Types of intervention and the effects of prohibition

Today, let’s discuss the types of market intervention and, using an example, the effects of one of its types.

Our aim is not to determine whether interventionism is “good” or “bad”. Our aim is to discuss the inevitable consequences of each type of intervention. Perhaps some people will find these effects good and some will find them bad. The question worth asking is whether the intervention is producing the effects that are expected by those who use it or try to use it. Is it an appropriate means to achieve the goal set by its originators? We will also not deal with the goal being good or bad, but whether the tools chosen to achieve it are right and will make it possible to achieve. This also seems to be a very important issue for those who would like to apply such an intervention. If it turned out to be counterproductive, would they not give it up? If we look at the economic objectives of the programs of the various, often conflicting political parties, there is a large overlap: increasing prosperity, improving the material situation for citizens or better wages. No one promises hunger and misery for everyone. They differ in the means by which they want to achieve these goals. Therefore, it is the means, not the goals, that are of interest to us. The importance of such an analysis was underlined by Mises when he wrote:

„No one should speak about interventionism who has not examined the economic consequences of interventionism. An end should be put to the common practice of discussing these problems from the standpoint of the prevailing errors, fallacies, and prejudices. It might be more entertaining to avoid the real issues and merely to use popular catchwords and emotional slogans. But politics is a serious matter. Those who do not want to think its problems through to the end should keep away from it.”¹

Types of interventions

Three broad categories of intervention can be distinguished.

1) Autistic intervention – it directly concerns only the entity in respect of which the intervention is made. The intervener restricts the freedom of the entity concerned to dispose of its person or property, but there is no exchange between them. In simple terms, the intervener forces a person to do something, or prohibits something, that concerns only that person or his property.² The intervener itself does not receive any goods or services in return.³ An Example of autistic intervention would be, the prohibition of possessing a good. The intervener in this sense does not have to be the state alone. An autistic intervention would also be called, for example, a beating or an act of vandalism carried out on someone else’s property.⁴

2) Binary intervention – occurs when the intervener forces an exchange between him and the entity against which he intervenes or demands a ‘gift’ from that entity.⁵ Examples of binary intervention are taxation, forced conscription or slavery. Here too, the state does not have to be the intervener. A robbery would also be a binary intervention.⁶

3) Triangular intervention– occurs when an exchange between two entities is forced or prohibited by intervention.⁷ The intervener does not participate in the exchange, but instructs the parties to carry it out, or prohibits them from carrying it out. Examples of triangular intervention are price controls or compulsory car insurance.⁸

Direct effects of the intervention

The laissez faire market can be described as a situation where there is no acts of aggression against persons or their property. Any action is voluntary in this situation. In order for man to take action, he must, first of all, feel some kind of discomfort, secondly, he must have an idea of a more satisfactory state than the present one, thirdly, he must believe that his action can reduce this discomfort.⁹ By his actions he tries to achieve always a more desirable state than the present one and maximize his satisfaction. As Rothbard wrote: „Any action, any exchange that takes place on the free market or more broadly in the free society, occurs because of the expected benefit to each party concerned”.

So, every person taking action believes that what they do is the best possible option to maximize their satisfaction. Of course, human goals are very different, and each person’s satisfaction can be achieved differently. However, in economic analysis we don’t evaluate these goals. We just say that people set themselves goals and choose the most appropriate ways to achieve them.

A man taking action is convinced ex ante (that is, in advance, before something happens), what will benefit him most. Any intervention that forces a person to make a different decision from the one he would have made if he had been allowed to act freely must lead to less satisfaction. The exception may or may not be a triangular intervention, where one subject loses to another. Rothbard writes:
„In autistic and binary intervention, each individual loses in utility; in triangular intervention, at least one, and sometimes both, of the pair of would-be exchangers lose in utility”.

As the action is geared towards an uncertain future, it carries a risk of failure. We have talked about the fact that the person taking action expects to benefit most from it. However, since no one knows the future, a person may not be right in this belief. It may turn out ex post (that is, after the fact) that he made a mistake. Rothbard explains that the market has certain ways to maximize not only the expected satisfaction, but it also promotes maximization of satisfaction after the fact, because „it works for the rapid conversion of anticipations into realizations”¹⁰:

“Error can always occur in the path from ante to post, but the free market is so constructed that this error is reduced to a minimum. In the first place, there is a fast-working, easily understandable test that tells the entrepreneur, as well as the income receiver, whether he is succeeding or failing at the task of satisfying the desires of the consumer. For the entrepreneur, who carries the main burden of adjustment to uncertain consumer desires, the test is swift and sure—profits or losses. Large profits are a signal that he has been on the right track; losses, that he has been on a wrong one. Profits and losses thus spur rapid adjustments to consumer demands; at the same time, they perform the function of getting money out of the hands of the bad entrepreneurs and into the hands of the good ones. The fact that good entrepreneurs prosper and add to their capital, and poor ones are driven out, insures an ever-smoother market adjustment to changes in conditions. Similarly, to a lesser extent, land and labor factors move in accordance with the desire of their owners for higher incomes, and more value-productive factors are rewarded accordingly. Consumers also take entrepreneurial risks on the market. (…) Consumers are not omniscient, but they do have direct tests by which to acquire their knowledge. They buy a certain brand of breakfast food and they don’t like it; so, they don’t buy it again. They buy a certain type of automobile and they do like its performance; so, they buy another one. In both cases, they tell their friends of this newly won knowledge. Other consumers patronize consumers’ research organizations, which can warn or advise them in advance. But, in all cases, the consumers have the direct test results to guide them. And the firm that satisfies the consumers expands and prospers, while the firm that fails to satisfy them goes out of business”.¹¹

It is worth noting that at the time when Rothbard was writing these words, there were not yet such excellent methods of evaluating products before buying that we have today. Today, we can find on the Internet opinions, evaluations and reviews about almost every product or company that help us make better decisions.

