10. “Exploitation” of Investors

LET US now ask whether the strike threat permits exploitation of investors (assumed to be wealthy) for the benefit of workers (assumed to be poor). As we have seen, the private use of coercion is, in this case, regarded as a permissible way of “soaking the rich.” The crucial general proposition has already been stated in Chapter 1. Our task at this stage is to consider certain arguments which seem to conflict with it.

Remember what has already been shown. When the price of labor in an activity is raised above its free market value, not only will the real value of labor inputs which can continue to be profitably absorbed in that activity be reduced, but the real value of utilizable complementary resources in the activity—and particularly the fixed assets needed—will also be reduced (or maintained below what would otherwise have resulted) when their renewal has to be considered. Managements (on behalf of stockholders) will not retain, or replace, let alone add to assets for labor to work with if their retention or provision offers a prospective loss. Hence vigilant investors are unexploitable except through a breach of some agreement, or as a consequence of some other wrong prediction about the use of strike-threat power. But if this power is used in a manner which the investor failed to forecast, he may (in the extreme case) lose the whole value of his investment. In that case, we can say that the investment ought never to have been made at all.¹ On the other hand, if entrepreneurial decisions are the outcome of realistic forecasting, we have the phenomenon of labor exploiting labor, as consumers and as displaced or excluded workers, with investors being exploited only in the same manner (and roughly in the same degree) through being denied the most profitable outlets and as consumers.

To generalize, it can be said that the inexploitability thesis regarding forward-looking entrepreneurs depends upon the observed fact that the prices of different productive services determine, immediately or ultimately, the magnitudes and the proportions of the different inputs acquired. In the economists’ useful jargon, different elasticities of substitution between “capital” and “labor,” different elasticities of demand for end-products, and different entrepreneurial interpretations of these elasticities, will influence the size and composition of the stock of assets in various productive activities. The most important relevant substitutions are: (a) of less exploitable forms of assets (generally the more versatile, and in some circumstances the more liquid²) for more exploitable forms (generally the more unversatile or “specific”³); (b) of assets for labor; and (c) of contracts which do not permit the exploitation of owners (for example, when assets are provided only for renting or leasing) for conventional wage agreements (see pp. 79, et seq).

When any kinds of costs rise through duress, then substitutions will still be made in attempts to equate marginal prospective yields with the rate of interest. This will always happen if we can assume all entrepreneurial action to be rational, in spite of previous action having turned out to have been based on wrong predictions of strike-threat use. And it is realistic to regard entrepreneurs as continuously vigilant—often engaged in research and experiment—in their efforts to observe and interpret the facts about current changes in the composition of consumer preferences and the availability of different kinds of means for their satisfaction. These facts, which are the data of business prediction, are frequently in the form of probabilities. They are used to determine both the prospectively profitable prices for outputs and the costs which it is prospectively profitable to incur. A business executive who makes the relevant decisions will in practice often say that he seeks an “adequate” yield and avoids an “unreasonably low” yield or a loss. He may mean by this that he is taking possible future competitive reactions into account, or that he is not trying to enhance returns via collusive price or output determination. But his thinking on such issues falls always into the category of what may be termed the “maximizing” type, despite the imponderables. And that means that he is groping toward the points at which marginal yields (to what he decides shall be invested in various input-mixes) shall reach but not fall short of interest.

In referring to “imponderables,” I have in mind a host of factors, some of which would have to be classified under the category described by the unsatisfactory but often used term, “degree of monopoly,” which influence forecast prices, sales and yields, and hence the input costs that entrepreneurs will incur. Because of inertias, rigidities and errors of prediction, changes in costs (including duress-imposed costs) and current prices do not always immediately affect sales out of inventories of end products, or purchases of equipment, materials and labor. Costs may rise while prices and sales are, for the time being, unaffected. But all this means is that sporadic rather than day-to-day investment decisions will be made. Even so, the exercise of foresight will be continuous. Indeed, while negotiations about a wage contract are in progress, managements will often be preparing and studying a range of different production and pricing programs ready for immediate adoption according to the outcome. Even before the labor costs which will have to be conceded have been arrived at, the appropriate reactions concerning the retention, replacement, or net accumulation of inventories and equipment will have been planned in detail.

Obviously the incentive for the owners of an undertaking to withdraw resources (that is, not to retain or replace them) will be very great if that undertaking is singled out for exploitation in a competitive industry (that is, where the product is sold, and the materials and complementary services are purchased in effectively competitive markets). That is why in practice unions seldom act against particular firms faced with competition. They bargain rather on an industry-wide scale.⁴ This usually recognized unprofitableness of the strike threat when it is exercised against a firm which operates in competitive markets is, properly interpreted, proof that the fixing of wage rates under duress can normally win gains for union members, not so much through exploitation of the investors against whom the strike threat is ostensibly aimed, but only against those who are most often considered the incidental victims: (a) the consumers and (b) investors and workers whose assets and efforts are diverted to less productive and less profitable fields. As a rule, it is only if industry-wide protection can be provided for investors (against the competition of firms which might otherwise offer employment at nonexploitative wage rates) that the strike threat can be used effectively.⁵ When managements capitulate to strike-threat demands because they recognize their competitors are to be burdened in like manner and degree, they have become agents (if unwilling agents)⁶ for union exploitation of the “incidental victims.” And managements are similarly motivated, and consumers (or suppliers of materials) similarly exploited, when wage demands are conceded because unions have successfully lobbied for tariff protection (or for restraints on the export of materials). In both circumstances, the investors against whom the strikes are threatened may not be exploited at all.

The protection of investors as a means of exploiting nonparties to wage “agreements” occurs in its least conspicuous form through the industry-wide enforcement of “the rate for the job.” In a rather blatant form, which is now and again evident, it occurs through “joint monopoly.”⁷ Managements and unions collaborate to exploit consumers and share the spoils through the mutual protection from competition they give one another.

An argument which, in various guises, has been used to suggest ways in which capital might be exploitable via union aggression depends on the assumption that entrepreneurial decision-makers do not think and act rationally in response to the above-mentioned imponderables. Particular instances of this sort of reasoning are to be noticed later; but at this stage it seems desirable to face the general issue. Unless the allegation of irrationality merely refers to unduly optimistic expectations of yields because of the clumsiness of some managerial procedures in predicting profitability, it has, I hold, no substance. For instance, it has been suggested that once labor costs have been determined, managements simply add a conventional gross profit margin over direct costs in order to get end-product prices, while these prices in turn determine saleable outputs. Well, managers who behaved like that, assuming that such a formula was as good as any other which might be used for setting the price of a particular product (and hence its prospective sales) at the outset, would know that their assumption might soon prove to have been wrong.

An industrial firm’s production budget will typically specify in detail the various outputs the production managers are called upon to put through the assembly lines month by month during the following year, just as the sales budgets will specify expected monthly sales for the same period. But actual realized sales as the year goes on, salesmen’s reports, cost changes, interest rate changes and so forth will bring about immediate changes in the budgeted outputs (increases, curtailments or abandonments). And in respect of the operations of a particular plant owned by a firm, or the operations of a firm as a whole, the question of whether to expand, maintain or curtail operations (that is, whether to scrap or sell assets, replace an equal value or add to them), the vigilance is continuous. And in every case the notion of marginal prospective yield, however vaguely envisaged, must be the determining decision-making factor. No entrepreneur will replace or add to the assets used by an enterprise unless he expects a yield in excess of interest on all input increments.⁸

But the argument presented here does not depend on any assumption that entrepreneurs do, on the whole, act with such thought, prudence and initiative as most students of business administration believe them to act. The validity of my claim that wage rates and prices are but one factor in the determination of income shares is not upset by the possibility that time lags in the adjustment of input and output magnitudes to market values may be experienced. And whether those values are determined under competitive pressures (the free market case) or whether they reflect deliberately contrived scarcities, or managerial sloth, or other phenomena leading to “market imperfections” is irrelevant to the point here at issue. Only if purchases of inputs and sales of outputs were independent of costs and prices (which they are not) could the strike threat, “degree of monopoly,” and the whole gamut of inertias, rigidities and irrationalities, directly determine income distribution. Yet ail the attempts I have found to imply that the imposition of wage rates under duress can be used to exploit investors depend ultimately upon such an assumption; and they all seem to me to obscure the reality that capital will avoid exploitable fields.

