6. The “Employer” Stereotype

IN AN age in which semantics is an academic discipline, it sounds almost platitudinous to refer to the misleading images which mere words often evoke. Yet I feel compelled to stress the adverse effects which one such image has had upon the quality of our thinking. There is an innocent, apparently neutral, nonemotive, word which, through the deceptive picture it conjures up, has caused greater intellectual havoc in the social sciences than any other misleading stereotype. I refer to the concept of “the employer.” Although this term has legal recognition and definition in many countries, it has been and still is largely responsible, I am convinced, for incalculable intellectual harm. The reader may have observed that I myself have so far avoided the use of the word in the present book, except in quotation marks.

I am not thinking of the word sometimes bringing to mind the conventional caricature of “the capitalist”—a bloated bully with an enormous belly emphasized by a heavy watch and chain. I am thinking simply of the notion of “the employer” as one party in wage-bargaining and wage settlements, as the owner of the capital employed, and as he who wields the authority to manage—to give orders and direct the processes of manufacture and marketing. The concept of “the employer” is confusing because, in reality, employment is not offered and wages are not paid by investors—normally the residual claimants on the value of output—except as intermediaries. Nor can we say that employment is offered and wages are paid by the managements responsible to investors. Employment is offered and wages are paid by the consumers of the product; while physical equipment and “circulating capital” are equally employed by and their services remunerated by the people in their consumer role. The undertakings which offer wage contracts are essentially intermediaries or agents, not “employers.” The resources they own and their entrepreneurial skills are employed, just as is the labor required.

It is true that the owner of a business may be said to invest in its inputs, labor’s inputs included. But these inputs become assets, namely, inventories of “work in progress” and inventories of end-products acquired on consumers’ behalf. The residual claimants are even more directly under the command of prospective customers than are the contractual claimants. The dominating reality which needs explaining is that “producers,” in which category I include both investors (represented by management) and wage earners, are essentially employees while people in their consumers’ role are employers. And consumers are ruthless employers! They dismiss without compunction “producers” whose output, in relation to quality and price demanded, and alternative output available (of the same or a different kind), is overpriced. “Producers” are “laid off,” “sacked,” “fired,” “discharged”—by the simple process of not buying their output. There is, however, an enormously important difference between the two parties who make up the category I have called the “producers.” By accepting the residual claim, investors normally bear almost the full burden of the democratic social discipline that consumers exercise—buying or refraining from buying in the market. Poor or unlucky judgment in forecasting and bad management in economizing are drastically punished. But good luck or judgment in prediction and wisdom in effecting economies are voluntarily and liberally rewarded by consumers. On the other hand, all wage-paid employees are provided, via their employment contract, with what, dispassionately viewed, is the most important form of social security that has ever been devised.

Naturally, this security does not shield artisans and laborers from all social discipline—for instance, from the consequences of any pricing of their services so that their full employment in their existing occupation is beyond what consumers can afford. Thus, if they force output prices to a higher level than the public can meet, they must expect the displacement of some of their number into lower-paid occupations (or into short-time, or unemployment) unless inflation rectifies the position. Nor can the wage contract protect the workers from the insecurity created when, faced with declining demand for any one kind of output, those displaced are prevented by some labor union demarcation or “closed-shop” rule from accepting other, possibly equally well-paid jobs. Nevertheless, in itself, the wage contract is a device by means of which investors bear the chief risks, with the result that artisans and laborers may enjoy the greatest possible continuity of income and employment.

It is equally important to see that because investors accept these risks, they must have the right (through their managerial representatives) of determining the use to be made of the resources they provide. It is by reason of the fact that investors are those whose incomes are least protected from market discipline that the sanctions for managerial authority are derived. It is often claimed that labor has “a right to participate in management.” A typical claim is that workingmen have the right to “a stronger and collective voice in determining the conditions of and reward for their work.”¹

Whenever a firm is selling to a large number of people and/or buying from a large number, its pricing of what it has to sell and its bidding for what it has to buy constitute, perhaps, its most important administrative and coordinative acts. For prices determine rates of flow of services or materials into, and rates of flow of products out of, that focusing of entrepreneurial responsibility that we call “the firm.” Now whenever a wage-rate offer ceases to be the decision of managers representing the residual claimants, legitimate managerial authority has already been partly usurped. Small wonder, then, that when this has occurred demands arise that the usurpation shall be carried a little further, and labor allowed “a voice in management,” or even participation “coequal with management.” In some industries, managements have already relinquished many of the powers which the rational evolution of the economic system accorded them. Even in such things as the selection of key personnel, product pricing policy and plant location, the unions have, on occasion, used strike-threat coercion to override managerial discretion. All these encroachments on the managers’ sphere tend to hamper the ability of the managers to economize resources and thereby maximize the community’s income.

