Cutting Meat

I’m not entirely convinced that economists know enough to tie their own shoes. Friedrich Hayek won the Nobel prize for his work in economics, but after dipping into The Constitution of Liberty, an influential book he wrote in the late 1950s, it seems pretty clear that I’m smarter than he was.

Rather than read the whole book through from the beginning (I hope to get to it later), I jumped forward to the chapter on labor unions. Hayek was no friend of unions. Though he claimed to see some value in unions as fraternal organizations, he ardently opposed strikes, picketing, boycotts, and collective bargaining. His objections to union activity were both philosophical and practical. To understand why he was wrong, we need to separate the two.

Philosophically, he opposed collective bargaining and the closed union shop on the grounds that an agreement between a union and an employer, to the effect that the employer would only hire union workers, was a restraint of free trade. That is, every potential employee should be free to negotiate individually with an employer, without being required to join a union as a condition of employment. He also suggested that unions should be regulated in the same manner as industrial monopolies — that is, that since government has (wisely) outlawed monopolies because they interfere with the working of the free market, the same principle should be applied to unions as a sort of labor monopoly.

What Hayek strikingly fails to note is that employers and employees are not on equal footing in the labor market. The employer has a great deal more power than the individual employee. Labor unions provide a mechanism by which workers, acting collectively, can negotiate in the market on a more nearly equal basis with employers.

There’s a reason why we should appreciate and applaud a legal difference between a manufacturers’ trust or cartel and a union insisting on a closed shop. The reason is this: Anti-trust laws, which prevent industrial monopolies, are designed to protect individual consumers against exploitation by the rich and powerful. A legal framework that allows unions to form “monopolies” of the labor pool is also designed to protect individual workers against exploitation by the rich and powerful. The two cases are equivalent only if we insist on the abstract concept of “free markets.” As a practical matter, in both cases we would like government to protect the little guy against the big guy.

The big guys don’t like this, of course. They have worked assiduously for many years to undermine the union movement. Hayek pretties up this undermining by giving it a philosophical gloss, but we should not let ourselves be deluded: That’s what he’s doing. He wants the rich and powerful to be able to do whatever they like, in the name of freedom.

Having dispensed with the anti-monopoly argument against collective bargaining, we find that Hayek’s other philosophical objection dissolves like morning mist. If unions are allowed to engage in collective bargaining with employers, then unions are quite free to insist on whatever contract provisions they feel are in their collective best interest, including a provision that the employer shall hire only union members. The employer is, of course, free to reject this contract and hire non-union workers — and to suffer the consequences: a strike and possibly a boycott.

Unions are not perfect organizations; some are inefficient, some are corrupt. It’s understandable that an individual worker might not want to join a particular union. On the other hand, if the union can provide its members, collectively, with better pay, better working conditions, and more benefits than they would enjoy in the absence of a union, a worker who prefers not to join the union is acting against his or her own best interest, and also undercutting the best interests of his or her fellow workers. That being the case, my sympathy for workers who don’t want to join unions is limited.

Now for the practical issues. Hayek maintains that collective bargaining causes unemployment and inflation. He doesn’t explain how this happens; he just asserts it. In trying to understand his thinking, I constructed a simple artificial economic model. My model may be a bit off-kilter. I’m not a professional economist. But it’s bound to be better than Hayek’s model, since he doesn’t give us one.

Let’s imagine a butcher shop. We’ll call it Benjamin Blood’s Big Butchery. It’s owned and operated by Mr. Blood, and he employs ten meat cutters. He pays each meat cutter $10 per hour, and pays himself (because he works hard and deserves the benefit of his years of effort) $50 per hour. His labor costs, then, amount to $6,000 per week. We’ll assume that his fixed operating costs are in the neighborhood of $1,500 per week, so his weekly cash outlay is $7,500. He needs to bring in that amount every week to meet expenses. We’ll have him buy $7,500 worth of raw meat every week, which he will have butchered and retail at a 50% markup. His gross receipts from retail customers are $15,000 per week.

The meat cutters unionize and demand a 10% raise, to $11 per hour. Mr. Blood has to figure out how to come up with the money. He can do this by raising his retail prices. He needs to bring in an additional $400 per week to meet his payroll, so he marks up his meat by 2.7%. That’s inflation. If the farm workers who are raising the meat animals also unionize and get a 10% raise, the inflation in the price of meat would be closer to 4%. But the workers would still be better off than before, because they’d have a 10% raise and only see inflation of 4%. Non-union workers — not so lucky. Inflation would also hit them.

In effect, the real improvement in workers’ purchasing power arises because Mr. Blood is taking home a smaller percentage of the total payroll than before. But since he’s still making more than four times as much per hour as the meat cutters, we’re not going to feel too sorry for him.

Mr. Blood’s other option, after the union negotiates a raise, would be to lay off one of his meat cutters. This would bring his payroll back into line. That seems to be the essence of Hayek’s argument — that raising salaries will lead to unemployment. However, the remaining nine workers wouldn’t be able to process as much meat, so Blood’s gross receipts would go down. Either that, or there would be the same demand as before for meat, so he could raise prices (inflation) in order to make the same amount of profit while selling less meat.

Here’s the thing that Hayek misses: Exactly the same scenario unfolds if Mr. Blood decides to increase his own salary from $50 to $60 per hour in order to afford a mink coat for his trophy wife. His payroll is, again, $400 per week higher than before. Now, however, he has a new option: He can cut the salaries of his ten meat cutters to $9 per hour (because they’re not unionized). Inflation will be avoided, but the purchasing power of the workers will be lower, which is pretty much the same thing from the workers’ point of view. And there will be less demand for meat, because (if we extrapolate this trend to workers throughout the city or the nation) workers can’t afford as much. So there will be a recession. Demand for all goods, except mink coats, will drop.

This is pretty much the situation we’re in now, here in the real world. Across the country, the Mr. Bloods are increasing their own compensation quite sharply, while cutting jobs and reducing the benefits of the remaining workers. This is great for the people who sell yachts, Porsches, and mink coats, but not so great for the rest of us.

And we owe a debt of thanks to Friedrich Hayek and others of his ilk for the swelling ranks of the impoverished.