Published Weekly by RESEARCH AMERICAN INSTITUTE for ECONOMIC RESEARCH REPORTS Great Barring ton, Massachusetts June 6, 1966

Free Competition vs. "Voluntary" Compliance The authors of many history and economics books trust legislation has restricted business enterprises from have described the United States as a nation whose cus- establishing monopolies and conspiring to restrain trade, toms, laws, and institutions provide the conditions that other legislation has conferred monopoly privileges on enable individuals to cooperate in an attempt to obtain labor unions. Closed-shop rules enable unions to pre- things that they want in exchange for things offered to vent individuals from competing by requiring member- others in free competitive markets. The purpose of this ship as a condition for employment. Collective bargain- article is to examine existing conditions and to ascertain ing rules have made possible unwarranted wage increases whether or not they facilitate or hinder such free com- that have restricted the ability of entire industries to petition. compete in the marketplace. We use the name "free competition" to refer to the Laws have been enacted that confer advantages on situation in which members of a social group voluntarily numerous special interest groups, thereby reducing oppor- engage in processing things or providing services and of- tunities for others to compete. Subsidies to farmers and fering them to others on an exchange basis that is mutual- many others enable them to offer less but demand more ly agreeable. For example, when processors of clothing in the markets. Tax exemption for cooperative organi- choose to buy a meal at a particular restaurant and the zations but not for corporations give the former an un- restaurateur purchases clothing offered by the former, fair competitive advantage. Import tariffs and quotas the parties involved, in effect, make a mutually agree- restrict the competitiveness of foreign processors. able exchange. If the clothing processors choose to pa- Special privileges granted to some individuals and tronize another restaurant because they consider the serv- groups have resulted in unequal competitive advantages. ice or food to be better there, that restaurant has com- These include arbitrarily granted franchises and rights for peted more successfully than the other. using air waves, transportation routes, and sites in favor- "Free" competition implies optimum competing be- able locations. In each instance, the holder of the special tween individuals or groups attempting to provide things privilege gains at the expense of others who are deprived including services to others. It implies, not an absence of equal opportunity for competing. of rules, but that the rules of the social group shall not Minimum wage legislation denies many unskilled per- give advantages to some that hinder others from compet- sons the opportunity to compete. Such legislation in ef- ing successfully. For example, the rules prescribed by fect decrees that those whose efforts are worth less than New York City for the operation of taxicabs include a the prescribed minimum wage shall not be employed. fixed number of permits for providing that service. Welfare legislation has reduced the incentive of many Holders of permits thus have an advantage over those persons to cooperate in processing things and offering who would compete in providing the service but who can- services. Rules for providing unemployment compen- not do so without purchasing a permit from a holder at sation have a similar effect; such compensation is pro- a cost reportedly approximating $25,000. vided for so long and in such large amounts that many Rules such as the one just described fail to ensure a individuals work for only about half a year and are sup- "fair field with no favor," with the result that perfectly ported by others during the remainder. free, i.e., optimum, competition is not possible. In some The adoption of such competition-reducing rules, to- social groups such as Russia, rules require many individ- gether with other unsound policies and practices, has uals to engage in processing and service-providing activi- resulted in economic maladjustments that seem, in the ties involuntarily, and other rules fix prices (and, there- view of many, to make more rules necessary. Perhaps fore, the ratios at which things are exchanged). Con- because proponents of the additional rules see little sequently, competition among the members of such chance for their enactment, compliance with most such groups is greatly hampered. rules has been made "voluntary." The Constitution of the United States was intended to The so-called guidelines for wages and prices are arbi- provide the economic and social rules necessary for the trary edicts made by a small group of central planners, practice of free