In envisaging entrepreneurs predicting yields, I have made no use of the often-used but clumsy notions of (a) “the rate of return to capital,” meaning the rate of interest plus the rate of profit or minus the rate of loss; and (b) “normal profit,” meaning the volume of profit at which the value of assets retained and replaced in an activity remains constant. In groping at profit maxization and loss minimization during the course of ordering different input-mixes of different magnitudes, entrepreneurs cannot avoid aiming at (however wide of the mark their achievement may fall) the point at which further increments of inputs of a particular kind will bring lower yields than could be obtained if the resources needed to produce those further increments were used in some other way. There is inevitably an element of hit and miss in their predictions; but if the contemplated output of a certain commodity at a provisionally envisaged price is 500, the sole reason why the figure is not 550 or 450 is that the responsible decision-maker guesses that 500 is more likely to be the most profitable. As I have insisted, however, judgments on such matters are under continuous vigilance and continuous or spasmodic revision.

Entrepreneurial forecasts are, then, continuously operative, even when at times much productive capacity is judged to be temporarily incapable of profitable utilization. Curiously enough, this is not generally recognized. Thus, we find an economist as rigorous as Scitovsky saying that “it is difficult to imagine the forces of demand and supply in factor markets influencing prices at times when the labor force, existing plant capacity, and the potential supply of savings are all under-utilized.” It is not difficult for me to imagine it. Scitovsky does “not deny that market forces operate in factor markets,” but thinks “they may be much weaker and much more sluggish than is generally supposed; and . . . they may, in some respects, operate quite differently from those that operate in the market for bread,”⁹ I myself have difficulty in imagining in what sense “demand and supply” forces can be thought of as failing to operate simply because entrepreneurs are frequently slow to react to “market signals,” so that some services or assets come to be priced beyond what consumers are judged to be able to afford (or inconsistently with price expectations). These forces continue to work when the services of some assets are temporarily valueless, exactly as they work when prices are so flexibly adjustable under market pressures that all resources are optimally employed. However drawn out the period of adjustment, the pricing process determines the values of the services of labor and assets just as it does with bread, or leisure, or annuities. Services which are priced out of the market represent “withheld capacity”—withheld supply—that is all. Hence, to anticipate an objection I expect, the thesis here presented does not assume “full employment.” Entrepreneurial expectations still determine the form of such replacement and the form of such net accumulation of assets as continues when much existing capacity and the labor it uses are priced into wasteful idleness.

But the adverse effect of wasteful pricing decisions upon the aggregate flow of income to be divided will be magnified if the displaced resources remain idle instead of finding other (less productive) uses. This is equally true whether the antisocial pricing is the result of deliberate monopolistic decisions to contrive scarcities or of mere price inertia. But in the absence of inflation, there will be a tendency created by every contrived scarcity to set in operation a cumulative displacement of other resources into less productive activities or into idleness. A contraction in the output of any industry means a reduced contribution to the source of demands in general, while price and cost rigidities will hold back attempts to adjust. On the other hand, in such circumstances, there will be a tendency toward a cumulative acceleration of aggregate income in the event of a cut in the price of any productive services (through the avoidance of any particular restraint on the utilization of labor or assets) in the broad direction of the prices consonant with optimal resources utilization.

A separate substitution reaction to prospective yields judged to be temporarily low through price and wage-rate rigidities judged to be of an unstable nature is that certain kinds of replacement are likely to be postponed. Not only will investment in inventories and work in progress decline, but entrepreneurs may be expected to replace scrapped equipment by relatively liquid assets until the costs of maintaining or adding to former capacity have reached their forecast reduced ultimate values. This will happen even when managements do not contemplate any important change in the eventual form of assets. Thus, if entrepreneurs can rely upon a governmental promise that, whatever happens, the inflationary solution can be ruled out, we can expect them to be waiting for greater “reasonableness” on the part of the unions, as well as for costs other than labor to fall. In more general terms, the prospective yield from money or near money in such conditions becomes greater than the yield to non-money. That is one of the substitutions through which the exploitation of investors is avoided.

I must now deal with a predictable objection. I may be asked: If your argument holds, what point is there in resistance to strike-threat demands? Do you maintain that managements’ reluctance or refusal to surrender to the strike threat is pure public spirit—the protection of consumers’ interests, or concern with the welfare of workers who may be laid-off and robbed of their present employment, or altruistic resistance on behalf of potential workers who are denied access to the bargaining table?

My answer is that, in each individual case in which the strike threat is an issue, it is invariably to the advantage of investors that the threat (or the strike) shall fail, and it is a disadvantage to them when the threat (or the strike) has some success. The advantage gained by the defeat of duress-backed demands is in the nature of a windfall, the possibility of which was one of the incentives to such investment as has occurred. Similarly, capitulation to strike-threat demands will mean a detriment to investors, the possibility of which will already have limited the volume of investment and influenced the composition of assets in the enterprise. Both possibilities are of some consequence, but managements are expected to (and are relied upon to) resist duress-imposed costs. Hence the prospective yields to assets which are retained, replaced or added to in particular undertakings are envisaged as a range of probabilities based (among other things) on strike-threat predictions. Resources of reduced aggregate value will stay in or be directed into activities in which prospective costs are thought likely to be forced up through the private use of coercive power, in spite of the hope that skillful “negotiations” will brake that power. Obviously, then, marginal prospective yields from fields in which a strong probability exists of successive capitulations to union demands will be no lower than they are in spheres in which no duress-imposed costs are forecast. Some resources will be diverted to other activities.

This argument must not be interpreted as meaning that forms of production involving a very high strike-threat risk cost will not be undertaken at all. It means that the profitable outputs in these cases will be smaller and hence much more expensive for the consumer. For when this risk is high, investing is like backing a horse at long odds. The investor, like the punter, will expect an exceptionally large yield in the event of his winning; and the investor “wins” when, through skillful bargaining techniques or strategies, he can evade coercively imposed labor costs, wholly or partially, and enjoy a fabulous return for having surmounted high strike-threat hurdles. Such exceptionally high yields, it must be recognized, are the consequence of the strike-threat system, not returns to the exploitation of labor which that system is presumably intended to resist.

To recapitulate on the point at issue. Investors know that the depleted prospective yields which constitute their incentive may be enhanced by windfall gains if managements are successful in dissuading the unions from pressing their claims as far as they (the investors) have forecast as probable, or further depleted by windfall losses if the unions are more successfully aggressive than seemed likely. But prospective marginal yields, and in the long run realized yields, will be equated to the rate of interest in both unionized and nonunionized activities. The vulnerability of investments in specific, non-versatile assets, in heavily unionized sectors of the economy simply reduces the rate of growth of those sectors—to negative growth in some cases. Unionized industries may expand, but the rate of growth where much exploitable fixed capital is needed will have been substantially curtailed.

Among the ways in which the avoidance of strike-threat consequences causes the emergence of a capital structure in which the risk of exploitation of investors is minimized or evaded is by the substitution of capital for labor. Quite apart from resort to labor-economizing machinery and methods, more highly mechanized methods of production generally (that is, capital-intensive methods), in which the ratio of labor costs to total costs is low, will tend to become relatively efficient as duress-imposed labor costs rise. Such growth as occurs is then more likely to be in these forms, while types of production in which the ratio of labor costs to total costs is high (that is, labor-intensive methods) will tend to contract, or even to cease operations except in non-unionized activities. Developments of this kind are more likely to reduce than raise labor’s relative share in the value of the product affected.

