The Strike-Threat System

13 Established Differentials

ANY STUDY of the empirical contributions which deal with the labor market must leave the student with an impression of the great complexity of that market and its even greater disorder. We find a value chaos due to the inherent arbitrariness of “exploitation” and merely private resistance to it or avoidance of it. Wage rates and earnings for different occupations within the same industry, and for different industries and different districts for the same occupations, often differ widely. Even between one group of workers and another doing virtually the same work for the same working day, the divergencies are sometimes large. The arbitrary factors can be classified, I suggest, as follows: (a) disparities in the ability to exploit consumers through different elasticities of product demand (that is, the possibility of foreign competition may, in some cases, cause product demand to be rather elastic and limit exploitative power); (b) differences in the willingness and power of unions to shut out would-be interlopers or witness the lay-off of members; (c) differences in the elasticity of substitution of labor-economizing assets for labor; (d) differing degrees in which earlier investment decisions have failed to allow for prospective strike-threat possibilities; and (e) psychological factors which influence the will to resort to strike-threat duress, especially when historically determined relative wage rates (whether fixed through the earlier expression of free market forces or the earlier exploitation of the strike threat) tend to be disturbed.

Under category (e) we must notice the very human attribute of envy, often indistinguishable from feelings of injustice. It is at times a headache-creating influence for the union leaders as well as for the managements of firms. Because particular groups of workers may and do have their wage rates raised through their unions’ pressures, members of other unions naturally and normally expect their elected leaders to achieve more or less proportional gains for them. Should their leaders not be successful in this aim, the rank and file are apt to believe that their officials are poor bargainers, or perhaps appeasers. Even if the members do not blame their leaders, they still usually feel that they have somehow been unjustly treated. The continuous depreciation of a currency seems to aggravate discontent as a result of this cause. But such attitudes exist, it should be stressed, regardless of inflation.

“Differentials” so determined are at times difficult to distinguish from (a) those resulting from differences in the inborn abilities of people to acquire valuable knowledge, skills and powers and (b) those resulting from differences in individual willingness or opportunities to invest time, effort and savings into improving their capacity to render valuable services. Under free labor market conditions, it would be these factors which would tend to bring about differences in relative remuneration. The initial differentials would then in turn create incentives for reactions which would tend constantly to change them. The direction of the changes would always be toward bringing the prices of the heterogeneous types of effort and skill which are incorporated in outputs into consistency with their natural scarcity prices (see pp. 92-93).

We notice for instance that, when duress-imposed agreements do not prevent it, managements often find it expedient to develop some more or less automatic system of insuring that employees shall be retained at what they are worth as their efficiency grows—especially efficiency due to experience. As the likelihood of their ability to command higher wage rates elsewhere—their “bargaining power” in the sense of their “opportunity value” (see pp. 64-67)—increases, their remuneration is raised without the need for their bargaining. Salary and wage increments are one (although the crudest) method of allowing for growing “opportunity values” as experience is acquired. Much more selective are systems of “job evaluation” and “merit rating.” Such methods can assist not only in affording a rough guide for the promotions needed for staff retention, but they can help to build a formal wage structure which insures that the less aggressive, modest individuals who never ask for promotion shall not be overlooked when concessions are made to pressures from the less modest. It is a system which can engender general confidence that favoritism and prejudice are not leading to discrimination. But quite apart from the achievement of justice and good morale by such methods, they are conducive to efficiency in the acquisition, retention or layoff of personnel and they can mitigate the consequences of nonmarket pressures which force relative wage-rate rigidity.

Differentials arrived at through “job evaluation” and “merit rating” are exactly the opposite of those imposed through duress. The former aim at justice. The latter negate it. Free market pressures tend to bring relative wage rates into consistency with one another.

Strike-threat resistance to market disturbance of any existing relationship between wage rates for different labor categories is today variously described as insistence on “established differentials,” “established parities,” “established relatives,” and “due relatives.” Once accepted, “established differentials” may be blindly enforced in certain industries for decades; be subject to change only after grievous harm has been caused; and even then, all too frequently, only following the failure of a strike, with a lingering aftermath of bitterness. Some “established parities” in Britain have lasted more than a half a century. So strongly does the notion that what is customary is “fair” bear on today’s situation, that managements may feel forced to preserve existing relative wage rates simply in order to avoid the appearance of injustice, however unfounded that appearance may be. Thus, H, A. Turner reports of Britain that “a large part of the strikes . . . turns out . . . not to consist of actions for wage increases as such, but of attempts to maintain a relationship the workers concerned regard as established by custom,”1 an observation which suggests that “peaceful bargaining” (the mere threat to strike) is also frequently concerned with the maintenance of such relationships.

These problems of maintaining “due relatives” appear to have been much less important in the United States than in Britain, although they are by no means absent in the former. Changes in the relative remuneration of differently defined groups within an industry occur, I think, more frequently or easily in American industry, possibly because the economy is still more dynamic and fluid than the British. But the issues are the same in both countries, particularly in respect of the relations between the remuneration of craft skills on the one side and unskilled or semiskilled work on the other.

