[This is Chapter Twelve of Murphey’s book Socialist Thought.]
Chapter 12
THEORIES OF EXPLOITATION
The theories
of capitalist exploitation have been central to the Left's worldview. The
British Socialist Union has seen quite validly that "the starting point of
all socialist thought has been the condemnation of capitalist
exploitation."l
This
corresponds with the importance assigned to exploitation theory by Hans Sennholz, a vigorous critic of socialism. He says "the
development of the exploitation theory was one of the most portentous events of the nineteenth century"
and that "its general acceptance and triumphant spread constitutes the
most ominous event of the twentieth century."2
Sennholz's observations appear in his preface to
Eugen von Böhm-Bawerk's
The Exploitation Theory. Böhm-Bawerk, one of
the leading members of the
I
prefer in my own analysis, however, to identify at least four distinguishable
ideas. This chapter will discuss each of
these in turn. The reader will notice that I see little merit in the first
three, but that the fourth will cause me to examine at
length an historic weakness in the classical liberal theory of a free
society. The fourth is pointing to
problems of considerable importance in the operation of a capitalistic system.
My
discussion will seek to go to the heart of the supposed injustices of the
market, and will be broader than a discussion of just labor-management
relationships. The analysis will lead us
into a consideration, as well, of various "bargaining power" and
"consumer protection" issues.
The
exploitation theories constitute a substantial part of socialist thought’s
critique of capitalism. Accordingly,
this chapter will differ in content from any other in this book, in that it
will center on a discussion of capitalism.
The
early economists Adam Smith and David Ricardo, both ardently pro-capitalist,
devoted considerable attention to the question of "value," trying to
come to grips with the underlying principle that can explain the ratios at
which goods exchange for one another. Each of them sought the answer in the
amount of labor that had gone into the manufacture of the respective
commodities. This use of the Labor Theory of Value
was more restricted in Smith's thinking than in Ricardo's, however, since Smith
applied it only to primitive economies.3
Economists
of the neo-classical
Socialist
thinkers such as Rodbertus and Marx, however, found that the Labor Theory of
Value fit well into their conceptual scheme. Their application of the theory
contained two parts: First, they continued to define "value" as being
the amount of work that went into something. Then, second, they added an extremely
significant qualitative judgment: that all of the return should by rights go
back to those who had performed the work,
since these were the persons who had "created the value." When the
capitalist entrepreneur paid the workers a pre-arranged amount contracted for
with them as wages and then sold the product of their labor for more, the
difference, which he kept as profit, was labeled
"surplus value." The socialist
authors argued that this was a form of exploitation that amounted, in effect,
to theft. It is a point of view that
negates the legitimacy of all entrepreneurial profit.
Thus
Marx could say in Capital that "the rate of surplus-value is
therefore an exact expression for the degree of exploitation of labour-power by
capital, or of the labourer by the capitalist."4 Capital is his main economic treatise,
and consists largely of an application of the Labor Theory of Value, with its attendant socialist
value judgment, to capitalism. "The directing motive," Marx wrote,
"the end and aim of capitalist production, is to extract the greatest
possible amount of surplus-value, and
consequently to exploit labour-power to the greatest possible extent."
About
Rodbertus, Thomas Kirkup
has told us that "the basis of the economic teaching of Rodbertus is the
principle laid down by Adam Smith and Ricardo, and insisted on by all the later
socialists, that labour is the source and measure of value. In connection with
this he developed the position that rent, profit, and wages are all parts of a
national income produced by the united organic labour of the workers of the
community."5
Maurice
Cornforth is an example of the countless socialist
authors who have picked up this theme when he writes that the "workers are
in effect working only in part for their own support and in the main for the
support of the exploiters."6
An advocate of capitalism
is immediately struck by the seeming ridiculousness of these arguments. To him, the flaws in applying the Labor
Theory of Value in this way are obvious.
He will point out that the entrepreneur has added a great deal: he has contributed market foresight, capital risk-taking,
organizational skill and a willingness to wait for his own return. The
entrepreneur is compensated for all this through a process of free contractual
arrangements, a process that is socially desirable in its own right precisely
because it permits individual freedom.
If these objections are sound, how is it
that Rodbertus and Marx, who were by no means unintelligent, couldn't see them?
The answer lies
in the fact that they implicitly approached the Labor Theory of Value from a
different direction than a supporter of capitalism does -- as well as from the
direction that they themselves outwardly took. In Capital, Marx immersed
himself ostensibly in the detail of the market system. From deep within the
bowels of the system, he purported to discover the fatal flaw that condemned
the wage system and accordingly justified socialism.
But this
approach gives a totally false impression. Their theory doesn't stand up when
it is seen in the context of market assumptions. The many criticisms levelled
against it by pro-capitalist thinkers make sense. The socialist's qualitative
judgment that "the entire return should go back to the worker" can be
rationalized only if the thinker already favors
a fully collectivist economy on other grounds. If he assumes the desirability of a
collectivist economy, then his assumption prepares him to write off the
entrepreneur's role as having no economic or social value, since a planning
board, say, would substitute for the entrepreneur in a socialist economy. Because of this, his assumption already
rebuts the pro-capitalist's criticism of his theory. There will be no place in his system for
either profit or the entrepreneur.
My point is
that the socialists' version of the Labor Theory of
Value has been presented backwards, in the form of a logical fallacy. It has
the conclusion justifying the premises, rather than the other way around. The Labor Theory of
Value is not a premise that, by establishing the flaw within capitalism,
justifies a conclusion that socialism is preferable; instead, an
already-assumed socialist economic model serves as the unspoken premise that,
by taking away the function of profit and the entrepreneur, lends the only
credence that is possible for the Labor Theory of
Value. The so-called premise is entirely dependent upon the conclusion it
purports to justify. As an extension of socialist thought, the Marxian version
of the Labor Theory of Value is neither more nor less valid than socialism
itself, when socialism is evaluated by other considerations.
