- The Centenary of Ludwig von Mises’s Critique of Socialism - June 9, 2022
- In the Beginning: The Mont Pelerin Society, 1947 - May 19, 2022
- Political Paternalism, Not Free Markets, Cause Economic Shocks - May 9, 2022
The free market often seems a hard sell. The resistance and opposition to its seemingly straightforward case emerges and persists, over and over again. It is all very strange, since, after all, how many people do not want the personal liberty to make their own choices about what to buy, where to live, and the amount they are willing to pay for something?
The same applies to their decisions on the supply side of the market. Which one of us does not want to decide what type of job and employment we’d like to pursue, the wage we are willing to accept for a job offered to us, and the ways we might apply our talents and abilities?
The alternative is for someone else to make all such decisions for us. When the fairy-tale rhetoric and utopian dreams about socialism are put aside, and people are told that a real socialist system involves the government telling you where you will live, the kind of job to which you will be assigned, and the wages and amenities of life to which you will be allowed, along with the personal freedoms that will be restricted or done away with, many of them soon become disillusioned, and even, sometimes, strongly opposed.
There is also the important moral element to the free-market society, that being that all human relationships should be based on mutual agreement and voluntary consent. Most people do not want to be coerced into associations and relationships to which they do not consent.
Stated in such general terms, certainly a majority of people in the United States would, no doubt, say they believe that these are essential and desirable elements to a free and good society. If the interested person were willing to sit through a more detailed explanation and understanding of the economics of the free society, they would most likely also agree with the logic of division of labor and comparative advantage.
Division of labor and gains from trade
When individuals specialize in their labors and develop their particular skills and abilities, all are made better off in a social setting in which we each offer in trade that which we decide to specialize in and obtain in exchange from others the goods and services we could not produce on our own, or at least not as effectively in terms of qualities or costs as some trading partners. Even if we are more productive and cost-efficient in many or most things compared to potential trading partners, by buying some things from these less efficient producers, it frees up our time to specialize in those areas where our productivity and income-earning possibilities are greatest.
A standard example of the latter is the highly valued lawyer who could do his own gardening around his home in, say, four hours, while a professional gardener might take five hours to do the same job. But if the lawyer’s opportunity cost is such that if those four hours are freed up to represent clients in court for $100 an hour, then even if the less efficient gardener were to charge him $50 an hour, for a total cost of $250, the lawyer would still be ahead to the tune of an additional $150 by entering into an exchange with a less efficient trading partner. If the lawyer values more highly what the extra $150 of income would enable him to buy than doing his own gardening, then both, clearly, gain from the market transaction. The more productive and the less productive all can find a place at the common table of free-market collaborative association.
So why, then, are people so often resistant to allowing the free-market to go about its work? To say there is “one” answer to this question would, of course, be completely misplaced. But a central one, in my view, is an aspect that has its origin in the very system of the division of labor that improves the overall economic wellbeing of all those participating in the social network of specialization.
Consumer interests and trade restrictions
Each of us in our respective producer roles in the division of labor offers for sale the particular good or service that we have chosen to specialize in. Only to the extent to which we are successful in producing, marketing, and selling that good or service to others in society can we earn the financial means that enables us to return to the marketplace in our role of consumer. In that role, we demand all the other diverse goods and services others in society are, in turn, specializing in the production and sale of so they, too, can earn the financial means to be consumers in the arena of competitive exchange.
Another way of expressing this is that while we are consumers of many goods, we are normally the producer of one or more goods or services. None of us can be a consumer unless we have first succeeded as a producer. As a consequence, we pragmatically place far greater importance on our producer role than on our consumer role in society.
Suppose you produce and sell a product that earns you $5,000 per month, or $60,000 a year. And further suppose that during the year, you spend that $60,000 on 20 different types of goods (e.g., food, housing, clothing, entertainment, transportation, etc.), or, on average, $3,000 per year on each of these categories, or $250 per month (just for the sake of the example).
Imagine that some of the domestic producers of clothing were to lobby their representatives in Washington, D. C., and successfully have an import tax imposed on their foreign competitors’ clothing apparel entering the United States, a result of which is the price of clothing in America increases by, say, 10 percent. This means that the clothing you had been purchasing for $3,000 over the year, or $250 per month, would now cost you $3,300 per year, or $275 per month.
As a consequence, you would find that your income now did not go as far as it had before in the purchase of clothing. You would have to reduce your apparel purchases accordingly, or marginally reduce your buying of other things, so to maintain the real amount of clothing purchased even in the face of the 10 percent rise in its price.
You might mumble and grumble, and if you were aware that this had been caused by the lobbying activities of American clothing manufacturers, you might curse it as another instance of “crony capitalism.” But out of $60,000 of expenditures during the year on all the various types of goods and services you buy, are you really going to become a radical anti-tariff activist over the loss of $25 a month in your standard of living due to this instance of trade protectionism? In many instances, it’s not even equal to the cost of one evening’s nice meal at a pleasant restaurant. And that $300 is barely 0.005 percent of your total $60,000 of spending on all goods and services over the year.
