2 Objections to the Thesis – Preliminary Discussion

IN THIS and subsequent chapters, I propose to consider whether there are any arguments advanced in the formidable literature of the labor movement which might upset the reasoning briefly submitted in Chapter 1.

The most likely objection can be put as a question. Am I seriously asserting that the unorganized employee needs no protection of any kind over and above the protection of the courts, which can enforce an employment contract? Am I suggesting that “unilateral bargaining” can bring about justice in contractual remuneration, even in the presence of the inherent monopsony of a large corporation, oligopsony in bargaining for labor, and the possibility of unprovable collusion between corporations? Am I suggesting that the “bargaining table” is purposeless? Or am I contending that the notions of “labor’s disadvantage in bargaining” or of “labor’s inequality of bargaining power,” which set the tone of current textbook discussion of the issue, have no meaning?

I can at once remove one possible source of misunderstanding by answering the last question first. If the phrase “disadvantage in bargaining” is interpreted to mean “disadvantage in respect of knowledge of alternative employment opportunities,” or “disadvantage in respect of knowledge of legal rights,” or “disadvantage because an individual (perhaps typically) lacks the necessary resources for enforcing his legal rights,” I agree that such disadvantages may exist. But I propose to show that “capital” as a whole cannot benefit at the expense of “labor” as a whole through this possibility.¹ I further agree that a labor union may provide the required knowledge of employment opportunities, supply the expertise and the finance to assist an individual to take advantage of those opportunities, and protect an individual’s rights before the law regarding the wage contract as well as facilitate his recourse to the courts when necessary. In Chapter 8, I suggest how such functions may be assumed, discuss the role of the “bargaining table” in that process, and try to deal both rigorously and realistically with the monopsony issue. But I shall try to show that the individual worker can be said to need protection against stockholders (providers of assets) in no other sense.

This does not mean that I am impervious to the possibility of managerial tyranny. Injustices may, indeed, arise under all forms of administration. Executives invested with disciplinary powers under “private enterprise” may abuse their privilege, as may government officials entrusted with similar powers. Hence, I do not dismiss the common and genuine fear that managers can “dictate” to those they manage—with the penalties of dismissal, demotion, or pay deductions at their service. Indeed, I fully understand why workers need some counterforce to insure common justice. Moreover, I appreciate the origin of the claim that labor should have the right to participate in management and appoint some of the managers. In Chapter 6, I discuss the sanctions for managerial authority; the question of managerial tyranny; the settlement of “grievances;” and the demand so often made for “labor’s participation in management.”

Some critics at this stage may object that my argument seems to be blind to the lessons of history; that it overlooks the distressingly low earnings and the appallingly bad working conditions which existed before unions acquired the powers they wield today; that it ignores the benefits which union pressures have obtained in the way of greater leisure, paid holidays, pension schemes, sickness pay, disability insurance, severance pay, and similar benefits. I expect to be told that the unions had to fight for years for all these things, and only through the eventual capitulation of the “employers,” did workers finally win these “fringe benefits.” Chapters 3 and 14 are devoted to these questions.

Economists who have not yet discarded the Keynesian yoke will feel that my reasoning has so far ignored the dynamic consequences which follow the lowering of wage rates by market pressures. This process, they contend, exterminates purchasing power, reduces “aggregate demand,” and brings developing depression and cumulative unemployment in its train. My reply to this issue can be found in two of my books.² It is unnecessary for me to return to the subject. The idea that market-selected price or wage rate adjustments generate recessions and help retard productive activity is fallacious.

But the most fundamental objection I anticipate is that the institutions of the market mechanism are inherently defective. I expect to be told that the “invisible hand” cannot be relied upon to produce industrial peace, just prices, equitable wage rates, or security in respect of earnings and employment. I shall accordingly try to show that what we call “the market” provides the only conceivable means of achieving either orderliness and the elimination of coercive action in the process of human cooperation, or results which are regarded intuitively as “just” by the overwhelming consensus among free peoples. And I shall show, for example in Chapter 10, that wage rates, like other prices, perform a crucial coordinative role in any planned and rationally coordinated economy, while determination of prices under the threatened warfare of the strike threat constantly disrupts the economy.

I expect skepticism from business managers, especially those who have been actually engaged in wage negotiation. They are likely to be bewildered by my contention that investors are unexploitable when there is general acquiescence in the strike-threat system. They will know only too well that the outcome of negotiations with unions can seriously affect dividends. The apparent paradox is discussed in Chapter 10.

Nevertheless, my suggestion that the strike-threat system is intolerable in an enlightened age will no doubt raise grave misgivings about the full implications in the minds of some sympathetic readers. They will, I know, be asking themselves: If a corporation has the legal right at any time to lay off any number of its personnel—even the whole of its staff—how can a parallel legal right be justly denied for the whole staff to withdraw their labor at any time? As Lord Jeffrey in 1825 aptly put the issue:

A single master was at liberty at any time to turn off the whole of his workmen at once—100 or 1000 in number—if they would not accept the wages he chose to offer. But it was made an offense for the whole of the workmen to leave the master at once if he refused to give the wages they chose to require.³

How inequitable such a law sounds when so described.⁴ But if we perceive the significance of the fact that “the master” (or “the employer”) is the residual claimant on the value of the product, and “the worker” the contractual claimant, it can be shown that there is nothing whatsoever unjust in the arrangement envisaged. The distinction is discussed in Chapter 6. But at present its relevance can be briefly indicated as follows.