To the
classical liberal advocate of capitalism, the labor
market is like all other markets. According to the theory of the "act of
exchange," the parties come together in any voluntary contract through
inducements they offer
each other. Each considers
his situation improved, or he wouldn’t bother to make the exchange. In the labor market, the worker takes the
employment he thinks most attractive in light of the other alternatives he
knows about. The terms he receives will result from the interplay of supply and
demand. If later he finds that other
employers are offering better terms, he will change jobs, provided it seems to
him that doing so will enhance his overall situation.
None of this
is accepted by socialist class theory. Class theory postulates that the
employers, taken together, constitute a monopoly over the sources of
employment, so that workers are presented with a lack of meaningful
alternatives. The worker must either take what the bourgeois class offers or
starve. This is what Kirkup was telling us when he wrote that "the
conditions necessary to the existence and growth of capitalism are as follows:
-- a class, who have a virtual monopoly of the means of production; another
class of labourers, who are free, but destitute of the means of
production."
For us to
make a judgment about the validity of class theory, we need first to realize
that the theory assumes both empirical and dogmatically non-empirical forms.
This will affect the method by which we critique it.
The
Marxist-Leninist dogmatic type of class theory which claims an inevitable
movement of history through dialectical phases is really based on a
neo-Hegelian metaphysic. It is not genuinely empirical, despite its pretension
to being "scientific socialism."
It holds to a schema and won't rest until it finds the categories of
that schema in reality. One way we could
conclude that it is unsound would be to note that enough time has now passed to
show that Marx's predictions haven't proved true in fact. But the essential weakness was apparent from
the beginning -- and is epistemological.
In the absence of building an empirical case, it ought to scale down its
pretensions from the level of grand "inevitabilities" and settle for
making statements, instead, about things that are more amenable to assessment
through experience or introspection. Or
it ought to offer criteria by which the truth of its assertions can be
judged. But it never has; it has just
issued broad pronouncements of deterministic inevitability without seeing the
necessity of proving them in any way.
Even if the predictions came to pass, it would be impossible to say whether
this was because the analysis itself was correct or because acting men, spurred
by the predictions and wanting to be on "the winning side," made them
self-fulfilling prophecies. This is the main point made so well by Karl Popper
in his books The Poverty of Historicism and The Open Society and Its
Enemies.
The empirical case for class theory
developed by many of the later democratic socialists is another matter. It calls upon us to look at a given society
ourselves to see whether we agree or disagree.
And frankly, as we look at modern society in
In much of
the world outside of
During my
lifetime, Americans have been almost unanimous in the view that a free market
in labor, in which individuals seek employment on
their own, is discolored by an imbalance in
“bargaining power” between the worker and the employer. In addition to calling this the “bargaining
power” theory, I sometimes think of it as the “strength versus weakness” or
even as the “commonsense” theory. Their
belief in this theory is what causes most people to favor
protective legislation and collective bargaining even if they don’t opt for
socialism.
The
“bargaining power” theory raises questions that are more difficult than the
issues raised by either the Labor Theory of Value or
class theory. It has a plausibility that
makes it self-evident to most people, who in matters of ideology often seem
unable to tell the difference between a whole truth and a partial truth. The plausibility is created by the fact that,
in at least some of its variations, the theory does actually reflect part of
the truth.
An
interesting and well-written presentation of the bargaining power theory, but
that nevertheless failed to go beyond the partial truths that are so popular
and that also failed to differentiate between types of bargaining power
problems, appeared in Sidney and Beatrice Webb’s Industrial Democracy.7
It is important, I think, to make a distinction that is rarely made. We should distinguish between the concept of “bargaining power” as it applies to wages, where I think it is entirely lacking in merit, and the concept’s much sounder application to many other contract terms, both in employment relationships and other transactions.
The argument
that an individual worker “lacks bargaining power” as to wages is an extremely
important part of the theory. It is,
among other things, the ideological basis for the minimum wage laws within an
interventionist system and for the on-going union drive to “raise wages.” These are powerful price-fixing forces in the
labor market.
In turn, they have become major institutional causes of the unemployment
that has, at a certain level, been chronic within an interventionist economy
such as the
The bargaining power theory as it relates to wages plays upon a vulnerable psychological point. It focuses on the urgency and weakness an individual feels while he is looking for a job. And even more selectively and effectively, it often focuses on the plight of someone who is looking for work during the downward phase of the business cycle. Since most people live from paycheck to paycheck, they are quite ready to identify with such an individual. They compare his urgency with the needs of the potential employer, which are often less urgent than the job-seeker’s. The employer needs workers, but he doesn’t necessarily need this particular worker. He may even be able to get along for a time without a new employee at all.
The employer
is for this reason considered to be in a “stronger position” from which he can
presumably “drive a hard bargain.” This
suggests that he will be able to pay a lower wage than he would otherwise have
to pay.
The trouble
with this is that it falls into one of the ignoratio
elenchi fallacies – an argument entirely from
sympathy – and ignores the processes at work in the market. The fallacy becomes apparent (a) if we think
further about the individual’s own situation and (b) if we broaden the context
to think in terms of overall supply and demand.
Even if a
worker accepts a certain wage to obtain a job, his urgency disappears once he
is hired. He then begins to hear reports about the wages other employers are
paying. If the job he took pays less, he
can apply to one of those others.
