We had a horrific attack on innocent people in Las Vegas on Monday and the politicians are running the usual script again. They want to crack down on our right to bear arms under the false tag name “Gun Control”. This is not the first time they do that, and won’t be the last. Every time we have a shooting or a terrorist attack we always hear the politicians giving us the false choice between Liberty and Security. We have fallen for this so many times over the decades, we accepted reduction in our liberties in exchange for false promises:
- We accepted restrictions on our gun rights in 1934, 1937, 1968, 1986. None of these laws made any improvements in any crime statistics.
- We let our government spy on us and harass us in airports in the name of security but no-one every question the effectiveness of these measures and what they are doing to our character as a supposedly free country.
- We accepted fiat paper money instead of gold backed currency in exchange for promise of a central bank that would prevent panics but since the establishment of the Federal Reserves our recessions became more frequent and inflation became the norm. The federal reserve has created money out of thin air and used it to buy government bonds to finance welfare and warfare spending that doesn’t benefit the country in the long run.
- We accepted government interference in our retirement planning in the form of social security and now we have a broken system that will go bankrupt soon and cannot support retirement life for anyone.
- We accepted government interference in our healthcare system in the form of regulations and mandates culminated in the disaster called Obamacare. In exchange we got high prices, denied coverage, shortages of doctors and bad health outcomes.
There are many examples in many fields of us letting the government take away some of our liberties in exchange for false promises. I am glad that our gun rights activists have successfully stopped the federal government from taking away more of our rights and expanded those rights in most states, but I wish we can do the same for all other areas of our life.
A monopoly is the exclusive control of the supply of a product, a service, or a commodity. Consumers do not have a choice if they decide to buy that product, service or commodity, they will have to deal with the monopoly and accept its terms.
How can a firm secure a monopoly? One way to do that is to buy all of its competitors, but this is easier said than done because that assumes the availability of enough credit for that company to buy all of its competitors and the acceptance of these competitors to be purchased. Another way is for the firm to compete hard on price and quality of service so it expands its market share and drives its competitors out of the market. Once the firm achieves market control it cannot arbitrary raise prices and abuse customers as many people may think, the reason is that if other investors see a good opportunity to make gains in that market they will enter the market and compete with that firm. The only way then for a natural monopoly to maintain its market dominance is to run an efficient business with an acceptable profit margin that does not encourage other investors to enter the market.
A Trust or Cartel is a group of producers who band together to control the market for a certain product, commodity, or service. Many people believe that a cartel can raise prices arbitrarily without a check, but in a free market new competitors will enter the market and challenge the cartel’s dominance if they see a good profit margin so the cartel cannot have total dominance on their market.
The free market protects the consumer by default because the producer will have to provide the best service in the most efficient manner to prevent either existing competitors or new competitors from taking that producer’s market share. In other words, the producers do not have a total pricing power over the consumers because competitors can always enter the market and provide a better price.
There is then no economic need for laws or regulations to control monopolies, trusts, or cartels but all countries have some form of Anti-Trust laws that regulate mergers and acquisitions. The main reason for the existence of these laws is to protect inefficient producers who fear being driven out of the market by more efficient producers. They run to the politicians and demand government protection to prevent market consolidation. They usually invoke protecting customers as one of the excuses for the intervention. Customers care about having access to good products with acceptable prices and having efficient producers in the market achieves that. Looking at the case of Standard Oil in the early twentieth century; we see that the price of oil products has dropped consistently every year of standard oil’s alleged monopoly and the consumers access to high-quality products increased. Breaking down Standard Oil only managed to serve the existing inefficient producers not consumers.
The only way a monopoly or a cartel can achieve total dominance is by restricting market entry and this can only be achieved through government power. Government created monopolies of utilities such as electricity and cable delayed the development of these fields and left the consumers without access to high-quality alternatives.
The existence of Anti-Trust laws is an example of how the government manages to create a problem while claiming to solve such problem.
These days many people talk about free trade. In this essay, I will cover some background about free trade and show how government introduces many problems into free trade.
Free Market is the free flow of goods and services between different people in the society. Free trade is the free flow of goods between political jurisdictions. The free market benefits the consumer because it makes multiple producers compete to offer goods and services offering the consumer the best possible price. Free trade expands the market to include foreign producers as well as the domestic ones. Free market benefits the consumers and the efficient producers and punishes the inefficient producers. Producers who don’t offer good value end up shutting down and freeing their resources such as capital and labor for other uses in the economy and this creative destruction ensures the proper distribution of resources.
