Freeman

ARTICLE

Victims of Reform Laws

APRIL 01, 1977 by E.C. PASOUR

Dr. Pasour is Professor of Economics at North Carolina State University at Raleigh .


Travel would be smooth if roads could be paved with good intentions. Unfortunately, good intentions do not assure that an action will achieve its stated purpose. Indeed, there is ample evidence consistent with Mises’ observation that intervention leads to "a state of affairs which—from the point of view of their authors’ and advocates’ valuations—is less desirable than the previous state of affairs which they were designed to alter" (Human Action, p. 858).


Government intervention creates victims in at least two ways. First, laws against selected economic activities (e.g., price controls) restrict choice by preventing voluntary market transactions. These illegal economic activities are victimless crimes since such market transactions create no involuntary victims. A number of examples are discussed below. Second, one intervention frequently leads to another further restricting individual choice. The snowballing effect of intervention is explained below in the case of education and health care.


Price Controls

First, consider price ceilings (or floors) established by law. In these cases, it is illegal to sell a product for an amount higher (or lower in case of price floor) than the stated price. Examples include wage and price controls, minimum wages, prohibition of ticket "scalping," and usury laws. In each case, a market transaction which would make both parties involved better off is prohibited by law.

Consider product price controls. When the price of gasoline in the U.S. was set below its equilibrium level in 1974 during the OPEC oil embargo, a shortage was predictably created. The shortage was handled through queue or line rationing. A more conventional method of rationing would have been to issue coupons to consumers to purchase a specified quantity of the product. Such coupons are typically not legally negotiable. If the buyer is willing to pay the seller more for the coupons than the seller feels they are worth to him, both parties clearly benefit. The exchange of such coupons is a good illustration of a victimless crime in that intervention creates victims where none would otherwise exist.

Similarly, it may be shown that minimum wage legislation, ticket "scalping" laws, and usury laws create real victims. In each case individuals willingly engage in market activities only if their own position is enhanced. Usury laws are sometimes defended on the basis that the borrower has inadequate information, but information is an economic good and it is not feasible for the consumer to obtain complete information about any market transaction. The consumer must weigh the anticipated costs and benefits of additional information for any economic good or service.

Safety Legislation

Consumer safety regulations also create victims. The Food and Drug Administration, Consumer Product Safety Commission, Occupational Safety and Health Administration and other agencies frequently restrict consumer choice, effectively prohibiting the individual from engaging in activities which have more risk but lower cost. The tradeoff between risk and cost varies from person-to-person. Individual A, for example, might well choose to operate a lower cost lawn mower which does not meet the safety standards of the Consumer Product Safety Commission. Similarly, he may choose to operate a compact car at lower cost knowing that the probability of serious injury is higher. Safety legislation arbitrarily selects the amount of safety for the individual and restricts choice by prohibiting the desired tradeoff between risk and cost.

Rationale for Legislation

Why should an activity constitute a concern of the state if there are no victims other than the individuals directly involved? Two reasons are frequently cited. First, the regulators are alleged to have more information than the individual and to be better able to make decisions for him. Safety devices for autos provide a good example. Mandatory seatbelts, air bags, and the like, can only be justified if the regulators can better determine the appropriate level of risk for the individual than he himself can. In a society where individual freedom of choice is a paramount virtue, such legislation obviously cannot be rationalized on this basis.

Regulators have no way to determine and provide for the diversity of tastes among individuals. Thus, regulations almost always restrict the options facing the consumer. If the consumer doesn’t have adequate information to make a well-informed choice, such information can be provided without the coercive restraints which accompany most safety legislation.

A second reason for intervention is that other people may, in fact, be indirectly affected through side effects (or "externalities"). A side effect may be defined as an effect on the welfare of others who are not directly involved in the activity in question. In reality, there are likely to be differences in the extent of side effects associated with particular acts. Drug use, for example, may affect members of society other than the user if the user’s actions or appearance impose a financial hardship on or, in other ways decrease the welfare of other members of society.

In some cases such as auto brakes, the side effects associated with an individual’s activity are obvious. Faulty brakes pose a hazard, not just to the driver involved, but to pedestrians and other motorists as well. The fact that there are side effects, however, doesn’t necessarily mean that the motorist should be required to have his brakes checked. It may be cheaper to make the man with faulty brakes liable for damage done to other parties instead of requiring him to have good brakes.

