Essentials of Economic Theory / As Applied to Modern Problems of Industry and Public Policy

by John Bates Clark

The heavy line AA´ represents, by its height at different points above the base line EE´, the product that is specifically imputable to labor in different employments. The part of the figure where the line is far above EE´ represents the condition where, on the employers' side, monopolies are established; while on the right of the figure, where the line has descended and is slowly approaching the base, the condition is represented in which employers are competing with each other, and many of them are selling their products at prices that only cover the cost of creating them. A unit of labor working for a monopoly creates as large a physical product as it does elsewhere. It turns out as many tons of steel or cases of cloth, etc., as though no monopoly existed, and the price of the goods is high because less labor is employed than would be employed under competition and fewer goods are produced. The actual product of the unit of labor, as measured in dollars, is enhanced by the employers' monopoly. BB´ represents, by its varying distance above EE´, what organized labor can get under the different conditions. On the left it forces the trusts to share gains with it, and gets a high rate of pay; while on the right, where employers are not in combination and there are no such great gains to draw on, it gets less, although at the extreme right it gets all that it produces. DD´ represents what unorganized labor can get under the different conditions, and it is usually somewhat more where trusts employ it than it is elsewhere. The dotted line CC´ represents the product of labor as it would be if it were equalized in the different fields.

The Parties interested in a Dispute in which Both Labor and Capital are Organized.—We can best deal with the problem of the adjustment of wages by arbitration if we approach it in a region where organization is strong, both on the side of labor and on that of capital, and disturbances of the natural system are greatest. The struggle that here goes on is, in a way, triangular. Organized labor contends against its own employers, on the one hand, and against unorganized labor, on the other; and the part which develops the greatest bitterness of feeling and the most violence is the strife between labor and labor—between the trade unionists who strike and the men who attempt to occupy their positions. The union is more tolerant of the employer's action in driving a hard bargain than it is of the "scab's" action in "taking another man's job."

The Public a Fourth Party in the Case.—The three parties just named—employers, organized employees, and applicants for places—are not the only parties whom the dispute affects. The public has a vital relation to it, and in a true sense its interest and rights are supreme. The public has a right to demand that production should not be interrupted, and that the supply of necessary articles should not be cut off; and it is in line with this demand that arbitrators seek first for an award that the contending parties will be willing to accept.

Two Issues needing Settlement.—In the immediate contest over the adjustment of pay, the three parties first named are the ones primarily involved. In discharging its duty as the preserver of justice, the court finds two issues which need to be settled rightly. The dispute between entrepreneurs and workmen must be rightly adjusted, and the issue between the workmen and other labor must be so. The power of the state cannot properly be used (1) to force from employers more than they can afford to give, or (2) to exclude from any field of employment free laborers who are able and willing to do the required work. Arbitrators make their awards with an eye to conditions within the business and to the state of the labor market. Instinctively an arbitrator, in trying to satisfy his sense of justice, thinks first of the amount that the business yields. The men must not take the whole income from the business, leaving to the entrepreneur nothing wherewith to meet the claim for interest. Without doing this, however, they may ask for much more than other laborers will accept, and the question arises whether this should be conceded to them. In merely putting the relation of workmen to employers on a proper footing, the tribunal may leave the relation of the strikers to other workmen as unsatisfactory as it has been. It appears that the tribunal of arbitration cannot by one act settle the two issues that are presented to it. If it gives to the men what seems like a fair share of the product of the business which employs them, it gives more than most workers get and more than the law of final productivity of labor would afford. Yet without a ruthless cutting down of the pay of favored laborers it cannot apply the standard of final social productivity of labor. If it applies this standard and cuts down the men's actual pay, they will refuse to abide by the decision; and if it tries to obtain a power of compulsion and make the men accept its decisions, they will try—probably successfully—to defeat the attempt. A system of compulsory arbitration that should go to the length of forcibly equalizing the wages paid to men of like ability in different occupations, would not be tolerated in a democratic community.

The Difficulty of Applying the Test of Final Productivity.—The law of final productivity works most efficiently when it works automatically, as it does when competing employers make the best bargains they can with locally organized laborers. The results, then, approach the theoretical standard, though they do not entirely coincide with it. The law, however, cannot be rigorously applied by a tribunal which is fixing a rate of pay by its own conscious act. How can the judges directly ascertain how much a final increment of social labor produces?

