Who Is Crippling the Free Market?
Peter E. Poole
[Reprinted from Land & Liberty,
November-December 1978]
PROFESSOR Friedrich von Hayek, Nobel prize-winner in economics, has
no doubt about the main cause of Britain's problems: trade unions, he
declares "have become In Britain the chief cause of unemployment
and the falling standard of living of the working class."[1] So
the coercive power which he says was given to unions 70 years ago
should be withdrawn.
Hayek has been highly esteemed by the political Right ever since he
wrote The Road to Serfdom,[2] his onslaught on communism. He
is a powerful influence on Tory leader Margaret Thatcher and the group
around her chief economic adviser, Sir Keith Joseph. His philosophy,
then, is of considerable relevance to the contemporary political
scene.
HAYEK'S analysis of the economic consequences of union power is not
faulty.
Unions which wield coercive influence (they are in a minority) can
adversely affect the labour market, as Hayek says. By pushing wages
above their competitive level, fewer people are employed and firms are
firced to turn to capital-intensive methods of production when
labour-intensive methods would otherwise have been just as good.
But it is the professor's interpretation of the general consequences
of this which has serious implications for policy formation. He says
that unions are the chief cause of our high unemployment, a
conclusion which reinforces the prejudices of a large number of
politicians and academics. Other causes of the recession - which, upon
objective examination, may turn out to be of greater importance than
union power - are consequently neglected.
MONOPOLY power distorts the free market to the disadvantage,
ultimately, of the consumer.
Our thesis is that land monopoly is the chief cause of
Britain's high unemployment; unions became aggressive in their wage
bargaining after Edward Heath's Chancellor of the Exchequer, Tony (now
Lord) Barber boosted the money supply to inflation-inducing
proportions in 1972. Can our competing explanation stand examination?
The world-wide slump in the mid-'70s is popularly attributed to the
huge increase in oil prices. This is a dramatic example of the way a
cartel (OPEC) can exploit the monopoly control over a natural resource
without, reference to the economic well-being of the rest of the world
community. But the oil effect, following the rapid rise in prices from
October 1973, was just an additional influence on top of
pre-established trends. . . .
The boom and speculation in land values during the 1960s reached a
crescendo in 1973 - the recession was about to occur even without the
intervention of oil producers!
During the 1960s financial institutions had sprung up to fuel land
speculation: real estate investment trusts (USA), fringe banks (UK),
Sicomis (France) and property trusts (Australia) to mention a
few.
So the crash was inevitable and predictable. In Britain it was
signalled by the collapse of the first of a string of fringe banks
(London & County Securities) in Nov. 1973. The effect on
employment was felt immediately in the construction industry, whose
fortunes are directly influenced by land values. As we can see from
the following index (1970=100), the number of employees in the
industry began to shrink rapidly in advance of unemployment in other
sectors (even those heavily dependent upon oil).
| 1974 |
January |
99.2 |
| 1974 |
April |
96.6 |
| 1974 |
July |
95.9 |
| 1974 |
October |
95.8 |
| 1975 |
January |
93.7 |
| 1976 |
January |
92.8 |
SO THE speculative exploitation of the resources of nature-first by
land monopolists in the industrialised nations, then by oil owners in
the Third World-crushed the world economy.
The consequences of land speculation were" analysed by Henry
George in Progress & Poverty. He proposed that
industrialised economies should adopt a single tax - one which fell on
land values - which would prevent speculation and redistribute
socially-created income to the whole community.
What does Hayek think of George's solution? He finds it attractive.
In The Constitution of Liberty[3] he states:
If the factual assumptions on which It Is based were
correct, i.e., if it were possible to distinguish dearly between the
value of 'the permanent and indestructibte powers of the soil,' on
the one hand, and, on the other, the value due to the two different
kinds of improvement - that due to communal efforts and that due to
the efforts of the individual owner - the argument for its adoption
would be very strong.
Powerful endorsement - potentially- for land value taxation. But
Hayek concludes that the policy is an impractical one, for "no
such distinction can be drawn with any degree of certainty."[4]
Thus, he says, it would be necessary to grant leases (which would have
to be freely transferable) at fixed rents for such long periods as to
become little different from private property, "and all the
problems of individual property would reappear."
Hayek, then, concedes the importance of land value taxation, but
withdraws from it because of the alleged empirical problems. Only a
few objections to his analysis need be made here. First of all,
location advantages (which he chooses to ignore) - not soil fertility
- are the main source of land values. There can surely be no ambiguity
as to either (a) who causes these values, or (b) how to separate them
from values arising from capital improvements upon the land? This
exercise is performed; daily by professional surveyors and valuers!
But Hayek appears to be anxious to create artificial problems. For
example, it is not necessary to distinguish between the value arising
from natural soil fertility (which is a feature only of the
agricultural sector) and values arising from communal effort. For
practical purposes, these can be considered one and the same thing.
As for separating values created by individuals from those which are
communally-created, this is - again, for practical purposes - an
exercise performed daily by bargaining in the market on behalf of
labour and capital.
AND YET, when it comes down to brass tacks, Hayek ignores land
monopoly in favour of promoting the trade union threat to liberty.
Boldly, he asserts that "the whole basis of our free society is
gravely threatened by the powers arrogated by the unions."[5]
Socially Important Industries, such as building, will be
greatly hampered In their development and will conspicuously fall to
satisfy urgent needs simply because their character offers the
unions special opportunities for coercive monopolistic practices.
Yet the professor has ruled out. on the basis of faulty logic and a
deficient appreciation of valuation techniques, the policy which would
wipe out the land monopoly which directly undermines "socially
important industries, such as building."
No doubt the market would operate just that little bit more smoothly
if unions could not enforce restrictive practices. But the cyclical
problem of unemployment, and the ever-present scandal of low wages for
many people, would still be with us.
As with the power of capital, which was derived from the imperfect
market conditions existing at the time of the Industrial Revolution,
trade union power arose as a result of pre-existing exploitative
conditions. Only after a radical transformation of the monopolistic
distribution of natural resources can we reasonably expect to deal
with secondary problems like union power.
REFERENCES
- The Times, 10.10.78.
- Routledge & Kegan Paul.
1962; first published 1944.
- Rout]edge & Kegan Paul.
1960. p. 352.
- Ibid., p. 353.
- Ibid., p. 269.
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