The Redistribution of Weatlh; R. Anderson

THE REDISTRIBUTIONof wealth as well as the creation of wealth is a natural development of the market process. Voluntary exchanges among individuals as producers and consumers constantly bring about the creation and redistribution of wealth. The advancement in the material wellbeing of individuals that re,· sults from a developing social divi· sion of labor is one of the great blessings of a free market society. The specialization of individuals producing goods and services fOJr trade in the marketplace has en hanced labor output far beyond any thing that was attained by individ uals who produced exclusively for their own direct consumption. Mr. Anderson la Executive Secretary and Director of Seminara, The Foundation for Economic Education. Robert G. Anderson THE REDISTRIBUTION OF WEALTH LABOR UNION STYLE With the market price system as their guide, entrepreneurs respond to their assessment of consumer de sires by bringing together capital and labor in the production of goods and services. The future behavior of the consumers in the marketplace ultimately rewards or penalizes these entrepreneurs for their deci sions. If the entrepreneur's judg ment in the productive employment of capital and labor is correct, as evidenced by subsequent consumer buying, profits result. A lack of consumer buying, however, reflects losses to the entrepreneur for his erroneous employment of these pro ductive resources.

The natural market process is the motivating force for all productive effort, and countless daily activities of this type result in an orderly 407 408 THE FREEMAN July market price system. Such volun tary behavior by producers and con sumers responding to market prices not only creates new wealth but re sults in the constant redistribution of wealth within a free society. Competitive Allocation There can be no reasonable objec tion to such redistribution of wealth when it results from voluntary ex change in a competitive mar ketplace; quite the contrary, such market processes are continually di recting productive resources to their highest use and thus bringing about the greatest material progress. The redistribution of wealth by labor unions, however, differs pro foundly from the market process. Unlike the transfer of wealth in a voluntary exchange between a pro ducer and consumer, the shift of wealth by labor unions is accom plished involuntarily, by force and intimidation. Furthermore, the magnitude of the wealth transferred by labor unions as well as the extent of the burden upon those deprived can never be calculated. These are unseen effects of the labor union's impact on the market.

An understanding of this distinc tion requires an awareness of labor's role in the marketplace. Contrary to the popular misconception that con flict prevails between labor and cap ital in productive employment, these independent factors of production actually complement one another. A joining together of capi tal and labor by the entrepreneur stems from the exercise of his foresight in the anticipation of fu ture consumer behavior, and the two factors work together for the· benefit of consumers. The Active Force It is competition among entrepre neurs for capital and labor, not com petition between capital and labor, that is the active force in the free market. Within the context of a par ticular productive effort, capital and labor join together in producing the output of goods and services for the benefit of consumers. The ultimate valuation of these goods and ser vices by consumers in turn estab lishes the value upon the specific productive factors employed.

It is true that capital frequently displaces labor in productive activ ity, as new and better machinery is invented. But far from a destructive, competitive force harming labor, such labor saving devices are the primary ingredient for material progress. Increases in both the quantity and quality of productive capital-tools and machinery contribute to an increase in labor's productivity. The value of labor is dependent upon CCgettingmore goods out of the woods in a given period of time." When capital is employed in produc1979 REDISTRIBUTION OF WEALTH-LABOR UNION STYLE 409 tion the output of labor is enhanced. While greater work effort can ill crease production, the history of man's material progress has primar ily occurred through the use of capital-more efficient tools. It is an obvious truism that a man working with a machine can produce more than a man with his bare hands, and on a greater scale the observatio~ that the great consuming nations are the great producing nations is directly related to their abundance of capital.

It is equally true that labor com petes with labor. Just as entrepre neurs bid against one another for productive labor, so too does worker bid against worker for productive employment. This competition among entrepreneurs, and among workers in the labor market, is a continual force that directs produc tive resources to their highest and most efficient use. Competition therefore, rather than being destructive, can thus be seen as a guiding force toward the attainment of efficiency in the employment of productive resources. The substitution of capital for labor, which increases the productivity of labor, makes the labor correspond ingly more valuable to competing entrepreneurs. This combination of greater capital employment coupled with competing entrepreneurs seek ing competing workers, results in ever-increasing benefits for labor. The Exploitation Theory The historical evolution of the union in the labor market had its intellectual roots in Marxian theories of exploitation. Arguing from the defunct labor theory of value as its premise, the exploita tion theory held that an inherent conflict existed between labor and capital. The labor theory of value erroneously assumed that the source of economic value was labor input.

