The Strike-Threat System

7 “Exploitation”—By Shutting In or Shutting Out

IN THIS chapter I explain that, when antitrust does not stand in the way, it is relatively easy to exploit actual or potential competing parties (competing workers or owners of competing assets) by shutting them out from an occupation, industry, or area, but extremely difficult (and, in general, impossible) to exploit complementary parties (capital by labor, or labor by capital) by shutting in workers or assets, that is, confining them to a particular occupation, industry, or area.

The term “exploitation” (defined on p. 3) is intended to have a completely neutral, nonemotive connotation. But let us assume at present that “exploitation” is justified if investors or the rich are exploited, and unjustified if the workers or the poor are exploited.

I shall here make use of certain simple concepts, the meaning of which I intend to be self-evident. I originally suggested the first five of these concepts in 1935.1 Few economists have made use of them. Yet I still feel that, if more generally used, they could greatly simplify our attempts to understand most of the problems we meet in studying the phenomena of economic conflict. The concepts are:

1. “Natural scarcity.” This is an attribute of the value of assets, and of the value of the services of people and of assets, when people in their role of entrepreneur (choosing means to ends) are completely free to choose the least-cost means (according to their judgment), while in their consumers’ role (choosing ends) they are free to substitute preferred ends and the preferred (including the cheapest) source of supply. Under such “competitive” circumstances, I shall regard the values of assets, the values of their services, and the values of the services of people as “natural scarcity values” (equivalent to “free market values”).

2, 3. “Contrived scarcity” and “contrived plenitude.” These terms refer to the values which emerge when persons acting in collusion, or relying upon such monopolistic or monopsonistic power as is inherent in largeness of scale of operations, can fix a price or wage rate higher or lower than the natural scarcity value respectively, or alternatively, when they can “control” the amount supplied or demanded of anything so as to cause its price to diverge from the “natural scarcity value.” I shall then refer to a “contrived scarcity value” if the price so determined exceeds the “natural scarcity value,” and “contrived plenitude value” if the price is lower than the “natural scarcity value.” I prefer the term “contrived” to “artificial” because there is nothing unnatural about deliberate scarcity contrivance where “the rules of the game” permit it.2 Did not Josiah Tucker rightly remark in the eighteenth century, “Every man would be a monopolist if he could”?

4, 5. “Incidental contrived plenitude” and “incidental contrived scarcity.” Every contrived scarcity, in diverting certain assets or people away from one field, must cause the services of such diverted resources to be valued below their natural scarcity in the less productive uses into which they are forced. I call such values “incidental contrived plenitude values.”3 Similarly, when the use of monopsonistic power can create a “contrived plenitude” by preventing certain assets or people from moving away from one area, activity, occupation or firm to another, so as to reduce the value of their services where they are retained below the natural scarcity level, the value of like productive services (and the corresponding assets) outside the area, occupation or firm must be above the natural scarcity level. We can describe the values so caused as “incidental contrived scarcity values.”

6, 7. The “shut-in” and the “shut-out. “4 (a) The “shut-in” refers to a man-made barrier which creates or maintains a “contrived plenitude,” that is, which prevents resources (labor or assets) from moving away from an area, activity, occupation or firm to other areas, activities, occupations or firms which offer more productive and better remunerated employment outlets. The “shut-in” prevents advantage being taken of offers that outside entrepreneurs would otherwise make. The “contrived plenitude” is the consequence, and the “shut-in” is the means, (b) The “shut-out” refers to a man-made barrier which creates or maintains a “contrived scarcity.” It “shuts out” resources (including labor) from moving into an area, activity, occupation or firm which offers more productive and better-paying opportunities than are available outside. The “contrived scarcity” is the consequence, and the “shut-out” is the means. Both the “shut-in” and the “shut-out” are methods of holding off such offers as pure entrepreneurial incentives (profit-seeking, loss-avoidance incentives) would otherwise allow to be made.

All serious “exploitation” must rely upon either the “shut-in” or the “shutout.” A wage rate materially less than the “natural scarcity” level in an area, occupation affirm can persist only if the exploited labor is “shut in,” that is, only if certain entrepreneurs’ bidding for this labor can be held off. A wage rate materially above the free market level can persist only if labor is “shut out,” that is, only if interlopers—potential competitors—can be kept out. Apparent exceptions to this categorical assertion are to be considered shortly.

Whenever a “shut-out” contrives a scarcity in a field, some assets and/or labor are cheapened for other purposes.5 The effect of each such scarcity contrivance is usually to cause the initiator (the “exploiter”) to gain (a) (through the contrived scarcity) ultimately at the community’s expense in its consumer role; (b) at the expense of competing parties—those investors whose property and those workers whose efforts are diverted to, or kept in, less remunerative and less productive activities; and (c) (for a quite different reason) at the expense of a complementary party (for example, labor exploited by investors or vice versa).

