How Labor Unions Cause Inflation
MAY 01, 1959 by LEONARD E. READ
and now remains
That we find out the cause of this effect;
Or, rather say, the cause of this defect,
For this effect defective comes by cause.
Labor unions “cause” inflation in precisely the same manner as do chambers of commerce, the National Council of Churches, thousands of other organizations, and millions of individuals who call themselves Republicans, Democrats, Socialists, and Communists.
Labor unions, like many influential groups, cause inflation by exercising their power to extend government beyond the point where sound financing is politically possible.
Why should we seek to understand how labor unions cause inflation? In order to see how most of the rest of us cause it! Looking into labor union behavior is like looking into a mirror for millions of us. We may not believe what we see, but it will be an accurate reflection, nonetheless.
It can be truthfully said that people cause inflation, but people do many other things besides. Thus, if we would stop inflation, we must know precisely which actions of people bring on inflation and which ones do not. So with labor union practices, we need to know which of these are inflationary. Otherwise, we may be criticizing labor unions on the wrong count while we ourselves innocently follow practices which bring on the very inflation we so stoutly deplore. We cannot hope to stop inflation until we know its causes—and the real causes will elude us as long as we chase after fictitious ones.
Those who blame inflation on the incessant, persistent, coercive drives of labor unions for higher and higher wages are on the wrong track. Such coercion is not to be condoned, but it is not a direct cause of inflation. For instance, if your gardener issues an ultimatum that you pay him $100 a day or else he will quit and forcefully keep any other person from taking his place (the labor union device in principle), you are right to condemn his action, but you are wrong to call it a cause of inflation. What you can say is that you may go broke if you give in to his demand, or that he may be unemployed if you refuse. The same results follow, except on a larger scale, when a million gardeners act in the same way through a labor union. Inflation is not one of the results of such action, except in an indirect way.
Union Aims and Accomplishments
Like most organizations, labor unions have aims they cannot attain, make claims for deeds they never achieved, and get blamed for sins they never committed. For example, labor unions try to claim credit for raising wages. But, regardless of their claims, unions have had no more to do with the general level of wages than with the general level of the seven seas.’ They have, it is true, succeeded in obtaining increases for their members at the expense of nonmembers; they have destroyed property and done other damage to their employers; and they have thrown many of their own members into unemployment. But their coercive wage hikes are not the immediate cause of inflation. It’s another action of unions which supplies the inflationary spark.
Let’s dismiss the labor union subject for a moment and examine inflation. What is it? Inflation is merely an increase in the money supply. The process or act of diluting the medium of exchange is inflation. Brutally, but nonetheless accurately, inflation is legalized counterfeiting. Inflating the medium of exchange—everything else being equal—will result in higher prices. But the rising price trend itself is not inflation; it is only one of the possible consequences of inflation. It is of supreme importance that we know the difference between cause and effect.
Assigning causation to any result is difficult, at best. My ears are injured. The injury is an effect. What caused the injury? A deafening sound. What caused the sound? Vibrations. What caused the vibrations? Dynamite. What caused the dynamite to explode? And so on. We find that cause underlies cause ad infinitum.
Inflation, like the ear injury, is the effect of a sequence of causes that go deeper than we are capable of exploring. However, the cause that immediately underlies the effect—inflation—is plainly observable. Inasmuch as government has sole responsibility for our monetary system, we can easily see that government causes inflation.
An Opiate Form of Taxation
But what causes government to inflate the money supply? Again, the answer is simple enough: Government meets its costs of operation by taxation. There is no other method. Now, if the costs of government become so high that it is no longer politically expedient to tax by direct levies, an indirect form of taxation will be utilized—inflating the money supply!
In most countries throughout history the direct tax levy has been politically expedient up to a 20 to 25 per cent “take” of the peoples’ earned income. After this point, in most instances, the direct levy becomes repugnant to the citizenry and thus politically impossible. The people just won’t stand for it any more! What to do? The answer: Inflate the money supply, an opiate form of taxation. At first, it feels good and secures the politicians’ popularity. The fact that it assures long-range disaster is a problem for the next generation! Indeed, inflation, as a rule and for a time, is a well-received form of tax. To the economically naive portion of the population it is a way to “have their cake and eat it too.” In short, they see inflation as a means of escaping direct governmental levies without giving up the “benefits” of governmentally guaranteed welfare and prosperity.
This particular subcause of inflation can be summarized as follows: Whenever the federal government can collect no more by direct tax levies without risking political suicide, it will print money to pay its bills. The fact that the current procedure involves monetizing the debt through the central banking system doesn’t make it a new procedure; it only becomes more difficult to understand. This complex scheme is no different in principle from calling in the coin of the realm and shaving off some of the precious metal—"coin clipping"—as was done of old.
Excessive Government Spending
Very well. We must now examine the next underlying cause. What causes the expenses of government to be so high that they cannot be paid by direct tax levies? Pressure group demand for government handouts, sometimes called “services"! In ideal theory, government is supposed to be the protector of life, liberty, and property. It shouldn’t be accessible to any group for largess or special privilege. But today, it’s open sesame; the bars are down. There isn’t a gold standard or any other discernible standard. Indeed, government in the
Demands of Pressure Groups
However, government behaves in accord with the thinking of the people who organize it. If they be lax and predatory in their ways, their government will fairly reflect these ways. Therefore, it is the thinking of the people—at least those in positions of leadership—that must be examined if we are to explain this third underlying cause of inflation.
