Signicance of Service; W. A. Paton

Kinds of Personal Services In commenting on this area of sloppy thinking and the accom panying harmful policies and practices I'll first call attention to w. A. Paton is Professor Emeritus of Account ing and Economics, University of Michigan. He is author (or co-author) of a score of books and many articles, largely in the field of ac counting. Since his retirement at Michigan, he has continued his writing and lecturing activ ities and has done part-time teaching at a doz en colleges and universities, in ten states. 48 the persistent tendency to define personal services too narrowly. In a very primi tive economy there may be a bit of justification for conceiving of "labor" in manual, physical terms - muscle applied directly to the necessary tasks with the aid of simple hand tools. But this conception is without merit in the highly-specialized, technologically-complex economic system in which we are now living and enj oying an amazing array of consumer products. Today muscles take a back seat for machines, and physical effort in production con sists in large measure of operat ing power tools, such as driving a tractor on the farm, performing some chore on a factory assembly line, or tapping the keys of a com puter in the office.

Further, to be realistic we must recognize that personal services required in our intricate exchange economy include a great variety of acti vities and functions - and the list is almost endless. In other words, there are many, many kinds 1975 SIGNIFICANCE OF SERVICES - HIRING AND FIRING 49 of "workers" in the modern vine yard. In ma~ufacturing, the ex tractive industries, transporta tion, power production, construc tion, communication, and other major lines we have researchers, designers, executives, salesmen, stenographers and so on as well as a variety of grades and groups of workers in factories and other op erating facilities. Modern busi ness, overall, requires the services of such people as bankers, brokers, insurers. In the professions, broadly defined, we find doctors, dentists, lawyers, accountants, teachers, writers, entertainers, and many other service groups, all functioning in the process of fur nishing economic "goods" to the ultimate consumer. Every family, too, has contacts with painters, plumbers, electricians, retail store staffs, car repair men, barbers, and many other familiar service providers. In mentioning these ex amples of some main fields and specific occupations I'm simply trying to stress the point that a very broad range of personal ser vices is associated with the pre sent-day production pipeline at all stages.

Restricting the use of the terms Hlabor" and "worker" to certain callings and trades is especially objectionable in that it fosters the view that these activities have a preferential position on the productivity scale. Thus popular opin ion continues to regard farmers, miners, bricklayers, and union members generally, as bona-fide "producers", with those engaged in managerial and other "non-la bor" roles relegated - in varying degree - to the status of parasitic poachers on output. That we do suffer from parasitism is not to be denied. Soldiering, featherbed ding, sabotage, fraud, coercion, and other destructive and unpro ductive practice-sare a common place these days. But the loafers, vandals, and crooks are not con fined to anyone class or group. The office staff, and the top brass for that matter, may be as hard working, as honest, and as truly productive, as the men out in the shop.1 I don't find it difficult to include in economic "services" the contri butions of those who make the bas ic decisions as to utilization of available resources and thus direct the course of production, acting as agents, so to speak, of the im personal mechanism of the mar ket. And there is some j ustifica tion for regarding the function of savers and investors, who provide the capital and assume the risks, as a type of "service" -- and one that is crucial to the existence of 1 See my "What PRODUCTION Means," Michigan Business Review, March 1973.

50 THE FREEMAN January private enterprise and a free econ omy. Relation of Services to Commodities and Physical Facilities In viewing the market structure many tend to regard commodity pricing as entirely separate and distinct from personal-service pricing. This is unreasonable. This view, for one thing, overlooks the fact that from a cost standpoint a physical commodity on any mar ket level, including the final stage of transfer to the consumer, is largely a bundle of service prices. The latent raw materials of our planet, including oceans and atmo sphere, prior to discovery, develop ment, conversion into useful forms, and transfer from one loca tion to another, generally have lit tle or no market value. In short, the process of commodity produc tion consists essentially of the application of personal services of many kinds to the natural re sources, raw materials, intermedi ate products, and commodities ca pable of satisfying consumer needs. And the end economic "good", as has been pointed out by economists from time to time, is use, not molecular content.

Our manufacturing plants with their equipment, and all other pro ductive facilities, may also be con ceived as bundles of the many kinds of services required in preparing and putting together the materials required in fabrication and construction. And the services utilized must include the efforts of planners, architects, and other spe cial skills, as well as the work of those operating the electric saws or handling excavating machines) cranes, and so on. I don't want to seem to be sup porting the view that the market value of a specific commodity or facility is determined by a sum mation of service costs. In a free competitive market no producer is assured, continuously, that the price of his output will equal - or exceed - the costs he incurs. More over, costs will vary among sup pliers during a particular period, although in a good market the price to all buyers for identical goods (taking into account all the at taching conditions) will tend to be the same. But the old socialist de scription of physical product as "congealed labor" does have a bit of merit, when broadly interpret ed, in suggesting the importance of services in the overall process of production.

