An Analysis Of The Effects Of Prohibition Of Tobacco By Excessive Taxation

The following paper was prepared for and presented at the Toronto Austrian Scholars’ Conference, November 9-10, 2012. I would like to think that it is a work in progress. As such, I am looking forward to comments, as well as directions to further explore the issue. Here, I would like to take the opportunity to thank Redmond Weissenberger for the fantastic job in organizing the event.


When societies grow opulent life becomes more precious to the living. People have a good reason to want to live longer lives as more of the promises of Paradise become Earthly. As a result, the ever growing body of evidence of the harmful effects of tobacco products to human health has, not surprisingly, been met with alarm. Cigarettes, the most common tobacco product, have been discovered to not only cause harm to the direct user, but also to bystanders, as a result of so-called second-hand smoke. In response, anti-tobacco advocates and governments have lead a three-decade long charge which has seen smoking in most public places turn from familiar sight to a thing of the past. Likewise, tobacco advertizing and the selling of tobacco products to minors have become outright outlawed in North America and the European Union (EU). Further, the EU has exerted pressure on candidates for membership to adopt its laws regarding tobacco advertizing and smoking in public places. As these measures failed at their stated goal on the one hand; and as governments grew in need of more revenues to pay for social programs on the other hand, a new approach was introduced in the War on Smoking: Prohibition-By-Taxation. While anti-tobacco activists have the best of intentions in mind, through an application of analysis of the economics of prohibition, this paper will demonstrate that prohibition-by-taxation is an unwise course of action since it encourages organized crime in the form of smuggling, fails to curb people’s tobacco consumption habits, and adversely impacts low income communities. For these reasons government efforts to dissuade people from consuming tobacco ought to be abandoned. Despite the author’s awareness of dissenting arguments concerning the actual harmfulness of tobacco products, this view will be completely ignored, for the express purpose of analyzing the effectiveness of prohibition-by-taxation.

While prohibitions of goods and services come about from a desire for social engineering, their failures come about as a result of the unclear understanding of the nature of the economics of prohibition. Austrian economist Mark Thornton, in his definitive study on the subject explains that “[d]espite the heated debate little progress has been made toward a theoretical understanding of prohibition. Economists and other social scientists have spent much more effort on empirical investigations and cost-benefit analyses than on theory” (Thornton 71).  He goes on to summarize the nature of prohibition.

Prohibition is designed to curtail the production, exchange, and consumption of a good with the ultimate goal of extinguishing it. While prohibition is an unusual and extreme form of government intervention, its effects can be analyzed within the framework of other interventionist polices such as taxation or regulation. Penalties such as fines, confiscation of assets, and jail terms are established to discourage activity in the market. Enforcement of prohibition requires the use of resources to make the penalties effective in discouraging these activities. The diversion of existing enforcement facilities may involve some savings but does not eliminate the need for additional resources. The amount of resources devoted to the enforcement of prohibition will (with a given penalty structure) determine the degree of risk placed on market participants and therefore the effects prohibition will have on production and consumption (Thornton 73).

Prohibition is an example of government interventionism, which is in itself the antithesis of a free market. “Interventionism is an alternative form of economic organization to capitalism or socialism, a form that involves governmental control or direction of resources that were private property” (Thornton, 79). Government planners see prohibition-by-taxation as an incentive based approach to behavior control. While correct in their assumption that consumers respond to incentives and disincentives on the demand side, legislators and orthodox economists neglect to consider the supply side of the issue. By contrast,

[t]he Austrian, or market-process, approach to economic analysis … best exemplified in the works of Mises ([1929] 1977, [1936] 1951, 1922, [1949] 1977), F. A. Hayek (1937, 1945), and Israel M. Kirzner (1973, 1985) … begins with the truism that human action is purposeful and aimed at enhancing individual utility amid uncertainty and imperfect knowledge. Economic development occurs through exchange, learning, entrepreneurship, innovation, and the evolution of institutions. The market economy generates solutions to social problems; for example, the introduction (or evolution) of money reduces the transaction costs of exchange. The generation of such solutions is a discovery process because it requires alertness to opportunities and interaction between numerous individuals over time. The market-process approach employs a multidimensional view of competition, whereas orthodox economists often rely on simplifying assumptions, such as homogeneous products. The market process approach reminds us that goods are subjectively evaluated by individuals, who base their evaluations on many features of products (Thornton 77).

It is of utmost importance to remember that the goal of excise taxes is to artificially increase the retail price of the product targeted. Depending on the elasticity of the product’s demand, there will be two most likely results in response:

1) If the demand for the product is highly elastic, then consumers are likely to turn to substitute products and abandon the targeted product. However, if the demand for the product was highly elastic to begin with, targeted excise taxation would not be necessary, as consumers could easily be persuaded to turn to substitute goods; and
2) If the demand for the product is highly inelastic, then the artificially increased retail price on the legal market creates opportunities for alternative—“black”—market activities. Tobacco products, due to their perceived addictive nature, tend to fall under the category of goods with highly inelastic demand.

