The Strike-Threat System

8 “Exploitation” of Labor—“Monopsony”

IS THE argument for the tolerance of the strike threat that the free market price of labor is “unfair”? Or is it alleged that the market price would otherwise be forced below the free market value? It is often difficult to tell. However, it is the second allegation that we are to consider in this chapter. Can the threat or use of the strike prevent the workers’ exploitation? Can it somehow achieve the results that a competitive labor market would bring about?

We can get the issues into focus, I think, if we envisage all labor union bargaining in which the threat of a lockout or a strike is a factor as falling into three categories: (1) a struggle over the division of the spoils of monopolistic exploitation, consumers being the exploited party, with investors and the union protecting one another in this process but quarreling about the reward (see pp. 50 and 128); or (2) as an attempt by management to neutralize exploitation of consumers, when such exploitation via the strike threat happens to harm investors also; or (3) as an attempt by managements to exploit labor for the benefit of investors by the use of monopsonistic power, while that attempt is resisted via the strike threat. It is category (3) alone which is now under consideration.

“Exploitation” of the workers means, under the rigorous definition discussed in the previous chapter, forcing the terms of wage contracts below the “natural scarcity values” which the unhindered free market would have determined, thereby creating a “contrived plenitude” of labor. Is it possible, then, for the strike threat to assist the conclusion of such wage contracts as are likely to be offered when managements are seeking to maximize profits (which means “minimize losses”) in the absence of any effective power on their part to “shut in” and hence “exploit” labor? If managements are somehow able to suppress competing demands for the services of workers to whom wage offers are made, can strike power effectively countervail such subterfuges as are used?

If a strike threat or strike has had the effect of raising the wage rate in a particular occupation from below the free market level to that level (that is, to the natural scarcity level), the situation will be characterized by the condition that no worker can be found prepared to accept less than the wage rate established for the occupation concerned. If a union insists, in these circumstances, that no interlopers shall be allowed to work for less, that is proof that, in the union’s judgment, their forcing up the wage rate was not a countervailing of monopsonistic exploitation. The test of whether any wage rate is at or below its natural scarcity level is whether any other persons are prepared to perform identical work for that or a lower wage rate. As long as any such persons exist, the price of labor is above the free market level, and if a strike threat has enforced it, the effect must have been not to nullify attempted exploitation of the workers, but the exploitation of others—investors, or displaced workers, or excluded workers, or consumers.

I have never recognized in practice the existence of the conditions here specified as tests for the antimonopsonistic effects of strike-threat pressures. No case studies that I have seen have ever left an impression of the required conditions having been fulfilled. Hence for some readers the remainder of this chapter, as well as Chapter 9, will appear redundant. They may feel that in pages 99-123 I am discussing a chimera—a merely notional circumstance which cannot be found in the real world. Such readers can usefully jump to Chapter 10. But I am trying to reach readers who will be extremely loath to accept the convictions to which I myself have been led. I propose therefore to examine contrary arguments with care. The well-entrenched idea that union power is essential to correct monopsony or oligopsony needs patient examination.

We need not discuss at length the case of monopsonistic exploitation of wage earners which occurs incidentally, through monopolistic output restraints superimposed upon a previous condition of competitive supply. If the monopolist has no power to restrict his employees’ mobility, any “exploitation” is likely in practice to be negligible; and although the situation imagined is one which needs rectification in the collective interest, the defensible remedy is “antitrust,” not recourse to private duress.

Monopsonistic exploitative power directed effectively against labor would, as we have seen, be derived from the ability of managements (independently or in collusion) to use some device or stratagem in order to retain workers under their direction although they are remunerated at less than they could otherwise command elsewhere (which means at less than the “natural scarcity” value of their services). Expressed in the terminology of the previous chapter, exploitation would require that managements could “shut in” their employees and thereby create a “contrived labor plenitude.” Such a situation implies that the labor provided is so specialized that the workers have no alternatives of comparable value and that they have been somehow tricked (a) into training themselves for that particular specialization, or to become attached to the operation in question, or (b) into chaining themselves to it by agreeing to a “lock-in” contract.1 The crucial point is that the workers concerned would have avoided that specialization or refused, say, “lock-in” terms of remuneration if they had foreseen the possibility of the exploitation. Any effective organization to shut in labor in this way would, I feel, always be at least discernible if not conspicuous.

The theoretical possibility of monopsonistic exploitation occurring cannot be challenged of course; and evidences of actual monopsonistic influences are not lacking. Nevertheless, I am inclined to accept H. C. Simons’ 1944 judgment that “monopsony in the labor market is . . . very unsubstantial or transitory.”2 His conclusion was, I think, based on realistic observation and perception. The only convincing example of continuous “pure” labor-purchasing monopsony which I have found (apart from explicit and formal “lock-in contracts,” discussed on pp. 101-102) is that of the recruitment of Africans for the South African mines, which is organized through a centralized agency.3

If monopsonistic exploitation of labor exercised on behalf of investors were practically important, however, it would almost certainly manifest itself in the form of discrimination in wage rates offered according to management’s judgment of each individual worker’s alternatives.4 Some workers have a wider range of skills or other valuable attributes than others and under monopsony some might be paid more or less, not in relation to their special competence in their actual employment but in relation to what they are believed to be able to command elsewhere (see pp. 65-67, 163-166).

This is the one sense in which ceteris paribus the standard rate (“the rate for the job”) principle might be held to be defensible. A nondiscrimination rule could weaken or destroy the profitableness of monopsonistic discrimination where it might otherwise occur (in theory at least). The difficulty in practice, however, would be to distinguish the case in which any rule of uniformity would discriminate against a worker who has not only poorly paid alternatives but is also handicapped in other ways, for example, by being more expensive to employ, or by reason of being initially less efficient for the work offered.5

Among the other kinds of possibly exploitative action which fall under the monopsony heading and certainly do occur, are agreements or understandings not to “poach” labor—particularly labor of a special type—in order to keep down wage rates or salaries. But unless action of this type is organized openly and is accepted as desirable by all parties as a method of achieving some other agreed collective objective,6 it can, I guess, seldom have much success. It seems to me that as soon as any agreement to maintain a wage-rate ceiling, or otherwise to limit demand for any kind of labor, begins to have any effectiveness, all the phenomena of “labor shortage” must emerge. It will then be to the interests of both managements and individual workers, who can hardly long remain unaware of the “shortage,” to find subterfuges for getting around the agreement. I do not suggest, however, that we must necessarily leave the matter here. Some economists have alleged that collusive monopsonies to forego “pirating” have at times existed in named districts of the United States.7 They have charged that certain managements have agreed to recruit no worker unless the firm which last employed him has given its approval, and that “gentlemen’s agreements” not to steal one another’s employees have been arranged. But if the facts were as these economists allege, and as discernible to government authorities as they were to the economists, one wonders why antitrust officials did not at once step in. The allegations, which refer to a period of vigorous general antitrust enforcement, concern conduct of patent illegality by the “employers,” yet the supposed offenders were not prosecuted; and as their managements would presumably have denied the accusations, the evidence of the monopsony is, to say the least, far from convincing.

