Monday, October 08, 2012

Adam Smith & John Stuart Mill on unions

Below is an item that I sent to the students in my seminar on the history of economic thought (Economic Liberalism & Its Critics) in Spring 2011. It may be of more general interest.

–Jeff Weintraub

PPE 475-302: Economic Liberalism & Its Critics
Spring 2011
Jeff Weintraub

Adam Smith & John Stuart Mill on Unions

When we were discussing Mill’s chapter on “Interferences of Government Grounded on Erroneous Theories” (Book V, Ch. X) in his Principles of Political Economy, I got the impression that many of you are a little hazy on what labor unions actually do and how they try to do it. More to the point, I didn’t sense a clear awareness of how we might analyze unions and their significance within the framework of the theory of the market developed by Adam Smith and the tradition of economic thought he helped to initiate. We will be encountering these and related issues throughout the course, so let me say a few words about them here.

=> At the heart of the whole tradition of economic liberalism is a conception of the market as a self-regulating system that, if allowed to operate without interference, generates optimal results that ultimately benefit everyone (albeit unequally). Interfering with the self-regulating operation of the market, whether for self-serving purposes or on behalf of good intentions (based on “erroneous theories”), will necessarily produce less-than-optimal, or even disastrous, results—at least, that should be the default presumption.

In order for the market system to operate smoothly and effectively, one key requirement is that prices of commodities are determined spontaneously (or, as Smith puts it, “naturally”) by the mechanism of supply and demand, driven by “free competition” between actors pursuing their individual self-interests through market exchange. As Smith says on p. 78 of The Wealth of Nations, the “natural price” of any commodity is “the price of free competition”. [All page numbers refer to the Liberty Classics edition of WN.] Labor, of course, is one of these commodities, and its “natural” price (i.e., the rate of wages) is subject to the same market mechanisms as those of other commodities.

=> Let me emphasize the central role that competition between self-interested individuals (whether they’re workers, capitalists, or whatever) plays in this whole process. Adam Smith, you will recall, describes the self-regulating market, which nowadays its admirers also call the “free market,” as the “system of natural liberty” (WN p. 687). This is one way to conceive of “liberty” or “freedom” and how it works. In this context, what it means is a system in which each individual is free to pursue his own self-interest—and does so—without coercion by other individuals and without needing to be concerned about collective outcomes. Collective outcomes are not controlled by any individual or set of individuals, but rather by the impersonal (and heteronomous) operation of the “invisible hand” of the market.

As we also know from WN, actors in the market often try to rig the game to their own advantage (and others’ disadvantage), for example by artificially keeping the prices of commodities they sell above the “natural” price (and/or by artificially depressing the prices of commodities they buy). The primary way they try to do this is by interfering with those self-regulating market mechanisms. And a key strategy for doing that is to replace competition with cooperation (or, to put it more pejoratively, collusion). As Smith says, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices” (WN p. 145). To the extent that this collusion can be achieved and maintained, it can enable participants to fix (or unduly influence) prices, restrict competitive pressures, monopolize occupations, exclude outsiders, manipulate supply, etc. But to the extent that these efforts are successful, they will also, necessarily, block and distort, or even short-circuit, the self-regulating dynamics of the market.

According to Smith, the kinds of market actors who are generally most effective in pulling this off, and whose anti-competitive practices are usually most damaging to society’s overall well-being, are capitalists. They do it through monopolies, cartels, and more informal types of collusion. Furthermore, they are often successful in getting governments to support their efforts to interfere with the market by laws and regulations (which are often rationalized, erroneously, as being in the public interest). Capitalists are "an order of men, whose interest is never exactly the same with that of the publick, who have generally an interest to deceive and even to oppress the publick, and who accordingly have, upon many occasions, both deceived and oppressed it" (WN p. 267).

But capitalists aren’t the only ones who try to get away with this and sometimes succeed. As Smith sees it, the same is true of craft guilds and other privileged “corporations” (in the older sense of the word "corporation") that manage to enforce restrictive production standards and work rules, control entry into particular trades and occupations, etc.

=> Now what about unions?

What’s the purpose of unions? As several of you mentioned, they try to raise the wages of their members (i.e., to raise the price paid for their labor). They may also try to improve working conditions—for example, by enforcing procedures that are safer, less unpleasant, and/or less degrading; by increasing job security; and/or by reducing the customary hours of work. All during the 19th century, for example, unions in western Europe and North America struggled to reduce the length of the working day in industry from 12-16 hours to 10 hours and eventually to 8 hours, to reduce the work week from 6 days to 5, etc.

The question is how unions (or, to put it another way, unionized workers) try to achieve these goals. Well, the crucial strategy they use is to try to reduce or eliminate competition between individual workers in the labor market and to replace it with collective action based on cooperation and solidarity. That is, the whole point of unions is to try to interfere with unlimited “free competition” between individual workers in the labor market. If working through unions can’t get the workers involved a higher price for their labor (or better working conditions) than would have resulted from the unfettered “free completion” between individual workers in the labor market, then the union would have failed in its main intended purpose, wouldn’t it?