The artificially inflated price leaves room for profits sufficient enough to cover the additional costs involved in smuggling, as well as to pay for the risk involved in undertaking an illegal enterprise. In such a manner the government invites what it labels as “criminal elements,” smugglers, to set up an alternative market in order to satisfy the demand for tobacco products. “The elimination or control of a particular economic activity produces profit opportunities that previously did not exist. These profit opportunities will likely disrupt the plans of bureaus and undercut the pursuits of regulators and government policymakers. The severity of the intervention will determine the extent of these new (black market) profit opportunities” (Thornton 82). In the case of prohibition-by-taxation of cigarettes, the government sets the minimum legal price. Thornton calls this approach the Wholly Superfluous Discovery Method. “[T]he wholly superfluous discovery process is particularly relevant to prohibition. The profit opportunities created by prohibition will result in new methods of production, transportation, inventory, distribution, and marketing,” inducing sellers to stay a step ahead of law enforcement (Thornton 82). One method often used by smugglers to stay in business is corruption of the law enforcement and judicial systems by means of bribery (Thornton 83).
To be sure, high excise taxes have failed to reduce smoking. According to Hudgins, when Canada introduced a large increase in tobacco taxation in 1991, the estimated profits that stood to be made by smugglers were at $1 billion (not adjusted for inflation) (Hudgins 4). As a result, while previously only 0.02% of all purchased cigarettes were estimated to be bought illegally, after the introduction of the new tax the percentage of illegal cigarettes sold rose to an estimated 25 (Hudgins 3). According to Lee “[i]t was widely reported that smuggled cigarettes made up 30-50% of the Canadian market. Taxable cigarette sales nose-dived as taxes rose during the mid- 1980s and early 1990s” (Lee 2). Similarly, immediately after the introduction of city and state taxes on cigarettes in New York, “local newspapers reported a ‘flood’ of cigarette smuggling into NYC and a rise in illegal street sales of untaxed cigarettes, particularly in low-income neighborhoods. Popular brands, it was reported, could be bought on the streets from bootleggers for as little as $5.00 per pack” at a time when legal retail prices of cigarettes averaged $7.50-$8.00 per pack (Shelley, Cantrell et al. 1). The unwanted effects of smuggling are compounded since people are able to purchase cigarettes at lower prices than the authorities would like them to pay; tax revenues are lost to smuggled products, while more law enforcement personnel is retained in order to combat smuggling; and honest businesses are faced with unfair competition in the shape of those who choose to circumnavigate the law.

Abolition of tobacco consumption through the employment of excise taxation is failing to extinguish the activity, exactly like the outright prohibition of alcohol failed to produce the desired goal during the 1920s.  One fallacy of the anti-tobacco advocates’ view is evident in the opinion of Merriman—a proponent of prohibition-by-taxation—who assumes that smuggled cigarettes cannot be obtained in convenient locations (Merriman 2). Merriman’s approach is typical of the orthodox economists’ method where purposeful human action is not acknowledged as the driving economic force. Practice shows that the inconveniences of increased prices and having to seek out sources of cheaper than legal cigarettes do little to deter smokers from their habit. Perhaps no better proof of the fallacy of Merriman’s assumption can be found than the Government of Ontario’s billboard campaign “Don’t Be Fooled! Illegal smokes come in baggies… and packs.” This recent campaign is an open admission of the failure of the Government of Ontario’s policies regarding smoking, as well as a rebuke of the assumption that illegal cigarettes cannot be purchased with little or no inconvenience to consumers, or their awareness of the illegal nature of the product they are buying. In a display of further ignorance of reality, Merriman assumes that “[c]onsumers may even fear embarrassment or legal penalties if they are detected buying smuggled cigarettes” (Merriman 2). He is proven wrong by a number of sources, as for instance: 1) as the Government of Ontario’s billboard campaign admits, some illegal cigarettes are undistinguishable from legal cigarettes, and consumers need not know that they are purchasing smuggled cigarettes; and 2) a study conducted by Shelley, Cantrell et al., discovers the “$5 Man” freely walking the streets of Harlem, accepted as a folk hero:

Most smokers were aware of a recent expansion in the illegal cigarette market in Harlem, which they observed corresponded with the cigarette tax increase. The $5 man was the commonly used term for a highly visible network of bootleggers who appeared after the tax increase throughout the community on street corners, in busy shopping areas, outside subway entrances, and in apartment buildings. Most smokers admitted buying cigarettes from the $5 man rather than stores as a way of avoiding higher taxes (Shelley, Cantrell, et al. 3).