The returns paid to capital and the extrepreneur, therefore, were neces sarily assumed to come from an exploitation of the labor employed in production. Interest and profits were considered ((unearned," and the in crement paid to them created ((surplus value," a capitalist accumulation of productive resources in fewer and fewer hands. Modem marginal utility theory as well as actual experience in the labor market has totally demolished this fallacious labor theory of value and its erroneous conclusions. It is now well-recognized that the true source of value is subjective, that it is the individual tastes, preferences, likes and dislikes of consumers which give economic value to pro ductive resources. The reason that productive resources have value is because of the contribution they make in satisfying the desires and demands of consumers. Entrepreneurs try to anticipate what these future consumer values 410 THE FREEMAN July will be and to direct market re sources into productive activity to ultimately meet these values. The pursuit of profit is the motivating force for this risk-taking activity.

This return of profits to the success ful entrepreneur resulted from his bringing together independent fac tors of production into a complemen tary state, today. To this end, the factors land, labor, and capital were drawn together for the present bene fit of consumers. Contributing Factors While labor is an important part of productive activity, it is certainly not the sole contributing factor to productive output. Compensation to the entrepreneur and to the owners of capital and land for their roles in bringing about desired goods and services for the consumer must also be paid. What this payment will be to each contributing factor of pro duction is consumer-determined by the resources they willingly ex change for the end-product of the productive enterprise. The rent for land, the interest for capital, the wages for labor, and the profits for entrepreneurs are deter mined by market forces. That is, the given supply of each factor of pro duction relative to the demand for this factor determines its market price. And since it is the final judg ment of the consumers on the worth of the productive output which gives value to these productive resources, the greater the quality and quantity of output that these productive re sources can generate, the more val uable they are in terms of market prices.

It is for this reason that an in creasing abundance of land, capital, and successful entrepreneurs im proves the returns to labor. As the total supply of these other produc tive factors increases, relative to the supply of labor, the greater will be labor's share of the total returns. The higher and higher wages earned by labor, therefore, have evolved from the greater productive output made possible by a declining cost of interest, rent, and entrepreneurial expertise as the supply of each of these has increased. While the concept of labor unions originated in a labor/capital conflict theory that has long since been re futed, and the advancement of living standards can be directly identified with the· market process, the labor union continues to exist today as an imposing force. The historical growth of unions to their present influence in the labor market has little, if anything, to do with their economic role. An under standing of labor union growth re quires an understanding of how the power of legal, government-sanc tioned monopolies can displace the market force of competition.

The role of law in a market society 1979 REDISTRIBUTION OF WEALTH-LABOR UNION STYLE 411 is to protect life and property. This function is vital to the preservation of peace and harmony among the members of society. Such a role de mands equality before the law if legal justice is to prevail. To violate this principle of universality guarantees injustice. Special Powers of Coercion Promote Growth of Unions It is an historical fact that the growth and presence of labor unions can be traced directly to violations of these legal concepts. Prior to 1930 fewer than four million members of the labor force were unionized in the United States. Beginning with the passage of the Norris-LaGuar dia Act in 1933, and the National Labor Relations Act in 1935, unions acquired special-interest legal ad vantages denied to any other insti tutions or individuals. There is no question that a definite correlation can be found between the preferen tiallegal treatment accorded unions at that time, and the twenty-one million union workers in today-'s United States labor force.

The growth of union membership during the past forty years would never have been possible without these special powers of coercion. Competitive free-market labor long ago would have displaced this ineffi cient structuring of unionized labor had not unions possessed their legal advantages. Modern unionism has been the offspring of a statist society of legal privileges. It must be pointed out that mod ern unionism is not synonymous with a voluntary association of workers. It is frequently argued that unions are simply a cooperative ar rangement of workers engaging in collective negotiation with their employer or employers. To believe that this is all that constitutes mod ern unionism would be exceedingly naive because it ignores reality. Certainly there can be no moral objection to workers creating a vol untary, private association as their representative in employment negotiations with their employers.

From an economic viewpoint, how ever, such a collective approach can never serve the individual worker's interests as effectively as he can serve himself. The collectivization of individual workers is not consistent with the competitive conditions that exist between workers for available jobs offered by employers. The estab lishment of a union of workers must subordinate the interests of the in dividual worker to the group. It became obvious very early in the history of the labor union movement that the competing threat from workers in the free labor market would lead to the demise of unionism. The survival of labor unions in a competitive labor mar ket would prove impossible as long as freedom of entry by new workers 412 THE FREEMAN July was allowed in the union labor mar ket. Furthermore, the more produc tive workers within the union itself would inevitably discover the price they were paying as members of the collective group.

