This article, written by Pepperdine University economics professor Gary M. Galles, was originally published by the Mises Institute on September 3.
Many of our present economic difficulties, while blamed by politicians on freedom and markets, are in fact the long-run effects of government policies emphasizing short-run, visible benefits that mask hidden or delayed costs. In particular, our economic woes reflect government’s reliance on coercion, whose harmful effects expand over time, in contrast to voluntary cooperation, whose beneficial effects expand over time.
Voluntary market cooperation expands because the more time sellers have to respond to increases in demand, the more their incentives lead to better ways of accommodating buyers with improved output. Similarly, the more time buyers have to respond to increases in supply, the more profitable uses are discovered. That is, when you give individuals better incentives to voluntarily cooperate in the marketplace, over time, they discover and implement more effective ways to do so, expanding cooperation and the mutual benefits that result.
We see this everywhere in personal computing and technology in which convenience, computing power, and portability of devices increase constantly, at rates much faster than most ever anticipated in earlier times. In contrast, when the state employs coercion, it encourages buyers and sellers to act against what would be in their self interest in a free economy. Over time, those who would otherwise spend time thinking about their trading partners, instead respond to coercive measures by expanding the ways they can evade the burdens imposed. In such a situation, social cooperation contracts.
Taxes (including deficits, which are delayed taxes), subsidies, and mandates all illustrate coercion’s progressive undermining of social cooperation. For example, when government raises taxes on income earned by benefiting trading partners, those who provide the benefits earn less over time. In response, those burdened with the new taxes have incentive to do less to benefit others while substituting more effort to avoid taxation.
Moreover, when government mandates employer-provided “free” benefits, employers then reduce other parts of compensation that many workers may actually value more than the mandated benefits, to “pay” for them. Or employers may simply hire fewer workers. We see this already in Obamacare’s mandated increases to employers’ labor costs. Employers have cut jobs and hours (the mandates don’t apply to under-30-hour-per-week workers), or employers squeeze other parts of employee compensation, including on-the-job training, which is a crucial mechanism through which workers learn their way to success.
Price ceilings such as rent control, and price floors such as the minimum wage, also illustrate coercion’s increasing erosion of social cooperation. In response to such mandates, people increasingly find ways to do less of what violates their self-interest, which entails cooperating less well with others. As Friedrich Hayek noted, “Any attempt to control prices or quantities of particular commodities deprives competition of its power of bringing about effective coordination of individual efforts.”
When government holds apartment rents artificially low, they reduce landlords’ incentives to continue supplying dwellings. Over time, fewer units are constructed (seen under every rent control regime) and owners find other ways to leave the rental housing market. This takes place through a variety of mechanisms, including condo conversions, which removes units from the available rental stock in order to evade restrictions imposed on rent, but not on mortgage payments. Owners might also respond by reducing maintenance and upkeep of units which rent controls make unprofitable. The end result is less social cooperation and long-term deterioration of the existing housing stock.
When government holds the price of low-skill workers artificially high, as with the minimum wage, government reduces employers’ incentives to use low-skill workers in production. Over time, employers find more ways to conserve on that artificially scarce input, reducing employment via changing production processes and products, substituting capital for labor, reducing output, moving jobs elsewhere, and to generally cooperate less with low-skill workers. For instance, restaurant industry responses to minimum wage hikes have included moving to buffets, which require fewer workers, expanding slow-cooked menu choices (essentially substituting crock pots for workers), and self-serve soda dispensing. Similarly, the higher the price of a worker relative to a computer, the more employers will substitute computers for labor.
Furthermore, the constant prospect of endless and arbitrary changes in taxes and regulations and other forms of coercion increases the risks involved in trying new and innovative ways of cooperating with others in search of profits. And because coercion expands evasion efforts over time, more and more resources go to enforcement, taking resources away from productive uses and violating principles of equity (since enforcement is inherently selective and unequal) that can be upheld only when arrangements are voluntary.
Since there are very few areas where coercion is necessary to achieve social cooperation, there are very few areas where government advances it. Instead, the massive expansion of government beyond such bounds has undermined cooperation and violated justice. Yet still more intrusion is constantly offered as a solution. That is why Ludwig von Mises’s recognition that “Those who ask for more and more government interference are asking ultimately for more compulsion and less freedom” is important and ominous today. Each expansion of government’s reach shrinks freedom and restricts otherwise expanding social cooperation, with effects that worsen progressively over time.