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The Strike-Threat System

Mises Daily: Wednesday, December 07, 2011 by

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[Politically Impossible? (1971; 2010)]

A strong tradition of leniency toward the implications of union activities had existed among the pre-Keynesian economists. Sir John Hicks once suggested that this was because British economists had always been supporters of the "Liberal" Party which had throughout relied largely upon the votes of the trade unionists.[1] My interpretation of the situation is somewhat different. First, no political party dared risk losing the votes which unpopularity with the unions would mean in any constituency with considerable numbers of unionists. Second, the economists also were striving for influence, irrespective of party, not only for personal ambition but through pure public spirit. They felt instinctively that they could only harm their objectives if they antagonized organized labor.

The Classical Economists

In Britain the phenomenon goes back to the early years of the 19th century. After the passage of the Combination Acts of 1799 and 1800[2] both Tory and Whig members of Parliament in industrial constituencies began competing with one another in promises to get those acts repealed. During the same period, leading economists tried to get the ear and the confidence of the emerging British labor leaders. Their purpose was no doubt the laudable one of persuading them to act wisely, a purpose which required supreme tact. Direct condemnation of the unions' methods would have been thought poor tactics. That is why McCulloch, the most uncritical expositor of laissez-faire doctrine, could have his writings quoted approvingly in the preamble of trade-union rule books of his day. McCulloch's failure to speak out against the strike-threat system was due to his wish not to attenuate in any way the ability of his political friends to assure the new vote-influencing institutions, the unions (which were legalized in 1824), that the economists were not hostile to "labor's" aims.

In 1936, two chapters of my Economists and the Public were were titled "The Influence of the Trade Unions upon J.S. Mill," and "The Continued Corruption of Economic Thought." I thought in 1936, although I do not today, that McCulloch and other utilitarians had supported the repeal of the Combination Acts simply because of their assumptions about inherent internal weaknesses in all monopolies, which made laws against "conspiracy" redundant — weaknesses which, in the absence of those acts, would have brought home to the community the complete inefficacy of the strike-threat system. I now feel that if the economists did think that, it was mere wishful thinking: that both McCulloch and Mill embraced a crude laissez-faire — a hands-off policy toward the private use of coercive power (the threat to disrupt the productive process via the concerted withdrawal of labor) — because they were tacitly concerned with "the vote-acquisition" necessities of governments and oppositions.

It was that which led Mill to contend that fixing wage rates by strike-threat duress was "mere moral compulsion," and to describe attempts to restrain such compulsion as "odious" — indeed, just as indefensible as the enactment of maximum-wage rates, which had been resorted to at one time under the Statute of Labourers. This in spite of his admission that "combinations to keep up wages … are seldom effectual, and when effectual … seldom desirable."[3] Only a similar motivation can explain his second line of defense for the toleration of the strike-threat system, namely, that "all economical experiments, voluntarily undertaken, should have the fullest licence";[4] for in other monopolies — equally describable as "experiments" — he advocated state interference.[5]

Avoidance of Criticism of Unions

The historical development of this opinion phenomenon subsequent to Mill is indicated in passages I used in 1936. Since Mill's time, the course of politics made it even less easy for any economist wishing to retain influence in the political field to be critical of unionism. The power exerted by organized labor on politicians is well illustrated by a contemporary comment on the passing of the Trade Union Act of 1871, which abolished specific legislation respecting intimidation, molestation, and coercion by unionists. The writer was E.S. Beesly, one of the most prominent workers for the trade-union cause in the 1860s and '70s. "It was generally believed in the House," he said, "that not a dozen members would go into the lobby with the mover and seconder." But when the day came, and the members found that there was no escape for them, sooner than risk offending their unionist constituents, they allowed the second reading to be carried without a division. Such an exhibition of slavish cowardice was never seen.[6]

