All Commentary
Wednesday, October 1, 1975

What Makes Jobs Scarce?

Mr. Rukeyser is well known as a business consultant, lecturer and columnist.

It is fashionable these days to forecast that massive unemployment will persist long after business volume recovers. This current forecasting vogue indicates that somewhere in the thicket of theory the savants lost their sense of direction and forgot that the moral sanction behind the economic system is the service of man.

This dilemma can be traced to confusion as to the nature of work. The deviation from common sense stems from union propaganda early in the century — long before Labor’s Magna Charta in the Wagner Act of 1935 — to the effect that labor is not a commodity. The kernel of superficial truth in the concept was carried to absurd extremes. The uncritical conclusion was reached that the worker is exempt from the workings of the market place.

Even anti-Marxians thus fell into the booby trap of unwittingly accepting the Communist principle of divorcing a person’s pay from his productivity. They thoughtlessly leaned toward the Marxist notion of paying each “according to his need” while expecting each to contribute “according to his ability.” In testing the concept, Nicolai Lenin in the first days of the Soviet Union found that egalitarianism was deadly to productivity.

Accordingly, in the inauguration of the Five Year Plans, he recognized differences in the value of work and paid differentials in compensation. This led Will Rogers on a visit to observe that he liked Russia because there were no Communists there. Wendell L. Willkie, in his One World written during World War II, found in a visit to the Soviet Union that managers were paid ten times as much as workers.

Thwarting the Market

The delusion nevertheless persists over here that the worker is unaffected by the market place. This error is implemented in minimum wage laws making it illegal to employ, persons of low productivity at wages which they can earn. And the rigidities of the Wagner Act (many of which were continued 12 years later in the Taft Hartley Act) still interfere with re-employment. These inflexibilities even render unacceptable the alleviative technique employed in the depressed 1930′s of sharing the work through reduced hours.

The dictatorial fiat powers of unions don’t spring exclusively from Congressional legislation, but also reflect the Judicial determination that unions are not subject to the antitrust statutes and administrative rulings by the National Labor Relations Board.

Behind the prevailing fallacy is the false assumption that generosity toward workers comes out of the hide of management and owners. This overlooks that the physical act of hiring is really an agency procedure, in which the employer acts in behalf of the customer, who is the real user of labor. Management attempts to prejudge whether the customer will later ratify the judgment of the businessman as to what new costs will prove acceptable.

The true interests of the labor force are served when reliance is placed on the expertise of management in anticipating the future willingness and ability of the customer to buy. Thus, it is self-defeating to use brute force to make management assent to an arrangement deemed to be imprudent.

Government intervention in tilting the scales of power to unions too frequently turned collective bargaining into collective bludgeoning. It is regrettable that the unemployed are the victims of thus ignoring signals from the open market. A more civilized goal would be collective consultation.

Government, in creating Frankenstein’s monster by legislation, has promoted manipulative folly in industrial relations instead of a process for harmonizing differences. On the contemporary scene the British Labor Government pleads with the unions to hold wage increases to 10 per cent, despite much lower productivity expectations. And in Argentina Mrs. Peron finds it incumbent to reject the demands of militant unions for increments of 80 to 130 per cent. If mass affluence could actually be attained in this arbitrary fashion, the economic millenium would indeed be at hand. It should be self-evident, however, that equating money gains with advances in material well-being constitutes opera bouffe economics.

The aware know that giving employees more and better things in exchange for a week’s work depends on enlarging output per man-tool-hour. This in turn comes from better methods, reflecting creativity in the realm of science, invention, engineering and managerial prowess. Improvement inheres in making two blades of grass grow where but one appeared before. Such socially beneficial progress is fed by willingness of self-disciplined income recipients to divert a portion of their receipts from current consumption to savings, which can be invested in capital goods (mechanized tools).

Inflationary Actions

When a governmental agency expands the money supply to meet wages elevated without regard to productivity, the resultant inflation creates mass frustration. Inflation inefficiently distributes the labor supply, and the status quo thus developed can be maintained only by continuing further to inflate the currency. With his customary felicity, Ludwig von Mises, in his classic on “wages, unemployment and inflation” (The Freeman, September 1975) pointed out: “Under the impact of progressing inflationary policy the union bureaucracy acquired the habit of asking at regular intervals for wage raises, and business, after some sham resistance, yielded. As a result these rates were at the moment too high for the state of the market and would have brought a continuous amount of unemployment. But the ceaselessly progressing unemployment very soon caught up with them.”

It is sheer illusion to regard inflation as a permanent way of life, for in due course inflation brings its own demise by shattering public confidence in the monetary unit.

Blue sky class warriors mistake shadows for reality, overlooking the fact that healthy employment develops when self-supporting specialized workers interchange among themselves the products of their hours of labor. The political manipulators fail to recognize that the open market is a flexible mechanism for adjusting balanced income relationships needed to achieve sustainable prosperity. Under competition, industry, though privately owned, is potentially an immensely complex social tool for achieving better living. Instead of surrendering to the hot heads, it is desirable in this computer age to modernize primitive tools for collective bargaining.

