THE ECONOMICS OF VIOLENT INTERVENTION IN THE MARKET
Up to this point we have been assuming that no violent invasion of person or property occurs in society; we have been tracing the economic analysis of the free society, the free market, where individuals deal with one another only peacefully and never with violence. This is the construct, or “model,” of the purely free market. And this model, imperfectly considered perhaps, has been the main object of study of economic analysis throughout the history of the discipline.
In order to complete the economic picture of our world, however, economic analysis must be extended to the nature and consequences of violent actions and interrelations in society, including intervention in the market and violent abolition of the market (“socialism”). Economic analysis of intervention and socialism has developed much more recently than analysis of the free market. In this book, space limitations prevent us from delving into the economics of intervention to the same extent as we have treated the economics of the free market. But our researches into the former field are summarized more briefly in this final chapter.
One reason why economics has tended to concentrate on the free market is that here is presented the problem of order arising out of a seemingly “anarchic” and “planless” set of actions. We have seen that instead of the “anarchy of production” that a person untrained in economics might see in the free market, there emerges an orderly pattern, structured to meet the desires of all individuals, and yet eminently suited to adapt to changing conditions. In this way we have seen how the free, voluntary actions of individuals combine in an orderly determination of such seemingly mysterious processes as the formation of prices, income, money, economic calculation, profits and losses, and production.
The fact that each man, in pursuing his own self-interest, furthers the interest of everyone else, is a conclusion of economic analysis, not an assumption on which the analysis is grounded. Many critics have accused economists of being “biased” in favor of the free-market economy. But this or any other conclusion of economics is not a bias or prejudice, but a post-judice (to use a happy term of Professor E. Merrill Root’s)—a judgment made after inquiry, and not beforehand. Personal preferences, moreover, are completely separate from the validity of analytic procedures. The personal preferences of the analyst are of no interest for economic science; what is relevant is the validity of the method itself.
Intervention is the intrusion of aggressive physical force into society; it means the substitution of coercion for voluntary actions. It must be remembered that, praxeologically, it makes no difference what individual or group wields this force; the economic nature and consequences of the action remain the same.
Empirically, the vast bulk of interventions are performed by States, since the State is the only organization in society legally equipped to use violence and since it is the only agency that legally derives its revenue from a compulsory levy. It will therefore be convenient to confine our treatment to government intervention—bearing in mind, however, that private individuals may illegally use force, or that government may, openly or covertly, permit favored private groups to employ violence against the persons or property of others.
What types of intervention can an individual or group commit? Little or nothing has so far been done to construct a systematic typology of intervention, and economists have simply discussed such seemingly disparate actions as price control, licensing, inflation, etc. We can, however, classify interventions into three broad categories. In the first place, the intervener, or “invader,” or “aggressor”—the individual or group that initiates violent intervention—may command an individual subject to do or not do certain things, when these actions directly involve the individual’s person or property alone. In short, the intervener may restrict the subject’s use of his property, where exchange with someone else is not involved. This may be called an autistic intervention, where the specific order or command involves only the subject himself. Secondly, the intervener may compel an exchange between the individual subject and himself or coerce a “gift” from the subject. We may call this a binary intervention, since a hegemonic relation is here established between two people: the intervener and the subject. Thirdly, the invader may either compel or prohibit an exchange between a pair of subjects (exchanges always take place between two people). In this case, we have a triangular intervention, where a hegemonic relation is created between the invader and a pair of actual or potential exchangers. All these interventions are examples of the hegemonic relation (see chapter 2 above)—the relation of command and obedience—in contrast to the contractual, free-market relation of voluntary mutual benefit.
Autistic intervention occurs, therefore, when the intervener coerces a subject without receiving any good or service in return. Simple homicide is an example; another would be the compulsory enforcement or prohibition of a salute, speech, or religious observance. Even if the intervener is the State, issuing an edict to all members of society, the edict in itself is still autistic, since the lines of force radiate, so to speak, from the State to each individual alone. Binary intervention, where the intervener forces the subject to make an exchange or gift to the former, is exemplified in taxation, conscription, and compulsory jury service. Slavery is another example of binary, coerced exchange between master and slave.
Examples of triangular intervention, where the intervener compels or prohibits exchanges between sets of two other individuals, are price control and licensing. Under price control, the State prohibits any pair of individuals from making an exchange below or above a certain fixed rate; licensing prohibits certain people from making specified exchanges with others. Curiously enough, writers on political economy have recognized only cases in the third category as being “intervention.” It is understandable that economists have overlooked autistic intervention, for, in truth, economics can say little about events that lie outside the monetary exchange nexus. There is far less excuse for the neglect of binary intervention.