But the reactions we may expect are far from simple. Investors in the production of outputs in capital-intensive activities happen to be exceptionally exploitable by strike-threat action. Unless the Substitutability of assets for labor in such operations can be used strategically by managements to make “reasonableness” in strike-threat duress expedient, the advantages of nonunion organization will be very large indeed. Wage rates profitable under “yellow-dog” contracts (enjoining employees not to join a union) will be much higher than wage rates under union agreements (where, of course, “yellow-dog” contracts are not prohibited by law).

Labor-economizing developments in technology or management may be autonomous (that is, unaffected by prior changes in cost conditions) or induced (that is, brought about by a rise—or expected rise—in labor costs); and the rise in labor costs (actual or expected) in any case may be caused (a) by increasing competition for the labor in question or (b) by duress-imposed wage rates.

Autonomous economization of labor in any industry reduces the relative claim of wages in that industry, and ceteris paribus tends to reduce labor’s percentage share in aggregate income. But it releases labor for the production of other things and adds to the source of demands for all noncompeting outputs. The products toward which the increased demands are directed may well be those of labor-intensive activities, and there are indeed reasons why this might be expected (see p. 229). Hence when the qualification ceteris paribus is relaxed, we have no certain way of telling how relative demands for labor and for the services of assets in the whole economy will be affected. We do know, however, that the most conspicuous inventions which have multiplied the yield to labor since the beginnings of the industrial revolution have been labor-saving rather than capital-saving. That such inventions have not tended to reduce labor’s relative share is probably due to the benefits having been largely consumed in the form of greater leisure.

Induced labor economization may be regarded as having a similar effect in one set of circumstances, namely, when the rise in labor cost in the firm or industry in question has been due to enhanced demand for labor services in other industries. In these circumstances, a tendency for labor’s share of income to increase in these other industries will be more or less offset by any substitution of machinery for labor in the industry which economizes. But the dynamic consequences of the economization—the factors mentioned in the paragraph above—will still be operative.

On the other hand, induced labor economization due to costs imposed through the strike threat does not seem so likely to have the broadly neutral consequence we have noticed. The technical developments called forth are labor-economizing in a manner which mitigates the burden on consumers and investors, yet in this case the economy achieved seems to be contrary to labor’s advantage and specially against the interests of the less well-paid wage earners. For under the circumstances we are considering, the community’s resources are not increased, as they are when the economy is autonomous. The displaced workers are available to produce different things, not additional things (as they are when they are released by autonomous economization). The laid-off workers can typically enter only occupations of inferior productivity and remuneration (and they may perhaps be forced into temporary unemployment). The distribution of the aggregate wages flow will tend to be more unequal. Moreover, the diversion of capital into labor-saving assets will have robbed the community of assets in other forms—presumably relatively capital-economizing—developments which one would expect to raise the proportion of labor’s share in the value of the product of industry as a whole.

Circumstances sometimes exist in which unions are in a position to insure that there shall be no displacement of labor following duress-raised labor costs, and that redundant workers shall be paid an income although they provide no services (as in the case of various “feather-bedding” conditions). But that extreme possibility is simply one of the situations in which investors in already existing assets can be exploited when the possibilities of future exploitation had not been foreseen. Under feather-bedding, the spoils of exploitation are divided either among the whole body of previous workers in the industry or among certain favored individuals.

Consideration of the immediate effect, then, forces us back for a moment to contemplation of an issue which is not directly under examination at this stage. The community in its consumer aspect is doubly exploited; firstly, in being denied the most fruitful utilization of labor and assets in the industry in question; secondly in being denied the alternative product which the “feather-bedded” workers could have been providing. But the long-run effect, which is relevant in the present context, is even more burdensome. As we have seen, the rate of growth of an industry or firm which is so exploitable will be slowed down or reversed. Investors as such will no longer be exploited, but the community may suffer a grievous detriment.

An empirical study by Paul H. Douglas of the period 1890 to 1926 suggested that a union can win large gains for its members when they first organize, but “thereafter the rate of gain enjoyed . . . tends to slow down to a speed which does not appreciably exceed that of the non-union industries.”¹⁰ Other investigators have reached similar conclusions. In 1962, Melvin Reder, relying also on the empirical researches of Paul Douglas, A. M. Ross, and William Goldner, referred to “the well-known conclusion. . . . that new unionism is associated with differential percentage wage gains to an industry, but long-established unionism is not.”¹¹

This is exactly what one would expect, for two main reasons. Firstly, we have the factor already mentioned, that elasticities of demand for end-products tend to be much greater in the long run than in the short run. But secondly, and this is the point which is relevant in the present context, the elasticities of supply of complementary assets also become greater as time passes. When a new union first uses its powers of aggression, it can exploit not only consumers and displaced or excluded workers¹² but (a) those investors who had not fully allowed for strike-threat possibilities, and (b) those investors who, hoping (rather than expecting¹³) that skilled management could prevent the formation of a union or defeat attempts to strike effectively, are disappointed in their hopes. “Profits” can be exploited only when the exploitation was not in prospect when the entrepreneurial decision was made. Thereafter, the explanation of experience may be that strike-threat policy tends to be “reasonable,” in the sense of calculated to keep the undertaking going or even expanding. If it is, then it is in the light of the expectations created by that “reasonablensss” that future investment will occur. Thereafter there will be no further gains at the expense of “profits” except to the accompaniment of a further slowing down or reversal of any rate of growth in the accumulation of assets in the field affected.

What is essentially the same line of reasoning is to be found in Eugen von Böhm-Bawerk’s Control or Economic Law. He perceived, as clearly as we can today, that yields in the loan market or from real estate, etc., limit the extent to which “capital” is exploitable.¹⁴ He said “there would be little inducement to replace used up capital funds, if the investment should promise a smaller return to its owners than the same capital could produce in other kinds of investments”¹⁵ (my italics). And in exposing the “hallucination,” as he called it, that labor can increase its share at the expense of capital,¹⁶ he reiterated several times the point that, in the short run, strike-threat coercion might sometimes be able to confiscate a large proportion of the prospective yield which had induced an investment.

But I would go even further than this. It is theoretically possible for a union, faced with an undertaking which has made a large investment in non-versatile equipment, to force up wage rates to a carefully calculated extent so that the undertaking is exterminated gradually, thereby permitting the continued employment of all surviving union members as their numbers decline through retirement and death. In other words, it is possible to envisage a model of strike-threat action in which the imposed costs are meticulously adjusted to ensure that it is just profitable for the undertaking to retain and replace as much of the capital as is needed for the continued employment of the declining labor force which the union allows to be available.¹⁷ But it is precisely because of such possibilities (illustrated by a wholly imaginary extreme case) that an enormous volume of specific assets which would otherwise be provided for the community’s benefit must fail to materialize. Both replacement and development take on less exploitable, but almost certainly less productive forms. For instance, the value of already provided non-versatile equipment may decline in value through unanticipated strike threats over the period of the economic life of the equipment¹⁸ (which life will be reduced); but thereafter the equipment may not be replaced at all or not replaced up to the same value (unless, of course, demand has subsequently risen).¹⁹ At the time of the investment, admittedly, entrepreneurs knew that the technical form of that piece of plant might commit them for years to the purchase of materials and labor, possibly in hardly changeable proportions. Wrong forecasts about union coercion can be disastrous in these circumstances, and investors know this only too well. On the other hand, some complementary inputs (for example, those devoted to the replenishment of inventories of materials) may shrink immediately the cost of labor’s contribution to the input-mix is forcibly raised. That is, the providers of “circulating capital” may be hardly exploitable at all via unforecast strike-threat pressures.