Employers, indeed, do make such tests. An estimate of how much a few additional laborers would add to the product of a business often has, in some way, to be made, and employers manage to make it; but subsequent experience is necessary for verifying their judgment. A rule of pay, governed by marginal productivity, results from the action spontaneously taken by a myriad of employers, who enlarge their working forces when they find that they gain thereby, and reduce them when they lose. Of course no court could do anything of this kind. No department of industry will turn itself into a laboratory for testing the productive power of labor. It is clear that the procedure must be much simpler and cruder; and a vital question is whether a board of arbitration, proceeding as it must do, is under any influence that impels it to render decisions which, in any degree, conform to the theoretical standard of pay. Does the economic law of wages operate at all when civil law steps in to the extent of creating any tribunal of arbitration? We shall see.

The Necessity for Some Standard on which Arbitrators may base Awards.—When a board of arbitration tries to do anything more than to end a quarrel, it must seek for some principle of justice. If it is dealing with a favored class of laborers, it finds two extreme limits between which its awards must fall, namely (1) the product which the business yields in excess of simple interest on the capital, and (2) the wages that unorganized laborers may offer to accept. It is possible that the workmen may demand the former amount and the employers may offer the latter; and if so, compromising is a rule-of-thumb mode of doing justice. In the case of a strong union and a highly profitable business the employers may offer more than the minimum amount, and the award that is a compromise between the terms of the contending parties will then be well above that which is a fair mean between the possible extremes; yet it does not appear that it really conforms to any ethical principle.

Average Wages as a Standard.—Another possible basis of an award is the average rate of wages prevailing; but it has no claim as a standard of exact justice and is very far from being workable. Wages vary from a very high rate to a very low one; and the highest rate is that which prevails where a trade union which is strong enough to keep men out of its field of employment deals with a trust which is strong enough to keep rival producers out of its field of business. Under such conditions shall a court average this rate and a very low one, and reason that a mean thus arrived at is a legitimate standard of pay or one that would be realized if no monopolies existed? There is no evidence that this is the accurate fact, and there is every evidence that a verdict attained in this way would be rejected. It would cut down the pay that the favored workers have been getting, not to mention denying them the increase they are striking for. On the other hand, the lowest rates prevail where no permanent organizations exist; and if a strike should arise here, should the tribunal take an average rate of pay as its standard? That would greatly increase the rate that prevails in the region where it is acting, and would give the men more than most of their employers could afford. It would discard the necessary rule of keeping within the limit of what an industry can pay without seeing many of its shops and mills closed. Yet a court which refused to raise the pay of the lowest class at all would seem to accept the bad results of monopoly; for it would ratify the hard arrangements which workers who are excluded from the better fields are forced to accept.

A Court of Arbitration not the Agency for Rectifying General Evils due to Monopoly.—It will be seen that the difficulty we discover in the way of a wholly satisfactory action by the court is caused by a tacit demand that it shall undo the results of monopoly itself. We instinctively say to ourselves that the court must insist on doing ultimate justice, and that all rates perverted by monopoly are unjust. The arbitrators should pull down the high rates, raise the low ones, and create such an approach to uniformity as would be realized if labor were as perfectly mobile as a static assumption requires. To do this would give some laborers much less than their employers can afford to pay and less than they often do pay; while it would be giving to others more than their employers can pay without bankrupting themselves. If such levelling is to be done, it must be done by some other agency than a board of arbitration.

The Attitude of the Public toward a Strike by Employees of a Monopoly.—If we turn from a formal tribunal to the court of public opinion, we find a like state of affairs. There is no danger whatever that the public will justify cutting down the wages now received by men in the employment of a monopoly to a much lower level. That in itself would not right the wrongs of the poorly paid workers or those of the public itself. The employer would go on getting high prices for his products and would pocket the new gain which the reduction of wages gave him. If a great corporation is now taxing the public, even those who suffer would rather see the proceeds of the grab shared with the men than see it all held by the employing corporation. It is, indeed, true that if a tribunal were to give the men an increased share of what the monopoly is getting, the employing company would try to recoup itself from the public by raising prices still higher; and, if it were to give a reduced share, the company might enlarge its business and make its prices a shade lower. Giving to the men a share of the grab made by their employer does indirectly cause a certain increase of the injury done to others, and withdrawing a share might slightly lessen the injury. The public would rather see the higher wages paid, and take some chance of this minor and indirect injury, than see the employing company pocket all that it exacts from the public.