The Theory of Collective Bargaining

ECONOMICS TEACHES that there is but one method available to raise wage rates for all those eager to earn wages, viz., to increase the per-head quota of capital invested and thereby the marginal productivity of labor.

At the wage rate established on a free labor market all those who are eager to hire workers can hire as many as they want and all those who want to earn wages can find a job. On a free labor market there prevails a tendency to make unemployment disappear. Not to interfere with the operation of the labor market is the only effective full-employment policy.

If either by government decree or by union pressure and compulsion wage rates are raised above the potential market rate, unemployment of a part of the potential labor force becomes a lasting phenomenon. It is impossible for the unions to raise wage rates for all those eager to earn wages and to find jobs. If they win for some groups of workers higher compensation than what they would have collected on an unhampered market, they victimize other groups.

It took much more than a century to attain this cognition. Quite understandably people sympathize with the impatience of wage earners who want to find a more rapid means for the improvement of their material conditions than that provided by the progressive accumulation of capital. The economists were not to blame for the fact that emotionally they agreed in this regard with the majority. What was wrong with the attitude of many of the older economists was that they blithely endorsed popular fallacies about the methods to be applied for the realization of this desirable end. One of the foremost social functions of economics is to explode current misconceptions about the fitness of means to attain definite ends chosen. The classical economists and their followers did a marvellous job in exposing prevailing errors concerning foreign trade, government tutelage of business, money, credit and so on. But they not only left the union doctrine intact, they even tried to find a justification for it. It was a hopeless task, and it entangled its authors in a maze of contradictions and inconsistencies. However, we must be grateful to them for the pains they bestowed upon the problems. For it was precisely the failure of their scrupulous exertions that made it easier for later generations to arrive at a more correct solution of the problems involved.

Professor Hutt’s brilliant essay is not merely a contribution to the history of economic thought. It is rather a critical analysis of the arguments advanced by economists from Adam Smith down and by the spokesmen of the unions in favor of the thesis that unionism can raise wage rates above the market level without harm to anybody else than the “exploiters.” As such it is of utmost use not only to every student of economics but to everybody who wants to form a well-founded opinion about one of the most vital as well as most controversial political issues of our age.

LUDWIG VON MISES

New York, March, 1954