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Quotation of the Day…

… is from pages 38-39 of Israel Kirzner’s excellent 1985 volumeDiscovery and the Capitalist Process (original emphasis):

A good deal of regulation consists in creating barriers to entry.  Tariffs, licensing requirements, labor legislation, airline regulation, and bank regulation, for example, do not merely limit numbers in particular markets.  These kinds of regulatory activity tend to bar entry to entrepreneurs who believe they have discovered profit opportunities in barred areas of the market.  Such barriers may, by removing the personal gain which entrepreneurs might have reaped by their discoveries, bring bring it about that some opportunities may simply not be discovered by anyone.  An entrepreneur who knows that he will not be able to enter the banking business may simply not notice opportunities in the banking field that might otherwise have seemed obvious to him; those who are already in banking, and who have failed to see these opportunities, may continue to overlook them.  Protection from entrepreneurial competition does not provide any spur to entrepreneurial discovery.

Imposed price ceilings may, similarly, not merely generate discoordination in the markets for existing goods and services(as is of course well recognized in the theory of price controls), they may inhibit the discovery of wholly new opportunities.  A price ceiling does not merely block the upper reaches of a given supply curve – further increases in supply to meet demand.  It may also inhibit the discovery of as yet unsuspected sources of supply … or of wholly unknown new products.

The point is straightforward, yet it and its implications are often missed.  One implication is that we must be more skeptical of empirical studies of the effects of government intervention.  By all means, perform such studies.  But in doing so, and in reading and in interpreting them, be aware that they will never measure that which would have been discovered but which remains undiscovered.  The tamping down of the discovery – the discovery of new products, sources of supply, and production processes – that is prevented by regulations (and by taxes) is among the costs of government regulation (and taxes), yet it is not seen; it is not quantifiable.  Yet it is as real as is, say, the cost to consumers of waiting in queues for a chance to purchase price-controlled gasoline or bread.

That these inchoate yet missed opportunities are not seen and measurable is excuse enough for researchers who mistake quantification as the chief mark of sound social science to ignore these missed opportunities.  “If we can’t measure them, either directly or by some quantifiable proxies, they’re not real.  And so we Scientists must ignore them” – that’s the scientistic attitude.  (It’s an attitude that dominates the economics profession, although, I boast, not at George Mason.)

Another point: Kirzner above uses price ceilings as his example of how price controls stymie the entrepreneurial discovery process.  Yet price floors do so as well (as I know Israel would agree). Consider “Progressives'” favorite price floor: a legislated minimum wage.  Not even the best possible empirical study of the consequences of such legislation can measure the value of the opportunities that would have, but for minimum-wage legislation, been discovered, tested, and honed.  Who knows if, in the absence of minimum-wage legislation, some entrepreneur in the U.S. would have discovered a method of profitably employing legions of very low-skilled inner-city teens at a starting hourly wage of, say, $4.00, and thereby have created attractive employment opportunities for the millions of young people who are today unemployed or working in the black market?

The current national minimum wage in the U.S. has been in place now for more than three-quarters of a century, with no reasonable hope (at least of yet) of it being repealed.  This reality is one to which employers and entrepreneurs (and workers) have long ago adjusted.  Empirical studies of changes in this national minimum wage, or of differences across states and locales of state and local minimum wages, are all done against the backdrop of this long-standing policy of minimum-wage legislation imposed by Uncle Sam.  Any phenomena measured even by the very best empirical studies will never include the possible employment opportunities that would have been discovered and exploited had there been no minimum wage at all.  Likewise, such studies necessarily cannot quantify the additional job skills (and, hence, worker productivity and subsequently higher worker earnings) that might have been gained had these missed opportunities been realized.

Yet to deny the possibility that such mutually beneficial opportunities would have been discovered or created and exploited were there never a minimum wage is to deny the very possibility of entrepreneurial discovery and creation that we see all around us when markets are left reasonably free.  Such a denial, although allowing the deniers to strike more-scientific-than-thou poses, is in fact deeply unscientific.  The reason is that it rejects some knowledge of reality – knowledge of the reality of entrepreneurial discovery and creation – that we already possess.