MANAGERIAL AND DECISION ECONOMICS, VOL. 8, 47-53 (1987)

Labor Relations at the Shop Floor Level ~~ ~

MORGAN REYNOLDS Department of Economics, Texas A & M University, College Station, Texas, USA

The tenacious myth that a free economy and free society impoverish working people undergirds modern government interference in labor markets and legal privilege for adversarial labor unions. Managers are concerned about harmony and productivity at the shop floor level The opposite characteristics of conflict, disco-ordination and inefficiency are anathema. Most of the union difficulties managers must cope with at the shop floor level stem from a fundamental source, namely the philosophy of collectivism. This paper analyzes the fable of labor’s disadvantage, wage determination under personal and impersonal conditions, public policy toward labor contracts and the role of businessmen in making labor markets operate more efficiently.

No issue of comparable scope has been vexed by more confusion and misinformation than labor relations. Popular opinion is untutored, to be sure, but articulate public opinion-government officials, the clergy, union leaders, the media, political activists, academics, even businessmen-is worse because they know so much that just is not so. To paraphrase H. L. Mencken, the great American journalist: ‘What remains to the world, in the field of labor relations, is a series of long- tested and solidly agreeable lies.’ (Mencken originally referred to ‘wisdom’ instead of ‘labor relations’.)

The basic deception boils down to the proposition that a free economy and a free society impoverish working people. In a free market system, goes the conventional wisdom, each employer (especially large ones) exercises an awesome power to impoverish the helpless people who trade their labor services for general purchasing power in a private property, capita- list order. The myth of the abused and oppressed worker has proven so successful in the West that i t undergirds all modern systems of government inter- ference in labor markets and legal privilege for labor unions to protect ‘the underdog’.

Economists have exploded the fable of labor’s disadvantage time after time, but reason has proven a weak foe of anti-reason in this arena. As is so common in economic policy, a combination of rent-seeking and power-seeking factions, aided by misguided idealists, has produced a muddled set of labor regulations which momentarily appease the politically potent at the expense of the general interest. Idealists ardently want to believe that economic progress can be secured by empowering unions and the state to intervene in labor contracts via coercion. The belief that intervention helps the underdog is emotionally satisfying, even if rational analysis demonstrates that well-intended labor policies harm the poorest citizens they are supposed to enrich.

Since I am addressing an audience predominantly of businessmen-a group well checked by reality on a daily basis-you may think that I exaggerate the

superstitions about labor. However, consider my home encyclopedia’s earnest message:

From the last quarter of the nineteenth century the condition of most manual labor has improved slowly in industrial countries through organization (see Union, labor), permitting collective bargaining with employers and successful pressure on govern- ments for protective legislation ( N e w Columbia Encyclopedia, p. 15 1 1).

If the encyclopedia’s economic theory of the material conditions of labor were correct then it would be easy for those in charge in Burma, Ethiopia, Egypt, the homelands or other poor countries around the world to apply the formula and bring prosperity to working people: (1) unionize, (2) be tough in collective bargain- ing, (3) impose protective labor legislation, (4) sit back and enjoy the abundance. Economic reality, however, has not been very kind towards such schemes. Those with social plans that call for the use offorce have had a dismal record in repealing economic laws, though not for want of trying.

The encyclopedia’s doctrine on wage progress via union and government wage pressure is defective on many counts. It fails to account for Japan’s real product per person rising from 17% of US product in 1950 to 72% in 1980, or why Hong Kong’s went from 18% of US GDP in 1960 to 51% by 1980. And we could go on (see Summers and Heston, 1984).

On wages and other working conditions, fashion- able opinion (partly due to the pernicious errors of Keynes) mistakenly reverses cause and effect: high productivity causes high wages, not vice versa. Produc- tion is the source of high living standards, not con- sumption spending, not high wages, nor other popular theories. As Jean Baptiste Say would put it: in order to demand, you must supply (Say’s Law). Alternatively, to consume, you must produce in an exchange economy. And supply (production) grows most rapidly via free market arrangements, including the free and efficient operation of labor markets. That, in a nutshell, is the

0143-6570/87/010047-07$05.00 0 1987 by John Wiley & Sons, Ltd.

48 M. REYNOLDS

true story about labor markets. The rest is either straightening out fairy tales or applying the theory to different situations.

