Answer to “Another Test, This One Microeconomic”

by Don Boudreaux on February 6, 2014

in Crony Capitalism, Prices, Reality Is Not Optional, Regulation, Seen and Unseen, Work

The answer to this test is that each of the three methods will, with equally high likely success, protect incumbent producers from the competition of upstart producers.  There is no relevant, first-order difference among these three methods.  The main differences that separate them are simply in the way they appear.

Elaborating a bit: a government-mandated lower price for L results in less L changing hands – less L being exchanged – less L being transferred from willing sellers to willing buyers.  Likewise, a government-mandated higher price for L results in less L changing hands – less L being exchanged – less L being transferred from willing sellers to willing buyers.  And of course, this very same outcome on the amount of L being exchanged is achieved by outright restrictions or prohibitions on the supply of L.

Many people untutored in economics are surprised by the fact that a government-ordered price rise affects the amount of L that is exchanged in the market in exactly the same direction as does a government-ordered price cut.  Such people are surprised also by the fact that price controls – be these ceilings or floors – typically have the very same competition-suppressing, cronyist outcomes as do more direct restrictions on the quantities of goods or services that can be legally offered for sale.

Each of these methods of interfering in markets usually has different second-order effects from each of the other methods.  But because politicians and interest groups are so skilled at playing on the public’s economic ignorance, they can frequently achieve their cronyist goals in ways that hide the cronyism – in ways that appear to the gullible to be noble rather than nefarious.

For example, if northeastern U.S. textile producers and politicians in the 1930s went more directly about their economic knee-capping of southern U.S. textile mills (see also here), they would have used quantity restrictions (such as output limits on the amount of textiles that can be produced and sold by southern mills, or quantity restrictions on the number of hours of labor that such mills were allowed to employ each day, week, or month).  Such a legislative move, however (in addition to likely being found unconstitutional even by the post-1937 U.S. courts), would have been too naked.  Even many economically untutored people would have seen the move for what it was: special-interest protectionism.  So instead these northeastern mills and their political cronies used a less direct and, hence, more devious means to achieve the very same goal: minimum-wage legislation.  Not only does such legislation achieve the same competition-suppressing outcome as would a more direct competition-suppressing means, it also has the added advantage of sporting a nice name – a name that dupes many people into missing the essence of what’s really going on.

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