Chapter 3, 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.
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
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
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.
Let us assume that the intervener imposes a maximum control price, above which any sale
becomes illegal.
At the control price, the market is no longer cleared, and the quantity demanded exceeds
the quantity supplied.
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
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.
The more resources will shift out of production, the more aggravated, ceteris paribus, the shortage will be.
If the price control is selective, that is, 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, that is, the imposition of a price above the free market price.
Under such circumstances, the quantity demanded is less than the quantity supplied.
Thus, while the effect of a maximum price is to create an artificial shortage, a minimum
price creates an artificial unsold surplus.
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.
Resources 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.
All price maxima are equivalent to imposing a minimum on the purchasing power of the money
unit, the PPM.
An imposed minimum PPM above the market impairs the clearing mechanism of the market.
The money stock exceeds the money demanded.
As a result, the people possess a quantity of money 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.
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.
One, it takes resources away from the public by inflating the currency, and two, after
After the money has percolated down to the public, it destroys part of the money's
usefulness.
Favoritism, lining up, bribes, etc., inevitably abound, as well as great pressure for the
black market, that is, 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
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, that is, 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
and the price control on the other, the prices being in terms of each other.
This, for example, was the essence of bimetalism.
Under bimetalism, a nation recognized gold and silver as monies,
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,
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
The ratio between them at 16 ounces of silver to 1 ounce of gold.
The market price, perhaps 16 to 1 at the time of the price control, then changes to 15 to
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 bi-metallic 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
The Theory of Money and Credit
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 and
specie in terms of some unit of weight.
Eventually, to simplify matters, governments began to decree worn coins to be equal in
and value to newly minted coins of the same denomination.
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.
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
undercover 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.
A modern example of the impossibility of keeping undervalued coins in circulation is the disappearance
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 earlier.
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 to 1.
One.
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.
Your 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 dis-save and consume their capital.
The extent to which this happens depends on how effective the usury laws are, that is,
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
The financial 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.
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.
Treasury 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
alone 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
are 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 ensuring 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 ensure 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 re-establishment of the market illegally, that is, 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,
For example, 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.
It is interesting to note that the bulk of organized crime occurs not as invasions of
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 consumer 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
and 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 stopped from using their money to the full, and blocked from
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
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.
Inefficient 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
as 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 later.
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
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 is inelastic or sufficiently less elastic above the free
market price.
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 would-be competitors.
Where the demand presented 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 is now inelastic, then he institutes a monopoly price so as
to maximize his revenue.
As 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
We cannot here use the argument that the restriction of output is voluntary because the consumers make their own demand inelastic.
For the consumers are fully responsible for their demand only on the free market, and only this demand 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 non-specific 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
monopoly reduced 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
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.
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
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 different demand for his product on the market, and
will be affected differently by the privilege.
Those quasi-monopolists for whom demand becomes inelastic will reap a monopoly gain.
Those for whom demand remains 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 before, 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
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 of production.
Subsidies, of course, penalize competitors not receiving the subsidy, and thus have a decided monopolistic impact.
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.
Inefficient 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
to 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 taxi cab 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 Fritz 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.
Requirements 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.
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 Transamerican had pioneered in rate reductions
for airline service.
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
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, whereas licenses to laborers always confer a higher restrictionist price
on the licensees.
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 ensuring that workers and businesses sell
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 10 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.
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.
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
The Theory of Money and Credit
He is selling him food while actually selling straw.
This is punishable in the courts under libertarian law, that is, 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 non-fraudulent 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
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.
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.
Say they restrict competition, but they cannot be said to raise the moral tone until morality
is successfully defined.
How can morality and 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?
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
The Building Industry is so constituted that many laborers are quasi-independent entrepreneurs.
Safety codes, therefore, compound the restrictionism of building unions.
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.
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.
Money 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, that is, 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
and Restrict Output and Absolute Embargos 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 inter-regional 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
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
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 pro-tariff 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.
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.
Suppose that Jones has a farm, Jones Acres, and Smith works for him.
Having become steeped in pro-tariff 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 1000% tariff on the imports
of All Goods and Services from Abroad, that is, 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
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.
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.
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.
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
and 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.
and the 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
From a newly established industry to a helpless newborn baby who needs protection, the substance
of the argument has been stated by Frank 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 out-compete 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 outlook for a profitable investment opportunity, enter the new field.
Only because entrepreneurs realize that such investment would be uneconomic.
That is, 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 non-convertible and non-transferrable
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
is 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
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 a 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
An individual worker, that is, 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.
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 demands for different types of labor in different
industries.
A reduced total supply of labor in an area will thus tend to increase 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
The Theory of Money and Credit
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.
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.
The barriers 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 affected 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 underpopulation 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 overpopulated, the problem stems not from
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
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.
Parts of the free market who also advocate immigration barriers have rarely faced the
implications of their position.
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 Oscar W. Cooley and Paul 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
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
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
a certain service, schooling, when he or his parents would prefer otherwise, thus imposing
a further loss of utility upon these children.
An item from the New York Daily News illustrates the connection between child labor laws and
restrictionist wage rates for adults, particularly for unions.
Through the cooperation of some 26,000 grocers plus trade unions, thousands of teenage boys
will get a chance to earn summer spending money.
Deputy Police Commissioner James B. Nolan, President of the Police Athletic League,
PAL, PAL, 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.
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
is 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.
Indirectly, 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.
Impulsory 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 non-members 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
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.
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,
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.
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.
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
which are burdened more than proportionately by the overhead requirements of running their business.
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
are saying 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
The insurance companies have been able to charge and collect the absurdly high premiums required by such a policy, because state governments have outlawed their own policies.
It may seem strange to the reader that one of the most important
Governmental Checks on Efficient Competition, and therefore Grants of Quasi-Monopolies, are the
Anti-Trust Laws. Very few, whether economists or others, have questioned the principle of the
anti-trust laws, particularly now that they have been on the statute books for some years.
As is true of many other measures, evaluation of the anti-trust laws has not proceeded from
from an analysis of their nature or of their necessary consequences, but from an impressionistic
reaction to their announced aims.
