Chapter 9:
Economic Regulation
Rules, Corruption, and Property
Chapter Objectives
After reading this chapter you should be able to:
1. Explain basic differences between the current pragmatic approach to economic regulation and the alternatives often suggested by critics.
2. List the objectives generally pursued by economic regulation and the basic methods of regulation that have been used in the United States.
3. Evaluate the effectiveness and propriety of each of the presently used regulatory methods.
4. Understand how American regulation of property and labor relations is very inadequate.
5. Describe the proposed "ideal" way to allocate rights to use scarce natural resources, and how the value contributed to production by natural resource scarcities would be distributed.
6. Explain why increases in the difference between highest and lowest wages could be accompanied by decreases in the difference between highest and lowest personal income under the arrangements proposed in the text.
Key Terms
black
market bureaucracy
collective
bargaining
Communism
"competition"
credentials
society
deregulation
externalized costs
Homestead Act of
1862
jawboning
justice in acquisition
justice in
transfer
pragmatic regulation
revolution of rising
expectations
social dividend
theory of the second best
tragedy
of the commons
transfer payments
trust fund
"It is not the Almighty, but we who are responsible for the vice and misery that fester amid our civilization. The Creator showers upon us his gifts--more than enough for all. But like swine scrambling for food, we tread them in the mire--tread them in the mire, while we tear and rend each other!"*
THE CRISIS IN ECONOMIC REGULATION
Almost everybody feels that something is badly wrong with the American economy. Agreement does not extend to the details.
Whatever the underlying causes, there can be little doubt about the long list of obnoxious symptoms. The dollar's purchasing power continues to decrease. The average level of unemployment--particularly among young people and blacks--drifts gradually up. Governments extract ever higher percentages of personal income as taxes, yet governmental bankruptcies loom ever closer. Proliferating red tape threatens the continued existence of large industrial corporations, and renders establishment of small new industries constantly more difficult. Strikes involving both private and governmental employees cripple whole regions as effectively as the occasional outbreaks of extreme winter weather.
One school of thought holds that things are not really so bad in today's America compared to yesterday's America and to the rest of the world. We are suffering not from a reduction in average attainments but from an escalation in desires, a "revolution of rising expectations." In terms of the equation introduced in Chapter 2
S = Ap/D
our dissatisfaction with the economy is due to increased D rather than decreased A. [Footnote 1] There is, of course, considerable truth here. But who is to say what level of desires is appropriate? And even if the average person is better off than he was yesterday, or than a foreigner is now, inflation, unemployment, taxes, red tape, and strikes do not affect everyone the same way.
At the opposite extreme from those who say there is nothing basically wrong stand two schools that would--each in its own very different way--radically alter the relationship between American government and the economy. One of these schools, in its most extreme form, we will call communist. Partisans of this solution maintain that government should own the entire productive plant of the country so that henceforth production can be for "use, not profit." Existing private enterprises would be nationalized, new ones would be outlawed, and everything would be produced and distributed according to the requirements of one big, coordinated--and, of course, just--master plan.
The basic difficulty in such proposals is political or metaconstitutional: they cannot be implemented without violating the fundamental requirements of the rule of law. This system cannot involve only the extension of productive economic activity by government. Government sanctions would have to be used to prevent private individuals and associations from doing what government-as-contractor is allowed to do. In other words, any such rule of action is patently not a general one. It does not say sanctions will be imposed on "all who," but only on all except government who take the proscribed actions.
The other extreme position consists of those who would completely deregulate the economy, returning the U.S. to laissez- faire capitalism in its pure form. By reducing the influence of government the forces of productivity and liberty would be unleashed, and the total productivity would so increase that even those getting a smaller share of it would be better off in absolute terms. (Which would you rather have, 10% of $1000 or 5% of $10,000?)
The basic problem with this proposed solution is that it is impossible for government to avoid influencing the economy. If it does not do so deliberately, it will influence the economy haphazardly. In order to operate at all, government must raise money. The precise form of taxes cannot help but influence the economy, as people strive to modify their actions to maximize real purchasing power. Likewise, the ways government spends its money--large quantities of money--have a substantial impact on the national economy. Even a hypothetical "minimum" government, acting only to provide external defense, internal policing, and enforcement of contracts, would still have to raise and spend enough money to make a substantial impact on the economy. Since we have no choice in whether government actions will affect the economy, the only thing we could do by adopting the libertarian or laissez-faire solution would be to make that impact entirely haphazard instead of partially intentional, as it is now. It is hard (though not quite impossible) to argue that we will get further toward our goals by a random path than we can by pursuing them deliberately.
Still another school assumes that present economic problems are due to dishonest or unintelligent political leaders. Basic changes in the system itself are therefore not needed. Rather, we should make the system work well by electing honest and intelligent leaders. The basic problem with blaming our national economic difficulties on crooked or stupid leaders, however, is that it completely ignores the ultimate responsibility of the electorate for the policies of a democratic government. No matter how virtuous and intelligent leaders may be, they cannot do anything if they cannot get elected and reelected, and to do this they must be willing to do things desired by the public. If the public is superstitious and economically illiterate, politicians will have to act as if they were economic idiots in order to remain in office, no matter how intelligent they are.
Perhaps the strongest school in recent decades has consisted of those who, when current economic regulations do not produce desired results, prescribe more of the same kinds of regulations. In specific cases, these people may have a valid point. Regulation has tended to be very pragmatic, and it is not always possible to hit exactly the right note in initial efforts to grapple with a problem. However there is another possibility, which these people tend to overlook: Many current problems may be due to the very government regulations intended to solve them. Higher unemployment, for example, may be in part a side effect of government programs designed to combat it. [Footnote 2] To the extent this is true, "more of the same" will aggravate the problem.
Objectives of Economic Regulation
"Regulation" is an inherently normative concept. It implies that some states of affairs are more desirable than others, and the object of regulating is to try to achieve these preferred results. The public objectives pursued via economic regulations are presumably not controversial as long as we do not attempt to rank them in order of relative importance. These objectives, as articulated by representatives of the various schools of thought include: information, production, distribution, environmental, liberty, and progress values.
Information Values. When production is highly specialized, it is hard for consumers to evaluate goods and services produced by other specialists. Customers are not apt to be able to judge the adequacy of sanitation in restaurant kitchens. Travelers are in no position to judge the mechanical condition of their airliner or the health of the pilot. Few of us are expert enough chemists to analyze a loaf of bread to see if it contains harmful chemicals. One objective of government regulation is therefore to assure either that customers are made fully aware of what they are buying or that certain minimum standards of quality are maintained in goods and services.
Production Values. Nothing can be consumed that has not first been produced. One goal of regulation is therefore to encourage maximum production, thus enabling maximum total consumption. Both "capitalism" and "communism" claim to unleash the forces of productivity, and both schools must therefore regard a high level of production as good. More recently, production values have apparently been questioned by certain environmentalists of the "no growth, more is less" school. However, if good environmental conditions are themselves regarded as a "good" or a "service," even ecologists fall into line and support production values.
Distribution Values. For both ethical and practical reasons, there is considerable agreement that huge inequalities in purchasing power are undesirable. Especially is this the case if the people on the low end of the economic scale fall below community standards of absolute welfare. Nobody is in favor of poverty. One objective of economic regulation is to reduce economic inequalities, or at least to eliminate extreme poverty from the community.
Environmental Values. Air and water are very largely "collective goods." Dirty air is breathed by the rich and poor alike. Water flows from the city water works into homes at all levels of economic prosperity and adversity. To a limited extent the wealthy may be able to live in expensive areas where air and water are exceptionally clean, or they may install air and water purifiers in their houses. But there is increasing awareness that we inhabit a closed ecological system, and that we are all in effect in the same boat. Nobody is in favor of pollution. To the extent that environmental values are not seen as a part of production values they must therefore be regarded as a separate objective of economic regulation.
