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Article Excerpt
Abstract
While American unions have a low and declining market share, they remain very significant, especially in the political marketplace. That political influence makes it possible for unions to yield far more power in the private sector than their market share in that sector (7.5 percent) implies. All this is possible because of the substantial goodwill capital that unions still enjoy. F. A. Hayek thought that if people, including workers, understood the negative consequences of unionism, unions would lose most of that goodwill capital. Hayek wrote extensively on two categories of malign effects of unionism: those involving breach of the rule of law and those involving the economy and the free society. This paper examines his views on the latter.
I. Introduction
Many people, aware that only 7.5 percent of private sector American workers are unionized, conclude that, at least in the U.S., unions are largely irrelevant. That inference is very wrong. To begin with, 35.9 percent of government sector American workers are unionized. To a large extent collective bargaining in the government sector results in government employees imposing taxation-without-representation on the rest of us. (Wages and salaries paid to government workers are paid for out of taxes, and taxpayers don't get to vote on the provisions of collective bargaining agreements.) Moreover, despite the low, and falling, market share of private sector unions, their ability to extract forced dues from workers who want nothing to do with them gives them far too much influence in the political marketplace. This sorry state of affairs is made possible by the fact that unions enjoy far more goodwill among the public than they deserve. F. A. Hayek believed that if people, including unionized workers, came to understand the actual consequence of unionism as it emerged in Britain and the U.S., unions would lose much of their undeserved goodwill capital. He thought that to be a true friend to labor, one had to oppose coercive unionism.
The negative effects of unionism examined by F. A. Hayek fall into two broad categories: conflicts with the rule of law, and perverse economic and social effects. In a previous paper (Baird, 2007) I discussed the former. Here I turn to Hayek's views of the economic and social consequences of unionism and conclude with a brief discussion of Hayek's proposal to substitute profit sharing for collective bargaining in the determination of wage rates.
II. Economic Consequences
The damaging economic effects of coercive unionism examined by Hayek are of four types: unions disrupt and impair the coordination of economic activities through the competitive market process; they increase the extent and duration of unemployment; they cause inflation and exacerbate the business cycle; and they lower productivity, which results in lower standards of living for working people.
1. Discoordination of Economic Activities
Part II of 1980s Unemployment and the Unions ([1980] 1984), is a clear and persuasive exposition of Hayek's long-held understanding of how markets achieve coordination of the diverse economic activities of all market participants without any central direction. Relative prices and relative wages, and their profit and loss implications, are central to that coordination process. In brief, within the context of voluntary exchange, all market participants attempt to do the best they can for themselves. They formulate production and exchange plans on the basis of the bid and ask prices they expect to encounter in the market. Each person formulates his own bid prices for those goods and services (including labor) he is interested in buying and his own ask prices for those goods and services (including labor) he is interested in selling. Each person also has expectations regarding the bid and ask prices of other market participants. As people attempt to carry out their plans, they will discover the extent to which their expectations and planned actions are consistent with what others are willing to do. Buyers who expected to encounter lower ask prices than they do will decide to buy less than they had planned. Buyers who expected to encounter higher ask prices than they do will decide to try to buy more than they had planned. Sellers who expected to encounter higher bid prices than they do will decide to sell less. Sellers who expected to encounter lower bid prices than they do will decide to try to sell more. All the while, market participants will adjust their own bid and ask prices to make them more consistent with newly discovered production and exchange opportunities. Gradually, as expectations come to correspond to reality, more and more coordination of production and exchange activities is achieved. Since market conditions are almost always changing, coordination is a moving target. Nevertheless, freely determined prices and wages move markets toward coordination, a state where the plans and actions of all market participants are mutually consistent. Note that no one has to have knowledge of the underlying reasons other market participants do what they do. All that is necessary is that prices are free to convey the implications of those actions. In Hayek's words:
Each individual can rarely know the conditions which make it desirable, for him as well as for others, to do one thing rather than another, or to do it in one way or another. It is only through the prices he finds in the market that he can learn what to do and how. Only they, constantly and unmistakably, can inform him what goods and services he ought to produce in his own interest as well as the general interest of his community or country as a whole. The 'signal' which warns him that he must alter the direction or nature of his effort is frequently the discovery that he can no longer sell the fruits of his effort at prices which leave a surplus over costs. The signaling apparatus works as much for the employed worker as for the professional or business man. ... For anyone earning his living in the market, which means most of us,...
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