The advocate
of the bargaining power theory will answer that "the worker won't actually
have those other alternatives in a market based on individual bargaining; all
employers will offer the same harsh terms." But this response just falls back onto the "class
theory" of exploitation. It transforms the bargaining power theory into a
subset of class theory. A variation of the argument may be that employers will
band together to agree on wages, keeping them artificially low. Such a
conspiracy is, however, a violation of the classical liberal conception of the
competitive market, and will be a violation of the anti-trust laws that form
part of the legal framework for competition.
If the worker
moves, the first employer will suffer the effects of increased employee
turnover. The employees who stay with the first firm will tend to be those who
cannot command the higher wages offered elsewhere. Their job with this firm
cannot appropriately be considered "exploitation"; it is a job
commensurate with their productivity. It is, for them, an alternative to
unemployment. They are being paid the market rate for their level of
productivity. The conceptual issue is whether we are to condemn, under the
rubric of "exploitation," a firm that decides to operate at lower
wages with less efficient workers. The thinking that underlies minimum wage
laws has been that "an enterprise should not be allowed to pay less than
the specified minimum; and if outlawing lower-paid jobs results in some workers
becoming unemployable, that is a social problem that is the fault of capitalism
and that transfer payments should alleviate." This is a line of thinking that reflects
alienation and anticapitalist bias. To those who accept a market economy, it
would seem a valid business judgment for a firm to decide to offer employment
at less pay to the less productive members of the work force, if that is what
will make the firm successful.
Neither has
the other worker, the one who changed jobs, been "exploited." There is no reason to judge a real-life process by false expectations
that everything will instantly fit perfectly into place. The worker who changed jobs has not stayed at
the lower-than-market wage. He has just gone through a process of finding his
appropriate level.
All of this
becomes even clearer if we look at the labor market
in a broader "supply-and-demand" context. In a free labor market,
wages will continually tend toward the level at which it is profitable to
employ everyone who seeks employment. Only superficially is there a bargaining
process going on in the dealings among the individuals.
The market is almost always highly
responsive to larger forces, since monetary remuneration is the foremost item
in the competition for workers; it is visible and easy to compare; and it
relates to the primary motivation of the worker rather than being merely an
auxiliary issue. "Flow," rather than "power," is the
essence of it. [Note in 2003:
There have recently been a number of situations in which top corporate
management receives vast sums even if the firm itself is failing. I very much doubt whether the remuneration to
those executives is based on supply and demand.
It would seem more likely that it is based on mutual aggrandisement
among the members of a small group who have come to hold positions of authority
within the respective firm – an “old boys’ club,” if you will. This is something the proponents of a free
market should themselves seek to rectify, since it is not consistent with their
philosophy. If they defend it, they are
clinging to de facto imperfections under the false impression that those
imperfections should be defended as consistent with their own system of
thought. Classical liberalism as best
conceived would not defend them.]
This remains
true even though firms often don't make their price and wage decisions with
conscious reference to supply and demand. If a firm prices its goods on a
"cost plus a fair mark-up" basis, for example, this doesn't mean that
its prices are independent of supply and demand. A firm can't avoid market
forces just by not thinking in terms of them. Its price and wage decisions will
still be tested by hard realities such as the speed of inventory turnover, the
flow of profits and losses, the rate of employee turnover, and the flow or debt
and equity capital toward or away from the business.
One source of
“less than market” pay occurs when an employer lets an established employee’s
pay slip below what he could get if he were to re-enter the labor
market. Here, the employer is
consciously or unconsciously discounting the pay because, with the passage of
time, the firm ahs developed something of a “local monopoly” advantage over the
employee. It would require significant
inconvenience, expense and trauma for the employee to change to another firm.
It should be
noted, however, that this factor can also cut the other way. The higher wage that an employee receives for
experience, training and seniority is, on his side, the result of his having
become differentiated from the mass of job aspirants in the labor
market.
There are two
opposing ways classical liberal supporters of capitalism can view the situation
of a worker who is receiving less than market because his roots are in a
certain job. One way is to say that
“everything in a market is valid if it is based on contract.” Another is to say that “the market rate
provides a standard by which we can judge that there is an abuse here.” I will indicate later in this chapter that I
feel classical liberalism would be best served by being more sensitive to
market imperfections. I would think it
wise to consider that there is an ethical violation in such a case. It is probable, though, that no classical
liberal will cry “exploitation” and seek a legislated solution. Those who support an individualistic society
hesitate to call in the state every time they spot a less-than-perfect human
relationship. With many such things,
they will rely upon an intellectual and ethical consensus.
The “Bargaining Power” Theory of Exploitation – As It Applies to Other Conditions of Employment and to Many Transactions Outside the Labor Market
A
"disproportion of bargaining power" is often sensed in many other
aspects of employer-employee relationships than just with regard to wages. In
addition, the problem of "bargaining power disparity" appears in
countless market transactions outside the labor market.
We
are discussing these things as part of an examination of the various
anti-capitalist theories of exploitation. At this juncture it is worth
stressing that this fourth theory also touches one of the central pillars of
classical liberal analysis: the
"theory of the transaction" or of "the act of exchange." As
a classical liberal myself, I am persuaded that the advocates of capitalism
have long done themselves a disservice by making an inadequate examination of
the issues that arise out of imperfections in the market. They have clung to
too simplistic a model of the market transaction. This has caused classical
liberalism to fail to address a number of concerns that people legitimately
have in their daily lives. Various societies, including American society, have
gone on to address those concerns, but without the intermediation of conscious
classical liberal desiderata. Classical liberalism's own failure to explore
more profoundly its own position has given a very real boost to the socialist
criticisms of capitalism. This is one of the effects of classical liberalism's
having been forced into a defensive posture for the past century. [Note in 2003: This paragraph was
written as part of my original chapter, and has not been added later. This is worth noting because it shows my continuing
concern over the years about the sufficiency of classical liberal theory and my
willingness to think more deeply about something if a problem became
apparent. My objective has been to
formulate classical liberal theory in the most satisfactory possible way, and
not simply to apply uncritically a number of premises.]