Liberty Values. No responsible school of thought argues that individual liberty is bad. All, in fact, promise to protect and increase "real" individual liberty. Economic regulation might appear to be inherently at odds with liberty values. Regulations, of course, must restrict some liberties. However, one can argue that less important liberties are restrained so that more important ones can flourish.
Progress Values. Economic regulation tries not only to achieve information, production, distribution, environmental, and liberty values in the short run, but also to increase them in the long run. No one is opposed to progress.
Pragmatic Regulation---America's "Middle Way"
American economic regulation has avoided extreme commitment to pure doctrine of either extreme we have discussed. Perceived problems and opportunities have been dealt with one by one in ways that appeared most promising and politically feasible.
Beginning in the late nineteenth century the federal government began evolving the approach to economic regulation that came to dominate the scene by the last quarter of the twentieth century. In 1887 the Interstate Commerce Commission (ICC) was created to regulate the railroads; in 1914 came the Federal Trade Commission; and in the 1930s what had begun as a slow trickle became a deluge: the Federal Communications Commission, Federal Power Commission, National Labor Relations Board, and the Securities and Exchange Commission. This evolutionary process has produced an economy that can be described as a "regulated" or "restricted market."
Effects of Regulations and Restrictions. The extent of restrictions on the functioning of markets in the U.S. is not generally realized. Special limits apply to the key transportation, power, and communications industries, the commanding heights of the American economy. No firm can haul other people's goods from state to state by truck without permission of the ICC. This permission is not given to all qualified operators who apply. Electrical and gas production and distribution are closely regulated both by federal and state public utility agencies. Telephone service is provided under equally stringent state and federal limits. And no one can originate radio or TV signals without permission of the FCC.
Many regulations now apply to producers in general rather than just to those in selected industries. Even private colleges and universities, long the bastion of academic freedom and independence from political controls, are increasingly subjected to labor law, the Occupational Safety and Health Administration (OSHA), antipollution requirements, rules against discrimination, and required provision of facilities to accommodate the physically handicapped.
Most surprising of all, in a country where official rhetoric emphasizes opportunity and individual liberty, are restrictions on who can perform certain kinds of work. The "credentials society" is a recent development. Walter Gellhorn notes that:
[A]s late as 1900 one could be admitted to the bar in every state without earning a law degree or even an undergraduate college degree. Footnote 3
By the last quarter of the twentieth century, however, the traditionally somewhat restricted professions of law and medicine had been joined by many others. Gellhorn ,suggests that the founding fathers would have been aghast to learn that in many parts of this country today aspiring bee keepers, embalmers, lightning rod salesmen, septic tank cleaners, taxidermists, and tree surgeons must obtain official approval before seeking the public's patronage . Footnote 4
Acrimoniously noting that only clergymen and college professors remain universally unregulated, Gellhorn suggests that this is "presumably because they are nowhere taken seriously."
Regulatory Techniques
Five main types of regulatory technique appear to be emphasized by American government today:
Payments to Private Individuals or Associations out of the Government Treasury, These may be general "transfer payments" designed to increase the purchasing power of selected people. (Examples: Old Age Assistance, and Aid to Families With Dependent Children.) They may be restricted transfer payments designed to increase recipients' ability to purchase particular things. (Examples: food stamps, college scholarships.) And they may be more than transfer payments; conditions may be attached to encourage behavior desired by the government or to discourage other behavior. (Examples: agricultural price support payments to farmers contingent on their reducing the acreage devoted to given crops, bounties on pelts of predatory animals, cash payments by the government of India to men allowing themselves to be sterilized.)
Required Disclosure of Certain Facts to Prospective Customers. These regulations may simply require that the weight of a loaf of bread or can of pears be printed on the container. Or they may insist that all ingredients in processed food be disclosed on the label so that people who are allergic to one of them will not unwittingly poison themselves by consuming it. Restaurants meeting certain standards may be allowed to put the letter A on the door; lesser places may have to rest content with a B or C Companies wishing to issue new stocks or bonds to the public may be required to inform all prospective purchasers of certain facts regarding the corporation's financial conditions.
Standards Applied to all Products or to all Processes of a Certain Type. Examples of product standards are the Pure Food and Drug laws, requiring specified degrees of purity in chemicals destined for human consumption, and automobile emission and mileage requirements imposed by pollution and conservation laws. Examples of process standards are rules applicable to slaughterhouses and noise levels permissible in factories.
Limitations on the Right to Enter into or Withdraw from Producing Particular Goods or Services. At the individual level these restrictions often take the form of licensing requirements, with formal education frequently a prerequisite for receipt of the license. According to Gellhorn:
In 1969 West Virginia was the foremost adherent to "free enterprise," with only 63 occupations subject to licensure. California was the most restrictive, with 178 licensed occupations; Pennsylvania closely followed with 165.< Footnote 5
Here, too, we find the requirement that firms wishing to carry goods or passengers commercially by road or air must get an appropriate "certificate of convenience and necessity" or the equivalent. Would-be TV station operators must receive a license good only for one channel in one location from the FCC. Phone, gas, electricity, and TV cable operators generally must get a "franchise" or other permission from the city where they wish to operate, and only one such operation per town is usually permitted. While individuals licensed to do a certain kind of work can always stop doing it and retire or go into some other profession (if they can get a license for it), firms are not always allowed to do this. Thus, for years private railroads seeking to discontinue passenger service and selected unprofitable freight runs were prevented from doing so by the ICC.
Regulated Prices. The federal government seeks to influence prices of particular goods and services via all three types of power at its disposal. It may seek to drive agricultural prices higher by paying inducements to farmers who plant reduced acreage. It may issue verbal appeals for management and labor to be restrained in seeking "inflationary" price and wage increases- this practice is called "jawboning." Government has frequently threatened sanctions against firms charging too much or too little for their products. These latter restraints are called wage-price controls when applied somewhat more generally during an emergency. More perennial forms of controlled prices are found in the regulated utilities.
Pragmatic Regulation Evaluated
As we might expect, the five techniques of regulation have had mixed success in achieving the six objectives of regulation noted earlier.
Transfer Payments. Transfer payments to eligible individuals, for example, may effectively further distribution values by increasing equality of purchasing power. At the same time, however, they may discourage productive effort, and thus total production, by allowing the more productive to keep only part of their additional output and using the rest-taken as taxes-to finance the payments.
Whether they are effective or not, transfer payments are completely proper when they command political support. Government, like all actors, must be free to give or refuse to give inducements for any reason it finds sufficient. Actual experience, however, casts doubt on the effectiveness of transfer payments in promoting distribution values. There is a good deal of evidence suggesting that under most political systems only those people with above average means can get organized enough to effectively seek transfer payments from government.
Disclosure. Required disclosures, on the other hand, appear to be both unequivocally proper and undeniably effective in promoting government objectives. Disclosure very obviously increases the information available to potential consumers, and it is hard to argue that customers have no right to know what they are buying.
Standards. Likewise, product and process standards are both legitimate and potentially helpful. These standards can be expressed in general rules of action applicable to all comers. Anybody producing an automobile putting out more than a certain amount of CO or NOx per mile violates the law. If all automobile engines could be made and sold no matter how "dirty," as long as people were told how dirty before they buy, many people would quite reasonably opt for dirtier, but cheaper, engines. If the cleaner engines were cheaper, there would be no need for regulations; private economy and public interest in clean air would coincide automatically. At the level of individual (retail) actions, the side effects of one additional dirty engine are negligible. However, many of the same people who would act this way in the absence of emission control regulations will support enactment of such regulations. At the wholesale level of decision, the aggregated consequences of a rule limiting pollution are big enough and important enough to produce considerable support.