Had it happened to be a tolerable division of function for the workers (that is, the suppliers of effort and skill) to accept the residual share, they would automatically have had the right, in a “no-strike” regime, to refuse to employ complementary assets except on terms no more costly than the alternatives open to the suppliers of those assets. The workers would have had thereby no power to exploit the other parties to production because it would have been unprofitable for them to offer less for the services of complementary assets needed than those services could command in alternative uses. Similarly, assuming the absence of collusion or abuse of monopsonistic power, an “employer” has no power to exploit the workers because he will always have an incentive to offer sufficiently favorable wage rates and conditions of employment to retain or attract all employees the values of whose inputs are judged likely to fall short of the corresponding output values.⁵

Under democratic institutions, the residual claimant must try to determine the market price of inputs and to offer or accept that price. In the case of his offer for labor, he will have an interpretative discretion, exactly as he will in charging output prices. But under our present assumptions, it will be just as much beyond his powers to influence the labor input prices determined by the workers’ alternative employment opportunities as it will be for him to influence the prices it will be most profitable for him to charge in the market for outputs. Failure by labor leaders to comprehend this simple truth has, I believe, resulted in harm to the industrial workers’ material well-being the world over.

In part the difficulty labor’s friends have had on this point has been because of their belief that the worker has been barred from possible alternatives by ignorance and lack of means. Now just as there is a frustrated incentive for an underpaid worker (who does not have the means) to seek out employments remunerated at what his services are worth to consumers, so is there an effective incentive for entrepreneurs (who have the means) to seek out underpaid labor anywhere in the economy. Let us suppose, then, that a firm employing a large number of workers, knowing that they possess virtually no savings, suddenly requires them all, as a condition for continued employment, to bind themselves to a long-term contract at wage rates much less favorable than the alternatives which they, the workers, would have been able to find had they enjoyed some means of subsistence while seeking those alternatives. Will not “the employers” then have the power to exploit? The essence of the situation imagined rests in the assumed ability of “the employers” to enforce a long-term contract; for otherwise competing entrepreneurs (who have the means) would gradually connect the “underpaid” workers with the alternatives we have assumed. Hence the case under consideration is, strictly speaking, excluded by our assumption of the absence of monopsonistic abuse (in the example, exploitation through a “lock-in contract”). Such a possibility is discussed in Chapter 8, on monopsonistic abuse, where the reader will, I think, conclude that the circumstances envisaged are of theoretical interest only. Even so, a simple rule will be suggested to exclude the possibility of any exploitation of the kind we have been discussing (see pp. 101-102). The possibility of exploitation by “employers” in the absence of monopsony (or oligopsony) is considered in Chapter 5.

The argument against my thesis which I find most difficult to answer is that which admits the existence of serious abuses associated with the strike-threat system but does not see them as its inevitable concomitant. In practice, it is said, little harm is caused when groups of workers agree in concert on the terms of a labor contract. It is not the strike as such which must be condemned but flagrant abuses which characterize the unions through which the striking power is wielded. All that needs to be done, it is suggested, is to withdraw the unions’ right (a) to prevent any person who is prepared to accept less than the rest (say, to insure his employment in a post he wants or to improve his prospects) from doing so; or (b) in the event of a concerted withdrawal of labor, to prevent by physical force or threats, or in any way to hinder, the employment of strikebreakers. The critics I am discussing identify the root evils in contemporary tabor unionism in the privileged position before the law which labor union leaders have secured, a situation which has enabled them to resort to threats or physical violence to achieve their aims. Critics of this persuasion do not fear the consequences of the use of the price mechanism, via collusion, to substitute private objectives for market objectives. Condemning favors governments have granted to the “labor bosses,” they tend to stress (particularly in the United States) the corruption at municipal, county, state and federal resulting from “campaign contributions”—in short, the buying of votes in legislatures in return for union privileges. Such critics cite abuses such as the bribery of juries and annuities to retired judges, as though for services rendered. Sometimes they point to (a) the deplorable quality of the men who have been attracted into union leadership—the dubious character of many of the so-called “labor bosses”—the Hoffas and the Glimcos; (b) the indefensible methods of achievement and retention of power on which they have relied; (c) the not-uncommon maladministration of pension and other funds for the private benefit of union officials and their friends; (d) the alleged totalitarian form of union government and the tyrannical powers possessed by the labor union hierarchy against their own members, who seem to have no effective remedy; (e) the injustices and general denial of individual freedom under the “closed shop” or the “union shop;” (f) the seeming lack of genuine concern on the part of union leaders for the rights of those persons, classes, and races who are excluded from any effective sharing in the employment opportunities offered in many occupations; (g) and the typical indifference of union leaders to the public interest generally and the interests of those who are not parties to any dispute.