It should also be noted here that the so-called "service industries" are closely related to physical products and facilities, at various stages. For example, we like a comfortable seat in a building with good acoustic properties while enjoying the singing of the 1975 SIGNIFICANCE OF SERVICES - HIRING AND FIRING 51 prima donna at the opera. We also recognize that a piano is needed for the accompanist, and that both performers require suitable garb for the occasion. Services and the Market It follows that the market for services is an integral part of the overall market mechanism, not a structure separate and distinct from the markets for commodities and physical facilities - in a sense consisting largely of embodied ser vices. It also follows that harass ment of the buyers and sellers of services as such, the imposition of a complex of restraints and con trols, legalized or otherwise, strikes at the very heart of the market as a means of channeling prod ucti ve factors and awarding output to participants. Efficient utilization of available resources, it is generally agreed, is the key to maximizing the flow of consumer products.

And how can this be accomplished if decision-making is taken away from the users and providers of services? It is true that a nation's endow ment of natural resources is not a negligible factor, but the attitudes and abilities of the people have of ten proved to be of primary im portance. As has been pointed out by economic historians, the de struction of physical property buildings, equipment, roads, and so on - in a devastating war may soon be remedied by even a defeat ed country if the population is en ergetic, capable, hardworking, and assuming that needed raw mate rials can be imported. Present-day Japan is an outstanding example. From certain quarters we hear the familiar cry to the effect that "people shouldn't be bought and sold like sacks of potatoes". In the absence of some form of slavery, of course, the human being is not a marketable chattel. But personal services are most assuredly bought and sold every day, and the pre vailing price - in the absence of interference by private or gove'rn ment agencies, and the impact of general misunderstanding and mistaken views - will be the re sult of impinging demand and sup ply influences. The pricing of ser vices in a free, competitive mar ket, conforms closely to the basic pattern of the pricing of commod ities.

The idea that the buyer of per sonal services will exploit the ser vice-furnisher, the worker, unless he is pressured by legislation or other means into paying what the service is worth, on the basis of economic productivity, is persis tent and widely accepted. On the basis of long study and observa tion, and a dozen years in an ad ministrative capacity in business operation, I find this view largely 52 THE FREEMAN January unfounded, at least on the Ameri can scene. Competition for services tends to be just as keen as the bid ding for the available supply of raw materials and other commod ities. If an employer is paying only $4.00 an hour for a certain type of service when the current value in the market area is $5.00 per hour, he will either be obliged to adjust his scale promptly or lose needed workers. It is true that the market for services, in the short-run, tends to be somewhat less flexible and sensitive than the market for ma terials, even in the absence of in terferences by goverument agen cies or others. To shift the flow of services from one region to an other of course requires suppliers of services to move, and, ~ such movement may be resisted, espe cially where families and older persons are involved. But in this country this influence has become minimal, with the availability of the automobile and other means of transportation and the erosion of sectional loyalties and prej udices resulting from increasing famil iarity with country-wide climate and other conditions.

As already implied, the inter fering pressures bearing on the la bor market are generally directed at the employer. He's the accepted villain in the play. But it shouldn't be forgotten that if the employer is coerced by nonmarket forces this inevitably means that employ ees are also being affected. Dic tated employer decisions are bound to have an impact on employee ac tions and welfare. And the overall result is hamstringing the market as a guide to economic conduct. Tenure I want to add to the above com ments some observations on the burgeoning restrictions on the rights of employers to select and dismiss employees, and the accom panying limitations on worker rights in seeking employment and holding jobs. I'll begin by refer ring to the development of tenure for the "civil service", starting long ago with legislation at the Federal level, and which has since been widely copied, in its main features, by state and local govern ments. The general objective of the various enactments and regula tions, at least at the outset, was to do away with the "spoils system", under which appointments were made - so the story ·goes - largely on the basis of political party af filiation, regardless of ability and character. In contrast the frame work of commission control that has emerged is often described as the' "merit system".