Product and process standards can be said to promote information values or to reduce the need for information. When airplanes and pilots not meeting high mechanical and health standards are not permitted in the air, we need not seek information about these things before deciding which airline to fly on. The fact that they are flying at all is considered to be all the information of this type that we need, assuming that the laws are enforced firmly and evenhandedly.
Other values may be adversely affected by product and process standards, however. Total production may be decreased. This may be made up for by improved quality and is not a sufficient basis for condemning such regulations. Distribution values may also be set back. Pushed too far, product standards may tell people, in effect, "Go first class, or don't go at all." They may say, "You are free to eat steak, but not hamburger." More prosperous elements in the community may not be bothered by such rules, but poor people unable to afford steak may have to go hungry. It has been said, for example, that if the housing code (a product standard) in any major American city were strictly enforced, hundreds of thousands of people would have to live in the streets. And product or process rules which are too rigid may inhibit future progress by making innovations difficult. Aspirin--one of the most beneficial drugs in human history-- probably could not run the gauntlet of Food and Drug Administration requirements if it were introduced as a new drug today.
Restrictions and Regulations on Employment. Governmental restrictions on working are a more debatable part of current economic regulations. If based on quality standards of an appropriate severity applied uniformly to all comers, entry restrictions may promote information and environmental values. Consumers could depend on government permissions as a source of information, just as in the case of product standards. In fact, if entry to a line of work were limited only on this ground, it would merely be a product standard by another name. Licensing may also promote environmental values. For example, to recall a case mentioned earlier, if anybody who wanted to could vend food from pushcarts in the streets of the New Orleans French Quarter, the resulting clutter and nuisance might greatly detract from the charm of that area.
The dangers of restricting the right to perform certain kinds of work are, however, very considerable. It may reduce total production. It may impair efforts of poor people to improve their economic position by moving into a more profitable line of work. (If it was less profitable no regulation would be necessary to keep them out.) Licensing is a serious restriction on the fundamental individual liberty to exchange favors by mutual consent.
The rhetoric of licensing and other restrictions on the right to produce is always to protect the public from producers. Actual operation of such restrictions, however, has always tended to protect existing producers from the public. Among students of the American regulatory process there seems to be an amazing consensus on this fact no matter what the political persuasion of the student. Footnote 6
Licensing has only infrequently been imposed upon an occupation against its wishes. . . . In many more instances, however, licensing has been eagerly sought--always on the purported ground that licensure protects the uninformed public against incompetence or dishonesty, but invariably with the consequence that members of the licensed group become protected against competition from newcomers. That restricting access is the real purpose, and not merely a side effect, of many if not most successful campaigns to institute licensing schemes can scarcely be doubted. . . . Those already in practice remain entrenched without a demonstration of fitness or probity. Footnote 7
Even more suspect are governmental restrictions excluding entire firms that are technically competent to do certain work. Standards applied in determining eligibility for a "certificate of public convenience and necessity" are so loose that the regulators can practically make any decision they wish from one individual case to the next. Not unnaturally, such an approach to regulation breeds corruption, as some firms will always be quite willing to share the benefits of tapping a new market with the bureaucrats whose support is essential in order to do so. The problem of a black-market bureaucracy permeates American regulatory politics to a degree that few citizens yet appreciate. As a side effect of the Watergate investigations into President Nixon's Committee to Re-Elect the President, public attention was briefly drawn to corrupt regulators. George Spater, chairman of the board at American Airlines, testified that
under existing laws, a large part of the money raised from the business community for political purposes is given in fear of what would happen if it were not given. Footnote 8
Regulation and Corruption. Attention was soon distracted from the connection between the type of regulation and corruption to one particular method by which the fruits of that corruption are harvested. Thus the New York Times editorialized that
[T]he electoral system rests on the financial bedrock of private campaign contributions. In its very nature this system breeds the kind of bribery and extortion that flowers in "laundered" money bags, higher milk prices in exchange for financial gifts from dairymen and interventions with regulatory agencies for the benefit of fat-cat contributors. Footnote 9
Common Cause, a public interest organization peddling its own pet approach to solving most problems, sent out envelopes labeled:
For Sale: The United States Government-All bids will be handled in secrecy. (Fall, 1973)
Jumping on the bandwagon, the Christian Science Monitor opined that
[I]t is . . . high time that a stop be put to the selling of enormously valuable political favors to individuals and corporations. Footnote 10
We will discuss the "campaign finance reform" proposal in its own right in Chapter 12. It is sufficient now to note that the methods by which assets can be conveyed are legion, that stamping out one such method while leaving the regulatory roots of corruption unmodified cannot solve the problem, and that prohibiting or restricting private donations to campaigns has extremely serious civil liberties and metaconstitutional implications. In the rush of enthusiasm over the Watergate- inspired "reforms," it is too bad that nobody bothered to ask why selling enormously valuable political favors is any worse than giving them away for nothing.
Price Controls. Regulating the prices that can be charged and paid in transactions between private parties, however, is undoubtedly the worst of the prevailing American techniques. Even restricting the right to engage in certain businesses has some beneficial results and, as we will see later in this chapter, there are ways by which this could be done without producing very much corruption. Price regulations, on the other hand, have nothing to be said in their favor. One function of floating prices, free to approximate their market-clearing or equilibrium level, is to convey information about the relative supply and demand for a given thing. When prices are artificially restrained by government-threatened sanctions, the message sent by prices is distorted. In a planned economy like that of the U.S.S.R., prices have been so distorted that the task of central planners in allocating scarce resources has been severely aggravated.
As the information conveyed by prices is distorted by controls, production values will inevitably be harmed. Whether something constitutes "waste" or "production" at all depends on the values that people place on it. So when people are not free to express their evaluations in the prices they can offer or demand, production in the real sense is unlikely to be maximized. It is often thought that this reduction in total production is merely a trade-off for a more equitable distribution, but whether price controls really promote distribution values is very debatable. To the extent that distribution is based on criteria other than price, the resources necessary to obtain certain things may or may not themselves be distributed in a way that favors those with little money. Some people with little money have plenty of time, so if allocation is by first come, first served, such people may be helped by controls that keep prices artificially low. If on the other hand allocation is by political pull, this may enhance the purchasing power of the rich (and powerful) at the expense of the poor.
Wage Controls. Perhaps the most disastrous price controls have been those which governments have tried to impose on wages- -the price of labor. In modern times, the usual asserted objective of such controls has been to increase the purchasing power of the poor by placing a "floor" under their hourly earnings. However the inevitable economic effect of "minimum wage laws" is to create a surplus of labor, or a shortage of jobs, depending on which way we look at it. At the equilibrium, or market-clearing price supply of labor will equal demand. When the price that must be paid for given labor is artificially forced above the equilibrium, disequilibrium results. Demand for that kind of labor, the amount of it that other people are willing and able to purchase, will decline relative to supply, generating unemployment. Unemployed people earn nothing, which is both less than the legal minimum and less than they could have earned if there were no legal minimum. Even when these losses are fully made up for through welfare or unemployment transfer payments, economic inequality in the community is increased because welfare recipients are dependent upon charity in a much stronger sense than workers are dependent on their employers. Production values also suffer, as the total national product cannot be as big as it would have been if all interested in working were productively employed.
Price Controls and Environmental Goals. It is hard to see how environmental values are promoted by price controls. Artificially low prices may promote higher use of resources, however, thus limiting efforts at conservation. Environmentalists generally worry more about prices not fully reflecting actual costs of producing something--including adverse impact on the local air and water--than they do about prices that are too high. One problem is that when a factory is free to dump pollutants into the air or water, its money or out- of-pocket costs of production--and hence the floor under its prices to its consumers--do not reflect the actual total cost to the community of its production. Such costs that are not reflected in dollars but simply absorbed by the community are called "externalized costs." One remedy advocated by many ecologist-economists is to tax factories proportionately to their pollution so as to internalize those costs, to force people to weigh actual costs against benefits when deciding to produce or to consume given things.
