Liberty and Labor
The Journal of Commerce
September 7, 1998
Strange things happened at General Motors this summer. Huge swatches of its highly paid, coddled, unionized labor force went on strike. The result was catastrophic: GM plants all over North America shut down, causing the company to lose $75 million a day, idling 175,000 other workers, causing an 81% drop in earnings, and doing untold damage to the company's reputation with consumers.
The fall opens with even stranger things happening at Northwest Airlines. Demanding ever more money, 6,100 highly paid and underworked pilots have held the entire workforce, and an entire region, hostage. The company's planes are grounded, its customers are furious, and 27,000 unsuspecting employees had to be let go, with as many as 50,000 more on the chopping block.
How can we account for this reckless and entirely unnecessary destruction of wealth? Fundamentally, it's an example of destruction wrought by federal intervention in labor markets. This intervention gives legal privileges to unions to extort money using coercive tactics. In the absence of that intervention, employees who attempted to withhold their labor en masse would be rapidly replaced with people eager to work.
Here's an idea: What would happen if we scrapped the entire apparatus of federal labor law and allowed relations between workers and bosses to be 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 generally no such thing as national labor law. Aside from a handful of special cases, the labor contract was just a contract. And, as it happens, Price Fishback of the University of Arizona economics department (writing in the Journal of Economic Literature) has examined every scrap of evidence about the way labor markets worked between 1890 and 1930 and exploded every piece of conventional wisdom about labor in the bad old days.
People were not stuck in indentured servitude. In fact, workers were highly mobile. Turnover rates were higher in 1890 than they are today. People outside of the Northeast didn't lead isolated lives of low pay and grime. Wages over time were converging among 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 workers are free to market their services to the highest possible bidder. In an active market economy with freedom of contract, the workers' wages eventually reflect precisely their 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 Mr. 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. Why? 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, and that goes for workers, management and owners. Labor markets in the United States are heavily controlled, yet the model and ideal for what they could become without regulation is right there in the history books for those who bother to look.
This history may also be our future, as the power of market forces continues to outrun the forces of government and its connected interests. These GM and Northwest strikes are strange aberrations in a new historical process of change, as much an outlier from the norm as two defunct leaders of one-time superpowers pretending to solve the world's problems in a "summit."