Then let us return to the question: Why should not the workers be allowed to “participate” in the making, changing and enforcing of the rules to which they are subject in the industrial and commercial world? The answer is that that right exists! The workers do not have to fight for it. They can, if they wish, make and themselves enforce all the rules. It is not necessary that they shall own the assets with which they work in order to delegate to managers of their own election the authority to direct the process of production (which is what Marxists would assume). They can do so by hiring the assets. That they never actually do this in practice is because the incidence of risk-taking under the present system of entrepreneurial direction is so much better. That is, the workers benefit enormously from contracts under which they agree to accept the commands of others. But there is no legal obstacle to their setting up businesses controlled by themselves, and there never has been. Nor, I think, has there ever been any private opposition or any contrived obstacle to their undertaking the whole of the planning and direction of industrial or other enterprises if they think that that would be to their advantage. If they wish to shoulder a major part of the entrepreneurial function, the workers have simply to accept responsibility for the decisions of the managers to whom they delegate decision-making powers. This means that, in a free society, they must accept the consequences of those decisions in the sense of meeting contractual obligations, taking the residue (that is, the profits) and bearing the losses. All that is necessary is that they shall rent or hire the fixed assets with which they work and borrow capital for self-liquidating assets like materials and work in progress and for the drawings they make (as wages) in prospect of profit. If they are prepared to accept the residue and to pledge future earnings to cover possible losses (hence accepting the risk), paying a contractual income—rent or interest—to the providers of capital, it will be their legal right to appoint and direct the managers—the decision-makers. In assuming the right to manage, they will of course have to contract to pay interest to those who (by refraining from consuming the capital they have saved or inherited) provide the “other resources” needed for production. But then they can then share the whole of the residue as their remuneration, which will be wages plus profits or minus losses.²

The issue can be put this way. In a “democratic,” “free enterprise” community, both the formulation of the complex of rules which govern the activities carried on within a workplace and the administration of these rules are functions which may be assumed either by officials appointed by the workers (for example, chosen by artisans, laborers, and clerks) or by officials representing those who finance provision of the other resources needed (the site, the buildings, the machinery and equipment, materials, power, and finance). Whichever group elects to accept the residual claim (positive or negative) on the value of the product acquires automatically the right to draw up the rules (or to appoint those who do so) as well as the right to select and appoint the managerial hierarchy.

Hence, if the workers (or their representatives) so choose, they can be completely free to make and enforce all the rules, with no interference whatsoever from the other parties to production. The sole condition is that they are prepared to bear all the losses and share (among themselves) all the profits. Their incomes will then depend upon the wisdom of the rules made by their appointed managers, the wise administration of those rules, and the general shrewdness of managerial predictions.

A much less unlikely arrangement, however, is one in which the workers in a corporation contract to share in profits and in management in proportion to that value of their inputs which they put at risk. For instance, if they are prepared to risk, say, a sum equal to a fifth of their current aggregate annual earnings, by pledging future wage receipts, they can do so by a sort of installment purchase of the corporation’s stock. They can borrow this capital sum through their union or through the corporation for which they work. With the borrowed funds they can acquire a special issue of the corporation’s ordinary stock. Their commitment can then be to repay capital at, say, an annual rate of 10 percent of the sum borrowed plus interest on the balance, the amount due being deducted from every wage payment. The deduction from each man’s wages at the outset could then be one-fiftieth of the gross wage rate at the outset plus a small proportion to cover interest. If the business is successful, the workers will receive more than their interest payment in the first year, either as a dividend check or indirectly in the form of capital appreciation. In subsequent years, of course, the deductions needed to pay interest on the loan will fall progressively. On the other hand, if the business is unsuccessful the workers may have to pay more in interest than they receive in dividends. Moreover, if losses are incurred and dividends have to be passed, the workers will still be committed to paying off the debt and interest on any outstanding balance.