In 1893 Nicholson charged the leaders of public opinion with damaging "the constitutions of the British working men" by the "adulterated sweets of sentiment and flattery."[7] And in the same year Clem Edwards could describe the Trades Union Congress as "to the politician a ready indicator of 'paying opinions.'"[8] By the 1890s some of the large trade unions exerted vast political influence, and phrases like "a living wage," "collective bargaining," and so forth, acquired, to use the words of Mr. L.L. Price, a "great argumentative advantage."[9] The press, of course, reinforced the tendencies arising from party politics playing upon the newly enfranchised democracy. They dared not publish anything which might offend the large labor organizations. Mr. Sidney Webb was certainly able to make disparaging remarks about the futility of the Trades Union Congress of the 1890s in his History. But as Edgeworth pointed out, "hardly any writer in the capitalist press would venture to imitate so frank a criticism of a trade-union body."[10]

The influence of trade-union growth upon the minds of politicians need not necessarily have affected economists. But the tradition set up by Mill was certainly followed by permanent inconsistencies in the science. The weaknesses were not entirely new. The idea that "labor's disadvantage in bargaining" led to the earnings of the working classes being unduly low had occasionally appeared as a sort of unexplained and very unimportant attachment of the economic theory of certain writers ever since Adam Smith. Wage rates were supposed to be forced, in some undefined sense and in some undefined degree, below the level determined by "supply and demand." Discussions of the point sometimes mentioned formal or tacit monopoly among employers, but more usually "labor's disadvantage" was regarded as a quite separate factor.

After Mill's time the idea took on a much greater importance, and it became, therefore, an even more astonishing and unexplained inconsistency. Economists then began to talk about "unequal bargaining power," and the phrase seems to have been regarded as having an obvious meaning. Practically the only attempted expansion or explanation of it was a further empty phrase. "Labour is a perishable commodity," it was said, as though the services of all other productive resources were not equally perishable! The gradual recognition that the effects of collective bargaining upon distribution could be tackled through the theory of monopoly might have led to a consistent treatment. One would have expected that the very conception of monopoly would have suggested doubts of some of the earlier explanations of "unequal bargaining power"; for the workers' bargaining weakness was generally supposed to be at its worst when the employers were most obviously subject to competition among themselves, as under the so-called sweating system for example.

But having demonstrated the indeterminateness of the distributive arrangements under bilateral monopoly in the case of collective bargaining in separate fields, the later economists jumped to the quite unjustifiable conclusion that distribution in general might be rearranged in the workers' favor by such means. This theory of how the spoils of monopoly might be divided between capitalists and workers in individual cases was, however, never absorbed into any complete theory of distribution. The economists sometimes seemed rather ashamed of their "bargaining power" argument and were apt to refer to its unimportance. Yet it remained as an unexplained inconsistency serving no purpose other than that of enabling economists to deny that they were opposed to trade unionism. How serious an influence this inconsistency has had is a question which historians will some day have to consider. It certainly destroyed the specificness of economic teaching at the very point at which its message should have been most unequivocal.

A frank admission of the futility of private or state wage fixation as a remedial agency ought to be the starting point of all social studies concerned with the problem of relative poverty. An honest recognition of the same fact should form the foundation of all academic discussions of "industrial relations." But the economists' weaknesses have resulted in whole social philosophies having been based on an extraordinary blindness to or a dogmatic denial of this truth, and in the efficacy of wage fixation being calmly assumed by practically all "sociologists."[11]

Futility of Strike Threat

The reference to the "futility" of strike-threat determination of wage rates may easily be misunderstood or misrepresented. The private use of coercive power can win sectionalist gains for unionists retaining employment after labor costs have been forced up. But the gains are at the expense of

  1. laid-off comrades,

  2. excluded workers who could otherwise have raised their earning power by accepting profitable employment in the occupation affected,

  3. consumers, and

  4. investors who, at the time at which they invested (when they decided to retain, replace or add to the resources used in any activity), failed to make due allowance for strike-threat possibilities.