The actions of labor unions are based pretty much on the thinking of their leaders. Their whole philosophy can be summarized by a statement in an AFL-CIO pamphlet (Publication No. 41):"Through their legislative activities, unions have consistently championed measures to improve governmental benefits for various groups of citizens, without regard to whether the beneficiaries are union members or not."
Going through their publications, one finds them supporting more government aid to foreign countries, government guaranteed full employment, federal aid to education, more government housing, more compulsory social security, government ownership of power and light facilities, federal aid to so-called distressed areas, and on and on and on.
Labor unions are politically influential. In large measure they get increased federal activity on projects they sponsor. Their coerced and uneconomic wage hikes cause unemployment. Then they use their pressure for government guaranteed full employment which adds billions to the costs of government. It is precisely this successful pressure on government that is the effective subcause of inflation. This is how labor unions cause inflation!
In principle, if not in degree, the social action program of the National Council of Churches resembles the labor unions’ program—the assumption by government of more and more responsibility for the welfare and prosperity of the people. The National Council of Churches is influential. The governmental activities they sponsor cost money. This is how the N.C.C. causes inflation!
And, chambers of commerce? Only a few in the whole nation have refrained from running to the federal pap-wagon. Federal aid for roads, hospitals, airports, and so on and on and on. Chambers of commerce are influential. The things they succeed in getting cost money. This is how chambers of commerce cause inflation!
Millions of citizens from all walks of life cause inflation in the very same manner. And all of them, along with labor unions, the National Council of Churches, thousands of other organizations, including chambers of commerce, loudly decry inflation and demand that the fire be put out as they add fuel to it!
Why People Act as They Do
We now come to that cause of inflation which is fourth in depth. What causes so many people to act so contrary to their own and the general interest? In short, why do they do things in the political collective they wouldn’t think of doing personally?
Who can be certain? The more one studies the problem the harder it seems to pinpoint the exact cause. No less than a dozen occur to me. Economic naivete is one.
But what causes otherwise responsible persons to be so inattentive to study and reflection on a matter this serious?
With an enormous evidence all about us that warrants a faith in free men, more and more persons are putting stock in a political apparatus that can do nothing more than take from them, giving back less than it takes. Why this decline in a sense of values?
Much of the world-wide surge into collectivism has rubbed off on our erstwhile free enterprisers. Why this softness among Americans with their reputation for hardheadedness, this caving in to the wiles of political medicine men?
Certainly, there has been an almost total failure to identify the free market, private property, limited government way of life with moral and spiritual ideals. Why this myopia when the moral basis for liberty is so obvious?
There are many other plausible causes. I wonder, however, if all of these wouldn’t tend to fade away were more of us to turn our eye inward, looking to an improvement of our own understanding. Admittedly, this doesn’t seem as easy as seeking solutions through organizations or by the reforms of others or by waiting for some “leader” to appear. Isn’t there a requirement for candor, for an integrity of personal conviction—an accurate, open reflection of what the conscience dictates as right—that is not now sufficiently prevalent? Leo Tolstoy suggested what would likely follow the change of emphasis urged here:
One free man says truthfully what he thinks and feels in the midst of thousands of men who by their words and actions are maintaining the exact opposite. It might be supposed that a man who has spoken out his thoughts sincerely would remain a solitary figure, and yet what more often happens is that all the others, or a large proportion of them, have for long past been thinking and feeling exactly the same, only they do not say so freely. And what was yesterday the new opinion of one man, becomes today the public opinion of the majority. And as soon as this opinion becomes established, at once, gradually, imperceptibly, and irresistibly, men begin to alter their conduct.
Labor unions can cease those collective actions which contribute to inflation, as can chambers of commerce, the National Council of Churches, the Republican and Democratic Parties, and other organizations. However, it is their members acting with intellectual integrity and as self-responsible individuals who can take positive steps to stop inflation. They can refuse to serve their own pressure groups in the advancement of socialism, communism, the Welfare State, and the other robbing Peter-to-pay-Paul schemes which cause the government to cause inflation. In short, they can stand in defense of individuals—all individuals—in their God-given right to their lives, liberties, and properties.
‘For a confirmation of this fact see Why Wages Rise by F. A. Harper. The Foundation for Economic Education, Inc.,
Professor Wilhelm Roepke, Graduate Institute of International Studies,
Inflation, and the spirit which nourishes it and accepts it, is merely the monetary aspect of the general decay of law and of respect for law. It requires no special astuteness to realize that the vanishing respect for property is very intimately related to the numbing of respect for the integrity of money and its value. In fact, laxity about property and laxity about money are very closely bound up together; in both cases what is firm, durable, earned, secured, and designed for continuity gives place to what is fragile, fugitive, fleeting, unsure, and ephemeral. And that is not the kind of foundation on which the free society can long remain standing.