Luccasen III, Coats et al., find that in the UK while “overall duty paid sales of hand rolling tobacco (HRT) have fallen by almost 50%, overall consumption of HRT has more than doubled” (Luccasen III, Coats et al. 2). Similarly, they find that middle and high school students in Turkey are able to easily buy smuggled cigarettes (Luccasen III, Coats et al. 2). In fact, Canada began a temporary about turn in policy when it was discovered that the number of teen smokers was actually rising due to smuggling activities (Lee 3); perhaps because smugglers do not check ID’s. Again we see a result quite the opposite of the target set by government planners. It can easily be observed that neither the increased prices, nor the inconvenience of buying smuggled cigarettes play and effective role in turning people away from consuming tobacco products in general, and cigarettes in particular.
To be sure, it is the lowest income communities that suffer the most from the increasing prices of cigarettes, as well as from the crime of smuggling. Luccassen, Coates et al. find that “the incentive to buy cheaper ‘illegal’ tobacco/cigarettes is greater for poorer households as tobacco products consume a larger proportion of their disposable incomes” (Luccassen, Coates et al. 2). At the same time it is those poorer households that smoke more regularly. Shelley, Cantrell et al. find that the inhabitants of low income Harlem, NY need cigarettes to help them cope with the stresses of their everyday lives (Shelley, Cantrell et al. 7). The same study concludes that the disparities in smoking prevalence by socioeconomic status are widening, as “[a]dults living below the poverty line have higher smoking rates (29.0% vs. 20.6%) and are less likely to quit successfully compared with those living at or above the poverty line” (Shelley, Cantrell, et al. 1). Thornton (71-72) lists a number of arguments that proponents make in favor of prohibition. We shall discuss some of them in turn:

“1. Expenditures formerly made on prohibited goods would be put to better use on items such as life insurance, food, shelter, and savings.” This argument neglects the relative elasticity of the demand of the good in question. As can be seen from the studies cited, consumers will pay higher prices for cigarettes rather than spend the money they would have otherwise spent on cigarettes on other goods or services.From Shelley, Cantrell, et al. (6) we learn that “[m]ost smokers said that regardless of price, they would find a way to purchase cigarettes, legally or illegally, because they were addicted and unable to quit. But they acknowledged that the rising price of cigarettes was leading to potentially detrimental tradeoffs for those smokers who were unable to quit: ‘They would exchange their food stamps to get that [cigarettes].’ (Female smoker, 25-49 years)” With low income individuals the extra money spent on cigarettes is that much more likely to be money that would be otherwise spent on general welfare of the individual.

“3. Consumption of prohibited products causes harm to the health of the consumer. Illness reduces time on the job, increases the demands on health-care facilities, and increases the cost of government-provided health care.” This argument neglects the fact that personal pleasure is the most desired good and that individuals tend to value it more highly than what seems rational to intellectuals, legislators and planners. Furthermore, the availability of third-party healthcare seems only to be an inducement to unhealthy behavior.

“4. Addiction, compulsive behavior, and habits are problems beyond individual control and must therefore be placed in the control of the state.” Governments across the world have been fighting one form of addiction or another for the better part of the last one hundred years with little or no success. Practice has proven this argument wrong, as prohibition of a good tends to make it more potent and thus more difficult to control by its user.

“5. Use of certain products causes violence and criminality in individuals who otherwise would not indulge in such behavior. Prohibitions help reduce crime, corruption, and social vices.” Contrary to this argument, history shows that prohibitions give rise to organized crime. There is no better example that the rise of the Mafia in the US during Prohibition. The lure of crime is more likely to be found attractive among the lower income members of society, thus increasing their chances to become incarcerated. These individuals perhaps could find better income employment if tobacco products were not pushed outside the realm of legality, since this would mean a higher demand on the job market. It is not difficult to see that the poor suffer doubly by the measures that are introduced with the intent of improving the quality of their lives.

“7. Use of certain products is infectious and would quickly spread to all socioeconomic groups, possibly leading to the addiction of substantial segments of the population.” This argument is another manifestation of the overgeneralization of orthodox economists. People are seen as bulk masses unable to make personal decisions for themselves.

“8. Use of these drugs is unnecessary and has no beneficial social function.” Value is subjective, thus what is a “beneficial social function” cannot be defined in any objective way. As noted by Shelley, Cantrell, et al., low-income earners use cigarettes as a means to cope with stress, thus finding social benefit in them.

“10. Given a properly established policy with appropriate penalties and adequate resources, potential users will be discouraged from experimenting, and current users will be isolated or forced to abandon their habits. In the long run, then, prohibition can virtually abolish the product from the market.” The “$5 Man” found in the study conducted by Shelley, Cantrell, et al. rebukes this argument. The high exposure and visibility of the “$5 Man” makes him an easy target for arrest.

On the other hand, anti-tobacco activists claim that the percentage of smokers is declining. This claim is difficult to prove, as no reliable empirical data exists. At the same time it is estimated that the absolute number of smokes in North America has remained largely unchanged for the past 40 years. Shelley, Cantrell, et al. (1) give a perfect example of how unreliable data on diminishing smoking habits is. In one instance they cite that “data from the 2003 NYC Department of Health and Mental Hygiene’s Community Health Survey (CHS), a telephone-based survey of 10,000 NYC residents indicated an unprecedented 11% decrease in smoking prevalence that corresponded with the tax increases. Smoking rates fell from 21.6% in 2002 to 19.2% in 2003.” Despite the CHS’s claim of an 11% decrease in smoking, the year-on-year rate between 2002 and 2003 remains within the standard margin of error. Another example in the same study tell us that “[a]lthough smoking in the United States has declined, in part because of effective statewide tobacco control programs and policies, disparities in smoking prevalence by socioeconomic status appear to be widening.” Additionally, it is impossible to know whether the percentage of smokers is declining as a result of government intervention or due to shifting attitudes among consumers—or simply that it appears to be declining as a result of an increase in the sales of untraceable illegal cigarettes.

