Chapter 4 then traces how labor reformers like Ira Steward, trade unionists
like Samuel Gompers, and revolutionary socialists like Karl Marx, each used
a version of the classical labor theory of value to put pressure on both
the wages-fund and the marginal productivity theories and also to propose a
set of policies and social practices which, to them, would most likely
ensure that labor would get its due. Together with other labor reformers
and trade unionists, they insisted that the supply of capital expanded or
contracted according to investor expectations about the future and was not
limited to past accumulations. Rather capital could be created (and
destroyed) simply by the willingness of those with money or credit to
invest it (or not); also that the joint contributions to the output of
modern, highly interdependent production systems were indivisible and
therefore unmeasurable. Individual compensation, they argued, was a
function of bargaining power rather than productivity, which could not be
independently or objectively determined. They were in this regard
premature Keynesians; and they were so in another regard as well: they
insisted that putting people to work and paying them well for their labor
would always do more to restore confidence in the future than firing people
and cutting their wages. The best way to create a high-wage economy, they
argued, was to pay high wages (!), which their labor reforms and their
trade unions were intended to secure.
The revolutionary socialists were a different matter. Marx believed that
in a capitalist economy trade union agitation for higher wages was
ultimately self-defeating. While he allowed that there were circumstances
in which wage increases might successfully be won at the expense of
profits, and even acknowledged that a general wage increase was
theoretically as well as practically possible, he nonetheless did not
believe that trade union action, in and of itself, could ameliorate the
condition of the working classes. Redistribution was to him just reform;
sustained high wages, he believed, required a revolution (like that which
ended slavery in the US). On this point both the English and the US trade
unions disagreed. They preferred, in Marx's words, "to march behind the
conservative slogan 'a fair day's wages for a fair day's work'." Doing
so, however, did not make them "conservative"—at least certainly not in the
eyes of employers and the courts, who continued to find them a serious
threat to what they thought of as justice. Moreover, the trade unions were
always among the staunchest supporters of both political socialism and
producer and consumer cooperatives, which many saw, again in Marx's words,
as ways to "abolish the wages system" and ensure a more equitable
distribution of labor's product.
Chapter 5 focuses on the response of mainstream economics to the rise of
the labor and socialist movements. It includes a summary of the
contributions of both well-known economists like Alfred Marshall, and
lesser knowns like John Davidson ("The Bargain Theory of Wages" [1898]).
But it devotes most of its attention to the Austrian students of Carl
Menger, who were among the most important founders of modern neoclassical
marginalist economics. The group included Eugen v. Böhm-Bawerk, Ludwig v.
Mises, Friedrich Hayek and Joseph Schumpeter, all of whom rank among the
most important liberal ideological opponents of socialism and trade
unionism world-wide. (Socialism and trade unionism had many illiberal
opponents—monarchists, aristocrats, fascists, Communists and others. What
distinguished the Austrian school was its liberalism.) Their arguments are
summarized here and their subsequent influence traced in the work of the
early John Hicks, Henry Simon and Milton Friedman, among others.
At least with respect to the theory of marginal productivity, which the
Austrians made their own, it is hard to find a contemporary economist who
is not, as it were, Austrian. Others before them had considered unions to
be illegal restraints of trade, even criminal conspiracies. But the ground
of the contemporary claim is mostly theirs. In effect, they argued, unions
are monopolies and as such are to be tolerated if and only if they serve a
larger social good, which they do not. The linchpin of this view is that
labor is a commodity and the labor market is a market, both like any other.
If so, then unions have the same market distorting effects as any other
monopoly and, as such, may be reluctantly tolerated if and only if they are
absolutely necessary. Otherwise they should be vigorously opposed. On the
other hand, if labor is not a commodity and labor markets are not actually
markets, then the outlook for the labor movement's desire to receive more
than just "whatever the market will bear" is very different. From this
alternative, very un-Austrian perspective, labor has right to a fair share
of the social product just as it has a right to a social minimum.
How is this claim, if just, to be realized?
Chapter 6 considers this question. Simply because a demand for higher
wages may be fair does not mean that all such demands will be fair. It is
possible for people to be paid too much as well as too little—as the
current compensation packages of many a financial analyst, banker and CEO
may be taken to illustrate. The claims of the various parties need to be
considered from the standpoint of equity as well as from the standpoint of
power. If wages are to be set on the basis of how much each party can
command, then we must ensure that all those engaged in the bargaining
compete on a relatively level playing field. If the game is fair, the
outcome can be considered fair, whatever it is.
But what if the game is unfair? Production theorists generally accept the
structure of the bargaining situation—including, especially, the
distribution of wealth and power—and ask only how much, given this
structure, each party receives. Distribution theorists, in contrast, seek
ways to ensure an equitable structure of bargaining among the various
parties. Both believe in "liberty of contract;" both, in short, are
liberals. But distribution theorists ask as well whether the liberty of
contract is real; and they favor positive action to create social
arrangements that guarantee "actual liberty of contract." They once did so
in no small part because they believed that a wage was a share, the outcome
of a social bargain, and not a price, which was best dictated to
wage-payers and earners in free and competitive markets. The difference is
between an approach that justifies (a) paying as little as you can for the
things you need or (b) giving as much as you can to those with whom you
work. It makes all the difference in the world.
In its Conclusion, "A Fair Day's Pay" considers the kinds of changes in
labor market policies that might help to secure a more equitable reward for
work—all kinds of work. It concentrates in particular on the problem of
how to raise the wages of service workers. The challenge appears very
different from the perspective of a production than from a distribution
theory of wages. According to the former, the best way, indeed the only
way, to increase service sector wages is to increase service sector
productivity. For production theorists, workers are generally paid what
they contribute: the more they contribute, the more they are paid.
Therefore, if a worker wants to be paid more, all they need do is
contribute more. According to the distribution school, however, workers
are not paid what they contribute but what they command. The more
bargaining leverage they have, the more they are paid. Furthermore,
leverage is a function of location. The more powerful your social or
bargaining position, the more you can command.
The way to increase service sector wages from a distributionist point of
view, then, is to increase bargaining power. We need not see the choice
as an either/or. We do not need to settle for an economy organized wholly
on principles of competition and suspicious disregard; or wholly on
principles of cooperation and mutual regard. The best way forward is to
strike a balance between the two—in particular, to distinguish clearly
between product and labor market policies. Labor is not a commodity and a
wage is not a price. The competition that drives innovation and a "race to
the top" in product markets is more likely to drive wage-cutting and a
"race to the bottom" in labor markets. We can do better. "A Fair Day's
Pay" is intended to help us understand how.
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