All Commentary
Tuesday, May 1, 1984

Socialists Argue About Labor Unions


There is a vast literature on the labor movement. Classical writers in the tradition of Adam Smith, first made an issue of “labor’s disadvantage”; the socialists developed their “exploitation theories.” In substance both doctrines are closely related although they may differ in form and appearance. The classical economists put it much more kindly when they spoke of “labor’s disadvantage”; the socialists bluntly called it “exploitation.” The classical doctrine undoubtedly gave life to the socialist theory; but later in the century the latter gave comfort and support to the former. Many writers who for various reasons hesitated to proclaim the exploitation theory, felt encouraged to espouse the milder theory of employers’ advantage and labor’s disadvantage.

The exploitation theory is one of the most portentous economic theories ever devised. It gave birth to modern socialism and stood at the cradle of many trade unions. Above all, it constitutes the focal point of the fateful issue on how human society shall be organized. It affirms that all economic goods are the product of human labor. But the workers do not receive the entire product of their efforts; a part goes to lenders and capitalists and yet another may go to entrepreneurs. As employers, they use the institution of private property and the contract system to seize a share that is produced by the workers. Employers exploit the situation that forces the workers by want and hunger to submit to exploitation. As a conscious and integrated doctrine this explanation was the logical sequel of the labor theory of value according to which labor is the origin and the source of the value of goods. In particular, Adam Smith’s and especially David Ricardo’s theories of value furnished the theoretical foundation on which the socialists could erect their exploitation doctrines.1

At first glance labor unions may appear to be the most obvious institution to offer instant relief from exploitation and labor’s disadvantage. They may engage in collective bargaining, call strikes, and use other force in order to alleviate or even prevent the exploitation. Or, at ]east, they may voice loud protests against injustice throughout the whole field of labor relations.

While the champions of unionism readily draw such conclusions, many socialists press for different solutions. They usually demand a radical restructuring of the system of economic and social organization along socialistic lines. Some appeal to government for legislation and regulation that would reform the system or replace it with a particular brand of command order. Others would want to reform man through education and information so that he may aspire to a “higher order” of socialism and communism. Karl Marx and his followers were convinced that the private property system in time would give way to a socialistic order. They all disapproved of workmen’s combinations for being ineffective or even harmful to working people. In their view, the interests of unionists are basically antagonistic to those of the laboring classes.

The Socialist View of Unions as Opposed to Other Workers

The founder of all modern schools and branches of socialism, William Thompson (1775- 1833), was an ardent critic of unionism. Other socialists, Saint-Simon, Proudhon, Rodbertus and Marx, borrowed heavily from this Irish writer. Robert Owen, the British industrialist and reformer, admired and befriended him. Thompson postulated that labor produces all value in ex change, and that all the product of labor should belong to laborers. But they merely get a bare subsistence remuneration, the balance of the product going to land and capital. And yet, he opposed labor unions which to him were “aristocracies of industry.”

Unionism, according to this early champion of socialism, “depends on mere force and would not allow other workers to come into the market at any price.” “It matters not, whether that force . . . be the gift of law or whether it be assumed by the tradesmen in spite of the law; it is equally mere force.” Union force together with government regulation manage “to keep up the remuneration of the few within the circle of the combination.” Their gains are always “at the expense of the equal right of the industrious to acquire skill and to exchange their labour where and how they may.”2

Whatever Thompson’s view of economic life may have been, it did not dull his understanding of the coercive nature of unionism. During the 1820s, when he wrote those lines, governments were still guided by the idea that they should protect employers and their property against the onslaught of strikers. They still were doing their duty in protecting life and property. Since then governments in non-socialistic countries gradually conceded to unions the right to resort to brute force. Under the influence of changing public opinion they permitted labor unions to prevent anybody from defying union orders concerning wage rates and other working conditions.

Unionists are practically free now to inflict bodily harm on strikebreakers and businessmen who employ strikebreakers. They are free to destroy their property and even harm customers who patronize those businesses. The police will not arrest the offenders, the state attorneys will not prosecute, and the courts will not pass judgment on such union actions. While the lawlessness in labor relations may inflict serious losses on employers, it primarily hurts the interests of fellow workers and the public consisting mainly of workers. As in the times of William Thompson, union gains are still “at the expense of the equal right of the industrious.”3

Unions Obstruct the Forces of History

Of all the socialistic leaders of the 19th century no one was more influential than Karl Marx (1818-1883). His chief work Das Kapital (1867) continues to be the classic of socialistic thought and the leading source from which the socialists of the world draw their knowledge. He created a militant, destructionist body of doctrine that meant to pull down or destroy the private property order.

