Power and Market: Government and the Economy

Another form of triangular intervention is interference with the nature of production directly, rather than with the terms of exchange. This occurs when the government prohibits any production or sale of a certain product. The consequence is injury to all parties concerned: to the consumers, who lose utility because they cannot purchase the product and satisfy their most urgent wants; and to the producers, who are prevented from earning a higher remuneration in this field and must therefore be content with lower earnings elsewhere. This loss is borne not so much by entrepreneurs, who earn from ephemeral adjustments, or by capitalists, who tend to earn a uniform interest rate throughout the economy, as by laborers and landowners, who must accept permanently lower income. The only ones who benefit from the regulation, then, are the government bureaucrats themselves—partly from the tax-created jobs that the regulation creates, and perhaps also from the satisfaction gained from repressing others and wielding coercive power over them. Whereas with price control one could at least make out a prima facie case that one set of exchangers—producers or consumers—is being benefited, no such case can be made out for prohibition, where both parties to the exchange, producers and consumers, invariably lose.

In many instances of product prohibition, of course, inevitable pressure develops for the reestablishment of the market illegally, i.e., as a “black” market. As in the case of price control, a black market creates difficulties because of its illegality. The supply of the product will be scarcer, and the price of the product will be higher to compensate the producers for the risk of violating the law; and the more strict the prohibition and penalties, the scarcer the product and the higher the price will be. Furthermore, the illegality hinders the process of distributing to the consumers information (e.g., by way of advertising) about the existence of the market. As a result, the organization of the market will be far less efficient, the service to the consumer will decline in quality, and prices again will be higher than under a legal market. The premium on secrecy in the “black” market also militates against large-scale business, which is likely to be more visible and therefore more vulnerable to law enforcement. The advantages of efficient large-scale organization are thus lost, injuring the consumer and raising prices because of the diminished supply.8 Paradoxically, the prohibition may serve as a form of grant of monopolistic privilege to the black marketeers, since they are likely to be very different entrepreneurs from those who would succeed in a legal market. For in the black market, rewards accrue to skill in bypassing the law or in bribing government officials.

There are various types of prohibition. There is absolute prohibition, where the product is completely outlawed. There are also forms of partial prohibition: an example is rationing, where consumption beyond a certain amount is prohibited by the State. The clear effect of rationing is to injure consumers and lower the standard of living of everyone. Since rationing places legal maxima on specific items of consumption, it also distorts the pattern of consumers’ spending. The unrationed, or less stringently rationed, goods are bought more heavily, whereas consumers would have preferred to buy more of the rationed goods. Thus, consumer spending is coercively shifted from the more to the less heavily rationed commodities. Moreover, the ration tickets introduce a new type of quasi money; the functions of money on the market are crippled and atrophied, and confusion reigns. The main function of money is to be bought by producers and spent by consumers; but, under rationing, consumers are estopped from using their money to the full and blocked from using their dollars to direct and allocate factors of production. They must also use arbitrarily designated and distributed ration tickets—an inefficient kind of double money. The pattern of consumer spending is particularly distorted, and since ration tickets are usually not transferable, people who do not want brand X are not permitted to exchange these coupons for goods not wanted by others.9

Priorities and allocations by the government are another type of prohibition, as well as another jumbling of the price system. Efficient buyers are prevented from obtaining goods, while inefficient ones find that they can acquire a plethora. Efficient firms are no longer allowed to bid away factors or resources from inefficient firms; the efficient firms are, in effect, crippled, and the inefficient ones subsidized. Government priorities again basically introduce another form of double money.

Maximum-hour laws enforce compulsory idleness and prohibit work. They are a direct attack on production, injuring the worker who wants to work, reducing his earnings, and lowering the living standards of the entire society.10 Conservation laws, which also prevent production and cause lower living standards, will be discussed more fully below. In fact, the monopoly grants of privilege discussed in the next section are also prohibitions, since they grant the privilege of production to some by prohibiting production to others.

• 8It is interesting to note that the bulk of “organized crime” occurs not as invasions of persons and property (in natural law, the mala per se), but as attempts to circumvent government prohibitions in order to satisfy the desires of consumers and producers alike more efficiently (the mala pro-hibita). Entrepreneurs of the latter kind constitute the generally despised “black marketeers” and “racketeers.”
• 9The workings of rationing (as well as the socialist system in general) have never been more vividly portrayed than in Henry Hazlitt’s novel, The Great Idea (New York: Appleton-Century-Crofts, 1951), reissued as Time Will Run Back (New Rochelle, N.Y.: Arlington House, 1967).
• 10On maximum hour laws, see W.H. Hutt, “The Factory System of the Early Nineteenth Century” in F.A. Hayek, ed., Capitalism and the Historians (Chicago: University of Chicago Press, 1954), pp. 160–88.