In tracing the effects of intervention, we must explore both the direct and the indirect consequences. In the first place, intervention will have direct, immediate consequences on the utilities of those participating. On the one hand, when the society is free and there is no intervention, everyone will always act in the way that he believes will maximize his utility, i.e., will raise him to the highest possible position on his value scale. In short, everyone’s utility ex ante will be “maximized” (provided we take care not to interpret “utility” in a cardinal manner). Any exchange on the free market, indeed any action in the free society, occurs because it is expected to benefit each party concerned. If we may use the term “society” to depict the pattern, the array, of all individual exchanges, then we may say that the free market maximizes social utility, since everyone gains in utility from his free actions.
Coercive intervention, on the other hand, signifies per se that the individual or individuals coerced would not have voluntarily done what they are now being forced to do by the intervener. The person who is coerced into saying or not saying something or into making or not making an exchange with the intervener or with a third party is having his actions changed by a threat of violence. The man being coerced, therefore, always loses in utility as a result of the intervention, for his action has been forcibly changed by its impact. In autistic and binary interventions, the individual subjects each lose in utility; in triangular interventions, at least one, and sometimes both, of the pair of would-be exchangers lose in utility.
Who gains in utility ex ante? Clearly, the intervener; otherwise, he would not have made the intervention. In the case of binary intervention, he himself gains directly in exchangeable goods or services at the expense of his subject. In the case of autistic and triangular interventions, he gains in a sense of psychic well-being from enforcing regulations upon others (or, perhaps, in providing a seeming justification for other, binary interventions).
In contrast to the free market, therefore, all cases of intervention supply one set of men with gains at the expense of another set. In binary interventions, the direct gains and losses are “tangible” in the form of exchangeable goods or services; in other cases, the direct gains are nonexchangeable satisfactions to the interveners, and the direct loss is being coerced into less satisfying, if not positively painful, forms of activity.
Before the development of economic science, people tended to think of exchange and the market as always benefiting one party at the expense of the other. This was the root of the mercantilist view of the market, of what Ludwig von Mises calls the “Montaigne fallacy.” Economics has shown this to be a fallacy, for on the market both parties to an exchange will benefit. On the market, therefore, there can be no such thing as exploitation. But the thesis of an inherent conflict of interest is true whenever the State or anyone else wielding force intervenes on the market. For then the intervener gains at the expense of the subjects who lose in utility. On the market all is harmony. But as soon as intervention appears on the scene, conflict is created, for each person or group may participate in a scramble to be a net gainer rather than a net loser—to be part of the intervening team, as it were, rather than one of the victims. And the very institution of taxation ensures that some will be in the net gaining, and others in the net losing, class. Since all State actions rest on the fundamental binary intervention of taxation, it follows that no State action can increase social utility, i.e., can increase the utility of all affected individuals.
A common objection to the conclusion that the free market, in unique contrast to intervention, increases the utility of every individual in society, points to the fate of the entrepreneur whose product suddenly becomes obsolete. Take, for example, the buggy manufacturer who faces a shift in public demand from buggies to automobiles. Does he not lose utility from the operation of the free market? We must realize, however, that we are concerned only with the utilities that are demonstrated by the manufacturer’s action. In both period one, when consumers demanded buggies, and in period two, when they shifted to autos, he acts so as to maximize his utility on the free market. The fact that, in retrospect, he prefers the results of period one may be interesting data for the historian, but is irrelevant for the economic theorist. For the manufacturer is not living in period one any more. He lives always under present conditions and in relation to the present value scales of his fellow men. Voluntary exchanges, in any given period, will increase the utility of everyone and will therefore maximize social utility. The buggy manufacturer could not restore the conditions or results of period one unless he used force against others to coerce their exchanges, but, in that case, social utility could no longer be maximized, because of his invasive act.
Just as some writers have tried to deny the voluntary nature and the mutual benefits of free exchange, so others have tried to attribute a voluntary quality to actions of the State. Generally, this attempt has been based either on the view that there exists an entity “society,” which cheerfully endorses and supports the actions of the State, or that the majority endorses these acts and that this somehow means universal support, or finally, that somehow, down deep, even the opposing minority endorses the acts of the State. From these fallacious assumptions, they conclude that the State can increase social utility at least as well as the market can.
Having described the unanimity and harmony of the free market, as well as the conflict and losses of utility generated by intervention, let us ask what happens if government is used to check interventions in the market by private criminals—i.e., private imposers of coerced exchanges. It has been asked: Is not this “police” function an act of intervention, and does not the free market itself then necessarily rest on a “framework” of such intervention? And does not the existence of the free market therefore require a loss of utility on the part of the criminals who are being punished by the government? In the first place, we must remember that the purely free market is an array of voluntary exchanges between sets of two persons. If there are no threats of criminal intervention in that market—say because everyone feels duty-bound to respect the private property of others—no “framework” of counterintervention will be needed. The “police” function is therefore solely a secondary derivative problem, not a precondition, of the free market.
