October 24, 2014

Corporations and Labor Unions: Great Ideas Corrupted By Government

There are no two institutions in American society that are more associated with the struggle between right and left than corporations and labor unions. Outside of foreign policy, there is nothing that liberals are more hostile towards than corporations, nor anything that conservatives are more hostile towards than labor unions. For most Americans, corporations and labor unions lie at opposite ends of the socio-economic spectrum. Corporations are “conservative and capitalist,” while labor unions are “liberal and socialist.”

This is an illusion. In all but the most superficial respects, corporations and labor unions are virtually identical to each other. They are both voluntary associations formed by individuals to achieve an economic goal. They would both provide enormous economic benefits to society if they were not completely corrupted by government.

A corporation is a group of people agreeing to pool their capital to create a larger venture than any of them could launch individually. The stockholders agree that none of their personal assets will be put at risk if the venture fails – only the assets of the corporation

The stockholders also make these terms with the corporation’s creditors, customers, and other parties. In this way, the stockholders can cooperatively take more risk than they would if their personal assets were at stake. With greater risk comes greater reward. Thus corporations are able to innovate, produce, and expand more rapidly than smaller partnerships or sole-owner proprietorships. This benefits consumers by offering them more choice and higher quality products at lower prices.

The benefits of corporations are derived from the voluntary nature of every transaction. The stockholders, creditors, and customers all consent to doing business with the corporation, knowing the risks and the limited liability of the stockholders. All parties are exercising a natural right to associate and exchange their property as they see fit. One can never harm another merely by exercising one’s natural rights.

The prospect of the corporation becoming “too large” or dominant in a particular industry is countered by the equal right of all other members of society to form their own corporations and compete with the dominant one. In fact, it is this natural market occurrence – new competitors entering the market when there is an opportunity to offer consumers the same or better products at lower prices – that drives explosive innovation and growth and confers enormous benefits  on the rest of  society.

All of the associations necessary to realize these benefits can be achieved by voluntary contract. There is no reason that a government must enact a body of laws indicating how these corporations should be formed or how they should operate. Neither is there any reason why the government must create an “artificial legal person” in order to insulate stockholders from liability. That can be achieved by voluntary contract as well. All that is necessary is that the various contracts made between parties be enforced. However, voluntary association is not the government’s purpose in enacting corporate laws. [i]

The government corrupts the entire nature of corporations in virtually every way. First, it grants the corporation limited liability that applies not only to those who have consented to it, but to everyone. This completely skews a natural risk/reward balance and enables the corporation to commit torts against third parties without consequences to the stockholders. It overrides the right of individuals who did not voluntarily release the corporation from liability to pursue compensation for damages. It also has the effect of encouraging corporations to take more risk than they would if the stockholders’ personal assets were at risk with respect to these third parties.

Second, the enormous body of regulations constructed around corporations harms both the stockholders and the rest of society. The stockholders have the right to form and operate their corporation anyway that they see fit, as long as they do not invade the life or property of non-contracted parties. Regulations override their decisions and force them to operate the way the government tells them to, regardless of whether it is the best way or not. This adds tremendous costs to operating the corporation, which is then passed on to consumers.

Worst of all, these unnaturally high operating costs create impediments to the rest of society in exercising its most important right in this area: to form new corporations and compete with existing firms. This inevitably results in a few companies dominating each sector of the economy. Not only are consumers punished with higher prices and less choice than they could expect in a free market, but when these government-protected corporations get into financial trouble, those same consumers are often punished again when the government bails the corporations out with taxpayer funds. Without easy entry into the market for competitors, any corporation providing a service for which there is high demand becomes “too big to fail.”

Thanks to the corrupting hand of government, corporations are motivated to do exactly the opposite of what they would do if that artificial force were absent. Instead of trying to produce better products at lower prices, the corporation has an incentive to lobby the government for higher tariffs which keep out foreign competition. This allows them to keep operating inefficiently and charging higher prices than they could if they had to compete with the true market prices offered by those competing firms.

They also benefit by lobbying for more regulations that actually drive up their own operating costs. Why would they do something so illogical? They do it because those higher costs provide an entry barrier to new competitors. The established firm can pass those higher costs on to consumers, while the new competitor is either unable to start-up at all or unable to compete until it can match the established firms’ economies of scale. In the long run, government involvement with corporations results in lower quality, higher prices, and less choice for consumers than would occur in a free market.

The dynamics at play in regard to labor unions are virtually identical. Just like the stockholders of a corporation, the members of a labor union are exercising a natural right to enter into agreements with each other in order to achieve results that they would not be able to achieve individually. They form a partnership wherein all members agree not to accept compensation below a certain agreed upon amount. Compensation can take the form of any combination of wages, benefits, or working conditions.

It is important to recognize that the relationship between employee and employer is a buyer/seller relationship, with the employer being the buyer who purchases services from the employee. Like all buyer/seller relationships, both parties benefit when the transaction is voluntary. The seller benefits by getting the very highest price for his product that the market will bear. The buyer benefits by getting the highest quality product that he is able to obtain for the money he is willing and able to spend. If either party in any buyer/seller transaction does not believe that he is benefitting from the transaction, he can refuse to go through with it.

