Do Unions Cause Automation? H. Sennholz

There are other popular notions on the beneficial effects of labor unions. Many people even outside the union camp give credit to the union bosses for the Amer ican trend toward more and more industrial "automaDr. Sennholz is Professor of Economics at Grove City College, Pennsylvania. [428 ] tion." They argue as follows: the unions demand higher wages. The employers, squeezed by higher labor costs, seek refuge in automation to reduce the costs. Automa tion then brings about higher productivity which in turn encourages the unions to demand still. higher wages. In other words, the union bosses are in the driver's seat in the industrial surge toward unforeseeable productivity. Oh, lucky land of labor unions! The economist is reminded of the fable of Aladdin's lamp whos owner merely rubs the lamp to evoke the friendly genie. Coura geous union bosses clamor for more and mo e, and frightened businessmen realize the dream of hig er and higher standards of living!

Automation Defined What is "automation"? It is an ill-chosen n me for production with more capital equipment. It car ies the connotation of an automatism of production that creates mass unemployment. The age-old question of hether machines create unemployment needs no furthe discus sion at this place. It is continuously revived b, union leaders in desperate need of an explanation for the chronic unemployment caused by their own activity. Production with more capital equipment necessitates industrial adjustment. In a capitalist economy an ad justment to changed consumers' demand, improved production techniques, and changing capital markets is continuously taking place. It is no new phenomenon. When the water-piping [429 ] system was first invented and became accessible to the population through capitalist mass production, adjust ments had to be made. In the big cities of Europe, thou sands of water carriers, who sold their water by the bucket, were set free by this new "automation." But it also gave employment to thousands of workers in fac tories producing the pipes and brought forth a new craft, plumbing, which gave employment through sell ing and servicing the piping systems. The people who were affected by this new automation did not complain, for it was progress.

There were no labor unions, or at least their power was insignificant. And yet, there was (4;automation."Why? The investment capital that was necessary for production and installation became available at a price that was lower than the cost of delivery by the water carriers. At first, when the price of the piping systems was very high and the required capital outlay very great, only wealthy families could afford the improvements. When the price declined and hence also the capital outlay, the savings in cost by the piping system increased, which consequently led to more installation in the homes of all strata of population. Capital Must First Be Accumulated The fundamental prerequisite for production with more capital equipment is the existence of new capital. If no new capital is accumulated either through entre preneurial profits or savings, no improvement through [430 ] additional capital outlay is feasible. If, some hundred years ago, no new capital had been available for the water-piping system, it simply could not have been introduced.

The prerequisite of new capital accumulation for pro duction improvements refutes the notion that labor unions stimulate capital outlays. Unions are the implaca ble foes of profits and savings. How can they claim credit for the· benencial effects of capital accumulation? New capital must be available at a price that consti tutes a saving in cost In other words, if a businessman is to replace an old production method with a new method that is physically more productive, it must be prontable for him to do so. The cost of the larger capital required for the innovation plus other production costs must be smaller than the combined costs of the old process. Interest .Rate ·Gives Signal for Conversion The cost of capital is determined by the market rate of interest which in turn is determined by the state of the capital market In a capitalist economy without con nscatory taxation and controls, capital accumulation takes place continuously. The interest rate declines and gives the businessman his signal for conversion from old production methods to new methods requiring larger capital outlays.

I should like to illustrate this. Let us take a marginal enterprise neither earning pronts nor suffering losses. Let [431 ] us assume that the interest rate it would have to pay for investment capital stands at 6 per cent. It clings to an old physically inferior production method because it requires less capital and lower interest charges on the capital invested than the new method. Its costs per unit of production are lower than they would be with the new method. Now the rate of interest declines because of additional capital supply. Let us assume that at 4 per cent it be comes profitable to borrow the capital required for the retooling. At this point the unit costs of the new method, which is physically superior but requires larger capital investments, falls below the unit costs of the old method due to the decline in interest charges. The alert business man at once embarks upon the conversion.

Producing at lower unit costs, this businessman now reaps a profit. He expands and increases production. The price of the product declines, which in turn leads to losses by the less capable businessman who clings to older production methods. Inferior Production Methods Lead to Losses for All Concerned Let us assume that our marginal enterprise clings to old production methods. Then it faces a loss, not only because of the declining prices of its product, but also because of rising labor costs. Competing modernized enterprises, earning profits and expanding production, bid up the price of labor. They work with higher labor [432 ] productivity. Also, the machine tool industries expand and attract additional labor. In order to hold its work force, our enterprise must raise wages and thus bear higher labor costs. Comparison of costs may now lead to the following conclusions: With the interest rate at 6 per cent it was definitely profitable to continue production with the old method requiring less capital and carrying lower interest charges. With the interest rate at 4 per cent, product prices and labor costs being the same, it was profitable to resort to the physically superior method requiring larger capital outlay. But with product prices declining and labor costs rising on account of the expanding pro duction by modernized competitors, the 4 per cent rate of interest no longer warrants the retooling. Our mar ginal enterprise will have to wait until the rate declines even further, let us say to 3 per cent, or until a produc tion method becomes available that yields even greater physical productivity with the same capital outlay. Only under these special assumptions can our businessman hope to compete again with his alert competitors. Most likely he will have lost irrevocably his position as a marginal enterprise. He will have to cease production or switch to other fields of enterprise.