What about labor relations on the shop floor? Managers necessarily are concerned with harmony and productivity at the shop floor level. The opposite characteristics are anathema: conflict, disco- ordination and inefficiency. Economists also must be concerned with disco-ordination and inefficiency, but they focus on the economy, not the shop floor. Good managers are expert at managing labor problems at the shop level while good economists (not all economists) understand malfunctions at the economy level. Break- downs in co-ordination at the economy level always can be traced to pricing failures and government intervention. Economists, however, have no special knowledge about the daily problems of labor manage- ment, and defer to managers on that front.

My lecture is not mistitled, though. I take my inspiration from Thoreau: ‘There are a thousand hacking at the branches of evil to one who is striking at the root’ (Bartletts, 1980, p. 559). Men of action must cope with the daily problems of the shop while I have been able to study and observe from the luxury of the academy. My conclusion is that most labor difficulties at the shop level stem from a fundamental source, namely, the philosophy of collectivism. In the war of ideas there are ultimately only two types of political philosophy: individualism or collectivism. To claim that free labor markets are unjust is to assert the right to ban voluntary transactions via coercion. Whether the vehicle of collective action is the labor union or government, the inspiration and the methods ulti- mately are the same. Unions and labor regulations seek to overturn free market processes and results.

The philosophy of collectivism and social engineer- ing is hardly confined to labor markets. We need only took at tariffs and other state barriers to international trade. Virtually all economists have agreed for over two hundred years that these barriers impoverish nations rather than enrich them. Yet virtual unanimity among economists on cause and effect in trade policy has had relatively little effect on public opinion and public policy. Economists are less agreed and certainly less vocal about free markets in labor services, though the same analysis and conclusions apply. The central problem always comes back to the fact that people do not understand how free markets can produce benign results. People, however, think they understand poli- tics and believe that the state can not only set out to but actually achieve benign results. Are some people paid too little? Well, pass a law fixing minimum rates. Or else have a union fix minimums. And? That’s all there is to it.

People are ambivalent, at best, toward competitive, free markets, including businessmen. Yet competition is not a destructive force, it is the opposite. It is the sole method of co-ordination which allows each person to peacefully use both capital and labor services in pursuit of his or her own ends. It is the only method for social co-ordination in the Great Society. The ethic of giving,

sharing and no money prices idealized by socialists only works at a primitive level of social co- ordination-the family or tribe-not in the Great Society of co-operation among strangers.

MORE ON THE BIG PICTURE

Standard economic analysis explains success and fai- lure at the economy-wide level: prosperity rests on productivity. And productivity (output per hour) de- pends on the capital available for multiplying the product of human effort, innovative entrepreneurs, plus industrious, skilled workers whose efforts are all co-ordinated through the pricing mechanism. The key to progress against poverty is peaceful co-operation-- mutually profitable exchange in a market-based envir- onment, not state-supported labor cartels nor other regulations that mostly serve to enrich insiders at the expense of outsiders.

Adversarial, state-supported labor cartels do not create wealth, though ‘wageers’ (trade unions) can skim off short-run profits for the few (union members) at the expense of the many (non-union labor, consumers and unforesightful investors). What is the long-run result of strong unionism and hampered labor markets? The outcome is on display daily in the relative demise of England: unions divert labor from higher- to lower- productivity jobs through wage aggression, oppose new technology, compel excessive use of labor and disrupt production and investment through strike threats and other tactics. The losses are suffered mostly by con- sumers, taxpayers and non-union workers rather than investors. While unions can reduce the returns on capital decisions made yesterday, it is difficult to seize the returns from tomorrow’s investments.

All of these observations may be obvious to this audience, so 1 feel compelled to offer another quote to suggest that misinformation flourishes:

‘Apart from the human misery entailed (especially for migrant workers returned to the homelands), retrenchments created a problem for unions by draining membership and providing a camouflage for employers seeking to break union power (though less enlightened employees tend to tackle the unions more openly)’ (Africa Contemporary Record, 1982-3, p. B783).

