https://mises.org/online-book/man-economy-and-state-power-and-market/12-economics-violent-intervention-market/6-triangular-intervention-product-control
Triangular interference with an
exchange can alter the terms of the exchange or else in some
way alter the nature of the product or the persons making the exchange. The
latter intervention, product control, may regulate the product
itself (e.g., a law prohibiting all sales of liquor) or the people selling or
buying the product (e.g., a law prohibiting Mohammedans from selling—or
buying—liquor).
Product control clearly and
evidently injures all parties concerned in the exchange: the consumers who lose
utility because they cannot purchase the product and satisfy their most urgent
wants; and the producers who are prevented from earning a remuneration in this
field and must therefore settle for lower earnings elsewhere. Losses by
producers are particularly borne by laborers and landowners specific to the
industry, who must accept permanently lower income.
(Entrepreneurial profit is ephemeral anyway, and capitalists tend to earn a
uniform interest rate throughout the economy.) Whereas with price
control one could make out a prima facie case that at
least one set of exchangers gains from the control (the
consumers whose buying price is pushed below the free-market
price, and the producers when the price is pushed above), in
product control both parties to the exchange invariably lose. The
direct beneficiaries of product control, then, are the government bureaucrats
who administer the regulations: partly from the tax-created jobs that the
regulations create, and partly perhaps from satisfactions gained from wielding
coercive power over others.
In
many cases of product prohibition, of course, inevitable pressure develops, as
in price control, for the re-establishment of the market illegally, i.e., a
“black market.” A black market is always in difficulties because of its
illegality. The product will be scarce and costly, to cover the risks to
producers involved in violating the law and the costs of bribing government
officials; and the more strict the prohibition and penalties, the scarcer the
product will be and the higher the price. Furthermore, the illegality greatly
hinders the process of distributing information about the existence of the
market to consumers (e.g., by way of advertising). As a result, the
organization of the market will be far less efficient, the service to the
consumer of poorer quality, and prices for this reason alone will be higher
than under a legal market. The premium on secrecy in the “black” market also
militates against large-scale business, which is likely to be more visible and
therefore more vulnerable to law enforcement. Paradoxically, product or price
control is apt to serve as a monopolistic grant (see below) of privilege to the
black marketeers. For they are likely to be very different entrepreneurs from
those who would have succeeded in this industry in a legal market (for here the
premium is on skill in bypassing the law, bribing government officials, etc.).24
Product
prohibition may either be absolute, as in American liquor
prohibition during the 1920’s, or partial. An example of partial
prohibition is compulsory rationing, which prohibits consumption
beyond a certain amount. The clear effect of rationing is to injure consumers
and lower the standard of living of everyone. Since rationing places legal
maxima on specific items of consumption, it also distorts the pattern of
consumers’ spending. Consumer spending is coercively shifted from the goods
more heavily to those less heavily rationed. Furthermore, since ration tickets
are usually not transferable, the pattern of consumer spending is even more
distorted, because people who do not want a certain commodity are not permitted
to exchange these coupons for goods not wanted by others. In short, the
nonsmoker is not permitted to exchange his cigarette coupons for someone else’s
gasoline coupons which have been allocated to those who do not own cars. Ration
tickets therefore cripple the entire system by introducing a new type of highly
inefficient quasi “money,” which must be used for purchasing in addition to the
regular money.25
One
form of partial product prohibition is to forbid all but certain
selected firms from selling a particular product. Such partial
exclusion means that these firms are granted a special privilege by
the government. If such a grant is given to one person or firm, we may call it
a monopoly grant; if to several persons or firms, it is
a quasi-monopoly grant.26 Both
types of grant may be called monopolistic. An example of this type
of grant is licensing, where all those to whom the government
refuses to give or sell a license are prevented from pursuing the trade or
business. Another example is a protective tariff or import
quota, which prevents competition from beyond a country’s geographical
limits. Of course, outright monopoly grants to a firm or compulsory
cartelization of an industry are clear-cut grants of monopolistic privilege.
