And the same time there arose no small stir about that way. For a certain man named Demetrius, a silversmith, which made silver shrines for Diana, brought no small gain unto the craftsmen; Whom he called together with the workmen of like occupation, and said, Sirs, ye know that by this craft we have our wealth. Moreover ye see and hear, that not alone at Ephesus, but almost throughout all Asia, this Paul hath persuaded and turned away much people, saying that they be no gods, which are made with hands: So that not only this our craft is in danger to be set at nought; but also that the temple of the great goddess Diana should be despised, and her magnificence should be destroyed, whom all Asia and the world worshippeth. And when they heard these sayings, they were full of wrath, and cried out, saying, Great is Diana of the Ephesians (Acts 19:23-28).
The Apostle Paul unquestionably preached that idols are not gods. Unquestionably, the silversmiths at Ephesus were at risk of suffering reduced demand for their output. The message that Paul brought challenged people's faith in the power of the idols produced by Ephesian silversmiths. This loss of faith would have reduced demand for all idols. The silversmiths at Ephesus responded by fomenting a riot.
The local Roman bureaucrat spoke to the crowd. He did not invoke the familiar cry of the potential loss of employment as a result of reduced consumer demand. Instead, he called on the crowd to calm down.
And when the townclerk had appeased the people, he said, Ye men of Ephesus, what man is there that knoweth not how that the city of the Ephesians is a worshipper of the great goddess Diana, and of the image which fell down from Jupiter? Seeing then that these things cannot be spoken against, ye ought to be quiet, and to do nothing rashly. For ye have brought hither these men, which are neither robbers of churches, nor yet blasphemers of your goddess. Wherefore if Demetrius, and the craftsmen which are with him, have a matter against any man, the law is open, and there are deputies: let them implead one another. But if ye inquire any thing concerning other matters, it shall be determined in a lawful assembly. For we are in danger to be called in question for this day's uproar, there being no cause whereby we may give an account of this concourse. And when he had thus spoken, he dismissed the assembly (vv. 35-41).
He instructed them to bring any charges against Paul to the court. He invoked the rule of law. He had in mind Roman law, but the same principle of law had long been the standard in Mosaic Israel: "One law shall be to him that is homeborn, and unto the stranger that sojourneth among you" (Exodus 12:49).
The judicial principle of the rule of law means that the civil government must not create special-interest legislation that favors one industry over another. If an industry begins to suffer a decline in demand because of changing beliefs or changing tastes among the masses of buyers, the state is not to intervene to defend it. The official did not call on Paul to cease preaching, nor did he offer a direct subsidy to silversmiths involved in manufacturing idols.
It would be better for customers and taxpayers today if the modern state adopted the same hands-off principle.
There were owners of silver who had developed a steady income by selling idols. They owned tools used in their trade. They also possessed certain skills related to their craft, which included knowledge of the markets for idols. There were also secondary owners: people who owned silver, people who rented space to the tradesmen, and people associated with transport.
Then there were people who owned money. They were potential buyers of idols of Diana. They possessed the most marketable commodity: money.
There was a market for these idols. This means that there were frequent sales. It was a predictable market, within limits. But Paul's preaching was perceived by one silversmith as a threat to the entire guild of idol-makers. He worried about unemployment because of this shift in consumer demand. He was not sure what could be done, and so he led a chant: "Great is Diana of the Ephesians." What effect that would have on the market was unclear. If potential buyers decided not to buy, what could the guild do about it? Customers were in control of their money. On its own authority, the guild had only this tactic: better preaching. A brief riot would solve nothing.
It was clear that the members of the guild would henceforth invest less in future production unless public opinion changed. Looking to the future, demand was likely to fall. Customers would bring negative sanctions against the guild. Lower sales would reduce market prices for the idols: greater supply than demand. These price signals would convey accurate information: falling demand. The economically rational response would be to reduce output. There would be layoffs in the industry. At least one guild member understood this.
The Roman state at this time did not move to call a halt to Paul's preaching. It would in AD 64.
In modern times, the guild would send its full-time team of lobbyists to Congress. These specialists in persuasion would invoke that most effective of all calls for economic intervention to save a contracting industry: reduced jobs. If the demand for any consumer good falls, and the industry is facing lower demand and lower profits, the industry warns voters that its demise would be a disaster for the job market. "Think of the jobs that will be lost if the government does not intervene immediately." Hazlitt began the chapter with these words:
The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores, and local motion picture theaters will lose business, and depression will spread in ever-widening circles. But if the X industry, by prompt action of Congress, is saved--ah then! it will buy equipment from other industries; more men will be employed; they will give more business to the butchers, bakers, and neon-light makers, and then it is prosperity that will spread in ever-widening circles.
