Seen and unseen consequences of policy decisions

The 2004/5 budget will affect all South Africans, some positively and others negatively. If Trevor Manuel maintains his past high standards, the overall outcome should be generally beneficial. Clearly he is conscious of the far-reaching effects of his decisions and approaches the task of preparing the budget with commendable caution.

Henry Hazlitt, the great 20th century economic commentator and columnist, warned in Economics in one Lesson of the detrimental consequences of policies designed to achieve short term benefits. When Manuel was asked whether he would not be tempted to prepare an ‘election budget’ he prudently responded that there was no point in doing so. An unrealistic budget would cause problems when it had to be implemented after the election. Perhaps he has read Hazlitt.

Despite past experience, many policy decisions continue to be based on age-old fallacies that just do not seem to go away. In 1946 when Hazlitt wrote his timeless book, minimum wage laws had been in operation in the United States for almost a decade. ‘You cannot make a man worth a given amount by making it illegal for anyone to offer him less,’ he explained. ‘You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn …In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.’ The argument is sound and there are mountains of corroborating evidence, yet governments continue to introduce minimum wage laws and put people out of work.

SA’s farm and domestic workers are recent victims of the fallacy that fixing a minimum price for labour can improve conditions for low-income workers without causing harm. If it was that simple, the government could make the poor even better off by fixing a minimum wage of R20,000, or R50,000, or even R100,000 per month. Why stop at R600 or R800? As the figure is raised the fallacy becomes more obvious, the secondary consequence will be ever-increasing unemployment as the minimum is raised ever higher above the market price for labour.

Government price-fixing always causes problems, whether the price is set above the market level as in the fixing of a minimum price for labour, or below the market level, as intended in the proposed regulation for fixing of the prices of pharmaceuticals. In the first case the supply of labour becomes greater than the demand and in the latter case the demand for pharmaceuticals will exceed supply. Fixing the price below its market level has two consequences. The first is to increase the demand for the cheaper product, which reduces the quantity available, and the second is to either reduce or entirely extinguish the profitability of manufacturing and supplying it. In the latter event the manufacturers will either produce less or completely stop the manufacture of the pharmaceuticals.

The intentions of the government departments in fixing minimum prices for labour and maximum prices for pharmaceuticals, is to compel the less poor to help the poor. However, those intentions do not alter the laws of economics, which predict that people will not engage in unprofitable activities merely because the government says they must. As a result of the regulations, less farm and domestic workers will be employed and fewer medicines will be supplied. Proponents of price-fixing will point to examples of people receiving higher wages because of the minimum wage laws and paying less for medicines because of the price controls on pharmaceuticals and claim that the measures have succeeded. They will be pointing to the consequences that can be seen while either ignoring or being oblivious of those that cannot be seen.

The large number of farm and domestic workers that have lost their jobs will be unseen as will the people that have not been able to get jobs on farms and in private households because they have been priced out of the job market. Medicines that are not manufactured, pharmaceutical firms that have left SA, firms that never come here because of the price controls on medicines, and medicines that never get imported will certainly remain unseen because they won’t exist and won’t be available in SA.

Similar results have been experienced since time immemorial when governments, including despotic and ruthless tyrants have tried to force people to do what they know to be unprofitable, yet the attempts continue. Somehow the lesson is never learned that infinitely superior results are achieved when people transact with each other freely, voluntarily, and without interference.

While despotic behaviour is harmful and counter-productive, people with good intentions that have based their policy decisions on economic fallacies have probably done more harm than despots. Manuel, who knows better, is being pushed into adopting fiscal policies that will have harmful secondary consequences. A recent Committee of Inquiry recommended that government should institute public ‘make-work’ programmes to reduce unemployment. According to reports this proposal is being seriously considered. What the Committee did not explain is that such programmes have to be paid for out of taxation – that taxes destroy jobs in the private sector – that every job ‘created’ by government will result in a job lost in the productive sector of the economy. Everyone will see the people working on the government infrastructure programmes but no one will see the jobs that are not created in the private sector. They will see the masses of unemployed but not relate them to the fundamental cause. Once again the delusion of the seen will cause unseen harm.

If Manuel has read Hazlitt he will understand the underlying fallacy and resist the public works job-creation proposal. However, politics is not always kind to sensible people and the forces aligned against good sense may be too powerful. In addition to the productive jobs destroyed by minimum wages, we may soon have more destroyed by public ‘make-work’ programmes. And if all this makes you ill, start thinking about having to travel to a neighbouring country to buy your medicines because the unseen effects of price controls on medicines are about to make some of them unavailable in SA.

Author: Eustace Davie is a Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article\17 February 2004