On the long run countries in a free trade system will specialize in certain products that they produce more efficiently. The same way individuals specialize in the areas of production they are the best fit for according to their comparative advantage. On the short run, there may be a trade imbalance between different countries but on the long run, any trade imbalances will be resolved through currency relative prices. For example, if country A exports less than it imports that means that its trading partners will end up with a surplus of country A currency. This surplus can be used by the trading partners either to invest in country A assets, keep the currency as a reserve, or they will trade that currency out. If the trade partners sold their access country A currency, this would push the currency relative price down and the raise the price of imports for country A which will on the long run forces it to consume less imported goods and create a trade balance.
Free trade works like the free market when we let the market process work and respect the outcomes. The role of government in the market should be limited to protecting property rights and resolving disputes between private parties. Problems arise when the government expands its role and select winners and losers.
The first problem is that the inefficient producers don’t go down quietly, instead, they use the political system to gain protection. They ask for tariffs and restrictions on imports to protect them against the foreign competition. This is similar to anti-trust laws on the national level that mainly protect the inefficient producers and penalize efficient ones. These laws end up creating inefficiencies in the market and protecting the well-connected companies and sectors and leaving other sectors out.
The second problem is that free trade exposes the problems with each country’s economic, legal and regulatory systems. If these systems impose extra costs on some or all areas of the economy these areas will be at a disadvantage against foreign competition from countries that don’t have similar costs. If country A has regulations that cause cars to be 25% more expensive, then equivalent foreign cars that don’t suffer the same regulation cost will be cheaper as long as they are priced less than the domestic producer even if they are not cheaper without the regulation overhead. These producers will have several options:
- Work for a political solution to reduce government-imposed overhead through tax, regulation, and legal reform.
- Join the inefficient producers and lobby the government for protection.
- Relocate their production to foreign countries and import their products afterward to their home country.
The third problem is the whole notion of a trade agreement. Governments pretend that the only way to have free trade is through complicated agreements that include 2 or more countries. Free trade doesn’t require complicated agreements, a commitment to remove tariffs or reduce them to the same level on all products should be enough. By looking at NAFTA or TPP as examples, we can see that all of these trade agreements come with thousands of pages of tariff schedules, exceptions, procurement rules, and regulation mandates. These agreements are examples of corporate welfare where connected firms get their products access to foreign markets or prevent foreign competition through exceptions and quotas.
Free trade, like the free market, has a very limited role for government and any deviation from this role cause imbalances and negatively affect the whole market. Government overreach cannot be solved without citizens holding the politicians accountable and vote them out of office for crossing the boundaries. We have made the mistake of relying on electing free market advocates to government and hoping to make a change. The better approach is to work on spreading true economic knowledge and expand the liberty movement to more people and only then we can hold the politicians accountable and turn the country around.
People start businesses to provide products or services to their customers in exchange for set prices. The price for any product or service is selected by the business owners to provide good value for their customers while providing the owners with enough profit to compensate them for the effort of running that business. Price should be higher than the cost of production but lower than the value customers get from using the product or the service.
Business tax is a cost and when any of the costs of production rises the business has to adjust to the rising cost by either cutting other costs, raising prices or accepting lower profits. Lower profits may drive businesses to close especially newer businesses that still have loans to pay and accordingly too sensitive to any profit loss. Raising prices may cause businesses to lose market share and lose profit when their customers move to cheaper alternatives. So, in reality, the only option that businesses have is to cut their costs to stay profitable and competitive.
A business can cut costs by reducing the costs of labor through relocating some or all of its operations to a foreign nation with lower labor and regulatory costs. It can also cut costs by using different suppliers who produce their products overseas with lower costs and offer lower prices accordingly. Another way to cut costs is to invest capital to automate more processes which reduces production costs.
So the real victims of high business taxes are workers who cannot move to different countries to keep their jobs and end up unemployed. As the Tax Foundation explains in a recent post, labor is the least mobile factor in production so it gets harmed the most by higher taxes.
Regulation is also a type of tax and over the last 30 years, taxes and regulations took a major toll on the American manufacturing jobs. The following diagram shows the growth of manufacturing industrial production in the United States over the past 30 years vs. the drop in manufacturing jobs. The graph uses 1986 as a reference year with value 100:
The diagram shows that the manufacturing output has almost doubled over the last 30 years while the number of manufacturing jobs is about 70% of the level at 1986. What happened over the past 30 years is a combination of all the cost reduction factors outlined earlier. Manufacturing of products such as clothes and small electronics moved overseas to use cheaper labor while the production of higher value products such as cars and industrial equipments became more automated.
Business taxes don’t redistribute the wealth or create a better society, they punish workers and kill their jobs. So when a politician claims that business taxes and regulations are good for the economy, remember all the manufacturing jobs lost in the United States and vote against him or her.