What Is Curtailed? Liberty values are badly harmed by price controls. Controls tell people who are willing and able to exchange goods or services at a mutually agreed upon price that they cannot do so even when the actions to be exchanged are themselves perfectly legal. Thus, during the Great Depression, a grocer was punished for selling milk at less than the legally required price to people whose children probably would have gotten none if the legal price were charged. [Footnote 11] Price controls, of course, are not laws--they are pseudo-laws. As we have defined the boundary between these two kinds of decrees, laws are general rules of action enforceable by sanctions. Imposition of government sanctions on any other basis constitutes pseudolaws. Price controls are not general rules of action. Rather, they take individual actions that are themselves perfectly legal--e.g., paying money to someone else, performing a service for somebody else--and make them "illegal" only when somebody else takes a similarly legal action. The "illegality" therefore derives not from the individual's action, which in itself is perfectly legal, but from another individual's action, or from the desire to induce that action. But it is incompatible with the rule of law to impose sanctions on somebody for another person's legal action, or for his desires.
Finally, price regulations are extremely harmful to progress values. Information, production, distribution, environmental, and liberty values may sometimes come into conflict with the requirements of progress. Some trade-offs of these other values may have to be made in achieving progress. But price controls are in total conflict with all of these other values, as we have seen. It is hard to imagine how a regulatory technique that suppresses meaningful information, prevents maximum production, reduces economic equality, inhibits efforts to preserve or restore the environment, and arbitrarily restricts individual liberty--how such a technique can contribute to progress.
A GENERAL PERSPECTIVE ON REGULATION
Pragmatism is the orientation chiefly to the practical consequences of action rather than to its conformity to rules or principles. Pragmatism has many advantages. It is undoubtedly safer than navigating with the aid of a totally perverse body of doctrine. The pragmatic inability to do anything methodically should be a sure-fire defense against going in the wrong direction methodically. Even so, there can be no doubt that the United States has paid a very high price for its pragmatic approach to economic regulation. Avoiding one grand, misleading general doctrine or ideology, we have suffered from a number of misleading specialized doctrines.
Ideologies, political and social decisions about what is true and what to do made wholesale, give us something to reject as well as something to accept--for the time being--and use. One wonders if astronomers could ever have gathered the data that ultimately led Copernicus to propose the heliocentric model of the solar system if they had not had Ptolemy's geocentric model to put order into their thinking and measurements.[Footnote 12] The trouble with doctrinaires is not that they have a doctrine, but that they assume that their ideology is completely adequate to the demands put upon it, that there is no need to consider modifying it as experience accumulates, and that competing ideologies have no valid elements whatsoever. If we can remember that all political discourse is a mixture of sense and nonsense, however, then we can safely think ideologically and reap the benefits of systematic, general, wholesale analysis.
It is a basic and continuing thesis of this textbook that the United States is in very bad shape ideologically. To the extent we have a national body of doctrine at all it is dominated by constitutional categories which are nearly 200 years old and badly unsuited to today's problems and institutions. What systematic analysis of basic issues is going on inside the government is being done by courts whose attachment to principles is increasingly doubtful. Footnote 13
We will return to the problems of pragmatism in the next chapter. For now, we will be interested in the fact that, in spite of, or perhaps because of, our pragmatism, we have managed to botch up regulation of two of the most fundamental relationships that exist in any society:
1.
our relationship to the natural resources we need
2. the
relationship between worker and employer.
Control of Natural Resources
Natural resources are one of the two essential components of all production. Even pure services cannot be rendered unless there is a material place in which to stand. But how are we to determine who has the right to use given scarce natural resources? How does one person get the right to stand somewhere and, thus, to prevent other people from doing so?
In thinly populated regions one can consider all natural resources including land to be a common, usable by all who wish to do so. Public parks in the United States are--in a limited way--vestiges of this earlier practice. It is thus highly appropriate when such a park has a name like the Boston Common. As soon as population pressures develop, however, it becomes undesirable to leave all natural resources as commons. Cultivation or "improvements" are unlikely unless the people making the effort can keep the fruits of their labors. This is not the case in a commons where all are free to take anything they wish. And when damage to the long run usefulness of common resources is (in effect) spread equally among all people but the benefits of exploiting them accrue to specific individuals, each individual has a strong interest in destroying long run resources for immediate gain. The carrying capacity of a given environment is limited, and if the limit is ignored the environment will deteriorate. Thus, if there are no limits on hunting, so many animals may be killed that their populations decline or are wiped out. This is very hard on future hunters, but great for the individual hunters as long as it lasts. Here we have what is called the "tragedy of the commons." Footnote 14
Improprieties of Property Law. To make effective use of natural resources it therefore becomes necessary to assign specific rights of occupancy, use, and exploitation to specific people. It is here that every human society making the attempt has gotten into serious trouble. When government officials have broad discretionary powers to allocate valuable privileges to whomever they please, massive corruption is inevitable. Given the absolutely critical place of land and other scarce resources, it is probably unsafe to allow government any flexibility at all in deciding who gets to use particular resources. But the most obvious rule conducive to this end, division of all resources into equal portions and allocation of one portion to each person, is not practicable and is also undesirable for several reasons:
1. There would be serious difficulties in determining the quantity of each natural resource and the value of those quantities. If evaluation is done by government officials, this may allow discretion and corruption to sneak in the back door while precautions are being taken at the front.
2. Certain natural resources are not as valuable to one person as they are to another. Thus only a process that simultaneously evaluates and allocates resources could allow for distribution of resources of equal value to all people.
3. Many efficient production processes cannot be employed on a small scale. Total agricultural production in the U.S., for example, would be vastly lower than it is today if all farmland were broken up into many small farms.
4. As population expands and new technologies develop, a previously equal division of rights in natural resources, even if it were possible, would be rendered out of date. Individual rights to potable water, for example, must be reduced as population increases but available water supplies remain constant. The bottoms of the oceans, once so worthless that nobody even considered them a resource at all, have become valuable due to new technology allowing commercial exploitation. Hence, the Law of the Sea conferences.
In practice, societies facing the natural resources allocation problem appear to have adopted systems of pure or modified highhandedness, more or less maximizing long-run opportunities for trouble and for corruption. In the Soviet Union, resources are simply all declared to be state property, and that is the end of the matter. Specific decisions about what is to be done with particular resources, and by whom, are made in a very centralized and arbitrary way by top Party and government leaders. The American system has been more subtle. As in the U.S.S.R., we assume that everything is owned by government, but unlike the U.S.S.R., we have not assumed that this initial condition should be perpetuated.
Ownership of Property. Early in American history large blocs of land were given away or sold by the British crown. After independence large blocs were sold to individuals or given to railroads to induce them to unify the country with their iron tracks. However, scandals arose over these large scale manifestations of governmental favor, and efforts were made to sell smaller plots of land at "retail." [Footnote 15] These culminated in the Homestead Act of 1862, offering free parcels of land to people who would settle and develop it. A popular song at that time went: "Uncle Sam is rich enough to give us all a farm." This policy worked well for a time, but over the longer haul it contained the seeds of its own destruction. Today, Uncle Sam is neither rich enough nor crazy enough to give us all a farm.
Robert Nozick, discussing the problem of property, maintains that
If the world were wholly just, the following . . . definition would exhaustively cover the subject of justice in holdings. 1. A person who acquires a holding in accordance with the principle of justice in acquisition is entitled to that holding. 2. A person who acquires a holding in accordance with the principle of justice in transfer, from someone else entitled to the holding, is entitled to the holding. 3. No one is entitled to a holding except by [repeated] applications of 1 and 2. [Emphases added.] Footnote 16
There are no fundamental problems with "justice in transfer." Such transfers of property from one owner to another can be neatly accomplished under the usual rules of contract, by mutual consent of the parties.
