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Many observers are concerned that the antitrust laws are often used by inefficient firms to protect themselves from the competition of more-efficient rivals. When they are unable to win out in the marketplace, the argument goes, they simply start a lawsuit against their competitors, claiming that those rivals have achieved success by means that violate the antitrust laws. Not only do they seek the protection of the courts against what they describe as “unfair competition” or “predatory practices,” but they often sue for compensation which, under the law, can sometimes be three times as large as the damages they have suffered. Moreover, even if the defendant is found to be innocent, it must normally pay the very high costs of the litigation itself. Aside from the enormous waste that such suits entail, observers worry that this is a perversion of the antitrust laws, which were, after all, designed to promote competition, not to prevent it. Three examples, one very old and two very recent, illustrate the nature of such litigation.’ These three cases also show that the courts are often sufficiently wise to throw out such attempts to use the antitrust laws to prevent competition.

The Schoolmaster Case. In 1410, two Gloucester schoolmasters brought suit charging a third schoolmaster with trespass, on the ground that the latter had entered into business in competition against themselves in the same town, and in the process offered a per-pupil fee some 70 percent lower than their own. The claim was rejected by the court, and one of the judges commented “…though another equally competent with the plaintiffs comes to teach the children, this is a virtuous and charitable thing, and an ease to the people, for which he cannot be punished by our law.” (Court of Common Pleas [1410]).

AMI versus IBM. Allen-Myland Inc. (AMI) is a small firm specializing in the upgrading of computers, in which it had obtained handsome profits, in a period when expansion of a computer’s capacity was very laborious. However, technological progress by IBM had reduced a labor-intensive task to the simple installation of a small and highly reliable part that took several minutes of essentially unskilled labor, thus rendering obsolete many of the services offered by AML AMI sued IBM, seeking to persuade the court to impose an artificial and expensive market niche for upgrading services, with AMI permanently protected from competitive pressures. The court’s decision completely rejected AMI’s position (Eastern District of Pennsylvania [1988]). The decision is now under appeal.

Sewell Plastics versus Coca-Cola, Southeastern Container et al. The Sewell Plastics Company had a preponderant share in the manufacture of plastic soft-drink bottles in the United States. At one time, it sold two-liter bottles at a price somewhat above 30 cents per bottle. A group of CocaCola bottlers in the Southeast considered the price too high, and formed a cooperative firm, “Southeastern Container,” to manufacture plastic bottles for themselves. Within five years Southeastern had reduced its cost below 14 cents per bottle, and real retail prices of soft drinks also fell. Despite rising national sales and profits, Sewell decided to sue Southeastern, explicitly admitting that it was seeking to persuade the court to force a sale of Southeastern to itself or, as a possible alternative, to force Southeastern’s customers to sign exclusive purchasing contracts with Sewell. In the spring of 1989 the judge dismissed Sewell’s claims (U.S. District Court, Western District, North Carolina [April, 1989]).

A weaker form of controls, invented by the Kennedy administration in 1962, is called They work as follows.

The government selects a target rate of inflation (say, 3 percent a year) and adds an estimate of national productivity growth (say, 2 percent a year) to get a consistent target for wage increases-5 percent in this example. It then announces that (a) wage increases above 5 percent per year will be deemed “inflationary,” (b) firms enjoying productivitv increases faster than the national average are expected to raise their prices less than 3 percent a year while, (c) firms obtaining sub-par productivity improvements are allowed to raise their prices more than 3 percent so that, (d) the overall price level can increase at a rate of 3 percent a year.

Such guideposts are logically sound. Indeed, they are meant to mimic the operation of an ideally-functioning market economy in which wages grow faster than prices by the amount of productivity growth. The problem comes in deciding what to do if some union or corporation violates them. The government can respond with exhortations, in the hope that public-relations-conscious companies and unions will obey. But that often fails. Alternatively, the government can give the guideposts the force of law, which brings us back to wage-price controls.

From the preceding discussion it may seem that measuring a nation’s balance of payments position is a simple task: we simply count up the private demand for and supply of its currency and subtract quantity supplied from quantity demanded. It has to do with the demand management.