Producer interests and restricting trade
On the other hand, suppose that you are one of those clothing manufacturers. And suppose that you had been selling 150,000 pieces of clothing to consumers in America at $20 per item. Your total revenues, as a result, were $3 million. But now, after the 10 percent tariff kicks in, you are now able to charge $22 per clothing item. Even if with the higher prices for clothing consumer demand for the product were to fall by 5 percent, so that total sales were now 142,500 items, your total revenues would still increase to $3.135 million, or an extra $135,000, for a 4.5 percent increase.
Even if you were a member of a clothing manufacturer’s association and were expected to contribute, say, $10,000 to help cover the lobbying costs to get the tariff increase passed, you would still be $125,000 ahead with this interference with freedom of trade. And, certainly, a political “investment” of $10,000 for an effective lobbyist to get an extra $125,000 in your pocket is not a bad return for getting an anti-competitive hurdle placed in the way of your foreign rivals.
Domestically, the same logic applies in understanding the reasons behind many, if not most, regulations that successfully restrict or at least hinder the ability of new competitors entering the market. Suppose that very lawyer who we referred to earlier of the logic in our example of the division of labor and comparative advantage was making an annual net income of, say, $250,000.
If the prospect of that type of monetary reward were to act as incentive for more people to decide to attend law school and make a living in the legal profession, our currently practicing lawyer might wonder if the arrival of new competitors in his area of the law might not, over time, result in legal fees being competed down, leaving him in the future with a net income of only $200,000. Or a 20 percent decrease in his yearly net income.
He and other lawyers might form an association devoted to protection of the standards and qualities of the legal profession. Maybe they might call for “quality” control in law school curriculum, to see that there is not a “diluting” in the training of lawyers through too much overcrowding in the classrooms. Hence, they might “suggest” — as the practicing “keepers” of the profession — limits on the number of accredited law schools, the number of students who might be annually admitted, and the imposing of stiffer law exam requirements to assure that those “joining them” in serving the legal needs of the public are properly prepared, knowledgeable, and qualified.
And just by coincidence, the number of new lawyers entering the profession each year under these rules and restrictions results in our already-established lawyer’s net income more or less staying at $250,000, or maybe even increasing over time if the number of new lawyers entering the field was not enough to keep up with any increases in consumer demands for such services.
From the perspective of consumers of law services, legal fees simply remain the same, rather than the decline that might have been experienced if the supply of lawyers had competitively grown over time. How can anyone know how much lower they might have been if the law associations were not as insistent in more rigorous “quality controls” in the name of the “public interest?” Especially if the law associations insist that without passing the bar and receiving a license, the government will not recognize a lawyer’s standing in a court of law.
It is an invisible “might have been,” one that was never experienced, so how does any consumer of legal services know what he might have lost in terms of legal fees due to anti-competitive restrictions in the legal profession? On the other hand, current competitors in the legal profession have a strong interest in limiting such new competition because its impact can be significant on how much they earn as producers, and for them to have the financial wherewithal to be comfortable consumers themselves.
Wicksteed and the producer interest in fostering scarcity
This dichotomy between each person’s interest as a producer versus as a consumer was explained fairly clearly more than a century ago by the British economist Philip Wicksteed (1844-1927) in The Common Sense of Political Economy (1910). The division of labor, he said, “differentiates the position, the functions, the opportunities and the capacities of men in such a way that each one is dependent for the supply of all his wants on the cooperation of countless individuals scattered all over the world.”
Each of us, Wicksteed said, is interested in the best terms for his own particular product or service that we offer on the market, so to maximize the income earned and have the greatest buying power possible to be able to reenter the market as a consumer and purchase all the other things we want that are available from everyone else. As a consumer, our interest is to have the lowest prices possible for all the things we wish to buy so each of the dollars we’ve earned can purchase as much as possible.
Thus, we want a relative scarcity of and high price for the product we sell but a general abundance of and low prices for everything we want to buy. But when those supplying various goods in their respective corners of the division of labor attempt to all do the same, the end result is growing poverty and reduced improvement in the condition of all.
In the free market, this anti-competitive urge to increase the scarcity of one’s own product is prevented from hindering innovation and progress. But once organized groups form and can turn to the state to limit competition, it all becomes a different matter. Said Wicksteed:
The desire for relative scarcity in his own skill, or his own commodity, is, therefore, only too natural and intelligible in any man. It is the desire for the conditions that will secure to him what everyone desires…. Where there is an open competitive market, this desire for scarcity may remain a pious (or impious) wish to which those who entertain it can give little or no effect….
But when we pass from the individualism of the open competitive market to the deliberate and concerted action of organized trades, or legislative assemblies, or to the general atmosphere of social ideals and aspirations by which they are supported or prompted, we see at once how fatally perverse this whole way of looking at things must be.” (pp. 353-354)
Restricting labor markets to gain higher-than-competitive wages
And the same applied, Wicksteed went on, when there is an attempt to interfere with market guided and establishment wages for labor:
If in the open market a man is not likely to receive in return for his effort more than it is worth to someone else at the margin, we must reflect that where there is any kind of patronage, or any system of fixed salaries for elective posts, it is extremely possible that a man may be receiving in payment for his work more than it is worth to anyone.