Violence and Privilege The survival of unions was depen dent upon the use of both private violence and legislated favoritism. It is no accident that the entire history of union growth is marked with examples of violence. To survive and grow, unions systematically re sorted to physical attacks on persons and property. Efforts at retaliation by employers led to mass conflict. Public opinion, swayed by a belief in labor/capital conflict theories, pas.. sively tolerated and sanctioned this union violence. As long as the general belief was that outbreaks of violence were caused by employers fighting to pre serve their power over exploited workers, the political climate was established for the creation of pro union legislation. Union prop aganda had successfully molded public opinion into believing that unions were the means by which working conditions were improved. It is a simple truism that ideas determine actions. While truth will ultimately prevail in the intellec tual battle of ideas, the belief in fallacious ideas meanwhile will chart our directions, and lead us to the disastrous consequences of these erroneous ideas. And so it has been with the labor theory of value and its concomitant conclusion of exploited labor under capitalism.

Arguing from these intellectual errors, the union was seen as a de vice to combat socialism and pre serve capitalism from its inherent, self-generated defects. Believing that the individual worker was de fenseless against the exploitation of the employer, the union has pre sented itself as a ((progressive friend" of labor. By banding togeth er, the workers would be a ((counter':' vailing power" within the labor/ capital conflict environment that was believed to exist. Such fallacious beliefs have, in deed, caused needless turmoil among men and destruction of prop erty. Armed with the passive sup port of public opinion and enabling legislation, unions have inflicted massive violence upon persons and property in their attainment of monopoly power in the labor mar ket. It is imperative to recognize the true nature of modern unionism. The union today is a legal cartel. It is as reactionary an institution as the guild of medieval times, but more insidious in its violence. Its violence against competing workers (scabs), and its intimidation against employers (strike), are matters of historical fact. The ominous pres1979 REDISTRIBUTION OF WEALTH-LABOR UNION STYLE 413 ence of union labor today is mute testimony to the triumph of monopoly violence over peaceful competition.

The economic impact of the union as a legal cartel is no different from that of any other monopoly. Its pres ervation of power is dependent upon government legal protection, and/or private violence. The power of the labor union is particularJly significant because it relies on both of these sources-all the power the law allows plus what can be usurped through private violence. Granted legal immunity from the judicial injunction, and exempted from jury trial in the United States, the legal power of the union against employers is awesome. By the execution of the strike and the iil legal use of private violence to re strict replacement of striking work ers, a union can effectively enforce its monopolistic wage demands against an employer. A Progressive Force? The redistribution of wealth by legal plunder or private violence is nothing new in the history of man kind. What is new, however, is to refer to unions as a ((progressive"

force as they engage in the destruc tion of the peace and harmony of the capitalist order. The growth of union power in the private labor market was in direct proportion to its effective use of the law and private violence. The abdi cation by professional managers of responsibility to corporate owners of broadly-held stock companies made the task of unions even easier. Rather than resist and risk bad pub licity by replacing striking workers with new workers, the professional managers of large corporate em ployers yielded to union demands for higher wages. The unions thus suc ceeded in acquiring for their work ers a wage rate higher than would have been attainable under condi tions of a free, competitive labor market. This situation can be clearly seen wherever labor unions are present in a labor market. Union wage rates are significantly higher than the wages paid for similar labor that has not been unionized. The tragedy has been to ascribe this differential to the union's ability to raise the gen eral wage rates of all labor, rather than to the use of their monopoly power in raising the wages of just some of the union workers in the labor force.

The direct economic impact of a legal cartel is clearly visible. By forcefully preventing entry of any competitive supplier, the cartel is able to command a monopoly price for its services. The result is that the consumer of goods and services of fered by a cartel is prevented from acquiring alternative goods and ser vices from competitive sources.

414 THE FREEMAN July This is precisely the case with employers acquiring union labor. The supply of workers bidding for the jobs offered by employers is re stricted by the union. Furthermore, no individual is permitted to negotiate directly for himself with an employer of union labor. The em ployer is forced to negotiate exclu sively with the union for his labor requirements. Irrespective of mar ket labor supply factors that would contribute to the determination of a market wage rate, the employer is forced to negotiate fixed wage rates with the union. Above-Market Wage Rates The legal advantages and private violence of the union are exercised in acquiring wage rates higher than would be paid by the market. The employer, in the interests of short run peace and a return to productive activity, is intimidated into accept ing the wage demands of the union. Regardless of any changes in the market forces of supply and demand, the employers are bound to their fixed wages with the union.