Secondly, if governments—or private agencies, for that matter—are employed to check and combat intervention in society by criminals, it is certainly obvious that this combat imposes losses of utility upon the criminals. But these acts of defense are hardly “intervention” in our sense of the term. For the losses of utility are being imposed only upon people who, in turn, have been trying to impose losses of utility on peaceful citizens. In short, the force used by police agencies in defending individual freedom—i.e., in defending the persons and property of the citizens—is purely an inhibitory force; it is counterintervention against true, initiatory intervention. While such counter action cannot maximize “social utility”—the utility of everyone in society involved in interpersonal actions—it does maximize the utility of noncriminals, i.e., those who have been peacefully maximizing their own utility without inflicting losses upon others. Should these defense agencies do their job perfectly and eliminate all interventions, then their existence will be perfectly compatible with the maximization of social utility.
We have thus seen that individuals maximize their utility ex ante on the free market, and that they cannot do so when there is intervention, for then the intervener gains in utility only at the expense of a demonstrated loss in utility by his subject. But what of utilities ex post? People may expect to benefit when they make decisions, but do they actually benefit from their results? How do the free market and intervention compare in traveling that vital path from ante to post?
For the free market, the answer is that the market is constructed so as to reduce error to a minimum. There is, in the first place, a fast-working, highly accurate, easily understandable test that tells the entrepreneur, and also the income-receiver, whether they are succeeding or failing at the task of satisfying the desires of the consumer. For the entrepreneur, who carries the main burden of adjustment to uncertain, fluctuating consumer desires, the test is particularly swift and sure—profits or losses. Large profits are a signal that he has been on the right track, losses that he has been on a wrong one. Profits and losses spur rapid adjustments to consumer demands; at the same time, they perform the function of getting money out of the hands of the inefficient entrepreneurs and into the hands of the good ones. The fact that good entrepreneurs prosper and add to their capital, and poor ones are driven out, insures an ever smoother market adjustment to changes in conditions. Similarly, to a lesser extent, land and labor factors move in accordance with the desire of their owners for higher incomes, and highly value-productive factors are rewarded accordingly.
Consumers also take entrepreneurial risks on the market. Many critics of the market, while willing to concede the expertise of the capitalist-entrepreneurs, bewail the prevailing ignorance of consumers, which prevents them from gaining the utility ex post that they had expected ex ante. Typically, Wesley C. Mitchell entitled one of his famous essays: “The Backward Art of Spending Money.” Professor Mises has keenly pointed out the paradox of interventionists who insist that consumers are too ignorant or incompetent to buy products intelligently, while at the same time proclaiming the virtues of democracy, where the same people vote for or against politicians whom they do not know and on policies which they scarcely understand. To put it another way, the partisans of intervention assume that individuals are not competent to run their own affairs or to hire experts to advise them, but also assume that these same individuals are competent to vote for these experts at the ballot box. They are further assuming that the mass of supposedly incompetent consumers are competent to choose not only those who will rule over themselves, but also over the competent individuals in society. Yet such absurd and contradictory assumptions lie at the root of every program for “democratic” intervention in the affairs of the people.
In fact, the truth is precisely the reverse of this popular ideology. Consumers are surely not omniscient, but they have direct tests by which to acquire and check their knowledge. They buy a certain brand of breakfast food and they do not like it; and so they do not buy it again. They buy a certain type of automobile and like its performance; they buy another one. And in both cases, they tell their friends of this newly won knowledge. Other consumers patronize consumers’ research organizations, which can warn or advise them in advance. But, in all cases, the consumers have the direct test of results to guide them. And the firm which satisfied the consumers expands and prospers and thus gains “good will,” while the firm failing to satisfy them goes out of business.
On the other hand, voting for politicians and public policies is a completely different matter. Here there are no direct tests of success or failure whatever, neither profits and losses nor enjoyable or unsatisfying consumption. In order to grasp consequences, especially the indirect catallactic consequences of governmental decisions, it is necessary to comprehend complex chains of praxeological reasoning. Very few voters have the ability or the interest to follow such reasoning, particularly, as Schumpeter points out, in political situations. For the minute influence that any one person has on the results, as well as the seeming remoteness of the actions, keeps people from gaining interest in political problems or arguments. Lacking the direct test of success or failure, the voter tends to turn, not to those politicians whose policies have the best chance of success, but to those who can best “sell” their propaganda ability. Without grasping logical chains of deduction, the average voter will never be able to discover the errors that his ruler makes. To borrow an example from a later section of this chapter, suppose that the government inflates the money supply, thereby causing an inevitable rise in prices. The government can blame the price rise on wicked speculators or alien black marketeers, and unless the public knows economics, it will not be able to see the fallacies in the rulers’ arguments.