The chief criticism of these laws is that they haven't gone far enough.
Some of those most ardent in the proclamation of their belief in the free market have been
most clamorous in calling for stringent antitrust laws and the breakup of monopolies.
Even the most right-wing economists have only gingerly criticized certain antitrust procedures
without daring to attack the principle of the laws per se.
The only viable definition of monopoly is a grant of privilege from the government.
It therefore becomes quite clear that it is impossible for the government to decrease
Decrease Monopoly by Passing Punitive Laws The only way for the government to decrease
monopoly, if that is the desideratum, is to remove its own monopoly grants.
The antitrust laws, therefore, do not in the least diminish monopoly.
What they do accomplish is to impose a continual capricious harassment of efficient business
enterprise.
The law in the United States is couched in vague, indefinable terms, permitting the administration
and the courts to omit defining in advance what is a monopolistic crime and what is not.
Whereas Anglo-Saxon law has rested on a structure of clear definitions of crime, known in advance
and discoverable by a jury after due legal process, the antitrust laws thrive on deliberate
vagueness and ex post facto rulings.
No businessman knows when he has committed a crime and when he has not, and he will never
know until the government, perhaps after another shift in its own criteria of crime, swoops
down upon him and prosecutes.
The effects of these arbitrary rules and ex post facto findings of crime are manifold.
Business initiative is hampered.
Businessmen are fearful and subservient to the arbitrary rulings of government officials,
and business is not permitted to be efficient in serving the consumer.
Since business always tends to adopt those practices and that scale of activity which
which maximize profits and income and serve the consumers best, any harassment of business
practice by government can only hamper business efficiency and reward inefficiency.
It is vain, however, to call simply for clearer statutory definitions of monopolistic practice.
For the vagueness of the law results from the impossibility of laying down a cogent
definition of monopoly on the market, hence the chaotic shift of the government from one
unjustifiable criterion of monopoly to another, size of firm, closeness of substitutes, charging
Merging a price too high or too low or the same as a competitor.
Merging that substantially lessens competition, etc.
All these criteria are meaningless.
An example is the criterion of substantially lessening competition.
This implicitly assumes that competition is some sort of quantity, but it is not.
It is a process whereby individuals and firms supply goods on the market without using
force.
To preserve competition does not mean to dictate arbitrarily that a certain number of firms
of a certain size have to exist in an industry or area.
It means to see to it that men are free to compete or not, unrestrained by the use of
of Force.
The original Sherman Act stressed collusion in restraint of trade.
Here again, there is nothing anti-competitive, per se, about a cartel, for there is, conceptually,
no difference between a cartel, a merger, and the formation of a corporation.
All consist of the voluntary pooling of assets in one firm to serve the consumers efficiently.
If collusion must be stopped, and cartels must be broken up by the government, that
is, if to maintain competition it is necessary that cooperation be destroyed, then the anti-monopolists
This must advocate the complete prohibition of all corporations and partnerships.
Only individually owned firms would then be tolerated.
Aside from the fact that this compulsory competition and outlawed cooperation is hardly compatible
with the free market that many antitrustors profess to advocate, the inefficiency and
and lower productivity stemming from the outlawing of pooled capital would send the economy a
good part of the way from civilization to barbarism.
An individual becoming idle instead of working may be said to restrain trade, although he
is simply not engaging in it rather than restraining it.
If anti-trusters wish to prevent idleness, which is the logical extension of the W.H.
Hutt concept of consumer sovereignty, then they would have to pass a law compelling labor
and outlawing leisure, a condition certainly close to slavery.
Municipal ordinances against vagrancy or loitering are certainly a beginning in this direction,
and are used to impose forced labor upon the poorest sectors of the population.
But if we confine the definition of restraint to restraining the trade of others, then clearly
there can be no restraint of trade at all on the free market, and only the government
or some other institution using violence can restrain trade.
and one conspicuous form of such restraint is antitrust legislation itself.
One of the few cogent discussions of the antitrust principle in recent years has been that of
Isabel Patterson.
As Mrs. Patterson states, standard oil did not restrain trade.
It went out to the ends of the earth to make a market.
Can the corporations be said to have restrained trade when the trade they cater to had no
existence until they produced and sold the goods?
Were the motor car manufacturers restraining trade during the period in which they made
and sold 50 million cars, where there had been no cars before?
Nothing more preposterous could have been imagined than to fix upon the American corporations
which have created and carried on in ever-increasing magnitude a volume and variety of trade so
vast that it makes all previous production and exchange look like a rural roadside stand
and call this performance restraint of trade, further stigmatizing it as a crime.
And Mrs. Patterson concludes, government cannot restore competition or insure it.
Government is monopoly, and all it can do is to impose restrictions which may issue
in monopoly.
When they go so far as to require permission for the individual to engage in production.
This is the essence of the society of status.
The reversion to status law in the antitrust legislation went unnoticed.
The politicians had secured a law under which it was impossible for the citizen to know
know beforehand what constituted a crime, and which therefore made all productive effort
liable to prosecution, if not to certain conviction.
In the earlier days of the trust problem, Paul de Roussier commented,
Directly the formation of trusts is not induced by the natural action of economic forces.
As soon as they depend on artificial protection such as tariffs, the most effective method
of attack is to simply reduce the number and force of these protective accidents to the
greatest possible extent.
We can attack artificial conditions, but are impotent when opposing natural conditions.
America has hitherto pursued the exactly reverse methods, blaming economic forces tending to
concentrate industry and joining issue by means of antitrust legislation, a series of
entirely artificial measures.
Thus there is to be no understanding between competing companies, etc.
The results have been pitiful, a violent restriction of fruitful initiative.
The legislation does not touch the rest of the evil, enlarges in place of restraining
artificial conditions, and finally regulates and complicates matters whose supreme needs
are simplification and removal of restrictions.
L. Outlawing Basing Point Pricing An important example of the monopolizing effects
Parts of a program supposedly designed to combat monopoly is the court decision outlawing
basing point pricing.
On the free market, price uniformity means uniformity at each consuming center and not
uniformity at each mill.