The initiation of ownership over resources not previously owned is an entirely different matter, however. One properly acquires a house and lot by purchasing them from the previous owner. He in turn acquired it by a similar transaction with a still previous owner. But the first owner of the property cannot have acquired it by this process, for there was no previous owner to give or refuse his consent and to receive the proceeds of the sale. Nor can the problem be avoided by assuming that in such cases the original owner is a government. As Nozick pointedly notes:
We should note that it is not only persons favoring private property who need a theory of how property rights legitimately originate. Those believing in collective property, for example, those believing that a group of persons living in an area jointly own the territory, or its mineral resources, also must provide a theory of how such property rights arise; they must show why the persons living there have rights to determine what is done with the land and resources there that persons living elsewhere don't have (with regard to the same land and resources). Footnote 17
And the requirement of the rule of law that sanctions be imposed only on people violating general rules of action precludes any rule presuming government ownership. Rules discriminating in favor of government-as-contractor, the only aspect of government that can own anything, are by definition not general. Yet to say that something is someone's property means that government will use sanctions against anybody who seeks to use it without permission of the owner. Hayek formulates the issue as follows:
The classical formula that the aim of rules of just conduct is to assign to each his due (suum cuique tribuere) is often interpreted to mean that the law by itself assigns to particular individuals particular things. It does nothing of the kind, of course. It merely provides rules by which it is possible to ascertain from particular facts to whom particular things belong. Footnote 18
But while Hayek's statement is perfectly acceptable as a norm, it is totally inadequate as a description of the way property has actually been handled in the United States or elsewhere. It is said that people who trace their ancestors back too far will always find a horse thief. Likewise, when we trace the ownership of any land or other natural resources back far enough, we discover that the original "owner" simply took it. In this sense, there is profound meaning in the famous statement by the philosopher P.J. Proudhon: "What is property? Property is theft!" Footnote 19
The patent violation of any defensible principle of "justice in [original] acquisition" is not just a philosophical fine point, of interest only to historians and other collectors of odd facts. All that we have to do is to read a newspaper, and we find that justifying original acquisition of property is a very practical problem. Who owns Israel? The Jews? The Arabs? Who was there first? Does this matter? Is there an implicit statute of limitations on territorial disputes among nations? Closer to home, what about the claims of Indians that they own vast portions of Maine, the Dakotas, and Montana? Who owns the billions of dollars of minerals in and under the international oceans? Who owns the moon? All efforts to answer these questions in a philosophically acceptable way have, to date, been failures.
Labor Laws
Human beings must consume in order to live. Consumables must first be produced, and all production requires both natural resources and labor. Just as American regulation of relations between man and natural resources has been highly unsatisfactory, so too has our approach to labor relations, the other fundamental part of the economic picture.
Production roles in modern society have, to date, constantly become more specialized. As we noted earlier, the total productivity of a given set of individuals is greatly enhanced if each of them concentrates on one particular kind of work. Experience, skill, and efficiency can accumulate more rapidly for a worker who does not try to be a jack of all trades. But while specialization vastly increases our ability to produce, it creates a new problem, or at least badly aggravates an old one, that of "distributing" what has been produced. Specialization means that some people will produce more food than they can use, while others will produce none. The efficiency advantages of specialization can therefore be realized only if part of the resulting production is transferred from one person to another.
Transfers of goods or services, like all actions that may affect the satisfaction of others, can be found in three distinct contexts: involuntary associations, trusts, and voluntary associations. Involuntary associations and trusts, being established unilaterally, are relatively simple to analyze. Trusts, unilateral transfer of inducements, are unequivocally legitimate. Involuntary associations, all in which a sanction is threatened or imposed, are unequivocally illegitimate except when the sanction is a punishment for violating a general rule of action.
Voluntary associations are more complicated. They may consist either of simple one-directional transfers by mutual consent ("gifts," "charity"), or of exchanges. Exchanges by mutual consent will not take place unless both parties expect to benefit. [Footnote 20] But the benefits produced by the cooperation of the parties to a voluntary association do not distribute themselves automatically. There may be a number or range of possible ratios of exchange that will leave both parties more satisfied than they would be without the association. Some of these ratios will distribute more of the increased satisfaction to one party, some to the other. Negotiations about the establishment or continuation of a voluntary association may therefore demonstrate that there is a very real conflict of interest between the parties. Relations between employees and employers are a prime example of voluntary associations, and of the conflicts centering around them.
Conflict and Cooperation. It is very misleading, however, to speak only of a conflict between parties to a voluntary association. The very occasion for their conflict is produced by the fact that they have a mutual interest in cooperating. And this mutual interest in cooperating is stronger than the conflicting interests, or there would be no association or serious negotiations. Unfortunately, it is very easy to take this mutual interest for granted and to focus all our attention on the subsidiary conflict over how to divide up the benefits produced by cooperating, thus getting a very distorted view of voluntary associations. Labor-management relations have been a classic, and tragic, example of this distorted perception.
The issue of proper wage levels for different kinds of work has been aggravated by several of the social and economic consequences of specialized production. Specialized production roles may be accompanied by narrow, parochial outlooks among citizens. As fewer and fewer people see the larger picture, more may come to regard their own slice of it as the only thing that counts. Intolerance, disdain, or just plain hatred of people preoccupied with different specialties may be stimulated by this parochialism, and cross-specialty communications may be inhibited. At the same time that increased specialization produces increased interdependency among people, it may therefore also reduce the empathy necessary if the fruits of that specialization are to be fully harvested via cooperation and exchanges.
In addition to endangering social empathy, specialized production also has two general types of economic consequences:
1.
large gains in average productivity of labor
2. a great increase
in the spread of individual productivities.
The first consequence
is self-evident. Anything increasing the output of some workers
without also reducing that of others will increase average output.
The second consequence is less obvious. In a completely
nonspecialized economy where each worker is a jack of all trades,
variations in productivity from one individual to another could not
be very large. Everybody confronts a complex physical universe before
which each is equally helpless. Specialization, by reducing the
proportion of the universe's complexity with which each producing
individual must contend, destroys this equality-in-helplessness by
bringing the action into a range where variations in individual
talents can make a difference. Nearly everybody has his productivity
increased, and the increase is from roughly the same baseline, but
the increase for some people is vastly greater than it is for
others--hence the increase in the spread of individual
productivities.
Effects of Differences in Productivity. If the market for labor is allowed to function, an increase in the spread of individual productivities produces an increase in wage differentials. While this increase in the welfare of the more productive is not at the expense of the less productive, whose value in the market is not decreased, it may arouse jealousies. These jealousies may be compounded by the reduced social empathy which can also accompany specialization. The "equality" issue arises. Unfortunately, any effort to prevent wages from reflecting actual productivities as evaluated by the market can result only in one of two undesirable developments: unemployment or the destruction of individual liberty to make some of life's basic decisions. The economist Fritz Machlup observes that:
The implications . . . of the trends observed with regard to the occupational composition of the employed labor force are rather dismal. They seem to leave us with an unpleasant choice: either to resign ourselves to larger wage differentials, increasing spreads between minimum and average earnings, or to face a continuing upward creep of the rate of unemployment, not only in bad times but also in prosperity. Footnote 21
Machlup is referring to the interaction of the increased spread of individual productivities with governmental and social efforts to prevent the range of compensations from similarly increasing. As we have already noted, minimum wage pseudo-laws produce unemployment.