Each worker will have to pledge wages yet to be earned for his share of any outstanding debt; and this will be possible only if he binds himself by an ironclad lock-in contract or offers some other form of security. Perhaps each worker’s loss of his rights in the stock, if he left before complete settlement, would serve as an effective lock-in. But the corporation or the union could act as his agent and sell his share of the stock, with its obligations, to a newcomer. Hence the “lock-in” disadvantage may perhaps be held not to be too serious.³

But compulsory loss-sharing (with profit-sharing) in the form envisaged still seems to be objectionable. If the undertaking has to close down, the worker will lose his job just as he loses what may have become an important portion of his savings. Alternatively, should things go badly with the undertaking, he may have to accept a wage cut to retain his employment at the very time that his dividends cease and the value of his capital in the corporation falls, while the value of the outstanding part of his debt is unaffected. Nevertheless, an experiment with such a method of sharing entrepreneurial power with the wage earners could have important educative effects. As stockholders, the workers would certainly gain some insight into the sanctions for managerial authority. Moreover, with all its defects, some such system may eventually come to be recognized as a better method of mitigating strike-threat chaos than inflation. It may be forced on any community which is determined to avoid un ion-enforced contractions of the prospective wages flow without relying (as at present) upon the progressive debasement of a nation’s currency as a corrective.

Should this alternative ever be sought, we are, I think, likely to find two kinds of corporations emerging, one owning plant and equipment, which it offers for rent, and another which hires labor, rents plant and equipment (from the other kind of corporation) and borrows to finance inventories. Under this scheme, labor does not rent the resources needed directly, but through a corporation in which it holds part of the equity. Such a corporation can take the initiative by recruiting labor solely on the loss-sharing and profit-sharing terms discussed above. Firms of that type will need relatively little capital, and if all workers are committed to contribute, say, merely one-fiftieth of their annual earnings to finance the loan through which part of the corporation’s stock is acquired, the workers can gradually build up a substantial representation on the board and a substantial voice regarding management. “Workers’ control” wilt be in direct proportion to the financial responsibility (or risk) they assume.

The reader should notice that, under this highly imaginary scheme, the intermediary corporations with which wage contracts are made do not invest in the fixed capital used but merely in the services it provides, together with the services of the workers plus materials and work in progress. The purchased services of men and of assets are invested in inventories of products for sale. The workers participate in the process partly through the skill and effort they contribute but partly through actual membership in the corporation which invests in this manner. They can be said to be partially but collectively self-employed. The corporations owning the fixed resources (plant and equipment) will employ labor only to service, not to use, its assets.

I have sketched possible arrangements of this kind, not because I believe that they offer an advisable or practical solution, but because I want to show that there is no legal obstacle to tabor playing a part—even a major one—in the direction of an undertaking, including the appointment of managers, the determination of the rules under which work must take place, and procedures for dealing with grievances of all kinds. To be defensible, some sharing in the fortunes and misfortunes of the undertaking would be essential. But I can think of no reason for supposing that under such arrangements the rules would differ one iota from what they typically are today or that the exercise of the necessary discipline would be any more (or less) just.

It appears to me that the only reason why obviously possible arrangements of this kind have never been advocated by those who have discussed such things as “profit sharing” or co-partnership” is that mentioned earlier. It seems to involve a sociologically inappropriate division of function. The most important attribute of the present system is that it is harsh on investors and the managers but soft on workers. The system is a good one precisely because it loads the risk-bearing function almost wholly on those who have the facilities for risk-spreading. But in return for assuming the risk burden, investors may rightly expect the workers to accept a contract under which they submit to the direction of managers whom investors appoint.

Unfortunately, advisers of the labor movement have almost entirely encouraged unions (with grave irresponsibility) to demand the right to share in direction without sharing responsibility and risk. Influential “labor economists” such as John Dunlop, Clark Kerr, Frederick Harbison, and Charles Myers (as summarized by Elliott J. Berg⁴ allege that the workers “live in a state of perennial latent protest arising from the frustrations implicit in being governed by a web of rules they usually have little to do with making.” But there is nothing to protest about. The right to make “the web of rules” is not withheld from the workers. They have simply not chosen to use that right because they have not been in a position to accept the responsibility for so doing, in whole or in part, without an unwise assumption of risk.