The sort of comparisons which give rise to what may be called “me-too” demands can be classified as interpersonal, interoccupational, interindustry, interarea and between unionized and nonunionized labor in the same industry. If one employee gets a “raise” his colleague will, as we have seen, expect a like gain. And wage-rate increases secured by the members of one union typically call forth demands for similar increases by other unions. If the wage rates of unskilled laborers in an occupation or industry are raised (say because those in this category happen to become relatively scarce), the higher-paid skilled artisans will feel that they have a moral right to preserve their former relative advantage; and the strike threat will be used to defend their interests in this sense. Again, when there are observed increases in the wage rates of nonunion workers, including most white-collar workers, one of the strongest inducements for insistence on the maintenance of “parities” arises. Union officials tend particularly to think it unfair that the earning power of any group of workers should rise conspicuously when the beneficiaries do not incur the expense of unions, that is, when, protected against exploitation only by the market, their earnings increase more rapidly than the increases the unions can show they are securing. But different abilities exist to avoid the displacement (and perhaps temporary unemployment) of workers in particular firms or occupations as labor costs are forced up for these reasons; and such considerations must in some measure affect the determination to maintain parities.

The phenomena produced through the purposeful maintenance of established differentials—a certain permanence or rigidity in the proportions of different categories of wage rates to one another—are today often referred to under the rather misleading term of “wage structure.” The term could be used, of course, as a synonym for “frequency distributions of wage rates,” however that frequency may be caused. But if there is a “structural relationship” among such categories in the sense of “a complex of rigidities”2—rigidities which hinder the stabilizing and coordinative mechanism of the value system—it can hardly be regarded as a “structure” ordained by Providence! It must be seen as the outcome of a set of institutions capable of being refashioned.3

Now the wage rates in an industry determine, ceteris paribus, the numbers employed in it and its contribution to aggregate income. It follows that in so far as the strike-threat system perpetuates earlier-determined “parities” for occupations in different industries, in a situation in which demand and supply conditions are changing, or if for that reason the proportions between the prices of different grades of labor within industries are frozen, it must be preventing the adaptation of the productive process to the changing relative scarcities of those grades. Clearly, then, the maintenance of “established differentials” militates against idea! resource use; but the deliberate use of union power to prevent the “leveling-up” tendency which is inherent in free market pressures, appears also as one of the clearest evidences of the inequalitarian consequences of the strike-threat system.

These consequences are, I judge, magnified during inflations because, with noninflationary expectations, managements are less inclined to capitulate. Again, when the value of the money unit is stable, although unions may sometimes be (in H. A. Turner’s words) “more fearful of their members’ wage rates falling below those of other industries than of the less determinate effect of a wage increase on employment,”4 a situation of serious labor shortage can be caused at the one extreme and displacement of labor at the other. The latter reaction will, however, tend to create incentives for the unions to permit more coordinated relationships (or rather, less discoordinated relationships) in interindustry or interoccupation differentials than occurs when inflation acts as a shield against competitive pressures.

In times of full scale war, the emergency situation often forces governments (as quietly as possible) to override the unions and insist upon “dilutions” which narrow the range of differentials. The aim is a more productive use of manpower. But greater equality of opportunity and earnings seems to be an almost invariable indirect result. Nevertheless, “dilutions” insisted upon during war emergencies are usually accompanied by promises that the unions’ right to reimpose and perpetuate inequalities will be fully restored as soon as possible after the cessation of hostilities.5 (See p. 227.)

Any satisfactory explanation of wage-rate frequency distributions must of course take into account the rigidities so enforced, with their concomitant instabilities. So powerful are the psychological pressures for maintaining custom-based proportions between different grades of work that, in Britain, unions sometimes submit their demands in the form of equal percentage increases for each grade. And in cases (exceptional cases) in which equal absolute increases to different grades have been requested or conceded (a procedure probably adopted where it has been difficult completely to flout market pressures toward a “leveling-up”),6 serious friction has often followed. The arbitrariness is blatant. If all wage rates must rise because particular wage rates rise, then all prices should rise because a particular price rises. But, ceteris paribus, if inflation is absent, a rise in one set of wage rates must entail a fall in another unless displacement of labor is to occur and aggregate income to contract.

Dunlop touches on the consequences of envy or irrationalities which influence the use of the strike threat to preserve “established parities” but does not describe the influences as “envy” or “irrationalities.” He says that, “for a variety of reasons,” differentials once established “are not readily altered in a looser labor market.”7 He does not explicitly refer to factors such as those I have listed above (p. 196) as the chief determinants of the “parities” which are maintained. He simply argues that “the differentials are not transitory; they are not to be discussed as imperfections. . . .”; they “are not basically to be interpreted as a range of indefinite or random rates;” they “reflect the basic nature of product and labor markets.”8 Such phrases, I submit, mean nothing whatsoever. The truth is that the defense of established differentials against the competition of interlopers is a defense of privilege and a defense of inequality of incomes. This assertion is true whatever the motives of those who defend them, whether or not the wage rates protected were originally set under free market conditions or as a consequence of strike-threat power, and however human or understandable the moral weaknesses responsible may be.