On balance, in my opinion, the substitution of commission author ity for the judgments of heads of 1975 SIGNIFICANCE OF SERVICES - HIRING AND FIRING 53 departments and other administra tors, including elected officials, has not worked out at all well. The selection process tends to be cum bersome and time-consuming, and influenced by all sorts of factors that have nothing to do with abil ity to perform (for example, pre ference granted to those who have served in the military forces). More serious is the virtual impos sibility of discharging any indiv idual who has secured a civil-ser vice appointment, regardless of level of capacity and accomplish ment. Once an appointee has come under the prevailing blanket of tenure he is almost entirely free from the risk of dismissal. As a member of a university teaching staff for 45 years I can speak with more authority on the impact of tenure in that field. Long and close observation has con vinced me that freedom from risk of dismissal for the teachers, fol lowing a brief probationary period, tends in many cases to chill incen tive to improve, blunt any latent desire to work harder and more ef fectively. Unions for the teaching staff are now being advocated and formed on many college campuses - a sorry picture for people aspir ing to professional stature. More over, it has become difficult to en force adherence to the· period of service required before· tenure be comes effective.

A feeling of some degree of se curity in one's job or position, needless. to say, is not something to be deplored. A continuing fear of summary discharge is not con ducive to good employee morale. But tenure should be earned, and maintained, by performance, not by rules and pressures that take the matter out of the employer's hands. Some Union Policies and Practices The current stress on seniority, a major feature of union policy, is a serious obstacle to sound em ployment practice with respect to promotion and retention. Other things being equal the duration of a person's experience might well be a decisive factor. But other things aren't equal. People vary widely in native ability, attitude, integrity, and so on; health and age are important factors. Effi cient utilization of personal ser vices, the key to productivity and volume of output, simply can't be achieved in any field if period of service becomes the sole basis for advancement and freedom from loss of job.

Compelling the individual work er to become a union member as a condition of employment is another highly objectionable policy, and one - unfortunately - which has acquired considerable legal sanc tion. This surely limits the work54 THE FREEMAN January er's right to choose, and discour ages labor mobility, so essential to a good market for services. Moreover, the typical union mem ber today has virtually lost his right to bargain as a supplier of service. He is one of a large group, under the thumb of well-financed union management - officers, shop stewards, and other staff groups. He can vote on occasion, it's true, but he'd better vote right. To suggest that threat of vio lence is a feature of current union practice is generally taboo, but that this factor is present and im portant is obvious to anyone will ing to look at the record. Indeed, if all fear of danger to himself and family could be lifted from the individual member the harm ful power of our unions would largely disappear.

The overall impact of union policies and practices' has not been beneficial to those who have' per sonal services to sell, including their own members. Union support of statutory minimum wage rates has helped to fasten this incubus on us, and the impact has been es pecially severe on those workers in the lower ranks from the stand point of abilities, and has thus con tributed mightily to unemploy ment. Another aspect of union wage rate' policies, often overlooked, is the restricting of increases for the especially talented· and skillful. Observant personnel managers will admit, privately, that they would be glad to pay more than the top union scale to their best people, if this were practicable. Without much doubt there is a tendency in a leveling direction resulting from union tactics and demands, al though possibly unintentional. Perphaps the most absurd of all the many misleading phrases we are plagued by these days is "free collecti ve bargaining" . The word "free" should certainly be deleted.

Enforced Catering to Minorities Federal, state, and local govern mental agencies, with help from many nongovernmental organiza tions and a host of do-gooders, have created a climate of irration ality with respect to the hiring of our racial "minorities", so-called. Beginning with a relatively mild pressuring of employers to give fair treatment to Negro and min or minority group applicants the tide has risen to the point where such ,applicants are being pushed to the top of the list, regardless of qualifications. The development has taken on the character of a social obsession, with an unwill ingness to permit any critical ex amination or discussion. In recent years the problem of female' rights has been thrown into the hopper, although the women can hardly be 1975 SIGNIFICANCE OF SERVICES - HIRING AND FIRING 55 regarded as "a minority group. There is now quite a clamor for equality of the sexes with respect to job applications, in practically all fields, and "equal pay" for "equal work".

Anxiety as to the welfare of the underdog is not altogether un wholesome, and no right-thinking male nowadays wants to see the ladies cast in the role of second class citizens. The record of man kind on this score is rather miser able, and women still are treated badly in many parts of the world. But the fact remains that the sexes are not the same in important re spects and that it is not unreason able to take these differences into account in employment practices. If an accounting firm, for exam ple, has had a number of experi ences in which a smart young woman, with a keen interest in the field, has decided to marry and re sign just about the time she was becoming an effective auditor you can hardly blame the organization for giving a promising male appli cant the edge when recruiting from the ranks of college gradu ates. But it seems clear to me that the degree of coercion to which em ployers are now subjected in their hiring practices is highly objec tionable and a barrier to efficient utilization of our personal-service resources. By and large the employer should have the right to se lect staff according to his views of his needs. Outside agencies, gov ernmental or otherwise, simply can't be expected to take over the hiring function directly, and to swathe the employer in such a network of rules as to cripple his right to select employees is bound to result in loss of operating ef ficiency.