In commodities where freight costs are a large proportion of final price, this distinction
is important, and many firms adopt such price uniformity, enabling firms further away from
a consuming center to absorb some freight charges in order to compete with local firms.
One of the forms of freight absorption is called basing point pricing, ruling this practice
This monopolistic, and virtually decreeing that every firm must charge uniform prices
at the mill, not only prevents interlocational competition in such industries, but confers
an artificial monopolistic privilege on local firms.
Each local firm is granted the area of its own location, with a haven set by the freight
Freight costs of out-of-town rivals, within which it can charge its customers a monopoly
price.
Firms better able to absorb freight costs and prosper in a wider market are penalized
and prevented from doing so.
Furthermore, the decreasing cost advantages of a large-scale market and large-scale production
are eliminated, as each firm is confined to a small compass.
The firm's locations are altered and they are forced to cluster near large consuming areas, despite the greater advantages that other locations had offered to these companies.
Furthermore, such a ruling penalizes small businesses, since only large firms can afford to build many branches to compete in each local area.
M. Conservation Laws.
Conservation laws restrict the use of depleting resources
and force owners to invest in the maintenance
of replaceable natural resources.
The effect of both cases is similar.
The restriction of present production
for the supposed benefit of future production.
This is obvious in the case of depleting resources.
Factors are also compelled to maintain replaceable resources, such as trees, when they could
have more profitably engaged in other forms of production.
In the latter case, there is a double distortion.
Factors are forcibly shifted to future production, and they are also forced into a certain type
of future production, the replacement of these particular resources.
Clearly, one aim of conservation laws is to force the ratio of consumption to saving,
investment, lower than the market would prefer.
People's voluntary allocations made according to their time preferences are forcibly altered,
and relatively more investment is forced into production for future consumption.
In short, the state decides that the present generation must be made to allocate its resources
more to the future than it wishes to do.
For this service, the state is held up as being far-seeing, compared to short-sighted
free individuals.
But presumably, depleting resources must be used at some time, and some balance must always
be struck between present and future production. Why does the claim of the present generation
weigh so lightly in the scales? Why is the future generation so much more worthy that
it can compel the present to carry a greater load? What did the future ever do to deserve
privileged treatment? Anthony Scott points out that this attitude rests on the contemptuous
and Unsupported View that future generations will not be as competent to take care of themselves
as is the present generation. Indeed, since the future is likely to be wealthier than the present,
the reverse might well apply. The same reasoning applies to all attempts to change the market's
time preference ratio. Why should the future be able to enforce greater sacrifices on the present
then the present is willing to undergo. Furthermore, after a span of years, the future will become
the present. Must the future generations then also be restricted in their production and consumption
because of another wraith-like future? It must not be forgotten that the aim of all productive
of Activity is goods and services that will and can be consumed only in some present.
There is no rational basis for penalizing consumption in one present and privileging
one future present, and there is still less reason for restricting all presents in favor
of some will-of-the-wisp future that can never appear and lies always beyond the horizon.
Yet this is the goal of conservation laws. Conservation laws are truly pie-in-the-sky
legislation. As Scott aptly asks, why agree to preserve resources as they would be in the
absence of their human users? And further, most of our progress has taken the form of converting
Natural Resources into more desirable forms of wealth.
If man had prized natural resources above his own product, he would doubtless have remained
savage, practicing conservatism.
If the logic of tariffs is to destroy the market, then the logic of conservation laws
is to destroy all human production and consumption.
Rentals in the market decide on the time structure in their allocation of factors in accordance
with the estimated revenue that their resources will bring in present as against future use.
In other words, they will tend to maximize the present value at any time of their land
and capital assets.
The time structure of rental income from assets is determined by the interest rate, which
in turn is determined by the time preference schedules of all individuals on the market.
Time preference, in addition to the specific estimated demands for each good, will determine
the allocations of factors to each use.
Since a lower time preference will connote more investment in future consumers' goods,
it will also mean more conservation of natural resources.
A high time preference will lead to less investment and more consumption in the present, and consequently
to less conservation.
In some cases, however, lower time preferences and greater investment activity will deplete
natural resources at a more rapid rate if there is a particularly great demand for their
use in the new activity.
This is likely to be true of such resources as coal and oil.
Most conservationist arguments evince almost no familiarity with economics.
Many assume that entrepreneurs have no foresight and would blithely use natural resources only
to find themselves someday suddenly without any property.
Only the wise providential state can foresee depletion.
The absurdity of this argument is evident when we realize that the present value of
the entrepreneur's land is dependent on the expected future rents from his resources.
Even if the entrepreneur himself should be unaccountably ignorant, the market will not
be, and its valuation, that is, the valuation of interested experts with money at stake,
will tend to reflect its value accurately.
In fact, it is the entrepreneur's business to forecast, and he is rewarded for correct
forecasting by profits.
Will entrepreneurs on the market have less foresight than bureaucrats comfortably ensconced
in their seizure of the taxpayers' money?
Entrepreneurs with poor foresight are quickly expelled from their positions through losses.
It is ironic that the plight of the Okies in the 1930s, widely publicized as a plea
for conservation laws and the result of cruel capitalism, actually resulted from the fact
that bad entrepreneurs, the Okies, farmed land that was valueless and sub-marginal.
Forced conservation investment on this sub-marginal land or government subsidization of the Okies
would have aggravated a dislocation that the market quickly eliminated.
Much American soil erosion, furthermore, has stemmed from failure to preserve full private
Property Rights in Land. Tenant farmers, moving every few years, often milked the capital of the
landlord's property, wasting the resource, in default of proper enforcement of the contractual
necessity to return the land to its owner intact. Another error made by the conservationists is to
To assume a technology fixed for all time, human beings use what resources they have,
and as technological knowledge grows, the types of usable resources multiply.
If we have less timber to use than past generations, we need less, too, for we have found other
materials that can be used for construction or fuel.
These generations possessed an abundance of oil in the ground, but for them, oil was valueless,
and hence, not a resource.
