketeers, for they are likely to be very different entrepreneurs from those who would
have succeeded in this industry in a legal market, for here the premium is on skill in bypassing the
law, bribing government officials, etc. It was notorious, for example, that the bootleggers,
a caste created by prohibition, were one of the main groups opposing repeal of prohibition in
in America Product Prohibition may either be absolute,
as in American Liquor Prohibition during the 1920s, or partial.
An example of partial prohibition is compulsory rationing, which prohibits consumption beyond
a certain amount.
The clear effect of rationing is to injure consumers and lower the standard of living
of everyone.
Since rationing places legal maxima on specific items of consumption, it also distorts the
pattern of consumer spending.
Consumer spending is coercively shifted from the goods more heavily to those less heavily
rationed.
Furthermore, since ration tickets are usually not transferable, the pattern of consumer
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.
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.
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.
A form of partial product prohibition is to forbid all but certain selected firms from
selling a particular product.
Such partial exclusion means that these firms are granted a special privilege by the government.
If such a grant is given to one person or firm, we may call it a monopoly grant.
If to several persons or firms, it is a quasi-monopoly grant.
We might well call the latter an oligopoly grant, but this would engender hopeless confusion
with existing oligopoly theory.
Both types of grant may be called monopolistic.
An example of this type of grant is licensing, where all those to whom the government refuses
to give or sell a license are prevented from pursuing the trade or business.
Another example is a protective tariff or import quota, which prevents competition from
beyond a country's geographical limits.
Of course, outright monopoly grants to a firm or compulsory cartelization of an industry
are clear-cut grants of monopolistic privilege.
It is obvious that a monopolistic grant directly and immediately benefits the monopolist or
Quasi-Monopolist, whose competitors are debarred by violence from entering the field.
It is also evident that would-be competitors are injured and are forced to accept lower
remuneration in less efficient and value-productive fields.
It is also patently clear that the consumers are injured, for they are prevented from purchasing
products from competitors whom they would freely prefer.
And this injury takes place, it should be noted, apart from any effect of the grant
on prices.
In Chapter 10 we buried the theory of monopoly price.
We must now resurrect it.
The theory of monopoly price as developed there is illusory when applied to the free
market, but it applies fully in the case of monopoly and quasi-monopoly grants.
For here we have an identifiable distinction, not the spurious distinction between competitive
and monopoly or monopolistic price, but one between the free market price and the monopoly
price.
The free market price is conceptually identifiable and definable, whereas the competitive price
is not.
The theory of monopoly price, therefore, properly contrasts it to the free market price, and
the reader is referred back to chapter 10 for a description of the theory which can
now be applied here.
The monopolist will be able to achieve a monopoly price for the product if his demand is inelastic
above the free market price.
We have seen that on the free market, every demand presented 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 less elastic, for the
consumer is deprived of substitute products from other potential competitors.
Whether this lowering of elasticity will be sufficient to make the demand presented to
the firm inelastic, so that gross revenue will be greater at a price higher than the
free market price depends on the concrete historical data of the case and is not for
economic analysis to determine.
When the demand presented to the firm remains elastic, so that gross revenue will be lower
The Monopolist will not reap any monopoly gain from his grant, consumers and competitors will still be injured because their trade is prevented, but the monopolist will not gain because his price and income will be no higher than before.
On the other hand, if his demand is inelastic, then he institutes a monopoly price so as to maximize his revenue.
His production has to be restricted in order to command the higher price.
The restriction of production and higher price for the product both injure the consumers.
Here the argument of Chapter 10 must be reversed.
We may no longer say that a restriction of production, such as in a voluntary cartel,
benefits the consumers by arriving at the most value-productive point.
On the contrary, the consumers are now injured,
because their free choice would have resulted in the free market price.
Because of coercive force applied by the state,
They may not purchase goods freely from all those willing to sell.
In other words, any approach toward the free market equilibrium price and output point for any product benefits the consumers and thereby benefits the producers as well.
Any departure away from the free market price and output injures the consumers.
The monopoly price resulting from a grant of monopoly privilege leads away from the free market price.
It lowers output and raises prices beyond what would be established if consumers and producers could trade freely.
And we cannot here use the argument that the restriction is voluntary because the consumers make their own demand inelastic.
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.
Once the government steps in to prohibit trade and grant privileges, there is no longer wholly voluntary action.