This quotation may set a record for economic errors in a single sentence, though I realize the competition is stiff. Amid the misery, the author vaguely pictures working people as helpless objects of pity, incompet- ent to manage their own affairs, passive victims who need the active protection and direction selflessly provided by unionists and bureaucrats. Employers, on the other hand, are pictured as crafty and cunning. We are left to wonder whether humans beings come in only two sizes: the calculators and ‘the workers’. Next, what caused the retrenchments? It may have been an ordinary business failure-the market punishes failed decisions and displaces inefficient uses of resources-

LABOR RELATIONS AT THE SHOP FLOOR LEVEL 49

an ordinary risk of life for resource suppliers. Losses are at least as important as profits in directing resource use. Perhaps the writer would make retrenchments and other forms of adjustment to market circumstances criminal offenses. Alternatively, the cause of retrench- ment may have been the business cycle-if so, it was caused by the unsound monetary and fiscal policies undoubtedly endorsed by the unions, the writer and Keynes. For example, in The General Theory Keynes (1936) said: ‘It can only be an unjust person who would prefer a flexible wage policy to a flexible money policy’ (p. 268). It would be difficult to find a clearer endorse- ment of inflation than that.

The desire for employment stability (properly: in- come security) is understandable, but most writers fail to understand that the marketplace responds to these desires. Companies do not like to lay people off because firms with steady employment avoid the higher wages that the market (labor sellers) imposes on firms with unstable employment. Well-managed enter- prises also enjoy the greater productivity that comes from intact employee teams. Managers get no joy out of retrenchment and delay it as long as is prudent. Productivity statistics confirm that firms treat labor as a quasi-fixed factor of production-firms are slow to increase employment on the upturn and slow to reduce on the downturn. Business has every incentive to supply steady employment and earn the goodwill of employees. These voluntary market processes are disrupted by unemployment benefits and taxes, union wage rigidities, union work rules and erratic monetary and interventionist policies.

Whatever the initial cause of economic difficulty, union opposition to wage cuts increases retrenchments, hinders rehiring and thereby retards recovery. Price and wage inflexibility prevents the reco-ordination of economic activity, thereby keeping employment and output below capacity.

To give a balanced assessment of the Africa Con- temporary Record quotation I agree that some com- panies find it embarrassing to do their job of keeping their costs as low as possible. Instead, they try to camouflage their opposition to unions and practice ‘accommodation’, at least for public consumption. Trade unions also suffer lower membership and smal- ler finances in retrenchment, though the problem is largely self-induced, caused by their inflexible, high wage policies which endanger the survival of the company. Unions accept no responsibility, of course, unless it is for improvements in working conditions, union and non-union.

As if the sentence from Africa Contemporary Record does not contain enough economic errors, the author treats us to a description of the 1982 labor disputes in South Africa’s motor vehicle industry, concluding that ‘The new minimum [wage] was set arbitrarily’. He adds that the minimum rates offered by the Chamber of Mines were ‘set arbitrarily’. Arbitrarily? Why not $1 million per month then? We can only wonder if the writer also believes that firms set the prices of their products ‘arbitrarily’. Apparently the relative scarcity

of different labor skills plays no role at all. Arbitrarily means capriciously, selected at random and without reason. It is odd to term wage determination with no unions ‘arbitrary’. The writer must believe that firms have unlimited discretion to set prices wherever they want without adverse market consequence, be they the prices paid for inputs or received for outputs. Consis- tency demands that the writer insist on a consumers’ union to bargain collectively ‘against’ the firm in order to set ‘fair’ (presumably low) prices. The writer appa- rently sees no pattern in price behavior, though students of the marketplace do. If company managers can pay any price they wish for the materials and other inputs purchased besides labor, it is difficult to explain why they do not pay prices of zero. The writer’s theory of corporate ‘power’ apparently leaves the door open to unlimited profits, which leaves no obvious way to explain why we observe companies losing money, merging, going bankrupt and coping with other kinds of stress.

All of this gets pretty silly, but it highlights the fact that most writing on labor issues reflects zero knowled- ge of economics. If labor writers know any economics they do not believe it. Labor services are somehow different, outside of economic laws. This conveniently leaves reformers free to operate in a world where there is no economics, at least until they get outside the office and decide what to buy, not buy and deal with their family finances. The world of zero economics includes the discipline of industrial relations, where the prices paid for labor-including fringe benefits, other work- ing amenities and employment taxes-are unrelated to the prices paid for capital, outputs, other inputs or considerations of productivity.

WAGE DETERMINATION-PERSONAL OR IMPERSONAL?