However, a far stronger case for anti-tobacco legislation is made on the grounds that it tobacco related illnesses increase the costs of socialized healthcare. The nature of third-party healthcare coverage is outside the scope of this paper, however, at this point it should be noted that third-party provided medical care encourages less personal responsibility on behalf of individuals. Likewise, the quality of smuggled cigarettes is not put under the same scrutiny by consumers as that of legal tobacco products. A major flaw in the Wholly Superfluous Approach is particularly detrimental to healthcare, as “[t]he product, its quality, and attributes will experience tremendous change moving from a competitive market environment to one dominated by prohibition. These changes should of course be attributed to intervention, not to the market. Cave and Reuter (1988) found that entrepreneurs (smugglers) learn from experience; such increased knowledge can result in lower prices even during periods of increased enforcement efforts” (Thornton 82). Economies of scale encourage higher potency (Thornton 93), while lack of advertizing and transparency encourage diminishing qualities of products.

[P]rohibition establishes a wholly superfluous discovery process with respect to the potency of illegal [products]. Black market entrepreneurs are spurred on by artificial, prohibition-created profit opportunities in a similar fashion to entrepreneurs in a legal market responding to profit opportunities. At one level, the entrepreneur supplies a profit-maximizing quantity of the product, in both legal and illegal markets. On another level, the profit motive prompts entrepreneurs to alter production techniques, product quality, and the product itself. Market forces lead to certain industry standards.… In prohibited markets, however, consumers face fewer choices at any time, but severe product variability over time (Thornton 89).

Another point to be made against government intervention against tobacco products is related to the fact that governments which have anti-smoking policies in place also have subsidy programs in place to compensate tobacco farmers for loss of revenue. One such program, administered by Agriculture Canada was the Tobacco Transition Program which cost taxpayers $284 million. The intent of the program was to encourage tobacco farmers to switch crops by way of having the Federal Government buy out their crops. The program turned out to be a failure, as Mann reports that

[t]obacco quota holders who agreed to leave the industry were paid $1.05 per pound for quota. … But some farmers who took money to leave the industry then switched their land and equipment to relatives who continued growing tobacco under the new licensing system.

In conclusion, the detrimental side effects of prohibition-by-taxation legislation are obvious, while the effectiveness of these polices remain dubious at best. Anti-tobacco policies come about due to misconceptions of the market’s ability to solve social problems (although rent seeking is typically required for prohibitions to be enacted). Bureaucracies established by prohibition are inherently inefficient and unable to discover the knowledge required to solve social problems. Prohibition also suppresses the market’s ability to solve social problems, so that little or no progress is made while prohibitions are in effect. And finally, prohibitions create profit opportunities which add to the problems prohibition is intended to solve (Thornton 83).

As already noted, prohibition is an example of government interventionism, which is in itself the antithesis of a free market. The market allows consumers to decide how to spend their incomes. Anti-tobacco advocates neglect the fact that not all individuals have the same wants and goals in life. Tobacco products have been accepted to be detrimental to human health since the 1960s, yet remain among the most popular goods on any market. This must mean that consumers value the immediate pleasure of a cigarette far more than their long term health.

Works Cited
Hudgins, Edward L. “Memo To The Mafia: Smuggle Cigarettes.” Regulation 21.2 (1998): 49-55.
Lee, Dwight R. “The Government’s Crusade Against Tobacco: Can It Ultimately Succeed?” USA Today Magazine 126.2636 (1998): 16-19.
Luccasen III, R. Andrew; Coats, R. Morris; Karaham, G. “Cigarette Smuggling Mitigates The Public Health Benefits Of Cigarette Taxes.” Applied Economic Letters 12.12 (2005): 769-773
Mann, Susan. 24 Nov. 2011 <http://www.betterfarming.com/online-news/audit-takes-aim-tobacco-buyout-4672>
Merriman, David. “Cigarette Smuggling Does Not Reduce The Public Health Benefits Of Cigarette Taxes.” Applied Economic Letters 9.8 (2002): 493-496
Shelley, Donna; Cantrell, M. Jennifer; Moon-Howard, Joyce; Ramjohn, Destiny Q; VanDevanter, Nancy. “The $5 Man: The Underground Response To A Large Cigarette Tax Increase In New York City.” American Journal Of Public Health 97.8 (2007): 1483-1496.
Thornton, Mark. The Economics Of Prohibition. Salt Lake City: University of Utah Press, (1991).