Figures presented by Dunlop show that wage rates for truck drivers in Boston were (in 1951 ) about 54 percent higher in building construction trucking and oil trucking than in laundry and scrap iron work. But he appears to deny that these differentials were due to use of disparate monopolistic power. He holds that “each wage rate reflects a contour. Each is a reflection of the product market. Within any one contour the wage rates will tend to be equal. . . . But there are sharp differences in rates as among contours,” due to historical factors which have “conditioned the labor supply so that the relative rates among contours are regarded as proper.” He continues, “. . . Teamsters hauling oil and building materials come in contact with high-paid employees in their work operations, while laundry and scrap drivers have more contact with lower-paid employees.”9 But this discloses only the reasons why truck drivers in industries in which they have been relatively highly-paid in the past, feel it right that the competition with them of less-privileged workers in other fields should be held off; and that those who work in industries in which they associate with highly-paid workers (possibly because the latter can exercise monopolistic power effectively) would like to have higher earnings too. Admittedly they may have a stronger motivation for the exploitation of the community than others not subject to the same temptations. But surely, because one truck driver is an almost perfect substitute for another, the main reason why one such driver may have a wage rate almost double that of another (for example, between scrap metal and magazine trucking in Dunlop’s examples) is that the magazine trade happens to be more exploitable than the scrap metal trade.

A quite separate suggestion to explain the anomaly, mentioned by Dunlop almost as though it were a minor qualification, is that “a larger emphasis is to be placed on the fact that competitive conditions permit higher pay” in the industries in which the truck drivers in fact command higher pay.10 But by “competitive” he means “monopolistic.” He mentions inelasticities of demand due to wages forming a smaller proportion of sales where truck drivers’ remuneration is highest. But what does this all amount to other than an admission of what he has seemingly been trying to avoid saying, namely, that the wage-rate differences are largely explained by differing exploitative power against consumers, or different motivation to exploit that power in different industries? He even suggests that the union may be acting like a discriminating monopolist among different industries, exploiting each according to what it wilt bear.11

It would be wrong, however, to leave the impression that frozen relationships between wage rates in different categories of employment are not often subject to thaw, at least over long periods of time. Concrete experience suggests that, although some established differentials have persisted during more than half a century, the process of substitution we call “competition” can seldom be wholly suppressed in the absence of governmental edict. Attempts to suppress competitive forces very often simply divert them—as a rule into less economizing channels. Responses to changes in taste, to changes in preference for alternative products, to changes in production techniques, etc, sometimes give scope for the avoidance of customary rigidities in relationships and make possible changes in the relative speed with which revised wage rates in different industries and occupations are brought about;12 and less frequently (as successive wage contracts are negotiated), they lead to changes in the ratio of earnings between skilled and unskilled work, even in union-dominated industries. It seems therefore that competition has, in one way or another, been tending to break through the restraints of duress-imposed costs and, in the course of successive wage negotiations, creating greater equality of earnings and reducing the range of differentials. For instance, attempts to maintain the wage rates of whites in a rigid ratio to those of nonwhites,13 and wage rates for men in a rigid ratio to those of women, appear to have succeeded in most cases only in slowing down, not in completely suppressing, a gradual trend to greater equality.

The trend toward industrial unions has apparently strengthened the maintenance of established differentials in some ways and in other ways to have weakened it.14 When powerful craft unions have found it profitable to merge with the larger, industry-wide organizations, the craft members have usually been careful to insure that any threat to their privileged position shall be minimized. The threat is often there—competition with them of “unskilled” (“unqualified”) workers who might take on such of their operations as can be learned with little training by seizing opportunities of learning on the job. But the skilled usually have the power which attaches to prestige. The break-away of a craft would be felt to weaken an industrial union seriously, and when the craft sector can capitalize on its power to secede, union officials typically find it expedient to insist upon equal percentage increases for skilled workers when demanding increases for the unskilled. It all seems “only fair.” This appears at times to have been the position, for instance, in the British cotton and steel industries.

There are some cases where crafts which have found it expedient to work through industrial unions have been able to raise the proportion of craft wage rates to those of the unskilled or semiskilled rank and file. Operating through an industry-wide organization, the crafts seem to have been able, in certain circumstances, to hold back competitive pressures from the unprivileged more successfully than they could have done if they had operated from separate craft unions. Compositors in the American printing industry have apparently been much more successful in preserving their differential earnings by maneuvering within an industrial union than have the builders operating as an independent craft organization.15 The evidence is inconclusive; but there is no doubt that the crafts within an industry-wide union can sometimes exploit the charismatic force of the “solidarity of labor” slogan for their sectional advantage.

H. A. Turner suggests that the lower-paid workers acquiesce in established differentials because, if there is no apprenticeship barrier, they have the chance of promotion to the higher grades.16 The situation could, of course, still appear unjust to those of the “unskilled” workers who have the least chance of admission to the privileged ranks, even where the unions have forced terms which compel promotion from within—that is, which prohibit the recruitment of skilled from outside present union ranks. This is one of the situations in which managements all too often act with what some have charged is cowardice (see p. 50). In Turner’s words, “the employers have generally preferred to accept the situation rather than provoke disputes about differentials.”17