competition. Such competition prob- not rules approved by the social group and established ably was approached most closely in the early days of by legislative process. Although most small groups of the Nation, when free land was available for the taking processors have ignored the price guidelines, some large and before much legislation granting advantages and groups have been forced to adhere to them by threats of special privileges had been adopted. Government reprisal. This unequal application of the During recent decades, however, rules have been guidelines enables some processors to make exchanges adopted that increasingly have restricted the practice of more advantageously than others, with the result that free competition in the United States. Alhough anti- competition is restricted. 89 Proponents of price guidelines would permit price ably will seek to compel compliance with rules that would increases by industries whose productivity had increased interfere even more with free competition in the United at a less-than-average rate, but they urge industries hav- States. ing greater-than-average productivity gains to reduce What the Indicators Say prices. Implementation of such an arrangement would reward those processors who serve others least effectively Among the leading indicators, floor area of commercial and penalize those who serve others most effectively. and industrial building contracts increased in March, in- stead of having decreased as preliminarily estimated; The chairman of the President's Council of Economic in April, this indicator is estimated to have increased Advisers recently asserted that profit increases have ex- markedly. ceeded increases in national income and employee com- Among the lagging indicators, the index of labor cost pensation while industrial prices have increased, and that per unit of manufacturing output increased in March, this development indicates that either prices had (been rather than having decreased as preliminarily reported; increased more than costs or that prices had not been re- in April, the index increased again. duced wihere costs have decreased. Such assertions im- ply that processors should obtain, not all tfhat they can The leading indicators continue to forecast further in free markets for their products, but only what the business expansion. central planners deem appropriate. SUPPLY "Voluntary" restrictions of direct investment and of New Consumer Goods Per Capita bank lending abroad prevent processors and providers of Our seasonally adjusted index of new consumer goods services from obtaining greater rewards from their efforts per capita increased slightly to a new record in April, to serve others more effectively. The President's appeal when it was somewhat more than the March index and 3 for voluntary reductions in expenditures for new plant percent more than that for April 1965. The index has and equipment asked processors to refrain from improv- been increasing at a rate averaging 0.4 percent per month ing their ability to serve others by modernizing facilities. since August last year. Varying degrees of acceptance of that appeal for self- Before adjustment for the change in population, cur- imposed restriction would result in unequal competitive rently estimated to be increasing at the rate of 1.2 per- advantages. cent annually, seasonally adjusted consumer goods produc- The foregoing discussion reveals that various rules tion increased about one-third of 1 percent in April and have been adopted during recent decades that have re- was more than 4 percent larger than that during April stricted the practice of Ifree or optimum competition in 1965. Production of manufactured consumer goods was the United States. The maladjustments resulting from one-third of 1 percent more than that in March and was al- those rules and from other uneconomic policies and prac- most 6 percent larger than that in April last year; resi- tices have made the adoption of more rules seem neces- dential construction, as measured in 1957-59 constant dol- sary. Consequently, a few central planners in positions lars, also was one-third of 1 percent more than that in of political power, who believe that they know what is March but was 1.3 percent less t/han that in April 1965. best for the social group, have urged processors to take Among the major market groupings of manufactured action that would restrict further their ability to com- consumer goods, the output of consumers' automotive pete effectively. products decreased 1 percent from March to April but Because most individuals presumably will not willingly was almost 2 percent more than such output in April 1965. take action that would be contrary to their best interests, Passenger car production decreased 1.5 percent in April the Administration's attempts to obtain voluntary compli- and