On the State Enterprise of Creating Bullies

[This article originally appeared on the mises.ca blog on October 16, 2012]

It’s a funny culture we live in. I’m at a loss for words to otherwise describe the regular bouts of collective hysteria that follow the deaths of strangers. To the best of my knowledge this came about around a decade ago, when MSN’s Instant Messenger was all the rage. I recall the “collective mourning” of my friends for a missing Western Ontario girl when her corpse was found. The phenomenon baffled me then as it does today in the case of Amanda Todd—the Vancouver teen who committed suicide as a result of having been “cyber-bullied.” It’s not that I don’t care about lives being lost, it’s the nature of the responses of the “mourners” that gets me: teary eyed vigils, Facebook posts, and of course the inevitable calls for authorities to “do something about it.” It all ends a week or two later, when a new tragedy occurs somewhere far from home, and the circus repeats itself.

Perhaps because I grew up being bullied, I never saw bullying to be the sort of out of hand problem that it is being touted to be. I just saw it as an exercise in character building. As someone who was fully ostracized by the society I lived in as a result of my family being declared enemies of the state (due to my parents’ “unimpeded commercial cooperation” with enterprises from abroad), it’s sometimes too easy for me to prescribe a dose of “get over it” to the bullied. Getting a shaking over your lunch money is one thing, but it’s a wholly different ball of wax when the State is orchestrating your demise. Of course, each person being a unique unit means that everybody’s tolerances for abuse are different. That given, what is to be said about rookie NDP MP Dany Morin’s (Chicoutimi-Le Fjord) proposal for a “national anti-bullying strategy”?

Morin says that “his own experiences from being bullied as a teen show the ‘scars are permanent’ and something must be done.” This may be so, but how is his proposal of non-partisan legislation supposed to end bullying? By declaring it illegal? Murder is illegal, yet it happens. So is theft, but it fails to stop Government, the Bank of Canada and street peddlers, among others, from doing it. While Canada’s parliamentarians ponder how to solve yet another problem beyond their ability to solve, it seems abundantly clear that they will not turn to Mises’ conclusions from A Critique of Interventionism as a guide.

Rather than composing more meaningless legislation, perhaps Mr. Morin and other believers in the myth of Government as the solution to every problem ought to consider Government’s role in producing poorly brought up citizens; for, bullying is precisely a problem of domestic upbringing. A good domestic upbringing requires a stabile family and parents (or grandparents) to spend many hours with their young. The “women’s revolution” which started in the late 1950s has meant that the concept of the stay at home parent has come to be a figment of the past. Not that it would matter anyway, as government regulation keeps lowering the age at which children must be handed over for social conditioning.

Truth be told, the profession of motherhood has been killed not as a result of women’s loose morals or desires to be free from the “shackles of parenthood”—that natural instinct present in practically every female of any species. Rather, despite the great forward strides that Western societies have made toward increased prosperity, Government has made it increasingly difficult for the populace to make ends meet. In 1987 Robert Batemarco wrote:

Over the past two decades, economists have observed and become professionally concerned with falling rates of economic growth. To many young people today trying to establish homes and raise families, that concern is not merely professional. Despite their greater investment in education than any previous generation and despite the extent to which two-earner households have become the norm, this generation, by all indications, is likely to be the first in US history not even to maintain, let alone improve upon, the standard of living enjoyed by their parents.

The trend has not changed 25 years hence. Why? The welfare state has grown larger, meaning that the workforce participation rate has dropped (indeed, this is how the unemployment rate has dropped of late, despite no earnest economic upswing)—in spite of higher eligibility rates! Indeed, improved technology has rendered many formerly considered “disabled” or “invalids” employable; yet more Westerners today collect some sort of government assistance which induces them to shy away from earning their keep. Half-literate single teenage girls are encouraged to breed for the reward of a social assistance cheque. Increasing effective taxation rates, including BoC targeted inflation of “2-3% annually,” unnecessary safety regulations, crony environmental and zoning laws, etc., have pushed businesses away from Western countries, thus reducing the potential to grow prosperity. Yet, Government keeps coming up with means to keep families from spending time together: be it through easy money for “upgraded” education or housing (so that the young can move out of their familial home); or through imprisoning citizens for hours or days at a time in some license granting bureau; or through the inducement of earning an income by manning said bureaus, to give but a few examples.

All this is only the tip of the proverbial iceberg, since, the ultimate problem concerning bullying is the fact that bullies tend have no concept of private property—a consequence of the educational system, to be sure. In order for Government to make its looting of the public palatable, it must condition its victims to accept its bullying as a socially necessary deed. Thus, notions of private property must be abolished, and the kernels of bullying implanted in the souls of the next generation.

E.coli Breakout In AB: Another Failure of the Corporate Welfare State

[This article originally appeared on the mises.ca blog on October 1, 2012]

As sure as the seasons change every year, so comes news of bacterial contamination in one CFIA-monitored processing plant or another. This time around the blanks are filled by “E.coli infested meat products” and “XL Foods, from Alberta.” The average person is daily indoctrinated by notions that Rotten Capitalists will do anything for a buck. Thus, conventional wisdom says that governments need to intervene and protect the gullible public from predatory corporations. So, when it comes to our food it has to be marked with the Government’s stamp of approval. Enter the Food and Drug Administration (USA) and the Canadian Food Inspection Agency—two of the most powerful and overreaching agencies in North America. How did they come to be?