It is curious, once more, that the very writers who complain most of the wiles and lures of advertising never apply their critique to the one area where it is truly correct: the advertising of politicians. As Schumpeter states:
The picture of the prettiest girl that ever lived will in the long run prove powerless to maintain the sales of a bad cigarette. There is no equally effective safeguard in the case of political decisions. Many decisions of fateful importance are of a nature that makes it impossible for the public to experiment with them at its leisure and at moderate cost. Even if that is possible, judgment is as a rule not so easy to arrive at as in the case of the cigarette, because effects are less easy to interpret.
George J. Schuller, in attempting to refute this argument, protested that: “complex chains of reasoning are required for consumers to select intelligently an automobile or television set.” But such knowledge is not necessary; for the whole point is that the consumers have always at hand a simple and pragmatic test of success: does the product work and work well? In public economic affairs, there is no such test, for no one can know whether a particular policy has “worked” or not without knowing the a priori reasoning of economics.
It may be objected that, while the average voter may not be competent to decide on issues that require chains of praxeological reasoning, he is competent to pick the experts—the politicians—who will decide on the issues, just as the individual may select his own private expert adviser in any one of numerous fields. But the critical problem is precisely that in government the individual has no direct, personal test of success or failure of his hired expert such as he has in the market. On the market, individuals tend to patronize those experts whose advice is most successful. Good doctors or lawyers reap rewards on the free market, while poor ones fail; the privately hired expert flourishes in proportion to his ability. In government, on the other hand, there is no market test of the expert’s success. Since there is no direct test in government, and, indeed, little or no personal contact or relationship between politician or expert and voter, there is no way by which the voter can gauge the true expertise of the man he is voting for. As a matter of fact, the voter is in even greater difficulties in the modern type of issueless election between candidates who agree on all fundamental questions than he is in voting on issues. For issues, after all, are susceptible to reasoning; the voter can, if he wants to and has the ability, learn about and decide on the issues. But what can any voter, even the most intelligent, know about the true expertise or competence of individual candidates, especially when elections are shorn of all important issues? The only thing that the voter can fall back on for a decision are the purely external, advertised “personalities” of the candidates, their glamorous smiles, etc. The result is that voting purely on candidates is bound to be even less rational than voting on the issues themselves.
Not only does government lack a successful test for picking the proper experts, not only is the voter necessarily more ignorant than the consumer, but government itself has other inherent mechanisms which lead to poorer choices of experts and officials. For one thing, the politician and the government expert receive their revenues, not from service voluntarily purchased on the market, but from a compulsory levy on the inhabitants. These officials, then, wholly lack the direct pecuniary incentive to care about servicing the public properly and competently. Furthermore, the relative rise of the “fittest” applies in government as in the market, but the criterion of “fitness” is here very different. In the market, the fittest are those most able to serve the consumers. In government, the fittest are either (1) those most able at wielding coercion or (2) if bureaucratic officials, those best fitted to curry favor with the leading politicians or (3) if politicians, those most adroit at appeals to the voting public.
Another critical divergence between market action and democratic voting is this: the voter has, for example, only a 1/100 billionth power to choose among his potential rulers, who in turn will make decisions affecting him, unchecked until the next election. The individual acting on the market, on the other hand, has absolute sovereign power to make decisions over his property, not just a removed, 1/100 billionth power. Furthermore, the individual is continually demonstrating his choices of whether to buy or not to buy, to sell or not to sell, by making absolute decisions in regard to his property. The voter, by voting for some particular candidate, demonstrates only a relative preference for him over one or two other potential rulers—and he must do this, let us not forget, within the framework of the coercive rule that, whether he votes or not, one of these men will rule over him for the next few years. (We should also not forget that, with a secret ballot, the voter does not even demonstrate this much of a constrained and limited preference.)
It may be objected that the shareholder voting in a corporation is in similar straits. But he is not. Aside from the critical point that the corporation does not acquire its funds by compulsory levy, the shareholder still has absolute power over his own property by being able to sell his shares on the free market, something that the democratic voter clearly cannot do. Moreover, the shareholder has voting power in the corporation proportionate to his degree of property ownership of the common assets.