What complicates the matter is that the exploitation of a complementary party can occur only through a “shut-in” which accompanies the “shut-out.” For instance, a “shut-in” of capital must accompany the displacement or exclusion of workers due to the raising of a wage rate by duress, if the maneuver is to be successful. That is, if the “shut-out” is to be effective, owners of assets in the exploited field must be somehow debarred from offering employment in that field to displaced or excluded workers at wage rates which would make their inputs profitable. Managements, on behalf of the investors who have provided assets, will be denied access to certain workers the actual or prospective availability of whose services had induced the provision of the assets.

Hence, already provided assets will have been “shut in” in exactly the same way that labor will have been “shut in” under the opposite case of monopsonistic exploitation of labor. When labor is exploited, managements must somehow hold captive the workers employed, paying them less than they could, if free to move, command outside. In both cases, if the assets or labor could break out and join forces with complementary labor or assets outside, they would find better remunerated employments.

Exploitation of competing parties can occur only through the “shut-out,” as for example when apprenticeship restraints limit recruitment to a privileged trade; while exploitation of complementary parties can occur only through the “shut-in,” as when monopsonistic exploitation of labor occurs for investors’ benefit.

An important principle can now be enunciated. To the extent to which exploitation in “shut-in” forms can occur, it can effectively redistribute income as between labor and capital (in the short run). It is incapable of doing this in “shut-out” forms, except to the extent to which assets compete with labor. Otherwise, through the “shut-out,” one group of workers can exploit other workers (and consumers) only, and investors can exploit other investors (and consumers) only.

The importance of the above stated principle is enhanced when it is considered in relation to the hardly disputable fact that it is much easier to exploit by “shutting out” competing assets or labor (i.e., substitutable resources) from a field of production (and this has no redistributive tendency as between investors and labor) than it is to exploit by “shutting in” complementary (i.e., nonsubstitutable) assets or labor, through which a redistributive effect is achievable. This is another way of saying that the contrivance of scarcity (with an incidental plenitude elsewhere) is much easier than the contrivance of plenitude (with an incidental scarcity elsewhere).

If permitted by law to do so, however, either managements on behalf of investors, or unions on behalf of labor, are able (by collusion) to resort to the “shut-out,” that is, to enter into arrangements under which capital or labor respectively are excluded from kinds of productive activity which it is wanted to protect. But the “shut-in” is another matter. Consider the workers trying to exploit the investors who supply the assets with which they work. Such exploitation is possible, as we have seen, only when the investors have allowed themselves to be vulnerable to the “shut-in,” through immobilizing capital in nonversatile forms; and this must have been simply because they have failed to foresee their vulnerability (Chapters 10 and 11 discuss possible objections).

However, short of some fraudulent (and easily discernible) device, managements are unable to lure apprentices or other recruits into “shutting themselves in,” that is, into specializing their skills in a particular field so as to permit managements, relying on the workers’ lack of versatility, to reduce wage-rate offers. That is, managements have no means of forcing labor to seek employment in activities in which the workers feel there is a chance that they will be exploited monopsonistically. But, if workers do not foresee their vulnerability, they may acquire vulnerable skills without anything resembling managerial misrepresentation, yet render themselves liable to later exploitation. If they do foresee such vulnerability, they can cover themselves through contractural “tenure.” (In a strike-free regime, the offer of contractural tenure as a recruitment inducement would, I think, become rather more common.)

To recapitulate: While a contrived scarcity (achieved through the “shutout”) is easily accomplished and indeed widespread, the contrived plenitude (achieved through the “shut-in”) is difficult and rare. For in the latter case, it is essential to entice resources or people into a trap, or to rely upon investors or workers walking into a trap; and in general ordinary foresight can eliminate the latter risk.

The difference is fundamental, and in a study like the present it needs the strongest emphasis. If the direct contrivance of scarcity (when permitted by law) is easy, while the direct contrivance of plenitude is both difficult and avoidable, it means that the burdens of the strike-threat system fall mainly with an incidence that involves no redistribution for the benefit of labor at the expense of investors. The beneficiaries from the fixing of the price of labor through the private use of coercive power achieve their gains: firstly, from consumers; secondly, to the detriment of displaced or excluded competing labor; and thirdly, at the expense of the providers of complementary resources, due to the incidental “shut-in” which accompanies an effective “shutout,” while this last possibility is of little long-run importance, (Objections are considered in Chapter 10.)

For logical completeness it is necessary to refer again to the exception referred to above (p. 94). Investors who have inadequately allowed for the strike-threat may be exploited via a shutting-out of capital resources which compete with the labor employed. Managements have at times been effectively called upon to abandon labor-economizing machinery or to refrain from installing it. Or, a variant of the same situation, the unions have allowed resort to labor-economizing machinery but enforced featherbedding.6 The exclusion of such labor-economizing assets illustrates aptly the principle I wish to stress. It is certainly possible for organized workers, by threatening to strike, to “shut out” competing forms of assets. But the workers will never purposely “shut out” assets which they recognize to be complementary. On the contrary, it will always be to their advantage to encourage their provision; for ceteris paribus, the greater investment is in such assets the greater will be the demand for the labor with which the assets cooperate.