Our modern advances have taught us how to use oil, and have enabled us to produce the
equipment for this purpose.
Our oil resources, therefore, are not fixed.
They are infinitely greater than those of past generations.
Capital conservation will wastefully prolong resources beyond the time when they have become
obsolete.
How many writers have wept over capitalism's brutal ravaging of the American forests?
Yet it is clear that American land has had more value-productive uses than timber production,
and hence the land was diverted to those ends that better satisfied consumer wants.
A typical conservationist complainer was J.D. Brown, who in 1832 worried over the consumption
of timber.
Whence shall we procure supplies of timber 50 years hence for the continuance of our
Navy?
Scott notes that the critics never seem to realize that a nation's timber can be purchased
from abroad.
What standards can the critics set up instead?
If they think too much forest has been cut down, how can they arrive at a quantitative
standard to determine how much is too much?
In fact, it is impossible to arrive at any such standard, just as it is impossible to
arrive at any quantitative standards for market action outside the market.
Any attempt to do so must be arbitrary and unsupported by any rational principle.
America has been the prime home of conservation laws, particularly on behalf of its public
domain.
Under a purely free enterprise system, there would be no such thing as a governmentally
owned public domain.
and would simply remain unowned until it first came into use, after which it would be owned
by the first user and his heirs or assigns.
This system was dimly adumbrated by the Homestead Law of 1862.
However, this law imposed an arbitrary and pointless maximum on the size of farm that
could be staked out by the first user.
This limitation had the result of nullifying the law further west where the minimum acreage
needed for cattle or sheep grazing was far larger than the antiquated legal maximum would
allow.
Furthermore, the maximum limitation and the requirement that the land be used for farming
led to the very ravaging of the forests that conservationists now deplore, for it hobbled
Private Ownership of Large Forest Tracts
The consequences of government ownership of the public domain will be further explored later.
Here we may state a few of them.
When the government owns the land and permits private individuals to use it freely,
the result is indeed a wasteful over-exploitation of the resource.
More factors are employed to use up the resource than on a free market, since the only gains
to the users are immediate, and if they wait, other users will deplete the limited resource.
Free use of a governmentally owned resource truly inaugurates a war of all against all,
as more and more users, eager for the free bargain, attempt to exploit the scarce resource.
To have a scarce resource and to make everyone believe because of the free gift of use that
its supply is unlimited causes overuse of the resource, favoritism, figurative queuing
up, etc.
A striking example was the Western grazing lands in the latter half of the 19th century.
The government prevented cattlemen from owning the land and fencing it in, and insisted it
be kept as open range owned by the government.
The result was excessive use of the range and its untimely depletion.
The government's failure to extend the homestead principle to the larger areas had another
important social effect.
It led to constant squabbles between the users, the cattlemen and the other homesteaders who
who came later and demanded their just share of the free land.
Another example is the rapid depletion of the fisheries.
Since no one is permitted to own any segment of the sea,
no one sees any sense in preserving the value
of the resource as each is benefited only by rapid use
in advance of his competitors.
Leasing is hardly a superior form of land use. If the government owns the land and leases it to grazers or timber users, once again, there is no incentive for the laissee to preserve the value of the resource since he does not own it.
It is to his best interest as a laissez to use the resource as intensively as possible in the present.
Hence, leasing also depletes natural resources excessively.
In contrast, if private individuals were to own all the lands and resources,
then it would be to the owner's interest to maximize the present value of each resource.
Excessive depletion of the resource would lower its capital value on the market.
Against the preservation of the capital value of the resource as a whole,
the resource owner balances the income to be presently obtained from its use.
The balance is decided, Ceteris Paribus, by the time preference and the other preferences of the market.
of the Market.
High demand for the product increases the value
of the resource and thereby stimulates its preservation,
investment in it and exploration for it.
High cost sources of supply will now be tapped,
thus further increasing the effective supply
of the product on the market.
If private individuals can only use but not own the land,
and the balance is destroyed and the government has provided an impetus to excessive present use.
Not only is the announced aim of conservation laws to aid the future at the expense of the present illegitimate
and the arguments in favor of it invalid, but compulsory conservation would not achieve even this goal,
for the Future is already provided for through present saving and investment.
Conservation laws will indeed coerce greater investment in natural resources, using other
resources to maintain renewable resources and forcing a greater inventory of stock in
depletable resources.
But total investment is determined by the time preferences of individuals, and these
These will not have changed.
Conservation laws, then, do not really increase total provisions for the future.
They merely shift investment from capital goods, buildings, etc., to natural resources.
They thereby impose an inefficient and distorted investment pattern on the economy.
Given the nature and consequences of conservation laws, why should anyone advocate this legislation?
Conservation laws, we must note, have a very practical aspect.
They restrict production, that is, the use of a resource by force, and thereby create
a monopolistic privilege, which leads to a restrictionist price to owners of this resource
or of substitutes for it.
Conservation laws can be more effective monopolizers than tariffs because, as we have seen, tariffs
permit new entry and unlimited production by domestic competitors.
There is another similarity between tariffs and conservation laws.
Both aim at national self-sufficiency and both try to foster national or local industries
by Coercive Intervention in the Free Market.
Conservation laws, on the other hand, serve to cartelize a land factor and absolutely
restrict production, thereby helping to ensure permanent and continuing monopoly gains for
the owners.
These monopoly gains, of course, will tend to be capitalized into an increase in the
capital value of the land.
The person who later buys the monopolized factor, then, will simply earn the going rate
of interest on his investment, even though the monopoly gain will be included in his
earnings.
Conservation laws, therefore, must also be looked upon as grants of monopolistic privilege.
One outstanding example is the American government's policy, since the end of the 19th century,
of Reserving Vast Tracts of the Public Domain, that is, the government's land holdings.
Reserving means that the government keeps land under its ownership and abandons its
earlier policy of keeping the domain open for homesteading by private owners.
Forests, in particular, have been reserved, ostensibly for the purpose of conservation.
What is the effect of withholding huge tracts of timber land from production?
It is to confer a monopolistic privilege and therefore a restrictionist price on competing
private lands and on competing timber.
