Comparative advantage, competition, Consumer Sovereignty, Contrived Scarcity, Free trade, Legalized Restraint of Trade, Markets, Matt Ridley, regulation, rent seeking, Richard Ebeling, Transatlantic Trade and Investment Partnership
The interests of consumers should always be placed first. That’s what happens in a free market economy, with the consent of competitive producers, and that is how public policy should be crafted. Too often, however, regulations and the laws on which they are based are written primarily with producer interests in mind. Don’t be cowed by the appealing names given to pieces of legislation or their ostensible purposes. These may be couched in terms of consumer protections, but more often than not they create barriers to entry, stifle innovation and confer advantages to big players, thus restricting competition. A case in point is occupational licensing, which inflates prices by preventing the entry of innovative and less costly competitors. In this political exchange, consumers gain “protections” that are often of questionable value, especially when incentives for improved service are blunted by the licensing rules.
Consumer primacy is of value in a general sense, as Richard Ebeling explains in “Consumers’ Sovereignty and Natural Vs. Contrived Scarcities“. When consumers are sovereign in their ability to decide for themselves among competing alternatives, including their own personal comparison of value to price, they essentially take charge of the flow of resources into and out of various uses. And they capture a positive gap between value and price as a personal gain in any transaction to which they are (by definition) a voluntary party. At the same time, producers must reckon with real costs, which reflect natural scarcities. But, by virtue of competition, it is in the interests of producers to deliver the best values to consumers at the lowest prices compatible with costs. Here is part of Ebeling’s introduction:
“One of the great myths about the capitalist system is the presumption that businessmen make profits at the expense of the consumers and workers in society. Nothing could be further from the truth. … In the free market, consumers are the sovereign rulers who determine what gets produced, and with what qualities and features. … The ‘captains of industry’ are not the businessmen, but the buying public who steer the directions into which production is taken.”
Ebeling gives a number of good examples demonstrating the ways in which this efficient market process is compromised by the hand of government. Regulations, mandates, licensure, price floors and ceilings, taxes and subsidies all act to distort the normal workings of the market, creating direct and indirect scarcities. The perverse effect is to generate a flow of economic rents to producer interests at the expense of consumers (and taxpayers). And that is why is those same producer interests are often inclined to seek market interventions. The successful rent-seeking effort ends in legally-sanctioned restraint of trade.
An example of contrived scarcity given by Ebeling results from protectionist trade policy, which ostensibly “protects” domestic producers and workers from “cutthroat” foreign competition. The plight of workers seems to be an easy sell to the public, though historically protectionism has inured to the benefit of relatively highly-paid workers, often unionized, who have an interest in restricting competition. Consistent with Ebeling’s point of view, Matt Ridley writes that trade policy should be driven by the benefits to domestic consumers, rather than producers. Ridley focuses on the UK’s interests in negotiating a free trade agreement between the United States and the European Union: the Transatlantic Trade and Investment Partnership. The following thoughts from Ridley should be taken to heart by anyone with an interest in trade policy, and especially those who fancy themselves liberal:
“The argument for free trade is paradoxical and much misunderstood. Free trade benefits consumers because it is the scourge of expensive or monopolistic national suppliers. It benefits both sides: yet it works unilaterally. Your citizens benefit if you let them buy cheap goods from abroad, while foreigners are punished if their government does not reciprocate. This creates more demand for local services and hence more growth and jobs in the importing country.
Contrary to what most people think, therefore, it is imports that bring the greatest benefit, not exports — which are the price we have to pay to get the imports. At the centre of the debate lies David Ricardo’s beautiful yet counterintuitive idea of comparative advantage — that it will always pay a country (or a person) to import some goods from another, even if the first country or person is better at making everything. Truly free trade cannot be a predatory phenomenon.“