Thus, we see that the free market has a smooth, efficient mechanism to bring anticipated, ex ante utility into the realization and fruition of ex post. The free market always maximizes ex ante social utility; it always tends to maximize ex post social utility as well. The field of political action, on the other hand, i.e., the field where most intervention takes place, has no such mechanism; indeed, the political process inherently tends to delay and thwart the realization of expected gains. So that the divergence in ex post results between free market and intervention is even greater than in ex ante, anticipated utility. In fact, the divergence is still greater than we have shown. For, as we analyze the indirect consequences of intervention in the remainder of this chapter, we shall find that, in every instance, the consequences of intervention will make the intervention look worse in the eyes of many of its original supporters. Thus, we shall find that the indirect consequence of a price control is to cause unexpected shortages of the product. Ex post, many of the interveners themselves will feel that they have lost rather than gained in utility.
In sum, the free market always benefits every participant, and it maximizes social utility ex ante; it also tends to do so ex post, for it contains an efficient mechanism for speedily converting anticipations into realizations. With intervention, one group gains directly at the expense of another, and therefore social utility is not maximized or even increased; there is no mechanism for speedy translation of anticipation into fruition, but indeed the opposite; and finally, as we shall see, the indirect consequences of intervention will cause many interveners themselves to lose utility ex post. The remainder of this chapter traces the nature and indirect consequences of various forms of intervention.
A triangular intervention occurs when an intervener either compels a pair of people to make an exchange or prohibits them from making an exchange. The coercion may be imposed on the terms of the exchange or on the nature of one or both of the products being exchanged or on the people doing the exchanging. The former type of triangular intervention is called a price control, because it deals specifically with the terms, i.e., the price, at which the exchange is made; the latter may be called product control, as dealing specifically with the nature of the product or of the producer. An example of price control is a decree by the government that no one may buy or sell a certain product at more (or, alternatively, less) than X gold ounces per pound; an example of product control is the prohibition of the sale of this product or prohibition of the sale by any but certain persons selected by the government. Clearly both forms of control have various repercussions on both the price and the nature of the product.
A price control may be effective or ineffective. It will be ineffective if the regulation has no influence on the market price. Thus, if automobiles are selling at 100 gold ounces on the market, and the government decrees that no autos be sold for more than 300 ounces, on pain of punishment inflicted on violators, the decree is at present completely academic and ineffective. However, should a customer wish to order an unusual custom-built automobile for which the seller would charge over 300 ounces, then the regulation now becomes effective and changes transactions from what they would have been on the free market.
There are two types of effective price control: a maximum price control that prohibits all exchanges of a good above a certain price, with the controlled price being below the market equilibrium price; and a minimum price control prohibiting exchanges below a certain price, this fixed price being above market equilibrium. Let Figure 83 depict the supply and demand curves for a good subjected to maximum price control: DD and SS are the demand and supply curves for the good. FP is the equilibrium price set by the market. The government, let us assume, imposes a maximum control price 0C, above which any sale is illegal. At the control price, the market is no longer cleared, and the quantity demanded exceeds the quantity supplied by amount AB. In this way, an artificially created shortage of the good has been created. In any shortage, consumers rush to buy goods which are not available at the price. Some must do without, others must patronize the market, revived as illegal or “black,” paying a premium for the risk of punishment that sellers now undergo. The chief characteristic of a price maximum is the queue, the endless “lining up” for goods that are not sufficient to supply the people at the rear of the line. All sorts of subterfuges are invented by people desperately seeking to arrive at the clearance of supply and demand once provided by the market. “Under-the-table” deals, bribes, favoritism for older customers, etc., are inevitable features of a market shackled by the price maximum.
It must be noted that, even if the stock of a good is frozen for the foreseeable future and the supply line is vertical, this artificial shortage will still develop and all these consequences ensue. The more “elastic” the supply, i.e., the more resources shift out of production, the more aggravated, ceteris paribus, the shortage will be. The firms that leave production are the ones nearest the margin. If the price control is “selective,” i.e., is imposed on one or a few products, the economy will not be as universally dislocated as under general maxima, but the artificial shortage created in the particular line will be even more pronounced, since entrepreneurs and factors can shift to the production and sale of other products (preferably substitutes). The prices of the substitutes will go up as the “excess” demand is channeled off in their direction. In the light of this fact, the typical governmental reason for selective price control—“We must impose controls on this necessary product so long as it continues in short supply”—is revealed to be an almost ludicrous error. For the truth is 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 have time to shift to other products. If the government were really worried about the short supply of certain products, it would go out of its way not to impose maximum price controls upon them.