In so far as monopsony in the labor field does occur, however, the unfairly low wage rates due to contrived plenitude will be accompanied by wage rates in other labor markets which are set at “incidental contrived scarcity values,” that is, higher than they would otherwise have been, because some of the captive labor (which the theory assumes) is withheld from those markets. Hence although monopsonistic power may, theoretically, enable certain investors to benefit directly at the workers’ expense, we must not overlook the countervailing advantage to the workers in the markets in which labor is rendered relatively scarce, i.e., endowed with an “incidental contrived scarcity” value. Labor’s strongest case against such monopsony (if it has any importance at all) may be more its injustices to the “shut-in” workers, and its regressive consequences for workers generally as consumers, than any general redistribution of income which can be effected through it in investors’ favor.

The form of pure monopsony which is most likely to be occurring today is that due to “lock-in contracts.” A corporation may, as part of the remuneration it offers to attract and retain labor, include “employer’s contributions” to, say, a staff pension fund; or it may issue employee bonus shares, or other forms of conditionally owned capital to “loyal” personnel. Those who remain in the service of the corporation until normal retirement age (or for some other specified period) will retain these rights; but should they take up other employment before, they may stand to lose a large capital sum in accumulated benefits.

To see the problem in due perspective, let us remember that no person is forced to commit himself to such a contract. He may be held to have accepted, willingly and without duress, a condition which means that, for him to change jobs profitably in the future, the remuneration and prospects offered him elsewhere will have to be greater than his existing earnings by a sum at least equal to the accrued value of “the employer’s contribution.” If the system is abused, then the issue resembles that encountered in installment selling. The suggestion is that people can be tricked into tying themselves by contract because they do not realize the implications of their commitment. The remedy then requires careful specification of the conditions under which such contracts may be legally entered into. It seems to me that, as part of a wider plan for eliminating the strike-threat influence, there would be no harm in legislation to render void or unenforceable all “lock-in contracts” unless (a) they are genuinely providing an incentive for investment in human capital; or (b) they are an agreed means of reimbursing removal expenses advanced; or (c) they are necessary for the completion of a specific piece of work (that is, a bridge, or a round trip on an ocean vessel). Of these three (a) appears to be the most important. A contractual lock-in can be a bona fide device for conferring a “reasonable” measure of property on the investment a firm makes in imparting special skills and trade secrets to its personnel. In the absence of such a contract, those whose services have been rendered more valuable through expensive training could otherwise be “poached” by firms which have made no contribution to their training costs.

I am prepared to go further and concede that even when the “lock-in” contract possesses one or more of these attributes which render it beneficial, its duration should be limited—the limitation being no more and no less arbitrary than the limited period over which a patent monopoly is allowed to run. And it ought, I suggest, to be laid down that all “employers’ contributions” to pension funds and the like should, subject to the exceptions just mentioned, belong unconditionally to the wage earner (or salary earner). This will mean that if the worker accepts other employment, he may take with him the surrender value of any “employers’ contributions” (to pension funds or similar retirement savings plans).

In most cases firms seem to resort to these “lock-in” devices innocently enough, and often obviously beneficially for both parties as well as for the community. The aim is solely to attract and retain the workers whom managements find it profitable to hire, by what seems to them to be a simple and wholly legitimate type of offer. Nevertheless, the “lock-in contract” does differ in principle from other nonwage methods of retaining staff.8

A wholly different suggestion is that labor is monopsonistically exploitable, not by reason of its being locked in, or tricked into an exploitable specialization through some managerial stratagem, but by reason of some inherent immobility of labor. To judge this idea we must begin by recognizing that labor market freedom is not limited, restricted, or rendered imperfect because labor movement is not costless. Through the existence of obstacles to mobility (including man-made barriers), switching from one occupation to another, or moving from one district to another, involves costs; but only if these costs are man-made—the consequence of deliberate action by governments, by unions or by managements—can we say that the market is restrained. It may, of course, be profitable for the community, collectively or privately, to invest in the steps needed to reduce spatial mobility costs when they have a natural origin, as when a tunnel is cut through a mountain range; and any such reduction of costs in expanding, say, the area of competition, is widening the spatial range of coordination.9 But that process is not removing restraints. For instance, if the workers’ immobility over space is the result of his lack of capital to finance movement, relatively cheap labor in a district (whether the “plenitude” is contrived by lock-in or otherwise) will create an incentive for entrepreneurs outside the sheltered area to advance removal expenses in the form of loans or in return for appropriate “lock-in contracts” (under which an agreed minimum period of service is deemed to wipe off the debt).

However, because the labor employed in a particular area or in a particular trade would be more valuable if it were not for (a) the pecuniary cost of movement to other areas, or (b) the workers’ own inertias or preferences, or (c) the impossibility of circumventing union-imposed demarcations or like restraints, that does not imply that it ought to be remunerated at what it would be worth in the absence of those conditions; or that if it is not so remunerated, it is being “exploited;” or that the strike threat can nullify the “exploitation,” Labor is only being “exploited” when the lock-in barriers are man-made; and in practice, unless fraudulent enticement is present, the only clearly discernible man-made barriers which restrict labor mobility in this manner are created by labor unions themselves or imposed in response to their political pressures. This is a glaring truth which ought not to be a matter of controversy among scholars. It is confirmed by any dispassionate observation of the institutions of the modern industrial system. In offering jobs in any area in which certain labor happens to be plentiful and cheap, and certain occupations therefore profitable, yet no managerial restraints on mobility exist, it is absurd to suspect or accuse managements of aggravating the cheapness. On the contrary, the initiatives (which lead to offers of employment to workers displaced or excluded by contrived labor scarcity) mitigate the injustices. Indeed, they raise the incomes of those employed in the cheap labor areas.10

To get our logic into perspective, it is useful to enunciate a general principle about the determinants of the wages flow and its distribution. Within any area sheltered by economic distance, by human enertias and by union-imposed restraints, in the absence of any “shut-in” of labor contrived on behalf of investors, the flow of wages wilt be highest and the distribution of the flow will be most equitable, when every wage rate is fixed at the lowest level necessary to retain or attract labor for each activity judged to be profitable. I stress that word “profitable.”11 The ideal will be most closely approached (a) the more successfully any labor which may have been “underpaid” for any reason can break through natural or man-made barriers to an occupation in which its remuneration is higher, and (b) the more successfully such transfers can dissolve privileges, that is, eliminate such “overpayment” of some as may be causing others to be “underpaid.”

The term “overpayment” in this context can be defined as “remunerated higher than is compatible with ideal resource use, maximization of the wages flow and distributive justice.” Under this definition, labor will be “overpaid” when it is benefiting from some removable obstacle to equality of opportunity. The test of whether labor is “overpaid” in any undertaking is whether additional workers, technically qualified to do the work (or potentially qualified) in the judgment of managements, would find it profitable to accept employment in the undertaking at less than the wage rates ruling,12 in the absence of legally imposed barriers, or barriers enforced through unions. Within any sheltered area there might be no “underpaid” or “overpaid” labor in relation to that area. But in relation to a wider area, if the shelter were the consequence of deliberate restrictive action, labor could be “underpaid” or “overpaid” respectively according to whether the restraints imposed were confining labor to the sheltered area or keeping the competition of interlopers out.

