The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part 1: Rights, Property, and Markets
• Property Or “property Rights”? *
• “design Faults” In Locke’s Theory of Property Taint Ownership With Guilt *
• Is Ownership a Myth? *
• How to Get a Free Lunch? Just Apply For It *
• The Problem of Contract Enforcement *
• The Public Goods Dilemma *
• Trying the Free Market *
• The Statist Legacy *
• Part 2: The Common Sense of Non-economics
• The Yakoubovich Syndrome, Or Lies, Damn Lies, and Economic Policy *
• Winning Policy Battles But Losing the War Against Economic Realities *
• Paying Ourselves More of Their Money *
• The Doctrine of “unequal Exchange” the Last Refuge of Modern Socialism? *
• Corporate Managers Are They Going to Kill Capitalism? *
• When the Economy Needs Morals *
• The Political Economy of Force-feeding *
• Hostile to Whom? *
• Mannesmann’s Courtesy Could Prove Rare *
• Part 3: French and Russian Tragicomedies
• Can Putin Build a Real Economy From Oil and Rigor? *
• Russia and the New Europe Growing Apart *
• Russia Hopping Along On Clay Feet *
• The French Tragicomedy *
• How the French “social Model” Could Self-destruct *
• A Little Bit of History Repeating *
• There Is No French Exception *
• The Hobbling of Private France *
• Part 4: The Capitalism They Hate
• The Capitalism They Hate *
• Striving to Get Richer and Poorer *
• “bread and Circuses” In the Modern Welfare State *
• Who Minds the Gap? *
• Float Or Sink? the Millstone of the “social Market” In Germany *
• How Germany and France, the Sick Men of Europe, Torture Themselves *
• Shall We Borrow From the Children? *
• Low Pay *
• Freedom to Strike Or Right to Strike? *
• Part 5: Creating Unemployment
• Stamp Your Feet and Demand a Fair Deal *
• Paternalism and Employment *
• The Things Labor Unions Are Up to *
• The Instability of the Welfare State *
• Some Bad News Could Be Good News *
• Built-in Unemployment Social Protection Costs More Than It Is Worth *
• Let ’s Throw This Model Away *
• How to Stifle Employment By “social Protection” *
• Workable Alternatives *
• A Tale of Two Models *
• A Vicious Circle of Social Kindness *
• Part 6: The Future of Europe
• The Economic Consequences of a United States of Europe *
• A Giant Free-trade Area Or a Political Counterweight to America? *
• European Crosscurrents and the Federalist Drift *
• How Confederacy Could Turn Into a Federal Superstate *
• Majority Rule By Any Other Name *
• What Now For “europe”? Why the People Failed Their Masters *
• Free-riding On the Euro *
• Some Democratic Economics *
• The Soviet Legacy *
• A War of Attrition Between Economic Reality and Political Dreams *
• A Brightening of the Economic Skies Over Brussels? *
• Turkey Knocking On Europe’s Door *
• Turkey and the Eu Club *
• Europe More Secular and More Islamist *
• A Bill of Rights Europe Did Not Need *
• Europe’s Social-democratic “government” *
• Power Corrupts, So Let ’s Make It Less Absolute *
• Part 7: Economics, True and False
• On the Economics of Protecting Employment *
• The Costly Mistake of Ignoring Opportunity Costs *
• “globalization” and Its Critics Mutual Gain Vs. Cloud-cuckoo Land *
• Are High Oil Prices a Form of Exploitation? *
• Immigration What Is the Liberal Stand? *
• More Nonsense On Stilts Mr. Bentham Is At It Again *
• Risk, Value, and Externality *

HOW TO STIFLE EMPLOYMENT BY “SOCIAL PROTECTION”*

In 1998, nearly one European in eight is involuntarily out of work, due largely to the state-sanctioned (indeed forced) return of labor-market practices that were rightly decried as unfair when practiced by private industry in the not-so-distant past.

In 1871, a royal commission in England reported on the “outright compulsion” exerted on workers by “truck,” the payment of wages in kind. The customary (and later, the collectively bargained) wage rate was set in money, but in some trades the less scrupulous masters converted it to a basket of goods of their own choosing and gave that to the laborer. Room was thus made for abuse, cheating, the passing off of shoddy goods, and so forth. But even if the truck was a fair exchange, employees would invariably rather have the money to do with as they chose.

The practice of truck went back a long way. It was widespread in handloom weaving, and there were legislative attempts to ban it between the fifteenth and seventeenth centuries. Truck was likewise entrenched in framework knitting, as well as in the handmade-nail trade that employed sixty thousand nailers in northwest England in the early nineteenth century. Less uniformly, it was resorted to in other hardware trades in the British Midlands. Employers practicing it were generally badly regarded and tended to lose the best employees, who gravitated to employers paying proper money wages. In this way, the labor market started to correct some of the ill effects of the truck system.