While the union, in the exercise of its powers as a cartel, succeeds in acquiring the payment of wage rates above the prevailing market rate, it cannot insulate itself from the in exorable forces of economic law that must follow from such action. Other consequences, less visible and un seen by many, inevitably result from such forceful intervention in the market. The most obvious market re sponse is that the quantity of labor demanded, as with any economic good, will be less at a higher price than at a lower price. Many con sumers will be unwilling to volun tarily exchange the greater re sources required at the higher price. How many consumers will refuse to exchange is dependent upon the sub jective valuations of the consumers for the particular economic good. While this knowledge can never be known with certainty, the mag nitude of these marginal consumers is the determining factor in estab lishing what the economist calls elasticity or inelasticity of demand.

Economic theory can only inform us, however, that all things being equal, fewer consumers will ex change at a higher price than at a iower price. The quantity of the change is dependent upon the price change and the values of the con sumers. The Employer as Consumer In the labor market it is the em ployer who is the consumer. When the price of labor (wages) is in creased, the quantity of labor de manded by employers will decline. The extent of the decline, as with any economic good, is determined by the amount of the increase in the price of labor and the number of 1979 REDISTRIBUTION OF WEALTH-LABOR UNION STYLE 415 marginal employers (consumers) i.n the particular labor market. The higher that wages are forced above the market rate, the greater the decline in demand for the labor by these consuming employers. Presi dent Calvin Coolidge put it well, ttas more and more workers lose their jobs, unemployment results!"

The surplus labor, unemploy ment, is an inevitable result when employers become unable to recover from consumers the higher cost of their productive output. The force of the unions can increase wage rates, but that same force cannot be im posed upon the buying decisions of the consumer. As employers raise their asking prices to cover the union-imposed labor costs, many consumers will cease to buy the goods and services offered. The re sultant decline in consumer buying requires a curtailment of production from the level that had prevailed. For some employers, this neces sity for reducing production levels may prove fatal .. At lowered levels of production the employer may be operating so far below his break even point that he has no alterna tive but to cease production entirely. More typically, it will mean a redu.c tion in unit efficiency for employers, as the more efficient employers are transformed into less efficient em ployers. The decline of their effi ciency in production means that fewer workers are required.

At the higher wages acquired through union force, both the un employed and those within the free labor market are attracted to the higher paying jobs in the union labor market. However, this addi tional supply of labor can have no competitive impact on the union labor market. The employers are bound to their fixed union wage scale and are forbidden to employ competing labor at lower wages. Unemployment The failure of the union-imposed wages to adjust to the competitive conditions of the market leads to both unemployment and a distortion of labor allocation. The magnitude of the unemployment and distortion is dependent upon the difference be tween union-imposed wages and the market wage. The unions are well aware of this consequence and their propaganda constantly seeks to con ceal their role as its cause. Their public image as the ttfriend of labor" forces them to perpetuate the myths that unemployment and the misal location of labor is caused by the capitalist business cycle and greedy, profit-seeking employers.

While the rhetoric of the union claims no limit to what it can ac complish for the worker in tenns of higher wages, the economic limita tions of massive unemployment from exorbitant wage demands .is understood. The long-term s~val 416 1;HE FREEMAN July of the union depends upon a large membership, and the preservation of a large membership of workers requires the economic survival of the employers. It is a constant balancing act, therefore, as the union demands wages above the market, but not so high as to destroy the entire market for the union labor, and with it, the unions them selves. A Free Market Sector The capacity of the union to ac complish this feat, almost with im punity, lies in an institutional re quirement that is essential to union success. The union must have a con current free labor market existing beside it. A competitive labor mar ket that responds to changing forces of supply and demand is needed to absorb the unemployed that are driven out of the union labor market.

Less than one-quarter of the labor market is unionized in the United States today. Furthermore, not all union labor is earning above market wage rates. It is probably a safe assumption that fewer than twenty percent ofthose in the United States labor market are receiving wage rates above what could be acquired under free market conditions. It is this small minority of union workers receiving above market wage rates that generates the in sidious redistribution of wealth in the labor market. The Tanstaafl principle (There ain't no such thing as a free lunch) has no better dem onstration than by this example somebody pays. There are two groups that pay directly-those who are employed in the free labor market, and those who consume union .labor market goods and seryices. Ultimately, everyone pays indirectly in the form of a low ered standard of living resulting from the disruption of the produc tive system and reduction of the incentive to the accumulation of capital.

Workers who would be employed in the union labor market, if free dom of entry prevailed, have no choice but to compete in the free labor market where supply and de mand forces still determine wages. Their bidding in competition with the existing supply of free market labor causes the wages of free mar ket labor to fall. The result is that wages in the free labor market are lowered because of the entry of the unemployed workers forced out of the union labor market. This shift of wealth, higher wages to union workers at a cost of lower wages to free market workers, is a subtle, but nevertheless very real, redistribution of wealth. It is, in deed, an exploitation of labor by labor, that is, a forced transfer of wealth from the free labor market to the union labor market in the form of differing wage payments.