Before investigating further the effects of general price maxima, let us analyze the consequences of a minimum price control, i.e., the imposition of a price above the free-market price. This may be depicted in Figure 84. DD and SS are the demand and supply curves respectively. 0C is the control price and FP the market equilibrium price. At 0C, the quantity demanded is less than the quantity supplied, by the amount AB. Thus, while the effect of a maximum price is to create an artificial shortage, a minimum price creates an artificial unsold surplus, AB. The unsold surplus exists even if the SS line is vertical, but a more elastic supply will, ceteris paribus, aggravate the surplus. Once again, the market is not cleared. The artificially high price at first attracts resources into the field, while, at the same time, discouraging buyer demand. Under selective price control, resources will leave other fields where they benefit themselves and consumers better, and transfer to this field, where they overproduce and suffer losses as a result.
This offers an interesting example of intervention tampering with the market and causing entrepreneurial losses. Entrepreneurs operate on the basis of certain criteria: prices, interest rate, etc., established by the free market. Interventionary tampering with these signals destroys the continual market tendency to adjustment and brings about losses and misallocation of resources in satisfying consumer wants.
General, over-all price maxima dislocate the entire economy and deny 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. Over-all price maxima are equivalent to imposing a minimum on the PPM (see Figure 85): 0F (or SmSm) is the money stock in the society; DmDm the social demand for money; FP is the equilibrium PPM (purchasing power of the monetary unit) set by the market. An imposed minimum PPM above the market (0C) injures the clearing “mechanism” of the market. At 0C the money stock exceeds the money demanded. As a result, people possess a quantity of money GH in “unsold surplus.” They try to sell their money by buying goods, but they cannot. Their money is anesthetized. To the extent that a government’s over-all price maximum is effective, a part of people’s money becomes useless, for it cannot be exchanged. But a mad scramble inevitably ensues, with each person hoping that his money can be used. Favoritism, lining up, bribes, etc., inevitably abound, as well as great pressure for a “black” market (i.e., the market) to provide a channel for the surplus money.
A general price minimum is equivalent to a maximum control on the PPM. This sets up an unsatisfied, excess, demand for money over the stock of money available—specifically, in the form of unsold stocks of goods in every field.
The principles of maximum and minimum price control apply to any prices, whatever they may be: of consumers’ goods, capital goods, land or labor services, or, as we have seen, the “price” of money in terms of other goods. They apply, for example, to minimum wage laws. When a minimum wage law is effective, i.e., where it imposes a wage above the market value of a grade of labor (above the laborer’s discounted marginal value product), the supply of labor services exceeds the demand, and the “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. This analysis applies whether the minimum wage is imposed by the State or by a labor union.
The reader is referred to chapter 10 above for an analysis of the rare case of a minimum wage imposed by a voluntary union. We saw that this creates unemployment and shifts labor to less remunerative and value-productive branches of employment, but that these results must be treated as voluntary. To prohibit people from joining unions and agreeing voluntarily on union wage scales and on the mystique of unionism would subject workers by force to the dictates of consumers and would impose a welfare loss upon the former. However, as we stated above, a spread among the workers of praxeological knowledge, of a realization that union solidarity causes unemployment and lower wage rates for many workers, would probably weaken this solidarity considerably. Empirically, on the other hand, almost all cases of effective unionism are imposed through coercion exercised by unions, i.e., through union intervention in the market. The effects of union intervention are then the same as the same degree of government intervention would have been. As we have pointed out, the analysis of intervention applies to whatever agency wields the violence, whether private or governmental. Unemployment and misallocations of many workers to less efficient and lower-paying jobs again occur in this case and again involuntarily.
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, one of the first economic laws to be discovered. Few have realized that this law is merely a specific instance of the general consequences 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. The phrasing has been fallaciously used even by those who generally favor the free market, to justify a State monopoly over the coinage of gold and silver. Actually, Gresham’s Law should read: “Money overvalued by the State will drive money undervalued by the State out of circulation.” Whenever the State sets an arbitrary value or price on one money in terms of another, it thereby establishes an effective minimum price control on one money and a maximum price control on the other, the “prices” being in terms of each other. This, for example, was the essence of bimetallism. Under bimetallism, a nation recognized gold and silver as moneys, but set an arbitrary price, or exchange ratio, between them. When this arbitrary price differed, as it was bound to do, from the free-market price (and this 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 moneys, and the government set the ratio between them at 16 ounces of silver:1 ounce of gold. The market price, perhaps 16:1 at the time of the price control, then changes to 15:1. What is the result? Silver is now being arbitrarily undervalued by the government and gold arbitrarily overvalued. In other words, silver is fixed 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 price maximum on silver and a price minimum on gold, in terms of each other.