At this stage, it is necessary to draw the students’ attention to a very simple but important aspect of “collective bargaining” which, to the best of my knowledge, has not been stressed by any contributor to this subject. It concerns the nature of any temporary, short-term transfers in favor of union members (and union officials) which are achieved when investors have underrated the degree to which strike-threat exploitation will be tolerated and practiced. What has actually happened when investors have been forced to accept yields below those the probability of which had induced the investment is that capital (that is, property) has been transferred, not in terms of legal definition but in terms of economic realities.

The point can be very simply illustrated by consideration of the circumstances in which, theoretically, the power to exploit investors who are trapped is greatest. Let us make the following assumptions. (1) A corporation’s assets have been provided by stockholders who initially expected no strike-threat action. (2) The assets are of very long physical life and highly specific. (3) The demand schedule for the output is highly elastic and does not change. (4) All other complementary services needed are purchased in competitive markets and their supply schedules do not change. (5) Duress-imposed labor costs are then forced on the firm. (6) The situation is not countered by a management-imposed work stoppage, that is, the laying-off a large number of workers solely in order “to teach the union a lesson.” Under these assumptions it will be profitable for managements to discharge very few workers, if any, and unprofitable to raise the price of the product. Hence labor’s gain can be said to wholly (or virtually wholly) achieved at the expense of capital. The value of the corporation’s shares will fall because the entrepreneurial residue will fall, while the earnings of the workers will rise by a more or less equal value. The aggregate loss of value in the corporation’s shares will tend to equal the present capitalized value of the increase in the aggregate earnings of the workers. The identical physical assets will be contributing services of about the same value to the productive process, but part of the capital value of those assets will have been seized by labor.

The issue is as simple as this. The threat of a strike, like the threat of a gun, can be used to seize the property of others, defensibly of course in the eyes of moralists who hold that Robin Hood objectives justify the means. I suggest that it is solely when capital can be transferred in this manner that investors are directly exploitable (that is, damageable otherwise than as consumers and beneficiaries from general prosperity). The principle is clear. The strike threat can be employed to expropriate certain kinds of assets when they have already been provided, but it cannot be used to enforce their continued provision as they are depleted or as they depreciate.²⁰

In the hypothetical example through which the argument has just been illustrated, the gains enjoyed by union members are assumed to have hurt neither excluded comrades nor consumers. But in practice fellow workers and customers bear virtually the whole burden. For this reason we must be careful not to confuse the capital confiscable from investors under the circumstances imagined (in other words, the capitalized value of the increased labor earnings from this cause) with the capital value of new union privileges, that is, sectional increases in income enjoyed because certain workers are priced out of the market and customers are disadvantaged. For gains at the expense of these last parties may also be expressed as the pecuniary value of a privilege—a capital value of which the yield is the union’s wage gains; and although such a privilege is in practice normally involved in some measure in all “collective bargaining” agreements it is conceptually distinct from the seizure of investors’ capital. It may sometimes have an objective pecuniary price; for example, it may be expressed in the form of union entrance dues. (It then resembles the market price of a transferable import permit.)

It is necessary now to bring our minds back to the realistic principle that, once trapped, investors will be twice shy. The assets which cooperate with labor will not be replenished by the original investors, except in the sense and in the circumstances discussed above. A possibility—although scarcely imaginable—is that the beneficiaries of the property transfer will themselves become new investors and find it profitable somehow to provide complementary assets for replacement or growth in the undertaking in which they are employed. If we conjure up the idea of union members saving (out of the yield to capital seized) a sum equal to what they have taken by force, we can imagine them offering to subscribe to a new capital issue or buying debentures in order to maintain intact the fixed capital they need to work with. But the rational investment of their future savings would mean choosing investment outlets offering the relatively highest yields; and this would hardly be in any undertaking which they intended to exploit later on.

In any case, there is no evidence to suggest that the thrift of union members compensates by replacing confiscated capital by way of investments anywhere in the economy, either out of real net savings on the part of members, or through the unions stepping up their investment of accumulated funds. In other words, the capital transferred tends in practice to be squandered. I do not question the probability that union members in any group save about as large a proportion of their incomes as nonunion workers of the same income group, and perhaps a somewhat larger proportion for an indefinite period immediately after their real earnings have been first forced up. But as their wages in such cases include an important element of capital, it seems certain that material capital squandering is the inevitable concomitant of unforeseen strike-threat action.

In the extreme case, assuming now (quite absurdly) (a) highly elastic demands for all products, (b) high inelastic supplies of all complementary resources, and (c) the failure of investors to foresee the possibility of the strike-threat system being used in the manner which is about to be described, we can imagine the workers as a whole, operating through a central agency, being able to seize all fixed assets through the use of the whipsaw or strike in detail. We can envisage, for instance, the AFL-CIO borrowing big sums from its members and using the funds to support strikers against one firm at a time, in each case forcing up wage costs to the point at which, while no business is driven into insolvency, the price of each one’s shares is driven down in turn to near zero. When that has happened, each undertaking’s workers will already virtually own the fixed assets, whether or not they subsequently purchase the shares. But we can imagine them using their funds to do this because they can acquire the shares at a negligible price. Eventually, by this stratagem all previously provided fixed assets will be owned by existing workers. The new worker-capitalists will have no incentive to share the capital so obtained with future workers allowed in. They can protect their property by insisting upon “yellow dog” contracts with any new entrants who can be offered wage rates below those paid prior to the strike which seized the capital, or by insistence upon entrance fees equal to a proportionate part of the capital at what its value had been prior to the strike. The worker-capitalists will then find it advantageous to retain, replace or add to the assets they own in accordance with their forecasts of the yields. In such circumstances, there will be no reason why the relative shares of income accruing to owners and workers should have been changed one iota; but there will have been a large redistribution among individuals of income from the services of assets.

Alternatively, centrally directed strike power is capable of being used to permit the nationalization of one firm after the other at negligible stock market prices. All firms can become owned by “the people” at niggling costs, while “full compensation” can be claimed to have been paid! That is, the burden of nationalization on the taxpayer qua taxpayer can be infinitesimal.

But let us now drop the unrealistic assumption (c) and assume instead that investors do foresee the possibility of exploitation via centralized whipsaw tactics. The fear of losing any return from the assets they have provided will lead to no further resources being provided in exploitable forms or under conditions which permit exploitation. Investors infixed assets will refuse to offer them under contracts which yield a residual claim on the value of the output, or they will do so only under iron-clad “yellow dog” agreements.

But when the owners of capital begin generally to refuse to accept entrepreneurial responsibility by insisting upon contractual instead of residual yields, an enormously important division of labor is being abandoned. The functions of (a) saving (financing the replacement or net accumulation of assets in general), and (b) investment (choosing the most productive, and hence most profitable, form in which assets are to be replaced or accumulated) are usefully linked in the entrepreneur who takes the residue after all the other parties to production have been paid at previously agreed prices. The merits of the specialization which would be upset are derived from the ability of investors to own assets in many different undertakings and so to spread their risks. If the workers must take the residual claim, they are subject to risks which cannot be spread, as we saw in Chapter 6. The circumstances envisaged show how harmful to the workers themselves—as a class—general attempts to exploit investors (such as we have been considering) would be. Owners of assets would escape exploitation because they would allow their property to be used only in return for rent or interest; but that would mean an enormous sacrifice of the social security provided by the free market. The function of risk-taking would be forced on the classes least able to spread risks.

But let us now drop assumptions (a) and (b). In practice, the forcing up of labor costs under duress would mean the forcing up of product prices and the immediate diversion of complementary resources from any field against which the centrally planned whipsaw was directed. In the absence of inflation, the raising of prices by any firm expresses a shrinking of its contribution to the source of demands for the products of all noncompeting activities. Dynamic factors would therefore engender catastrophic depression with the cumulative falling off of outputs in general, to which reference was made above (p. 130). The recovery or counterforce would then be the strong incentives which I have just stressed, to offer the use of assets only in return for contractural rent or hire.