The distortion in the composition of the stock of assets which occurs through entrepreneurial avoidance of exploitation (in an economy in which abuse of the strike threat is tolerated) not only reduces the source of "aggregate demand" (that is, the community's real income) but also the wages flow.

The reader may feel that, though all this may be true, it remains "politically impossible" today, in any industrial country, to attempt effectively to restrain strike-threat power. In Britain the Labour government tried in 1969 to check the misuse of union power, but in 1971 the Conservative government is succeeding in what their Labour predecessors had tried, without avail, to achieve. And in the United States, if only in carefully guarded language, there are continual references in influential circles to the need for restraint. On the day that this passage was drafted, the United States assistant Treasury secretary, Mr. M.L. Weidenbaum, is reported to have said (November 1970) that he personally favors

a conscious effort to create a new climate in which more reasonable and sensible wage-cost-price decisions are made and particularly in those areas of the economy where substantial concentrations of private economic power exist.… Until this climate is achieved or until these substantial concentrations of private economic power are reduced, I find it hard to see how we can arrive at these two desirable and inter-related objectives — the return of full employment and sustained reduction in inflation.[12]

Clearly, Mr. Weidenbaum regards it as inexpedient or impolitic to direct this veiled threat at organized labor specifically. But all his readers will know, and he knows they will know, that if business, including big business, is in any measure responsible for pricing output beyond the reach of income (subject to any degree of inflation) the remedy lies in antitrust initiatives. It is precisely because labor is protected from antitrust proceedings that the problem arises. Mr. Weidenbaum is dealing with a situation which emerged because official policy in the United States has been based on the expectation, or rather hope, that increased productivity would justify cautious monetary expansion. But when powerful inflationary indications showed that these hopes had been disappointed, Washington seems still to have thought that (to use Professor V. Salera's words),

it could meet major companies and talk them out of proposed price increases.… Why shouldn't price moderation reflect assumed "economies" of production at high rates of capacity utilization? Actually workers were getting more dollars for producing less per dollar. Productivity was in steep decline.[13]

The reality is that the "concentration of private economic power" which is responsible for the dilemma of unemployment or inflation which Mr. Weidenbaum is discussing is so easily identifiable that one cannot help wondering whether it can still be claimed to be "politically impossible" to reduce its power or even wholly to dissolve the power of the strike-threat continuously to reduce the flow of uninflated wages and income. Why should not government spokesmen come out wholeheartedly with a "courageous" (as commentators would be inclined to describe it) identification of labor-union pressures as responsible for the dilemmas which constantly confront the world's statesmen?

Lack of Candor in Advocates of Incomes Policies

The advocates of "incomes policies" in the United States are at last coming close to doing just that. They are now frankly identifying "wage push" as responsible for the expediency of inflation, although they typically still fight shy of explicit reference to the crucial expediency, or the discomforting truth, that inflation is deliberate and purposeful. Like the Keynesians 40 years ago, they do not yet feel bold enough to inform the public that pushing up end-product prices is a crude means of correcting an incipient depression of the wage flow of which wage push is the direct cause.

Thus Professor Gardner Ackley, formerly chairman of the Council of Economic Advisers, has recently insisted that the object of an "incomes policy" must be to reduce "excessive wage claims." Professor Herbert Stein, a present member of the council, states categorically that "the rate of inflation … will depend upon the wage-rate increase probably more than anything else." And the chairman of the Federal Reserve Board maintains that "the inflation that we still experience … rests on the upward push of costs — mainly rising wage rates." But Mr. Lawrence Fertig, in the title of a masterly article, describes those and similar opinions as "Right Diagnosis — Wrong Prescription."[14] The prescription is indeed for an attempted solution of the politicians' dilemma which has just been abandoned in Britain as a complete failure. Economists must now begin to speak unequivocally.

