RESEARCH REPORTS Great Barring Ton, Massachusetts June 6, 1966
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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.