We have seen that limiting the labor supply confers a restrictionist wage on the privileged
Workers, while the workers pushed out by union wage rates or by licenses or immigration laws
must find lower-paying and less-value productive jobs elsewhere.
A monopoly or quasi-monopoly privilege for the production of capital or consumer goods,
on the other hand, may or may not confer a monopoly price, depending on the configuration
of the demand for the individual firms as well as their costs. Since a firm can contract or expand
its supply at will, it sets its supply with the knowledge that lowering output to achieve a
monopoly price must also lower the total amount of goods sold. On the free market, the demand for
Each firm in equilibrium must be elastic above the equilibrium price, otherwise the firm would
reduce output. This does not, of course, mean that the demand for the entire industry must be
elastic. When we refer to a possible monopoly price, the demand consulted by each monopolistic
The firm is its own. The laborer need bother with no such consideration, aside from a negligible
variation in demands for each laborer's total hours of service. What about the privileged landowner?
Will he achieve a definite restrictionist or a possible monopoly price? A prime characteristic
of a piece of land is that it cannot be increased by labor. If it is augmentable, then it is
a capital good, not land. The same, in fact, applies to labor, which in all but long periods
of time can be regarded as fixed in its total supply, since labor in its totality cannot
be increased, except, as we have noted in regard to hours of work per day, government
restriction on the labor supply, child labor laws, immigration barriers, etc., therefore
confers a restrictionist wage increase on the workers remaining.
Capital or consumer goods can be increased or decreased so that privileged firms must
Another example of government creation of a monopoly gain in land has been cited by the
The Georgist economist Mason Gaffney City governments all over the country deliberately
keep dead lands off the market with the avowed purpose of protecting other land prices.
Gaffney cites the head of the American Society of Planning officials as advising that a vacant
one-third of urban land be more or less permanently removed from private ownership in order to
Keep Up Land Values for the Owners of the Remaining Two-Thirds.
Gaffney concludes, following this advice, many state and local governments avoid returning
tax-reverted lands to use.
The same is true for depleting natural resources, which cannot have their supply increased and
are therefore considered part of land.
If the government forces land or natural resources out of the market, therefore, it inevitably
lowers the supply available on the market, and just as inevitably confers a monopoly
gain and a restrictionist price on the remaining landowners or resource owners.
In addition to all of their other effects, conservation laws force labor to abandon good
Let us return to the government's policy of reserving timber lands.
This confers a restrictionist price and a monopoly gain on the lands remaining in use.
Markets are specific and do not have the same general connexity as labor markets.
Therefore, the restrictionist price rise is confined far more to lands that directly competed,
or would compete, with the withdrawn or reserved lands.
In the case of American conservation policy, the particular beneficiaries were, a, the
Land Grant Western Railroads, and b. the existing timber owners.
The Land Grant railroads had received vast subsidies of land from the government, not
only rights of way for their roads, but 15-mile tracts on either side of the line.
Government reservation of public lands greatly raised the price received by the railroads
when they later sold this land to new inhabitants of the area.
The railroads thus received another gift from the government, this time in the form of a
monopoly gain at the expense of the consumers.
The railroads were not ignorant of the monopolistic advantages that would be conferred upon them
by conservation laws.
In fact, the railroads were the financial angel of the entire conservation movement.
Thus, Louise Peffer writes,
Administration was financed in part by the Transcontinental Railroads and by the Burlington
and the Rock Island Railroads to the amount of $39,000 a year out of a total budget of
around $50,000.
The program of this association and the railroads, as announced by James J. Hill, a preeminent
and Railroad Magnet was almost more advanced than that of the leading conservationists.
Senator H.C. Hensbrough also pointed out that the railroads paid $45,000 annually to a leading
conservationist magazine, The Talisman, and financed the Washington Conservation Lobby.
The timber owners also understood the gains they would acquire from forest conservation.
Theodore Roosevelt himself announced that the great users of timber are themselves forwarding
the movement for forest preservation.
As one student of the problem declared, the lumber manufacturers and timber owners had
arrived at a harmonious understanding with Gifford Pinchot, the leader in forest conservation
as early as 1903.
In other words, the government, by withdrawing timber lands from entry and keeping them off
the market, would aid in appreciating the value of privately owned timber.
N. Patents A patent is a grant of monopoly privilege by
the government to first discoverers of certain types of inventions.
The patent was instituted in England by King Charles I as a transparent means of evading
the parliamentary prohibition of grants of monopoly in 1624.
Some defenders of patents assert that they are not monopoly privileges, but simply property
rights and inventions, or even in ideas.
And in free market or libertarian law, everyone's right to property is defended without a patent.
If someone has an idea or plan and produces an invention, which is then stolen from his
house, the stealing is an act of theft, illegal under general law.
On the other hand, patents actually invade the property rights of those independent discoverers
Inventors of an idea or an invention who happen to make the discovery after the patentee.
These later inventors and innovators are prevented by force from employing their own ideas and
their own property.
Furthermore, in a free society, the innovator could market his invention and stamp it copyright,
thereby preventing buyers from reselling the same or a duplicate product.
Patents, therefore, invade, rather than defend, property rights.
The speciousness of the argument that patents protect property rights in ideas is demonstrated by the fact that not all, but only certain types of original ideas, certain types of innovations, are considered legally patentable.
Numerous new ideas are never treated as subject to patent grants.
Another common argument for patents is that society simply makes a contract with the inventor to purchase his secret, so that society will have use of it.
But in the first place, society could then pay a straight subsidy or price to the inventor.
It does not have to prevent all later inventors from marketing their inventions in this field.
The Most Popular Argument for Patents Among Economists is the utilitarian one that a patent
for a certain number of years is necessary to encourage a sufficient amount of research
expenditure toward inventions and innovations in new processes and products.
This is a curious argument, because the question immediately arises, by what standard do you
judge that research expenditures are too much, too little, or just about enough?
Uses in society are limited, and they may be used for countless alternative ends.
By what standards does one determine that certain uses are excessive, that certain uses
are insufficient, etc.?
