Ludwig von Mises Institute

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In the midst of an economic boom, strange things were happening at General Motors. Huge swatches of its highly paid, coddled, unionized labor force were on strike. The result was catastrophic: GM plants all over North America shut down.

In a free market, the management (serving at the behest of the stockholder-owners) would have no difficulty knowing what to do. It would advertise thousands of job openings at a market wage, hire and train them all, and get back to doing what companies are supposed to do, namely produce goods for the public to buy. This is what is called "union busting," but in fact it is nothing more than the free market at work.

Instead, GM was forced to crawl to judges and bureaucrats and plead its case that the strike is illegal under federal law. This is sheer chaos, and the only reason for it is the massive amount of government intervention in the labor markets.

It's hardly the only example of destruction wrought by federal intervention in labor markets. The Supreme Court recently upheld payoffs to workers hollering "sexual harassment" and the conscription of doctors to work on patients carrying deadly communicable diseases. As the case history piles up, the freedom of association is curbed ever more seriously.

What if we just scrapped the entire apparatus of federal labor law? What if relations between workers and bosses were governed solely on the basis of contract, like any other market transaction? In a contract, you can choose to sign or not to sign, but if you do, you must stick by the agreement. Redress is allowed and penalties are exacted only if contracts are violated and result in damage. This is the market way. Why should labor be in a special category?

Until the New Deal, there was no such thing as national labor law. Aside from a handful of special cases, the labor contract was just a contract. Price Fishback of the University of Arizona economics department has examined the way labor markets worked between 1890 and 1930.

In Fishback's studies, conventional wisdom about labor in the bad old days is exploded. People were not stuck in indentured servitude. In fact, workers were highly mobile. Turnover rates were higher in 1890 than they are today. People in the South and West didn't lead isolated lives of low pay and grime. Wages over time were converging between all regions for comparable lines of work. Blacks weren't exploited; they were paid comparably to whites of equal training and skill.

The reason should be obvious: competition for workers. Managers and owners would love nothing better, then or now, to pay nothing for unlimited amounts of work. But they must compete with other possible lines of employment, and thus the worker is free to market his services to the highest possible bidder. In an active market economy with freedom of contract, the worker's wage eventually reflects precisely his own contribution to economic productivity.

But what about safety? Workers were paid more to undertake higher levels of risk. What about unemployment due to shutdowns? If there were a higher risk of that, wages would reflect it too. And under the common law, and even outside the court system, workers were compensated for accidents resulting from employer negligence.

But what about cases in which competition doesn't seem to exist, when there is only one firm and that firm provides not only the job, but also runs the schools and stores and rents the housing? This is the "company town" of American folklore ("I owe my soul to the company store"). The most interesting results of Fishback's studies concern the economics of the company town.

It turns out, the private paradise of the company town provided stores, houses, and schools as part of a highly desirable compensation package. They did this to attract workers. Rents were low, store prices were competitive, and the schools were good. Again, the reason is competition. If the company ever slacked off or attempted to exploit a "monopoly," workers would leave the company town to go to work elsewhere.

In contrast to this free market, modern labor law has brought us nothing but trouble.

Llewellyn H. Rockwell, Jr., is president of the Ludwig von Mises Institute.

FURTHER READING: Price V. Fishback, "Operations of 'Unfettered' Labor Markets," Journal of Economic Literature (June 1998):  722-65. Richard Vedder and Lowell Gallaway, Out of Work (New York: Holmes and Meir, 1993).

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