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As we reflect on this Martin Luther King Jr. holiday, we fondly remember our late colleague Steve Horwitz, founding director of Ball State’s Institute for the Study of Political Economy. Steve also founded the website “Bleeding Heart Libertarians” and was deeply interested in issues of racial and social justice. Among his many insights was that laws prohibiting voluntary exchange between groups, such as Jim Crow laws in the U.S. South or apartheid restrictions in South Africa, unjustly harm all groups to the benefit of a privileged few.
Let’s say a society is characterized by two groups, the dominant majority Greens and the marginalized minority Purples. Green barbers have managed to pass a law that forbids Purple barbers from cutting hair of Green customers. Our typical Green haircut customer is willing to pay $50 for his monthly haircut, while our Green barber is willing to cut the Green customer’s hair for a $20 minimum price. At a price less than $20, the Green barber finds it in his best interests to do something else—say, work in a local factory. Let’s say the going price of a Green-Green haircut is $30, so that the Green customer gets a gain of $20 on the transaction, while the Green barber gets a gain of $10—for a total social gain of $30.
Enter the Purple barber. Let’s say he’s willing to cut the Green customer’s hair for $10 but is forbidden by law from doing so. Steve always argued this was an injustice to the Purple barber for sure, but also to the Green customer. Moreover, the actual social-gains market is reduced by the law. Let’s say the restriction is abolished and our Green customer and Purple barber agree to a $15 price for a haircut. The Green customer now garners a $35 gain from the haircut, $15 more than under the old arrangement. The Purple barber is $5 better off by having access to an expanded market. The total social gain is now $40. At the $15 price, our Green barber exits the market, although he is likely resentful of his Purple competitors. Nevertheless, his loss of $10 in gain is offset by the $20 net gain to the other two market participants.
The bottom line: Rules that restrict people from engaging in market exchanges are not only unjust—they also reduce wealth. Law should not be a tool to indulge economic resentments!•
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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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Agree that licensing is a real problem. “In the 1950s, around 1 in 20 American workers needed an occupational license. Today, it is one in four. And licensing requirements vary vastly between states…” (see The Myth of Capitalism) This makes it difficult, in this era of the two income family, to move to other states. It also restricts entry into many fields with the results you describe. This is caused by excess government interference in the market.
But there is another side to this. We have seen massive consolidation in industry while unions have been crushed. The result in many areas is monopsony in the labor market, with large employers imposing onerous employment terms – non-compete agreements, forced arbitration, stagnating wages etc. So we also have a problem with private actions that reduce social welfare.
Indiana seems to have the worst in both areas: many government-supported licensing requirements and a pro business (as opposed to a pro market) regulatory regimen.