Someone observes that there is little investment in Arizona, but a great deal in Pennsylvania.
He indignantly asserts that Arizona deserves more investment.
But what standards can he use to justify such a statement?
The market does have a rational standard, the highest money incomes and highest profits,
for these may be achieved only through maximum service to the consumers.
This principle of maximum service to consumers and producers alike, that is, to everybody,
Learns the seemingly mysterious market allocation of resources, how much to devote to one firm
or another, to one area or another, to the present or the future, to one good or another,
to research rather than other forms of investment.
The observer who criticizes this allocation can have no rational standards for decision,
he has only his arbitrary whim.
This is particularly true of criticism of production relations in contrast to interference
with consumption.
Someone who chides consumers for buying too many cosmetics may have, rightly or wrongly,
some rational basis for his criticism.
But someone who thinks that more or less of a certain resource should be used in a certain
in Manor, or that business firms are too large or too small, or that too much or too little
is spent on research or is invested in a new machine, can have no rational basis for his
criticism.
Businesses, in short, are producing for a market guided by the valuations of consumers
on that market.
Observers may criticize the ultimate valuations of consumers if they choose, although if they
interfere with consumption based on these valuations they impose a loss of utility upon
the consumers, but they cannot legitimately criticize the means, the allocations of factors
by which these ends are served.
All funds are limited, as are all other resources, and they must be allocated to various uses,
one of which is research expenditures.
On the market, rational decisions are made with regard to setting research expenditures
in accordance with the best entrepreneurial expectations of future returns.
To subsidize research expenditures by coercion would restrict the satisfaction of consumers
and producers on the market.
Many advocates of patents believe that the ordinary competitive processes of the market
do not sufficiently encourage the adoption of new processes, and that therefore innovations
must be coercively promoted by the government.
But the market decides on the rate of introduction of new processes, just as it decides on the
rate of industrialization of a new geographic area.
In fact, this argument for patents is very similar to the infant industry argument for
tariffs, that market procedures are not sufficient to permit the introduction of worthy new processes.
And again, the answer is the same, that people must balance the superior productivity of the
new processes against the cost of installing them, that is, against the advantage possessed
by the old process in being already in existence.
Conferring special coercive privileges upon innovation would needlessly scrap valuable
Patents Distort the Allocation of Factors on the Type of Research Being Conducted.
For while it is true that the first discoverer benefits from the privilege, it is also true
that his competitors are excluded from production in the area of the patent for many years,
and since a later patent can build on an earlier related one in the same field, competitors
can often be discouraged indefinitely from further research expenditures in the general
area covered by the patent.
Moreover, the patentee himself is discouraged from engaging in further research in this
field for the privilege permits him to rest on his laurels for the entire period of the
patent with the assurance that no competitor can trespass on his domain.
The competitive spur to further research is eliminated.
Research expenditures, therefore, are overstimulated in the early stages before anyone has a patent,
and unduly restricted in the period after the patent is received.
In addition, some inventions are considered patentable, while others are not.
The patent system thus has the further effect of artificially stimulating research expenditures
in the patentable areas, while artificially restricting research in the non-patentable
areas.
As Arnold Plant summed up the problem of competitive research expenditures and innovations, neither
can it be assumed that inventors would cease to be employed if entrepreneurs lost the monopoly
over the use of their inventions.
Businesses employ them today for the production of non-patentable inventions, and they do
not do so merely for the profit which priority secures.
In active competition, no business can afford to lag behind its competitors.
The reputation of a firm depends upon its ability to keep ahead, to be first in the
with new improvements in its products and new reductions in their prices.
Finally, of course, the market itself provides an easy and effective course for those who feel that there are not enough expenditures being made in certain directions on the free market.
They are free to make these expenditures themselves.
Those who would like to see more inventions made and exploited are at liberty to join
together and subsidize such efforts in any way they think best.
In doing so, they would, as consumers, add resources to the research and invention business,
and they would not then be forcing other consumers to lose utility by conferring monopoly grants
and distorting the allocation of the market.
Their voluntary expenditures would become part of the market and help to express its
ultimate consumer valuations. Furthermore, later inventors would not be restricted. The
friends of invention could accomplish their aims without calling in the state and imposing
losses on the mass of consumers.
Patents like any monopoly grant confer a privilege on one and restrict the entry of others, thereby
distorting the freely competitive pattern of industry.
If the product is sufficiently demanded by the public, the patentee will be able to achieve
a monopoly price.
Patentees, instead of marketing their invention themselves, may elect either to, one, sell
sell their privilege to another, or, two, keep the patent privilege but sell licenses
to other firms, permitting them to market the invention.
The patent privilege thereby becomes a capitalized monopoly gain.
It will tend to sell at the price that capitalizes the expected future monopoly gain to be derived
from it.
General licensing is equivalent to renting capital, and a license will tend to sell at a price equal to the discounted sum of the rental income that the patent will earn for the period of the license.
A system of general licensing is equivalent to a tax on the use of the new process, except that the patentee receives the tax instead of the government.
Tax restricts production in comparison with the free market, thereby raising the price
of the product and reducing the consumer's standard of living.
It also distorts the allocation of resources, keeping factors out of these processes and
forcing them to enter less value-productive fields.
Most current critics of patents direct their fire not at the patents themselves, but at
Alledged Monopolistic Abuses in their use.
They fail to realize that the patent itself is the monopoly, and that, when someone is
granted a monopoly privilege, it should occasion neither surprise nor indignation when he makes
full use of it.
O.
Franchises and Public Utilities
Franchises are generally grants of permission by the government for the use of its streets.
Where the franchises are exclusive or restrictive, they are grants of monopoly or quasi-monopoly
privilege.
Where they are general and not exclusive, however, they cannot be called monopolistic.
For the franchise question is complicated by the fact that the government owns the streets
and therefore must give permission before anyone uses them.
In a truly free market, of course, streets would be privately, not governmentally owned,
and the problem of franchises would not arise.
