Freedom Flyer Winter 1988-89 Cover

Freedom Flyer 13

the official newsletter of the
Freedom Party of Ontario

Winter 1988-89




Article electronically reproduced from:

The London Free Press

March 8, 1989


Beware insidious poisons of controls and wage laws

By Walter Block
The writer is senior economist with the Vancouver-based Fraser Institute.

The basic premise of all modern medical practice is the Latin expression "Primum non nocere." It means "First do no harm."

This is an astoundingly important maxim, and it is indelibly etched onto the thought processes of all medical students. It urges doctors and all health professionals to be prudent and conservative with the patients in their care. Physicians must of course take risks. And being only human, they must of necessity fail from time to time in their efforts. But the principle of "Primum non nocere" still stands like a moral beacon, imposing a level of behavior on doctors that would otherwise simply not be there.

The same, unhappily, cannot be said for politicians, civil servants, judges, bureaucrats and regulators. They, too, are often capable of achieving great benefits for the public. After all, without government life would be "nasty, brutish and short," in the words of Thomas Hobbes. There would be a war of all against all, and the weak, and even many of the strong, would perish.

But the state can also impose great harm on society. There are hundreds of instances where government acts in diametric opposition to the basic laws of economics - or perhaps even worse, as if they did not exist. For example, it is a basic staple of economic analysis that the setting of price ceilings leads to a shortfall in supply, and to excess demand. This insight has even percolated down into the introductory textbooks on the subject, where rent control is often used to exemplify the evil.

The point is, when rents of residential dwelling units are precluded from reaching their market levels, business firms will tend to divert their investments elsewhere: to commercial or industrial real estate, to home ownership units, to shopping centres, or to fields even further removed. As a result, shortages, low vacancy rates and even homelessness occur, coupled with excess store and office capacity, where rent controls do not apply.

Sometimes a rent control provision exempts new construction, but this posture too is fraught with difficulties. First of all, already existing buildings (which comprise the overwhelming majority of units at any given time) deteriorate as the landlord's incentives to make repairs diminishes. This process can take decades to ruin a city's housing stock (for example, the South Bronx) but once it is put into motion it is exceedingly difficult to stop.

Secondly, if rent control is such a good idea, how can its proponents advocate its limitation? If they really believed in this legislation, they would urge expansion, not contraction.

And thirdly, investors are usually too canny to be taken in by a city's protestations that controls will not apply to new stock. They have been burned in too many places, on too many different occasions, for this provision to appear credible.

Notwithstanding these considerations, some provinces in Canada (including Ontario) still maintain antiquated systems of rent controls.

Another violation of the "Primum non nocere" rule is minimum wage legislation. Here, a price floor, not a ceiling, is set. Several provinces have set $4 per hour as the minimum allowable pay scale: others have gone higher.

At first blush this would appear to be a beneficial legislative enactment. Many people think it will actually raise the wages of ill-paid workers. However, as elementary price theory suggests, the effects are deleterious.

For the law does not mandate that anyone must be hired at a wage of $4 per hour. On the contrary, it only requires that an employer will be subject to fines and/or a jail sentence if he pays an employee less than this hourly rate.

Consider the plight of a worker whose productivity level is $3 per hour. It is extremely unlikely that such a person will be hired, or be able to maintain his job slot - for the employer will lose $1 for every hour he is on the shop floor. Rather than raise this person to the $4 level, the minimum wage law will likely preclude him from employment in the first place.

If this is hard to see, imagine the effects of a minimum wage law requiring an hourly payment of $40 not $4. (This might be "justified" on the ground that if by mere dint of legislative pen, salaries can be pushed up to $4, why not continue the process to $40, or even beyond?) It is clear, however, that any province enacting such a law would soon suffer almost total and complete unemployment. Virtually all employers would leave and the ones who remained would be forced into bankruptcy.

But this is no less true for lesser skilled workers. As elementary economics makes clear, setting a price above market value will only succeed in creating a surplus. This is called unemployment, and it is largely for this reason that teenage joblessness is twice as high as the adult average.

Were economic planners to be bound by the rule of "Primum non nocere," our society would not now be burdened with rent controls and minimum wage laws.




Contact FP
Freedom Flyer Newsletter

e-mail

Page last updated on April 28, 2002

FP logo (small)