Situations regarding conditions of
employment.
Here are some of the bargaining power situations that pertain to
"conditions of employment":
1.
Whether
there will be a "fair procedure" on such matters as promotion,
demotion, transfer, discipline or discharge. When an employee hires in, it is
virtually impossible for him to hammer out the details of all this with his
employer. Just the same, an assurance of
due process becomes increasingly important to him as he develops a greater
"personal investment" in his job over the years.
2.
Whether
the relationship will be structured adequately to allow the individual to plan
dependably for his retirement. It is vitally important to an employee that
the accumulating pension fund be invested securely and that he is accruing
rights that cannot be lost by his losing his job, the firm's going out of
business, his changing employers, or the like.
3.
Whether
he is "plugged into" a sufficient system of income-maintenance that
will sustain him and his family if he becomes disabled.
Jack
London launched a devastating attack against capitalism on this score in his
novel The Iron Heel. London was a great American storyteller and at the
same time an advocate of revolutionary socialism. He told the story of a worker
who lost his arm, and consequently his job and income, in an accident at his
machine. London designed the story for the greatest effect by describing the
worker as having been exceptionally capable. When the worker sought a legal
recovery against the company for the accident, several common law defences
barred any tort compensation.
London's
story was written in a stridently propagandistic vein, but it raises questions
the theory of capitalism must be prepared to answer to peoples' satisfaction as
part of the model of a market economy.
Any answer that fails to protect the worker's legitimate interests in
such a situation invites disaster both ideologically and politically, and in
effect amounts to having a seriously incomplete social philosophy.
4.
Whether the employee will be treated
in a way that acknowledges his worth as a human being. This is the "dignity of labor" issue.
I have known a man who was within a few years of retirement after working for the same firm for almost fifty years. He had risen to the vice-presidency. He and the president (the son-in-law of the firm’s founder) and their wives were leaving to attend a convention in another city. The president appeared at the airport with two first-class air tickets for himself and his wife, and two "economy" tickets for the vice-president and his. This created a flush of embarrassment and ended with the president’s wife ordering her husband to return to the ticket counter to obtain four first-class tickets.
We can well
suppose that this incident, with its gratuitous insult, drained the
satisfaction from the vice-president's job for quite a long time. The work situation can lend itself to an
authoritarian model which gives rise in such a case to a sense that there is a
real disparity in "bargaining power."
The vice-president could have resigned to vindicate his dignity, but
most people would rightly consider that that would simply compound the injury
he had suffered.
5.
Whether there will be steady
employment. Louis Brandeis, one of
the leaders in twentieth century American liberalism but quietly an advocate of
small-group socialism, saw the lack of continuous employment as one of the
critical problems for workers.8
6.
Whether the work will be diversified
and interesting rather than deadening in its boredom or strain.
Situations outside the labor market. Illustrations of “bargaining power” situations outside the labor market include the following:
1.
After
I finished law school I rented an apartment and had just moved in when the
property manager came by to tell me that "we like every tenant to sign a
written lease." He presented a long
form that contained a provision disclaiming liability if I were killed or
injured by the landlord's negligence. I saw the attorney for the property
management company about it, but he told me "we aren't willing to
negotiate the terms of leases with individual tenants; after all, we have
thousands of tenants." I stayed in
the apartment for a few months and then moved.
2.
Several
clients in my law practice have wanted to have homes built for them by local
contractors. The sketchy one-page contract the builder has invariably drawn up
has been totally insufficient to protect their interests. I have written out
suggested contract terms that would help define specifically what end-product
they would be entitled to receive for the many thousands of dollars they were
agreeing to pay, and that would protect them from mechanics liens and other problems. So far, none of the builders has been
willing to discuss such terms seriously. My clients report that "the
builder says we will just have to trust him if we're going to have him build a
home for us." Much of the time, my
clients choose to have the home built despite this response. It is worth mentioning that I have seen more
people lose their life savings in dealings with home contractors than in
anything else.
3.
When
someone goes to a car company to buy a car and strikes a deal with the
salesman, the salesman will usually hand him a bill of sale containing a page
or two of printed provisions. The salesman will mark a pencilled "X"
at the beginning of the signature line and say. "Please sign here."
The customer, who so far has enjoyed an affable relationship with the salesman,
will need to change suddenly into an ungracious paranoid if he is to take time to read, much less think about, all the printed provisions.
He just signs. Hopefully, we have
all been raised from infancy to be polite.
The effect of this civility upon our ability to guard our own interests
can, however, be disastrous.
4.
The
owner of a medium-sized shopping center can
ordinarily impose his own lease terms when he is dealing with small business
tenants, who need the center more than he needs any
one of them. But the owner is in an
entirely different situation when he is negotiating with a large department
store or other “Triple A tenant,” which most centers
desperately need as an anchor tenant to be the main attraction for
customers. Then it is the tenant who
supplies the lease form and can pretty well say “take it or leave it.”
5.
