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

by John Bates Clark

Monopoly Prices as affected by an Increase of Wages.—Arbitration often authorizes a rate of pay based on the profits of an employers' monopoly; and yet a tribunal of this kind must not, and will not, make itself the accomplice of any monopoly by making its position more secure. The policy of every public institution must, and will, be designed to help make an end of every such outlaw that now has a foothold in the field of business. Yet any plan which would force a monopolistic employer to give to his men an increased share of the "grab" which he makes from the pockets of consumers tends to increase the amount of the grab if the employer is entirely secure in his position. A monopoly that is thus safe from interference tries to put the price of each of its products at the point where the largest net revenue is afforded. If distance along the line AG measures the supply of a commodity and vertical distance from it measures price, DF will be the price curve of a commodity, as it is offered in increasing amounts. AD will be the price when one unit is offered, and GF will be the price when the full amount represented by the line AG is produced. The price will then stand at the cost of producing the article. When a monopoly is firmly established, it will seek to get the largest net profit that can be had, and a consistent execution of the plan would reduce the output from the amount measured by AG to that measured by AH. The price would then become HE and the net profit the amount of the area EB. If wages are so raised that the cost becomes G´F´, the net profit becomes EB´. This profit can be increased by further reducing the product to the amount AH´, putting the price at H´E´, and the net profit E´B´, which is larger than EB´. If an independent producer can employ non-union labor and create the goods at the cost GF, and market them without reducing the price much below the level indicated by H´E´, he can make on each unit of product a profit nearly equal to I´E´. This fact makes the monopoly cautious about raising its price to the level H´E´. A tribunal of arbitration may somewhat raise wages without fearing such an increase of prices. By a crude and instinctive judgment the court will hit upon some level of wages which falls well within the limit of what the monopoly can pay and is above the amount which marginal social labor gets.

The Probable Result of a Strike as a Standard for an Award.—Let us see what would happen if a board of arbitration should abandon all effort to level out the general inequalities in wages, and try chiefly to end quarrels and avert long-continued strikes. With this in view it might aim to give the men whatever they would be likely to gain by means of the strike. In a true sense this mode of procedure is more nearly scientific than either of the others. Any tribunal of voluntary arbitration will aim to content both parties sufficiently to prevent an interruption of business. The men may consent to take somewhat less than they hope to get by a successful strike; and the employers may be willing to pay somewhat more than they would at the end of a successful lockout. The probable outcome of the struggle may be differently estimated by the contending parties, and if so, an actual struggle will end by making employers pay more and the workmen take less than they had severally expected to do. If this amount can be awarded at the outset and the struggle precluded, all parties will be gainers by the continuance of business, unless the employers desire a strike for the sake of making their products scarce and dear.

When the Probable Results of a Strike afford an Unfair Standard of Wages.—Where monopolies exist and trade unions rely on violence in carrying their point, it would not be fair to establish a permanent rule of wages based on the amounts that strikes so conducted secure. Such strikes depend for success on the violent exclusion of non-union men; and actually to give permanence to rates so gained would be to fasten on the majority of workers the disabilities under which they now labor, and to perpetuate the gains of a two-fold monopoly. On the other hand, if the court should make its award conform to the probable result of a strike which should be general in the trade, but should not resort to any violence, the procedure would be natural and would base itself, in an unconscious way, on the true standard of wages. Such a general strike, by its mere magnitude, would preclude the possibility of any immediate filling of the vacated places by men at the time out of employment; and yet the fact that non-union men were not forcibly kept out of the trade would be an all-important feature of the situation. If, when no strikes were pending, men could gain admission to this field, there would be no true monopoly on the men's side. The rule of giving, by arbitration, what a strike would secure would remove the chance of cutting down the rate to that which prevails in the more ill-paid employments, and would insure to the men the rate that marginal workers in actual employment get plus the two additional amounts spoken of at the beginning of the preceding chapter. The marginal product of labor plus an amount for personal superiority plus an amount for good organization would be the standard to which wages in favored employments would conform; and it is as nearly normal as any practicable standard would be. A free application of it would reduce the wages of unions that thrive by the use of force and would be opposed by such unions. If it were adopted, there is a prospect that the awards would be rejected by the men until hard experience should teach them to relinquish gains secured by violence. Yet a tribunal that should adopt this standard would allow workmen to retain every advantage that organization can afford without a violation of the criminal law. Its guide in making awards would be the pay which the best unions lawfully get in trades akin to the one in whose case they were acting.

In dealing with a union which is not a true monopoly and does not depend on force, arbitrators may safely award what an actual strike would probably secure, and the simple plan of compromising gives an approximation to this amount. What the men will accept and the employers will give is about what a strike would extort. Where a monopoly of the field of labor exists and force is used to protect it, a compromise which anticipates the probable result of a strike concedes what could not otherwise be lawfully secured, and we have to see whether this is a plan that a board of arbitration can properly adopt.

