All Commentary
Friday, April 1, 1960

The High Cost of Coercion

Foreign cars, cameras, tools, steel, and other products are growing in favor with the American consumer. An Italian-based firm recently bought control of one of the oldest typewriter companies in the United States. A parallel trend is found in rising investment of American capital abroad.

Concern about rising imports of goods and the flight of gold and savings from the United States prompts inquiry into the causes and possible correctives for this shifting pattern of trade. As pro­ducers, why are we finding it in­creasingly difficult to compete for customers in the world market? Why are our exports of consumer products and services giving way more and more to exports of capi­tal goods—to American investments in foreign plants and production facilities? Are we comparatively overcapitalized—too many tools and facilities per laborer—in the United States? Are we in America, as consumers, getting a bargain from this new pattern of interna­tional trade; or is the trend detri­mental to our interests?

Current concern about interna­tional trade brings to mind the appeals, so widespread in the depth of the “Great Depression” a gen­eration ago, to shop at home—patronize local merchants. The ar­gument was that shopping in chain stores or through mail-order houses, or otherwise spending money outside the community, would aggravate the conditions of local unemployment, slackness of business activity, and hard times generally. There is a fallacy in this “buy-locally” cure for depression: it is not possible to spend oneself rich. True, the local merchant would like to sell more goods at his price, the local laborer would like to sell his services at his price, the farmer would like to sell all he can produce at his price, and so it goes as far as all sellers are concerned.

But man does not live by selling alone. The other side of every sale is a purchase. Selling one thing involves buying another—even if the thing bought is “only money.” The customer is “the forgotten man” in the “buy-locally” argu­ment. For if the consumer says that local prices are too high—whether for merchandise or the services of a laborer or whatever—the result is “No Sale!”

The Customer Holds the Key

The upshot of all this is that no­body in a community gains, either as buyer or as seller, when there is no sale. And contrary to the im­plications of the buy-locally argu­ment, the community gains, rather than loses, if a customer can find what he wants at a price he’s will­ing to pay, even though he has to go outside the community to find such a bargain. What did the com­munity gain? Just what that cus­tomer gained in satisfaction from his trade—and the community lost nothing in the process. At least one person in the community made a sale and a purchase—traded something he wanted less for something else he wanted more. If he could have bought the same thing at the same price locally, no doubt he would have done so. Those who want customers to buy locally need only see to it that their ask­ing prices are right—for cus­tomers are motivated by bargains. Just as the customer is the key to community trade, so must the interests of consumers be consid­ered in matters of international trade. But let’s further analyze some important aspects of trade at the local level before introducing international complications.

Jones of Jonesville

In Jonesville, let us say, Mr. Jones has found he can serve his interests very nicely by inventing and operating a machine that turns out nails which he can trade to others in the community for anything he needs. Indeed, so pleased are the others that they reward Jones handsomely in trade until he has more than enough for his immediate requirements; he has savings.

As his savings accumulate, Jones risks them in part to improve his machine until it will turn out twice as many nails as before in a given time; and his savings grow. Then he begins casting about for other investment opportunities. He sees that others in the community also have been acquiring savings and tools and skills to improve their output. But it appears that his sav­ings are largest, so he concludes that another nail-making machine might be the best investment op­portunity at the time—if he can hire an operator at a reasonable wage. Upon checking, he discovers that the most likely candidate for the new job is a young man who has not yet accumulated any tools but who has the intelligence and ability and desire to operate the new machine for Jones. They agree upon a wage rate that is higher than the young man could earn elsewhere, yet lower than Jones would have to pay any other work­man of comparable ability.

Though nail prices decline as Jones expands his output, he con­tinues to profit because he knows how to cut production costs with new and better machines and hired help. He also is able to expand his sales territory as his costs—and prices—decline. In other words, the market area is enlarged, trade increases—to the advantage of everyone concerned. This would be true, even were Jones to bring in new workmen from the fringes of the market area, workmen willing and eager to work at wages that might not attract others in the community.

If the Wage Is Earned

At first thought, it might seem that bringing in cheap outside labor would lower the level of wages in the community to the in­jury of native workmen. Actually, it does not, if the new workmen earn their wages through produc­tion. In that case, they contribute to the community at least as much as—and generally more than—they draw from it.

A common argument is that a community has only a limited sup­ply of capital or tools; and if these tools are spread thinner among more workmen, the average pro­ductivity must decline. But in a free market, it may happen other­wise. When labor is available at reasonable wages, then capital and tools are attracted. They come forth out of idleness; they are di­verted from consumer uses; they may come from outside the com­munity as did the extra supply of labor. In other words, the supply of capital is flexible, too. And so is the supply of managerial talent. If labor is available, some of the laborers themselves will become employers, start new businesses, and thus move up the industrial ladder. So, an increased labor sup­ply means increased production and lower prices for goods and services, and each wage dollar has increased purchasing power.

Furthermore, Jones cannot ar­bitrarily set wage rates. Other em­ployers in the community—or po­tential employers—also want hired help and will bid against Jones to keep the going wage rate high enough to clear the market. This means that everyone who wants to be employed, instead of working for himself, can find a job.