was 1.4 percent less than that in April 1965; pro- ance probaibly will fail. We find no evidence to indicate duction of parts and related automotive products was that the Nation's political leaders soon will abandon the unchanged during the month but was 7 percent larger rules that restrict free competition or the unsound policies than sudh production a year earlier. Production of con- and 'practices that seem to require more such rules. There- sumer staples increased by less than 1 percent in April fore, the Administration's economic planners presum- but was almost 6 percent larger than that in April 1965. INDEX 175 Production of home goods and apparel decreased almost DEMAND 1 percent from the March volume but was 6 percent more than that in April last year. Apparel production Department-Store Sales had increased 3 percent since March last year, and home Sales of department stores reporting to the Bureau of goods production had increased almost 10 percent; out- the Census compare with those of corresponding periods standing in the latter grouping was an increase of about a year earlier as follows: 17 percent in the television and radios component, at- Period Percent Change tributable to the popularity of color television sets. Week ended May 28 +18 The Federal Reserve Board's index of consumer dur- Four weeks ended May 28 +11 ables, including automobiles and home durable goods, PRICES was unchanged from March to April but was about 6 percent more than that in April 1965; this larger volume Consumer Prices of consumer durable goods production was attributable The Consumer Price Inciex increased 0.4 percent be- entirely to increased output of appliances. The Board's tween mid-March and mid-April to a record 231 on the index of consumer nondurable goods, including apparel 1935-39 base.* At mid-April the index was 2.9 percent and staples, was unchanged during the month but was more than that of a year earlier. 5 percent more than that during April 1965. Among the major components of the index, all five in- Somewhat smaller automobile production during April creased. Component prices increased by the following was more than offset by increases in production of staples, percentages; housing, 0.6; apparel and upkeep and trans- television sets, and other major appliances. A marked portation, 0.5; health and recreation, 0.4; and food, 0.1. reduction in automobile output during May and probable Average weekly earnings after taxes for a factory further reductions subsequently might end or even re- worker with three dependents decreased 10 cents in April verse the upward trend of new consumer goods produc- to $98.29. Although such earnings were 3.0 percent tion. more than those during April 1965, their purchasing power changed little because of the increase of 2.9 per- Industrial Production cent in the Consumer Price Index during the same pe- Production of steel, automobiles, electric power, and riod. The purchasing power of the consumer dollar in lumfber (1) in the 1- and 4-week periods ended on the April was 43.3 percent of that in the 1935-39 period. indicated dates in the current year and (2) in t!he cor- Not since the year preceding the contraction of busi- responding periods of earlier years was as follows: ness activity that began in August 1957 have consumer Steel 1929 1932 1957 1961 1965 1966 prices increased as markedly as they 'have during recent Ingots—million tons months| The Consumer Price Index continued to in- 1 week: May 28 1.32 0.35 2.22 2.08 2.73 2.74 crease throughout that contraction, but it remained rela- 4 weeks: May 28 5.41 1.47 8.98 8.05 10.81 11.04 tively stable for about a year after the contraction ended Automobiles Vehicles—thousands in April 1958. 1 week: May 28 110 38 124 129 199 183/? Some observers have asserted that the relative stability 4 weeks: May 28 447 148 496 506 864 761p Electric Power *The Consumer Price Index, compiled by the Bureau of Labor Kilowatt-hours—(billions Statistics, is a statistical measure of changes in prices of goods 1 week: May 28 1.7 1.4 11.6 14.3 19.8 21.1 and services bought by urban wage earners and clerical workers, 4 weeks: May 28 6.8 5.7 45.7 57.1 77.2 83.3 including now both families and single persons. The index is Lumber often called the "cost-of-living index," ibut its official name is Board feet—'billions Consumer Price Index for Urban Wage Earners and Clerical 1 week: May 21 0.71 0.23 0.72 0.69 0.68 0.61 Workers. It measures changes in prices that significantly affect 4 weeks: May 21 2.84 0.91 2.84 2.69 2.73 2.45 the cost of living, but it does not indicate how much people ac- p Preliminary. tually spend to defray their living expenses. INDEX 250 C (SIJM El PRICE 1< >35 - 39 = 100

200 r r* y «^ *•* / /J > 150 A / r / 100 / \ / / <•