The mainstream record of history regarding meatpacking holds that the meatpacking industry was unregulated before the passage of the Federal Meat Inspection Act (USA), which resulted in unsanitary conditions placing the public at risk of disease. Upton Sinclair’s The Jungle increased awareness of the terrible conditions in the meatpacking industry and the awakened public urged a revolted Theodore Roosevelt to pass meat inspection legislation. The large meatpackers were against the legislation and did not support the actions of Congress. Indeed, the Neill-Reynolds report confirmed the disgusting picture of the meatpacking facilities and sealed the nail in the coffin, reaffirming the need for regulation and the inability of the free market to regulate itself. (Source)

The meatpackers, however, were not all that unhappy:

The big packers were actually enthusiastically in favor of the regulation. At a government meeting with the large packers, the packers responded to the regulatory proposition with loud applause and praised as a “a wise law” which must be enforced universally and uniformly.
The packers had lobbied for regulation of the industry for decades. The book by Sinclair gave them an opportunity to get their bill passed through the Congress at last. There were a few reasons for the meatpackers to want government regulation:
1) Government inspection increases operating costs – Though this seems counter-productive, imposing a large fixed cost on competitors is advantageous to big businesses, because it establishes market barriers that prevent new players from entering the market, thus helping the large trusts gain a larger market share (perhaps this was in retaliation against antitrust claims made by smaller, local meatpackers against the trust, which were proven false as well). The imposition of a fixed cost is significant because entry into the market had in fact been relatively easy without many barriers.
2) Stamp of approval to overcome European embargo of meat – Europe had begun passing protectionist bans on American meat under the guise of “diseased meat.” The large packers were troubled by this, as they did not want to lose the foreign markets. To circumvent this measure and combat claims of the European governments, the meatpackers wanted a government stamp of approval that would signal safe meat and hence tear down European barriers to meat importation from America. (Emphasis added) (Source)

According to the Canadian Press: “E.coli bacteria was first detected at the XL plant in Brooks, Alta. on Sept. 4, but it wasn’t until three weeks later that the CFIA suspended the plant’s operating license until measures are implemented to ensure its products are safe.” In the meanwhile “the Canadian Food Inspection Agency made dozens of additions on Sunday to its list of possibly contaminated beef products which came from an Alberta plant.” So, the publically funded agency whose task we are told is to prevent the sale of possibly contaminated food to the taxpaying public allowed product to flow out of a plant where a bacterial outbreak was occurring. So much for Government looking out for the public. Having all it can do, the CFIA has resorted to depending on the free market to soften their blunder: it “has made the list of stores and products affected by the potential E.coli contamination so long that consumers are now advised to inquire at the point of purchase whether the beef they’re buying came from XL Foods.” [Emphasis added]

A combination of ignorance of how free competition works, socialist indoctrination in schools and the overwhelming propaganda in the media by the Government-Industrial Complex ensure that people can’t look at the issue in a rational light. There is a simple question that a person needs to pose: Would I buy food from a source that I don’t trust? Communities got along just fine with their local butchers and corner store grocers for quite a while before the Government got their sticky fingers into it. People frequented the shops of those who provided sanitary products, and became acquainted with their owners. It’s how communities were built. Person-to-person relationships become unnecessary when we look for the FDA’s or CFIA’s stamp instead of building relationships with our food suppliers. This is no coincidence. Tight knit communities are the bane of Big Government’s existence. People’s loyalties to family, church, or local organization cut into Government’s ability to draw support for its schemes, which naturally revolve around graft, kickbacks and generally unearned profits for those close to the ruling circles.
According to CP, former Finance Minister, Liberal MP Ralph Goodale has unsurprisingly “blamed the E.coli scare on changes to the meat inspection system introduced by the Harper Conservatives.”

Despite a hundred year-long involvement, Government supervision of food producers has not stamped out instances of the most common food poisoning causing bacteria, such as Salmonella, Listeria, E.coli O157, Campylobacter or Clostridium perfringens. A major reason why this is so, is the lack of open competition. To be sure, the limited number of players on the market at present have the safety net of the de facto cartel to keep them safe in case of a major failure. Case in point was the Maple Leaf Food’s listeriosis outbreak of 2008 when despite the grand scale of the outbreak, Maple Leaf was able to restore itself on the market, because the competition did not have the capacity to sweep in and punish them for the slip up.* The lack of capacity among the competition was a direct result of the entry barriers imposed on newcomers in the industry: your local butcher or pig farmer can’t pay the licensing fees and figure out the administrative labyrinth to get Big Brother’s stamp of approval. For similar reasons—time lag and cost to approve additional facilities—Maple Leaf’s big-time competitors could not ramp up production enough to drive them out of the market.

Deregulation is not the dirty word it has come to be. Next time you hear someone calling for more regulation to industry, ask yourself who stands to benefit from it, because you, the consumer, sure as hell won’t. In the particular case of the food industry the lack of competition due to regulation allows the existing suppliers to keep prices higher and quality is allowed to be kept lower than it would be in perfectly free competition.
This latest episode of food contamination in a government supervised plant proves yet again the point that when Big Brother watches over the public, he does it strictly for his own benefit, not the public’s.