The same consequences now follow as from any effective price control. With a price maximum on silver, the gold demand for silver in exchange now exceeds the silver demand for gold (conversely, with a price minimum on gold, the silver demand for gold is less than the gold demand for silver). Gold goes begging for silver in unsold surplus, while silver becomes scarce and disappears from circulation. Silver disappears to another country or area where it can be exchanged at the free-market price, and gold, in turn, flows into the country. If the bimetallism is worldwide, then silver disappears into the “black market,” and official or open exchanges are made only with gold. No country, therefore, can maintain a bimetallic system in practice, since one money will always be undervalued or overvalued in terms of the other. The overvalued always displaces the other from circulation, the latter being scarce.
Similar consequences follow from such price control as setting arbitrary exchange rates on fiat moneys (see further below) and in setting new and worn coins arbitrarily equal to one another when they discernibly differ in weight.
To sum up our analysis of price control: Directly, the utility of at least one set of exchangers will be injured by the control. Indirectly, as we find by further analysis, hidden, but just as certain, effects injure a substantial number of people who thought they would gain in utility from the imposed controls. The announced aim of a maximum price control is to benefit the consumer by giving him his supply at a lower price; yet the objective effect is to prevent many consumers from having the good at all. The announced aim of a minimum price control is to insure higher prices to the sellers; yet the effect will be to prevent many sellers from selling any of their surplus. Furthermore, the price controls inevitably distort the production and 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 remaining producers—thereby benefiting the bureaucrats, but injuring the rest of the people.
Some economists, notably Edwin Cannan, have denied that economic analysis could be applied to acts of violent intervention. But, on the contrary, economics is the praxeological analysis of human actions, and violent interrelations are forms of action which can be analyzed.
Is it, then, surprising that the early economists, all religious men, marveled at their epochal discovery of the harmony pervading the free market and tended to ascribe this beneficence to a “hidden hand” or divine harmony? It is easier for us to scoff at their enthusiasm than to realize that it does not detract from the validity of their analysis.
Conventional writers charge, for example, that the French “optimistic” school of the nineteenth century were engaging in a naïve Harmonielehre—a mystical idea of a divinely ordained harmony. But this charge ignores the fact that the French optimists were building on the very sound “welfare-economic” insight that voluntary exchanges on the free market conduce harmoniously to the benefit of all. For example, see About, Handbook of Social Economy, pp. 104–12.
The study of the direct consequences for utility of intervention or nonintervention is peculiarly the realm of “welfare economics.” For a critique and outline of a reconstruction of welfare economics, see Rothbard, “Toward a Reconstruction of Utility and Welfare Economics.”
Perhaps we may note here the German sociologist Franz Oppenheimer’s distinction between the free market and binary intervention as the “economic” as against the “political” means to the satisfaction of one’s wants:
There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. These are work and robbery, one’s own labor and the forcible appropriation of the labor of others. . . . I propose . . . to call one’s own labor and the equivalent exchange of one’s own labor for the labor of others, the “economic means” for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the “political means.” . . . The state is an organization of the political means. (Oppenheimer, The State, pp. 24–27)
One of the roots of this fallacy is the idea that in an exchange the two things exchanged are or should be “equal” in value and that “inequality” of value demonstrates “exploitation.” We have seen, on the contrary, that any exchange involves inequality of the values of each commodity between buyer and seller, and that it is this very double inequality of values that brings about the exchange. An example of stress on this fallacy is the well-known work by Yves Simon, Philosophy of Democratic Government (Chicago: University of Chicago Press, 1951), chap. IV.
It has become fashionable to assert that John C. Calhoun anticipated the Marxian doctrine of class exploitation, but actually, Calhoun’s “classes” were castes: creatures of State intervention itself. In particular, Calhoun saw that the binary intervention of taxation must always be spent so that some people in the community become net payers of tax funds, and the others net recipients. Calhoun defined the latter as the “ruling class” and the former as the “ruled.” Thus:
Few, comparatively, as they are, the agents and employees of the government constitute that portion of the community who are the exclusive recipients of the proceeds of the taxes. . . . But as the recipients constitute only a portion of the community, it follows . . . that the action [of the fiscal process] must be unequal between the payers of the taxes and the recipients of their proceeds. Nor can it be otherwise; unless what is collected from each individual in the shape of taxes shall be returned to him in that of disbursements, which would make the process nugatory and absurd. . . . It must necessarily follow that some one portion of the community must pay in taxes more than it receives in disbursements, while another receives in disbursements more than it pays in taxes. It is, then, manifest . . . that taxes must be, in effect, bounties to that portion of the community which receives more in disbursements than it pays in taxes, while to the other which pays in taxes more than it receives in disbursements they are taxes in reality—burdens instead of bounties. This consequence is unavoidable. It results from the nature of the process, be the taxes ever so equally laid. . . .