In the light of the insights gained so far in this chapter, we can turn now to an objection which has at times been expressed to me verbally. The questioner has in mind, not the extreme form of strike-threat coercion strategically directed according to whipsaw principles, which we have considered above, but an extension of the kind of situation which already exists in western communities. I am asked: If virtually all investors who accept the residual claim on the value of output are subject to exploitation via the strike threat, can my reasoning still be accepted? Surely, it is asserted, in a regime in which most (or a large proportion) of the workers do rely upon union coercion (instead of, as today, a small proportion in all industrial countries), even if all investment decisions take full account of the probable consequences, entrepreneurs as a class will have no alternatives. Hence (I am asked) if no unexploitable investment outlets are left anywhere in the economy, must not some redistribution of profits be achievable for labor’s benefit?

To consider the truism which this last question implies, we must begin by recognizing that as long as investors do, on the whole, correctly forecast the cost consequences of duress-imposed wage rates, their realized yields on the value of all input increments in the investment channels they choose will still tend not to fall below the rate of interest. The outlets chosen as relatively most favorable will continue to be those in which ceteris paribus the probability of exploitation—valued as a cost—is relatively low, while this cost (that is, the value of the probability) will be least when savings and disinvested funds seek contractual yields as distinct from residual yields.²¹

I have explained above how the extreme use of strike-threat power would cause the owners of assets to force “labor” to assume the greater part of the entrepreneurial function. It seems to me that this is what would be bound to happen under the circumstances imagined. Let us assume that all prospective residues (profits) in all sectors of the economy are regarded as equally likely to be exploited, in the sense that the same proportion of what would otherwise be residues are forecast as destined to be lost through strike-threat concessions. Because all prospective yields are assumed to be reduced by the same predicted percentage, the higher this percentage, the smaller the proportion of investment that will be devoted to equities (with prospective residual remuneration), and the greater the proportion which will be devoted to loans, debentures, bonds, mortgages, etc., or to the provision of assets to be leased or rented. The extent to which prospective losses will be avoided via the sacrifice of prospective profits (under the highly unrealistic assumption we have accepted) will depend upon this valuation of the liability to exploitation. We can, if we wish, envisage the extreme case in which the degree of forecast exploitation is such that entrepreneurs calculate it will confiscate a value equal to or exceeding profits.²² In such a situation all new assets²³ not operated by their owners, or by the owners’ families, or by partners would be leased or rented. But in practice, long before prospects of exploitation had created anything approaching such a state of affairs, the contraction of the flow of wages and of income so caused would have forced governments either to take effective action against the strike-threat system, or to fall back on the inflationary palliative, or to resort to the political determination of wage rates.

At this stage, however, the relevant issue is that even under the most extreme assumptions favorable to the notions which I am refuting, direct exploitation of investors would be avoided. Investors would suffer from the absurdities of the system (that is, be exploited) in the same way that the workers would. Demands for the services of assets would fall, but so would demands for the services of labor. All broad categories of income would be reduced more or less in the same proportions (the consequences being therefore regressive).

This argument applies fully to the category “profits.” There is no reason why, in the circumstances imagined, society’s valuation of entrepreneurial services should be reduced more than in proportion to aggregate income. There are no grounds, that is, for assuming that there will be a decline in the relative natural scarcity value of the function performed by those who finance production at risk and direct productive operations. Stockholders who anticipate strike-threat pressure will either choose outlets with the prospect of huge windfall gains (see pp. 131-132) or accept risk in the less sensitive and less productive way of a contractual yield; but they will never be able to avoid the risk-bearing function altogether. In the extreme case, they will assume risk in deciding what kinds of assets are likely to be most profitably offered for renting or leasing, leaving to labor the greater part of the risk-taking (and relinquishing to labor, of course, the greater part of remuneration for risk-taking). The category “investors” will then overlap, including both “stockholders” and “labor.” But when stockholders’ investment decisions correctly allow for exploitation probabilities, contractual yields to investment will be as unexploitable as residual yields.

In practice, the unions seem to follow the principle of forcing wage rates upward according to “what a firm or industry can afford to pay.” Sometimes the phrase is “ability to pay.” Presumably, duress-imposed burdens are in each case calculated with a view not to destroying the source of employment or not reducing the rate of growth of the firm or industry by more than is judged to be expedient. The expediency in this case is concerned with the support of members who may be threatened with displacement.²⁴ Accepting this interpretation of the phrase “ability to pay,” limits to the exploitability of a firm or industry by strike-threat power can be said to be set by the inadvisability of causing too many lay-offs of union members. Even where governments (that is, taxpayers) in some form foot the wages bill, the unions know that the fertility of the goose that lays the golden eggs may be reduced by trying to squeeze too much more out of her than she normally delivers. Hence they must always weigh up the question. How many additional eggs will it be wise to require? The caution shown is usually described as “union reasonableness.” The expectation of such “reasonableness” in any activity is, as we have seen, a determinant of the amount and composition of investment in that activity; and it is that which is of vital importance in the present context.

While there is little awareness of the long-term consequences of strike-threat action, the unions do, then, recognize the short-term dangers. They can see for instance that, while they are in a position to exclude (or even displace) workers from industries which are responding mainly to domestic demands, it will be against their interests to try to do this in industries which are subject to foreign competition, or which produce largely to satisfy export demand. In the words of B. C. Roberts, “while under full employment unions are little concerned with the effect of wage increases on the level of employment in industries engaged in supplying goods to the home market, they are conscious of the relationship between wages, costs, and prices and do take some account of it in the export industries.”²⁵ It happens also, and not infrequently, that in expanding industries, especially when earnings are high in relation to the basic wage rates stipulated in wage agreements (because incentive bonuses are earned, or various forms of overtime), suggestions that the basic wage rates shall be pushed up under strike-threat pressure are rejected by union ballot.

Again, when the standard rate is enforced on a national scale, the local unions in areas of relatively high nonlabor costs will often press for the right to accept a scale below the national standard; and if the national union is threatened with a break-away, the members will agree, probably to the great relief of the officials. Should the position then be that the industry neither grows nor declines in any area (whether high cost or low cost), we can say that exploitation is maintained in just such intensity in different places as to permit a positive yield to all increments of assets retained or replaced but not to any increments of assets accumulated. Each area is forced to pay what “it can afford” because it is thought dangerous to displace any present union members, or inexpedient to cause a reduction of the employment outlets available as present union members leave, retire, or die. There is no merit in such a situation (which is sometimes defended on grounds to be later examined—that increased wage rates for some are “absorbed by the profits” of the efficient—see pp. 153, et seq). It is just as indefensible to destroy the profitability of growth in any field as it is to destroy the profitability of maintaining currently used capital intact.

Recognition of possible backlash from “unreasonable” strike-threat demands in particular cases is frequently clearer in the minds of the union rulers than it is among the members. As we have seen, union officials perceive at times that it is to the interests of those they represent that an industry or firm should be allowed to grow. They will then warn the membership not to expect “unrealistic” wage improvements. Yet it is precisely because of the “democratic” control exercised by the rank and file that, when elected union rulers try to protect, say, the interests of a minority likely to be jeopardized by “irresponsible” demands, they are all too apt to be overruled. Moreover, as with so many democracies, there are often “extremist” rivals for power, while the majority of union members are typically ill-informed—so much so that they sometimes insist on policies through which even their short-term interests are harmed.²⁶

Although on occasion managements can rely in some measure upon the “responsibility” or “reasonableness” of union officials, these officials seem prepared all too often to capitulate to cupidity and shortsightedness, rather than risk loss of power and income. Shrewd managements are under no illusion on this point. The risk of unions being forced to act contrary to the interests of their whole membership is felt as an aggravation of the process under which incentives to growth in the relevant industry are weakened, or accepted as yet another factor hastening its relative or absolute decline. But, as we have seen, managements typically realize the need to think up capitulation formulas which will allow the hierarchies who govern the unions to satisfy their membership that they are just as successfully aggressive as other union rulers. (See pp. 69-70.)