Unions' Political Power Exaggerated

This is one of the fields in which what I have called earlier "the polemical asseveration of 'political impossibility'" on behalf of the vested interests has intimidated party organizers and candidates. Even in the United States, where the power of organized labor as a swing group in elections and a source of "campaign funds" seems to be stronger than in any other country, the voting strength of labor unionists amounts to no more than 15 percent of the voters, while unionists constitute less than a quarter of the labor force. Moreover, some believe that more than half of the union members are involuntary. They join and acquiesce in union rules simply because they would otherwise be deprived of their livelihood.

The three-quarters of the labor force who are not unionists represent the class most seriously hurt by strike-threat and strike consequences. They are hurt both as consumers and because, through union exclusiveness, considerable numbers of them are shut out (displaced or excluded) from more remunerative and productive employments), and possibly even more because entrepreneurial avoidance of prospective duress-imposed costs impairs the composition and volume of wage-multiplying assets.

Can it be "politically impossible" to explain the issues to a sufficient proportion of this three-quarters of the labor force to be able to reverse the trend? In the United States the issue will soon become unavoidable. In Britain, the chance of this occurring has not seemed so bright since early last century.

"Incomes policy" the Second-Best Political Alternative

Nothing could be plainer than that the politicians now perceive the responsibility of the strike-threat system for the constricted wages and income flow and hence for unemployment. But it is just as obvious that they find it "politically impossible" to say so, or to recommend direct action for the advantage of the general body of wage earners. They tend therefore (although this does not seem to apply today to the ruling politicians in the UK) to grope toward an "incomes policy" solution as the alternative to inflation. And, even this policy, they feel, must be enunciated in such a way that its real purpose is hidden, with the result that "controls" on the pricing system may be at cross-purposes with the basic coordination objective.

To satisfy the economically illiterate, there must be a pretence of "impartiality." The people need to be told that both wage-rate increases and "profit margins" must be curbed. Yet if the restoration of the wages and income flow is the purpose, prospective yields ("profits") must be raised, not curtailed. Certainly, "impartiality" may require some guarantee that such restrictive practices as may be alleged (and supported by evidence) for which organized labor is not responsible shall be tackled simultaneously. That is, however, too difficult for politicians to explain to editors, clergy, or university students. Given the current stereotypes of the opinion formers and the masses, it behooves politicians therefore to pose as impartial between sin and virtue.

But why should virtually all the economists be following suit, as they seem to be doing today, at least in the United States? If economists pressed unanimously for the deliberate maximization of prospective yields, which was indeed Keynes's remedy in 1930 (pp. 70–1), as well as in his General Theory once the fallacious unemployment equilibrium element is expurgated from it (pp. 64–5), could it not be made self-evident for all opinion formers that market-selected price and wage-rate adjustments are the means to prosperity with stability and distributive justice?

Britain's Industrial Relations Bill

Adopting the "dual form" of exposition advocated here, the economist can describe the Industrial Relations Bill currently under discussion in Britain as a move in the right direction.[15] He can explain that its virtue is that it goes as far as is likely to be accepted as "politically possible" today, although it must be regarded as a mere step toward what Professor A.A. Shenfield called a few years ago "the emancipation of labour."[16] It does no more than curb the private use of coercive power.[17] But the strike as such is a type of warfare, and in war there is never any presumption that victory will be for the righteous. The achievement of a humanitarian order with distributive justice and the optimal use of the community's resources demands that the strike threat as such be eliminated as a determinant of the price of labor. The truth is that in the "good society" there is no substitute for the determination of all prices, of labor as well as the services of assets and entrepreneurs, under the social discipline and coordinative pressures of the unrestrained market.

But neither the "opinion formers" nor the voters can be expected to understand the economists' insights on this issue. The electorate must be led toward such a perception by concrete experience of reforms which increase labor-market freedom by gradual degrees. For that reason the British bill is welcome. It is a step which will at any rate disturb, even if it does not dissolve, stereotypes which have for years been barring the way to relative security and affluence.