The necessary result, then, of the unequal fiscal action of the government is to divide the community into two great classes: one consisting of those who, in reality, pay the taxes and, of course, bear exclusively the burden of supporting the government; and the other, of those who are the recipients of their proceeds through disbursements, and who are, in fact, supported by the government; or, the effect of this is to place them in antagonistic relations in reference to the fiscal action of the government. . . . For the greater the taxes and disbursements, the greater the gain of the one and the loss of the other, and vice versa. . . . (John C. Calhoun, A Disquisition on Government [New York: Liberal Arts Press, 1953], pp. 16–18)
See Rothbard, “Toward a Reconstruction of Utility and Welfare Economics.” For an analysis of State action, see Gustave de Molinari, The Society of Tomorrow (New York: G.P. Putnam’s Sons, 1904), pp. 19ff., 65–96.
We have seen above that praxeology may deal with utilities only as deduced from the concrete actions of human beings. Elsewhere we have named this concept “demonstrated preference,” have traced its history, and criticized competing concepts. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” pp. 224ff.
For a critique of the first assumption, see Murray N. Rothbard, “The Mantle of Science” in Helmut Schoeck and James W. Wiggins, eds., Scientism and Values (Princeton, N.J.: D. Van Nostrand, 1960); on the latter arguments, see Rothbard, “Toward a Reconstruction of Utility and Welfare Reconstruction,” pp. 256ff.
Schumpeter’s insights on the fallacy of attributing a voluntary nature to the State deserve to be heeded:
. . . ever since the princes’ feudal incomes ceased to be of major importance, the State has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force. The theory which construes taxes on the analogy of club dues or of the purchase of the services of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind. (Schumpeter, Capitalism, Socialism and Democracy, p. 198 and 198 n.)
I am deeply indebted to Professor Ludwig M. Lachmann, Mr. L.D. Goldblatt, and other members of Professor Lachmann’s Honours Seminar in Economics at the University of Witwatersrand, South Africa, for raising these questions in their discussion of my “Reconstruction” paper cited above.
Neither are these contradictions removed by abandoning democracy in favor of dictatorship. For even if the mass of the public do not vote under a dictatorship, they must still consent to the rule of the dictator and his chosen experts, and therefore their unique competence in the political field as against other spheres of their daily life must still be assumed.
See Rothbard, “Mises’ Human Action: Comment,” pp. 383–84. Also cf. George H. Hildebrand, “Consumer Sovereignty in Modern Times,” American Economic Review, Papers and Proceedings, May, 1951, p. 26.
Cf. the excellent discussion of the contrast between daily life and politics in Schumpeter, Capitalism, Socialism and Democracy, pp. 258–60.
Ibid., p. 263.
Schuller, “Rejoinder,” p. 189.
We might say that this insight underlies F.A. Hayek’s famous chapter, “Why the Worst Get on Top” in The Road to Serfdom (Chicago: University of Chicago Press, 1944), chap. x. Also see the recent brief discussion by Jack Hirshleifer, “Capitalist Ethics—Tough or Soft?” Journal of Law and Economics, October, 1959, p. 118.
Cf. the interesting definition of “democracy” in Heath, Citadel, Market, and Altar, p. 234.
Of course, even a completely ineffective triangular control is likely to increase the government bureaucracy dealing with the matter and therefore increase the total amount of binary intervention over the taxpayer. But more on this below.
A “bribe” is only payment of the market price by a buyer.
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 twofold: (1) it takes resources away from the public by inflating the currency (see below); and (2) after the money has percolated down to the public, it destroys part of the money’s usefulness.
In the present-day United States, much of the task of coercion has been assumed on the unions’ behalf by the government. This was the essence of the Wagner Act, the law of the land since 1935. (The Taft-Hartley Act was only a relatively unimportant amendment to the Wagner Act, which continues on the books.) The crucial provisions of this act are: (1) to coerce all workers in a certain production unit (arbitrarily defined ad hoc by the government) into being represented by a union in bargaining with an employer, if a majority of workers agree; (2) to prohibit the employer from refusing to hire union members or union organizers; and (3) to compel the employer to bargain with this union. Thus, unions have been invested with governmental authority, and the strong arm of the government uses coercion to force workers and employers alike to deal with the unions. On special coercive privilege granted to unions, see also Roscoe Pound, “Legal Immunities of Labor Unions” in Labor Unions and Public Policy (Washington, D.C.: American Enterprise Association, 1958), pp. 145–73; and Frank H. Knight, “Wages and Labor Union Action in the Light of Economic Analysis” in Bradley, Public Stake in Union Power, p. 43. Also see Petro, Power Unlimited, and chapter 10, pp. 714–15 above.
Mises, Human Action, pp. 432 n., 447, 469, 776.