How the State destroys Social Cooperation

This is a review of an article I had to present in class. I thought I would post it here.

The article we have chosen is titled How the State destroys cooperation. The source of the article is, a webpage belonging to the Mises institute which aims to expand the ideas of the Austrian school of economics.

Hayek, actually belonged to the Austrian school of economics, and was a disciple of Ludwig von Mises, the father of the Austrian school.

This is why a lot of the ideas in this article, can be related to topic 5, markets versus politics, and especially the essay by Hayek The use of Knowledge in Society.

The main idea the article supports, is that, often, the actions of the State, while well intended, will distort the interaction of the market, making it more difficult for people to participate in the market, and ultimately destroying social cooperation.

Furthermore, the intervention of the State will create an extra cost in the market, that of avoiding regulation.

There are many ways in which the State can destroy social cooperation, which usually comes in the form of taxation, regulation or prohibitions.

The first example the article lists, is employee benefits, such as healthcare, insurance, training programs… When the state forces employers to give certain “free” benefits, what we often see is that employers will reduce other benefits which the employee prefers. This happened recently in the U.S. With the introduction of Obamacare, many employers cut-down on training programs, which are a type of employee benefit, to make up for the cost of providing the mandated healthcare benefits.

We can see clearly from this example, that rather than increase utility, this policy has diminished, by redirecting resources which could have been better used elsewhere, or more simply, by making decisions, politically, which would be better made in the market.

In the words of Hayek, the reason that government policy is not effective is that they don’t possess the specific knowledge that can only arise from the interaction of all the different market participants at any given time or place which will lead to spontaneous order.

If we view the interaction between employee and employer as a free contractual agreement we may ask ourselves. Why should the State decide which benefits workers value more or less? Is this efficient? And also, what will the consequences of enforcing this be?

Another example the article uses to illustrate this point, is price ceilings, such as rent controls. A price ceiling, for those of you who don’t know, is when the governments limits the price at which something can be sold, effectively, putting a ceiling on it. We look here at price ceilings in rents.

From a social point of view, we may think that price ceilings are good, that everyone should be able to afford somewhere to live. We may think, therefore, that high prices in rents are the result of greedy landlords.

An economic analysis, however, will tell us something different. If the price of rents is kept artificially low, below the market rate, this will create incentives for landlords to abandon the rental market, which will reduce the supply of houses for rent on the market, making it even harder for people to find a good place for rent.

Or it may make landlords cut costs elsewhere, by supplying worst houses and having a lower or inexistent level of maintenance.

Price ceilings, as well as any other forms of price fixing will inevitably lead to market inefficiencies. To quote Hayek,

“Any attempt to control prices or quantities of particular commodities deprives competition of its power of bringing about effective coordination of individual efforts.”

With this example, we see again that State interference, as well as ineffective, will create a subsequent and unforeseeable set of reactions in the market participants, which may lead to outcomes totally different from what the policy intended.

The Spanish rental market was actually almost destroyed because of this and other policies which basically made it very costly to rent properties. We may even list this is a contributing factor to the extension and effect of the housing bubble in Spain.

The final example we can reflect on, is that of minimum wage laws. This again, is a prime example of a decision that we make politically, rather than via the market.

But who possesses the true information about the utility and price of labor? Who knows how much demand there is, and how much supply?

We can let the market set wages, as it sets any the price of goods and services, by letting supply and demand meet at equilibrium and by allowing mutually beneficial interactions of employers and employees to take place.

The other option, which is prevalent in most developed economies, is to allow the government to introduce a price floor, in this case, a minimum wage that has to be paid by law.

This will inevitably lead to unemployment, in those labor markets where the equilibrium wage is below the enforced wage, mostly, for unskilled labor. By making employers pay more for labor, they will be forced to hire fewer people; this is a simple microeconomic principle.

Is this outcome good? We do have some winners, the people who keep their job, but also some losers, those who are forced out of the market.

Another form of labor market intervention which creates interference is tax on labor.

This is a current problem today in Spain. The taxes on labor are very high. This makes labor more expensive, and will again, disincentivise entrepreneurs from hiring workers. Instead, firms will employ more time and money into developing capital intensive production.

Once again, government intervention has lead to an unwanted outcome, less employment, and destroying social cooperation.

In conclusion, as illustrated by the examples, government intervention and regulation is often inefficient, and may lead to unintended consequences, extra costs for the market, and overall, hamper the creation of wealth.

These ideas are all related to topic 5, markets versus politics, but as we all know, this is not a question of one or the other, the real question is: How much market and how much politics?

To properly tackle these questions, we must be sure to use the right frame of mind, and approach the questions in a logical way, for example, by assuming the same behavioral models between policymakers and market participants, since we are all human.

Many times, the analysis of voters is too superficial and often uninformed. This isn’t surprising, since we know that voters don’t have incentives to be “good”, informed voters.

We could say that voters often don’t see beyond the intentions of policies, and fail to see the real effects this will have in the market.

They fail to see that increasing the prices of labor will inevitably change the demand for labor.

They fail to see that maintaining rents artificially low, will diminish, and in extreme cases, obliterate the supply.

They fail in general, to understand how prices affect demand and supply.

And they fail to see that, by forcing employers to provide certain benefits, you do not actually increase the total benefits of workers. All this will do is reallocate the money spent in benefits in a way that is not most efficient. The state is in fact depriving you of choosing the benefits you want most.

As always, with more “rights” comes less freedom.

Ultimately, the choice we make, politically, is not about left, or right. The choice we make is about freedom. Funnily enough, the political spectrum is terribly inconsistent with freedom.

On the left, you will often have people advocating for social freedom, and economic non-freedom, intervention.

On the right, people will talk about economic freedom, while trying to make centralized decisions on social issues, like abortion, religion…

At the end of the day, we either choose to believe that humans are somewhat rational and that they can make good decisions.

Or we believe that they are not.

If you believe the first, then you will also believe in that the best outcomes will arise in a free-society.

If you believe the second, you believe that freedom is bad, and that the coercive action of the State is necessary to achieve an “ideal” state of affairs.

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