Mr. Bechara is an attorney in Mayaguez, Puerto Rico.
Detractors of the free market proclaim that most social problems may be solved through the political process of coercive income redistribution. It is often pointed out, for ex ample, that if the government had additional powers to redistribute income, many existing social problems would disappear. This criticism of the workings of the market order rests on a vast oversimplification.
Social problems have a number of causes, many of which are the result of previous government interference. For example, unemployment is, in large part, a result of the labor laws and minimum wage structure. It is naive to think that government spending will eliminate unemployment while the laws that created the unemployment in the first place are left in effect. The result would be a misallocation of resources in the economy, not a higher productivity from redistributive policies.
This does not mean that government is powerless to eliminate unemployment, only that the programs generally followed have been erroneous. So it is with the majority of the other social problems common in the world today. Most of these problems—usually a shortage or a surplus of goods and services caused by price controls—would be eliminated if the controls were withdrawn. However, by advocating a spending program, the politicians give the impression of doing something positive to eliminate the problem—and loyalties are inevitably created. There is a self-interest on the part of the politicians to continue the “spend and spend, tax and tax, elect and elect” practices.
It is imperative to address the resolution of social ills with an analysis of both the pre- existing structural barriers as well as the proposed re-distributive solutions. Many of today’s economic ills may be traced to diverse governmental interferences in the workings of the market. But it may be more instructive to visualize some of the effects that redistribution or spending policies have on the economy.
It is customary for economists to analyze the market sector by sector. However, all sectors of the market are interrelated. Specifically, consumer behavior affects the availability of consumer goods, the allocation of the factors of production, and individual income. When the government interferes in any one of those areas by engaging in redistributive policies, it inevitably sets off disturbances in the other two.
Transfer of Factors of Production
When a demand exists for a particular consumer good, entrepreneurs are quick to transfer some factors of production toward this more profitable use. For instance, if demand increases for furniture, entrepreneurs will invest capital in those areas which provide the natural re sources for the production of furniture as well as in the manufacturing process. The demand for the factors of production is therefore derivative of the demand for consumer goods.
Similarly, income is generated when entrepreneurs are able to successfully serve consumers. The greater the popularity of goods and services provided, the higher the income earned. High profits in an industry signal competitors that the business is attractive. Cost- saving measures are brought about by the profit incentive, all to the benefit of consumers. But what happens when these market relationships are severed by the political process of income redistribution?
When income is expropriated and redistributed, consumer choices are inevitably frustrated. The severity of the consequences depends on the magnitude of the confiscation and the universality of the measures. If certain areas of production are more heavily taxed than others, profit margins will decrease accordingly, and there will be less incentive for outsiders to enter the field and compete. If taxes are levied against consumer goods, the public will tend to readjust its demand. Consumers may substitute other goods, or they may curtail their demand for other things in order to purchase the goods which are more costly due to the tax. Or, marginal producers may withdraw from the field as demand slackens.
The range of adjustment is as varied as the forms of governmental taxation. Subsidies play a significant role in the behavior of consumers. Goods that would not otherwise have been produced in the quantities that the governmental authorities deem necessary are demanded because of the attraction of the subsidies or because of the protection of a tariff. These devices distort communications between consumers and producers at the expense of the taxpayer.
The Impact Upon Society of Market Interventions
Society in genera] is affected by interventions in the market place. Goods that consumers want are not being produced because of the governmental measures taken to alter production. Factors of production are misallocated, and their further supply becomes dependent upon the governmental program that generated the shift in demand. Therefore, political forces are created that lobby for the maintenance and expansion of these programs. If the government eliminates a subsidy or a tariff for a particular product line, the voters are reminded that many families will be affected with the certain loss of jobs that a shift in demand would create.
The true issue, however, will be muddled by these arguments. The question is whether one respects consumer freedom of choice, or substitutes governmental controls. Invariably, the groups most adversely affected by a change in governmental policy will lobby for the retention of measures that benefit them. This activity, however, does not detract from the real issues; it only serves to bring some of the ugly consequences of intervention into focus.
Thus, we see that redistribution of income can take the form not just of taxing Peter to give to Paul, but of subsidizing goods and services, controlling prices, and engaging in countless other interventionist policies.
One of the most common examples of government intervention is in response to the charge that capitalism fosters bad literature. The frequent solution to this supposed problem lies in government promotion of the fine arts. The argument is that the economic system does not accurately reflect the wishes of the people. The free market economy tends to produce that which is demanded by consumers. What the critics are really saying is that they disagree with the public’s choice. Their solution is to persuade the public that the fine arts are preferable to whatever is being produced.
Capitalism as a system is at fault in the same sense as a mirror is at fault: it reflects a reality. The viewer may wish the mirror to portray a more handsome face, but it can only reflect that which is in front of it. The free market produces that which the public demands. If the government intervenes to change the extent of production, it only succeeds in substituting goods that are less desirable to the public than those that would have been produced. Far from eliminating social ills, the policies of redistribution exacerbate new ones by misallocating scarce resources.
Schemes that redistribute the wealth affect not only the victims of the programs but also the public at large. Measures taken to foster some special behavior may very well bring forth unforeseen consequences. Additionally, the idea that income may be divorced from the rest of the market forces is based on the false assumption that income will always be generated as if from a machine running on an inexhaustible supply of fuel. Yet, the reality is that the incentive to obtain a profit is the fuel that generates income. Income redistribution policies only serve to deplete the efforts aimed at the production of wealth. Instead of ameliorating social evils, redistributive policies lower productivity, misallocate resources, and create new victims of the political process.