1979 REDISTRIBUTION OF WEALTH-LABOR UNION STYLE 417 Also harmed are the consumers of goods and services produced by union labor. The law of costs ulti mately requires that the higher union wages must be borne by these consumers if production is to con tinue. Future production at the above market labor costs imposed by unions, exacts its toll in the form of consumer prices higher than would prevail in a competitive market. Once again, a forced redistribution of wealth occurs as the consumer must pay the higher costs of union labor, but of what magnitude can never be known. The competitive market price in the absence of the union labor is unknown. While such redistribution of wealth by the force of union power represents exploitation and injus tice, the capacity of unions to trans fer wealth to themselves is limited by the ultimate consumer. If union wage demands become too excessive, employers are destroyed by the fail ure of consumer buying. In the so called private sector labor market it is a continual balancing act that is pursued by the union.

There is, however, a new and far more effective labor market that unions can exploit. This is the so called public sector labor market, the labor market composed of gov ernment employees. Unlike the private labor market that survives by its capacity to pro duce goods and services that are voluntarily acquired by consumers in willing exchange, the public sec tor labor market is supported by the taxing power of government. The law of costs does not apply to gov ernment activities as it does to pri vate employers in a competitive free market. As a matter of fact, cost has nothing to do with the price of gov ernment activities. More often than not, government-provided services are offered free of price to the con sumer. The costs of these govern ment services are generally imposed upon the taxpayer. Monopoly, Bureaucracy, and Union Power in Public Sector Union power in the public sector labor market is further enhanced by the monopoly structure of government-provided services, and the bureaucratic system of govern ment management. Market compe tition in the form of freedom of entry in supplying alternative sources of goods and services to the consumer is generally prohibited by the force of law. Unlike the private labor market where higher union labor costs invite competition from free labor market employers, the public sector labor market is protected by legal monopoly. Competitive alter natives to the consumer are denied by the force of law. Whether it is policemen, firemen, teachers, sani tation workers or clerical govern ment workers, the determination of 418 THE FREEMAN public sector wages is more a politi calor bureaucratic decision than a market-determined decision by con sumers.

Resistance to union wage de mands in the public sector stems more from political considerations than from productivity considera tions. It is usually the vocal outcry of the constituency, not the bureau cratic manager, that objects to the excessi ve wage demands of the unions in the public sector. After all, the bureaucratic manager himself is a worker in the public sector labor market, and any union gains for his subordinates accrue to him as well. The bureaucratic manager has even less incentive to resist union de mands than his counterpart in the private sector market-the profes sional manager of the large corpora tion. The wage costs of public sector workers, like any and all costs of government, ultimately are borne by the taxpayers. Whereas the union redistributes wealth to its workers from expropriating the re sources of consumers and free mar ket labor in the private sector, the redistribution of wealth to the pub lic sector worker comes primarily from increased taxation.

Not confronted with the problems of competitive workers or unwilling consumers, the public sector union can significantly increase the magnitude of its wealth redistribution. The only effective limitation to such union power is the same force that limits the whole of government-the private wealth of the citizenry that can be seized by government taxa tion. Government labor unions have been quick to observe this massive increase in their power to redistri bute wealth, and naturally have urged an expansion in public sector unionization. To this end, the growth of government in economic affairs has opened a new source of labor union power in the forced re distribution of wealth. It is a sad commentary of our age that the combination of economic ignorance and man's blind pursuit of power has brought us to this point. Any reversal in this state of affairs can occur only if we improve our economic understanding and struc ture our legal institutions to safeguard our lives and property from such private power abuses.

The hope of the future is in chang ing ideas. Unions exist today as a monument to intellectual error. They are the -product of a statist society that permits the private abuse of power in the forcible redis tribution of wealth. Any return to a free society demands the realization that competition and freedom, not legal privilege and violence, are the way to general prosperity for all. , John Chamberlain "WINDFALL" FOR CONSUMERSIN DEREGULATION OF EVEN THOUGH the deregulation of oil prices won't be complete until 1981, practically everybody is cer tain that the big oil companies-the so-called Seven Sisters-are going to make some exorbitant profits on a uwindfall" situation. But what if the profits fail to materialize? If ordinary economic law has anything to do with it, the increased competition for the ex panded energy dollar must, at some point, lead to lower, not higher, re tail prices. If this isn't the truth, then Henry Ford never lived, the American Way was a misnomer, and all the classical economists from Adam Smith to Alfred Marshall were a bunch of hams.