It was pointed out above (p. 197) that free market forces are continuously tending to eliminate such differentials as are not reflections of the relative scarcity of different abilities and valuable attributes; and in industrial unions, because the unskilled often possess the greater voting power, the evidence suggests that they have at times been able to use that power to reduce the craft-imposed restraints on their competition. Where the votes of the lower-paid members are dominant, the union officials have found it a useful compromise to put forward their demands, not as requests for equal percentage increases but for equal absolute increases. Such concessions to free market pressures to equality of opportunity are, to be sure, very small concessions. But the assurance the lower-paid receive that they have been awarded a larger percentage rise than the higher-paid is probably enough, in most instances, to insure their acquiescence.18 On the whole, the internal voting strength of the unskilled or semiskilled in industrial unions seems likely to serve as a very indirect method of weakening some of the restraints. A less inequitable use and remuneration of labor could result. It is in this respect alone that there is any justification whatsoever for the suggestion of Reynolds and Taft that “the eventual development of trade unions in the lowest-paid industries may enable those industries to pull up closer to those which now stand at the top of the wage structure.”19 That claim can be defended solely if the workers’ organization in unions somehow permits them to evade or smash through barriers created by the better-paid groups.

In so far as the general growth of union power in any country has been accompanied by greater equality of wage rates in an industry, this has almost certainly been due (a) to managerial initiatives leading to the substitution of semiskilled jobs for unskilled jobs, (b) to the voting dominance of the unskilled in industrial unions tending to mitigate craft exclusiveness, or (c) to the impossibility for other reasons of suppressing all competitive influences. These three factors are not independent.

Competition does, then, succeed at times in eroding, unobtrusively, one restraint on equality of opportunity after another, changing thereby the relative prices of different kinds of labor, and causing a narrowing of the range of wage differentials. But over long periods a straight-jacket of “due relatives” still obstructs the most productive deployment and development of human resources.

R. S. Morrison, a United States businessman, perceiving (a) the damage done to the community in its consumer role by the strike-threat system, (b) the arbitrariness and injustices of its bearing on relative wage rates, and (c) its responsibility for chronic inflation, has put forward a plan for fundamental reform,20 He proposes, among other things, the elimination of the arbitrariness we have been discussing in this chapter via the application on a national scale of the techniques developed in connection with job evaluation within firms (see p. 197). The purpose of this part of his plan (which he calls the “Contax Plan”) can be said to be to eradicate duress-imposed differentials.

The adoption of such a procedure could certainly do much to mitigate injustices on its first application. But the plan fails to allow for the coordinative function of divergencies of relative wage rates (for labor inputs of standard content and quality) among different firms, occupations, industries, and areas. An expanding firm will find it profitable to offer a wage premium to attract the labor it needs, while in a firm confronted with declining demand, wage cuts can (a) minimize the harshness of consumers’ democracy and (b) provide an incentive for a sufficient number of workers to leave for activities in which their remuneration or prospects are higher (a reaction which will minimize the magnitude of mutually beneficial wage cuts).

Job evaluation within firms is defensible only when its purpose is to discern values which the free market is tending to determine but which managements (through neglect or defective judgment) have somehow failed to perceive, or to impose such values in cases in which managements have allowed favoritism, nepotism, or appeasement of personnel or unions to influence them in discriminations between individuals, sexes, races or age groups. Similarly, to be defensible on a national scale, as under the “Contax Plan,” the authority to which the task was entrusted would have to try to discover those cases in which monopolistic or monopsonistic influences were causing the wage rates of particular groups to diverge from free market values. And in the labor market as a whole, this can be incomparably more efficiently achieved through removing restraints than through the enactment of the values which the responsible authority judges would have resulted under those conditions.

NOTES

21 H. A. Turner, in J. T. Dunlop, Theory of Wage Determination (London: Macmillan, Ltd., 1957), p. 123.

22 The reader is reminded that by “rigidities” here is meant restraints imposed by man-made law (“controls”) or man-made contrivance (that is, the enforcement of the standard rate). “Immobilities” due to, say, costs of movement; or costs of training (otherwise than costs due to such things as union barriers to investment in human capital); or custom which is not perpetuated by legislation or collusion, etc., these things are not here regarded as “rigidities,” although they will have to be included among the determinants of the frequency distribution of wage-rates. They are no more “rigidities” than are mountain ranges. See Chapter 8, pp. 102, et seq.).

23 A different kind of rigidity, which is not to be specifically discussed in this chapter, involves fixed relationships between numbers of journeymen and apprentices, or between numbers of skilled and unskilled, or in the relative numbers of those engaged in a variety of specified tasks in an industry.

24 Turner, op. cit., p. 129.

25 In South Africa, an attempt by the mines to preserve the right they had acquired during World War I to allow simple skills and simple responsibilities to be entrusted to Africans led to the most bitter and bloody strike in South Africa’s history, in 1922. Two years later a Labor Party shared power, through a coalition with the Nationalists, and the Mines and Works Act of 1926 was passed to freeze previously established differentials through prohibiting skilled or responsible work by Africans. The leader of the ultimately successful strike of 1922 became the secretary of the Communist Party of South Africa almost immediately afterwards. Later, he became and remained its president until that party was outlawed. (See Hutt, Economics of the Colour Bar, pp. 61-2, 68-70.)

26 Because equal absolute increases must cause greater equality.

27 John T. Dunlop, The Theory of Wage Determination (London: Macmillan, Ltd., 1957), p. 22.

28 Ibid., p. 22.

29 Ibid., pp. 21-22.

30 Ibid., p. 22.

31 In the light of this notion, an interesting proposition would be the Teamsters’ Union exacting the spoils of exploitation, achieved through discriminating monopoly power exercised on behalf of all its members, and dividing the spoils equally (or according to some other principle of equity) via private taxation and handouts, among all the truck drivers!

