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Restricted Supply and the Free Market

Contrary to libertarian philosophy, government plays an essential role in the economy. Big business does not want government to go away since it is useful in providing subsidies and imposing regulations which keep small players in their place.

Generally the law of supply and demand sets prices and quantities of products bought and sold in the free market. Adam Smith was right. From a business standpoint, a problem arises when, following Smith’s principle, the profit potential for a certain product attracts a multitude of producers. Then supplies increase, prices fall, and producers take a loss. Some go out of business.

The solution is often to enlist the help of government in limiting competition either by granting a state-sanctioned monopoly or by imposing regulatory barriers to discourage competitors from entering the field. Medical doctors, for instance, enjoy high salaries because state licensing boards limit the number of persons licensed to practice medicine. Extensive education is required to gain a license. In the name of improved quality, the quantity of potential competitors is controlled.

A similar practice takes place in other fields. An African-American braider of hair with a clientele of satisfied customers was recently required to go back to school and take 1,000 hours of course work before she would be allowed to resume her business.

“Quality” has therefore become a code word for “high-priced”. In theory, consumers should have the power to decide which products are of a certain quality relative to price and make their buying decisions accordingly. In practice, professional groups prevail upon the government to establish licensing boards controlled by the same groups which impose educational and other requirements to ensure that newcomers to the field will provide “high-quality” service. Consumers are not allowed to purchase “low-quality” service even if they were so inclined. Again, this “high-minded” appeal is belied by the fact that competition is quashed by government fiat and prices rise.

We see, therefore, that for a producer (or seller of goods and services) to prosper in a free-market economy, the government needs to limit competition. The freest of our free-market competitors - farmers - went out of business as they outdid each other in producing corn and the price of corn dropped. Now government supports prices in that industry. The farmers could have accomplished the same result by convincing government officials to restrict sales to “quality corn”, or to corn grown by “quality” - i.e. educated - farmers. All the hick farmers would have been forced out of business and their corn fields would have remained fallow. We could have celebrated this as “improving the quality of agriculture” even if we paid more for the product.

The same principle could apply, for a change, to improve the price which a laborer receives for his work. Labor has a quantity expressed in terms of man-hours of work. Government can limit the weekly hours which an employer can legally work the laborer before he is required to pay an overtime premium. If productivity increases do not offset the shortfall in production, there is a reduction in the supply of labor which, in the face of constant demand, forces prices (wages) to rise. By such means we can have more people working at an adequate level of wages even if mechanization reduces the demand for human labor.

If there should be a crisis in employment, the community will be hard pressed to deal with it unless government takes steps of this sort. We need, in other words, to find a way that more people can remain gainfully employed despite steady improvement in labor efficiency. We will also need to find a way that economic activity can remain at a level of support to meet human needs without ravishing the environment. But since organized labor is no longer pushing for this measure and the business community is firmly opposed, the impetus for it will have to come from government or from the community at large.

The point is that, despite free-market rhetoric, the government regularly intervenes in the economy to limit supply and thus helps existing suppliers to improve their income. Normally this is done by imposing new educational requirements - good for existing suppliers and good for educators, but bad for new people who want to enter the field. In the case of labor, the restricted supply would be brought about by curtailing work hours rather than by requiring working people to go to school. The result in this case would be that more people, not fewer, would find an opportunity to work in this field.

Now, in the absence of such measures, if only the blue-collar workers could find academic experts or persons in suits to make arguments about quality on their behalf. We need “professionalization” of the industry. We need more people going to school - not to learn something but to keep them meanwhile from competing for jobs and undercutting the price.

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