Such critics perceive the wastes of “demarcations,” “featherbedding,” “make-work” rules generally, “established differentials,” etc., which certain unions have imposed upon the economic system. They condemn “unofficial strikes,” yet accept the “official” use of strike-threat power as tolerable. But they regard the abuses as eradicable without any assault on the right to strike.

These alleged abuses may well be indicative of something basically wrong in today’s labor institutions. But it is strike-threat activity as such, as it would be in the absence of the practices just mentioned, which I shall be calling in question. There is no special significance in such methods of seeking sectional objectives. I shall try to show that every maintenance or increase of labor costs resulting from practices enforced through union pressures yield the same sort of economic consequences.

I do not wish, then, to minimize the importance of any of the “abuses” just mentioned. But they seem to be the inevitable consequences of an intolerable system. One of the most disturbing aspects of labor unionism in its present form is manifested in an apparent lack of sympathy on the part of the movement and its leadership for the welfare and dignity of the workers as a whole. No disinterested student can be blind to the truth that the dominating concern of each union is the immediate interests of its own members. In the words of a leading British “Labor” politician (quoted above, p. viii), its aims are “antisocial.” The use of the strike threat to enforce “the rate for the job” denies persons of inferior abilities, or of undeveloped initial abilities, the right of effective access to the bargaining table and the opportunity of full and free development.⁶ Indeed, the worst injustices of the system are borne by minorities, sometimes discernible and sometimes undiscernible minorities, who are occasionally forced (through compulsory membership and the checkoff) to finance their own detriment.

I must anticipate also the objection that I ignore the more positive sides of labor union activities. But I have simply chosen to concentrate on the principal purpose of the unions, namely, the use of the strike threat and the strike. Certainly labor organizations undertake other functions, not all of which are necessary concomittants of the organization of strike power. Their “friendly society” activities, which fall into this class, could be assumed, however, by purely voluntary associations, the members being bound by contract only. However, because the unions exist, it may well be that they are the most appropriate institutions for these purposes.⁷

But unions have become an integral part of a free economy in other ways. They provide essential machinery for the wage-bargaining process, which would probably still need to be carried on by intermediaries in the absence of the strike threat. The role of unions under “no strike bargaining” is discussed on pp. 111-112. Hence because I shall refer only incidentally and occasionally to the beneficial aspects of actual labor union activity, I must make it clear that I do not dismiss the more positive side of union functions. The union framework has, become an indispensable part of the institutional apparatus of this age. But the private use of coercive power in determining the price of labor is not a necessary concomitant of unionism, although it is its overriding purpose at present. What I shall call the unions’ “noncontroversial” role (apart from their “welfare” activities) is concerned mostly with upholding the “rule of law” or “due process” in the exercise of managerial discipline (discussed in Chapter 6) and with advice, assistance, and finance to union members in their task of seeking out the best employment outlets for the skills and other valuable attributes of union members, discussed in Chapter 8.

NOTES

¹ See pp. 101, et. seq.

² W. H. Hutt, Keynesianism—Retrospect and Prospect (Chicago: Henry Regnery Co., 1963), passim; W. H. Hutt, Politically Impossible. . . .? (London: Institute of Economic Affairs, 1971), Part V.

³ Quoted approvingly in Webb, History of Trade Unionism (London: Longmans Green and Co., 1920 edition), p. 72.

⁴ The ancient common law of Britain which forbade “conspiracy” (reformulated in the 1799 and 1800 “Combination Acts” that Lord Jeffrey was condemning) was, I believe, based upon a remarkable insight into the principle that people as consumers are exploited when the prices of inputs or outputs can be collusively arranged—i.e., in the case of wage rates, fixed at above levels determined in the light of alternative employment opportunities. The same insight should have condemned equally collusion by “the masters” to force wage rates below free market levels through somehow shutting off the alternative employments. I am aware of no evidence that the collusive barring of alternatives ever occurred; but Adam Smith felt it to be unfair that (in the eighteenth century) the law of conspiracy did not condemn agreements among the masters to keep down labor’s compensation. Between 1800 and 1824, however, such collusion among “employers” was of unquestioned illegality in Britain, as it ought to have been. In fact, the law may not have been effectively enforced against the masters, through the secrecy of their collusive agreements. (See p. 34.)

⁵ Expressed more rigorously, it will pay every “employer” to purchase labor’s inputs (and complementary inputs) up to the point at which the marginal prospective yields from the corresponding outputs have fallen to the rate of interest.

⁶ For the services of such persons at their present quality are priced out of each market protected by the standard rate.

⁷ It was partly perception of this kind of usefulness which caused positive encouragement to be given to working-class associations by law and public opinion in Britain as the industrial revolution developed during the 18th century. Laws like the Friendly Societies Act of 1793 were intended to foster and facilitate group action on the part of wage-earners. Such laws were (as we shall see, pp. 111-112) seriously abused; but this does not detract from the fact that the organization of mutual support against the hazards of life was (and can still be) an excellent example of “cooperative” response to “needs.” that is, a particular form of supply reacting to demand.