In light of this information, considering the possibility of error does not alter the conclusion, the intervention is likely to reduce the satisfaction achieved. Especially when we realize that the intervener has even less knowledge than the consumer required to make the best decision.

Autistic intervention

Let us move on to discuss the possible effects of autistic intervention. We will use here the example given by Dr Jakub Bożydar Wiśniewski in his lecture on interventionism.¹² Let’s say that the government prohibits citizens from owning or manufacturing, even for their own use, a particular substance, such as alcohol. We assume here that officials have the best intentions. In fact, they want citizens not to damage their health by taking this substance, and they believe they will achieve this through such intervention. The government will aim to eliminate alcohol consumption. This intervention will only directly affect people who would like to consume alcohol, and it will not affect people who did not want to consume it anyway. It will therefore reduce the satisfaction of those who want to. If alcohol was previously fully legal, it also means a ban on production and sale. This is a complete prohibition. You cannot produce and sell something that you cannot own, which makes this intervention not only autistic but also triangular. This will reduce the demand for the factors of production needed to produce alcohol, which can be fully legal. Owners of these production factors will lose. This would, of course, be the case if the intervention was effective. However, its enforcement could be very difficult and expensive. The police would have to check every case where there would be a suspicion that someone owns or manufactures alcohol, even if they only produce it for themselves on their premises and have no intention of selling it further. This would have a cost to society in the form of increased budget expenditure for this purpose. As experience teaches us, this type of intervention is not effective and does not eliminate the consumption of a given substance despite incurring huge financial outlays to fight it. An illegal black market is being created for this substance.¹³ If the ban is very effectively enforced, then less is produced on the black market; the higher the price and the lower the consumption. This in turn, however, means that the budget expenditure for this purpose will also be correspondingly higher. So we have a choice: either not to spend a lot of money on enforcement, accept its ineffectiveness and the development of the black market, or to strive to make it effective, but this will require much more money to be spent on it. Taxpayers will lose money anyway. In the first case less, in the second case more. A complete elimination of consumption would be practically impossible.

As there is no legal protection of contracts and transactions on the black market, the production and distribution of alcohol will be handled by criminal organizations, which will be able to enforce contracts through illegal coercion and violence. Neither will there be legal protection for consumers, who will not be able to go to court to seek justice in cases where they do not receive goods they paid for, where the quality is unsatisfactory or where the product is simply harmful. As a result, the amount of poisoning with poor quality alcohol may increase.

The black market is also not suitable for the development of large-scale production activities, due to the risk of law enforcement. Hence, the benefits associated with mass production disappear or diminish. Production efficiency decreases and thus supply decreases. In addition, as black-market activities entail higher risks, the price will have to compensate producers for the increased risk in order to encourage them to start production at all.¹⁴ Reduced supply will lead to higher prices.

On the other hand, the likely effect of such a prohibition will be an increase in robbery crimes by some consumers. This is particularly true of alcohol addicts whose demand is not flexible and is not willing to reduce consumption as the price increases.¹⁵ Some of them – it is impossible to say how many – will be ready to steal to get extra money and pay a new, higher price. Another option is that they will steal the alcohol itself, which can be risky, given that production and distribution will be managed by criminal organizations.

It is worth noting here a certain sensible argument, which is cited by supporters of such intervention. It goes like this: “If you use harmful substances, you don’t just harm yourself in the current system. The cost of your treatment will be borne by society as a whole, because medical care in many countries is financed by public money”.

However, it should be noted that the mere financing of medical care from public money is also an intervention. As we will see during this series, it is very often the case that one intervention is the cause of another. If the problem we want to solve is that we do not want to finance the treatment of people who do not care about their health, then the solution worth considering is also to stop financing this kind of treatment. Forcing a healthy lifestyle on those whose treatment we finance is not the only solution. When the system forces actions contrary to human nature, this is usually ineffective.

Summary of effects

With the intervention discussed today – in an economic sense – consumers who cannot buy a product or can buy it illegally at a higher price, in poorer quality and at greater risk lose out, as well as producers who use to be able to trade legally and now have to move to another, less profitable branch of production. If other lines of production were more profitable, they would not hesitate to move to them until a ban was imposed. Owners of specific production factors (i.e. those not suitable for other uses) used by the alcohol industry also lose out. Those producers and owners of specific inputs that move to the black market will lose less, but then the intervention makes them criminals.

Rothbard writes:
„It is interesting to note that the bulk of “organized crime” occurs not as invasions of persons and property (in natural law, the mala per se), but as attempts to circumvent government prohibitions in order to satisfy the desires of consumers and producers alike more efficiently (the mala prohibita)”.¹⁶

The only winners in this situation may be black market criminals who will gain a monopoly position through bypassing the law and corruption.¹⁷ The corrupt authorities may pursue competition while “turning a blind eye” to their activities. The authority’s objective of eliminating alcohol consumption will not be achieved, and the more the authority’s pursue this objective, the higher the costs to society associated with it.

Finally, it is worth noting that the economic inefficiency of an intervention does not immediately mean that “everything should be legal”. The economics will help us to determine the “price” of a given action, prohibition, or intervention. Knowing this price, we can still consider the worth of paying it in order to obtain other important goals for us, for society, which cannot be easily calculated in money.

The next types of interventions will be addressed in the following videos.