To trade unions, Marx assigned the foremost task of leading the fight against capitalism. But he insisted that unions alone offer no hope whatever for improving labor conditions and raising wage rates. In Marx’ own words: “In place of the conservative motto: ‘A just day’s wage for a just day’s work’ they ought to print on their banners, ‘Abolition of the wage system.’ They generally miss their aim because they limit themselves to carrying on a guerilla war against the consequences of the present system, instead of working at the same time for the transformation and employing their organized power as a lever for the final emancipation of the working classes; that is, for the final abolition of the wage system.”4

Karl Marx was no stranger to the fact that trade unions usually benefit some workers at the expense of others. Strikes, violence and sabotage cannot improve the economic conditions of all, but are capable of causing havoc in economic production and inflicting serious losses not only on employers but also on other workers. Wherever unions succeed in raising labor costs through higher wages, costly benefits, or hampering work rules, they cause total output to decline or, at least, remain smaller than it otherwise would have been. To Karl Marx such effects merely delay the coming of socialism, which springs from the exploitation of labor. Unions must not resist the forces of history that demand that the masses of people will be employed and exploited by a small number of capitalists. These cannot consume the surplus production, but are led to reinvest their gains in facilities of production, thus further increasing output. The laboring class is weighed down further by an “industrial reserve army” of unemployed who provide poor markets because of lack of purchasing power. When the business crises become increasingly severe, the labor class will rise, cast off their chains, and seize control of the state—the exploited will expropriate their expropriators.5

Consider the Facts

The emptiness and spuriousness of these doctrines are visible to everyone not blinded by Marxian sophistry. The essential point made by Marx and all other socialists is the exploitation and impoverishment of the working people in capitalistic countries. But it is an indisputable fact that the workers’ levels of living are highest by far in countries with private property in the means of production, and most wretched where the system has never been tried.

In a world ranking of workers’ income, there probably is a directly proportional relationship between income and the application of capitalism. The U.S. has the longest tradition of adherence to the private property order; its working people are enjoying the highest standards of living. The backward countries of Africa and Asia have remained unaffected by the spirit and the ways of capitalism; their masses linger in poverty and despair. Neither labor unions nor labor laws can alter this basic relationship.

Wherever the disciples of Marx come to power they immediately abolish labor unions in their traditional form. In the Soviet Union, which is the ready model of all Marxian systems, unions are just another “driving belt” that makes the workers meet their production quotas. They do not represent the interests of working people, but are obedient instruments in the hand of party and state. There is no room for independent unions in the Marxian command system. Wherever they should rear their heads, imitating the labor organizations of capitalistic countries, they are crushed without delay. The Solidarity movement of Poland is a recent example.6 But this Marxian principle and public policy does not prevent the leaders of the system from encouraging, promoting and supporting the most destructive labor unions in the West. After all, Karl Marx assigned the task of leading the fight against the private property order, against capitalism, to the unions.

The Base of a New Order

The exploitation theory, which gave birth to modern socialism, may also be interpreted as a mandate to unionism. If labor is actually exploited, labor organizations may offer relief from exploitation through collective bargaining and other devices. This is why so many ardent socialists always have been the faithful friends of unions, and most unionists the eager disciples of socialism.

In England and France some elements of socialism friendly to unionism were discernible throughout the 19th century. One of the early socialists, Robert Owen (1771-1858), began to influence social thought as owner and manager of the cotton mills of New Lanark, Scotland. His mills became a showplace of enlightened management and philanthropy, which aimed at introducing “new principles in the conduct of the people.” Owen rejected the competitive private property order in which “one man’s gain” is “another man’s loss,” and urged the introduction of a cooperative order with a healthy and happy environment. He favored “villages of co-operation” where production would proceed without the profit motive. The villages were to be both a necessary remedy for unemployment and a contribution to “social regeneration.”

When Owen failed to convince the British public of the wisdom and practicability of his plans he left Britain for the United States in 1824. At New Harmony, Indiana, he established a system of communal living in order to realize “the new moral world.” When the venture failed, swallowing up most of his fortune, he returned to Britain, developed a secular religion, and, in 1839, constructed a new community at Harmony Hall, in Hampshire, England.7

Owen’s greatest dream was a “Grand National Moral Union of the Productive Classes,” which was a pyramid of producers’ cooperatives with trade unions at the base.8 He probably reached the high point in popularity when, in 1833, the Grand National Consolidated Trades Union was formed. It soon had over half a million members.