Consumers are forced, willy-nilly, to deal with the monopolist for a certain range of purchases.
All the effects which monopoly price theorists have mistakenly attributed to voluntary cartels therefore do apply to governmental monopoly grants.
Production is restricted and factors are released for production elsewhere.
But now we can say that this production will satisfy the consumers less than under free market conditions.
Furthermore, the factors will earn less in the other occupations.
As we saw in Chapter 10, there can never be lasting monopoly profits, since profits are
ephemeral, and all eventually reduce to a uniform interest return.
In the long run, monopoly returns are imputed to some factor.
What is the factor being monopolized in this case?
It is obvious that this factor is the right to enter the industry.
In the free market, this right is unlimited to all, and therefore unowned by anyone.
The right commands no price on the market, because everyone already has it.
But here, the government has conferred special privileges of entry and sale, and it is these
Special Privileges or Rights that are responsible for the extra monopoly gain from a monopoly
price and to which we may impute the gain.
The monopolist earns a monopoly gain, therefore, not for owning any truly productive factor,
but from owning a special privilege granted by the government.
And this gain does not disappear in the long run ERE, as do profits.
It is permanent, so long as the privilege remains and consumer valuations continue as
they are.
Of course, the monopoly gain may well be capitalized into the asset value of the firm, so that
subsequent owners who invest in the firm after the capitalization took place will be earning
Only the Equal Interest Return
A notable example of the capitalization of monopoly, or rather quasi-monopoly, rights
is the New York City taxi cab industry.
Every taxi cab must be licensed, but the city decided years ago not to issue any further
licenses or medallions, so that any new cab owner must purchase his medallion from some
previous owner.
The high price of medallions on the market is then the capitalized value of the monopoly
privilege.
As we have seen, all this applies to a quasi-monopolist as well as to a monopolist, since the number
of the former's competitors is also restricted by the grant of privilege, which makes his
demand less elastic.
Of course, Ceteris Paribus, a monopolist, is in a better position than a quasi-monopolist,
but how much each benefits depends purely on the data of the particular case.
In some cases, such as the protective tariff, the quasi-monopolist will end in the long
run by not gaining anything, for since freedom of entry is restricted only to foreign firms,
The higher returns accruing to firms newly protected by a tariff will attract more domestic
capital to that industry.
Eventually, therefore, the new capital will drive the rate of earnings down to the interest
rate usual in all of industry, and the monopolistic gain will have been competed away.
Monopoly privilege is granted by a government, which has power only over its own geographic
area.
Therefore, monopoly prices achieved within an area are always, on the market, subject
to devastating competition from other countries.
This is increasingly true as civilization advances and transportation costs decline,
Thus subjecting local monopolies to ever greater threats of competition from other areas.
Hence any domestic monopoly will tend to reach out to restrict foreign competition and block
efficient interregional trade.
It is no wonder that the tariff used to be called the Mother of Trusts.
We might note here that on a truly free market, there would be no need for any separate theory
Monopolistic grants can be either direct and evident, such as compulsory cartels or licenses,
less direct, such as tariffs, or highly indirect, but nevertheless powerful, ordinances closing
Outlawing businesses at specific hours, for example, or outlawing pushcart peddlers or
door-to-door salesmen are illustrations of laws that forcibly exclude competition and
thereby grant monopolistic privileges.
Similarly, antitrust laws and prosecutions, while seemingly designed to combat monopoly
and promote competition actually do the reverse, for they coercively penalize and repress efficient
forms of market structure and activity. Even such a seemingly remote action as conscription
has the effect of forcibly withdrawing young men from the labor market and thereby giving
their competitors a monopolistic or rather a restrictionist wage. Monopolistic privileges
Privileges to business may confer a monopoly price, depending on the elasticity of the firm's demand.
Privileges to workers, on the other hand, always confer a higher restrictionist price at lower than free market output.
The reason is that a business can expand or contract its production at will.
If, then, a few firms are granted the privilege of producing in a certain field, they may
expand production if conditions are ripe, and not reduce total supply.
On the other hand, aside from hours worked, which is not very flexible, restriction of
entry into a labor market must always reduce the total supply of labor in that industry,
and therefore confer a restrictionist price. Of course, a direct restriction on production,
such as conservation laws, always reduces supply and thereby confers a restrictionist
price. Unfortunately, we have not the space here to investigate these and other instructive
of Cases.