[product:0]

One almost universally misunderstood consequence of the strike-threat system which the economist needs to clarify is that the harm does not reside mainly in the detriment suffered by innocent third parties, or in the harassment of salesmen at home or abroad, or in the inefficiencies due to industrial unrest and the maintenance of workers' resentments (preservation of a sort of war psychology conducive to effective strike warfare and threats of such warfare), or in the sacrifice of outputs caused by long periods of strike idleness of men and plants. These are merely the most conspicuous evidences of the burdens from which the people, particularly the poorer classes and races, cannot at present escape.

The major burdens, of which all disinterested economists are aware, are much less conspicuous: the distortion of the production structure[18] and of the composition of labor employment — a distortion which must curb or reverse the real income growth that would otherwise be generated by society's savers and entrepreneurial enterprise. Not only does the present system exterminate part of the source of demand for labor; it has regressive consequences upon the distribution of wages and income[19] and recession-creating effects which, as we have seen, render inflation politically expedient.[20]

Notes

[1] J.R. Hicks, in Economical May 1931, pp. 244–5. Hicks's words are "most economists were — in a wide sense — Liberals; Trade Unionists were also Liberals.'

[2] These acts may be said to have consolidated into one Act about 40 previous acts and the traditional common law forbidding "conspiracy" (i.e. agreements in concert about the prices to charge for commodities, including labor's contribution to the cost of commodities).

[3] Principles of Political Economy, Ashley Edn, p. 936.

[4] Ibid., pp. 938–9.

[5] An even more blatant case than J.S. Mill's, involving an economist of lower stature, was that of Thorold Rogers. Originally a pure Bright, Cobden, Bastiat exponent, on entering politics (from academic life and the Church), he began to write just as do those modern "labor economists" who act also as labor consultants, arbitrators, conciliators, mediators, and so forth. W.H. Hutt, "Misgivings and Casuistry on Strikes," Modern Age, Fall, 1968.

[6] E.S. Beesly, Letters to the Working Classes, 1870, p. 20.

[7] Quoted in Economic Journal, 1894, p. 367.

[8] Economic Journal, 1893, p. 694.

[9] Ibid., 1898, p. 468.

[10] Ibid., 1894, p. 499.

[11] Economists and the Public, op. cit., pp. 202–5.

[12] Quoted in Business Week, 21 November, 1970, p. 23.

[13] Wall Street Journal, 24 November, 1970, p. 18.

[14] L. Fertig, "Our Faltering Economy: Right Diagnosis — Wrong Prescription," Human Events, February, 1971.

[15] The bill can be briefly summarized as follows:

  1. it establishes an industrial-relations court with power to fine unions which are guilty of certain "unfair labor practices" or permit "wild-cat" strikes. The provisions here resemble those in the United States Taft-Hartley Act, but the British bill, if passed, is likely to be more effective because of the more efficient administration of justice in Britain and her politically neutral courts,
  2. It weakens abuse of the "closed shop" device,
  3. It imposes a "cooling off period before strikes may legally be called when they may harm the national economy.
  4. It makes labor contracts enforceable in the courts, although there are loopholes obviously intended to mitigate the impact on labor opinion.

[16] At a meeting of the Mont Pelerin Society, 1967.

[17] The nearest parallel yet in the United States is President Nixon's suspension of the Davis-Bacon Act, which requires the payment of prevailing wage rates on federal housing projects. As a gesture, the suspension may be important.

[18] The composition of society's stock of assets is biased toward what entrepreneurs predict will be relatively unexploitable by the unions.

[19] I.e., it causes the injustices of an income distribution strongly influenced by an arbitrary power to disrupt. It means the pricing of labor's input and products according to the principle of "might is right."

[20] As a crude yet decreasingly effective means of rectifying union-precipitated unemployment.