Most
people are unusually helpful to everyone else during a blizzard, causing
everybody to reflect upon “the good side of human nature.” A man who runs around with a jeep pulling cars
out of snowdrifts for an ample charge is even performing a much-needed
service. But what are we to think of the
person who, coming upon a woman whose car is stuck along an isolated road,
charges her “an outrageous amount” for his help? In light of the fact that classical liberal
theory has not traditionally embraced the concept of the “fair price,” is a
supporter of capitalism to perceive any problem at all in the charge made to
the woman?
6.
The builder of a home may give the buyers a
ten-year warranty under a national warranty program. The buyers believe they are receiving
something meaningful. They don’t really
know that, however, unless they read the approved standards carefully – and
with an eye experienced in home construction.
Speaking generally, warranties are often not really promises that
substantially increase the obligations of the warrantor. Warranties are often the creatures more of a
firm’s marketing than of its legal department.
Consumers usually accept the statement that “it’s warranted” with a
naïve conviction that they have been told something meaningful. The result is that they may be receiving
mostly “puffing,” instead of a well-considered transaction from the point of
view of their own interests.
Factors leading to bargaining
power disparities. Examples can
be cited endlessly. The next step is to
isolate the factors that produce the various disparities in “bargaining
power.” I shall leave until later my
discussion of the very concept of “bargaining power” and of what solutions, if
any, may be offered by someone who favors a market
economy. Here are at least some of the
factors:
1.
Comparative
size. In some of the situations I have mentioned,
an individual or small unit was dealing with a larger organization. Most people assume that a difference in size
by itself creates a disparity in bargaining power. To a point, they are right, since size may
create a psychological advantage. But
some of the examples show that major differences in bargaining power can be
present even when both parties are approximately the same size. In the example about my clients who have
wanted to have homes built, the builders who refused to negotiate an adequately
drawn contract usually amounted to one-man businesses themselves. The example of the driver of the jeep also
involved a simple person-to-person transaction.
Size seems pertinent mainly because it can help supply some of the other
factors.
2.
“Local
Monopoly.” Being in the right place at the right time
is often a major advantage. The jeep driver’s
fee was exorbitant only partly because the woman urgently needed help; she also
lacked other competing sources of assistance.
The driver held a temporary monopoly.
This factor was even present when the property manager for the apartment
I had rented handed me the harsh lease form.
By waiting until I had moved in, he had effectively limited my choice of
landlords, since moving to another apartment would then have caused me the
serious inconvenience of a second move.
In another of the examples, the small businessmen became supplicants in
their dealings with the shopping center owner because
they knew that only a few centers exist within a
given market area. In turn, the center’s owner became a supplicant when negotiating with
the “Triple A tenant,” since he knew there are few such tenants.
In
the “condition of employment” situations, there is an element of “local
monopoly” that develops over time. The
other employers become less and less plausible because only with his past
employer does the individual have his seniority, his particularized training,
his friends and the satisfaction of being in familiar surroundings. Sometimes a firm deliberately strengthens
this hold by establishing a system of forfeitable pension or stock rights that
the employee will lose if he changes employers.
3. Relative urgency. Countless reasons may cause the parties to
approach a transaction with varying degrees of urgency. Because classical liberal theory assumes that
such differences are bound to be present in many cases, it accepts the
disparity as an acceptable part of the act of exchange. We should notice, though, that in the case of
the woman whose car was stuck in the snowdrift, her urgency interacted with one
of the other factors (the driver’s local monopoly) to bring about a substantial
imbalance in the resulting transaction.
4. Degrees of organization. A common source of “disparity in bargaining
power” occurs when one party is organized and the other is not. If one party has an established modus
operandi to handle a flow of business, so that both parties implicitly
assume that the “expected thing” is to follow that procedure and not “rock the
boat” by demanding a different format, that party will normally be able to
impose his own structure onto the transaction.
This
was the main ingredient in the example of the home builders who would not
negotiate ample contracts. They were the ones who were in business, and they
had simply "done it a certain way" too long to be hospitable to
change for any one home buyer. The urgency
of the parties wasn't a factor; in fact, we might suppose that most small
builders will be just as anxious to find customers as a married couple will be
to have a home built by a specific builder.
There was no element of local monopoly.
And neither was their size important, since both parties were small
units in an active market composed of many small units.
The
organizational factor also applies in my illustration about the national home
warranty program. The program has been formally set up well in advance of any
individual home sale. The buyer takes it or leaves it, and cannot expect to
negotiate a change.
A consensus
often supports the legitimacy of certain organizational structures. Someone
dealing with such a structure will have little chance to negotiate
changes. I recall watching a football
practice where the coaches treated the players in the same abusive way Marine
Corps drill instructors have traditionally treated recruits. It doesn't quite describe the situation to
say that the player and the coach are two equal contracting parties, with each
taking part only so long as the relationship is mutually beneficial. That is
true in an overall sense; but it is not true with regard to any of the
specifics. The player "plugs in" contractually to an organization,
and any such package deal can include many specifics that don’t serve the needs
of both parties.
The various
"conditions of employment" are normally arrived at in this way. In a labor market
based on individual bargaining, it is only practical that they would be. An
employee hires into a firm, which often is much larger than he is. It then establishes all the incidents of the
relationship: what applications to fill
out, when he will be paid, the hours he will work, when he will eat lunch, and
the like.
This has a
special nuance so far as the "dignity of labor"
issue is concerned. Most organizations
follow a hierarchical pattern made necessary by the need for management
decision and control. This hierarchy is supercharged, then, with sociological
baggage. The participants are aware of either their power or their
subordination, or often both. It is true
that each person belongs to the entity because he has formed a
"contractual nexus" with it; but once he is part of it he assumes a
certain role in a human milieu that will rarely proceed on the premise that
each member is a contracting equal.
5.