Aside from abandoning specialized production, which would be catastrophic, the only other way to avoid increased wage differentials is to deny workers a property in the fruits of their labor. But by decoupling production and consumption we would either greatly reduce the size of the social pie available for consumption or, to keep production up, we would have to greatly reduce individual liberty to make tradeoffs. Leon Trotsky said:
The foundations of the militarization of labor are those forms of state compulsion without which the replacement of capitalist economy by the socialist will forever remain an empty sound. . . . Such a form of planned distribution pre- supposes the subordination of those distributed to the economic plan of the state. And this is the essence of compulsory labor service, which inevitably enters into the programme of the socialist organization of labor, as its fundamental element. Footnote 22
A Look at Labor Regulations
Considering the highly emotional nature of our relation to work, in addition to its economic importance, perhaps it is surprising that regulation of the employment relationship has not been even more unsatisfactory than it has been. From the first, however, American labor policy seems to have been unbalanced one way or the other. In the absence of legislation, nineteenth-century courts were left mostly to their own devices, and they were extremely hostile to the labor unions that were springing up to try to promote the welfare of their members. Efforts to bargain collectively were treated as illegal restraints on trade or "conspiracies." The same view was held of strikes. Perhaps the basic judicial error was to refuse (in the name of "public policy"!) to extend to workers the normal laws of agency and contract. Under normal contract law, no one can have a legal duty to make a contract unless the duty itself derives from a previous contract (an "option," for example). Nor does exchanging goods or services today imply an obligation to continue doing so tomorrow if one of the parties wishes to discontinue the association-after "squaring the books," of course. Under the rules of agency law, a person having the right to negotiate a deal on his own behalf also has the right to appoint an agent to do so for him. Nor was there any rule that one person could not act as agent for more than one principal.
Laws of Contract and Agency. Applied to labor relations, these laws of contract and agency would have produced approximately the following results:
1. Any workers desiring to do so could appoint the same agent (individual or union) to negotiate with an employer on their behalf.
2. Workers not under term contracts, having no duty to continue working for their current employer, are free to quit individually at any time, or to announce their intention of doing so unless certain terms are agreed to by the employer. What each worker is legally free to do as an individual, workers are equally free to do jointly or collectively-a strike.
3. Just as employers are free to keep or discontinue individual workers, they are free to deal or not to deal with a union or other collective bargaining agent appointed by their workers, or some of them.
4. Collective bargaining agents can speak only for workers individually authorizing them to do so. Just as my neighbors cannot call a meeting, out-vote me, and appoint an agent to sell my house for me without my consent, neither can a majority of my fellow workers deprive me of my right to negotiate the terms of my own employment.
5. Violence or threats of violence are illegal. Withdrawn inducements and peaceful persuasion are allowable tools for employers, workers, and unions; sanctions are not. Strikers and picketers may not be physically attacked or threatened with attack by employers; employers and workers not wishing to strike may not be attacked or threatened with sanctions by strikers.
Reacting to judicial refusal to give workers and unions the benefits of normal contract and agency law, Congress attempted early in the twentieth century to strike a more evenhanded balance in national labor laws. This effort was sabotaged by the Supreme Court. [Footnote 23] Congress, responding to outraged public opinion, then stopped reacting to the courts and began over-reacting. A torrent of national legislation in the 1930s stood the previous situation on its head. National labor policy shifted from assuming that unions could do no good to assuming that they should be encouraged by all means at the disposal of the federal government, fair or foul. Initial jurisdiction over most labor cases was taken away from the courts and given to a new National Labor Relations Board, the membership of which was carefully selected to assure pro-union bias. Pseudo-laws were enacted compelling employers to bargain with a union having majority support among their workers, or an appropriate category of them, even as to the terms and conditions of employment of workers not desiring to be represented by the union. The courts, having finally gotten the message, then began amplifying the favorable treatment of unions. Subsequent labor legislation including the Taft-Hartley Act and the Landrum-Griffin Act has refined the initial pro- union enthusiasm considerably, particularly where conflicts emerged between workers and their unions. However the basic labor policy of the U.S., as expressed in laws and otherwise, remains highly favorable to unionization as a means of promoting better working conditions and higher wages for workers.
Unfortunately, today's labor laws are based on faulty analysis of the basic employment relationship and of its place in the overall picture. They assume a basic identity of economic interests between worker and worker, a basic conflict of interests between worker and employer, and that high wages are an effective means of promoting reductions in purchasing power inequalities among the population.
We are now in a position to see why all three of these assumptions are perverse. From the economic point of view the basic relationship between workers and would-be workers in the same specialty is one of pure conflict, not an identity. If the number of workers in a given specialty were cut in half by a mysterious plague, demand for such services remaining the same, the market-clearing price of the survivors' labor would increase. Many policies of labor unions and professional associations represent efforts to achieve the same results artificially: support of stringent licensing requirements, limited number of places in apprenticeship programs, efforts in general to prevent expansion of the ranks of people allowed to perform given tasks. Physicians fight to prevent overexpansion of medical schools, lawyers warn of overproducing attorneys, and so with plumbers, electricians, school teachers, etc. This economic conflict between worker and worker also comes to the surface on those regrettable occasions when economic difficulties force an employer to reduce payroll costs. There are always two ways to produce the required saving: reduce the number of individuals employed, or reduce the average pay received by employees. The usual solution, concurred in or even compelled by the relevant unions, is to fire or lay off the necessary number of people.
The basic economic conflict between worker and fellow worker is obscured by the social empathy that tends to prevail among people with similar backgrounds, interests, and activities. Workers are apt to feel more comfortable socially with people like themselves, and to feel that representatives of management are different. And indeed these people are different--in education levels, interests, and lifestyles. There is therefore a conflict between the social solidarity of a group of workers and their economic interests. Which will prevail probably depends on the relative strength of each of these conflicting factors. Occasionally a union will request that wages be lowered by a troubled employer in order to avoid layoffs or firings. Such requests are unusual enough to constitute "news." Such requests tend to come in firms with small numbers of employees, a situation in which social solidarity can outweigh economic interests of the workers. Throwing fellow workers to the wolves is easy when they are just impersonal numbers in a large organization, but difficult when you know them well and have to watch the wolves devouring them.
The basic economic conflict between workers and employers postulated by federal labor policy is also purely imaginary. As we have seen, there is an economic conflict here, but it is not basic. Sometimes available vocabulary channels the direction in which thoughts can proceed. What appears to be lacking in this case is a single word referring simultaneously to conflict and to mutual interest in cooperating, and pointing out the more fundamental nature of the mutual interest. Doug Chamberlin, a student of political science at Adrian College, has invented a word to fill this lamentable gap: competition. The term is defined as "conflict over how to divide up the benefits produced by cooperation," and the reference to cooperation comes first to symbolize the fact that this is the larger component in the total relationship. Footnote 24
Employers do not have an economic interest in having any workers unemployed. Unemployment can occur only when average wage rates are above the equilibrium level, and employers have no interest in paying more than necessary to obtain a given quantity and quality of labor. If wage rates are driven below the equilibrium price, however, labor shortages will be generated and competition among employers will drive them back up to the level at which the market is cleared. Only where the labor market is prevented from operating can wages be driven below the equilibrium level. Although communist propaganda likes to depict capitalists as exploiters of workers, the government monopoly of the basic right to hire people makes the "socialist" countries the prime examples of places where workers are systematically paid less than equilibrium wages. As economic analysis would predict, the communist-ruled countries generally have a surplus of jobs rather than of workers, and unemployment is thus virtually unknown there. Communists like to brag about this fact, but the reasons they give to explain it are economically absurd.
Since American labor policy is based on badly flawed ideas about work and employment, it is no wonder that it has not produced brilliant results. The reasons why the policy of encouraging high wages has been harmful to distribution values and hindered achievement of more economic equality will be explained in the final part of this chapter.
A MODEL POLITICAL ECONOMY
It is easy to become confused in thinking about economic regulation because of the complexity of the physical universe and of human societies. The confusion is compounded by the great abundance of interested arguments put forth in the form of principles but actually constituting special pleading on behalf of some element of economic society. Finally, the compounded confusion is itself aggravated by a problem known to economists as the "theory of the second best." [Footnote 25] One of the distressing characteristics of an imperfect world is that it is possible for improvements in some of the details to produce a worse total situation. For example, an individual "progressive" tax that in itself violates the generality requirements of the rule of law may cancel out the opposite defects of another tax, which is regressive. The combination of the two taxes approximates the requirements of the rule of law. Changing one of the taxes to flat rate, an improvement according to the relevant norm, but leaving the other tax as it is, makes the overall tax system less just.
