baird -- unions and antitrust

Unions and Antitrust

C H A R L E S W. B A I R D *

California State University, Hayward, CA 94542

I. Introduction

Section 1 of the Sherman Antitrust Act states that "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or c o m m e r c e . . , is hereby declared to be illegal." Notwithstanding that the antitrust laws have been used more often to favor particular competitors rather than the process of competition, the official position of the federal government is to promote competition in most markets. Two notable exceptions are the K-12 education market and the labor market. This essay examines the antitrust issue with respect to the latter.

I examine the nature of the unions' antitrust exemption and question its legitimacy on grounds that it violates the constitutional principle of equality before the law. While Professor Schwochau's paper in this symposium is a comprehensive overview of the rel- evant case history, I revisit some of these cases to illustrate why I see much of the case history after 1935 as a silly game with high stakes but with arbitrary rules. Standard case history on this topic focuses on activities of unions such as strikes, picketing, and boycotts. I broaden the discussion by examining three features of the NLRA i t se l f - -exc lu- sive representation, union security, and the proscription of company unions - - which are also anticompetitive. This whole topic arises because Congress has chosen to favor labor unions with special privileges and immunities. I explain why I see no grounds for such preferential treatment. Next, I consider two types of remedies to the problem that are routinely offered, and explain why I consider them inadequate. Finally, I propose a radical solution to the problem. There is no reason to have any antitrust regulation at all. Government should simply refrain from supporting all combinations in restraint of trade. Without that support such combinations naturally self-destruct. Of course, that means that abolishing standard antitrust regulation doesn' t go far enough. The National Labor Relations Act (NLRA) must go too. It must be replaced with a statute constructed on the principles of voluntary unionism such as New Zealand's Employment Contracts Act (1991).

II. The Intent of Congress

There is little doubt that the original intent of Congress was to include labor unions in the proscriptions of the Sherman Act, for an amendment to the original bill that would have specifically exempted unions failed to pass in the U.S. Senate (Commanger, 1958, Vol. II, pp. 162-63). It is also clear that Congress now intends for unions to be exempt

J O U R N A L OF LABOR R E S E A R C H

Volume XXI, Number 4 Fall 2000

586 JOURNAL OF LABOR RESEARCH

from most antitrust regulation. Congress attempted to grant the exemption in the Clay- ton Act (1914) but was unsuccessful because of Supreme Court interpretations of the Act. Congress tried again, this time successfully, in the Norris-LaGuardia Act (1932). In 1947 the House passed a version of the Taft-Hartley Act that included several provisions that would have removed the unions' exemption, but the Senate's version omit- ted those provisions and they were dropped in conference.

However, in my mind, the intent of Congress does not settle the issue of whether unions ought to have an antitrust exemption. I am reminded of Will Roger's remark that "The country has come to feel the same when Congress is in session as when the baby gets hold of a hammer." On this issue, Congress has legislated at the behest of special interests not the general welfare. Congress ought to pay attention to fundamental principles.

III. Combinations in Restraint of Trade

Economists define a cartel as an agreement among sellers (or buyers) of a product or service, who otherwise would compete against each other, to eliminate, or at least restrict, competition among themselves. The members of a cartel join together to try to act as a monopolist in the market. For example, if General Motors, DaimlerChrysler, and Ford organized to fix prices and to assign sales quotas to each other, that organization would be a cartel. And it would be an illegal combination in restraint of trade under the Sherman Act. As such it would be subject to criminal and civil prosecution. Similarly, if the employees of General Motors, DaimlerChrysler, and Ford organized to fix wages (or, as unionists like to put it, take wages out of competition) and set up job demarcations (specify who does what work) that organization would be a cartel. Using ordinary English the worker cartel (union) would be a combination in restraint of trade. But the union cartel would not be illegal under the Sherman Act.

Congress did much more than just immunize labor unions against antitrust prosecution. With the NLRA (1935, amended in 1947 and 1959) Congress undertook to promote their formation, operation, and durability. In fact, the NLRA has been used by the courts as the basis of a "nonstatutory" exemption from the antitrust laws. The Clay- ton and Norris-LaGuardia Acts, as interpreted by the Supreme Court in U.S.v. Hutch- eson [321 US 219 (1941)], gave the unions a statutory exemption regarding specific activities including boycotts, picketing, and strikes. Whenever the unions undertake other activities, for which no statute has given them specific exemption, but which are anticompetitive, they, too, are declared exempt simply because they must be exempt in order to make the NLRA effective.

For example, in the Allen Bradley case [325 US 797 (1945)] the Court ruled that although collusion between unions and employers - - such as certain collective bargaining outcomes - - that restricts competition in labor markets is exempt, collusion between unions and employers that is aimed at markets for nonlabor goods and services is not exempt. Of course, every collective bargaining contract is the result of joint action of an employer and a union to fix wages and work rules in a labor market; and

CHARLES W. BAIRD 587

this necessarily affects the prices and availability of the nonlabor goods and services produced by that labor. However, those activities are permitted under the NLRA so they fall under the unions' nonstatutory exemption.