Robert Owen, like so many other socialists before and after him, fell prey to the inveterate fallacy that things and services exchanged should be of equal value. The error blocked and misled economic analysis for more than 2000 years since Aristotle first uttered it. If it were true, “one man’s gain” would indeed be “one man’s loss.” But in reality only disparities in the value attached to economic goods lead to exchange. Things and services are traded because people attach a greater value to the goods they receive than to those they give in exchange. Both parties profit from a voluntary exchange; “one man’s gain” is also “another man’s gain.”

Owen’s life-long ambition to create workers’ cooperatives probably sprang from his incapacity to understand the nature of trade and commerce. It led him to a predilection for a return to simpler modes of production, in a self-sufficient community. His New Harmony in Indiana was just the first installment toward his Utopia. It fared ill from the beginning because it misread human action and sought to return to the economic ways of primitive times.

The Chartist movement, which was most active between 1838 and 1850, depended much on Owenite ideals. It asked only for political changes. But many supporters expected these to be the keys to economic and social changes. Political representation of the poor, especially industrial laborers, was expected to lead to government measures and policies favoring these groups. The movement depended for encouragement and support on trade unions, which in turn savored the loud acclaim by the Chartists.9

The Intellectuals’ Liaison with Labor

The Fabian Society, founded in 1884 and active ever since, is desirous of a similar relationship with labor. It attracts the intelligentsia of the labor movement, and provides it with opportunities for expression and discussion. In time, its membership exceeded 5,000, some of whom are the political and social leaders of Britain. The principal activity of the society is the promotion of socialism by means of meetings, conferences, seminars, summer schools, by conducting research and publishing books, pamphlets and periodicals.

But it is rather awkward for this tiny class of British intellectuals to wax eloquently on the needs of the working class and speak convincingly on its deliverance from capitalism if few, if any, members are or ever have been members of the working class. How convincing are Fabian asseverations and protestations coming from the mouths of intellectuals who know of working people only through their servants? To bridge the credibility gap, Fabians need to associate with the agents and spokesmen of labor and invite a few to join their elitist society. Supportive of trade unions and affiliated with the Labour Party, they may wax about the needed “reconstruction of society in accordance with the highest moral possibilities.”10

Fabians promote a gradual introduction of socialism, rejecting the revolutionary, political action approach to proletarian power as advocated by Karl Marx. They prefer John Stuart Mill and Stanley Jevons to Karl Marx, and regard the state as a political machine to be captured and used for the promotion of social equality and economic transfer.

Fabians generally lack the Marxian commitment to ruthless implementation of a socialist command order. And yet, wherever they come to power they are tempted to curtail the destructive powers of labor unions. But they must be ever mindful of the fact that the votes of organized labor constitute the socialistic political power base. To question this base and oppose its leaders, or impugn the legal privileges and immunities of unions, is to invite political disaster to socialistic administrations. Therefore, they seem to have no choice but to cater to union leaders and accede to their demands.

To appease them and secure the peaceful cooperation of the unions, Fabian administrations may offer labor leaders important positions in government. Union officials may staff the department of labor, the labor relations boards, and other offices important to unions. Fabian governments may offer more permanent privileges in exchange for temporary union restraint and cooperation. Senior union officials approaching retirement age may count on appointments to ambassadorships in important foreign countries, or be granted prizes and titles that confer personal honor and prestige. In short, Fabian administrations seek to befriend union leaders rather than confront them. They proceed with socialistic prudence, which is conformity to the rules of unionism.

Ramparts Against Competition

Over the years the Society included such well-known persons as Beatrice and Sidney Webb, Graham Wallas, Ramsay MacDonald, George Bernard Shaw, and many others. It is difficult to appraise their positions on trade unions, which may rest on different doctrines and theories. But it is most appropriate to cite Sidney and Beatrice Webb who cemented the Society-union relationship with their voluminous writings on the history of trade unions. They devoted six years’ investigation to the task of giving a scientific analysis to trade unions in Britain. In the History of Trade Unionism, published in 1894, they traced the origin and growth of the union movement. Three years later they added Industrial Democracy, which deals with the structure and functions of trade unions. Both volumes reveal the spirit and method of “Historical Economics” that painstakingly presents voluminous data on places, people and events, but carefully avoids causal explanations. The au thors venture into the domain of explanation, which they call “economic generalization and abstract theory” only in the last part of Industrial Democracy.11

Both volumes build on a particular version of the exploitation theory and arrive at a powerful advocacy of unionism. They do not charge the impairment of competition for “the tendency of wages to fall to a minimum,” as some eminent economists had done, nor do they, in a Malthusian fashion, lay the blame on the reproductive powers of man. They blame competition itself for a presumed tendency for wage rates to fall to exploitation levels.