There have been periods in the past during which the great majority of investors in unionized or potentially unionized occupations may be assumed to have failed to forecast the intensity of the future use of the strike threat. In particular, the growing political power of the union organizers has probably been insufficiently allowed for at certain times. Transfers of capital (regarded as income) in favor of labor could have occurred, I think, if other reactions had not offset the possibilities we are here considering. Before the New Deal, entrepreneurs expected neither the disastrous price-cost policy of 1929 to 1933, which unnecessarily transformed unparalleled prosperity into unparalleled depression, nor the extent to which politicians (successfully seeking profit from the distress, fears, and disappointed hopes due to price discoordination) would find it expedient to capitulate to the labor lobby and bestow privileges and immunities on the unions. Even after the Wagner Act, the quiet ruthlessness with which sectionalist aims would come to be pursued seems to have been generally underestimated. Hence some considerable exploitation of the providers of assets almost certainly did occur at first; and we should expect to find evidence of short-term union gains (observable in the shape of a larger percentage of aggregate “income” being received as “wages”). Empirical studies do not, curiously enough, support this inference. But for reasons to be discussed in Chapter 15 and 16 this does not permit us summarily to reject the inference.

The consequences of entrepreneurial reaction to exploitation expectations during this period have been far-reaching, even if hardly noticed. They are to be discerned in a changing composition of the assets stock, gradually assumed over the years. Directly or indirectly, a growing (although undistinguishable) proportion of the equipment and tools which are used by labor has come to compete with labor rather than to act as a source of demand for labor. The bias toward assembly-line, mass-production and automated plants, machinery and operation patterns, which strike-threat anticipations have induced, has been a powerful force even in nonunionized activities (for the possibility of later resort to economic duress can nowhere be dismissed). The development is one which has squeezed out much of the meaning from empirical studies of changes in “labor’s relative share” of income (see Chapter 15). Its significance from the standpoint of the quality of the response of the productive system to consumers’ sovereignty may one day be recognized as having been profound.

It is not uncommon for “labor economists” to refer obliquely to the vital issue of the avoidance of imposed burdens following input-output value comparisons. I say “obliquely” because they typically do so in the vaguest of language. Occasionally they refer to the “harshness of the market” or to “budgetary restraints;” they sometimes hint that the existence of foreign competition could “aggravate” the “harshness;” and at other times they admit that the productive system may “adapt itself to strike-threat pressures in some usually unspecified way. But passages of this kind are never, as far as my reading has gone, followed up by careful definition of concepts or rigorous analysis. I have sought in vain in the “labor economists’” contributions for any systematic consideration of the change in the composition of the stock of assets (and hence in the form of output) which is the consequence.

The blindness of organized labor to the consequences of the strike-threat system upon the wage-multiplying structure of assets, and this concerns the long-term benefit of the wage earners, is quite remarkable. For instance, managerial techniques of an economizing nature which do not displace labor (for example, capital-saving technological innovations which might greatly decrease the nonlabor cost per unit of product) are far more likely to be adopted in a free labor market than when the arbitrariness and uncertainty of the strike or the strike threat are present. For capital-economizing innovations usually require formidable investments in specific, nonversatile forms (perhaps of what the Austrian economists called the “roundabout” kind) and they are normally more exploitable than labor-economizing innovations. Investments of that type are never lightly undertaken; they will certainly be deterred if the very fact that they have been made increases the risk of future strikes; the possibility of recourse to them cannot reduce the incentive actually to use the strike weapon, as can recourse to labor-economizing inventions; yet they are the investments most likely to accelerate the wage-multiplying process.

At the other extreme, we have assets which possess no wage-multiplying power and of which the yield consists wholly in gratifications for the owner. For instance, a wealthy investor may put much of what he disinvests or saves into assets like private parks, big estates, mansions, yachts, luxury cars, valuable paintings, diamonds, pearls and consumers’ capital goods generally. It is obvious that capital held in that form has no wage-multiplying power. That is, it does not contribute to the production of wage goods nor cooperate with the labor required to replace or add to the assets used and consumed in the production of wage goods.

I draw attention to these two extreme cases in order to stress the broad nature of the generalization that I have enunciated, namely, that entrepreneurial avoidance of strike-threat exploitation seriously reduces the wage-multiplying attributes of the stock of assets. The disturbing reality seems to be that those assets which can most effectively enhance the flow of wages are those of which the replacement and provision are most seriously deterred by strike-threat restraints. In most countries of the western world, the unionized sector covers industries which are key factors in general material progress and prosperity. The conclusion is surely incontrovertible. Attempts to transfer income from investors to labor must have destroyed income-creating and wage-multiplying possibilities on a formidable scale. All contrary notions can be seen to ignore the reality of investors’ freedom. Prospective exploitation is avoidable exploitation.

The hardy notion of investors being effectively “soaked” via duress-imposed wage rates depends hardly at all, I think, on experience of the circumstances in which, because investors have not yet come fully to anticipate strike-threat consequences, income transfers have been forced. The “hallucination” (as Böhm Bawerk called it) can be traced, I suggest, rather to (a) misinterpretation of the “economizing-displacement” process (which is the phrase I have used to stress the economic significance of technological progress (see pp. 19-20) and (b) a failure to perceive the dynamic consequences (via the operation of Say’s law) of labor-economizing and capital-economizing innovations. Progress in the form of “economizing displacement” happens to have accompanied the emergence and growth of the strike-threat era, and this progress has been continuously making tolerable labor costs raised by union pressures. Yet these pressures themselves have actually been curbing the process of adding to the stock of assets in the most effectively wage-multi plying form. As we have seen, the strike-threat system has, among other things, caused productive operations within the unionized sector to take on capital-intensive rather than labor-intensive characteristics, and it has forced the process of replacing assets, and the deployment of labor, into fields of lower productivity and remuneration. The almost paradoxical truth is that the “validation” of labor costs by managerial and technological ingenuities (building often on developments in science) seems to have given rise to the firm conviction that rising standards of wage remuneration, including fringe benefits, are the results of gains achieved through labor’s fight for just wages,²⁷ Ultimately, as Böhm-Bawerk put it in 1914, the belief that “during the last decades countless strikes have led to an improvement in the workers’ economic status”²⁸ must be attributed to a general unawareness of “outside influences . . . which have increased the marginal productivity of labor, and therewith increased the possible permanent higher wage level. . . .”²⁹ The enhanced wage rates could survive, he added, because of “the stupendous progress of our times . . . great technological improvements, improved methods of utilizing human labor. . . .”³⁰

The “hallucination” has been intensified through misinterpretation of inflationary experience. The rise in money wage rates, which is one of the consequences of inflation, happens to occur within the unionized sector through negotiations conducted by the unions. It appears therefore as though only lurking strike power has achieved the periodic increases in nominal wage rates which characterize an inflationary era.

One further source of the “hallucination” should be mentioned. We find also misinterpretation of the sort of experience which is encountered when rising real wage costs in a particular productive activity do not bring reduced outputs because demand for the output in question happens to be growing. In such circumstances, a rising output of, say, 20 percent in the course of a decade could, perhaps, have been 50 percent in a free labor market, and have resulted in a much cheaper product. It would therefore have exerted a greater incentive for an expansion of the outputs of noncompeting goods and services. Let us consider, for instance, the price of steel in the United States. It seems to me beyond question that a free labor market in this industry would have achieved a very much lower price of steel with appropriately larger outputs. It would have served therefore as a contribution toward lower production costs and higher wage rates in almost every American industry.

I shall return to this important example (see below, pp. 147-148). The spread of the unionized sector has largely been toward those productive activities which have been tending to grow most rapidly, so that the general detriment caused by duress-imposed costs in curbing their rate of growth has been obscured. That is, strike-threat pressures have been most successfully parasitic (and hence most rewarding from the sectionalist angle) in those industries and occupations which could otherwise have made the greatest contributions toward real income and the well-being of the community as a whole. The unionized occupations have been mutually harming one another, while diverting much capital investment into assets which cooperate with labor in the less productive, nonunionized occupations.