32 For instance, in the 1950s, strike-threat destruction of prospective yields to replacement eventually forced the acceptance of low wage rates in the British cotton industry (relatively to those in other industries).

33 The maintenance of such rigid relationships between the wage rates of whites and nonwhites has been achieved most successfully in South Africa, but only because union-enforced standard rates have been supported by the government-imposed economic apartheid policy. In periods in which there has been an temporary relaxation of collectivist policy, a trend toward a gradual diminution of inequality of opportunity and earning power has manifested itself.

34 The situation in which the industrial union form of organization tends to weaken established differentials is to be discussed shortly.

35 See Reynolds and Taft, in Bakke, Kerr, and Anrod, Unions, Management, and the Public (New York: Harcourt, Brace and World, 1967), p. 599.

36 Turner, op. cit., p. 133.

37 Ibid., p. 134.

38 Even so, the resentments of the higher-paid groups are often aroused.

39 Reynolds and Taft, op. cit., p. 602.

40 R. S. Morrison, The Contax Plan (Morrison Publications, 1970). Mr. Morrison should be forgiven for believing that forcing up particular costs and prices forces up the general scale of prices. In the absence of inflationary policy, however, it means that other costs or prices must fall or that the economy is forced into a cumulatively worsening depression. But economists of world reputation are guilty of the same fallacy. What “cost-push” does, as we shall see, is render inflation politically expedient.