Business firms buy and lease an enormous variety of goods and services every day. How are the prices of all these inputs determined? Essentially by a competitive, free market process. How can we be sure that suppliers are getting the ‘right’ (‘fair’, ‘living’, ‘decent’) prices for their products? We cannot, but few political activists ask about most of these prices. No-one seems to be concerned about whether Goodyear gets a ‘fair’ price for the tires it supplies to Ford Motor Company, but sentimentalists are concerned about labor because labor allegedly is different. We know that Goodyear and Ford found a price that was mutually agreeable. No doubt both parties were influenced by their respec- tive alternatives-that is, market conditions and an- ticipated conditions.

In the case of labor an ‘inequality of bargaining power’ allegedly exists in labor transactions, despite the obvious fact that these trades too are for the mutual benefit of both parties. The terms of trade are not right, however, according to modern dogma. Businesses, goes the story, have control over the prices (and other

50 M. REYNOLDS

conditions) of labor and persistently set them too low unless forced to raise them by aggressive labor unions or by government edict. The theory is false on many grounds, but the lack of generality in the theory is manifest. Advocates of unionism do not claim that employers have enormous control over the prices of other materials, services and equipment that they purchase in the marketplace (an exception is farmer’s complaints about unfairly low prices paid by pro- cessors for agricultural output, analogous to unions’ claims).

Employers cannot set arbitrary labor prices or working conditions and survive in business for long. The plain fact is that employers are subject to the discipline of the marketplace. Pricing decisions are ruled by market conditions, that is, supply and de- mand. The ‘captains of industry’ only remain at the helm (some are being relieved of their duties at this moment) as long as they achieve positive profits through relative efficiency. They must be able to produce at low enough costs and please enough paying customers to survive.

The same market discipline operates in labor mar- kets as it does in product markets. Not that markets operate ‘perfectly’-with continuous spot prices in- stantaneously clearing markets with infinitely large numbers of buyers and sellers-but that supply and demand conditions for the different labor skills matter. The democratic market process results in relatively impersonal market pricing for the results of human effort -marginal productivity pricing.

True, individual firms have latitude in the wage- amenity packages they can offer for the quantity and quality of the skills they wish to attract and keep. However, markets are constantly, silently correcting and adjusting these compensation bundles. Some firms, for example, meter rewards more closely to individual contributions to the success (output) of the firm. Higher relative efficiency in monitoring and rewarding the work force enriches these firms, and ultimately spreads to other firms by displacing less productive personnel practices.

What alternative to market-directed pricing for labor is there? The only substitute is caprice- removing pricing judgments from the masses and placing decisions in the hands of a few. Union power, like other forms of economic collectivism, is a form of personalized pricing. It seeks above-market rewards for privileged workers, extracted from certain buyers of labor-generally penalizing the more successful em- ployers (more productive), thereby indirectly reward- ing less successful businesses with cheaper labor prices.

Union ‘power’ means monopoly power-the coer- cive ability to restrict a firm’s or industry’s access to competing sellers of labor services. Union power denies other labor sellers, who seek to improve their material conditions, access to superior employment opportun- ities. Labor strikes, in other words, are not simple withdrawals of labor services by incumbent workers but an attempted closure of a labor market until the strikers’ demands are met. Strikes are not the much-

ballyhooed conflict between management and labor (a buyer-seller conflict) because labor, capital and man- agement services basically are co-operating factors in the production process. Instead, strikes expose the basic conflict among competing suppliers in the labor market. The central problem for worker cartels is ‘scabs’, ‘rats’, ‘strikebreakers’, and other substitutes for members’ services, including other union labor, not excessively greedy capitalists, investors and corpor- ations. Successful strikes and strike threats depend on a union’s ability to persuade (intimidate) everyone to strike. In virtually all of the Western world trade unions have been granted shadowy legal privileges and immunities to make their coercive threats real.

What has been overlooked in most discussions about working conditions is that labor prices (rewards) perform crucial allocative, efficiency and equilibrium functions. The slogans of unionism, like socialism, only make superficial sense-in fragments. No-one can construct a coherent vision of what a truly unionized society (abandoning market pricing) would look like. Giant collectives with shadowy privileges to use threats and violence would be joined by similar collectives of lenders, physicians, landlords and so on, thereby intensifying political conflicts over an unear- ned and ultimately diminishing the economic pie. The viciousness, the rousing of tribal loyalties, the persist- ent effort to politicize members, the ‘we and them’ hatred that highlights the atavism of adversarial unionism would destroy order. Economic collectivism destroys peaceful social co-operation.

