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.