The fact that the government must give permission for the use of its streets has been cited
to justify stringent government regulations of public utilities, many of which, like water
The regulations are then treated as a voluntary quid pro quo, but to do so overlooks the fact
that governmental ownership of the streets is itself a permanent act of intervention.
Regulation of public utilities or of any other industry discourages investment in these industries,
thereby depriving consumers of the best satisfaction of their wants, for it distorts the resource
allocations of the free market.
Prices set below the free market create an artificial shortage of the utility service.
Prices set above those determined by the free market impose restrictions and a monopoly
price on the consumers.
Good rates of return exempt the utility from the free play of market forces and impose
burdens on the consumers by distorting market allocations.
The very term, public utility, furthermore, is an absurd one.
Every good is useful to the public, and almost every good, if we take a large enough chunk
of supply as the unit, may be considered necessary.
Any designation of a few industries as public utilities is completely arbitrary and unjustified.
P. The Right of Eminent Domain
In contrast to the franchise, which may be made general and non-exclusive as long as
the central organization of force continues to own the streets, the right of eminent domain
could not easily be made general.
If it were, then chaos would truly ensue.
For when the government confers a privilege of eminent domain, as it has done on railroads
and many other businesses, it has virtually granted a license for theft.
If everyone had the right of eminent domain, every man would be legally empowered to compel
the sale of property that he wanted to buy.
If A were compelled to sell property to B at the latter's will and vice versa, then
neither could be called the owner of his own property.
The entire system of private property would then be scrapped in favor of a society of
mutual plunder.
Saving and accumulation of property for one's self and one's heirs would be severely discouraged,
and rampant plunder would cut ever more sharply into whatever property remained.
Civilization would soon revert to barbarism, and the standards of living of the barbarian
would prevail.
The government itself is the original holder of the right of eminent domain, and the fact
that the government can despoil any property holder at will is evidence that in current
Society, the right to private property is only flimsily established.
Certainly no one can say that the inviolability of private property is protected by the government,
and when the government confers this power on a particular business, it is conferring
upon it the special privilege of taking property by force.
Evidently, the use of this privilege greatly distorts the structure of production.
Instead of being determined by voluntary exchange, self-ownership and efficient satisfaction
of consumer wants, prices and the allocation of productive resources are now determined
by brute force and government favor.
The result is an overextension of resources, a malinvestment in the privileged firm or
industry and an underinvestment in other firms and industries.
At any given time, as we have stressed, there is a limited amount of capital, a limited
supply of all resources, that can be devoted to investment.
Compulsory increase in investment in one field can be achieved only by an arbitrary decline
in investment in other fields.
Inevitably someone will point to the plight of the railroad or highway company that must
pay extortionate rates to the man who merely owns the property along the way.
Yet these same people do not complain, and properly so, of the fact that property values
have enormously increased in downtown areas of cities, thus benefiting someone who merely
happens to own them.
The fact is that all property is available to everyone who finds or buys it.
If the property owner in these cases is penalized because of his speculation, then all entrepreneurs
must be penalized for their correct forecasting of future events.
Furthermore, economic progress imputes gains to original factors, land and labor.
To render land artificially cheap is to lead to its overuse, and the government is then
Many advocates of eminent domain contend that society, in the last analysis, has the right
to use any land for its purposes.
Without knowing it, they have thus conceded the validity of a major Henry Georgist plank,
that every person, by virtue of his birth, has a right to his aliquot share of God-given
land, except that the eminent domain thesis is on even shakier ground, since the Georgists
at least exempt, or try to exempt from the social claim, the improvements that the owner
has made.
Actually, however, since society does not exist as an entity, it is impossible for each
Each individual to translate his theoretical aliquot right into real ownership.
As Benjamin R. Tucker pointed out years ago, the Georgist equal rights thesis, or eminent
domain, leads logically not to a single tax, but to each individual's right to appropriate
his theoretical share of the value of everybody else's land.
The state's appropriation of this value then becomes sheer robbery of the other individual
claims, rather than of just the claim of the landowner.
Therefore, the ownership of the property devolves not on everybody, but on the government, or
on those individuals whom it specially privileges.
Q. Bribery of Government Officials
Because it is illegal, bribery of government officials receives practically no mention
in economic works.
Economic science, however, should analyze all aspects of mutual exchange, whether these
exchanges are legal or illegal.
We have seen that bribery of a private firm is not actually bribery at all, but simply
payment of the market price for the product.
The theory of government officials is also a price for the payment of a service.
What is this service?
It is the failure to enforce the government edict as it applies to the particular person
paying the bribe.
In short, the acceptance of a bribe is equivalent to the sale of permission to engage in a certain
line of business.
The purchase of a bribe is therefore praxeologically identical with the sale of a government license
to engage in a business or occupation, and the economic effects are similar to those
of a license.
There is no economic difference between the purchase of a government permission to operate
by buying a license or by paying government officials informally.
What the briber receives, therefore, is an informal, oral license to operate.
The fact that different government officials receive the money in the two cases is irrelevant
to our discussion.
The extent to which an informal license acts as a grant of monopolistic privilege depends
on the conditions under which it is granted.
In some instances, the official accepts a bribe by one person and, in effect, grants
him a monopoly in a particular area or occupation.
In other cases, the official may grant the informal license to anybody who is willing
to pay the necessary price.
The former is an example of a clear monopoly grant followed by a possible monopoly price.
In the latter case, the bribe acts as a lump sum tax, penalizing poorer competitors who
cannot pay.
They are forced out of business by the bribe system.
However, we must remember that bribery is a consequence of the outlawing of a certain
line of production, and therefore that it serves to mitigate some of the loss of utility
Imposed on Consumers and Producers by the Government Prohibition
Given the state of outlawry, bribery is the chief means for the market to reassert itself.
Bribery moves the economy closer to the free market situation.
The same is true of an official license. A firm's payment for a license is the only means for it to exist.
A licensed firm cannot be stamped as a willing party to the monopolistic privilege unless it had
helped to lobby for the licensing law's establishment or continuance, as very often happens.
In fact, we must distinguish between an invasive bribe and a defensive bribe.
The defensive bribe is what we have been discussing, that is, the purchase of a permission
Operation to operate after an activity is outlawed.
