Chapter 12—The Economics of Violent
Intervention in the Market
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12
THE
ECONOMICS OF VIOLENT INTERVENTION IN THE MARKET
1.
Introduction
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.
2.
A Typology of Intervention
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.
3.
Direct Effects of Intervention on Utility
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.
4.
Utility Ex Post: Free Market and Government
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.
5.
Triangular Intervention: Price Control
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.
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