September 22, 2012 by ccradden
The World Bank is looking for ideas on how to end poverty. Well I’ve got one – unions. Neoclassical microeconomics, the basic guiding policy principle of the Bank and governments and international organizations around the world, hinges on the idea of equilibrium. It’s all about allowing economic forces to find their ‘natural’ balance. If we just let the economy get on with it, the argument goes, an optimally efficient allocation of financial (and thereby physical) resources will simply arise by itself. Problems only start to arise when economic relationships are disrupted by non-economic forces or when relationships that would otherwise exist are prevented or changed by regulation. The ideal balance will only arise when individuals are free to choose their economic relationships on the basis of the pursuit of their own interests with no outside interference.
This idea is often given a political spin — market economics is said to be uniquely compatible with democracy because it is based on individual freedom of choice and self-determination. What’s more, market economic relationships are supposedly blind to colour, nationality, religion and gender because the best price always wins.
Sounds great, doesn’t it? But if this is the way that things actually work, then there are a lot of weird people in the world. There are, quite literally, billions of people who choose to sell their labour for a wage that’s not enough even to keep themselves and their families clothed, fed and housed, still less educated or healthy. And of course women are more likely to make these unusual choices than men, and people from countries in the Global South more likely to make them than Europeans or Americans.
So do we just conclude that there’s nowt so queer as folk (as they used to say in the north of England), or is there in fact something wrong with the neoclassical model? To tell the truth I’m not sure that there’s anything seriously wrong with the model, but I don’t think that people are choosing to live in poverty either.
So what’s going on? Well, one part of the problem is that economic equilibrium doesn’t just happen by itself. A Swiss economist called Leon Walras called it ‘tâtonnement’, which means something like tentatively feeling your way or making progress by trial and error. In reality, tâtonnement happens via the negotiation of prices and contracts, including the price of labour. The idea is that buyers and sellers haggle to see if they can find a price that’s profitable for both of them. If they can’t settle on a price they’re both happy with, then the exchange doesn’t happen. Whether or not someone is happy to cut a deal at a particular price depends (a) on whether that price is high enough to cover what it costs them to be in the market and (b) on whether they think they can do better elsewhere. If they think they can do better, then they’ll risk holding out for a better price even if they know they can already cover their costs. If the other prospective partner in the deal suspects that someone else will make a better offer than they’re currently making, then it makes sense for them to revise their offer upwards or downwards too. Alternatively, if they think the other party is bluffing or is just wrong about being able to do better, they’ll stick where they are, betting that the other guy won’t actually walk away when push comes to shove — or that they’ll walk away, find out that they can’t actually do any better elsewhere and come back.
This process of everyone keeping an eye on what everyone else is paying to see whether there’s something better they could be doing with their money is where the equilibrium comes from. In principle, the tendency ought to be for prices to settle at a level that works for everyone because no-one will voluntarily sign up for a deal that doesn’t work for them.
The trouble is that this only works if both prospective partners in a deal have more or less the same to gain or lose from it — it’s the realistic possibility that prospective partners will simply refuse to cut a deal that makes the whole thing work. Only mutual need leads to a result that’s good for everyone. But employers need individual employees a great deal less than individual employees need employers. The risk of not being able to find another job is incalculably greater to the employee than the risk of not being able to find another employee is to the employer. The result is that workers feel they have no choice but to accept the very low wages that are perhaps the principal cause of poverty.
The simple, time-honoured and above all effective solution to this problem is for workers to join together in unions to negotiate collective employment contracts, using their market power to balance the collective power of the capital invested in their employer’s business. By negotiating their wages collectively rather than individually, workers are able to bid up wages to a level that reflects the true market value of their labour. This is not an interference with a market process, but the creation of a market process where before there was only coercion.
Employers the world over — not all of them by any means, but almost certainly the majority — resist unions not because they want to keep politics out of their economic relationships, but because they want to keep economics out of their economic relationships. They are desperately afraid of having to negotiate a price for labour with a partner whose market power is not significantly less than theirs. Denying workers this opportunity for meaningful negotiation is not only the height of hypocrisy, it prevents workers helping themselves to leave poverty behind. World Bank take note.