It is typical of the lack of consistent principle among apologists for union claims to management’s prerogatives that the representatives of the movement seem always to contradict themselves on the topic. Lindblom’s excellent chapter, “Management’s Shrinking Domain,”⁵ contains several exasperating examples. In the National Management Labor Conference of 1945, the labor members of a committee reported (perhaps unguardedly, thinking that it would be a mere meaningless gesture) that “the function and responsibilities of management must be preserved if business and industry is [sic] to be efficient, progressive, and provide more jobs.” But when the management representatives took this admission seriously and “drew up a list of some thirty-odd specific acts . . . which [they thought] it seemed clear . . . must be reserved to management. . . labor refused to accept a single one.”⁶

Claims by labor unions to “a voice in control” can now be seen to be essentially undemocratic unless the suggestion is that labor wishes, to a degree commensurate with the measure of control claimed, to share in any losses incurred. For the industrial and commercial system can be said to be “democratic” when it is controlled ultimately by the people in their consumer role; and when, in accordance with that control, the rules under which production and marketing activities are directed, and the appointment of the managers to administer these rules is made by the residual claimants on the value of the product. And when this is recognized in policy, the right to make the rules and to direct a productive undertaking is assured to that party which protects the other parties from the defensible ruthlessness of the consuming proletariat and the market generally.

To recapitulate, the economic arrangements of the western world have always permitted the providers of skill and effort, as a group, legally to determine the rules which govern the general conditions under which they work, and the administration of those rules. The fact that the workers have hardly ever made any use of this right is (a) because it entails the workers investing their services in the replacement and maintenance of the resources they must hire and preserve intact;⁷ (b) because it would, in general, be a disadvantageous form of division of function; and (c) because although loss-sharing and profit-sharing arrangements with labor are conceivable, the risks associated with acceptance of any part of the residual claim are incomparably more wisely borne by independent investors who can spread the risks in the capital market.

In the contemporary world, the rules—typically codified into “operations manuals,” “standing orders,” and so forth—are often inevitably intricate and technical. They form part of the institutional framework needed for direction and coordination under social discipline. But when wisely designed, this discipline does not mean constraint. On the contrary, it secures that freedom which is created when one man can act in confidence because he knows that another will act in an agreed manner. The rules must cover, of course, the actual giving of orders (see p. 84). But if the deliberate creation of hostility to and suspicion of those who must issue the commands, which has become so common today, could be eradicated, the whole process of command could occur in an atmosphere of good fellowship and mutual understanding.

Whether investors or workers take the risk (and hence assume the managerial function) managements must obey society’s commands. Because the prospective yields which determine rational entrepreneurial action are forecasts of the public’s preferences, the consumers’ sovereignty to which both managements and, through them, all employees, are subject represents a basic social discipline. It has been the use of the misleading term “private enterprise” to describe this relationship which has left the wholly false impression that managerial power is arbitrary power.

The “personal power” of managers, to which apologists for the unions so often object is, in fact, purely an interpretative power. Their authority is not autocratic. They are, as we have seen, continuously deciding whether to incur the labor costs (market-determined or influenced by the strike threat) and other costs of retaining, replacing or adding to the resources which it is their duty to direct. Their judgment must involve countless imponderables, but they are helpless to control the factors which determine the relations between objective input values and prospective output values—relations on which all their decisions must be based. There is no “governing class exacting implicit obedience from inferiors,” as they were being described a century ago. Nor does subordinacy mean inferiority. If A accepts commands from B, who is responsible for A’s performance, he is subordinate but not inferior. When the traffic policeman finds it necessary to divert my car in an emergency, I obey him without feeling inferior. And yet it is the tactics of labor propagandists habitually to confuse subordinacy with inferiority.

