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You Can’t Regulate Just One Side of an Exchange

Summary:
I have a new piece up at Cato’s libertarianism. org site that reminds us that when we regulate exchanges, we are not just regulating one side of that exchange. For example, minimum wage laws don’t just regulate firms that are trying to buy labor at less than that wage. They also regulate people, and especially poor, lower-skilled workers, for whom selling their services below that wage, or for a combination of benefits that includes a wage less than the legal minimum, is not just a preferred bundle but also possibly the only way they can be employed at all. “These examples all demonstrate an important point about the nature of economic exchange: you cannot disentangle the buyers from the sellers when you intervene in their attempts to cooperate with each other. There are as

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I have a new piece up at Cato’s libertarianism. org site that reminds us that when we regulate exchanges, we are not just regulating one side of that exchange. For example, minimum wage laws don’t just regulate firms that are trying to buy labor at less than that wage. They also regulate people, and especially poor, lower-skilled workers, for whom selling their services below that wage, or for a combination of benefits that includes a wage less than the legal minimum, is not just a preferred bundle but also possibly the only way they can be employed at all.

“These examples all demonstrate an important point about the nature of economic exchange: you cannot disentangle the buyers from the sellers when you intervene in their attempts to cooperate with each other. There are as many margins on which the conditions of exchange might take place as human creativity is capable of imagining. Trying to regulate how parties to one side of an exchange can exercise their freedom means that not only will those parties adjust on other margins, but also that the people on the other side of the exchange have had their choice sets limited as well.

Proponents of minimum wage laws or rent control or restrictions on sharing services seem to think they know, and know best, the right combination of wage or price and quality that people should consume. They seem to think, also, that they can get that outcome by restricting the behavior of those one side of the exchange. They are wrong on both counts. First, there is no “right” combination of compensation for workers or price and quality for consumers. There is only what people prefer and their attempts to cooperate with those on the other side of the market to obtain it. Second, attempting to restrict one side of an exchange is impossible as any restriction on exchanges will also regulate the options available to the other side.”

It’s also the case that many of the regulations that supporters believe target just the rich and power mostly hurt the poor and powerless.

Steve Horwitz
Steven "Steve" Horwitz (born 7 February 1964) is an American economist of the Austrian School. Horwitz was born in Detroit, Michigan to Ronald and Carol Horwitz. He was raised in Oak Park, Michigan and graduated from Berkley High School in Berkley, Michigan in 1981. He graduated cum laude with an A.B. in Economics and Philosophy from the University of Michigan in 1985, where he was also active with several libertarian student groups and where he wrote and performed with the Sunday Funnies/Comedy Company sketch comedy group.

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