*Some would argue here that Maple Leaf’s employees would have been the victims here, since they would have been left jobless. There are two things to consider: (1) The competitor moving in to replace MLF would need to hire experienced personnel, and the persons who lost their jobs would have an advantage over other candidates. (2) The listeriosis outbreak was their fault. Perhaps no-one’s in particular, but the fault of the collective body of MLF’s employees. Therefore, them being kept out of the food supply industry may be a service to the community. In a free market those people are sure to be re-hired somewhere else.

My Personal Case Against Charity and Welfare

[This article originally appeared on the mises.ca blog on September 11, 2012]

As another US presidential election gets into high gear, the narrative of the “brother’s keeper” that Barack Obama brought forth at his first major speech in 2004 (12:50) is beginning to dominate the debate. Dr. Gary North recently explained how this is a mischaracterization of the biblical story of Abel and Cane, where in fact the implied answer to the question “Am I my brother’s keeper?” is in the negative. The facts of this story notwithstanding, the idea that the citizens of a society (city, province/state, or country) ought to be coerced to be each others’ “brother-keeper” has prevailed quite strongly even in the classically liberal (individualistic) society of the United States of America, even among those representatives of the political Right. Now, I see this whole philosophy as an extension of the old Judeo-Christian socialist (the original Marxists) approach to be fruitful and multiply, thereby throwing reason to the wind in the name of this godly command. This idea is supported by false premises which suggest that individuals cannot create wealth—rather that wealth must be gifted them by the State, or stolen from the meek; and that the rich keep getting richer while the poor get poorer. Unsurprisingly, since it stems from religion, at the bottom of this quasi-economic theorizing is a sort of mysticism which attributes god-like capabilities to governments that allow them to create wealth out of thin air.
 
While many an academic paper have been written in the effort to refute these popular fallacies, they remain popular still. Rather than add yet another paper on the theory of the matter, I feel that giving a practical example of how things really work might be more helpful. As what I am about to unfold is in essence a biographical story of a portion of my life, I embark on this task with reluctance. I seek neither sympathy, nor proverbial pats on my back. I simply wish to prove the proponents of the welfare state wrong.

I shall begin the story with my family’s arrival in Canada at the turn of the 21^st Century. As indicated in the “Author Spotlight” section, my family was exiled from our native homeland in the year 2000. My brother landed in Alberta in the Fall of 2000 as a university student; my parents in Ontario in December of the same year; I had spent that school year in Florida, as an exchange student, and arrived in Ontario in May of 2001. The details as to what caused our exile are rather irrelevant to the point of this article, so they shall remain omitted. The following facts, however, are: in fleeing to safety, my family was forced to leave behind all our worldly possessions—except for a handful of suitcases of old clothes and some petty cash to pay for the trip to Canada; both of my parents were about to turn 50 in the near future, and spoke no English (or French); my brother and I spoke English, but were 20 and 17 years old respectively; none of us had Canadian experience; apart from one family, we knew nobody in Canada.

According to the theories propagated by Mr. Obama and his ilk, my family was doomed. At this point our only hope would have been provided by the Canadian State which would have had to intervene and supply us with jobs, start-up capital, housing, education, healthcare, tutorials on integrating into Canadian society, provide us with friends, etc. Yet, the facts of the matter were wholly different. The Canadian State only provided us with obstacles, such as requirements to obtain “legal status” in the country—which meant the waste months of workable time as well as several tens of thousands of dollars over the next five years in Immigration and Refugee Board procedures; ineligibility to work for the majority of our first year as a result of not having work permits; the Healthcare system which produces doctor shortages deprived a member of my family of a timely visit to a specialist when it was desperately needed; the red tape and regulation related spending surrounding drivers’ licenses and vehicle registration forced us to waste money that could have been otherwise spent on building capital, in satisfying bureaucratic requirements; etc.

Having arrived in Canada virtually penniless, it was imperative for my family to start working as soon as possible. Having arrived in Canada without a work permit from the Canadian Government, getting a job was not an option. For the first few months my parents stayed with a friend, but all hospitality has its limits. During that time, my dad was able to get his G2 driver’s license—he was treated as a novice, despite having been a driver in Europe for close to 30 years. In the Spring of 2001 my parents spent the last $600 dollars they had brought with them from the Old Country in purchasing our friend’s 1989 Chevy Vandura and moved out. They spent the next two nights sleeping in the back of the van. Neither of them had a job at this point, due to the fact that their IRB applications had not yet reached the stage where they could become eligible for a SIN, with which they could apply for work permits. Following the State’s prescription, getting a job was at this point at least some months away.