Moreover, it must seldom be practicable to employ private coercive power to compel the provision or replacement of complementary assets (except as amenities which may become the chosen form of labor’s remuneration).7 Theoretically, the strike threat could be used in this manner where the alternatives would be even more burdensome on investors. We can imagine a firm getting into a position in which it resembles a person blackmailed—forced to pay more and more in order to retain what it has left. But actual cases in which the strike threat has forced investment in any assets must be difficult to find.

Later on, we shall notice the puzzlement of a dozen or more distinguished statistician-economists at the tenacious constancy of the empirically-determined ratio between the shares of labor and property in aggregate income (see Chapters 15 and 16), despite all the efforts, via the coercive power wielded by union organization and government, to change those shares. The argument I have advanced provides, I believe, if not a full and adequate explanation, at least an important link in the causation chain. Strike-threat gains are entirely, or almost entirely, at the expense of competing resources “shut out,” and not at the expense of complementary resources “shut in.”

Nevertheless, I do not propose to allow my whole thesis to stand or fall according to the acceptability of the broad thesis of this chapter. For the benefit of skeptics, I shall examine in detail the chief arguments which have implied that it is possible to exploit a complementary factor as well as a competing factor—that is, that union aggression is capable of wresting from investors some part of the ill-earned gains which the free market would otherwise have yielded them, or alternatively that it is able to win back from investors some or all of the spoils of monopsonistic extortion (due to the price of labor having been forced below its free market value). These possibilities are discussed in Chapters 8 and 10.

This distinction between the “shut-in” (with the consequential contrived plenitude) and the “shut-out” (with the consequential contrived scarcity) does not coincide with the more common distinction between monopoly and monopsony in the currently accepted connotation of those terms. To the extent to which exploitation of investors for labor’s benefit occurs, the case falls, as I have just shown, into the “shut-in” category. Such exploitation would at once appear as monopsonistic if the workers happened to act as entrepreneurs (as imagined above, pp. 79 et seq), that is, agreeing to accept the residual share of the value of output, paying rent for the services of plant and machinery, interest on circulating capital needed, and salaries to managements responsible to them for entrepreneurial decision-making. The organized workers would then appear as buyers of the services of assets, materials and so forth; and any exploitation by them of the owners of plant and machinery used would clearly be monopsonistic.

For these reasons, when planning the present chapter and the three following ones, I considered the desirability of discussing both the exploitation of labor and the exploitation of investors simply as different examples of monopsonistic power. I decided against doing so because I thought possible confusion from such an unusual use of terms could not be wholly offset by the greater conceptual clarity won. Accordingly, I shall deal with the exploitation of labor on behalf of investors under the heading of “monopsony,” and discuss the exploitation of investors by the strike threat without again reminding the reader that it represents a perfect parallel to the exploitation of labor.8

In conclusion I must refer to a situation in which the validity of some of the above assertions or conclusions may not be obvious. What is often called “taking advantage” of workers who provide services which are relatively cheap for any firm, activity, occupation or area is not “exploitation” by the entrepreneurs making wage offers if they are not themselves responsible in any way for that cheapness. Consider, for example, what is often called “sweated labor.” The firms which find it profitable to offer employment because there happens to be an “incidental contrived plenitude” of such labor are not themselves exercising any exploitative power unless they themselves are using some “shut-in” device. I shall return to a consideration of such circumstances.

NOTES

9 W. H. Hutt, “Natural and Contrived Scarcities,” South African Journal of Economics, 1935.

10 I defended this usage originally in the article referred to in the previous footnote.

11 In the extreme case of completely nonversatile assets, “incidental contrived plenitude values” may be nil.

12 I originally thought of using the terms “lock-in” and “lock-out.” But because the latter already has a conventional meaning—a management ordered work stoppage—it could puzzle some readers.

13 “Shut-out” labor may be (a) “displaced,” the case in which the contrivance of a labor scarcity in a field causes a layoff of some currently employed, or (b) “excluded,” the case in which the labor would have been recruited for employment in a field but for the scarcity contrivance. Category (b) seems to be far more important in practice. (See p. 54.)

14 See pp. 133-134.

15 See Chapter 14.

16 Nevertheless, I have found it helpful to return to this point on pages 223224.

• 1I 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.
• 2I discuss Marshall’s contribution on pp. 7-9.
• 3I 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.
• 4W, H. Hutt, “Misgivings and Casuistry on Strikes,” Modern Age, Fall 1968.
• 5Barbara Wootton, Freedom under Planning (Chapel Hill: University of North Carolina Press, 1945), p. 97,
• 6F. A, Hayek, The Constitution of Liberty (Chicago; University of Chicago Press, 1960), p. 505.
• 7That 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.
• 8Sidney and Beatrice Webb, The History of Trade Unionism and Industrial Democracy (London: Longmans Green and Co., 1920).
• 9Already 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.
• 10Already 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.
• 11I 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).
• 12There 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.
• 13Two 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?
• 14Two 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?
• 15The 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)
• 16The 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.