Propagandists in this field often refer scathingly to the “employer’s” insistence that his servants shall “submit to his authority as master.” But market commands being those of society, managerial authority is a legitimate and democratic interpretative authority; and the managers’ commands, unless against the interests of the investors, ought to be obeyed. I do not say “obeyed without question.” For instance, I have no right to give illegal orders. But when I engage a gardener, I expect him to carry out any specific tasks to which I direct him—planting, pruning, spraying, weeding, mowing, as the case may be. He may, of course, suggest to me that it is too early for pruning or spraying, without questioning my authority. When it is said that his conformance to my instructions means his “submission” to “authority” (and that is what the modern textbooks mostly say⁸), it creates an impression of intolerable subservience. And that is not all. The hackneyed suggestion that managements and workers should “meet as equals” is meaningless unless all it means is (as it has never in fact meant!) that the workers want arrangements under which they can share according to some equitable formula the profits and losses accruing, pledging future earnings against possible losses.

It is sometimes said that the workers want a share in management in order to win a sense of recognition and self-expression.⁹ But when we try to find what is meant by such phrases, we discover that all the notions are distressingly woolly. There may be something to be said for allowing schoolchildren to pretend to run schools or undergraduates to pretend to run universities; and there is a similar case for pretending to allow the workers a voice through “works committees” and that kind of managerial gimmickry. There is evidence that it can be educative. But if there is one clear-cut principle which emerges from the literature of management above all others, it is that power without responsibility leads always to inefficiency, to waste, sometimes to chaos, and all too easily to injustices. And you cannot have responsible decision-making without accountability and penalty.

In a totalitarian system, the worker can hardly have true freedom in selling his services. In a competitive labor market, however, he sells the product of his labor, either directly, as when he is “self-employed,” or indirectly, as when he takes advantage of the social security and enormously widened contact with customers that is afforded by the wage system. In the latter case, he sells his contribution to the product, his “input” (as economists call it). Perhaps the greatest virtue of a free market, strike-free wage system would be that it would clarify what the union obscures, namely, that the worker is a free being, not a commodity; that he is free to contract, through any firm with which he accepts employment, for protection from most of the inescapable risks of a progressive age, and at wage rates which managements are unable profitably to influence (any more than they are able to influence the prices of the materials they purchase or the interest rates on the funds they find it profitable to borrow).

The moral sanctions for managerial disciplinary authority are, as I have been reiterating, derived from society in its consumer role. This authority is enhanced by the fact that the command-obedience relationship is based on a contract in which the worker’s inducement is his judgment that he will be better off in the undertaking he enters than he is likely to be in the next best alternative known or available to him. The strongest penalty any management can apply is the lay-off, and that simply means refusal to renew a contract. All other penalties are subsidiary—demotions, loss of increments, pay deductions. I shall shortly refer to safeguards against the arbitrary use of these penalties; but the existence of the market is the chief safeguard against injustice. Any apparent harshness seems always to vary more or less in proportion to the extent to which a person’s remuneration tends to be above his market value. In nonunion firms, for instance, case studies suggest that punctuality, regularity, and general efficiency are easier to achieve when conditions of service, prospects and wage rates are favorable in relation to the outside market. But that may be due to recruitment of specially cooperative staff having occurred. If allowance is made for quality, what appears as a policy of paying more than the market may not be that at all. It is said, for instance, that a South African businessman of the last generation, I. W. Schlesinger, used to pay his executives well above what they could earn outside his organization because in that way he could command meticulous obedience, loyalty, and alertness. He had the reputation of being an exceptionally strict and exacting disciplinarian. Of course, fear of poor performance (including fear of disobedience) cannot be eliminated in any system in which consumers’ rights are honored. Bad workmanship is automatically penalized where it is recognizable. Yet the social discipline exerted is for the greatest good of those subject to it when it is “ruthless” in the sense of always to be expected—inexorable,

In suggesting that the market is the most powerful safeguard against the exercise of managerial tyranny (which is not to claim that it is an all-sufficient safeguard), I must stress the corollary that anything which might leave a flavor of injustice is contrary to the interests of stockholders. For it is to the advantage of those who take the risk of financing production that all available labor which offers a prospective yield greater than its cost shall be engaged. And if any available labor fails to be purchased by reason of, say, personal spite or prejudice on the part of managers, the prospective profits of the enterprise will be sacrificed for the private ends of the managers. The danger to the organization is that it will lose, possibly to its rivals, the valuable services of those employees who perceive that they have been unfairly dealt with. Unrestrained market activity not only releases motivations which are indifferent to color or race, it constitutes the most powerful safeguard (I repeat, not an all-sufficient safeguard) against injustices which might be encountered in the course of the exercise of managerial authority.