And sometimes, like capitalists, unions and wider working-class movements have been able to obtain laws and regulations that assisted their efforts. In Britain, for example, after decades of agitation a series of Factory Acts in the middle of the 19th century established a maximum working day of 10 hours. (A number of prominent political economists argued that this legislation would be a catastrophe for British industry.) And most western societies now have minimum wage laws (which many economists continue to attack as absurd, irrational, and harmful), unemployment compensation programs, etc.  In the United States, national legislation passed in the 1930s confirmed that most workers have the right to form unions and bargain collectively. (At least, workers have these rights in principle; in practice, they have been significantly eroded over the past several decades.)

From the perspective of workers who have participated in and/or supported unions over the past several centuries, this kind of collective action is a necessary and legitimate way to increase their leverage vis-à-vis employers, to protect their interests, to assure themselves some degree of security and dignity instead of just being helpless pawns or instruments, and to avoid a situation where they simply drive down each others’ wages in a dog-eat-dog quasi-Hobbesian process.

From the perspective of economic liberalism (especially in its strongest and most doctrinaire forms), this kind of collusion is an unfair and illegitimate interference with the self-regulating market, which will necessarily distort the market’s operation, reduce efficiency and productivity, and generate other perverse and harmful effects. (From this perspective, unions are tolerable only to the extent that they are ineffective.)

=> As I've emphasized throughout the course, different theoretical and ideological perspectives shape the ways that we frame and understand important social, economic, and political issues. That includes different approaches, practical as well as theoretical, to understanding the relationship between freedom and unfreedom (heteronomy). For hardcore economic liberals—and this remains true today—unions and everything that goes with them, including strikes & picket lines & work rules & “sticky” wages, represent not only an interference with the self-regulating operation of the market, but also an infringement on the freedom of individual workers. (From this perspective, as I said, unions are bad in principle, and are tolerable in practice only to the extent that they’re weak and ineffective.) For workers who have participated in and/or supported the labor movement, on the other hand, unionism represents an expression of their freedom and a crucial protection for it. (How so? If some possible answers don't come immediately to mind, think about it further.)

=> By now it should be clear why those two examples of government “interference” discussed by Mill in the selections you read from Ch. X of Book V represent different kinds of government intervention, which raise somewhat different issues. Tariffs and other forms of trade protectionism involve straightforward interference with the market, and Mill’s arguments against them largely repeat Smith’s. On the other hand, laws that outlaw or restrict unions raise more complex issues. Although such laws do constitute “interference” in society, they could be justified—and often were—as measures designed to prevent harmful and illegitimate interference with the market.

Adam Smith himself does not recommend that governments should actively outlaw or break up “combinations” by workers. Similarly, he doesn’t recommend that government actively break up or regulate collusion by capitalists, including combinations by employers “to lower the price of work” (WN p. 84), even though he definitely regards the effects of collusion by capitalists as harmful. Instead, he merely insists that government should not assist efforts at collusion, and seems to expect that, in the long run, the self-correcting dynamics of the market will generally, though perhaps not perfectly, solve these problems by themselves.

However, many economic liberals have favored anti-union laws on the grounds that they prevented harmful, unjust, and illegitimate interference with the self-regulating market. For example, during the French revolution a 1791 law named after Le Chapelier not only outlawed guilds on economic-liberal grounds, but also outlawed unions, strikes, etc. (This law stayed on the books through the 1860s, at which point the ban on unions was softened. But labor unions weren’t fully legalized in France until the 1880s—which doesn’t mean they didn’t exist in practice before then.) In the US the Sherman Anti-Trust Act, passed in 1890, outlawed monopolies, cartels, and other anti-competitive practices. For Senator Sherman, the main target of the act was supposed to be collusion by big corporations (in the current sense of the word “corporation”). But for a long time the Sherman Anti-Trust Act was used mostly against unions—in 1894, for example, it was used to help crush the American Railway Union, one of the largest unions in the US, during the Pullman Strike. And so on.

=> So here are some questions to consider. Let's start with Adam Smith. Smith favors allowing the self-regulating market to operate freely according to its own “natural” dynamics, opposes interferences with the operation of the market, and argues that any forms of collusion that reduce competition are likely to have harmful effects in terms of the larger “public interest.” More specifically, Smith persistently attacks “corporations” (in the older sense of the term) and the “corporation spirit”.

Well, isn’t unionism a classic example of the “corporation spirit”? But Smith (unlike many of his later followers, right down to the present) doesn’t seem especially worried or upset about labor unions. Why not?

=> And that brings us back to John Stuart Mill. Mill doesn’t seem especially worried about unions either; in fact, he isn’t even hostile toward them. Why not?

And why does Mill oppose “laws against combinations of workmen to raise wages” (i.e., unions)? His reasons for opposing anti-union laws can’t be precisely the same as his reasons (which are also Smith’s reasons) for opposing tariffs and other “interferences” with international trade. So what are Mill’s reasons & justifications for opposing anti-union laws? Ponder further.

—Jeff Weintraub