Ancillary contract terms. Many contracts involve a major thrust, which
is supplemented by a number of less important ancillary terms. If two equal parties sit down to negotiate a
contract without urgency, with each being fully advised, they will work out a
contract that will express a negotiated meeting of the minds on all of these
points. But an enormous number of
transactions, inside the labor market and elsewhere,
do not occur in this way. The parties come together because they agree on the
main aspect, such as when a borrower applies for a loan after asking how much
interest the lender will charge. Then the "stronger" party (i.e.,
the party who has the most favorable position in
light of the many factors we have discussed), virtually dictates the other
terms as an unspoken matter of
course. In the case of the loan, the
lending institution will produce a set of forms, including mortgages or
security agreements with all sorts of small print, which the borrower will
accept by acquiescence.
This
is again a significant element in “condition of employment” issues. It is actually an amazing fact that the
economic relationship that is to be of the longest duration and greatest
importance in most peoples' lives -- their career with a certain employer -- is
contracted for loosely and peremptorily, most often on an "at will"
basis. Employees usually look at the main thrust, which is the type of work and
the amount of pay. The countless incidental features are relevant to the job's
overall acceptability; but these aspects are established by the organization,
not through contractual negotiations. What is more, the many incidents of
employment are fluid, necessarily undergoing change as the years go by. As the
employee develops deeper and deeper roots in his career and location of life,
his decreased mobility makes him less able to pass in a meaningful way even
upon their overall merit. Still further,
it is worth noticing that a work situation that is good in general may
not be free of abuses in all aspects. A career employee in effect buys a
package of indeterminate content, taking a major portion on faith.
6.
Lack of auxiliary institutions. The parties to a carefully drawn contract on
a serious matter will satisfy many of their needs by having the contract
"plug into" certain already-existing institutions. In a "buy-and-sell agreement" in either
a partnership or a closely held corporation, for example, there is a problem of
how the surviving investors are to have sufficient liquid funds to buy out the
interest of an investor who dies. A common solution is to buy life insurance on
each investor's life, so that the proceeds can be the source of payment. The
existence of the insurance industry is necessarily an assumed precondition for
being able to do that.
If
we think back to the worker in Jack London's story who lost his arm, we can
identify a major institutional void as perhaps the core of the problem. At that
time more than a century ago, the "Friendly Societies" that had been favored by the French classical liberal economist Frederic Bastiat as a way that workers could provide mutual
assistance to each other had not been formed in most industries; and the
insurance industry had not grown to provide disability insurance as a standard
part of every job. The worker obtained
employment with an eye toward what it paid; the contingency of what would
become of him if he became disabled was a fearsome incidental that wasn't
addressed by the employment contract. In
part this was due to a lack of auxiliary institutions. It was also the result of a lack of
affluence, in the sense that humanity can think about meeting such contingency
needs, no matter how vital, only after it has reached a certain level of
affluence.
This
is something that should be kept in perspective. By its highly motivated development and
application of modern science and technology, capitalism has taken enormous
strides to overcome precisely the lack of affluence and the institutional voids
that in the past have condemned most people to a severe life. I agree with the fourth theory of
"exploitation" in its sensitivity about bargaining power issues, but
I thoroughly believe the Left's alienation has been misdirected.
7.
Competitive
"common denominator." Where firms are
competing for customers, competitive pressure will prevent any firm from
undertaking expenses that are not also incurred by its competitors, unless the
expense justifies itself by differentiating the firm's product enough to
attract extra business or allow an increased price. With regard to many
incidental features in a transaction, pressure therefore exists toward a
relatively inexpensive, low-quality "common denominator."
This is not
in itself objectionable. Cheap goods for
the many rather than expensive custom-made goods for the rich is a hallmark of
the democracy that is implicit in mass-production. There are, however, two sources of
difficulty. First, there may be problems
as to what Milton Friedman has called "neighborhood
effects." It may be that no airline
can afford, for example, to retool its aircraft to cut down the noise of their
engines unless all competitors are required to bear a similar expense; but a
noisy "common denominator" may be undesirable in a society in which
large air terminals are located near populated areas. Second, a pressure toward
shortcuts may result in serious deficiencies in contracts where (for one or
more of the reasons already mentioned) the various incidents aren't given
two-sided attention by the parties. In an employment contract a worker will
have to take the "incidental" feature of job-safety on faith,
presuming that the employer will do everything reasonable to keep the job safe.
But if safety devices are among the costly items competition pushes to a low
common denominator, his faith may prove ill-founded.
8. Other factors. Many additional factors contribute to a
bargain's being struck without the parties giving considered attention to all
its implications and to how the vital interests of each party may be
served. The fact that there are books
about "How to Negotiate" and "How to Win by Intimidation"
suggests that the wiles of negotiation play a role. One party may lack assertiveness
while the other is aggressive. One may lack experience. Both may be influenced
by habit and custom. One may be inhibited by a desire to be courteous or
trusting or by a sense of loyalty to an organization that makes him lose sight
of the need to look out for himself the way he would in an arm's length
transaction. The list could perhaps be endless.
Bargaining
power as a concept. Now that we have surveyed the bargaining
power issue denotatively, looking first at a series of situations in which it arises
and then at the separate factors that introduce a disparity between contracting
parties, we are prepared to discuss the underlying conceptual question of
whether the notion of "bargaining power disparity" even has a
legitimate place in social theory. So
far, I have deliberately passed over this question, wanting to establish an
adequate setting before discussing it.
It is a question, by the way, that most people will discount as
ridiculously academic, since the average person “knows” (without so much as
five minutes reflection, true; but with the reality-bound non-reductionism that
makes “everyday common sense” a good competitor with most other theory) that
the concept is sound. Nevertheless, an effort to formulate the classical
liberal theory of the market in the most satisfactory way is compelled to take
the question seriously, since the "bargaining power" concept is at
odds with its traditional understanding of market transactions.