At this stage, it is essential to refer briefly to a point already mentioned, namely, the possibility of reaction to the strike threat by the substitution of the consumption process for the saving process. A very large (although unidentifiable) proportion of the flow of savings is altruistically or prestige motivated, being based on the desire to bequeath capital to those of the savers’ dependents or others who are dear to them, or to those causes they favor, such as universities, favorite charities, etc.; while many savers are influenced by the prestige which attaches to persons who are successful in amassing capital (a success which, in the absence of exploitation, theft or fraud, must be broadly correlated with the degree to which they have served the community³¹). The expectation that a considerable part of their savings which is not destined for consumption during their lifetime (for example, which is not invested in annuities) is going to be seized and used or squandered by others, is likely to reduce individual saving preference. But I refer to this possibility solely for the sake of completeness. It is, I think, of no great importance because (as we have seen) investments in nonexploitable forms will still be available to the prudent saver. Redistributive taxation can, however, induce a decline in saving preference (although whether it must do so is a matter of controversy).

The reactions of exploitation-avoidance upon the production structure are sometimes far-reaching in their effects upon the spatial spread of investment. Development tends to be diverted toward areas in which the prospects of exploitation are least. Countries or districts in which the “unreasonable” use of the strike threat is judged to be particularly likely will attract less capital—just as they would had they been burdened with a discriminatory tax. Thus, during the interwar period, a large proportion of British savings was driven abroad for precisely this reason. Such international capital movements can be curbed by “controls” and taxes (like the American “interest equalization tax”), but only at the expense of assisting the exploitation process. Fiscal restraints have (not very consciously) originated in part from attempts to prolong the period in which home investors have been exploitable.³² The locking-in of capital by exchange control certainly may facilitate its exploitation—an almost exact parallel to the locking-in of labor by restraints on emigration. But restrictions on capital exports will tend to reduce the domestic rate of interest³³ rather than profit residues. Otherwise the argument of this chapter needs no modification.

Within a country, evaluations of the strike-threat burden can be seen to have driven the net accumulation of assets or the replacement of disinvested assets from districts thought prone to strike-threat activity to relatively strike-free areas. There is, for instance, little doubt that in the United States the individual states which have made use of the provisions of 14 (b) of the Taft Hartley Act and passed “right to work” laws have attracted development, because these laws reduce the risks of the strike-threat (although in some states minimum wage enactments, under the Fair Labor Standards Act or otherwise, have possibly more than countervailed any advantage).

Again, within Britain during the interwar period, virtually all development of new industries (such as artificial fibers, plastics, foam rubber, electrical equipment, and so forth) took place southeast of a line drawn between Bristol and Hull. This southeastern part of Britain was relatively nonunionized, having about only a fifth of total union membership after World War I. And one region to the northwest of the line, the South Wales district, which had become a depressed area,³⁴ was unable to attract investment in a new stock of assets, in spite of a plentiful supply of idle potential labor (masses of able-bodied unemployed) and the presence of rich natural resources capable of development. In this case, it was largely the fear of relatively militant unionism which deterred investment there and caused South Wales to remain chronically depressed.

The spatial distortion of the production structure is, however, simply one manifestation of the general tendency we have noticed for exploitation-avoidance to cause the composition of the stock of assets to be less productive and less conducive to maximization of the wage flow.

Having considered the fundamental factors of the composition and spatial distribution of the stock of assets, we must turn our attention to the conceptually distinct factor of the labor cost of assets. We have seen that the strike-threat system amounts to a form of economic warfare under which labor is mainly exploiting labor (through regressive, imposed burdens on consumers and displaced or excluded workers.) We can now observe that “labor exploits labor” in yet a third way, namely, in raising the cost of replacing or adding to the stock of assets which cooperate with labor. This burden is imposed irrespective of the composition of the stock. The capital resources which the workers must use have had the services of previously existing capital resources as well as the services of labor incorporated into them. But except for that relatively small element in the value of those resources which is the result of scarce natural assets, these capital resources have themselves been the product of labor. It follows that any forced enhancement of the labor cost element in their value must harm the workers as a whole not only as consumers but as wage earners. (Of course, nonlabor incomes in general must also be adversely affected.) A fuller explanation of this important point is given below (pp. 223-224).

The adverse effects of the strike-threat system upon the composition of the assets stock which has been explained in this chapter can be illustrated by examples from recent American experience. It has become evident that the United States is unable to compete advantageously with foreign fishing vessels outside her monopoly defined by the 12-mile limit. American investors dare not risk capital in great factory ships with attendant fleets of subsidiary vessels such as are operated close to the United States’ shores by Russian, Japanese, and German vessels. This is simply because of the virtual certainty that force majeure would later, subsequent to the investment, push up labor costs above the level which would have justified the risk. The situation is currently depriving large numbers of relatively poor Americans of opportunities of better-paid employment, as well as robbing consumers in the United States of cheap fish.

Again, if American merchant vessels could have been protected against strikes, the United States could today have been one of the world’s leading mercantile marine powers if not the world’s leading power; and if her shipbuilding industry could have operated under similar protection from the strike-threat, the technological genius of her intellectual élite would, it is not unreasonable to assume, have led her to dominate international developments in marine engineering. Certainly, protected from duress-imposed costs, vessels flying the United States flag could have offered relatively well-paid jobs to large numbers of presently underprivileged American nationals—especially those in the minority groups.

Finally—an example which, it is felt, ought to have been causing the gravest misgivings—we have the American steel industry, to which I have already referred. Costs imposed by the strike threat have brought about ageing plants and hence high nonlabor costs. Moreover, in plant replacements, the urge to “economizing-displacement” and modernization has been dampened. In a key industry, the unions have been allowed to destroy the incentive for large-scale experiments in capital costly yet capital-economizing methods. All American manufacturing activities have shouldered the burden. The fact that the British and German steel industries have been similarly handicapped has softened the blow to American investors in steel, although 1971 seems (from the profit angle) to have been one of the worst years those investors have ever experienced. Small wonder, then, (hat the Japanese and Soviet steel industries boomed as the American languished. Although “the Soviet system is ridden with waste and inefficiency,”³⁵ the Soviet Union’s steel output for 1971 exceeded America’s for the first time in history. But American steel output would have been incomparably greater under market freedom, and it would then have been cheapening the costs of wage-multiplying assets in all noncompeting activities (and so benefiting the whole community in its consumer role).

The reader must now be reminded that, in this chapter, only occasional and incidental account has been taken of the fact that in each case the consequences of attempts to exploit investors (or of actual exploitation when investors’ predictions are at fault) are regressive in their systematic closing of potentially higher-paid employment outlets for unprivileged workers (quite apart from their consumer impact). Gains won by the private use of coercive power are not achieved at the expense of “rich” investors. Indeed, were it not for the fact that unions certainly can gain at the expense of (a) comrades confined to or driven to less well-paid work, (b) consumers, and (c) (in government employments) the taxpayers, they would be forced to consider more explicitly and more often whether attempts to get any additional eggs from the goose at all would not bring adverse repercussions on too many of their members (in the long run if not immediately).³⁶

The sacrifice in material well-being which the system must have caused would have been even more serious had it not been for a collective (although essentially ephemeral) method of evading the consequences. The manner in which money wage rates in the unionized sectors have been forced up in the great industrial countries of the western world during the last three decades could have brought disaster—a general running-down of the economy—had the situation not been crudely rectified through chronic inflation. Thus, in the United States, it has been, perhaps, the very skillfully planned and executed destruction of the real value of the dollar which has prevented the unions from forcing down the flow of wages catastrophically. Inflation seems to have been the only alternative to (a) governmental restraint of the strike threat, or (b) “incomes policies”—the authoritarian imposition of maximum wage rates as a politically acceptable means of maintaining the flow of wages and the prospective yields needed to call forth sufficient replacement and growth. In 1949, Lindblom expressed grave forebodings about the ultimate consequences of unionism as it then appeared to be developing.³⁷ He had not foreseen, I think, the success which inflation could achieve as long as people generally could be misled about its intended speed and duration (see Chapter 17). But are not his dismal predictions likely yet to be justified unless a wiser policy toward the private use of coercive power is not soon adopted? For do we not all still expect inflation to continue?