In the absence of deliberate restraints, wage rates will tend to rise in any expanding industry or firm by reason of inelasticity of labor supply.13 There is no exploitation of investors involved in such a case. Similarly, there is no exploitation of labor when, because there happens to be inelasticity of labor supply in a declining industry or occupation, the wage rates at which such workers as choose to remain in the industry14 can escape displacement are forced down. The downward wage-rate adjustments they must accept to retain employment are in no sense a consequence of any monopsonistic power. They are the kind of pricing needed to soothe the pains of recoordination.15

Consider, for instance, the rapid decline of laundry work through the competition of washing machines and laundromats. This may well have meant that many laundry employees found themselves caught in that occupation. The owners of the laundries were unable to prevent their more versatile and enterprising workers from leaving, in spite of laundrymen’s unions having been unable to force money wage-rate increases similar to those which inflation was permitting elsewhere. It seems almost absurd to suppose that monopsonistic exploitation was a factor assisting the survival of laundries in these circumstances. But lack of mobility on the part of some of their employees, especially the older ones—victims of their own inertia—may well have helped the survival of laundries. In doing so, it would have contributed to an orderly transition to a new division of labor, with a minimum disturbance of established expectations. Hence we must be careful not to attribute to abuse of monopsony the consequences of lack of enterprise on the part of many of the older laundrymen; and we must remember that the relative fall in rates of remuneration in the laundry industry did not aggravate but rather softened the harsh effects due to change confronted with very human inertias.

It is now possible to enunciate a corollary of the general principle stated above (see p. 103), a corollary which may have seemed outrageous to many readers if it had been put forward earlier. If labor is cheap partly because it is unable to move from a firm, activity, occupation or area except at prohibitive costs of movements, but entrepreneurs are in no way to blame for these costs, the susceptibility of labor to monopsonistic exploitation is not enhanced by the immobility. Let us consider the possibility under “natural monopsony,” that is, in the case in which there is no collusion and hence no visible intention to exploit, which is the usual signal for antitrust to intervene. Can it be argued that, because antitrust protection is ruled out, labor is forced to rely on strike-threat defense?

A distinction must be made between “natural monopoly” and “natural monopsony.” We get “natural monopoly” when economies of scale are so important that only one firm can operate economically in a particular activity in a particular area. Now such a concentration of economic power vis-à-vis consumers does not automatically create monopsony vis-à-vis labor and suppliers of complementary resources;16 and if it does, it does not necessarily confer the ability to exploit. “Natural monopsony” requires that there shall be one firm only that offers a particular type of employment in a sheltered area. And under such monopsony, exploitation of labor still requires some device which either lures workers into locking-in themselves to employment in that undertaking or locks them in directly.

It is useful to consider the case in which the product of the monopsonistic undertaking, which we can assume constitutes the only output of the district, is sold competitively and mainly outside the sheltered area (for example, in world markets). Under our assumptions, if the demand schedule for the end-product rises, the price of this product will rise but the “natural scarcity level” of wage rates will not rise until the demand schedule has risen sufficiently to make it profitable to recruit labor from outside the area.

When such recruitment occurs for the first time it will, of course, make it essential to meet the higher wage costs ruling in competitive labor markets outside (as well as any costs of movement inwards). If, when that situation is reached, the rule of nondiscrimination is enforced (see pp. 164 el seq), it will suddenly become necessary to raise wage rates in the sheltered industry by a large jump, to bring the remuneration of the original workers in the sheltered area into equivalence with the remuneration needed to attract the newcomers. The original workers will then experience a sudden great increase in the value of their services. This big windfall gain to labor would not mean the ending of previous exploitation. It would represent either the consequence of a switch of consumer preference toward the product, or the consequence of the growth of outputs in noncompeting fields generally (through which real demands for products as a whole would be rising). These two factors together could build up a condition at which, owing to a rise in demand for the product in question, consumers (the ultimate “employers”) are all at once offering a large addition to the wage rates of labor in the area.

It is important to notice that, up to the time when recruitment from outside has become profitable, all increased revenues due to rising demand for the output will (in the absence of the strike threat or wage fixing by law) accrue to the owners of the undertaking. This is not because of some special attribute of services rendered by assets, but because the owners of assets are the residual claimants on the value of the product. If it had been a wise division of risk-taking for labor to have accepted the residual claim (renting the site, building and machinery and paying interest needed to finance inventories and work in progress—the possibility discussed in Chapter 6) the whole of the additional revenues would have accrued to labor; for in such a case the workers are entrepreneurs.

But suppose that, irrespective of any change in demand for the product, one or more other entrepreneurs perceived that the cheap labor of the sheltered area could be still more profitably used in producing commodities or services which did not compete in markets for the monopsonists’ product but did compete for labor and locally provided materials.17 Their intervention would bid up labor’s remuneration there and reduce the original monopsonist’s yield. Exploitation would occur if the original monopsonist could insert an obstacle between the workers in the sheltered area and any potential new investors who might wish to bid for their services. In other words, if some law-conferred privilege or some tolerated abuse of the pricing system conferred power on the monopsonist to block freedom of access between factors of production, exploitation could certainly happen.

Let us ask ourselves why labor in the sheltered area might happen to be initially cheap (in relation to the earning power of similar workers in other areas). One possibility is that the workers there had agreed, quite freely, to accept employment under what amounted to lock-in conditions under a long-term contract. (We are here excluding the possibility that they were fraudulently lured into accepting such a contract.) Whenever workers conclude a long-term contract of that kind, they are acting as entrepreneurs. They may gain or lose from the commitment they enter into. Should it subsequently turn out that their contract is unfavorable, that no more implies their exploitation than the opposite would imply exploitation of investors. But the workers in the area might have been cheap for quite different reasons, such as a differential birth rate in the past which has left an exceptionally large number of persons of conventional working age in relation to the resources of the district. Or the reason might have been a decline in demand for the output of a former industry. Through all such possibilities, workers in a sheltered area might have poor employment alternatives.

Let us now assume for simplicity that the exceptional cheapness of labor in that sheltered area happened to be the critical factor in causing investors, in what was to become a natural monopsony, to risk locating their plant there. In doing so the investors in the new enterprise (or rather the managers on their behalf) closed no existing employment outlets except by offering the workers better terms. They must have raised the natural scarcity value of those employed. Moreover, an expectation that countervailing increases in labor costs would not have to follow forecast increases in demand (and rising end-product prices) may well have created an additional investors’ incentive. Indeed, that very expectation could have been mainly responsible for the enterprise being located where it was—in the sheltered, cheap labor district.18

But suppose there had been several different groups of investors competing for the cheap labor stock postulated, instead of one monopsonistic corporation, would not the remuneration offered then have had to be higher? The answer is, no—not unless we can assume (a) that prospective yields in the area were then somehow greater in the aggregate so that entrepreneurs found it profitable to bid more against one another for labor in the sheltered market; or (b) that prospective yields in the aggregate being assumed the same, one or more competitors decided to attempt “predatory buying” (see p. 122) with a view to rendering the field unprofitable for the rest, that is, by bidding up wage rates so as to corner the labor supply in order then to exploit consumers.