The dividends could be far-reaching in better use of the work force. On the other hand, when management is forcibly maneuvered into making irrational decisions, the basis is laid for reduced volume of transactions and greater unemployment. The damage skyrockets when and if management insiders themselves believe the myths, such as the canard that the big companies in highly concentrated industries are above the market and can dictate to customers.

Few non-public utilities are as concentrated as the automobile industry. But, if (as widely charged by academicians and their political sycophants) automobile management can “administer prices” and dictate styles, why the disastrous collapse of sales volume and profits in 1974 and beyond? If the executives can call the shots, then their performance was indeed monumentally stupid! The record shows that the manufacturers were unable to make higher price tags stick even though they reflected a partial cost increase. Customers revealed their independence by staying away from dealers’ showrooms in droves, and resultant price-cutting was euphemistically described as cash rebates.

Customers in Charge

In the boom following World War II, domestic car makers overlooked a market for smaller, less expensive vehicles. They were reminded that the customer is the boss when the buyer expressed his sovereignty by purchasing imported compacts. This demonstration was repeated in the first half of 1975. Experience demonstrates that the power of business, big or little, is contingent on pleasing the customer. In a changing world, business survival depends on innovation. Side by side with creative research is the humility of the business executive which causes the executive to heed to his master’s voice as expressed in customer plebiscites at the market place.

“Know Nothing” obstruction, however disguised in the language of propaganda, is anti-social and anti-humane. It is retrogressive and condemns the innocent to unwanted idleness. What is fatal is a defeatist view that the right to be wrong is foreordained and irreversible.

The true libertarians, who advocate competition, should not shrink from competing in the realm of ideas. As the bi-centennial of the nation approaches, there are two major conflicting doctrines afloat as to how to achieve better living. Distrusting the ability of the “common man” to make choices, the Communist police states delegate to little commissars in big jobs the right to determine what should be produced and in what quantities. In contrast, the free market purports to give optimum opportunity to individuals to express preferences. Much of the futility in which the globe now finds itself springs from the fallacious notion that these two irreconcilable systems can be harmonized into a so-called “mixed economy,” more accurately described as a “mixed-up economy.”

The resultant effect of trying to mix oil and water has caused theorists to predict that the unemployed, like the poor, will always be with us. There is mental confusion behind such economic Puritanism. For prosperity is no class issue, but springs from an equilibrium conducive to making and exchanging goods and services on a basis which enables workers to live better, while the saver-investor-manager reaps rewards also from high productivity per man tool-hour.

Frictions develop from illusory thinking about governmental mandates empowering private associations with the right to be obstructive. By way of illustration, persons of little vision advocate being nice to union bosses even if their demands seem to be unreasonable. This distracts management from its decisive role of determining the optimum labor payment at which goods will move. Wise union officials look to the businessman at the other side of the bargaining table for guidance on the matter. Wage rates so high as to cause a buyers’ strike are frustrating. The fundamentals are more honored during a recession than in time of boom when there is a reckless tendency to assume that anything goes. Management defaults when it merely passively submits to dictated costs, hoping to pass them along to customers in higher prices. This creates pressures for a cheap money policy, which has in it the seeds of impermanence.

Designed Unemployment: Potential Disaster

Scientific analysis leads to the culprit breeding trouble. The fiat granted by government brings rigidities which result in built-in unemployment, which is chronic in good times and socially disastrous in depressed interludes. After nearly four decades, the premises behind the Wagner Act have become so deeply rooted in the national consciousness that important preliminary spade work is necessary before relief can be expected. As a loner, Senator John Tower of Texas has vainly introduced resolutions through the years for a full dress Congressional inquiry into the desirability of modernizing labor management legislation.

As a prelude, it is desirable to build a foundation of better public understanding of the national economic body, the functions of the various parts and their relationship to one another. A new grasp of the benefits of freedom could pave the way for liberating the open market from shackles. There is greater potential opportunity for change in times when all is not well.

Important Differences

Ideological improvement or freeing the intellectual atmosphere of pollution cannot be based on public relations techniques to circulate half-truths. In the Great Debate, whenever it comes, there must be courage to escape from the formula of Plato, who taught that the public prefers beautiful lies to the ugly truth. A competitive system rests on a no-holds-barred recognition of human inequality in strength, talent, skill and motivation. Accordingly, it’s a perversion for bleating hearts to want to achieve equalitarianism in an open market system. Any attempt to laugh away individual disparities is disruptive to a way of life which is powered by unequal rewards and incentives.

A competitive system can’t be all things to all men. Those who object to income differences are quarreling with the Lord of Creation, who failed to make us all identical in aptitudes and talents. It would do less harm if the misdirected visionaries, instead of hamstringing the enterprise system, would in their drive for equalitarianism frankly turn to the Marxist blueprint!

Instead of kidding the unsophisticated, it would be a step forward to concede that, where individual differences are substantial, even highly refined public relations cannot guarantee universal happiness!