It
is obvious that a monopolistic grant directly and immediately benefits the
monopolist or quasi monopolist, whose competitors are debarred by violence from
entering the field. It is also evident that would-be competitors are injured
and are forced to accept lower remuneration in less efficient and
value-productive fields. It is also patently clear that the consumers are
injured, for they are prevented from purchasing products from competitors whom
they would freely prefer. And this injury takes place, it should be noted,
apart from any effect of the grant on prices.
In
chapter 10 we buried the theory of monopoly price; we must now resurrect it.
The theory of monopoly price, as developed there, is illusory when applied to
the free market, but it applies fully in the case of monopoly and
quasi-monopoly grants. For here we have an identifiable
distinction: not the spurious distinction between “competitive” and “monopoly”
or “monopolistic” price, but one between the free-market price and
the monopoly price. The “free-market price” is conceptually
identifiable and definable, whereas the “competitive price” is not. The theory
of monopoly price, therefore, properly contrasts it to the free-market price,
and the reader is referred back to chapter 10 for a description of the theory
which can now be applied here. The monopolist will be able to achieve a
monopoly price for the product if his demand curve is inelastic above the
free-market price. We have seen above that on the free market, every demand
curve to a firm is elastic above the free-market price;
otherwise the firm would have an incentive to raise its price and increase its
revenue. But the grant of monopoly privilege renders the consumer demand curve
less elastic, for the consumer is deprived of substitute products from other
potential competitors. Whether this lowering of elasticity will be sufficient
to make the demand curve to the firm inelastic (so that gross
revenue will be greater at a price higher than the free-market price) depends
on the concrete historical data of the case and is not for economic analysis to
determine.
When
the demand curve to the firm remains elastic (so that gross revenue will be
lower at a higher-than-free-market price), the monopolist will not reap
any monopoly gain from his grant. Consumers and competitors
will still be injured because their trade is prevented, but the monopolist will
not gain, because his price and income will be no higher than before. On the
other hand, if his demand curve is inelastic, then he institutes a monopoly
price so as to maximize his revenue. His production has to be restricted in
order to command the higher price. The restriction of production and higher
price for the product both injure the consumers. Here the argument of chapter
10 must be reversed. We may no longer say that a restriction of production
(such as in a voluntary cartel) benefits the consumers by arriving at the most
value-productive point; on the contrary, the consumers are now injured because
their free choice would have resulted in the free-market price. Because of
coercive force applied by the State, they may not purchase goods freely from
all those willing to sell. In other words, any approach toward the
free-market equilibrium price and output point for any product benefits the
consumers and thereby benefits the producers as well. Any departure away from
the free-market price and output injures the consumers. The monopoly price
resulting from a grant of monopoly privilege leads away from the free-market
price; it lowers output and raises prices beyond what would be established if
consumers and producers could trade freely.
And
we cannot here use the argument that the restriction is
voluntary because the consumers make their own demand curve inelastic. For the
consumers are only fully responsible for their demand curve on
the free market; and only this demand curve can be
fully treated as an expression of their voluntary choice. Once the government
steps in to prohibit trade and grant privileges, there is no longer wholly
voluntary action. Consumers are forced, willy-nilly, to deal with the monopolist
for a certain range of purchases.
All
the effects which monopoly-price theorists have mistakenly attributed to
voluntary cartels, therefore, do apply to governmental
monopoly grants. Production is restricted, and factors are released for
production elsewhere. But now we can say that this production
will satisfy the consumers less than under free-market conditions; furthermore,
the factors will earn less in the other occupations.
As
we saw in chapter 10, there can never be lasting monopoly profits,
since profits are ephemeral, and all eventually reduce to a uniform interest
return. In the long run, monopoly returns are imputed to some factor.
What is the factor being monopolized in this case? It is obvious that this
factor is the right to enter the industry. In the free market,
this right is unlimited to all and therefore unowned by anyone. The right
commands no price on the market because everyone already has it. But here the
government has conferred special privileges of entry and sale; and it is
these special privileges or rights that are responsible for
the extra monopoly gain from a monopoly price, and to which we may impute the
gain. The monopolist earns a monopoly gain, therefore, not for
owning any truly productive factor, but from owning a special privilege granted
by the government. And this gain does not disappear in the long-run ERE as do
profits; it is permanent, so long as the privilege remains and consumer
valuations continue as they are.