• 1Already in the late 1920s I had reached the conclusion that all the textbook treatments I could find of this important subject were—superficially considered—definitely indefensible or inadequate and unconvincing, For instance, the great Alfred Marshall’s treatment of what he appeared to regard as the crucial issue—bilateral monopoly—was illustrated by his famous example of the barter of nuts and apples; yet as I saw the problem, the circumstances he was thus postulating were, for a variety of reasons, of negligible practical significance. And Marshall was widely regarded as the greatest economist of his age.
• 2Already in the late 1920s I had reached the conclusion that all the textbook treatments I could find of this important subject were—superficially considered—definitely indefensible or inadequate and unconvincing, For instance, the great Alfred Marshall’s treatment of what he appeared to regard as the crucial issue—bilateral monopoly—was illustrated by his famous example of the barter of nuts and apples; yet as I saw the problem, the circumstances he was thus postulating were, for a variety of reasons, of negligible practical significance. And Marshall was widely regarded as the greatest economist of his age.
• 3I expected that the obvious challenge of my book would prompt a major contribution, from economists better qualified than myself, to deal with the questions I raised. During my entire academic life I have been expecting an authoritative book. But although there have been many splendid contributions, mainly in the form of articles that have given more or less the same answers that I myself have given, they have had hardly any policy impact. The following economists have all written cogently on aspects of the problems discussed here, and I have gained something substantial from each of them (although some might differ—or would have differed—sharply on certain issues): Fritz Machlup, Ludwig von Mises, Milton Friedman, Friedrich A. Hayek, Aaron A. Director, M. Reder, Goetz A. Briefs, John Van Sickle, Armen A. Alchian, William R. Allen, Marshall Colberg, Yale Brozen, Arthur A. Shenfield, S. Rottenberg, H. Gregg Lewis, Gottfried Dietze, Clarence Phil-brook, Henry Hazlitt, H. Demsetz, F. A. Harper, A, Rees, P. Sultan, V, Orval Watts, C. E. Lindblom, C, H. Cooley, Henry Simons, W. Eucken, E. H. Chamberlin, Wilhelm Röpke, David McCord Wright, Gottfried Haberler, Sylvester Petro, N. J, Simler, Ben Rogge, Helmut Schoeck, H. G. Johnson, and P. Mieskowski. Of course, there are many others who would share some or most of my conclusions. Yet these economists have not yet succeeded in making their convictions on the strike-threat issue influential. They have failed, particularly, to win the sympathy even of those of their academic colleagues whose minds are not closed (which, unfortunately, I often think today is a small proportion).
• 4There is of course today an enormous literature on “labor economics.” I find it for the most part tendentious, often derivative, and usually devoid of any original or independent thinking. Much of it has been written, I guess, to satisfy the imperative in American universities to “publish or perish.” Trying to judge whether there is anything worthwhile in all these volumes has been exasperatingly time-consuming and unrewarding. But it is the bias of most of this literature which is most disturbing. In an article published a few years ago, I ventured a diagnosis. I said that most books on “labor economics” have been by labor consultants, arbitrators, conciliators, mediators, labor attorneys, labor correspondents; and that such “economists” cannot think or write dispassionately on matters affecting their incomes.
• 5Two decades ago, a leading member of the British Labor party, Lady Wootton (Barbara Wootton), stated quite categorically, that it is “the business of a union to be anti-social; the members would have a just grievance if their officials and committees ceased to put sectional interests first.” F. A. Hayek, commenting on this passage, noted “few liberal sympathizers of the trade unions would dare to express . . . [this] obvious truth.” But why should trade union sympathizers, including their academic advisers, not dare to refer to such a truth unless they felt that their political ambitions or prospects as consultants, or advisers, or labor journalists would be jeopardized by so frank art admission?
• 6Two decades ago, a leading member of the British Labor party, Lady Wootton (Barbara Wootton), stated quite categorically, that it is “the business of a union to be anti-social; the members would have a just grievance if their officials and committees ceased to put sectional interests first.” F. A. Hayek, commenting on this passage, noted “few liberal sympathizers of the trade unions would dare to express . . . [this] obvious truth.” But why should trade union sympathizers, including their academic advisers, not dare to refer to such a truth unless they felt that their political ambitions or prospects as consultants, or advisers, or labor journalists would be jeopardized by so frank art admission?
• 7The problems to be considered here fall within this theoretical framework. Wage-rate increases enforced through the strike threat benefit those remaining employed at the enhanced labor costs. But, on whom does the burden then fall? On the specific investors? On investors in general? On displaced or excluded workers? On consumers? What is the incidence of the burden? This problem is like that which economists discuss under the heading of the incidence of taxation. To express the issue in abstract terms (which means in the simplest terms), any one party to the productive process can exploit one or more of the other parties only in a measure determined by the “elasticities of supply” of the different productive services rendered by the people or by the assets employed. In this connection I propose to draw attention to four vital realities: (1) In the absence of man-made barriers to mobility, noticed above (p. 4), there is a wide range of alternative uses for a large proportion of workers and assets, a fact which implies long-term elasticities of supply. (2) Assets are often substitutable for labor (a consideration which is usually taken into account under the heading of “elasticity of substitution”). (3) If growing large scale recourse to the strike threat, accompanied by growing hostility to inflation, does not cause a disastrous cumulative decline in real income (depression without deflation), it must eventually force labor somehow to become the residual claimant on the value of the product, in order to make profitable the replacement of the complementary assets labor requires, let alone permit any growth in the stock of such assets in response to society’s saving preference. (4) Substitution of the consumption process for the saving process may contribute to the elasticity of supply of assets as such. (See p. 145)
• 8The only practically important case of monopsony (to be discussed in Chapter 8) involves some clear “shut-in” power. Yet even the Webbs, in two massive studies (both special pleading for the union movement), have presented no evidence of “employers,” in collusion or singly, ever deliberately and fraudently enticing employees into specialized occupations, with a view eventually to reducing their remuneration unfairly.
• 9The effect of wage rates determined under labor union pressure is, I shall insist, to distort society’s production structure, while it causes no redistribution whatsoever in favor of the poorer classes as such. The only income transfers that the use of strike power can effect are (1) in favor of those employed in one occupation at the expense of those in others, or (2) in favor of workers as such when entrepreneurs generally have failed to forecast the extent to which, as investors, they will be subjected to duress-imposed costs.