In the case of labor unions and employers, the union members benefit by higher compensation for their services. By bargaining collectively, they can control the supply of a particular type of labor demanded by employers and thus drive up the price. However, the employers actually benefit as well. As they are free to choose to hire people outside the union, the union must ensure that their product (labor) is superior enough in quality to persuade the employer to pay more for union employees than for cheaper, non-union employees. Such are the incentives in a free market, where all transactions are voluntary.

Under these conditions, labor unions would have an incentive to offer continuing education or training courses, to monitor the productivity of their members, and to set minimum standards for entry into the union as well as criteria for expelling non-productive employees. All of this would drive up quality, productivity, and profitability, further encouraging employers to pay more for union employees as a wise investment in more profitable products.

As with corporations, the benefits conferred upon society by labor unions depends upon contracts being enforced and all transactions between parties being voluntary. However, just as it does with corporations, government completely corrupts the nature of labor unions, eliminating many of the benefits they would otherwise provide. With interventions like the National Labor Relations Act of 1935 and subsequent legislation, the government destroys the voluntary nature of the employment contract, in many cases forcing employers to hire union workers. This violates the rights of employers to purchase services from whomever they wish to and eliminates competition for the labor unions, encouraging them to behave in a manner completely contrary to how they would behave in a free market.

Instead of encouraging their members to be more productive, labor unions actually encourage lower productivity from their members. It is not uncommon for a union member to be threatened by his coworkers for working too fast or being too productive and skewing the lower expectations negotiated by the union in the interest of employing more dues-paying members to accomplish the same work. Instead of setting higher standards for entry into the union, the union actually forces new employees to join as a condition of taking the job.

Finally, with competition from non-union employees eliminated, the union has no incentive to control the price they are charging for their services. In a free market, there would be a price point at which the presumably lower-skilled non-union workers would be a more profitable buy for employers than the presumably higher-skilled union workers. However, once the government removes the ability of the employer to make this choice, there is no longer any control on the price of union labor. This is why unions played such a large role in the demise of the American auto industry and American manufacturing in general.

Despite the unnatural, corruptive influence of government, corporations and labor unions still manage to provide many benefits to society. The insight that each must have about themselves and each other is that all of the benefits they provide derive from the extent to which they are voluntary associations which enter into consensual agreements with other parties. Conversely, all of the harm that they cause and all of the animosity that they and their supporters have for each other are the result of the coercive interference of government.

Instead of appealing to the government to assist them in invading each other’s rights, they should recognize that the government is actually their common enemy, preventing each from benefitting themselves and each other. If they wish to secure their rights and achieve positive results for themselves and society, they should kick the government out of their affairs and follow the law of nature.


[i] Special thanks to libertarian thinker and activist Steve LaBianca for his help in developing this analysis of the nature of corporations.

Comments

  1. Kennon says:

    Very educational article. Other Libertarian work is at: http://www.Libertarian-International.org

  2. Dan H says:

    Ambivalent. I don’t think that word means what you think it means.

  3. an armchair philosopher says:

    Thanks for your insights about corporations and liability. It’s something I’ve been puzzling on for awhile.

    However, if “The stockholders have the right to form and operate their corporation anyway that they see fit, as long as they do not invade the life or property of non-contracted parties”… then what about things that are are arguably essential for our well-being, but could be considered “communal” property, or, in another perspective, *nobody’s* property? Examples: the air we breathe, rivers/streams/aquifers, the ocean, wildlife, forests, the EM spectrum, the ozone layer. There are likely to be some areas of strongly differing interpretation of what constitutes ‘invasion of life or property’ when property ownership isn’t evident, and when the effects on ‘life’ are indirect, hard to measure, or evident only in long, perhaps multi-generational, time frames.

    • admin says:

      Great question. The best answer is given by the Austrian economists, which is that all property should be privately owned. They actually cite that as the answer to corporate pollution. When there is an identifiable victim to a tort, then that party should be able to take the corporation (and its stockholders) to court to sue for damages. When property is “communally owned,” or “owned by everyone,” the water gets muddy, because even the stockholders of the corporation should have a say, as they are one of the owners of the property. They can then argue that the benefits of their production outweighed the harm caused by their pollution. The government could go a long way to solving the environmental issue by selling off the vast landholdings that it has, which it has no right to acquire anyway. They could pay the national debt and also force corporations to deal with private property owners in every transacton.

  4. an armchair philosopher says:

    In the fast-moving and modern world of hi-tech, unions are rare to nonexistent. I’ve worked for internet/computer companies for 20 years and never heard of a union in my field nor any real desire for unionization.

    But there are many professional associations, training/certification programs, and staffing agencies that perform the functions you suggest unions ought to. In fact, many employers will foot the bill for your training and pay your association dues. But they do everything they can to discourage group bargaining for working conditions, hours, or other employment terms, often forbidding by policy anything that might vary from individual negotiation. And if you have a grievance, you can file a grievance with Human Resources (that is, tell the employer you have a complaint about them!!??) or lawyer-up (thereby getting blacklisted from other potential employers).

    An individual seller of labor typically has little negotiating strength with a corporate (joint strength of all shareholders) buyer of labor, and a great deal more to lose. So a union could actually be a good thing, if it worked as you describe.

  5. an armchair philosopher says:

    and btw your footnote link is broken (no need to publish this)

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