Of
course, the monopoly gain may well be capitalized into the asset value of the
firm, so that subsequent owners, who invest in the firm after
the capitalization took place, will be earning only the equal interest return.
A notable example of the capitalization of monopoly (or rather, quasi-monopoly)
rights is the New York City taxicab industry. Every taxicab must be licensed,
but the city decided, years ago, not to issue any further licenses, or
“medallions,” so that any new cab owner must purchase his medallion from some
previous owner. The (high) price of medallions on the market is then the capitalized
value of the monopoly privilege
As
we have seen, all this applies to a quasi monopolist as well as to a
monopolist, since the number of the former’s competitors is also restricted by
the grant of privilege, which makes his demand curve less elastic. Of
course, ceteris paribus, a monopolist is in a better position than
a quasi monopolist, but how much each benefits depends purely on the data of
the particular case. In some cases, such as the protective tariff, the quasi
monopolist will end, in the long run, by not gaining anything. For since
freedom of entry is restricted only to foreign firms, the higher returns
accruing to firms newly protected by a tariff will attract more domestic
capital to that industry. Eventually, therefore, the new capital will drive the
rate of earnings down to the interest rate usual in all of industry, and the
monopolistic gain will have been competed away.27
Monopolistic
grants can be either direct and evident, such as compulsory cartels or
licenses; less direct, such as tariffs; or highly indirect, but nevertheless
powerful. Ordinances closing businesses at specific hours, for example, or
outlawing pushcart peddlers or door-to-door salesmen, are illustrations of laws
that forcibly exclude competition and thereby grant monopolistic privileges.
Similarly, antitrust laws and prosecutions, while seemingly
designed to “combat monopoly” and “promote competition,” actually do the
reverse, for they coercively penalize and repress efficient forms of market
structure and activity. Even such a seemingly remote action as conscription has
the effect of forcibly withdrawing young men from the labor market and thereby
giving their competitors a monopolistic, or rather a restrictionist,
wage.28 Unfortunately,
we have not the space here to investigate these and other instructive cases.
- 24It
was notorious, for example, that the bootleggers, a caste created by
Prohibition, were one of the main groups opposing repeal
of Prohibition in America.
- 25The
workings of rationing (as well as the socialist system in general) have
never been more vividly portrayed than in Henry Hazlitt’s The
Great Idea.
- 26We
might well call the latter an oligopoly grant, but this
would engender hopeless confusion with existing oligopoly theory. On the
latter, see chapter 10 above.
- 27Monopoly
privilege is granted by a government, which has power only over its own
geographic area. Therefore, monopoly prices achieved within an area are
always, on the market, subject to devastating competition from other
countries. This is increasingly true as civilization advances and
transportation costs decline, thus subjecting local monopolies to ever
greater threats of competition from other areas. Hence, any domestic
monopoly will tend to reach out to restrict foreign competition and block
efficient interregional trade: It is no wonder that the tariff used to be
called “The Mother of Trusts.”
We might note here that on a truly free market there would be no need for
any separate “theory of international trade.” Nations become significant
economically only with government intervention, either by way of monetary
intervention or barriers to trade.
- 28Monopolistic
privileges to businesses may confer a monopoly price,
depending on the elasticity of the firm’s demand curve. Privileges to
workers, on the other hand, lways confer a higher,
restrictionist price at lower than free-market output. The reason is that
a business can expand or contract its production at will; if, then, a few
firms are granted the privilege of producing in a certain field, they may
expand production, if conditions are ripe, and not reduce
total supply. On the other hand, aside from hours worked, which is not
very flexible, restriction of entry into a labor market must always reduce
the total supply of labor in that industry and therefore confer a
restrictionist price. Of course, a direct restriction on
production such as conservation laws always reduces supply and thereby
confers a restrictionist price.