• 10When a wage rate is raised so as to price some part of potential output higher than consumers are prepared to pay, the wage gain is partly at the expense of workers who would otherwise have found their most remunerative employment in that trade; partly, of course, it is at the expense of consumers in general; but hardly ever (and I shall be developing this point at some length) is it at the expense of those who provide complementary resources—i.e., the assets which, in general, multiply the yield to effort. It is consumers who ultimately pay wages; and when the market value of output of any kind is forced (whether by the right to strike or through legal enactment) above the level which the free market would have determined, the effect is, in general, actually to harm the poorer classes disproportionately. This “regressive” consequence is aggravated because the process keeps (in the long run) a large segment of the work force in low-productivity and low-paying jobs; or (in the short run) forces workers into short-time jobs and (encouraged by unemployment compensation) into idleness. Hence the effect of the strike-threat system upon the distribution of the wages flow is to render it less equitable.
• 11Through the consequences of the strike-threat system upon the composition of the assets-stock, and the nature of the employment outlets available, the flow of output as a whole and hence aggregate real income will be reduced. And, because all must admit that it is highly improbable that any substantial redistribution of the shrunken real income in favor of labor has ever been thereby effected, obviously the system has all along been reducing the flow of real wages and the average of real wage rates.
• 12In the “classical” theory of wages, as it had evolved at Cambridge in the pre-Keynesian era (by which I mean before publication of J. M. Keynes’s General Theory of Employment, Interest and Money in 1936), the issues which I have discussed in this chapter were virtually ignored. On the points which concern society most seriously, exposition was hopelessly contradictory for this reason. An inherent part of Alfred Marshall’s imposing synthesis of the “orthodoxy” of his age was the marginal productivity theory of wage-rate determination. This was clear, for instance, when he criticized Cliffe Leslie who (in attempting to justify strike-threat actions) had, Marshall showed, failed to understand why competition tended to establish equivalence of net advantageousness in labor’s earnings. Yet other passages in Marshall’s writings appear to me to have been quite inconsistent with the insight he showed in his reference to Leslie.
• 13This criticism applies, I suggest, particularly to Marshall’s discussion of what has been called the “range of indeterminateness” under bilateral monopoly; for the circumstances imagined relate to the problem of income distribution, I maintain, only under the assumption of wrong predictions. And I find that his contemporaries and successors who have relied upon similar kinds of reasoning have never stated this assumption—either explicitly or implicitly.
• 14Marshall does recognize, through his notion of “derived demand,” that consumers ultimately employ all the resources used. But does not his analysis treat only the particular case? For one thing, it shows that consumers are the more exploitable the greater the inelasticity of demand’ for the output happens to be. For another, it indicates that the suppliers of fixed and circulating capital who have failed to anticipate and discount typical trade-union practices (the vital qualification which Marshall does not specifically make) are more exploitable (a) the fewer the alternative uses there happen to be for the assets they have provided, (b) the smaller the proportion of labor cost to the total cost of the output, and (c) the fewer the opportunities of replacing existing employees by others (for example, strikers by blacklegs) or by labor-economizing machinery or organization.
• 15Marshall’s lack of rigor on the labor issue raises a question of great sociological interest. In his Economics of Industry he seems to imply (without clearly referring to the strike threat) that workers as a whole gain through their unions. He says that their power “to sustain high wages depends chiefly on the influence they exert on the character of the workmen themselves. . . .” If this means that the unions increase personal efficiency so that the market value of the workmen is higher, the question is how the unions manage to do so. Exploiting the consumer and excluded workers could, of course, take away, in Marshall’s words, “that want and fear of hunger which depressed the physique and moral character of the working class,” on the part of the exploiters; but as it would further depress those exploited, it is difficult to see how the “working class” as a whole could benefit. He goes on to say, “Unions have been at once a chief product and a chief cause of this constant elevation of the standard of life: where that standard is high, unions have sprung up naturally; where unions have been strong, the standard of life has generally risen.” That unions have been a product, of which more has in fact been acquired when the standard of living generally has been rising, is beyond question. But overcoats and bicycles and cars and television sets have also been products of which more has been acquired as standards of living have risen. Hence it is quite another matter to claim that living standards generally have risen because the unions have been strong, or because people generally have more overcoats or bicycles. Marshall refers also to the unions compelling employers to treat the worker “as an equal with something to sell that they (the employers) wanted to buy.” Of course union officials who are allowed to use the strike threat will be treated courteously by managements, as will their tax assessors. But will management’s fears of a union’s powers enable its members to raise their earnings without exploiting people poorer than themselves? Marshall did not face this sort of question with frankness; nor, in my judgment, have most subsequent economists.
• 16Marshall’s lack of rigor on the labor issue raises a question of great sociological interest. In his Economics of Industry he seems to imply (without clearly referring to the strike threat) that workers as a whole gain through their unions. He says that their power “to sustain high wages depends chiefly on the influence they exert on the character of the workmen themselves. . . .” If this means that the unions increase personal efficiency so that the market value of the workmen is higher, the question is how the unions manage to do so. Exploiting the consumer and excluded workers could, of course, take away, in Marshall’s words, “that want and fear of hunger which depressed the physique and moral character of the working class,” on the part of the exploiters; but as it would further depress those exploited, it is difficult to see how the “working class” as a whole could benefit. He goes on to say, “Unions have been at once a chief product and a chief cause of this constant elevation of the standard of life: where that standard is high, unions have sprung up naturally; where unions have been strong, the standard of life has generally risen.” That unions have been a product, of which more has in fact been acquired when the standard of living generally has been rising, is beyond question. But overcoats and bicycles and cars and television sets have also been products of which more has been acquired as standards of living have risen. Hence it is quite another matter to claim that living standards generally have risen because the unions have been strong, or because people generally have more overcoats or bicycles. Marshall refers also to the unions compelling employers to treat the worker “as an equal with something to sell that they (the employers) wanted to buy.” Of course union officials who are allowed to use the strike threat will be treated courteously by managements, as will their tax assessors. But will management’s fears of a union’s powers enable its members to raise their earnings without exploiting people poorer than themselves? Marshall did not face this sort of question with frankness; nor, in my judgment, have most subsequent economists.