And if, as in all public and official posts, those who determine how much a man is to be paid are not those who ultimately pay him, we escape to an undefined extent the controlling action of the economic forces. If I am to decide how much a man is worth to me for my purposes, and I am then to pay him, I have a more direct interest in determining his worth than if I am to decide how much he is worth to someone else, and how much he is therefore to receive from him….
No doubt, then, there are a large number of persons who are receiving from various public bodies, under the name of salary, more than their efforts are worth. Proposals for a minimum wage, coupled with provision for state employment, whenever that wage cannot be earned in the open markets, would constitute a method of securing more than they are worth, to a large number of other persons. (pp. 343-344)
Wilhelm Röpke on why producer interests trump consumer interests
Inspired by Wicksteed, this was all very clearly summarized by the German free-market economist Wilhelm Röpke (1899-1966) in his book The Economics of the Free Society (1962):
Thanks to the division of labor, each of us in our role as producers is desirous of keeping our goods and services as rare, and therefore as expensive as possible in relation to other goods. By the same token, in our role as consumer, each of us is desirous of having abundance and cheapness prevail in all categories of goods other than those which we ourselves happen to produce.
But since the consumer’s interest is spread over innumerable goods, the judgment of each man in economic matters is determined by his position as producer than by his position as consumer. The concentration of producer interests in a given case will normally permit these interests to enjoy easy victories over the divided consumer interests. Thus, though the interests of the consumers taken as a whole are greater and more encompassing than the opposed interests of the producers in question, the latter will be easily able to override the dispersed and hence ineffectual power of the consumers. The producers’ task is made all the easier by the use of pseudo-economic theories which lull consumers into accepting their own impotence as a normal and beneficial state of affairs. (pp. 68-69)
Röpke highlighted that the only means by which both freedom and prosperity may be secured is a personal ethics and a constitutional order that requires of each member of the society to respect the rights of others to freely choose and freely compete in their respective roles a consumers and producers. We all abstractly know and understand that our standards of living and qualities of life are far better than those enjoyed in America 200 years ago, 100 years ago, even 50 or 25 years ago as a consequence of people being left relatively free to innovate and compete in the marketing of new products, better products, and less expensive products.
A free society needs a personal ethics of social liberty
This requires an open and unrestricted free-market arena in which the only legal prohibitions recognized and impartially enforced are those against murder, theft, and fraud and misrepresentation. This does not suggest that the determination and delineation of each of these is always clear cut or does not require a proper nuancing of the law as cases come before the courts. But the underlying principle in a free and open society is that these broad concepts of right and justice dictate and guide the defining and execution of the law. And all else is left to the free play and voluntary associations and agreements of the societal members themselves.
Röpke pointed this out, as well, in his earlier work The Social Crisis of Our Time (1942), where he said:
We will have to resign ourselves to the fact that in the majority of cases only the reestablishment of unadulterated and honest competition can put an end to the exploitation of all by all rampant today. But in order to achieve this and to maintain free competition against all opposition, an urgent appeal to the insight and goodwill of all concerned is once more necessary.
It is also in order to keep competition itself untainted because it cannot function unless it is based on certain definite ethical norms: general honesty and loyalty to business, adherence to the rules of the game, making excellence of workmanship a point of honor, and a certain professional pride which deems it humiliating to defraud, to bribe or to misuse political power for one’s own selfish purposes.
It should in fact be the rule that everyone who does not adhere to the strict code of business ethics, who violates the rules of competition, indulges in monopolistic manipulations, asks the state for economic assistance … should be socially ostracized as violating the dictates of decency, and in worse cases as a cheat, as a fraudulent bankrupt, as someone engaging in a “dishonest” profession.” (pp. 133-134)
Only by changing the climate of opinion and ethical presumption, Röpke was reasoning, can there be a turn away from the interventionist state with its anti-competitive favors and privileges. But before the politics of government interventionism can be reversed and repealed, Röpke was saying that ideas must first change in society, the transformation of which brings about a different ethical attitude about the role of government in serving the producer interests of sectional groups against what is, in fact, the interest of all of us as consumers as free-choosing actors in the marketplace.
If people today support or acquiesce in market restrictions that increase scarcity or retard the reduction of scarcities, it is due to acceptance that it is alright for people to use the state to gain at other’s expense, and if some have done so, why shouldn’t I be able to play the same game? Most of us, if you see that someone has dropped their wallet, consider it as right to bring it to their attention and return it to them, even if a policeman is not immediately looking over our shoulder. It is just “the right thing to do.” Stealing is wrong, and taking advantage of such a situation in which someone has dropped their wallet is just not the right thing to do.
This is the crucial task as hand: Restoring a sense of right and wrong in terms of what are people’s individual rights in making their own choices and in their freedom of associations and agreements with others. Until this is done, little that is lasting is likely to move us back in the direction of the truly free and prosperous society.
[FIRST PUBLISHED AT: Future of Freedom Foundation].
PHOTO: coins. PHOTO BY: Nathaniel_U, Attribution 2.0 Generic (CC BY 2.0).