Economics studies people in their capacities both as consumers and producers. If the ultimate purpose of economic activity is consumption, then the forgotten person in labor disputes surely is the consumer. Most mistaken economic policies protect producer groups from competitive pressures, including labor unions and state labor regulations. Sound labor policies in the firm or at the government level dictate that we keep our gaze fixed on the long-run interests of the consumer. In the words of the master, Adam Smith (1776):

Consumption is the sole end and purpose of produc- tion; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer (p. 660).

Who said life was supposed to be easy for producers, be they workers, managers or capitalists? It is supposed to be for consumers. Policies that protect losers from competitive pressures hamper prosperity.

The consumer, however, is not the only one harmed by pro-union intervention. Each artificial scarcity im- plies an artificial abundance somewhere else: those excluded from unionized employment opportunities do not concern unions, their members or plant man- agers, for that matter, despite their protests to the contrary. The jurisdictional feuds among trade unions shows that unionists are not much interested in other unionists’ welfare, despite all the cant about the labor movement, solidarity and brotherhood, much less about the plight of the unemployed.

LABOR RELATIONS AT THE SHOP FLOOR LEVEL 5 1

PUBLIC POLICY

My sharp words about labor unions can be easily misinterpreted. In principle, unions can help their members, as well as employers and labor markets, in a variety of ways. Unions could operate as peaceful associations of workingmen. The problem is that almost all unions reject the co-operative model in favor of the adversarial. This is understandable because the legal privileges and immunities of the modern welfare (laboristic) state allow them to basically operate out- side of the rule of law, despite an ever-growing web of labor rules and regulations. It is fruitless and naive to blame unions for their threats or use of force in pursuit of monopoly gains or to urge them to reform them- selves. They are responding to incentives. If other private associations had immunities similar to unions, they would act the same way. As Sylvester Petro (1 959) says:

If, for example, businessmen were allowed to compel the purchases of their customers [compulsory], to assault them when they showed any intention of removing their patronage, and to block access to competitors-there is very little reason to believe that such conduct would not become common business practice (p. 21 3).

A century of intellectual effort has promoted the idea that the noble ends of unionists justify their means. Within broad limits, many governmental officials do little to protect law-abiding citizens and their property from union assault because of the belief that i t helps ‘labor’. The shadowy privilege of unions to use violence is not only important instance of the state failing to jealously guard its monopoly on coercion. Union privilege and immunities violate the three ideals of the Statue of Justice-blindfold, scales and sword- because justice peeks, tips the scales in favor of unions and allows them to use the sword to initiate violence.

The remedy is to restore the rule of non-political law in labor relations, which means generality, impartiality and predictability. Unions and their members would then be treated in a manner consistent with everyone else under ordinary contract, tort and criminal law. Woodrow Wilson summed it up in a phrase then common in the sporting world: ‘A free field and no favor’ (Henry, 1945, p. 131).

Repeal of union privilege would weaken the mono- poly power of unions, but most economists agree that such a change would have favorable effects for the economy and workers as a whole. Redistribution in favor of union leaders and members would diminish. Inefficient work rules would be lifted, making the reforming nation more competitive in world markets. More productive opportunities for non-union workers and the unemployed would open up. Labor disputes would decline and those that occurred would be resolved as other human conflicts are-primarily in private negotiation and ultimately in the courts under common law. More companies would experiment with

a richer menu of personnel policies with little fear of adversarial unions. Instead of trying to ‘keep the lid on’ and fighting union fires, managers could create volun- tary arrangements for the mutual benefit of themselves, owners and employees like co-operative labor organiz- ations, participatory management, and higher labor compensation to reward higher productivity and re- tention of the best people.

BUSINESSMEN

Businessmen must cope with the daily results of misguided labor policies. While I sympathetize with their problems, the business community cannot be excused without accepting a measure of responsibility for the situation. As George Stigler (1982) says: ‘[Tlhe larger part of the regulations that businessmen are subjected to must be of their own contriving and acceptance. . . most regulatory policies have been sought by producer groups, of whom the business community is the most important and the academic community by no means the least important’ (p. 3).