Conceptually, this is all there is to it. But in practice, the difficulties are great because we never observe directly the number of dollars demanded and supplied.

If we look at actual market transactions, we will see that the number of U.S. dollars actually purchased and the number of U.S. dollars actually sold arc identical. Unless someone has made a bookkeeping error, this must always be so. How, then, can we recognize a balance of payments surplus or deficit ? Easy, you say. Just look at the transactions of the central bank, whose purchases or sales must make up the difference between private demand and private supply. If the Federal Reserve is buying dollars, its purchases measure our balance of payments deficit. If it is selling, its sales represent our balance of payments surplus.

Thus the suggestion is to measure the balance of payments by excluding official transactions among governments. This is roughly how the balance of payments surplus or deficit is defined today, though, for a variety of complicated reasons, the U.S. government decided long ago to stop publishing any official statistic called “the balance of payments deficit.” Instead, all foreign transactions are listed, and readers are invited to define the balance of payments in any way they wish. Let us now see just what data are published in these official accounts.

However, of course, there is not one labor market but many-each with its own supply and demand curves and its own equilibrium wage. We all know that certain groups in our society (the young, the black, the uneducated) earn relatively low

wages, and that some of our most severe social ills (poverty, crime, drug addiction) are related to this fact. But why are some wages so low while others are so high?

Supply-and-demand analysis at once tells us everything and nothing about this question. It implies that wages are relatively high in markets where demand is great and supply is small, while wages are comparatively low in markets where demand is weak and supply is high. This can hardly be considered startling news. But to make the analysis useful, we need to breathe some life into the supply and demand cost curves.

We begin our discussion on the demand side. Why is the demand for labor greater in some markets than in others? The marginal productivity principle teaches us that there are two types of influences to be considered. Since a worker’s marginal revenue product depends both on his marginal physical product and on the price of the product that he produces, variables that influence either of these will influence his wage.

The determinants of the prices of commodities were discussed at some length in earlier chapters, and there is no need to repeat the analysis here. It is sufficient to remember that because the demand for labor is a derived demand, anything that raises or lowers the demand for a particular product will tend to raise or lower the wages of the workers that produce that product.

A worker’s marginal physical product depends on several things, including of course, his own abilities and degree of effort on the job. But sometimes these characteristics are less important than the other factors of production that he has to work with. Workers in American industry are more productive than workers in many other countries because they have generous supplies of machinery, natural resources, and technical know-how to work with. As a consequence, they earn high wages.

Turning next to differences in the supply of labor to different areas, industries, or occupations, it is clear that the size of the available working population relative to the magnitude of industrial activity in a given area is of major importance. This helps explain why wages rose so high in sparsely populated Alaska when the Alaskan pipeline created many new jobs, and why wages have been and remain so low in Appalachia, where industry is dormant.

Second, it is clear that the nonmonetary attractiveness of any job will also influence the supply of workers to it. (The monetary attractiveness is the wage itself, which governs movements along the supply curve.) Jobs that people find pleasant and satisfying-such as teaching-will attract a large supply of labor, and will consequently pay a low wage. In contrast, a premium will have to be paid to attract workers to jobs that are onerous, disagreeable, or dangerous-such as washing the windows of skyscrapers.

Finally, the amount of ability and training needed to enter a particular job or profession is relevant to its supply of labor. Brain surgeons and professional football quarterbacks earn generous incomes because there are few people as highly skilled as they, and because it is time consuming and expensive to acquire these skills even for those who have the ability. In addition to all of the above, it is important to recognize that adjustments in the labor market are slow in comparison with those in the markets for other inputs and commodities. Workers, for example, will be reluctant to move, even from lowwage geographic areas to high-wage areas; so wage differentials often persist longer than price differentials. In the labor markets, long-run equilibrium takes a long time to attain, particularly where substantial retraining and relocation is required to eliminate differences in wages among jobs.

A surprising feature of the 1980s was the equanimity with which the electorates of the United States and other industrial countries tolerated high unemployment rates. One major reason was unemployment insurance.

