The Mises Institute monthly, free with membership
Volume 16, Number 10
In the midst of an economic boom, strange things were happening at General Motors. Huge
swatches of its highly paid, coddled, unionized labor force
were on strike. The result was catastrophic: GM plants all over North America shut down.
In a free market, the management (serving at the behest of the stockholder-owners) would
have no difficulty knowing what to do. It would advertise
thousands of job openings at a market wage, hire and train them all, and get back to doing what
companies are supposed to do, namely produce goods
for the public to buy. This is what is called "union busting," but in fact it is nothing more than the
free market at work.
Instead, GM was forced to crawl to judges and bureaucrats and plead its case that the strike
is illegal under federal law. This is sheer chaos, and the only
reason for it is the massive amount of government intervention in the labor markets.
It's hardly the only example of destruction wrought by federal intervention in labor markets.
The Supreme Court recently upheld payoffs to workers
hollering "sexual harassment" and the conscription of doctors to work on patients carrying
deadly communicable diseases. As the case history piles up,
the freedom of association is curbed ever more seriously.
What if we just scrapped the entire apparatus of federal labor law? What if relations between
workers and bosses were governed solely on the basis of
contract, like any other market transaction? In a contract, you can choose to sign or not to sign,
but if you do, you must stick by the agreement. Redress is
allowed and penalties are exacted only if contracts are violated and result in damage. This is the
market way. Why should labor be in a special category?
Until the New Deal, there was no such thing as national labor law. Aside from a handful of
special cases, the labor contract was just a contract. Price
Fishback of the University of Arizona economics department has examined the way labor
markets worked between 1890 and 1930.
In Fishback's studies, conventional wisdom about labor in the bad old days is exploded.
People were not stuck in indentured servitude. In fact, workers
were highly mobile. Turnover rates were higher in 1890 than they are today. People in the South
and West didn't lead isolated lives of low pay and
grime. Wages over time were converging between all regions for comparable lines of work.
Blacks weren't exploited; they were paid comparably to
whites of equal training and skill.
The reason should be obvious: competition for workers. Managers and owners would love
nothing better, then or now, to pay nothing for unlimited
amounts of work. But they must compete with other possible lines of employment, and thus the
worker is free to market his services to the highest
possible bidder. In an active market economy with freedom of contract, the worker's wage
eventually reflects precisely his own contribution to economic
But what about safety? Workers were paid more to undertake higher levels of risk. What
about unemployment due to shutdowns? If there were a higher
risk of that, wages would reflect it too. And under the common law, and even outside the court
system, workers were compensated for accidents
resulting from employer negligence.
But what about cases in which competition doesn't seem to exist, when there is only one firm
and that firm provides not only the job, but also runs the
schools and stores and rents the housing? This is the "company town" of American folklore ("I
owe my soul to the company store"). The most
interesting results of Fishback's studies concern the economics of the company town.
It turns out, the private paradise of the company town provided stores, houses, and schools as
part of a highly desirable compensation package. They did
this to attract workers. Rents were low, store prices were competitive, and the schools were good.
Again, the reason is competition. If the company ever
slacked off or attempted to exploit a "monopoly," workers would leave the company town to go
to work elsewhere.
In contrast to this free market, modern labor law has brought us nothing but trouble.
Llewellyn H. Rockwell, Jr., is president of the Ludwig von Mises Institute.
READING: Price V. Fishback, "Operations of
'Unfettered' Labor Markets," Journal of Economic Literature (June 1998):
722-65. Richard Vedder and Lowell Gallaway, Out of Work (New
York: Holmes and Meir, 1993).