In principle, those who work in a market system can operate efficiently without understanding the forces within which they operate because of the social disci- pline exerted by markets. However, in our politicized age, some leading businessmen must understand the virtues of free markets and articulately defend what they are doing, or else the business community abets the destruction of society.

In labor relations, my plea is for more managers to live by announced principles and apply them in impersonal ways. Managers must proudly say, yes, we are trying to maximize the value of the company, the wealth of the owners. We try to produce and sell our products for the highest profits obtainable. We insist on our right to seek out the lowest prices for the skills we want to employ, as well as the myriad other inputs we use. We intend to resist forced exchanges (unioniz- ation of the company), keep our labor costs competi- tive, protect jobs in the company, our stockholders and (ultimately) consumers. Our behavior, by the way, adds to total employment and output in the nation, and helps to diminish inequality over time.

Efficient managers are the only line of defense for consumers. Guilt-ridden businessmen infected by col- lectivist ideas cannot defend themselves or the con- sumers. As Alfred North Whitehead said: ‘A great society is a society in which men of business think greatly of their functions’ (Jackson, 1984, p. 17). And, we might add, if businessmen are ashamed of their functions, we all suffer economic woes.

On the other side of the labor market, people should have the right to sell their labor services to the highest bidder, without fear of those supposedly harmed by this freedom (e.g., union members). Competitive arrange- ments produce prosperity. State and union interferences with competitive forces hamper the displacement of inefficient by relatively efficient arrangements. Protec- tive legislation, by definition, protects incumbents’

52 M. REYNOLDS

privileges from interlopers. Unrestrained compe- tition in labor markets breaks down man-made bar- riers and puts more people in the higher-paid kinds of work and fewer in the lower-paid kinds. Free markets not only accelerate the growth of the economic pie-a claim that many leftists would grudgingly admit-but markets are egalitarian, constantly undermining the status quo of natural and man-made inequalities, a feature leftists do not understand. I f labor markets are allowed to work flexibly, supply and demand produces competitive pricing (or close approximations), thereby maximizing total output and employment. Economic growth increases the size of the pie and economic inequality diminishes. The marketplace simply is in- tolerant of inefficiency and privilege.

Labor relations is a prominent aspect of the general problem of defending private ownership in the means of production and capitalist arrangements generally. The abundance that freedom produces for the masses provides little defense against intellectual and political attack. The great twentieth-century economist Joseph Schumpeter (1962) asked if capitalism could survive. No, was his answer. Why? Among others things, businessmen would fail to defend the market system. First, they lack the capacity even if they have the will. In the words of Schumpeter:

A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose- both in the drawing room and on the platform. Knowing this he wants to be left alone and to leave politics alone (pp. 138-9).

Second, businessmen lack the will. Organization men, for example, succeed the self-made entrepreneurs of early capitalism, and corporate types are not steeped in rugged individualism, have no strong sense of private property and are indifferent to anonymous shareholders. More importantly, Schumpeter says:

. . .the bourgeoisie, besides educating its own enemies, allows itself in turn to be educated by them. I t absorbs the slogans of current radicalism and seems quite willing to undergo a process of conver- sion to a creed hostile to its very existence . . . the typical bourgeois is rapidly losing faith in his own creed (p. 161).

Too many businessmen respond to the general encroachment of labor unions and labor regulators like the native girl did to Lord Jim’s advances, described by Conrad this way: ‘He would have rav- ished her, but for her timely compliance’ (Rogge, 1979, p. 34). Too many businessmen have learned to mouth the inanities about the social responsibility of business, enlightened wage policies and so on. Such accommod- ation to the enemies of private property and economic liberty might work in the short run but not in the long run. The unionized US steel companies, for example, virtually signed over their companies to the unions, wondered why they were uncompetitive and ran to Washington for protection. Nothing can do more harm to capitalism, free markets and the material

condition of the masses than businessmen parroting talk about ‘enlightenment’ and the social responsibility of the businessman. Nobody believes it anyway.