In many of the economic examples cited, side effects are absent or negligible. In the case of price controls, ticket "scalping" and usury laws, for example, there are no important third party effects. The same is true for auto safety belts and most of the safety legislation which prohibits the individual from making the tradeoff between cost and risk. In these cases, government intervention cannot be rationalized on the basis of side effects.

Safety legislation in some cases may actually have a perverse effect. When the state assumes the responsibility for product safety and a product is given the government stamp of approval, the safety incentive of the producer and/or consumer is likely to be reduced.

Intervention—Why it Snowballs

There may be a basis for legislation when side effects are important (e.g., as in the case of faulty auto brakes). What is not widely recognized, however, is the role played by government in creating side effects and, hence, in providing a justification for more government activity. For example, when a service is provided collectively rather than individually, the intervention is likely to lead to additional restrictions.

First, consider health care. As long as the individual is primarily responsible for his own welfare, he bears the cost of activities which are likely to increase the costs of health care. Such activities include smoking, intemperate use of food, skiing, mountain climbing, careless use of bath tubs, and so on. Under these conditions, the cost of accidents, sickness, and the like is borne by the individual and his participation in these activities imposes no cost on other individuals. Thus, harmful side effects affecting other people are negligible, and there is no case for government action to restrict the individual’s hazardous activities.

The situation is much different when health care is socialized and the individual no longer bears the burden of his own health care. In this case, any activity which increases the cost of an individual’s health care affects the welfare and cost of other people since the costs of health care are borne collectively. Where health care is socialized, anything an individual does which increases the cost of his own health care is of concern to others. There are side effects associated with risky activities which increase the cost of health care to other people. Thus, these side effects or spillovers can be attributed to the fact that health care is collectively rather than individually provided. In this way, government financing provides the rationale for more government intervention.

What are the implications? A system of national health insurance will predictably lead to restrictions against individual activities of a risky nature. Participation in such activities will increase the cost of health care. Consequently, some economic activities which are legal under a system of private health care are likely to become illegal when health care is provided for collectively. For example, the "hazardous activities" mentioned above might be expected to become "social problems" when health care is publicly financed.

Problems of Compulsory Schooling

Education is another area in which government financing creates a situation where additional government activity is required to eliminate side effects. Privately financed education is compatible with a diversity of viewpoints and tastes. Parochial schools, for example, can inculcate the tenets of the sponsoring group. The group is homogeneous with respect to the doctrine which provides the focal point for the educational system. In such cases, textbook selection, choices of doctrines being taught, and so forth are simplified.

When education is publicly financed, the situation is drastically changed. A state system means that there is likely to be relatively little leeway allowed from school to school with respect to text-book selection, teaching methods, teaching approach, and the like. The state agency responsible must have a standard against which it can judge compliance. Consequently, there is a strong force toward uniformity and little latitude to cater to the interests of particular groups. A recent example is the controversy in Kanawha County , West Virginia where parents vainly objected on religious grounds to textbook material being used in public schools.

A publicly financed educational system faces an insurmountable problem in catering to a diversity of tastes relating to religious or doctrinal preferences. Separation of church and state means that schools must not offer fare which is oriented toward any single group. The prayer which poses no problem in a parochial school serves the needs of some students and offends others in a public educational system in a pluralistic society. Virtually any religious or moral teaching will prove objectionable to some group or segment in the community. Here again, government financing provides the rationale for additional government control, reducing choices available to parents and students.

Numerous other examples can undoubtedly be cited where government financing creates side effects making a particular activity objectionable. That is, an activity which is victimless when supplied through the market, involves side effects when publicly financed. Ironically, victims of government intervention in such cases typically blame the wrong culprit. Individuals blame other individuals for having different tastes. The real culprit is the method of financing the service. When a service is supplied through the market, a wide range of tastes can be accommodated without imposing costs on others.

Conclusions

If wishes were horses, we would all be wise to own stock in a harness factory. There is ample evidence, however, that economic regulation does not achieve the results desired by its advocates. Government intervention, regardless of the reformer’s intention, tends to create victims where none would otherwise exist. Laws preventing voluntary market transactions create victims by restricting individual choice. There is no legitimate basis for laws preventing such transactions, as in the case of price controls and much of the safety legislation, where there are no important side effects affecting other parties.

The way in which intervention paves the way for more intervention, leading to further restrictions on individual choice, is not widely recognized. A recognition of the impact of these effects should be taken into account when the relative merits of the market and the state are being compared as alternative ways of providing any economic good or service.

ASSOCIATED ISSUE

April 1977

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