Economic analysis: we are all affected, and the market too, by restrictive laws

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As we reflect on that Martin Luther King Jr. vacation, we fondly remember our late colleague Steve Horwitz, founding director of the Ball State Institute for the Study of Political Economy. Steve also founded the “Bleeding Heart Libertarians” website and was deeply interested in issues of racial and social justice. Among his many ideas was that laws prohibiting voluntary exchange between groups, such as Jim Crow laws in the American South or apartheid restrictions in South Africa, unfairly harm all groups for the benefit of a privileged few.

Let’s say that a society is characterized by two groups, the dominant majority Greens and the marginalized minority Purples. The Green Barbers succeeded in passing a law that prohibits purple barbers from cutting the hair of green customers. Our typical green haircut client is willing to pay $50 for his monthly haircut, while our green barber is willing to cut the green client’s hair for a minimum price of $20. At a price of less than $20, the green barber finds it in his best interest to do something else, for example, work in a local factory. Let’s say the going price for a green-green haircut is $30, so the green customer gets a $20 gain on the transaction, while the green barber gets $10, for a gain $30 total social.

Enter the purple barber. Let’s say he’s willing to cut the green customer’s hair for $10 but the law forbids him to do so. Steve has always maintained that it was an injustice to the purple barber, but also to the green customer. Moreover, the real market for social gains is reduced by law. Let’s say the restriction is lifted and our green customer and our purple barber agree on a price of $15 for a haircut. The green client is now earning $35 from the haircut, $15 more than under the old arrangement. The purple barber earns $5 by having access to an expanded market. The total social gain is now $40. Priced at $15, our green barber is leaving the market, though he likely has some resentment towards his purple competitors. Nevertheless, his $10 gain loss is offset by the $20 net gain for the other two market participants.

The bottom line: Rules that prevent people from engaging in trade are not only unfair, they also reduce wealth. The law should not be a tool to assuage economic resentments!•

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Bohanon and Curott are professors of economics at Ball State University. Send your comments to [email protected]

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