When businessmen set out to do social good they generally do harm anyway. Consider this economic example: when businessmen succumb to public pres- sure and maintain artificially high wage rates during a recession they damage the economy. Their employ- ment is smaller at high labor prices, which keeps company output smaller. In turn, the demand for (‘non-competing’) outputs in the rest of the economy stays low, and consequently employment remains lower there too. Eventually, ofcourse, the truth will out and market-selected wage cuts (nominal and real) begin to clear out some of the unemployment. How- ever. rarely does the reco-ordination process proceed to clear all labor markets (all those desiring to work at prevailing rates can find jobs reasonably promptly). Some resources continue to be priced out of full employment and are then kept in subsidized idleness via the welfare state. The market cannot freely value resources and outputs, so employment and output is kept below capacity, causing avoidable hardship. The intellectual defense of market-dictated labor policies by businesses goes unused because of a failure of nerve among businessmen, failure ultimately based on ignorance.

CONCLUSION

The threat posed to prosperity by the widespread failure to appreciate the co-ordinating effects of the competitive price system can hardly be underesti- mated. Nowhere is this better illustrated than in the decline of the Roman Empire.

By the second century AD-the age of the ‘good emperors’- the Roman Empire clearly had reached an advanced stage in the division of labor and interregi- onal trade. Commerce flourished. Transportation was easier than it was again until the railroads of the nineteenth century. Rome was the first city to achieve a population of 1 million. The residents of Rome and other urban centers were supplied with food and other goods daily from neighboring and distant provinces. The various parts of the empire were no longer ‘autarkic’ (economically self-sufficient) but interde- pendent. Comparable luxury and technical proficiency did not exist in any European city until the eighteenth century.

The decline of the Empire, decay of its civilization and the descent into the privations of the Middle Ages were due to the disintegration of economic interde- pendence (Mises, 1966, pp. 767-69). The Empire was already medieval in its economic and social structure when the northern tribes invaded. Why? In the third and fourth centuries the emperors resorted to currency debasement (inflation) and rigidly enforced maximum wages and prices to suppress price inflation. The predictable result of this frozen price system, though not diagnosed in those days, was the paralysis of

LABOR RELATIONS AT THE SHOP FLOOR LEVEL 53

production and trade. In the face of this massive co- ordination failure, people deserted the cities-Rome shrivelled to a local trading center of fewer than 10000-and settled in the countryside to avoid starv- ing. Society reverted to a less advanced state of social co-operation, namely, the quasi-autarkic estates of the Middle Ages.

Supposedly, we know better today. Yet in 1971 many in the US business community applauded the Nixon wage-price controls. The public, news media and many businessmen remain innocent of the social functions of pricing. This accounts for the inferior level of discussion over governmental and union manipul- ations of the price system, whether the controversy is over price minimums, price maximums, price supports, state subsidies, quotas, marketing orders, licensing restrictions, tariffs and other competitive restraints.

The price-induced fate of Rome is not my forecast of the future, merely an example from the past. I have no

forecast. If I did, there would be little reason to place any confidence in it. There are always conflicting tendencies in the present. Which will seize the day cannot be confidently predicted in advance. On the side of optimism, we need look no further than Adam Smith (1 776), who identified the permanent factor operating to save us from the Roman fate:

The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extra- vagance of government, and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor (p. 343).

REFERENCES

Africa Contemporary Record, 1982-83 (1 984). New York: Afri-

Bartlett’s Familiar Quotations (1 980). Boston: Little, Brown,

L. C., Henry (ed.) (1945). Best Quotations for All Occasions,

M. Jackson (1984). The Macmillan Book of Business and

J. M. Keynes (1936). The General Theory of Employment,

L. von Mises (1966). Human Action. Chicago: Contemporary,

New Columbia Encyclopedia (1 975). New York: Columbia

cans.

15th edn.

New York: Doubleday.

Economics Quotations, New York: Macmillan.

lnterest and Money, New York: Harcourt, Brace.

3rd edn.

University Press, 4th edn. S. Petro (1 959). Power Unlimited, New York: Ronald Press. B. A. Rogge (1 979). Can Capitalism Survive? Indianapolis:

Liberty Press. J. A. Schumpeter (1 962). Capitalism, Socialism,andDemocracy,

New York: Harper & Row, 3rd edn. A. Smith (1 776). An Inquiry into the Nature and Causes of the

Wealth of Nations, Indianapolis: Liberty Classics edn, 1981. G. Stigler (1 982). Is American capitalism at high noon? Compe-

tition 3, Nov./Dec. 3-4. R. Summers and A. Heston (1984). Improved international

comparisons of real product and its composition: 1950-1 980. Review of Income and Wealth 30, June, 207-62.