• 17To sum up. When the owners of assets or the suppliers of labor anticipate the possibility or likelihood of “exploitation,” as they will if society permits attempted “exploitation,” they will be unexploitable. Neither the providers of assets nor the providers of effort and skill are exploitable by one another (a) unless the former fail to predict and allow for the full cost consequences of future strike threats when they choose their investments, or (b) unless the latter fail to predict the wage-rate consequences of lockout threats or monopsonistic action by the hirers of labor when choosing and preparing for specialized employment. To me it seems unchallengeable that, because during the past half century or more the strike-threat influence has obviously been increasing, investors must on the whole have predicted the cost implications and hence have been virtually unexploitable. I use the word “virtually” because whether they have overestimated or underestimated the cost effects of strike power is difficult to judge. But if my reasoning is valid, the major consequences of society’s tolerance of the strike-threat system must have been simply a slowing down of the rate of increase in aggregate income, to the disadvantage of both participants, and with no discernible change in the proportion in which income is shared between “capital” and “labor”.
• 18Even the Webbs’ presentation quotes no facts which might suggest the operation of formal monopsonies during the eighteenth and nineteenth centuries. Actually their explanation of the need for the protection of labor relies most often on the fact that “employers” had not combined. They refer, for example, to the craft guilds fighting for legislative protection “against the cutting down of their earnings by the competing capitalists.” This is of course the opposite of the monopsony allegation. If the masters were competing in the sale of the product, they were equally competing for the purchase of labor and materials. Hence they would have been tending to bid up the remuneration of the work force (actual or potential) as a whole, not to push it down.
• 19We must notice at the outset that, as feudalism and serfdom disappeared during the last two centuries of the Middle Ages, and especially following the Black Death, associations of workers for peaceful and lawful purposes had been neither illegal nor discouraged. Nor were they ever illegal or discouraged in subsequent ages. But from the thirteenth century, the conviction clearly emerged that certain antisocial practices affecting the pricing of products (including the product of labor) had to be restrained for the common good. Thus, practices known as “forestalling, engrossing and regrating” were forbidden by ordinances and statutes because these were supply and pricing procedures which were perceived to be exploiting the common people through the contriving of scarcities of food and necessities.
• 20Collusive action to raise the price of labor was, then, regarded as pernicious only in the sense that agreements to raise the price of food or necessities (such as salt) were considered pernicious. The spirit of the law seems never to have been hostile to artisans as such, still less to the laboring masses. Its hostility was directed against what I like to call “the contrived scarcity.” Cases such as those brought against London carpenters in 1339 and against shoemakers in 1349 certainly seem to have had the aim of preventing specific commodity prices from being forced up.
• 21I did not then know of Eugen Böhm-Bawerk’s important Control or Economic Law? which reached conclusions similar to those I reached. It had not then been translated into English. Nor had works by Ludwig von Mises which dealt briefly with the same issue.
• 22I discuss Marshall’s contribution on pp. 7-9.
• 23I noticed the important contribution of Professors Johnson and Mieskowski too late to permit a discussion of it in all appropriate contexts. I refer to its findings in an appendix to Chapter 15. I received E. P. Schmidt’s splendid study. Union Power, on the day I received the page proofs of this book.
• 24W, H. Hutt, “Misgivings and Casuistry on Strikes,” Modern Age, Fall 1968.
• 25Barbara Wootton, Freedom under Planning (Chapel Hill: University of North Carolina Press, 1945), p. 97,
• 26F. A, Hayek, The Constitution of Liberty (Chicago; University of Chicago Press, 1960), p. 505.
• 27That is, as is to be explained later, the workers will be forced to hire or rent the fixed assets they need and to pay interest on the circulating capital because the owners of assets will only make them available on those terms.
• 28Sidney and Beatrice Webb, The History of Trade Unionism and Industrial Democracy (London: Longmans Green and Co., 1920).
• 29Because, as we are about to see, when duress-imposed labor costs in any activity reduce the number of workers who can be profitably employed in it, the number of workers who must compete for employment in other activities is increased, while as consumers all other workers will be disadvantaged.
• 30A tax is said to be “regressive” when the proportion of the tax to the taxpayer’s income is greater the smaller his income. Thus import and excise duties and sales taxes are obviously regressive.
• 31I use the work “substantial” because in this context I am relying upon empirical evidence (see chapter 16). In the light of the general case argued in this chapter and the rest of the book, the word “substantial” could be omitted.
• 32Cliffe Leslie was one of a group of writers on wage questions (of whom the others were Thornton, Longe and Fleeming Jenkins) who had tried to show how union initiatives could enable a redistribution of income in labor’s favor. They had a considerable influence on John Stuart Mill during the last years of his life, when he was contemplating entry, and after his entry, into politics. I have discussed their contributions in my Theory of Collective Bargaining (Glencoe. Ill.: Free Press, 1954).
• 33“Bilateral monopoly” means, in this context, “monopsony” (see above footnotes) among the purchasers of labor and monopoly (a union) among the suppliers of labor. Under such conditions there is no market determination of the price of labor.
• 34The demand for a thing is said to be “inelastic” when a change in its price will have little influence on the amount of it that will be purchased.
• 35Alfred Marshall, Economics of Industry (London: Macmillan, Ltd., 1909), p. 389.
• 36Ibid., pp. 388-9.
• 37Within the category “labor” there must have been a consequential regressive redistribution (see footnote 10 and below pp. 168, et. seq.).
• 38S. and B, Webb, op. cit. p. 46 (my italics). On the whole, Parliament sided with the craft guilds until the middle of the eighteenth century (by which time their effectiveness was rapidly weakening); but with the spread of laissez-faire ideas in the latter part of the century, Parliament was less inclined to protect craft privileges.
• 39So effectively has the myth I am here exposing been propagated that even in Armen A. Alchiàn and William R. Allen’s University Economics (2nd ed.; Belmont, Calif.: Wadsworth Publishing Company, 1967), which contains by all odds the most satisfactory elementary discussion of the labor union issue to be found in any currently used textbook, the student is told that the British anticonspiracy laws tried to abolish “the right to form a union—which is a very different thing from a strike.” Associations of working people were encouraged rather than frowned upon provided they did not resort to anything resembling the strike. Nor is this textbook quite correct in saying that “the threat of violence via the strike was basically what anticonspiracy laws aimed to stop. . . .” (p. 406). This was true only of certain of the special statutes, referred to on pp. 29-30. The gist of any “conspiracy” offense was concerted action to agree upon a price or wage rate. (See p, 31.) Violence was always a separate transgression.
• 40The London carpenters were charged with trying to keep “foreigners” (i.e., workmen from outside London) from accepting less than sixpence a day.