“OUTRIGHT COMPULSION”

Nevertheless, there were repeated legislative attempts to do away with it altogether, with Truck Acts in 1604, 1621, 1703, and, particularly, 1831. All were largely ineffective. Though truck survived in isolated coal mines for a few more years, as a system it was practically extinguished in Britain by the end of the nineteenth century—not by regulation, but by the ordinary interplay of supply and demand. In the United States, in mines and mill towns isolated by geography or langauge, the practice was preserved somewhat longer. As late as the New Deal era, the National Recovery Administration was impelled to turn its attention to employers paying in company scrip to be spent in the company store, an attenuated form of the “outright compulsion” involved in pure truck.

What is the point of turning over these old leaves today? Is it relevant to modern industrial society how Staffordshire nailmakers, Montana miners, or estate laborers in East Prussia, Poland, and Hungary were paid generations ago? Before proposing an answer, two things should be noted. First, as a matter of historical fact, employees hated truck, often reselling the goods in question for far less than their nominal worth. Second, there is a strong potential defense of truck: The goods a worker gets in exchange may go to feed and clothe the worker and his family, while if he gets money, he may improvidently blow it on payday and leave wife and children in misery for the rest of the week. This is the classic paternalist argument for gentle constraint, if not for “outright coercion” of the working classes for their own good. For all its plausibility, it was little used to defend wages in kind. Tellingly, it is not used at all to justify the massive reintroduction of the truck system into the modern welfare state. In fact, the mere suggestion that the manifold aspects of social protection are perfect products of (and difficult to justify without frank recourse to) paternalist doctrine makes the left blush with embarrassment or explode in fury.

For the truck system is back with a vengeance, more uniformly and inescapably than ever, and instead of trying to liberate them from it, state power now turns “outright compulsion” on workers and their employers and forces them to live with it.

It is readily accepted by public opinion that everyone needs some security against the common hazards of illness, unemployment, or in-capacity to work. Plainly, some people will voluntarily buy insurance to protect themselves and their families, but some others won’t or can’t. The incipient welfare state will insure the latter in a fairly minimal way. The notional “premiums” are either borne by general taxation or—politically less unpopular and administratively easier—are charged to payrolls, with the employer seemingly paying all or most of it. Once the system takes hold, there usually develops a strong democratic constituency in favor of extending these policies to cover ever more risks, ever more generously. With social insurance, it is obscure who pays what for whom. As a result, health benefits become progressively more comprehensive, unemployment pay longer-lasting and less conditional, and pensioners get younger as time goes by. The incipient welfare state is transformed into a mature one. Willy-nilly, it conducts itself like the lady who could not say “no”—indeed, to stay in office, modern democratic government must say “yes” even before being asked. (Take France’s new 35-hour workweek.)

More benefits paid out on policies of social protection mean that more premiums must be collected. Whoever pays them in the first place, ultimately they fall upon capital and labor. How much is really borne by employers and how much by employees may matter a good deal to present well-being and future growth, but it is not germane to understanding how truck, the provision of social protection as part of the wage, may generate endemic unemployment.

How this comes about is inherent in the compulsory nature of social protection. It is a benefit in kind. Its money equivalent to all wage-earners cannot be more than its total cost; to most individual workers, it is substantially less. They like the insurance, but if they could, they would rather have what it cost, or even a good deal less, and spend the money as they see fit. Whether they would be wise to prefer the money is immaterial if, in fact, they do. For if they do, they will subjectively undervalue social protection, and its cost will thus be higher than its worth to those it seeks to protect.

VICIOUS CIRCLE

However, this is tantamount to saying that the cost of labor—the money wage plus the premiums employers and employees must pay to produce all the social protection on offer—will nearly always be higher, perhaps much higher, than the effective wage—take-home pay plus the money value the worker puts on his prospective social insurance benefits. To offer any given effective wage, employers must incur higher costs under this social truck system than they would otherwise have to do. Consequently, they will “restructure” and eliminate jobs. The resulting unemployment will be endemic, in the sense that it will resist both cyclical upswings and fiscal or monetary stimuli. As long as the cost of labor is generally higher than the value such cost buys for the employee, employment will remain stifled.

The dynamics of this mechanism are intimidating. With more unemployment, more insurance benefits are paid out and more premiums must be charged, which should normally increase the gap between total labor cost and effective wages; enhancing the gap increases unemployment some more, and so on in a vicious circle. It is once this circle gets going (which may be a matter of passing some threshold) that the problem becomes nearly intractable, as it seems to have done in much of the European Union. For it is of little practical use to say that the one real cure of unemployment is to abolish the insurance against it at the very time when this could only be done over the dead bodies of the jobless and the justifiably scared.

[* ]First published in the Wall Street Journal Europe, March 20-21, 1998. Reprinted by permission.