One of the most valuable pieces of legislation to emerge from the trauma of the Great Depression was the Social Security Act of 1935. Among other things, it established an unemployment insurance system that is now administered by each of the 50 states under federal guidelines. Thanks to this system, many-but not all-American workers can never experience the complete loss of income that so many suffered during the 1930s.

While the precise amounts vary substantially, the average weekly benefit check to unemployed workers in 1989 was about $152. This amounted to about 45 percent of average earnings. Though a 55 percent drop in earnings still poses serious problems, the importance of this 45 percent income cushion can scarcely be exaggerated, especially since it may be supplemented by funds from other welfare programs. Families that are covered by unemployment insurance simply do not have to go hungry when they lose their jobs, and they are only rarely dispossessed from their homes.

Who is eligible to receive these benefits? Precise qualifications vary from state to state, but some stipulations apply quite generally. Only experienced workers qualify; so persons just joining the labor force (such as recent graduates of high schools and colleges) or reentering after a prolonged absence (such as women resuming work after years of child rearing) cannot collect benefits. Neither can those who have quit their jobs, except under unusual extenuating circumstances. You must be looking for work to qualify, and benefits end after a stipulated period of time. For all these reasons, less than one-third of the roughly 6.5 million persons who were unemployed during 1989 actually received benefits.

The importance of unemployment insurance to the unemployed is obvious. But there are also significant benefits to citizens who never become unemployed. During recession years many billions of dollars are paid out in unemployment benefits, and since recipients probably spend most of their benefits, unemployment insurance limits the severity of recessions by providing additional purchasing power when and where it is most needed.

The unemployment insurance system is one of several “cushions” that have been built into our economy since 1933 to prevent the possibility of another Great Depression. By giving money to those who become unemployed, the system helps prop up aggregate demand during recessions.

While the U.S. economy is now probably “depression proof,” this should not be a cause for too much rejoicing, for the deep recession of the early 1980s amply demonstrated that we are far from “recession proof.”

Among the many trials faced by Odysseus, the hero of Homer’s Odyssey, one of the most difficult was to steer his fragile boat through a narrow strait. On one side lay the rock of the monster Scylla, which threatened to break his craft into pieces, and on the other was the menacing whirlpool of Charybdis.

The makers of national economic policy face a similarly difficult task in trying to chart a middle course between the Scylla of unemployment and the Charybdis of inflation. If they steer the economy far from the rocks of unemployment, they run the risk of being swept up in the swift currents of inflation. But if they maintain a safe distance from inflation, they may smash against the rocks of unemployment. In Parts 2 and 3 we will explain how economic planners attempt to strike a balance between high employment and low inflation, why these goals cannot be attained with machinelike precision, and why improvement on one front generally spells deterioration on the other. A great deal of attention will be paid to the causes of inflation and unemployment. But before getting involved in such weighty issues of theory and policy, we pause in this chapter to take a close look at the twin evils themselves:

Why is a rise in unemployment generally considered bad news? Why is inflation so loudly deplored? Can we measure the costs of unemployment and inflation? The answers to some of these questions may seem obvious at first. But we will see that there is more to them than meets the eye. The chapter is divided into two parts. The first deals with unemployment. After a few words on the human costs of high unemployment, we explain how government statisticians measure unemployment and consider how the elusive concept of “full employment” can be defined. We turn next to our country’s system of unemployment insurance, and we conclude by investigating-and quantifying-the economic losses associated with unemployment. In the second part of the chapter, we turn to inflation. We begin by exploding some persistent myths about inflation, myths that help explain why inflation is so universally deplored. But the costs of inflation are not all mythical. The first real cost we consider is how and why inflation redistributes income and wealth from one group of people to another. Next, we learn how certain laws make inflation impose heavy economic costs that could be avoided if the laws were written differently.
We shall see that it is the failure to understand the effect of inflation on interest rates that explains the existence of some of these laws and accounts for other costs of inflation as well. Finally, we define and analyze the difference between creeping and galloping inflation and explode another myth about inflation: the myth that creeping inflation always leads to galloping inflation. An appendix explains how inflation is measured.