So far, our analysis has dealt with the effects of capital accumulation on the introduction of new production methods requiring more capital. We assumed an unham pered market with capital accumulation and declining interest rates. Let us now introduce the case of rising labor costs as a result of union coercion. [433 ] A Labor Union Coerces a Single Enterprise within an Industry Our marginal enterprise is threatened by a strike. Investment capital is available at the rate of 6 per cent. At this rate and with unchanged labor costs it would be profitable to continue to produce with the old pro duction method. Now union pressure increases labor costs. Is it now profitable to embark upon the expensive retooling entailing a saving of labor costs, or is it wiser to cling to the old method burdened by much larger labor costs? The answer to this question obviously depends on the extent of the wage increase enforced by the labor union.

It may be that the physically more productive method requiring larger capital outlay with some savings in labor costs is less costly than the old method burdened by the new labor costs. Or it may be that the old method is still less costly than the new method. But either answer is utterly insignificant for our enterprise, for each alterna tive entails higher production costs which cannot be passed on in the form of higher product prices. Both methods, therefore, lead to losses for our marginal enter prise and its ultimate bankruptcy. This conclusion clearly demonstrates that the union clamor for higher labor costs does not lead to "automa tion," but merely confronts the entrepreneur with the choice of two losses: through the old method burdened with higher union wages, or through the new method burdened with higher capital costs. [434 ] A Whole Industry Is Coerced In the foregoing case, our enterprise suffered losses on account of union coercion; there is no refuge in automa tion. Let us now assume that, instead of our marginal enterprise being threatened by a local union, the whole industry suffers from the grip of a nationwide labor organization. In this case, as in that of a single enter prise, the given alternatives are the following: increased costs through higher union wages or increased costs through larger capital outlay with some savings in wages.

Again the question of which one of the evils is the smaller depends on the specific case. But no enterprise can be expected to embark upon expensive retooling merely to suffer the smaller loss. However, this case of an· industry whose labor costs are increased by an industry-wide union organization diHers from that of a single enterprise in an important respect. The higher production costs lead to industry wide losses which in tum force a restriction of produc tion. The curtailment in product supply then leads to higher product prices. The higher product prices growing out of production restrictions may in fact permit the surviving producers to choose one of the two costly alternatives. It is con ceivable that expensive retooling with higher capital costs may be the less costly alternative and may even be profitable on account of the higher product prices. There is still another factor standing in the way of conversion to production methods requiring more capi[435 ] tal. The surviving enterprises that prefer the expensive retooling exert an influence on the capital market. The rate of interest tends to rise. In other words, investment capital may no longer be available at 6 per cent, but may rise to, let us say, 7 per cent. This would reduce the likelihood of large capital expenditures for retooling.

t:t:Automation~~ as Maladjustment But, in some cases, the unions may indeed force the surviving producers to undertake the conversion. The conditions are the following: industry-wide union coer cion, restriction of production, higher product prices, and the barring of all union-free newcomers to the field. It is conceivable, for instance, that General Motors, Chrysler, and Ford have been forced by the coercion of the automobile workers' unions to resort to some ~~auto mation" that otherwise might not have been undertaken. This is by no means a laudable achievement. The capital needed for the costly retooling is withdrawn from other more productive uses. Other industries that profit ably converted to production methods requiring more capital now find themselves short of capital. They have to be content with old inferior methods and must wait until additional capital is accumulated through profits and savings. In the meantime, consumers must pay higher prices than they would have paid if the retooling could have been achieved in some way.

In other words, the "automation" brought about by union coercion constitutes a· maladjustment of "automa[436 ] tion," that is, a diversion of funds from more productive to less productive employments. On balance, it consti tutes a decrease in productivity, lower wages, and lower standards of living. Higher Productivity through "Shortening Inventions" Production improvements in general require larger capital outlays. Capital must be available at a rate of interest that permits the introduction of methods of production requiring additional capital. This condition stresses the importance of capital accumulation through profits and savings. It also points at the disastrous effects of confiscatory taxation and wasteful union practices. I used the words "in general" because there is an important exception to the rule. Once in a great while creative human genius brings forth what Bohm-Bawerk called "shortening inventions."! They are inventions that are physically more productive without requiring addi tional capital outlays. For instance, a machine is invented that is more productive although it is no more expensive, or even less expensive, than the old machine in use. Or, a new material is invented with comparable qualities but cheaper than the material in use. In this case, all pro ducers in the field will immediately employ the invention without having to wait for new capital to be accumu1 Eugen von Bohm-Bawerk, Further Essays on Capital and Interest, in process of publication by Libertarian Press, South Holland, Illinois.

[437 ] lated. It even may free some capital for various other purposes. As we cannot depend on creative genius continuously to improve our production methods through "shortening inventions," we seem bound to rely on the slow and pain ful process of saving. For this reason we must defend the free enterprise system from all interventionist attacks on savings and, especially, from attempts at capital con sumption by the labor unions. [438 ] JUSTICE VS. RESTRICTIONS ON TRADE tg :J.l'eJeric BaJlial (1801-1850) COME with me into one of those wooden cabins that cling to the French side of the Pyrenees [in 1846]. We discover that the father of the family has not been able to eam much in that mountainous section of the country. His poorly-clothed children shiver in the icy blast. The fire is out and the table bare. On the other side of the mountain in Spain, there are wool, firewood, and corn. But the poor father is forbid den to use them because they are grown in another country!