The isolated workman, unprotected by anything like a trade union, always gets the worst of the bargain. He is too poor to wait, too ignorant about market conditions to bargain intelligently. “The capitalist employer will take full advantage of his strategic strength, and beat each class of wage-earners down to the lowest possible terms.” Even an intelligent, far-sighted, and public- spirited employer is not master of the situation; “he is constantly finding himself as powerless as the workman to withstand the pressure of competitive industry . . . This competitive pressure pushes him in sheer self-defense, to take as much advantage of his work-people as the most grasping and short-sighted of his rivals.”12 The manufacturer is “squeezed” by the wholesaler who is “squeezed” by the shopkeeper who is pressured by the consumer who applies a “persistent pressure on sellers, which, transmitted through the long chain of bargainings, finally crushes the isolated workman at the base of the pyramid.”13

The Role of Competition

The Webbs unfortunately never grasped the meaning and functions of competition in the market order. Where they saw antagonism about incompatible interests, there actually is a drive for excellence and pre-eminence in cooperation and want satisfaction. Competition assigns to every member of society that position in which he can best serve all other members. It selects the most able man who is willing to perform a given task. Competition is no fight that creates victors and vanquished. It forces sellers to outdo one another by offering better and cheaper goods and services, and forces buyers to outdo one another by offering higher prices.

If the Webbs had analyzed both sides of the exchange, they might have arrived at quite different conclusions. They looked at the one-sided competition of the sellers of labor outdoing each other by offering their labor at lower and lower prices, until they are “crushed at the base of the pyramid.” They completely ignored the competition by the buyers of labor to outdo one another by offering ever higher wages. If they had looked at the buyers only, they would have foreseen a crushing of isolated employers “at the base of the pyramid.” Perhaps they would have seen an urgent need for “employers’ organizations and associations” to avert the disaster.

Both Sides Benefit

In reality, competition is both-sided, assigning to every worker an income that reflects his contribution to the production process. If, for any reason, an employer should offer more than a laborer should contribute, he would suffer losses. If he should offer less, leaving a profit margin from the employment of particular labor, he himself and other competing employers would want to employ additional labor, which would raise wage rates again to the very margin of productivity. In short, in the competitive market order every worker tends to earn a wage that corresponds to the value of his contribution to the production process.

The crude exploitation doctrine resting on a misinterpretation of competition led Sidney and Beatrice Webb to hail trade unions and labor legislation enforcing a “common rule” of wage rates and working conditions and preventing “industrial parasitism,” as the guardians of decency and prosperity. Nevertheless, they revealed a remarkable understanding of the potential dangers of trade unions in the form of mass unemployment. They recommended a rule for union conduct that would, if it were ever observed, alleviate most of the known union evils.

The Webbs were careful not to place the blame for stagnation and unemployment on trade unions. But they did not hesitate to warn against excessive rises in labor costs. “It will not pay them,” they cautioned, “to obtain a rise of wages, a shortening of hours, or improved conditions of sanitation or safety at the cost of diminishing their own continuity of employment. To put it concretely, whenever the percentage of the unemployed in a particular industry begins to rise from the 3 or 5 percent characteristic of ‘good trade,’ to the 10, 15, or even 25 per cent experienced in ‘bad trade,’ there must be a pause in the operatives’ advance movement.” Only if there are no restrictions on the number of workers entering the occupation, and all union members are fully employed, should there be any further advance in wage rates and other labor costs.14

This is cogent economic reasoning. But trade unions throughout the nonsocialistic world steadfastly ignore it. They make their demands for “more” and “more” although half their members may be on the unemployment roll. This percentage would be larger yet if all willing workers held at bay by union rules and picket violence would be added to the jobless rate.

A Source For Social Justice

Many practical reforms can be traced to the work of Fabians; but the Webb warnings about unionism remained rather unheeded, especially in Britain. Much of the impact of Fabianism has been through the dissemination of Fabian ideas among teachers, civil servants, politicians, and trade union officials. In the United States the work of the Society is felt in colleges and universi ties where it has touched two generations of educated Americans. In American politics the socialists would not be tutored or guided by the Fabian intelligentsia.