This strikes fear into the heart of any politician. Unemployed workers are far more likely to vote for his opponent in the next election. But the bureaucrat in Ephesus did not have to worry about that threat. Ephesians did not vote.
So, the politicians toss a stone through the window. It might be a restriction on competing industries. It might be a direct subsidy. But politicians do this in good faith: to save an industry that is "under attack."
Who is attacking it? Consumers. They are buying a rival's product. Or they are buying something else entirely.
The costs are the familiar ones: short-term unemployment in the industry, as capital shifts to those industries whose services are still in high demand. Investors will shift their capital. The price system will cease to convey accurate information regarding customers' preferences. But these price signals are the basis of consumers' control over what gets produced. Without the ability to impose such sanctions -- positive and negative -- they cannot retain control over producers. The intervention reduces the economic authority of consumers. It transfers authority to the politicians.
Then there are these costs: forfeited income for producers of services that customers prefer. They will not make profits. They will not purchase raw materials or build new production facilities. They will not hire workers.
There will be less innovation. The protected industry does not need to innovate in order to retain customers.
Taxpayers will lose if the subsidies come straight out of the national treasury. Hazlitt reminds us of cause and effect.
This would be nothing more than a transfer of wealth or income to the X industry. The taxpayers would lose precisely as much as the people in the X industry gained. The great advantage of a subsidy, indeed, from the standpoint of the public, is that it makes this fact so clear. There is far less opportunity for the intellectual obfuscation that accompanies arguments for tariffs, minimum-price fixing, or monopolistic exclusion.
This transfer of wealth does not create wealth, he wrote.
But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the X industry has expanded. The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.
The intervention does not merely equalize wealth. It lowers it.
There is this cost: a loss of faith in the principle of the rule of law. The new rule is this: success is penalized; failure is subsidized.
Then there is this: foreign producers will gain in international markets. The subsidized industry may not have to compete domestically, but it must compete internationally. It will lose its competitive edge. The influence of the industry will not reach its potential. New products, new production techniques, and new marketing techniques will give foreigners an advantage.
In this case, Hazlitt made a mistake. It is probably the biggest mistake in his book. He assumed that the subsidies are used to save dying industries. After all, this is the justification. In fact, the subsidies go to the most successful industries. These industries have the most political clout. For example, in the United States in 2010, about 1% of the Fortune 500 companies received over half of the federal subsidies: financial, utilities, telecommunications, oil, gas, and pipelines. In short, the official justification of these subsidies -- saving W, X, Y, and Z industries -- was in fact merely political cover. It was for the voters back home.
The wealth redistribution system is conducted in the name of helping the poor, the downtrodden, and the afflicted. It is in fact subsidies the rich, the downtrodders (through politics) and the afflicters (through politics).
There will be reduced economic growth. A token amount of this capital will remain invested in a contracting industry. Most of it will be invested in industries that are making lots of money, and which do not need the subsidies.
The U.S. government protected the American steel industry for decades. This was a huge industry. It was dominant in 1945. But foreign competition could not be kept out forever. Cheaper steel abroad provided a competitive edge for automobile imports, which were not equally protected. Employment in the automobile industry fell. Meanwhile, the steel industry is now a shell of what it was in 1950. Specialty steel companies are flourishing, but these are high-tech firms. They employ fewer workers than the old mills.
The classic example is the buggy whip industry. This example is easy to understand. But there was also the offal-sweeping industry. Automobiles and electric trolleys eliminated it by 1920.
Note: there were no federal subsidies to these industries. There were state and local subsidies to automobiles: tax-funded roads. There were municipal subsidies to trolleys until after World War II.
Subsidies are not given to save the X industry. Subsidies go to rivals of the X industry.
When you hear that X is a dying industry, ask yourself this: "Who is killing it?" There is a clear answer in a free market: consumers. But there may be another source: the state.
When politicians intervene to save a dying industry -- a rare event -- which means a contracting industry, they are announcing this: "We do not accept the decisions of consumers. We are substituting our judgment for their judgment." This is a conflict over authority: political authority vs. market authority. This is a debate about standards of institutional success: political vs. economic. The currency of the political realm is votes. The currency of the market realm is money.
Hazlitt's conclusion is on target:
Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second. It is as foolish to try to preserve obsolescent industries as to try to preserve obsolescent methods of production: this is often, in fact, merely two ways of describing the same thing. Improved methods of production must constantly supplant obsolete methods, if both old needs and new wants are to be filled by better commodities and better means.
There should be no subsidies to save a dying industry. Thankfully, there will not be many. The main problem is this: the huge subsidies to rich, well-connected industries.
For documentation, go here: http://bit.ly/CEIOL-Doc-14All chapters are here: http://bit.ly/CEIOL
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