Of course, the reason why my family was exiled from our native country is our dissent with statism. While breaking Canadian laws would have meant deportation for my family back to Macedonia, taking government welfare was never an option. So a third option was necessary. While my parents spent their first two nights away from our friend’s house sleeping in the Vandura, they spent the days collecting garbage. It was a specific sort of garbage: wooden pallets used to transport goods on. You see, once a store receives goods on top of a pallet, that pallet becomes nothing more than a nuisance to it. Stores struggled with their pallet problem for years—until the 1990’s when pallet recycling started becoming a widespread business practice. Those who were in on it early on were able to make generous profits, while serving both stores which would otherwise had to pay the garbage collectors to get rid of them, and providing producers cheaper alternatives in the way of pallets. By the early 2000’s the industry had become quite wide spread, and was starting to get competitive in the large metropolitan areas, though it was still underdeveloped in the outer edges. The established pallet recyclers were doing a good job of servicing large factories and distribution centers which shipped truckloads at a time; but they could not find profitable ways to serve stores and small companies which dealt with a handful of pallets weekly. Thus, the need for independent pallet pickers developed—a need that my dad saw as the perfect opportunity for himself.

Now, let me be clear: he did not invent independent pallet picking, it was already an established practice; though rarely as a full time profession. In many ways this is not different from aluminum or cardboard pickers and the like. Also since he was receiving finders’ fees, and not wages, he was technically not breaking the law. This was crucial. As I noted before, my father spoke practically no English whatsoever. The government vision sees people like him taking English for Speakers of Other Languages, paid for by taxpayers, before integrating into the workforce. My parents saw this as a waste of time. Even with the very little knowledge of English, they were able to go through the phone book and locate pallet recyclers that bought pallets from street vendors. Uneasiness is the drive for human action indeed. It took my parents less than a week to get the money together to rent an apartment. The Vandura lasted less than a month; but by then we could afford a $3,000 1990 Ford F-150; which in turn lasted for a year, at which point we upgraded to a 1990 Ford F-350 flatbed.

We settled in the Niagara Region precisely because pallet picking was underdeveloped in that area. There was no need of generosity, just the need for freedom from harassment from taxpayer-paid-racketeers to hold back competition. While we deprived many a hobby pickers from the additional income of a few hundred dollars per year, we provided valuable service to countless businesses in the Region by taking away their refuse; while on the other hand we helped the pallet recyclers that we dealt with grow and create new jobs.

At no stage did we receive government assistance, yet we thrived. We started out penniless and homeless. When I say homeless, I mean to say that not only did we have no house; we also had no house wares like furniture, kitchen utensils, or beds. Yet, it did not matter: within weeks of my parents leaving our friend’s house, we were starting to build a home of our own, and a business to boot. All that was necessary was our own effort. I grant that policy makers considered my household to be living under the line of poverty for the majority of our first four or five years in Canada, but there was hardly any pleasure, not to speak of necessities, that we deprived ourselves of during that time—despite the fact that one member of my family required expensive medical treatments all along the way.

Now, I don’t tell this story to many people. So, when I find myself in an argument over the socialization of society, I’m always amazed at what people that have never been downtrodden think happens to you if you are. They are only able to see the false construct of “the vicious circle of poverty.” Since I’ve been living a more or less middle class lifestyle for the most of my time in Canada, people just assume I have a “normal” background and see me as a propagator of cruelty when I speak against charity in general, and government welfare in particular. When I disclose my family’s early experience in Canada, I either get a concession from the person I’m debating, or else I get the inexplicable comment of: “Well, yeah, but you guys are different.” This comment has without exception left me baffled on every occasion that I’ve heard it, as there is nothing ostensibly different about the members of my family from anybody else in society. We all have the same number of limbs, eyes and ears as the average person. No member of my family graduated from university (or college); no member of my family possesses a special skill whatsoever. Indeed, the sort of work we have done for the past dozen years has been that of unskilled laborers. The only difference I can think of is the fact that my family takes responsibility for itself and expects no handouts. Perhaps if more families took the same approach, all of us would not be wasting our lives in the Great Recession.

Weighing In On The Entrepreneur Debate
Over the past few months Austrian economists Peter G. Klein and Israel Kirtzner have opened up a debate over the nature of the entrepreneur. In the last week or so, Economic Policy Journal’s editor Robert Wenzel having taken Mr. Kirzner’s side, has escalated the debate by zeroing in on what he sees as the shortsightedness of Mr. Klein’s argument in that “there are no objective profit opportunities to be alert to.” Having given the example of how my family got started in Canada, I believe that I can offer an example to support Mr. Wenzel’s argument. According to Klein, an entrepreneur is only he who takes a risk. Kirzner and Wenzel’s view is that while risk is often present in entrepreneurial undertakings, it is not a defining characteristic of entrepreneurship. To them the crucial characteristic of the entrepreneur is his alertness to opportunity.

As I noted above, when my father started out as a pallet picker the practice was already established, thus he took no risk of inventing a new process in the recycling of wooden pallets. Before he took on the risk of going out to waste his time, money on fuel, etc. on collecting pallets, he made no charge phone calls by which he ensured himself of a market for the product he did not yet have. He found the market in the pallet recyclers who paid finders’ fees for pallets delivered to their premises; while the product was easily found for free on street curbs and behind mini-malls. So, when he actually went out and collected pallets he did it with no risk at all. My dad simply saw an opportunity in the many pallets around town which no one bothered to collect. The same can be said, say, of house cleaning businesses, poop-scoopers, etc., where the sort of work to be done is generally considered to be “beneath one’s level.”