For several decades Norman M. Thomas (1884-1968) was the undisputed political leader of American socialism. He was a candidate for governor of New York once, ran twice for mayor of New York City, and ran for president of the United States in every election from 1928 to 1948. He lauded “the labor movement as the single potential source for social justice in American society,” offering “important immediate amelioration” to the problems of automation and unemployment.15 To Fabian socialists, trade unions are a potential cause for stagnation and unemployment; to Norman Thomas and his followers unions promise hope and relief from unemployment. To Thomas automation was the root of all evil; unfortunately he did not explain why the problems of automation are felt most painfully in unionized industries.

Norman Thomas was a political socialist searching for political solutions. He called upon unionists to join him in the political battle, forsaking all efforts at labor-management cooperation. “The problems faced by the unions are national in scope and require democratic social planning if they are to be solved.”16 All roads to social justice in socialism lead to Washington.

It is disheartening that after more than two hundred years of economic thought and teaching, some people continue to view “automation” as the root of all evil. They steadfastly refuse to see that “automation” merely is another label for production with better equipment. It makes human labor more productive, raises wage rates, and affords more comfort and leisure. As it raises labor productivity it actually increases the demand for labor and creates more employment. Efficient tools and equipment are common blessings to Americans; they are so common indeed that men forget to appreciate them and pay their praises. []


1.   Adam Smith, The Wealth of Nations, 1776 (New York: The Modern Library, 1937), Book I, Chapter V, p. 30 et seq.; David Ricardo, The Principles of Political Economy and Taxation, 1820 (New York: Dutton, Everyman’s Library, 1973), Chapter I.

2.   Labour Rewarded: The Claims of Labour and Capital Conciliated; Or, How to Secure to Labour the Whole Products of its Exertions (London: Hunt-Clarke, 1827), p. 75.

3.   Ibid., pp. 76-77.

4.   Value, Price and Profit, ed. Eleanor Marx Aveling (Chicago: Charles H. Kerr & Co., 1910), pp. 126-128.

5.   Cf. also Capital, 1867 (London: Lawrence and Wishart Ltd., 1959), Vol. I, Part VII, Chapter XXV.

6.   Cf. Hans F. Sennholz, “Tensions in Poland,” The Freeman, May 1981, pp. 259-271.

7.   Lloyd Jones, The Life, Times, and Labours of Robert Owen, 1890, (New York: Charles Scribner’s Sons, 1919); Frank Podmore, Robert Owen (New York: D. Appleton & Co., 1924); William Lucas Sargant, Robert Owen and His Social Philosophy (London: Smith, Elder & Co. 1860); J. F. C. Harrison, Quest for the New Moral World (New York: Charles Scribner’s Sons, 1969).

8.   Lectures on an Entire New State of Society (London: Strange, 1830); Cf. also A New View of Society, and Other Writings, 1813-1821 (New York: Dutton, 1927). Cf. William Lucas Sar-gant, ibid., pp. 325, 326.

9.   Earnest Charles Jones, Selections From the Writings and Speeches of Earnest Jones, ed. by John Saville (London: Lawrence & Wishart, 1952); Thomas Carlyle, Chartism (London: J. Fraser, 1840); Julius West, A History of the Chartist Movement (London: Constable & Co., 1920).

10.   Fabian Tracts, Nos. 1 to 133, London: The Fabian Society, 1907; M. Margaret P. Mc- Carran, Fabianism in the Political Life of Britain, 1919-1931 (Chicago: The Heritage Foun dation, Inc., 1954); A. M. McBriar, Fabian Socialism and English Politics, 1884-1918 (Cambridge: University Press, 1962); Anne Fremantle, This Little Band of Prophets (New York: The Macmillan Co., 1960); G. D. H. Cole, Fabian Socialism (London: George Allen & Un-win, 1943); Margaret Cole, Beatrice Webb (New York: Harcourt, Brace & Co., 1946), also The Story of Fabian Socialism (Stanford: Stanford University Press), 1961.

11.   The History of Trade Unionism, 1894 (London: Chiswick Press, 1911); Industrial Democ racy (1897), printed by the Authors For the Trade Unionists of the United Kingdom, 1913.

12.   Industrial Democracy, Ibid., p. 662.

13.   Ibid., p. 671.

14.   Ibid., p. 739.

15.   Socialism Re-examined (New York: W. W. Norton & Co., 1963), p. 248; also The Choice Before Us (New York: Macmillan, 1934). 16Socialism Re-examined, p. 247.


  • Hans F. Sennholz (1922-2007) was Ludwig von Mises' first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, 1992–1997.