The natural scarcity value of local labor is determined by its alternatives, but these alternatives are at once improved if entrepreneurial interlopers, who judge prospective yields from employing the local labor to be favorable, intervene with better offers. But because the district is sheltered by economic distance, it is possible that the wage rates which the new, monopsonistic undertaking can initially offer are lower than wage rates for similar work elsewhere by an amount equal to the costs of movement. Since, however, the wage rates originally offered represent natural scarcity values, the monopsonist will only be exploiting labor if by some stratagem he can pay less than this. And to do so he must devise some shut-in arrangement which renders the alternative still less favorable to the workers.

It must be borne in mind, however, that the specially cheap labor available for the “naturally monopsonistic” undertaking (specially cheap to the extent of labor mobility costs) is initially equally available for all potential investors to bid for, before the enterprise is established. Hence the actual wage rates it is found necessary to offer (in order to attract the workers from their previous occupations) are determined, so to speak, in an environment of potential competition. Stockholders in the corporation can hardly be imagined as the only capital owners whose managements realize that there are profit advantages in bringing more productive work to any cheap labor region. If other investors—at least within the same country—refrain from intervening, it must be because they feel that the lowly paid labor of the region is not cheap enough, presumably because they cannot envisage equally productive ways (or still more productive ways) of using that labor. It follows that the “natural monopsony” we are considering arises simply because whoever gets in first with one big dominating plant, excludes others from a possible big profit gain. The actual promoters are those who happen to perceive before others that, at the estimated labor costs necessary to persuade the required number of workers to accept the new jobs, their proposition justifies the risk. Therefore, if no actual additional19 bidding for labor against the monopsonist occurs, that will be due to the fact that at the new wage rates established, further investment in the area is rendered unprofitable (possibly through the additional costs of overcoming the workers’ inertia).

In a free labor market, the services of workers everywhere are, so to speak, continuously up for auction as their existing contracts of employment (which may often be by the week or even by the day) expire. Only if some potential investors are prevented from engaging in unhampered competitive recruitment of labor in an area is there monopsonistic exploitation.

Once the monopsonistic undertaking has been established and is operating, and on the assumption that the demand schedule for the product remains unchanged, only potential or actual competition from other entrepreneurs, either offering employment outside the sheltered area (in which case their offers would have to be sufficient to compensate for the high migration costs) or inside (which would mean that new productive potentialities inside the area had come to light) can raise the natural scarcity value of the given labor stock. But there is no exploitation simply because, until that happens, the labor is relatively cheap in comparison with, say, other areas of the country concerned.

Monopsonistic exploitation cannot occur, then, unless the monopsonist can contrive a “shut-in” of the complementary services he purchases. Any measure of monopsony which may exist in the absence of some deliberately contrived “shut-in” is nonexploitative. Admittedly, the imaginary “naturally monopsonistic” condition we have considered constitutes one of the situations in which the strike threat can be used to seize income at investors’ expense without direct harm to consumers or to displaced or excluded workers. But as will be further explained in Chapter 10, the prospect of costs being raised in that manner, even when monopsony is present, must deter some investment in those forms of assets which most successfully multiply the flow of wages and income.

Strike-threat action might of course be used to lessen the costs of labor mobility. Some interunion fights may have had this effect. But unless the unions can use their organization somehow to lower or demolish man-made barriers to the better utilization of labor and of the tools with which labor cooperates, they are powerless in this respect. As I insisted above (see p. 103), in practice these barriers, and the economic injustices and wastes they cause, are created almost entirely by the very union policies which purport to be fighting for justice in distribution; and the power of the unions to erect the barriers is dependent ultimately upon their use of the strike threat. Local discrepancies in real wage rates must exist for “natural” reasons as long as areas are insulated by economic distance from other areas. But the more burdensome discrepancies are caused when spheres of employment are hedged in by the standard rate, demarcations, occupational licensing, apprenticeship rules, color bars, and the like.

As an example we can consider a type of labor “shut-out” which exists in the United States where the unions have been strong enough to secure occupational licensing. When this has happened, we find the unions opposing reciprocity in respect of qualifications (determined for the different states individually). This is quite rational, given the sheer selfishness which is regarded as ethically acceptable in labor unions because, as Rottenberg points out, “If reciprocity prevailed, people would enter through the widest door.”20 But from the standpoint of the workers in any state, they are denied access to opportunities, not by any management-contrived arrangements, but by union-contrived arrangements. I have found no parallel in the whole literature of the labor movement of a man-made barrier to mobility of labor which is equally obvious;21 and this barrier is imposed, not in the interests of rapacious capitalists, but in the interests of labor and professional organizations.

The reader must be reminded that the circumstances I postulated on page 105 in order to illustrate “natural monopsony” were highly abstract and notional. Nothing resembling that model of one firm producing a particular product in a sheltered district and selling it almost entirely outside is, I believe, to be found anywhere in practice. True “natural monopolies” are in practice almost always undertakings in which the output cannot be rendered apart from the plant; they essentially serve therefore the areas in which they are physically situated, and this fact means that there are people in other occupations in their district earning through the production of noncompeting things,22 whom it is their (the “natural monopolies”) purpose to serve. In every realistic example of “natural monopoly” undertakings of which I can imagine, there will be highly competitive natural markets for the materials and the labor they employ. The adjective “natural” here means that competitive conditions would exist in the absence of legal or collusive restraints imposed in those markets. Normally we may expect a wide range of occupations to be competing for nearly al! kinds of labor—firstly, for juveniles to choose from on entering the labor market, and secondly, for labor of different degrees of versatility which may be attracted from other firms, activities, occupations or areas at appropriate wage rates, even if the costs of labor movement to and from other areas happen to be high.

We must be careful, then, not to exaggerate the importance in the real world of some of the circumstances we have been imagining (for purely ex-positional purposes). Thus it is doubtful whether even the largest cartels can often, say, profitably force down the price of the materials they use. They may certainly benefit from purchasing economies which are sometimes achievable through large, or guaranteed continuous orders, or through shrewd investment in a developing supply source. That is something quite different. But not only does a monster corporation or a great cartel usually express a very small part of the total demand for any raw materials, but it is to its advantage that a continuing supply shall be forthcoming. In a rather different way the same is true vis-à-vis labor.

Even the most careful empirical studies throw little certain light on the problem. For instance, J. W. Garbarino23 and H. M. Levinson24 have found that what they call “noncompetitive” industries (assuming that the concentration of output into relatively few firms implies less than normal competitiveness) have raised wage-rates by more than the average. Unfortunately, the data they present are no proof of the absence of monopsony; for the differential rate of wage-rate increases may obviously have been the consequence of strike-threat pressures possibly facilitated by joint monopoly. M. W. Reder, who has criticized these contributions on other grounds, suggests that “large firms are more dilatory about correcting overpayment . . .” (when wage rates get out of line) “than correcting underpayment”; and he finds that “large and profitable firms do tend to pay more at any one time than could be explained by the competitive hypothesis.” He finds further that “high concentration ratios . . . measured by (say) the percentage of the industry’s employment concentrated in the four or eight largest firms” are associated with “high wages at a given moment of time.”25 Such findings tend, superficially at any rate, to contradict the notion that monopsonistic exploitation of the workers is correlated with scale of operations or ownership. But using data presented by G. Warren Nutter, for the extent of monopoly, Reder shows that the figures indicate “a slight (negligible) tendency for a decrease in monopoly to accompany an increase in wages. . .,”26 and he refers to similar conclusions reached for the Canadian economy by D. Schwartzman. This is exactly what we should expect in the light of the analysis presented in this and the previous chapter. When exploitation of consumers by, say, manufacturers is weakened, their demand schedules for labor and other productive services will rise and, except under the wholly unrealistic assumptions we made on the preceding pages, the increased bidding for labor will raise wage rates in the industry.