Arbitration as affected by Employers' Monopolies.—We confine our attention, for the present, to arbitration that has no power of coercion behind it. A board may be formed which is compelled by statute to investigate quarrels and announce fair terms of settlement, but the contending parties may be allowed to do as they please about accepting the awards. The most difficult case with which such a tribunal would have to deal is that in which the employer has a monopoly of a department of production, and a trade union has an exclusive possession of its field of labor. The mere removal of the employer's monopoly would so greatly simplify the situation as to leave no ground for serious difficulty. With that out of the way,—with potential competition doing the perfect work that under good laws and good policing it ought to do,—the pay of laborers in other employments would be somewhat higher, and extortionate profits would be altogether absent. Profits based on special economy would exist, as they should, but those which are filched unjustly from any one's pocket would not exist. There would be likely to be, in most of the subgroups, independent employers efficient enough to hold their positions, but without any means of getting abnormal gains. These would be marginal employers in their several subgroups, and their returns would range about that static level at which the wages of labor and the interest on capital would absorb them all. An award based on what such employers could pay would express what other employers would naturally pay, and it would be all that the subgroup as a whole could concede without ruining some of its members, but it would allow others to make something by special economies in production. Productivity profits they would get and no others, and these it is in every way expedient that they should be allowed to enjoy. Suppressing employers' monopolies would remove much of the difficulty connected with arbitration, and putting an end to violence on the men's part would remove almost all the remainder.

With monopolies in the field it is quite otherwise. Their gains are not of the kind that it is for the interest of the public to let them keep. The public claims these sums on grounds of equity and expediency. It is a perverted distribution that gives them to their present recipients; and this fact threatens to involve more and more the processes of production themselves. Centralization, without monopoly, increases the product of industry; but the monopolistic feature that often attends it partially paralyzes the producing forces, and must be gotten rid of before there can be a normal income to divide and a normal way of dividing it. The court of arbitration itself cannot get rid of it, and it would do harm if it should try to do so. Drastically to cut down wages that have been raised by the power of monopoly would injure some workmen without materially helping others, and it would benefit chiefly the monopolistic employers. Such a policy would bring the entire system of arbitration to an end; for it is partly a fear that arbitration would not leave to favorably situated unions as much as they can now get by strikes and boycotts that prevents the system from coming into vogue. The state can end the monopoly, but it must do it by other measures than installing courts of arbitration. In the interim—long or short, as the case may be—before these measures will have their effect, it is necessary to proceed on a plan of securing by awards something like what would result from actual trials of strength. The effects of adjudication will not, in this interim, be ideal, but it is necessary to accept this fact and struggle the harder to obtain conditions that will improve them.

Abnormal Conditions which Arbitrators must Accept.—Crude force of one sort or another would sometimes give to organized labor twice or thrice as much as free labor can earn at the social margin of production, and the public approaches the problem of adjustment while this condition exists. It may be that a trust has crushed competition, made large gains for itself, and made it possible to pay employees at a high rate; while, on the other hand, a trade union has made itself strong, put pressure on the employers, excluded free laborers, and secured a share of the monopolistic spoils. Arbitrators, then, whenever a strike is pending, may divide the spoils as a strike would do, between masters and men. This will leave a few workers in possession of a rich field and many hungry ones outside of it; and we have asserted that the board should confirm the workmen's tenure of place on the sole condition that they accept a rate of pay which it shall authorize. In this case the arbitrators authorize a high rate, while needy men stand ready to take a lower one. They confirm wages based on the profits of monopoly, but look to the state as the power which will get them out of their anomalous position, by making an end of monopoly.

Why Sharing a "Grab" already made is not an Aggravation of the Evil.—While plunder is to be had, it is at least by one point fairer that workers should have a share of it than that employers should have it all. We have said that the court of arbitration finds two issues needing settlement, namely, the relation of employers and employed within the business, and that of laborers outside of this department of industry to those within it. Only one of these issues is it capable of settling, and it is by a true instinct and not merely from expediency that arbitrators permit workmen to share in some degree the gains of the monopoly that employs them. This is legitimate, however, only on the condition that, by further measures, the gains of monopoly be reduced.

How Arbitration will be facilitated by the Suppression of Monopolies.—In studying monopolies we discovered that the prices of their goods do not entirely part company with their natural standards, even when governments do not at all interfere with them. Potential competition keeps these prices from rising above the standard of cost by more than a certain margin. We shall see that if governments do nothing in the way of controlling the contests over wages, the rates that these yield will not be wholly unnatural. They will be held within a certain distance from the standards. If too high wages are exacted, the barriers will be broken down and competing laborers will come into the favored fields. The potential competition of idle men hangs as a menace over the heads of the too exacting trade unionists, and enforces a measure of prudence in the wages demanded. If the unions ask too much and strike in order to get it, the competition which is now latent will become active, other men will take the vacated places, and the struggle of force will begin. Slugging may ensue and may go to the limit of a weak government's toleration. The more complete is the exclusion of free labor, the higher is the rate which organized labor secures; but this rate always falls within a certain distance of the normal one, as that is fixed by the final productivity of social labor. Even the pay secured by violent strikes is, as we have already shown, governed by the law of final productivity, though it does not coincide with that rate. Actual pay and standard pay are like a vessel and a tug attached to each other by a hawser, which allows one to drift far from the other but does not let them part company. In the long run the tug takes the tow with it. Even the wages which a trust gives to a fighting union—wages paid by a monopoly to a monopoly—are governed by the law of final productivity, since there is a limit on what the trust can extort from the public, and there is a limit on what the union can extort from the trust. Potential competition, by limiting both the producing corporation and the trade union, vindicates the natural law of wages, though its results are made inexact by monopoly.