Since everything in a society is interconnected, to criticize or propose reforms in only one aspect of current society risks serious distortions or misinterpretations, deliberate or otherwise. For clarity here, let us complete the present analysis of economic regulation by laying out a specifically normative model of a political economy. The model represents my attempt to design a system satisfying the usual goals of economic regulation (information, production, distribution, environmental, liberty, and progress values) while conforming to the requirements of the rule of law.
Basic Propositions And Corollaries
Our prescription for a model political economy will be laid out within the confines of a not terribly controversial basic proposition: In a properly organized political system everybody must have the legal right to do everything not prohibited by law and to refrain from doing everything not commanded by laws.
Since the term "right" is ambiguous, let it be understood that as used here it simply means that government may not impose sanctions on a person for doing or not doing what he is legally free to do or not do. It does not mean that government may not withdraw or refuse to confer an inducement. It does not mean that government has a duty to provide the resources necessary to do something merely because that something is not illegal and the person wishing to do it lacks the resources. In terms of current law, it is a right in the sense that we have a right to travel, or to petition the government, if we can afford air fare, postage, and printing costs. It is not a fight in the sense that we have a legal right to counsel, paid for by government if necessary, when prosecuted for a crime.
Free Speech Corollary. If you have a legal right to do it, you must have a legal right to threaten, or offer, to do it.
Voluntary Association Corollary. If you have a legal right not to do it, you must have a legal right to condition your doing it on action by another person which he is legally free to take.
Price Corollary. Laws cannot make actions which are themselves legal illegal when exchanged for other actions which are likewise legal. (If it is legal for me to mow your lawn, and if it is legal for you to give me $10, it cannot be made illegal for us to exchange those actions. There can be no minimum wage laws prohibiting the exchange because $10 is not enough; nor can there be "anti-inflationary" price freezes prohibiting the exchange because $ 1 0 is too much.)
Legitimate Monopoly Corollary. When only some people are to exercise certain legal rights, these rights must be extended on the basis of uniform rules applied impartially to all comers. The monopoly of the right to produce a new machine, for example, is granted in the form of a "patent" to all people whose inventions meet certain standards of originality and utility. All persons meeting certain education, character, and bar exam standards are licensed to practice law.
Natural Resources
As we have seen, our relationship with natural resources is very important because those resources are essential elements in all production. The Lockean theory that resources should belong to the person who mixes his labor with them begs many questions, not least of which is how to determine which people are to be allowed to mix labor with which resources when there is not enough to go around. "First come, first served" is not a general rule, being discriminatory between people of different generations. The communist solution, that government owns everything, is not law, for law may not single out government-as-contractor for special treatment; its rules must be general. Equality in use of nature is not economically efficient, for equal individual parcels would be unsuited to the economies of large-scale production and specialized labor, while leaving everything in one big "common" from which everybody takes what he pleases produces totally irresponsible behavior from the ecological point of view and thus treats later generations unfairly.
Our prescription for property is based on recognition that the benefit of the value contributed to production by natural resource scarcities should be distributed equally to all people. It is also based on recognition that specific people must have specific rights to specific natural resources if these are to be put to efficient use. And it is based on recognition of the fact that nobody has any inherent right--individually or collectively--to use any specific resources.
When a right does not inhere in private hands or in government, it must either be nonexistent or it must reside in the "public" in the strongest possible sense of the term. In this strong sense, the public consists of every man, woman, and child in the area over which a given government claims jurisdiction.
The public, of course, cannot act at all. It is amorphous, temporally dispersed over many generations, and inherently unorganized. But this need not prevent the public from possessing rights, any more than the infancy of an heir prevents that individual from having rights. The law has long recognized that an ability to exercise rights is not always required in order to have rights. In the case of the infant, a guardian or trustee is appointed to exercise the minor's rights in his interest, temporarily--until he comes of age. In the case of the public, government must act as trustee permanently, to exercise the public's rights in its interests. At this point, we find the classification of associations introduced in Chapter 4 particularly useful:
Table 9-1. Classification of Associations
Involuntary Trusts Voluntary _________________________________________________ | | | | | | | | Private | 1.robber-vict.| 2.parents- | 3.husband-wife | | | children | | |_______________|_____________|_________________| | | | | Compound | | | | | 4.Govt-as- | 5.Govt-as | 6.Govt-as- | | bandit | trustee I| contractor I| |_______________|_____________|_________________| Public | | | | | | | | | 7.Govt-as- | 8.Govt-as | 9.Govt-as- | | legislator | trustee II| contractor II| |_______________|_____________|_________________|
Government as Trustee for Public Rights. Government-as- trustee for the public (II) must toe a very fine line, as is typically the case with fiduciaries. [Footnote 26] It acts in cooperation with government-as-legislator, as follows:
1. Government-as-legislator must enact a rule imposing sanctions on anybody who exploits certain natural resources without consent of the public's trustee. This legislation does not confer any rights on the public to exploit these resources, for government-as-legislator has no such rights to confer, as noted earlier. The legislation merely recognizes the rights inherently belonging to the public and provides for their protection.
2. Government-as-trustee II must auction the right to exploit specified resources for a limited time to the highest bidder. The right must be leased rather than sold permanently, because government-as-trustee lacks authority to dispose of the public's property. (Of course in the case of nonrenewable resources the lease has many similarities to a sale, but it also has important differences. And by no means are all scarce resources nonrenewable.) Rights must go to the highest bidder because the trustee's responsibility is to maximize benefits for the "cestui que trust.." Footnote 27
3. Government-as-trustee must place all of its income in a trust fund which is periodically distributed in exactly equal amounts to every man, woman, and child in the population--i.e., to those members of the public currently alive. The right to receive this social dividend must neither be taken away from particular individuals by government-as-legislator nor exchanged in return for things desired more by individuals.
Like everybody else, government-as-contractor can bid for temporary rights to exploit given resources. If its bid is highest, government-as-contractor exercises the fight upon paying the stipulated amount to government-as-trustee II--i.e., by placing it in the social dividend trust fund.
Results. The upshot of this proposed system would be that scarce natural resources and, in fact, all monopoly rights except those such as patents and copyrights, would be leased through auctions at the currently market-clearing price. The proceeds of these auctions would be distributed equally to the individual members of the population, so that the benefit of the value contributed to production by resource scarcities would be shared by all. Government would thus remove itself from the business of deciding who is to receive immensely valuable privileges and the occasions for corruption of public officials would be vastly reduced.
Prescription For Labor
An economy in which there is any substantial amount of unemployment must be regarded as an absolutely intolerable state of affairs. In effect, the unemployed person's "access to nature" is being cut off by inadequate social arrangements.
In order to eliminate unemployment, we must arrange to let supply come into balance with demand for labor. As we have already noted, this can happen only at the market-clearing price for each type of labor. Hard though it may be to remember, there is no such thing as an inherently unemployable person. An individual only becomes unemployable when the costs of employing him exceed the benefits he produces for employers (consumers). Hence if wages are free to rise and fall with supply and demand, and if subsidy programs do not deprive the individual of incentive to make necessary compromises in seeking a job, unemployment can be expected to be minimal: people totally unable to function for physical or emotional reasons, and those merely between jobs.
As we have also already noted, if wages are free to find their market-clearing level, industrial progress will tend to increase wage differentials. Nobody is set back by greater increases in other people's productivity, but some will be left behind. Thus, Machlup's conclusion cited earlier that we must choose between increasing wage differentials or increasing unemployment. In a way, this choice appears to put us between the proverbial devil and the deep blue sea. Nobody favors unemployment, of course. But to allow increasing wage rate differentials appears to fly in the face of the egalitarian values which are so influential today. (Of course, the unemployed earn nothing, a maximum differential in earnings, but most people do not think about it this way.) The prescription requires repeal of the minimum wage laws and an end to the policy of encouraging reductions in wage differentials. Even so, however, it can be argued that these changes need not produce a net decrease in economic equality among the population.