To assess the practical importance of the monopsony argument for acquiescence in the strike-threat system, we should remind ourselves that in the United States and Britain this system originally emerged in spheres in which the entrepreneurial undertakings were small, and where the relations between separate undertakings could only be described as highly competitive. Obviously, then, at that epoch, resort to the private use of coercive power by the unions can hardly have been a countervailing response to monopsony. Moreover, even today a very large area of union operation is in fields in which the typical undertaking is small relative to the market, and where competition in the sale of output is not subject to any obvious restraints. Consider, for instance, building, printing, textiles, footwear, transport and mining in the United States. Antitrust has kept these industries competitive (superficially considered at any rate); and certainly one finds nothing resembling cartels or explicit price agreements, for output agreements and any other apparatus of collusion are illegal. Hence in such instances there can hardly be any question of the unions, through the use of the strike threat, having been able to act as an antidote to monopsony. Yet unions are powerful in these industries (for instance, the Teamsters). It follows that any valid argument for permitting the strike-threat influence in wage determination has to be developed so as to cover circumstances in which neither monopsony nor joint monopoly (to which I refer in the following paragraph) can be alleged. “Countervailing power” is clearly irrelevant.

Empirical evidence suggests that it is to the advantage, not the disadvantage, of a union that the undertaking with which it is “bargaining” shall be organized monopolistically. This is because its power to exploit the consumer can be magnified through joint monopoly (see pp. 72-73). But it is true also that strike-threat action on a union’s part is essential for any actual exercise of this joint power. For example, if a union is confronted with an association of undertakings which arranges the pricing of output, only the use of strike-threat power can insure its members a share in the spoils. There is no reason why this should occur automatically unless the associated managements regard collusion with the union as a means of perpetuating their ability to exploit consumers. Managements have, on occasion, taken the initiative and offered “sweetheart contracts” to raise the remuneration of their workers in return for union protection against interlopers. And there are other possibilities. For instance, a union’s initiative might force what had been competing undertakings to adopt collusion in order themselves to share some part of the spoils; or, as it would probably appear to the managements, in order the better to off-load increased costs on the public. In all of these cases, it is the public which is exploited; yet it is a form of exploitation which would be impossible if the strike-threat power were absent.

There is one further possibility. Given the legality of strike-threat pressures, managements may have found an incentive to rely upon “reasonableness” (so-called) in competition for labor; for increased reliance upon an “oligopsonistic” situation may be expected to appear in that light. It seems as though union pressures cause competing undertakings to act less competitively (that is, having a reduced incentive to substitute the least-cost method of achieving outputs for the community’s benefit). And in the extreme case the effect may be, as Albert A. Rees has pointed out, “to create effective cartels in the product market.”27 Rees suggests that this may be the position in the building trades and the local service industries in the United States, but I feel that he is thinking rather of the cases discussed in the paragraph above.

In a strike-free system, an incentive to oligopsonistic “understandings” about wage rates might well arise among managements; but a strong counterincentive to bid against the rest for underpriced labor would remain. Competition could hardly be effectively restrained, one feels, except under some explicit agreement. Managers are like the rest of us, reluctant to pay more or to accept less. But that will not prevent some from anticipating future labor scarcity and, possibly through the offer of fringe benefits and stress on superior prospects, outbidding the rest. The withheld bidding of firms which hold off vigorous recruitment (via the offer of higher wage rates) until their managements feel certain that a real labor scarcity is developing, is likely to become active bidding through the fear that rivals may get in first. And this likelihood will be increased if the unions begin to act as entrepreneurs, which I am about to suggest should be their chief function when the strike-threat system is abandoned. The oligopsony possibility will be discussed in the next chapter. I shall try to show that it is unimportant.

I have been stressing the apparently rare occurrence, the inherent instability, and the ephemeral nature of labor-purchasing monopsony in the absence of conspicious “shut-in” power. I have shown the improbability of more than negligible abuse, but I cannot deny the possibility of serious exploitation in particular cases. Where managements are in a position to restrain labor mobility, “shut-in” arrangements may be discernible. There are, however, three general methods of insuring that such theoretically conceivable abuse from monopsonistic exploitation shall be avoided. Among these methods, the use of the strike threat is not included.

(1) To bring collusive monopsonistic exploitation of labor explicitly within the scope of antitrust (or other legislation aimed at eliminating socially indefensible use of private power to contrive scarcities and plenitudes);

(2) To forbid “lock-in” contracts with labor except under the conditions specified above (101-102):

(3) To encourage labor unions to take up cases of monopsonistic abuse in the purchasing of labor and:

(a) to act entrepreneurially on their members’ behalf, firstly, as an employment agency, and secondly to finance or otherwise assist the transfer of “underpaid” workers to the better-paid jobs available, the potential existence of which alone can justify the term “underpaid”;

(b) to initiate antitrust (or similar) action against what they believe to be deliberate collusive monopsonies, or “shut-in” devices, including nonpoaching agreements;

(c) to initiate similar proceedings against firms which are held to be exploiting consumers, and thereby incidentally acting against the interests of the union’s members as wage earners;28

(d) to initiate private proceedings against firms alleged to be using unjustified “lock-in” devices.

But in cases (b) and (d) the unions surely would have to establish initially the absence of potential interlopers. That is, they would have to demonstrate that no outside workers were prepared to accept less than the existing, allegedly monopsonistic ally determined wage rates being paid in the firm or firms challenged. (See pp. 98-99 above.)

The typical laborer or artisan is said to be badly informed about alternatives. It is contended that he usually begins to try to become informed about the market only when he is laid off. There seems to be considerable scope, therefore, for the sort of expert guidance recommended under 3 (a); and if the unions can play on the divergences of interest which exist under monopsony or oligopsony, and are also able to disclose employment opportunities outside of the area, they can reduce or wipe out the prospective profitableness of any attempt at monopsonistic exploitation.

I have treated respectfully the notion of managements using monopsonistic power to force down wage rates only because I do not expect all readers to share my judgment that such a possibility is of negligible practical importance. But I have shown also that in so far as evidence of monopsonistic abuse is forthcoming, recourse to the courts and not recourse to strike-threat power is the defensible remedy. “Antitrust” or its equivalent is the answer, not private coercion. Admittedly, if justice is not effectively and promptly obtainable through the courts in labor disputes, men may be expected to take private steps to protect themselves against invasion of their rights. In the sort of issues with which we are here concerned, it is exceptionally desirable that “the law’s delays” should be minimized. But the cost of achieving reform in this direction—possibly the establishment of special courts—would be negligible in comparison to the benefits of eliminating the injustices which are inevitable when wage rates are determined through any form of warfare.