If the management of a restau rant decides to employ only women to serve their customers why shouldn't they be permitted to do so? If a trucking company prefers men as drivers why should it be compelled to take on a female con tingent? If it is traditional to em ploy males with some African blood as porters on railway sleep ing cars why should the manage ment be required to hire a quota of males of Caucasion extraction, or attempt to recruit women? If a clothing store considers tailors from abroad more efficient than those trained in this country (as suming there are such) it surely doesn't make sense to coerce the business into changing its hiring policy. Indeed, if an employer - in a special situation - prefers em ployees with a Scotch accent that's his business, not that of any gov ernmental or private body trying to force its pet views on the enter prise. It should be kept in mind that 56 THE FREEMAN January 'in a free market economy it's the customer who calls the tune, and employers who don't listen and conform aren't likely to stay in business very long. The employer who caters to any personal preju dices he may have as to hiring practice that conflict sharply with customer attitudes will soon hear from his patrons. The market mechanism is a great disciplinar ian, if permitted to function as such.

In short, I believe it would be a blessing if the government, at all levels, would abandon the attempt - now in full swing - to interfere with employer rights to pick their employees. And this doesn't mean that I am protesting the basic role of government as an agency to protect us from violence, fraud, and other criminal actions, or that I wish to exempt employers from the police power. Summary I'll summarize, briefly. In the present-day economic process a wide range of kinds of personal services is required, and no type of service essential to providing the great array of consumer "goods" found on the modern mar ket has a preferential position on the productivity scale. Services permeate the economic pipeline at aU stages, and in a sense commod ities and physical facilities are bundles of applied services. Thus the process of production consists essentially in discovering, convert ing, transporting, and using the basic physical ingredients avail able, plus providing desired ser vices as such directly to the ulti mate consumer. It follows that ser vices are an integral part of the overall market structure and that interference with the buyers and sellers of services, by govern mental or other agencies, consti tutes a crucial assault on the mar ket mechanism in its role as a guide to efficient utilization of re sources.

Today's mounting wave of in terference with the right of em ployers to select and discharge employees has taken many forms. Employee tenure, now highly de veloped in government service, has become firmly established in teaching and is a factor in other fields. Today the employer who fires an employee does so at his peril, whatever the cause, and the overall result of undue job se curity is impairment of the incen tive to do well on the part of the employee and thwarting of em ployer efforts to spur efficiency in production. Some dominant union policies are clearly roadblocks to good staff management. Stress on seniority interferes with both the retention and advancement of em ployees on the basis of ability and 1975 SIGNIFICANCE OF SERVICES - HIRING AND FIRING 57 performance. Forcing union mem bership as a requirement in ob taining and holding a job is an un justified interference with both employee and employer freedom of choice, and legal sanction of this practice is truly an outrage.

Individual initiative among the rank and file of union members is largely lost, and there is often a very real danger of persecution and violence where a member has the audacity to oppose the policies and decisions of the officers and their minions. Thus union mem bership often has a tendency to discourage the more talented and energetic, and union wage scales demanded often fail to do justice to the most able workers. At the same time union leaders generally support minimum-wage legisla tion, demonstrably an obstacle to the employment of workers at the bottom of the totem pole of pro ductive capability. The current and expanding pressure on employers to cater to minorities and women in hiring is certainly having an adverse effect on both the quantity and quality of services available to the market and also on the efficiency of the productive process and the volume of output. ~ - Reprints of this article available, 10 cents each.What Is Seen and What Is Not Seen IDEAS ON LIBERTY HAVE YOU ever heard anyone say: "Taxes are the best investment; they are a life-giving dew. See how many families they keep alive, and follow in imagination their indirect effects on industry; they are infinite, as extensive as life itself."

The advantages that government officials enjoy in drawing their salaries are what is seen. The benefits that result for their sup pliers are also what is seen. They are right under your nose. But the disadvantage that the taxpayers try to free themselves from is what is not seen, and the distress that results from it for the merchants who supply them is something further that is not seen, although it should stand out plainly enough to be seen intel lectually. When a government official spends on his own behalf one hun dred sous more, this implies that a taxpayer spends on his own behalf one hundred sous the less. But the spending of the govern ment offic~al is seen, because it is done; while that of the taxpayer is not seen, because - alas! - he is prevented from doing it. FREDERIC BASTIAT, Selected Essays on Political Economy A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Th ent WITH the two hundredth anniver sary of the American Republic coming up, the publication of Alf J. Mapp, Jr.'s seventeen-year-old The Virginia Experiment (Open Court, $5.95) in· an expanded paperback edition will have its purely ceremonial uses. Its theme is "the Old Dominion's Role in the Making of America: 1601-1781."