Also to be considered is that Jones, or anyone else with savings or capital, would be under strong temptation to invest some of the savings in new plants and new tools in any area that offers sales opportunities and a supply of available workmen. Thus it is that capital moves from one location to another, as do workmen, within any market area, tending to spread and equalize job opportunities, wage rates, industrial development, cultural advances, and a rising level of living. Nor does this process of competitive growth and trade im­properly exploit or injure anyone—unless he had expected to get something for nothing. It assures everyone not only all he can earn but also the best possible oppor­tunity to earn it—whether his goal be material goods, services, cul­tural opportunities, self-improve­ment, or just plain leisure.

Now, suppose that Jones had been fully satisfied with his first nail machine and had decided to let it support him for the rest of his life. In that case, he might have imagined that the Jonesville market was his exclusively—that he had a right to all the money that community could afford to pay for nails. Then he might urge the Community Council to forbid any other nail manufacturing in the area and any importation of nails. He would argue for such a nail monopoly on grounds that compe­tition would injure him; and if he were injured, the rest of Jonesville would suffer accordingly!

By that same rationalization, other producers in Jonesville could argue for protection against com­petition, and organized workmen could protest against any importa­tion of “cheap foreign labor.”

Some Consequences of Intervention

At this point, there is no need for further speculation as to what might happen in some hypothetical Jonesville. We need only look about us to see that these very things have happened and are happening every day. One after another, spe­cial interest groups have turned to government for some “fair advan­tage” over competitors, both do­mestic and foreign.

Farm prices have been propped up to the disadvantage of domestic consumers; exports are subsidized; acreage or marketing quotas have been invoked to keep down poten­tial competition in agricultural production.

Labor unions have sought and obtained legislation that, in effect, grants them monopoly powers and exempts them from common law prosecution for acts of violence, coercion, assault, and intimidation. Manufacturers and various pro­ducer groups, often with active support from organized labor, seek and obtain tariffs and other pro­tective measures against competi­tion from “cheap foreign labor.”

Publishers, advertisers, ship­pers, and other groups get postal subsidies.

Teachers, preachers, and various proponents of “worthy causes” ex­pect tax exemption, federal aid, and other special privileges.

Promoters demand subsidized credit and artificially low rates of interest.

There appears to be no end to the possible combinations of spe­cial interests seeking something for nothing at the other fellow’s expense. All of these developments, it must be noted, are departures from the method of voluntary co­operation and exchange in the open market. There are no willing buyers of nothing-for-something, which means that coercion or a reasonable facsimile must be in­voked to get something-for-noth­ing. And organized coercion tends to gravitate toward and congeal in the hands of government. The pow­erful and burdensome bureaucracy that now demands a third of the productive efforts of the American citizenry is but a reflection of our departure from voluntary competi­tive enterprise and a measure of the force that is required to push or drag individuals into unattrac­tive projects. Much of the govern­ment spending is in the name of national defense, which becomes a growing problem as multiple pres­sure groups seek protection against possible competition. This is what always happens when government intervenes, first to establish a mo­nopoly power, and then to defend the monopolist.

Multiplying the Problems

We in America, if we persist with the prevailing pattern of co­ercive practices and departure from open competition in our do­mestic affairs, have no right to expect anything but trouble in our international relationships. It is possible to get some production by compulsory devices—if the com­pulsion is not absolute; slavery “works” after a fashion. But it is tremendously inefficient and waste­ful of natural resources, not the least of which is the unimaginable ingenuity and creativity of which individuals are capable if only they could be free to pursue peacefully their own interests with their own property. Burdensome taxation, culminating in runaway inflation, is the inevitable consequence of shunning competition and turning to coercion as a way of life. And this tax burden, otherwise mani­fested as an international flight from the U.S. dollar, is precisely why American goods and services are meeting increased customer re­sistance in the markets of the world: coercion makes for costly production and distribution.

Let no one suppose this to be a trifling fact of merely academic concern. Serious enough is the threat to the soundness of the dol­lar and the credit of the U.S. gov­ernment. But even that should not be our major object of concern. The terrible seriousness of the situation is hidden behind Khrush­chev’s boast that “we will bury you,” which American business and professional and political leaders are interpreting to mean that we are now “at economic war with Russia.” Now, the reason why this is serious is not because Khrushchev has challenged capital­ism to compete in the markets of the world. Such competition is the bread and butter of capitalism, the reason for its being, its very life. No, the seriousness lies in the fact that supposedly stanch defenders of competitive private enterprise are now using the term economic war to describe a competitive situ­ation. This is the new terminology of the coercive way of life, de­signed by and for those who do not choose to take their chances in open competition. And if this de­fection from capitalism means that we are going to try to beat Khrush­chev and company at their own game with their choice of weapons—that we, too, are bound to rely upon coercion and government con­trols—then we are indeed at war, not against Russia, but with Rus­sia, against the ideals and prac­tices of freedom that once guided American affairs at home and abroad.

  • Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.