To sum up. Demonstrable monopsonistic exploitation seems to be remarkably rare; yet the remedy we are asked to tolerate is a general and universal right to strike. Moreover, if the right to strike is defended because it can be used defensively, the fact remains that it can equally well be used aggressively. “Those who understand the economic, social and political implications of monopoly power,” says Fritz Machlup, “must deplore the lack of imagination and intelligence of a society which in the name of ‘equalization’ embarked on a policy of combatting occasional monopsony by creating more monopolies. The hope that they may neatly offset one another is plainly naive.”29

There remains one aspect of the topic which requires mention. I am convinced that neither managements nor sole proprietors do typically act in the rapacious spirit which nearly all the textbooks in the labor economics field manage to imply. This is a conclusion reached after a long academic life devoted to the study of business administration in which I have relied on the recorded experience that constitutes the literature of this subject. The late Sumner Slichter (on the whole an apologist for the strike-threat system) admitted that managements tend to appear generous when it is at all possible and to resist demands for wage-rate increases or to call for cuts, only when things are going badly.30 But when an undertaking is prospering in the sense that the business is expanding, managements are often forced to pay a wage premium to get the additional labor they require, even in what is regarded as a competitive labor market. And when they have had to accept a union-demanded standard rate, there still seems to have been a tendency toward what has been called “wage drift,” that is, payment of more than the standard rate when there is “excess demand.”31 What Slichter may really have been observing was managerial appeasement—the unwillingness to fight on consumers’ behalf, especially when confronted with expanding demands or when inflation is relied upon to validate any concessions.

Of course, salaried managements, as distinct from proprietors, have no right to be generous at stockholders’ expense. When they appear generous in wage negotiations, I judge it to be due to their trying to show that the offers they make (on behalf of the residual claimants) are highly favorable to the workers they wish to attract or to those they want to persuade not to strike. But the popular and propaganda-perpetuated stereotypes of avaricious investors and unscrupulous managements anxious to carve out careers by exploiting the workers, and held in check only by union power, are grotesque caricatures.

“I think the robbery of labor by capital is a humbug,” concluded Mr. Justice Oliver Wendell Holmes as he approached the end of his famous career.32 This chapter has tried to show that, even it it is not “humbug,” it is a delusion.

NOTES

33 A “lock-in contract” is one in which the employee binds himself for a period, or under the terms of which he is subject to some penalty if he leaves before the expiry of a stipulated period, for example, the confiscation of deferred pay, profit-sharing rights or pension rights.

34 H. C. Simons, Economic Policy for a Free Society (Chicago: University of Chicago Press, 1948), p. 129.

35 Whether there is indeed any effective monopsonistic exploitation in this case is, however, far from certain; for it is difficult to see anything resembling a “shut-in.” The number of South African workers in the mines has been declining (because better-paid or more attractive work is available elsewhere in the Republic) and more and more foreign Africans (migrants) are being employed.

36 Similar discrimination by monopolists against consumers, based on estimates of the urgency of their need for the product, is normally impracticable, although sometimes contracts can be entered into prior to investment in fixed resources under which some consumers or users of products agree to discrimination against them under long-term contracts—but in their own interests (see pp. 163-166).

37 Such a worker would be harmed by the enforcement of so-called “equal pay for equal work;” for it would disallow him the effective right of bargaining. Any acceptable nondiscrimination rule would have to guard against all the possibilities which, in practice, make “the rate for the job” the most effective discriminatory device that has ever been invented (as I shall be explaining in Chapter 12).

38 For example, in British professional football, maximum wage rates were (until recently) enforced as a means of ensuring that the wealthier clubs did not attract all the best players and thereby destroy spectator interest in the game by reason of contests becoming too one-sided. This is an interesting example of a general problem known as “externalities.”

39 For example, see A. Myers and W. R. Mac Laurin, The Movement of Factory Workers (1943), quoted by Fritz Machlup, The Political Economy of Monopoly (Baltimore: Johns Hopkins Press, 1952), pp. 353-4.

40 For instance, offering better terms than competitors in respect of provision of special “fringe benefits,” an attractive place of work, playing fields, sports clubs, and other “extramural” facilities and amenities.

41 In practice, when such natural barriers are broken down, the unions tend to substitute man-made barriers for them. For example, Phelps Brown, referring to “the improvement of communications exposing once sheltered local markets to the vicissitudes of wider competition, . . .” says that this phenomenon “heightened the need felt for a union.” E. H. Phelps Brown, The Economics of Labor (New Haven: Yale University Press, 1962), pp. 40-41.

42 Incidentally, we cannot assume that undertakings which are viable because labor is plentiful and cheap where they are located, are able to earn a larger proportion of the value of output for investors than can be gained for them in similar activities in other parts.

43 The word “profitable” is justified here only because monopsonistic exploitation on the part of managements is assumed (in this paragraph) not to exist.

44 In other words, wage rates raised by any sort of compulsion other than the social discipline of the market, cause the labor they remunerate to be “overpaid” in the light of the definition given.

45 An apparent exception is discussed on p. 106.

46 The workers’ lack of versatility, ignorance, lack of enterprise, or simple preference—or the pecuniary costs of mobility—may determine such a choice.

47 If demand for the product is declining, ceteris paribus it will be to the interests of both investors and employed that wage rates shall fall relatively to wage rates in general until the more versatile of the workers have found better openings elsewhere, which may happen rapidly or slowly. In that way, not only may the burden of lay-off be mitigated, but the contribution of the industry to the source of demands in general will be maximized (although it will be declining).

48 The labor market in question may be sheltered (in that all entrepreneurs enjoy exceptionally plentiful and cheap labor) but competitive (in that there is a wide range of employments).

49 The entry of competing capital to supply the same kind of product is of course ruled out by the assumption of natural monopsony.

50 Actually, under the simplified situation I have envisaged for exposition purposes, it could be to the advantage of the workers in a sheltered area to be discriminated against by the monopsonist during a transitional period. Such discrimination might cause expansion of profitable outputs to occur sooner, as demand for the product was rising. Recruitment from outside at wage rates considerably higher than those ruling internally could make it possible thereby to raise the remuneration of existing employees, although not to the point at which equivalence of remuneration with the lucky newcomers had been established. If, however, anything distantly resembling this situation ever came into being (which I myself can hardly imagine) in a nonstrike regime, it could be a union function to agree to the suspension of any antidiscriminatory rule and allow its existing members, for their own benefit, to be paid less than newcomers (see pp. 163-167).

51 “Additional” to the bidding offered in the previous employments from which the recruits are attracted.

52 Simon Rottenberg, “The Economics of Occupational Licensing,” Aspects of Labor Economics: A Conference of the Universities—National Bureau Committee for Economic Research (Princeton; Princeton University Press, 1962), p. 19.

53 I do not say “equally burdensome.” The most effective barrier to spatial or occupational labor mobility is enforcement of “the rate for the job” (see Chapter 12, passim).

54 “Noncompeting” in respect of outputs, not in respect of resources used in production.