The Road to Maximum Equality
In the properly arranged system visualized here, wages are only one component in the purchasing power of individuals. The other component consists of social dividend payments derived from the rents paid to government-as-trustee II for use of scarce natural resources. This second component in individual purchasing power is distributed equally.
As technical progress and population increase drives up the rents paid for resources, wages will become a less important part of the total picture. Increasing inequalities in wages are therefore potentially compatible with decreasing inequality in the total flow of purchasing power to individuals. Since the trust fund/social dividend system has never been tried, it is difficult to predict what proportion of a gross national (or gross world) product would flow through the dividend fund at any given level of technology. The impact of the dividend on economic inequality can easily be calculated for various GNP proportions, however, and illustrates the interesting possibilities of such a system:
Assume a five-person "society" with a 10: 1 spread in individual productivities. In the absence of a social dividend system, there will also be a 10: 1 spread in individual incomes resulting directly from labor.
Recall that the trust fund must be distributed in exactly equal amounts to all members of the population. (We will assume here that all members are producers, to simplify the illustration.)
Table 9-2. Calculation of Individual Incomes
Individual's Percentage of Society's Income from Direct Labor Plus the Social Dividend ________________________________________________ % of Total If 10% of GNP If 20% of GNP If 50% of GNP Social Flows through Flows through Flows through Person Productivity the TrustFund the Trust Fund the Trust Fund A 50% 47%* 44% 35% B 10% 11% 12% 15% C 5% 6.5% 8% 12.5% D 20% 20% 20% 20% E 15% 15.5% 16% 17.5% * Sample calculation: 1) 20% (equal share) of the 10% of GNP flowing through the trust fund...............................2% 2) 50% (proportional to productivity) of the 90% of GNP not flowing through the trust fund..............45% ___________ Total 47%
Note that for person D, whose productivity is average, the trust fund system makes no difference. For those whose productivity is above average, the results of the trust fund will be to reduce income, while for those with below average productivity income will be increased. The resultant of these decreases and increases is to decrease the inequalities of income produced by the productivity spread resulting from specialization.
In the absence of a trust fund system, or if even that does not produce "enough" equalization to satisfy public sentiments, additional equalization may be achieved by means of a minimum income floor or negative income tax without producing the unemployment generated by present approaches to "helping the poor."
SUMMARY
Economic regulation is a controversial but necessary government responsibility. Even under total "deregulation," massive government expenditures and taxes could not help influencing the economy. For many reasons, however, total deregulation is undesirable. People have spent too much time debating whether government should regulate, and not enough time thinking about how it should do so. In the U.S., present techniques too often give officials vast discretionary powers to grant valuable privileges to particular people and refuse them to others. Since some would-be beneficiaries are willing to pay for value received, a black market bureaucracy emerges,
Government regulation of the economy should employ methods that are compatible with the rule of law. Product or process standards that apply to all who wish to produce given things can be expressed as general rules. Licensing of professionals poses threats of abuse, but need not be ruled out entirely. Price controls, on the other hand, are totally unacceptable because they cannot be expressed as general rules of action and because their economic consequences are totally pernicious. However, deregulating all prices, including the price of labor, will not in itself produce an ideal society unless radical changes are made in the rules governing the right to use scarce natural resources.
QUESTIONS FOR DISCUSSION
1. What is the difference between a "black market" and a "free market"?
2. By 1978, about half of U.S. oil consumption was imported from abroad. List all of the major alternatives our government would have if a foreign boycott cut off all our foreign oil. What are the advantages and disadvantages of each of these alternatives? Which would you favor, on balance, and why?
3. Speaking of his fellow anarchists, Benjamin Tucker wrote that
Upholding thus the right of every individual to be or select his own priest, they likewise uphold his right to be or select his own doctor. No monopoly in theology, no monopoly in medicine. Competition everywhere and always.
To what extent is this attitude congenial to current U.S. regulatory policy? To the extent there is a conflict, which side do you think has a stronger case, and why?
4. Explain why "campaign finance reform" laws cannot solve the corruption problem in the U.S.
5. Proudhon said, "Property is theft." To what extent does this text agree? To what extent do you agree, and why or why not?
6. "The author attacks the present arrangement regarding property in the U.S. Therefore he is a communist." Discuss the adequacy of this statement and its explicit and implicit logic.
7. Explain why the concept of competition is useful in thinking about voluntary associations, including employer-employee relations. What are the misconceptions the concept is designed to point up?
8. If the labor market is allowed to function freely, so as to eliminate unemployment by letting wages for different kinds of work find their equilibrium level, will this increase or decrease wage differentials? Why?
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Footnotes
* Henry George, Progress and Poverty (New York: Robert Schalkenbach Foundation, 1955), p. 550.
1.. See Edward Banfield, The Unheavenly City, Boston: Little Brown, 1968, p. 19.
2. Martin S. Feldstein, "Unemployment Insurance: Time for Reform," Harvard Business Review, March- April 1975, pp. 51-61.
3. Walter Gellhorn, "The Abuse of Occupational Licensing," 44 University of Chicago Law Review (1976), p. 8.
4. Ibid., p. 6.
5. Ibid., p. 6.
6. See Murray Edelman, in Francis E. Rourke, ed., Bureaucratic Power in National Politics, 2nd ed., Boston: Little Brown, 1972. p. 360. His article "Symbols and Political Quiescence" can be found in 54 American Political Science Review (1960), 695-704.
7. Gellhom, pp. 11-12.
8. Adrian Daily Telegram, July 12, 1973.
9. New York Times, May 29, 1973.
10. Christian Science Monitor, September 26, 1973.
11. Nebbia v. N. Y, 291 U.S. 502 (1934).
12. See Thomas Kuhn, The Structure of Scientific Revolutions, Chicago: University of Chicago Press, 1962.
13. See Wechsler, "Toward Neutral Principles of Constitutional Law," 73 I-Iarvard Law Review 1 (1959).
14. Garrett Hardin and John Baden, Managing the Commons. San Francisco: W. H. Freeman & Co., 1977.
15. Fletcher v. Peck, 6 Cranch 87 (1810).
16. Nozick, Anarchy, State, and Utopia, New York: Basic Books, 1974, p. 151.
17. Ibid., p. 178.
18. F. A. Hayek, Law, Legislation, and Liberty, Vol. 1: Rules and Order, Chicago: University of Chicago Press, 1973, p. 108.
19. Stewart Edwards (ed.), Selected Writings of P. J. Proudhon, Garden City, N.Y.: Anchor Books, 1969, pp.124-125.
20. The benefit need not be in the selfish sense. A person can desire the happiness of another.
21. Machlup, The Production and Distribution of Knowledge in the United States, Princeton: Princeton U. Press, 1962, pp. 397-398.
22. Leon Trotsky, "Terrorism and Communism," in Anne Fremantle (ed.), Communism: Basic Writings, New York: Mentor, 1970, pp. 259-260.
23. Duplex Printing Press Co. v. Deering, 254 U.S. 443 (1921).
24. For a mathematical treatment of competition, see James Buchanan and Gordon Tullock, The Calculus of Consent.- The Logical Foundations of Constitutional Democracy, Ann Arbor: University of Michigan Press, 1962, pp. 99-103. See also Nozick, pp. 183-184.
25. Guido Calabresi, The Costs of Accidents, New Haven: Yale University Press, 1970, p. 86.
26. The American College Dictionary: "A person to whom property is entrusted to hold, control, or manage for another."
27. The beneficiary of the trust.
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