The Economics of Government Regulation
Restrictive measures are those measures undertaken by the authority which directly and primarily are intended to divert production, in the widest meaning of the word, including commerce and transportation, from the ways which it would take in the unhampered economy. Each interference diverts production from the channels prescribed by the market. The peculiar characteristic of restrictive measures lies in the fact that the diversion of production is a necessary and not unintended result of the intervention, and that the diversion of production is precisely what the authority seeks to accomplish by its action. Each intervention has also the necessary effect of diverting consumption from the ways which it would choose in the unhampered market economy. The restrictive measure is no exception in this respect. But the diversion of consumption is not the aim which its originators pursue; they want to influence production. The fact that these measures influence consumption as well seems to them a side effect which they either do not want at all or which they accept as unavoidable.
By restrictive measures the authority forbids the manufacture of certain goods, or it forbids the application of certain methods of production, or it makes manufacture by such methods more difficult and more expensive. The authority thereby eliminates some of the means available for the satisfaction of human wants. The effect of the intervention is that men find themselves in a position where they may only use their knowledge and ability, their efforts and their material resources in a less efficient way. Such measures make people poorer.
Despite all attempts to invalidate this argument, the fact remains indisputable. In the unhampered market, forces are at work which tend to put every means of production to the use in which it is most beneficial for the satisfaction of human wants. When the authority interferes with this process in order to bring about a different use of the productive factors it can only impair the supply, it cannot improve it.
This has been proved in an excellent and irrefutable manner for the most important group of restrictive measures by the extensive discussion dealing with the economic effects of barriers to international trade. It appears superfluous to add anything in this respect to the teachings of the classical school of political economy.
Costs and Benefits of Restrictive Measures
One might be of the opinion that the disadvantages which restrictive measures cause by diminishing productivity, and thus impairing supply, are outweighed by advantages in other fields. The authority might claim, for instance, that the preservation of a group of less efficient producers is so important that the resulting cut in consumption appears quite justified. It might consider it justified to make bread more expensive for the masses of the
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