Perception of the validity of command by the residual claimants does not permit us to ignore the problem of justice in relation to command. A command is unjust when it harms the person commanded in some measure which is inconsistent with the achievement of the socially-determined objectives of the organization he is directly serving. A command which is discourteously given may, for instance, harm the respect of the person commanded.¹⁰ But admonishments, reprimands, and penalties are unavoidable if command is to have meaning; although the certainty of their just use in cases of trespass or poor performance always minimizes the need for actual recourse to them.

On the other hand, in every conceivable kind of organization of society, persons entrusted with authority may abuse their power through a reprehensible act or decision, whether by reason of incompetence, ill-will or prejudice. For instance, the head of a department may report falsely on the competence or loyalty of a subordinate—perhaps of one whose advancement in the firm he fears. But because this possibility and similar abuses are known to exist, promotion plans as well as job evaluation and merit-rating programs have been explicitly designed to minimize their likelihood.

The loss-avoidance, profit-seeking incentive is the best safeguard against unfair treatment that has ever evolved in the sphere of human relations. And the wage contract, in addition to conferring on the worker the most all-embracing form of social security that has been contrived in response to human needs, enormously magnifies his freedom. For in agreeing to submit to managerial discipline, he becomes part of a complex system of cooperation which permits one man to act in a certain way under the assurance that another will act, simultaneously, or at an agreed time, in some stipulated complementary manner. It is a method under which the intermediary (the firm, with whom the worker concludes a contract of employment) can play off on his behalf an enormous number of individual employers—that is, consumers or clients. Instead of being able to serve, say, a few dozen or hundred customers as a “self-employed” person, the corporation which assumes responsibility for his wages may serve hundreds of thousands or even millions.

It is almost universally accepted by writers in this field, however, that it is a legitimate union function to assist in drawing up and occasionally revising the rules of the business organizations in which their members are employed, and to play a part in the administration of those rules. There can be no controversy on the point that there may be a case for sometimes bringing in union officials as expert advisers during the drafting of operating manuals or the standing rules and orders of business concerns, just as industrial consultants can be brought in. Indeed, it may be good sense to submit proposed revisions of the rules to the staff generally before their adoption. Comments and criticisms could be valuable. But there is not the slightest reason why it should be regarded as a duty of managements to do this. How can the managers accept full responsibility for their stewardship (to the residual claimants) if outsiders are allowed to have any right to veto or amend their plans?

We have had a mass of what may be quite fairly called “managerial gimmicks” aimed at meeting the workers’ “psychological needs.” We find suggestions which imply that “participation” can in some way generate “respect.” Even schemes for relaxing discipline are sometimes claimed to have worked wonders in morale improvement. We are told for instance that the great British firm, Imperial Chemical Industries, has achieved better personnel relations by just such methods. “Supervisors do not check the quality of our work,” a shop steward is reported to have remarked. “We do it ourselves, and it is as good or more often better now. . . . If we feel like a tea break or lunch, we take it at the time best for us. . . . The foreman used to be called ‘a white-coated bastard’, now he is more a father confessor.” A union secretary remarked of the same experiment, “You can now feel a relaxed, sensitive mood in this plant. . . . No one is looking over your shoulder.” The shop steward just quoted left an impression of greater honesty when he went on to say, “Control by the worker is inevitable. We are capable of running and controlling this plant. Obviously the next step for us is to have more involvement in the broader decision-making.”¹¹ But how nauseatingly false it all sounds. The critical attribute of good discipline, like efficient law enforcement, is that hardly anyone fears it; everyone knows of it; but virtually no one is currently reminded of it; for the penalties being known to be severe and certain, only a negligible proportion of those subject to it ever dream of transgressions, and they are a very small and nearly always stupid, pathological minority.

The source of sound morale in industrial relations is to be found primarily in an understanding of the sanctions for managerial authority on the part of all affected—the legitimacy of command by those executives to whom responsibility has been delegated. All need to be taught that the decision-making function is exercised on behalf of the residual claimants on the value of outputs. And this is true whether the workers or the providers of the capital happen to be the residual claimants.

