Quantitative restrictions through price and wage controls almost inevitably produce “black markets,” where exchange takes place either in illegal quantities or at illegal prices and wages. The more complex the system of controls, the more difficult it is to monitor black markets. Frequently, the system is undermined, or those skeptical of controls may say that it becomes manageable through the development of illegality.
We have seen this under Prohibition, as one of the most extreme cases of quantitative controls, with the development of illegal producers and sellers, and of illegal alcohol outlets. This can easily lead to a general lack of respect for the law and to the delegitimization of political institutions, which may have disastrous consequences for a society.
Another aspect of quantity and price controls is the development of corruption as a feature of the illegality favored by these controls. Wherever an official has the power to impose sanctions, it is often tempting to induce that official, through bribery, to refrain from exercising that power. This takes the form of a grants economy, as a kind of tribute, and may again lead to a disastrous delegitimization of the legal and political system.
In effect, controls thus create vicious spirals: creating a spiral is often an invitation to corrupt its servant, and this, in turn, corrupts the entire system.
One of my favorite examples of the principle of implicit irony is the quota imposed by the British government on imports of Danish bacon in 1934, because of strong political pressure to “do something for British agriculture.”
British pig producers persuaded the government to impose a quota on imports of Danish bacon, which had become a popular consumer item among British families, in the hope that the reduction in imports would produce an increase in demand for British bacon and, therefore, a rise in its price and higher returns for the sector.
However, in the eyes of the British housewife, the greasy and untidy products of the British pork industry were not substitutes for the delicate and uniform Danish bacon rashers, so demand for Danish bacon proved to be fairly inelastic.
As a result of the quota, the price of Danish bacon rose sharply, and the British ended up paying the Danes more money for less bacon. Thus, the quota gave the Danes fruitful monopoly power in the British market. The increase in demand for British bacon was small, and the net result was an implicit grant from the British consumer to the Danish producer, which was certainly not what the British government had intended.
Another example of the principle of implicit irony arises from the consequences of the tobacco quota in the United States, first imposed in 1934. Under this system, any farmer in the specified areas who was producing tobacco at that time had to be subject to a quota; that is, to a license to sell a certain quantity of tobacco, based on how much they had been producing.
In this case, the quota was attached to the farm rather than to the farmer and soon became a valuable property. Between two identical farms, one with a quota and one without it, the farm with the quota can now be sold for six times the price of the one without it.
Clearly, this represented an implicit grant, although it is not very clear from whom, in favor of the owners of those farms that were subject to quotas in the initial year. It may be very difficult to justify this by any principle of social justice.
Another example of implicit grants in a licensing system is the problem of United States federal government licenses for radio and television stations. Here again, this represents a grant from the public to the recipients of these licenses, one that can easily be valued in millions of dollars. It is no secret that President Lyndon Johnson’s fortune was based mainly on an implicit grant of this kind.
Import licenses and foreign-exchange control licenses are similar examples of implicit grants from the rest of society to those fortunate enough to receive the licenses. In effect, this is a system of private taxation that allows license holders to impose a tax on the rest of society for their own benefit.
Since license recipients are frequently the richest and most powerful members of society, this type of implicit grant almost always involves a redistribution from the poor to the rich and therefore offsets any redistributions from the rich to the poor that may take place through the direct grants system and the tax system.