The defender
of capitalism has characteristically believed that "power has nothing to
do with voluntary acts of exchange in the marketplace." He has urged, consistently with the marginal
utility theory of value, that "such a transaction reflects the difference
in subjective evaluations by the parties. One party pays a quarter for an
apple, or a million dollars for an apartment building, because to him the apple
or the apartment building is worth more than the money he is paying. The other
makes the opposite assessment, that to him the money is worth more. In every
voluntary exchange, both parties benefit, at least from their own point of
view. Neither would be motivated to enter into the transaction if he didn't
feel it would benefit him. This will be true regardless of the urgency of the
parties; unless each perceives an overall benefit, the bargain will never be
struck. Nor does power have anything to do with it. As supporters of a free society, we prefer to
speak of power only in situations that involve coercion or force, since
we don't want to adopt a semantic that obscures the essential distinction
between voluntary relationships and those foisted onto someone at the expense
of his own perceived interests."
This is the
creed I have espoused in my own writings, which are classical liberal. I still believe it sound; more sound, anyway,
than the creeds that don’t affirm the voluntary transaction as the centerpiece of their social model. Just the same, I have come to believe that
classical liberalism has been seriously deficient in its formulation of the
theory of capitalism by having been so exclusively preoccupied with the
arguments I have just recited.
The trouble
with these arguments isn’t that they are false, but that they take too static
and simplistic a view of market transactions.
Everything the arguments assert is correct; but they aren’t enough. They fail to consider that a party can enter
into an act of exchange precisely because he perceives it will benefit him,
only to look back later and feel quite legitimately that “I was really taken in
that one” or that “I did benefit, but I could have looked after my interests a
good deal better if the situation had been structured more adequately.”
It isn’t
enough to respond, as a classical liberal will be inclined to do, that “this
simply underscores the moral imperative of the individual in a free society to
be knowledgeable and capable, and to look after his own interests; we cannot,
consistently with our overall values, allow ourselves to adopt a paternalistic
oversight of market transactions to safeguard his interests for him.” No doubt there is considerable classical
liberal wisdom in such a response, and the essential point it makes should be
kept in mind; but it overlooks the important fact that a transaction does not
occur in a vacuum. Even the simplest
transaction presupposes the extensive legal, ethical and institutional
framework that has grown up as part of the fabric of civilization. There are implied warranties, for example;
there are remedies and grounds for possible rescission; there are ethical expectations
about “being a man of his word”; and so forth.
Classical liberalism’s theory of the market has ordinarily assumed these
aspects as a given rather than as important subjects for analysis. The real
question is whether, precisely from the point of view of an adequate theory
of the market economy, this legal, ethical and institutional framework has
become sufficiently developed and subtle as to facilitate the making of
well-considered exchanges. Jack London’s
story about the worker who lost his arm shows what a telling criticism a
socialist can make of capitalism if part of the essential framework is missing.
A concern
about these “framework” issues does not mean that a thinker necessarily wants
to “substitute his judgment” for the decisions of the parties in a given
transaction. A supporter of capitalism
will want to set the stage so that millions of people can pursue their own
ends. He doesn’t want to tell them where
to go or even how to get there. But his
theory of a voluntary nexus is incomplete if he assumes, usually implicitly,
that there are no legal, ethical or institutional issues relating to the
prerequisites for the most workable functioning of such as nexus.
My own view
is that classical liberals can be sensitive to the various “bargaining power”
concerns without violating their overall philosophy. Such a suggestion is in some ways
earth-shaking, since it invites classical liberal theory, in effect, to “enter
the twentieth century.” Classical
liberalism can have much more to say than it has in the past about many of the
standard “social issues” that have been addressed, largely without classical
liberal guidance, during the twentieth century.
(It is possible that the “pragmatism” of so many of our political and
business leaders is in part an adaptation to a felt inadequacy of classical
liberal theory.) Its voice can now
express a refreshingly different approach, however: one that is aware, even
though quite belatedly, of the validity of the issues, but that seeks solutions
consistent with a voluntaristic system.
Solutions
within a classical liberal framework.
What are the solutions that are consistent with the capitalist ethos
with regard to the bargaining power issues? The answer lies in strengthening
the framework in the legal, ethical and institutional areas.
1.
The legal framework. The courts have long recognized that
contracts may be rendered voidable by the taint of fraud, innocent
misrepresentation, duress and undue influence. When an equity remedy has been
sought, the petitioner has had to satisfy the court that he has himself done
equity, since all equity remedies are discretionary; and this has permitted
courts to refuse certain forms of relief where serious disparities have existed
between the parties. In recent years the Uniform Commercial Code has declared
that no "unconscionable" provision or settlement will be enforceable.
Although the Code's declaration applies only to a "sale of goods,"
many other statutes and court decisions have followed suit in other areas.
There has also been growing reliance on the "contract of adhesion"
doctrine which refuses to apply harsh contract terms that are buried within a
form that one party has prepared and presented to the other party on a
"take it or leave it" basis. All of these developments in the law of
contracts and sales relate to the legal framework within which transactions
occur. They make the courts, as the enforcing agency, a more active participant
in precisely the many bargaining power situations, at least where the abuse is
palpable.