On the other hand, a bribe to attain an exclusive or quasi-exclusive permission, barring others
from the field, is an example of an invasive bribe, a payment for a grant of monopolistic
privilege.
The former is a significant movement toward the free market.
The latter is a movement away from it.
Are Policy Toward Monopoly
Economic historians often inquire about the extent and importance of monopoly in the economy.
Almost all of this inquiry has been misdirected because the concept of monopoly has never
been cogently defined.
In this chapter we have traced types of monopoly and quasi-monopoly and their economic effects.
It is clear that the term monopoly properly applies only to governmental grants of privilege,
direct and indirect.
Truly gauging the extent of monopoly in an economy means studying the degree and extent
of monopoly and quasi-monopoly privilege that the government has granted.
An opinion has been traditionally anti-monopoly. Yet it is clearly not only pointless but deeply
ironic to call upon the government to pursue a positive anti-monopoly policy. Evidently,
all that is necessary to abolish monopoly is that the government abolish its own creations.
It is certainly true that in many, if not all, cases, the privileged businesses or laborers
had themselves agitated for the monopolistic grant.
But it is still true that they could not become quasi-monopolists except through the intervention
of the state.
It is therefore the action of the state that must bear prime responsibility.
Historians, however, will go sadly astray if they ignore the monopolistic motivation for passage of such measures by the state.
Historians who are in favor of the free market often neglect this problem and thus leave themselves wide open to opposition charges that they are apologists for monopoly capital.
Actually, of course, advocates of the free market are pro-business, as they are pro any
voluntary relationship, only when it is carried on in the free market.
They oppose governmental grants of monopolistic privilege to businesses or others, for to
this extent, business is no longer free, but a partner of the coercive state.
Finally, the question may be raised, are corporations themselves mere grants of monopoly privilege?
Some advocates of the free market were persuaded to accept this view by Walter Lipman's The
Good Society.
It should be clear from previous discussion, however, that corporations are not at all
monopolistic privileges.
They are free associations of individuals pooling their capital.
On the purely free market such men would simply announce to their creditors that their liability
is limited to the capital specifically invested in the corporation, and that beyond this their
personal funds are not liable for debts, as they would be under a partnership arrangement.
It then rests with the sellers and lenders to this corporation to decide whether or not
The Theory of Money and Credit
The limited liability for torts is the illegitimate conferring of a special privilege, but this does not loom large among the total liabilities of any corporation.
Appendix A. On Private Coinage.
The common erroneous phrasing of Gresham's law,
bad money drives out good money, has often been used to attack the concept of private coinage as unworkable,
and thereby to defend the state's age-old monopolization of the minting business.
As we have seen, however, Gresham's law applies to the effect of government policy, not to the free market.
The argument most often advanced against private coinage is that the public would be burdened by fraudulent coin and would be forced to test coins frequently for their weight and fineness.
The government's stamp on the coin is supposed to certify its fineness and weight.
The long record of the abuse of this certification by governments is well known.
Moreover, the argument is hardly unique to the mitting business.
It proves far too much.
In the first place, those mitters who fraudulently certify the weight or fineness of coins will
be prosecuted for fraud, just as defrauders are prosecuted now.
Those who counterfeit the certifications of well-established private mitters will meet
a fate similar to those who counterfeit money today.
Numerous products of business depend upon their weight and purity.
People will either safeguard their wealth by testing the weight and purity of their
coins as they do their money bullion, or they will mint their coins with private minters
who have established a reputation for probity and efficiency.
These minters will place their stamps on the coins, and the best minters will soon come
The Theory of Money and Credit
The mistake would be of greater import than an error involving coins, yet prudence and the process of market selection of the best firms, coupled with legal prosecution against fraud, have facilitated the purchase and use of the most delicate machine tools, for example, without any suggestion that the government must nationalize the machine tool industry in order to ensure the quality of the products.
Another argument against private coinage is that standardizing the denominations of coin is more convenient than permitting the diversity of coins that would ensue under a free system.
The answer is that if the market finds standardization more convenient, private mints will be led by consumer demand to confine their minting to certain standard denominations.
On the other hand, if greater variety is preferred, consumers will demand and obtain a more diverse
range of coins.
Under the government mintage monopoly, the desires of consumers for various denominations
are ignored, and the standardization is compulsory, rather than in accord with public demand.
Appendix B, Coercion and Lebensraum
Tariffs and immigration barriers as a cause of war may be thought far afield from our
study, but actually this relationship may be analyzed praxeologically.
A tariff imposed by Government A prevents an exporter residing under Government B from
making a sale.
Furthermore, an immigration barrier imposed by Government A prevents a resident of B from
migrating.
Both of these impositions are affected by coercion.
Tariffs as a prelude to war have often been discussed.
Less understood is the Lebensraum argument.
Overpopulation of one particular country, in so far as it is not the result of a voluntary
Every choice to remain in the homeland at the cost of a lower standard of living is
always the result of an immigration barrier imposed by another country.
It may be thought that this barrier is purely a domestic one, but is it?
By what right does the government of a territory proclaim the power to keep other people away?
Under a purely free market system, only individual property owners have the right to keep people
off their property.
The government's power rests on the implicit assumption that the government owns all the
territory that it rules.
Only then can the government keep people out of that territory.
Caught in an insoluble contradiction are those believers in the free market and private property
who still uphold immigration barriers. They can do so only if they concede that the state
is the owner of all property, but in that case they cannot have true private property in their
system at all. In a truly free market system, such as we have outlined, only first cultivators
would have title to unowned property. Property that has never been used would remain unowned
until someone used it. At present, the state owns all unused property, but it is clear that this is
conquest incompatible with the free market. In a truly free market, for example, it would be
inconceivable that an Australian agency could arise, laying claim to ownership over the vast
tracts of unused land on that continent and using force to prevent people from other areas
from entering and cultivating that land.
It would also be inconceivable that a state could keep people from other areas out of
property that the domestic property owner wishes them to use.
No one but the individual property owner himself would have sovereignty over a piece of property.