50 1914 16 18 20 '22 "24 '26 '28 '30 '32 '34 '36 '38 '40 '42 '44 '46 '48 '50 '52 '54 '56 '58 '60 '62 '64 '66 91 of wholesale prices since mid-February indicates that con- sonally adjusted monthly totals, and the long-term trend sumer prices soon will stop increasing. During the past and cyclical fluctuations of such liabilities thus are clari- decade, however, consumer prices have increased rapidly fied. This average increased in January, the latest when wholesale prices did, and they continued to increase, month for which it is available, after decreasing in each albeit less rapidly, when wholesale prices were relatively of the preceding 5 months. Thus some doubt has arisen stable. Only after a business recession had ended has the concerning the current cyclical status of the inverted upward trend of consumer prices been interrupted. series of business-failure liabilities, a leading indicator of We expect consumer prices to increase further during business-cycle changes, which apparently had been ex- the next few months, possibly at a reduced rate. Such panding cyclically since the spring of 1965. However, prices probably would decrease only after a severe con- because business-failure liabilities fluctuate widely from traction of business activity had been underway for sev- month to month, further data will be required for ascer- eral months. taining whether or not the recent expansion of the series Commodity Prices hag ended. 1965 1966 The weekly average of "large" business failures (those Index May 31 May 23 May 31 with liabilities of $100,000 or more) was 37 in April, Spot-market, 22 commodities 278 295 297 compared with 36 in March and with 33 in April 1965. Commodity-futures 274 284 285 The continued cyclical expansion of the inverted busi- Steel-scrap $35.17 $29.17 $29.50 ness-failure liabilities series has become questionable, but Note: The indexes are, respectively, those of the U.S. Bureau additional data are needed before the implications of this of Labor Statistics., Dow-Jones, and Iron Age. The spot-market series for future business activity will become clear. and futures indexes are converted so that their August 1939 daily averages equal 100. The steel-scrap index is a composite BUSINES'5 FAILURES: NUMBER AND LIABILITIES price for No. 1 heavy melting scrap. BY TYPE OF BUSINESS April 1965 and 1966 BUSINESS Number Liabilities* April Percent April Percent Business Failures Business 1965 1966 Change 196ti 1966 Change Liabilities of business failures in April totaled $110,- Mining & mfg. 183 154 -16 26.1 22.0 -16 141,000, or about 32 percent more than those in April Wholesale trade 134 116 -13 11.5 9.9 -14 1965. Our 6-month moving average of seasonally ad- Retail trade 535 509 - 5 20.1 22.4 + 12 Construction 228 206 -10 19.6 35.0 + 79 justed failure liabilities, centered at the end of January, Com. service 99 121 +22 6.0 20.8 +244 was $101,105,000, or 4 percent more than that centered in December but 7 percent less than that centered in Jan- All businesses 1,179 1,106 - 6 83.2 110.1 +32 uary 1965. *In millions of dollars. The proportion of failure liabilities in the various divi- BUSINESS5 FAILURES: NUMBER AND LIABILITIES sions of trade and industry, expressed as percentages of By Months, 1964-1965-1966 the monthly totals, changed from those in April 1965 as Liabilities Month Number (000 omitted) follows: mining and manufacturing, down from 31 to 20; 1964 1965 1966 1964 1965 1966 wholesale trade, down from 14 to 9; retail trade, down January 1,217 1,137 1,084 $ 96,731 % 89,272 $103,175 from 24 to 20; construction, up from 23 to 32; and com- February 1,241 1,114 946 123,935 111,985 95,536 mercial services, up from 7 to 19. March 1,320 1,332 1,226 110,999 146,579 103,471 Failure liabilities in these categories changed from April 1,197 1,179 1,106 112,884 83,247 110,141 May 1,075 1,183 93,419 133,113 amounts in April 1965 by the following percentages: min- June 1,157 1,094 144,496 144,607 ing and manufacturing, down 1; Wholesale trade, up 13; July 1,096 1,074 125,642 121,485 retail trade, up 41; construction, up 109; and commercial August 1,169 1,131 95,180 135,039 services, up 286. September 1,034 1,100 114,565 104,976 October 1,060 1,047 93,766 82,066 The num'ber of failures in the 4 weeks ended May 26 November 967 1,033 119,324 71,722 was 972, or about 8 percent less than that in the cor- December 968 1,090 98,282 97,575 responding period last year. Dun's Failure Index, sea- Total 13,501 13,514 $1J329,223 $1,321,666 sonally adjusted and expressed as an annual rate per 10,- 000 active enterprises, was 47.4 in April, compared with 50.2 in March and with 50.8 in April 1965. American Institute for Economic Research is a non- Random irregularities among business-failure liabili- political, noncommercial organization engaged in scien- ties are minimized by our 6-month moving average of sea- tific economic research. MILLIONS OF DOLLARS 200

100

1928 '30 '62 '64