Many of these
rules are broad rather than specific, and this isn't altogether desirable in
light of the Rule of Law criteria that classical liberalism supports. As situations are identified in terms of
their more specific components, it should be possible to form more specific
rules for many things. And then it may sometimes be desirable to permit the
contracting parties to agree to a variation, if they do so knowingly. Some
recent "consumer protection acts," for example, prohibit a contract
term that eliminates the implied warranties of quality that a seller would
normally give. But the same statutes go
on to provide that the parties may, by specific agreement, bargain about known
defects, lowering the price and removing those defects from the warranty
coverage. A corporation code is involved in a similar process when it provides
that shareholders will not have a “preemptive right” unless the Articles
of Incorporation establish such a right.
Our law already includes a fair amount of this concern. Even more concern could be built into the law compatibly with the classical liberal rationale for capitalism. The law could curtail many abuses without appreciably interfering with the right of the parties to "make their own transactions." In fact, the resulting contracts could more meaningfully reflect the parties' positions.
Much could be
done, for example, through the use of what we might call "paradigm
contracts." A statute could spell out the terms of one or more forms of
well-balanced home construction contracts, say, and could then provide that the
parties are free to deviate from them if the fact of deviation is clearly
revealed to both parties. (There may also be points, however, upon which the
law would not permit a deviation, since to do so would open the door to some
sort of slippery practice that a party could not very well judge. Or the law could say the deviation will only
be good if done upon the advice of counsel.)
This philosophy underlies, but finds inadequate expression in, the
federal Magnuson-Moss Warranty Act.
Under that Act, a manufacturer must label any warranty either
"Full" or "Limited."
The content of a full warranty is spelled out by the Act, but a
manufacturer is allowed complete latitude if he reveals that the warranty is limited. The word "limited" is intended to
serve as a warning flag to the public, causing a buyer to inquire into the
specifics of the warranty.
Magnuson-Moss
could be considered among the statutes that seek to create a flow of all
material information to the contracting parties. We see this attempt in the requirement under
state and federal securities laws that a public issue of a security must be
registered and that each purchaser must be given a copy of a prospectus; in the
Truth-in-Lending Act requirement for disclosure statements in connection with
most loans; and in the Interstate Land Sales Full Disclosure Act requirement
that each buyer of a parcel within an unimproved-land subdivision be given a
copy of detailed “property report.”
2.
The institutional framework. Market processes are often well-served by
developed institutions, and parts of the "legal framework" may help
create such structures. The law of corporations is a good example. It creates a
type of legal entity that would not otherwise be available. The Employee Retirement Income Security Act
of 1974 (ERISA) spells out detailed procedures for pension plans as to the
vesting of pension rights, recordkeeping, disclosure, investment of the fund,
etc. If we recall my earlier discussion
of bargaining power deficiencies relating to "conditions of
employment," we come to realize that what ERI.SA is doing is to fill in
the details in a vital part of the career relationship. A similar void with
respect to industrial accident and disease was filled by the Workmen's
Compensation system.
Those who
support capitalism will necessarily want to assert a number of desiderata about
how the legal and institutional framework should be strengthened:
(a)
Wherever possible, they will want the
resulting institutions to be private and competitive, not governmental;
(b)
They will prefer that the framework allow
optional approaches so the market can actively germinate new solutions;
(c) They will consider it important to weigh
benefits of any system against its added complexities and costs (something that
has been sorely overlooked, for example, in securities regulation);
(d)
Wherever possible, they will prefer a
politically decentralized system to one that comes from the federal government;
and
(e) They will not
accept a legal or institutional intervention on the ground that it is building
the framework for the market if they are not persuaded that there is an
imperfection in market processes sufficient to call for it.
These
desiderata will often give rise to objections to legislation that is not
sensitive to them. But the values embodied in these desiderata should not
prevent those who are theorizing from a pro-capitalist point of view from
seeing the important truth that the free market itself can often be enhanced,
even in crucial ways, by a more sophisticated framework.
3.
The ethical framework. Classical liberal theory has a certain
ambivalence about ethics in the marketplace. The theory of a free society calls
for the attainment of social order through a ubiquitous ethical nexus
(noticeably removed from a "do your own thing" concept of freedom),
as distinguished from relying on the state to coordinate most human
relationships. But then it has been common
to define even ethical duty by purely contractual criteria, so that "any
exchange is ethical if it is voluntarily entered into without force or
fraud."
The points I
have raised are, in part, a rebuttal to this latter view. In my opinion, a free society needs strong
but sympathetic intellectual leadership, and a powerful ethical consensus. I
would have each of these give considerably more attention to the subtleties of
market transactions. If that happens, many of the problems of bargaining power
disparity will disappear, and won't even require legal and institutional
changes. Classical liberal theory should throw its weight behind the ancient
ethical norm of “do unto others….” It is
a good norm for the stronger or better-organized party to follow where there is
bargaining power disparity.
In this chapter,
I have raised points that I anticipate will be thought-provoking to socialists
and free market theorists alike. If my
analysis is correct, many of the major socialist attacks on capitalism as
“exploitive” are unsound. At the same
time, we have seen that the classical liberal theory that underlies the free
market is inadequate in at least one very important dimension.
This
inadequacy has given "exploitation theory" its greatest
justification. The imperfection of the labor market
and of consumer markets has actually involved a substantial amount of
"taking advantage" and of insensitivity to some fundamental human
needs.
This only
becomes a significant argument for socialism, however, if the weakness cannot
be remedied consistently with classical liberalism's overall values. I believe it can be. A stronger, more tenable theory about
bargaining power situations will lead to a stronger, more workable market.
The matters
discussed in this chapter could just as well have been taken up in my book on classical
liberalism, since they have to do with the basic theory of a market system. I
have considered them here because they are also vitally important in connection
with socialist thought, which is to a large degree founded on its critique of
capitalism.