It is important to notice that this discussion of what is achievable through the private application of coercive power has been concerned only with its effectiveness when it operates directly through the price system—either through imposing wage rates and prices, permitting supply and demand factors to react to these duress-fixed values, or by restraining the expression of supply and demand factors and allowing wage rates and prices to react to the restraints. But of course strike-threat power could be used via the general strike or otherwise,³⁸ in order to gain control of government. By such methods all capital could be seized on behalf of the proletariat (or for the private benefit of those who organized the disruption, if they could keep control in their hands). That could well be a more effective strategy for revolution than the centralized use of the whipsaw because the responsibility of the unions would be less obvious to an electorate. But our interest in this chapter has been confined to the consequences of attempting to redistribute income, not by way of taxes and capital levies, even when these are a response to strike-threat coercion, but by the fixing of wage-rates and prices under duress.

NOTES

¹ We must be careful not to exaggerate the extent to which, in practice, assets already provided in a given physical form are exploitable for such reasons. If only a tenth of the aggregate stock of assets has to be replaced on the average in each year, it still allows some considerable scope for modifications in the composition of the stock of assets over the course of, say, a decade.

² See p. 131.

³ The substituted forms of assets may be of types which produce different kinds of output, that is, goods or services for which the required productive arrangements are less exploitable although the product stands lower on consumers’ scales of preference than those which would be preferred in a strike-free economy but for which the productive arrangements are relatively exploitable. Leisure may be one of the outputs.

⁴ There are exceptional circumstances. Sometimes the use of “the strike in detail” (“whipsaw”) appears to be good tactics (see p. 47), and on occasion discrimination against the more efficient firms is deemed advantageous (see pp. 153-155).

⁵ Curiously enough, Phelps-Brown and Hart (Economic Journal, 1952, pp. 269-73) have argued that, where prices of end products cannot be raised (or cannot be raised “proportionally”), the forcing up of labor costs means that unions can “squeeze profits” and hence cause redistribution in labor’s favor. But that is true only if the dynamic factors, to which the whole of this chapter is devoted, are ignored. I deal specifically with a model based on that assumption on pp. 136-137.

⁶ The word “unwilling” (in the sense of “coerced”) is justified when investors do not themselves benefit from the “joint monopoly.” But (as we are about to see) both may benefit and share the spoils.

⁷ W. H. Hurt, The Theory of Collective Bargaining (Glencoe, Ill.: Free Press, 1954), pp. 96-104. Such joint monopoly has, at times, had the express support of legal enactment. In the United States wage agreements in this category are often called “sweetheart contracts.”

⁸ In stressing the importance of prospective yields, it is important to perceive that current realized yields are most misleading at times—and business decision-makers have learned this truth through bitter experience. There can be no simple extrapolation of current yields to get prospective yields. Still less are the sales of one month simple evidence on which to forecast sales of subsequent months.

⁹ Tibor Scitovsky, “A Survey of Some Theories of Income Distribution,” National Bureau of Economic Research, The Behavior of Income Shares: Selected Theoretical and Empirical Issues. Studies in Income and Wealth (Princeton: Princeton University Press, 1964), p. 25.

¹⁰ Paul H. Douglas, Real Wage Rates in the United States. 1890-1926 (Boston: Houghton Mifflin Co., 1930), p. 567.

¹¹ Melvin W. Reder, “Wage Structure Theory and Measurement,” Aspects of Labor Economics: A Conference of the Universities—National Bureau Committee for Economic Research, A Report of the National Bureau of Economic Research (Princeton: Princeton University Press, 1962), pp. 297-298.

¹² The reader is reminded that by “excluded workers,” I refer to those who could have improved their incomes and prospects in the absence of duress-imposed labor costs, as well as those actually “displaced”—“laid-off.”

¹³ See pp. 131-132.

¹⁴ Eugen von Böhm-Bawerk, The Shorter Classics of Bohm-Bawerk, ed. Hans F. Sennholz (South Holland, III.: Libertarian Press, 1969), p. 181.

¹⁵ Ibid., p. 182.

¹⁶ Ibid., p. 192.

¹⁷ Simons has used this illustration of the point at issue, Economic Policy for a Free Society (Chicago: University of Chicago Press, 1948), p. 132.

¹⁸ Because the capital value of the equipment will fall as its prospective earning power falls.

¹⁹ It may, however, cost less to replace a piece of equipment than it cost originally to install it (for example, the renewal of a railroad track).

²⁰ Some part of the value confiscated may be that of natural (as distinct from man-made) assets, which are not subject to depreciation and replacement. Owners of such assets are extremely exploitable. But in an economic system which tolerates the strike threat this fact will hold back investment in their development, for example, of mines. In other cases natural resources are highly versatile. Land is a case in point, although a nationwide union of farm workers would have formidable strike-threat power.

²¹ The ceteris paribus qualification here is meant to remind the reader that this particular cost has to be reckoned together with all other costs in entrepreneurial decisions.

²² I say “exceeding profits” because investors in debentures and bonds are also exploitable—although of course to a much smaller degree—when insolvencies on the part of the borrowers are caused by unexpected strike pressures.

²³ I am making abstraction here of those replaced assets which may be needed to minimize losses due to previous exploitation.

²⁴ And whose subscriptions could be lost to the union in the event of their lay-off.

²⁵ B. C. Roberts, in J. T. Dunlop, ed., Theory of Wage Determination (London: Macmillan, Ltd., 1957), p. 117.

²⁶ “The process of decision-making based on the economic knowledge of the leaders is . . . sometimes frustrated by the attitude of the membership.” (Ibid., p. 118.)

²⁷ This conviction is shared by judges, superficial sociologists, journalists, school teachers, clergy and other opinion-makers, as well as by politicians, labor consultants, labor lawyers, and so forth, for many of whom it is (to use the phrase of a shrewd observer in this field, a century ago) a “paying opinion.”

²⁸ Böhm-Bawerk, op. cit., p. 192.

²⁹ Ibid., p. 189.

³⁰ Ibid., p. 196.

³¹ I say “broadly correlated” because sheer good luck, although often indistinguishable in practice from good investment judgement, is in itself hardly meritorious. The winner of a bet or of a sweep has not served the community.

³² I feel that Kaldor’s plan for a consumption tax was intended more as an attempt to prevent exploitation avoidance (in this and other ways) than as a means of discouraging ostentation. See Kaldor’s The Expenditure Tax (New York: Macmillan Company, 1956).

³³ Unless fear of being caught in that way drives away capital imports, that is, foreign capital which would otherwise have provided wage-multiplying assets in the country concerned.

³⁴ After a Labor Government had forced a cartel on the coal industry in order to insure the raising of wage rates for those miners who were not to be displaced when the price of coal was raised.

³⁵ S. Pejovich, “Economic Reforms in the Soviet Union,” Modern Age, 16 (1972): 68.

³⁶ It is not irrelevant to point out that the fields in which gains from union pressures are popularly regarded as most “unreasonable” or “outrageous” concern occupations in which the possibility of exploiting investors in fixed equipment is least or wholly absent, for example, among plumbers, medical practitioners, barbers, lawyers, and so forth.

³⁷ Charles E. Lindblom, Unions and Capitalism (New Haven: Yale University Press, 1949).

³⁸ E.g., via pressures calculated and planned to create unemployment, insecurity, discontent, racism, disorder and generally deplorable conditions which can be blamed on existing governments (or on “the capitalist system” or “the profit system”).