Because I insist on the right of the managers to make untrammeled decisions, I am not, I repeat, suggesting anything so foolish as blind obedience. Are not the managers themselves employees? And do they not habitually delegate the discretion entrusted to them (namely, authority together with responsibility) right down through the administrative pyramid to the overseers and foremen? Indeed, in the business world, commands are communicated in the course of a process of continuous consultation at all levels. And this process could have been not only more obvious, but much more effective in today’s world had the atmosphere created not been almost universally influenced by the lurking strike threat. For the fostering of warlike attitudes is the almost inevitable concomitant of the labor union system in its present form (see above, pp. 22-23, 50-51, 73-74).

Moreover, attempts by managements to attract and retain labor by means such as developing the atmosphere of a club, maintaining a strict insistence upon courtesy to subordinates, and striving to create friendliness toward and from those whose input is purchased by wages and salaries (similar to the friendliness which every salesman habitually displays) tend to be described by union leaders in terms of the scornful epithet, “paternalism”! The use of that epithet is effective propaganda. But the tragedy is that efforts on the part of managements (and in small businesses, endeavors by the actual owners), as leaders prompted by humanity, or perhaps prompted by the moral teachings of the age, to concern themselves with the welfare of those who have accepted wage contracts, and to treat them as free cooperators in the process of production, have been continuously sabotaged. And the incentive for the sabotage has been the interests of the union leaders in perpetuating that hostility toward and suspicion of investors and managements (“the employers”) which seems to fortify the raison d’être of their profession.

There is no really satisfactory authority for the settlement of grievances (for example, over work rules, product standards, output measurement under piece rates, and so forth) other than management; for it is in the interests of those who direct great enterprises that agreements shall be meticulously carried out and that they shall be seen to be carried out. Good morale can ultimately be based on trust alone, and the cooperative endeavors within a firm require faith in the justice of decision-making at every level of the administrative hierarchy.

This does not mean that some form of independent representation of the rank and file is incapable of assisting the achievement of harmonious relations, especially during the determination and interpretation of employment contracts. It ought to be an offense, however, for any worker (whether a union member or otherwise), an offense for which he should be liable at least to dismissal, to attempt to cause unrest and distrust of management, let alone intimidate any employee. If grievance procedures are laid down in wage agreements and alleged to be working unsatisfactorily, every wage earner should of course have an effective right to complain to top management, with no fear of victimization, of what he regards as injustices. This he could do either personally or through his union representatives. But managements ought to be envisaged as having been vested by society—that is, by the people—with the right to watch over the community’s interests in least-cost production.¹² For instance, it is their duty to resist adamantly all suggestions that they will be courting trouble if they do not acquiesce in color or race discrimination. And the overriding democratic responsibility of business managements needs protection from inflammatory and subversive talk and action. In the good society, it will be recognized as just as intolerable that known troublemakers should be allowed free rein as that, in an active army, a hostile infiltrator should be allowed deliberately to undermine morale.

From the very beginnings of the free enterprise system, the right of managements to accept market discipline and, in turn, to use the interpretative discretion which society (in its consumer role) delegates to them has been resisted. Such resistance has been mostly blatantly manifest, I think, in action taken at times to restrain managements which have tried to perform their difficult and dismal duty to root out the instigators of dissension and unrest. I have already referred to the forced abandonment of “company spies” (see pp. 50-51). But it has been the obvious obligation of managements to discharge employees whom they know are tending to wreck the process of orderly cooperation. The presence in industrial firms of implanted troublemakers created one of the circumstances in which, in the United States, fights arose this century between the Supreme Court (which originally had tended to protect the interests of the unprivileged) and the Federal Government (which was under political pressure from the privileged—that is, the unions). This ominous phenomenon was observable in federal legislation as early as 1898¹³ in the United States, when railroad managements were forbidden to end contracts with employees whom they perceived were trying to destroy good personnel relations. In 1908, the upsetting of this legislation as unconstitutional meant the temporary restoration of the right of every person to better his position, if he believed he could, by bargaining for employment on the railroads.¹⁴

It was not difficult, of course, to persuade the public that the unions were fighting for one of the common rights of man, and that the “blacklist” (used cooperatively among firms to warn managements of persons who were expert in disseminating unrest with a view to ultimate strike-threat disruption) was reprehensible. But the public had been hoodwinked. Since then, by several acts, of which the Norris-LaGuardia Act and the Wagner Act have been most important, the right of managements to exercise the disciplinary power which society delegates to them has been seriously curtailed. They can no longer keep open the channels through which the least privileged may bargain for employment opportunities. And this has gravely restrained society’s power to foil, by way of managerial authority, the deliberate fostering of bad morale.