55 J. W. Garbarino, Quarterly Journal of Economics, May 1950, pp. 299-300.

56 H. M. Levinson, Study Paper 4, Joint Economic Committee, U. S. Congress 1960, pp. 2-5.

57 M. W. Reder, op. cit., pp. 285-6. Actually, there is some reason to believe that large firms shrewdly recognize the advantages of outbidding competitors and purchasing the cream of the labor supply. They may obtain thereby what Reder has called a “richer skill mix.” It is a way of purchasing labor’s inputs more cheaply, and a particular economy of scale. Another suggestion mentioned by Reder is that large undertakings “over-pay” for prestige reasons. But prestige contributes to “goodwill”; and “goodwill” is an item in a firm’s stock of assets.

58 Ibid., pp. 286-287.

59 Albert A. Rees, The Economics of Trade Unions (Chicago: University of Chicago Press, 1962), p. 84.

60 If a union can prove that the consumer is being compelled to pay too much for a certain output, for the very reasons which are keeping the earnings of those who make it unjustly low, it will have an iron-clad case; and, incidentally, it will be fighting the case also for better remunerated opportunities for diverted capital resources.

61 Fritz Machlup, Wage Determination and the Economics of Liberalism (Washington: U. S. Chamber of Commerce, 1947), p. 56.

62 Sumner H. Slichter, “Notes on the Structure of Wages,” Review of Economics and Statistics, February 1950, pp. 81-91.

63 The term “excess demand” is a misleading way of describing the situation when there are more vacancies than unemployed in any field at current wage rates.

64 In a letter to Harold Laski, quoted by Helmut Schoeck, Envy—A Theory of Social Behavior (New York: Harcourt, Brace and World, 1970).