We must never lose sight of the reality that the actual “employers”—the consumers—are mainly those who enjoy relatively small incomes. The great bulk of consumption-demand is expressed by persons who fall into the lower income groups. When this is recognized, the notion of an “employing class” vanishes. Stockholders, through the managements responsible to them, are completely powerless (and properly powerless) against the commands which the market expresses;¹⁵ while through wage contracts the residual claimants shield the workers from the otherwise inescapable consequences of unpredictable forms of economic change, coordination to which is ordered via market pressures.

In conclusion, I must return the reader’s attention to the crucial point made at the beginning of this chapter. If governments are performing their role in the free market, the interests of investors and of workers are not opposed; for the services of assets and the efforts and skills of the workers are both purchased by the ultimate consumers. Admittedly, in every transaction, although both parties gain, their interests are opposed. But the “other party” concerned in the remuneration of labor is not that abstraction which is sometimes called “capital” or, at other times, “the employer.” The “other party” is primarily consumers. True, the worker is hired through managers who represent investors; but the firm which offers the wage contract is essentially an intermediary, and the investors’ resources (including the labor purchased) which the managers direct, are “employed” by those who eventually buy the output. Whatever one’s opinions may be about the defensibility of accumulated or inherited wealth, there are no grounds for accepting the Marxist notion that the income flow to private savers and inheritors represents the proceeds of their exploitation of the workers or that it has conferred the power to maltreat or tyrannize.

NOTES

¹ E. Wight Bakke, Clark Kerr and Charles W. Anrod, Unions, Management and the Public, 3d ed. (New York: Harcourt, Brace and World, 1967), p. 19.

² Only one economist has, as far as I have noticed, referred specifically to this possibility. I. B. Kravis remarked, in a well-known article of 1959, “. . . when the entrepreneur commits his labor and his capital to an enterprise, he is taking the risk that he will get less than the market rates of return on both the labor and the capital in the hope, of course, that he will get much more. Since the two types of input are jointly committed, there is a case for allowing both to share in the ups and downs of entrepreneurial income.” I. B. Kravis, “Relative Income Shares in Fact and Theory,” American Economic Review, December 1959, p. 925.

³ To prevent unwieldly stockholders’ meetings, attendance could be limited to shareholders with a minimum holding, personal or through proxies. Each small stockholder among the workers could be represented through a limited number of proxies, voting power being of course according to the value of holding (that is, in proportion to the risk being taken).

⁴ Elliott J. Berg, “Comment,” 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. 52-53.

⁵ Charles E. Lindblom, Unions and Capitalism (New Haven: Yale University Press, 1949), Chapter XII.

⁶Ibid., p. 156.

⁷ They could, of course, add to those resources by a ploughback as well as by further borrowing.

⁸ Thus one of the most influential textbooks (Bakke, Kerr, and Anrod, op, cit., p. 18) says: “Employers attempted to justify their control over the workers by invoking religious sanctions for . . . submission by the ‘servant’ to the authority of his ‘master.’”

⁹ Actually, as I shall be showing, in holding back progress in material well-being on the part of the “working class” as a whole, and especially in slowing down the advance of the least fortunate classes and races, the strike-threat system must have hampered their acquisition of greater dignity, self-respect, and sense of self-expression.

¹⁰ One must beware of exaggerating this point. The technique of some very successful football coaches is to disparage what they regard as poor performance (by the team or by individuals) in the most abusive and even blasphemous terms! The players love it (at least in some instances).

¹¹Business Week, 7 October 1970, p. 59.

¹² As well as with the corresponding right to serve the community’s interests in determining the form of production.

¹³ The Erdman Act, 1898.

¹⁴Adair v. United States, 1908.

¹⁵ They may of course try to condition those commands through advertising, and restrain them through collusive price or output determination.