• 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).
• 9Because, 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.
• 10A 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.
• 11I 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.
• 12Cliffe 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).
• 13“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.
• 14The 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.
• 15Alfred Marshall, Economics of Industry (London: Macmillan, Ltd., 1909), p. 389.
• 16Ibid., pp. 388-9.
• 17Within the category “labor” there must have been a consequential regressive redistribution (see footnote 10 and below pp. 168, et. seq.).
• 18S. 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.
• 19So 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.
• 20The London carpenters were charged with trying to keep “foreigners” (i.e., workmen from outside London) from accepting less than sixpence a day.
• 21Wyclif was attacking the masons employed in church building. The quotation is A. H. Gardner, Outline of English Architecture (New York: Scribners, 1946), p. 24.
• 22Quoted in M. D. George, The Combination Laws Reconsidered, cited in Economic Journal History Supplement, 1927, p. 215.
• 23Important instances were in the woolen, cotton, linen, silk, hemp, fustian, hatters, dyers, pressers and the iron industries.
• 24This is surely indicated in the very name of an early general statute: Act of Conspiracies of Victuallers and Craftsmen, 1549. Consumers’ interests were paramount.
• 25I say “apparent” because the evidence of growing union activity is mainly indicated in the increasing number of court cases involving unions; and this may have been correlated with rising industrial outputs or due to more vigorous law enforcement.
• 26One very defensible practice of those days (which survived into the nineteenth century) was the subsidization of craftsmen in the form of what were called “traveling” or “tramping” benefits if they were prepared to leave an area in which there was unemployment. This could have led to an improved allocation of labor over area—greater geographical mobility.
• 27Smith, op. cit., p. 126.
• 28The King v. Eccles, quoted in Donald Dewey, Monopoly in Economics and Law (Chicago: Rand McNally and Company, 1959), p. 120n.
• 29Quoted in Webb, op. cit., p. 70n.
• 30The amendments concerned provision for arbitration.
• 31Dewey, op. cit., p. 117.
• 32Webb, op. cit., pp. 72 and 81.
• 33Already 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.
• 34Already 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.
• 35I 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).
• 36There 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.
• 37Two 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?
• 38Two 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?
• 39The 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)
• 40The 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.
• 41The 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.
• 42When 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.
• 43Through 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.
• 44In 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.
• 45This 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.
• 46Marshall 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.
• 47Marshall’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.
• 48Marshall’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.
• 49To 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”.
• 50Even 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.
• 51We 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.
• 52Collusive 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.
• 53One thing which makes the preindustrial revolution era rather difficult to interpret is a blatant inconsistency in this respect. Merchant and craft guilds, constituted by charter, had the explicit right to act in a manner which would have been criminal, under the common law and certain statutes, had it not been for the protection of a charter. Wyclif accused the guilds of conspiring “that no man practicing their craft shall take less payment daily than that they have agreed among themselves,” and that “they oppress other men who are in the right” (meaning that these others were prepared to work for less). But the guilds were protected by charter. The anomaly can probably be explained in terms of pre-eighteenth-century conservatism. Unsettling change could be prevented by way of protection of a privileged status quo (and this policy took the form among other things of encouragement of craft and merchant guilds) as well as through the prevention of any new privileges which seemed likely to arise. Revolutionary changes were feared. By the middle of the eighteenth century, however, the guilds had largely lost their power, and rather different forms of organization—labor unions of the modem type—emerged as “friendly societies.”
• 54A supplementary policy, developed following the Black Death, was that embodied in wage-fixing by authority and, following the Elizabethan Statute of Artificers, generally bolstering up the guild system. Important provisions of this statute had, however, the effect of enforcing adherence to contract. An artisan wishing to transfer to another master required a testimonial certifying that he had carried out his obligations to the master he was leaving. In some cases the employee was bound by contract until a specific piece of work had been completed, for example, “any ship, house or mill or any work taken by the gross or piece.” If he left before then, his master could claim damages fixed in the statute.
• 55Recourse to special statutes to outlaw “conspiracy” in particular trades seems to have been mainly because really effective enforcement of the common law (when there was no exoneration through guild privilege) had seemed beyond the administrative machinery of the courts until modern times. Common law cases had to be heard by judges and hence were costly. They were time-consuming. By reason of long delays, artisans charged could often escape trial by moving to other districts where they could seldom be traced. Statute law cases, on the other hand, could be dealt with expeditiously by justices. That is why we found “masters,” in the emergent industries of the seventeenth and eighteenth centuries, petitioning Parliament for explicit statutory protection against “conspiracy” for their own industries or trades. In Britain, as a whole, some 40 such statutes were repealed in 1824. But before then enforcement of common and statute law in this sphere seems to have been curiously casual. Moreover, as I have already insisted, conspiracy law was not aimed primarily at labor.
• 56Recourse to special statutes to outlaw “conspiracy” in particular trades seems to have been mainly because really effective enforcement of the common law (when there was no exoneration through guild privilege) had seemed beyond the administrative machinery of the courts until modern times. Common law cases had to be heard by judges and hence were costly. They were time-consuming. By reason of long delays, artisans charged could often escape trial by moving to other districts where they could seldom be traced. Statute law cases, on the other hand, could be dealt with expeditiously by justices. That is why we found “masters,” in the emergent industries of the seventeenth and eighteenth centuries, petitioning Parliament for explicit statutory protection against “conspiracy” for their own industries or trades. In Britain, as a whole, some 40 such statutes were repealed in 1824. But before then enforcement of common and statute law in this sphere seems to have been curiously casual. Moreover, as I have already insisted, conspiracy law was not aimed primarily at labor.
• 57Nevertheless, the problem to which these laws were believed to offer a solution seems to have increased in importance during the late eighteenth century, probably because of the gradual emergence of labor unions in the modern sense in the relatively highly-paid crafts and occupations, and their apparent growing activity. Unions were “friendly societies” concerned with the commendable task of insuring their members against the worst consequences of sickness or unemployment. This was the more conspicuous side of their activities but probably not the most important. Indeed, it seems that their insurance funds were often more in the nature of strike funds. Where apprenticeship had survived, they enforced the rules under some protection from the otherwise virtually moribund Elizabethan Statute of Artificers. Some “friendly societies” were trying to maintain, even at that time, what is today called “the closed shop.” In the light of rising sophistication during the eighteenth century, the harm done may well have been becoming more conspicuous. For instance, Adam Smith pointed out that the wool-combers were able, by refusing to take a reasonable number of apprentices, not only to “engross the employment, but reduce the whole manufacture into a sort of slavery to themselves, and raise the price of their labour above what is due to the nature of their work.”
• 58Nevertheless, the problem to which these laws were believed to offer a solution seems to have increased in importance during the late eighteenth century, probably because of the gradual emergence of labor unions in the modern sense in the relatively highly-paid crafts and occupations, and their apparent growing activity. Unions were “friendly societies” concerned with the commendable task of insuring their members against the worst consequences of sickness or unemployment. This was the more conspicuous side of their activities but probably not the most important. Indeed, it seems that their insurance funds were often more in the nature of strike funds. Where apprenticeship had survived, they enforced the rules under some protection from the otherwise virtually moribund Elizabethan Statute of Artificers. Some “friendly societies” were trying to maintain, even at that time, what is today called “the closed shop.” In the light of rising sophistication during the eighteenth century, the harm done may well have been becoming more conspicuous. For instance, Adam Smith pointed out that the wool-combers were able, by refusing to take a reasonable number of apprentices, not only to “engross the employment, but reduce the whole manufacture into a sort of slavery to themselves, and raise the price of their labour above what is due to the nature of their work.”
• 59Nevertheless, the problem to which these laws were believed to offer a solution seems to have increased in importance during the late eighteenth century, probably because of the gradual emergence of labor unions in the modern sense in the relatively highly-paid crafts and occupations, and their apparent growing activity. Unions were “friendly societies” concerned with the commendable task of insuring their members against the worst consequences of sickness or unemployment. This was the more conspicuous side of their activities but probably not the most important. Indeed, it seems that their insurance funds were often more in the nature of strike funds. Where apprenticeship had survived, they enforced the rules under some protection from the otherwise virtually moribund Elizabethan Statute of Artificers. Some “friendly societies” were trying to maintain, even at that time, what is today called “the closed shop.” In the light of rising sophistication during the eighteenth century, the harm done may well have been becoming more conspicuous. For instance, Adam Smith pointed out that the wool-combers were able, by refusing to take a reasonable number of apprentices, not only to “engross the employment, but reduce the whole manufacture into a sort of slavery to themselves, and raise the price of their labour above what is due to the nature of their work.”
• 60Persons in possession of any articles of trade may sell them at such prices as they individually may please, but if they confederate and agree not to sell them under certain prices, it is conspiracy; so every man may work at what price he pleases, but a combination not to work under certain prices is an indictable offence.
• 61Now the actual effect of these two acts was simply to make more explicit what had indeed been the law during four centuries or more. But nearly all writers on this topic, the Webbs being most influential, have represented the “Combination Acts” as the legislative outcome of a sort of conspiracy among “employers” or “capitalists.” Actually the reverse is the truth. The 1799 Act came to be passed almost by accident. Indeed, so casually were both acts enacted that, in Sir James Fitzjames Stephen’s History of the Criminal Law, we are told that “there is no account of any debate on these Acts, nor are they referred to in the ‘Annual Register’ for these years.” What actually happened in 1799 was that a bill, more or less in the form of the 40 or so other anticombination statutes already applying to particular trades, was introduced in Parliament. The original aim in 1799 was simply to forbid “conspiracy” on the part of millwrights. During the proceedings Wilberforce (the famous antislavery champion) suddenly and unexpectedly moved for an amendment to make the principle apply to all industries and occupations. There seemed to be no good reason for opposing this amendment and the bill became law with little opposition. No one spoke against the Act on principle, although some thought that too much power was being given to the lower courts. Some unimportant changes were introduced the following year in the amending Act.
• 62Now the actual effect of these two acts was simply to make more explicit what had indeed been the law during four centuries or more. But nearly all writers on this topic, the Webbs being most influential, have represented the “Combination Acts” as the legislative outcome of a sort of conspiracy among “employers” or “capitalists.” Actually the reverse is the truth. The 1799 Act came to be passed almost by accident. Indeed, so casually were both acts enacted that, in Sir James Fitzjames Stephen’s History of the Criminal Law, we are told that “there is no account of any debate on these Acts, nor are they referred to in the ‘Annual Register’ for these years.” What actually happened in 1799 was that a bill, more or less in the form of the 40 or so other anticombination statutes already applying to particular trades, was introduced in Parliament. The original aim in 1799 was simply to forbid “conspiracy” on the part of millwrights. During the proceedings Wilberforce (the famous antislavery champion) suddenly and unexpectedly moved for an amendment to make the principle apply to all industries and occupations. There seemed to be no good reason for opposing this amendment and the bill became law with little opposition. No one spoke against the Act on principle, although some thought that too much power was being given to the lower courts. Some unimportant changes were introduced the following year in the amending Act.
• 63The important point to remember is that the new combination laws did not make any activities illegal which had not already been criminal offenses for centuries. They were, writes Donald Dewey, “thought to incorporate no new legal principle but were rather designed to improve the cumbersome enforcement procedure which largely nullified the usefulness of a conspiracy prosecution.” Yet they are described as “severe,” as inaugurating “a new and momentous departure,” “a far-reaching change of policy,” an era of “legal persecution” of would-be strikers or strikers. These are descriptions of the acts by Sidney and Beatrice Webb, in a seriously slanted work characterized at times by meticulous scholarship—a work which has had an enormous influence in spreading the myth. The truth is, however, that the “Combination Acts” were just as leniently, almost half-heartedly, enforced as the common law against conspiracy (and the various special statutes forbidding conspiracy or combination in particular industries) had previously been.
• 64The important point to remember is that the new combination laws did not make any activities illegal which had not already been criminal offenses for centuries. They were, writes Donald Dewey, “thought to incorporate no new legal principle but were rather designed to improve the cumbersome enforcement procedure which largely nullified the usefulness of a conspiracy prosecution.” Yet they are described as “severe,” as inaugurating “a new and momentous departure,” “a far-reaching change of policy,” an era of “legal persecution” of would-be strikers or strikers. These are descriptions of the acts by Sidney and Beatrice Webb, in a seriously slanted work characterized at times by meticulous scholarship—a work which has had an enormous influence in spreading the myth. The truth is, however, that the “Combination Acts” were just as leniently, almost half-heartedly, enforced as the common law against conspiracy (and the various special statutes forbidding conspiracy or combination in particular industries) had previously been.