IV. Ignoring Constitutional Principle

One of the most basic principles of the rule of law under the U.S. Constitution is equal treatment of every person and every group of people under the law. The statue of Jus- tice wears a blindfold signifying that all courts, including the Supreme Court, should pay no attention to who a person is in applying justice. The same rules are to be applied equally to all irrespective of their identities and circumstances. There is not supposed to be one set of rules applied to some and another, contradictory set of rules applied to others. But, when it comes to antitrust, if it is to abide by the will of Congress, the Supreme Court must ignore the principle of equality before the law. Two cases illustrate the point.

In Apex Hosiery v. Leader [310 US 409 (1940)], the lead case creating the unions' nonstatutory exemption, the issue was whether a labor union that had, mainly with people who were not employees, undertaken a three-month, violent, destructive sitdown strike at a plant, could be prosecuted under the Sherman Act. These were clearly actions in restraint of trade. Workers who were willing to work, customers who were willing to buy, and suppliers who were willing to deliver were, through violence, prevented from doing so. Goods that would have been produced and sold in local and interstate commerce were, by force, kept off the market. Moreover, both the Clayton and the Norris-LaGuardia acts proscribe government interference only in "peaceful and lawful" labor disputes "without fraud and violence." Nevertheless, the Court ruled that "Restraints not within the [Sherman] Act, when achieved by peaceful means, are not brought within its sweep merely because, without other differences, they are attended by violence" (at 513). The Court recognized that labor unions are, indeed, combinations in restraint of trade, but said that does not matter because unions must take wages out of competition in order to achieve their goals (at 503). Congress has approved those goals in the NLRA so they must be legitimate. So much for constitutional principle.

Absent constitutional principles, what is and what is not acceptable legislation in the U. S. depends merely on the votes of at least five sitting Supreme Court justices who can make it up as they go along depending on their own peculiar perceptions, beliefs, and dispositions. Consider, for example, Hunt v. Crumboch [325 US 821 (1945)] in which a union used its closed-shop contracts (which are, themselves, inherently anticompetitive) with shippers to drive a trucking firm out of business simply because the union leaders didn't like the owners of the trucking firm. All the shippers with whom the target firm might have done business had agreements with the union that they would use only unionized truckers. The target was willing to unionize, but the union refused to accept any of the target's employees into the union or to supply the target with any unionized drivers. Simply put, out of pure malice, the union drove the target firm out of business through its combinations in restraint of trade. Was this a violation of the


Sherman Act? The Court, by a 5-4 vote, said no. These activities were declared legitimate because, and only because, they were carried out by a labor union. The Court con- ceded that "Had a group of petitioner's business competitors conspired and combined to suppress petitioner's business by refusing to sell goods and services to it, such a combination would have violated the Sherman Act" (at 824). The vote could have gone the other way. Only one more justice had to see the union's actions as outside the lim- its of the union's antitrust exemption because they were not ordinary union activities as envisioned by Congress in the NLRA. The call was wholly arbitrary because the rule of law was ignored.

V. Additional Comments on the Case Law

The case law reviewed by Professor Schwochau illustrates, I think, the absurdity of trying to reconcile the irreconcilable. For example, in Allen Bradley the Court ruled that collusion between electrical equipment manufacturers, contractors, and the Inter- national Brotherhood of Electrical Workers to close New York City to outside manufacturers and contractors violated the Sherman Act. It also said that if the union had effected the same result on its own, it would have been exempt. Now, this is very unsat- isfactory. How can a given means (the impairment of open market competition) to achieve a bad result (higher prices and entry and output restrictions) be approved when done by some and condemned when done by others? Congress is supposed to promote the general welfare, not the interests of some over the interests of others.

Allen Bradley suggests a simple rule: to avoid antitrust prosecution unions must act alone when they are rigging markets. But it isn't quite so simple. In the Jewel Tea case [381 US 676 (1965)], all members of an employers' association except the Jewel Tea Co. agreed with a union to prohibit the sale of fresh meat in their stores after 6:00 p.m. The union then threatened the lone holdout with a strike. The strike threat was severe because the other employers agreed with the union to abide by the rule. Was this collusion between employers and a union to impose an anticompetitive work rule on Jewel Tea? I think so, and so, too, did Justice Douglas in his dissent. But the majority of the Court said it was not. Instead, it concocted an "intimately related" test. It approved the collusion between the employers' association and the union on the grounds that the hours restriction was "intimately related" to the issues of wages, hours, and other terms and conditions of employment that are mandatory subjects of bargaining under the NLRA.

"Intimately related" is a term whose definition is infinitely elastic. Any two judges can come to different conclusions on whether a restrictive practice is sufficiently intimately related to mandatory subjects of bargaining to preclude antitrust prosecution. If nothing else, the intimately related test helps keep labor and antitrust lawyers fully employed. The result of the Jewel Tea decision is that judges must now apply a balancing test to decide such cases. They must balance the anticompetitive effects of the collusion against the necessity of protecting the privileges granted labor unions in the NLRA. They cannot reconcile the two so they must resort to deciding how much of


one to sacrifice on the altar of the other. This is what happens when Congress enacts contradictory statutes, and contradictory statutes are inevitable when Congress legislates in favor of specific interests instead of the general welfare.

The Pennington case [381 US 657 (1965)] was decided on the same day as Jewel Tea, and it illustrates how arbitrary the balancing test can be. Here a union colluded with several large mine operators to impose collective bargaining terms they agreed to on to small mines and their employees. The Court held that this collusion was not exempt from antitrust prosecution. Now, whatever the merits of the Court's reasoning in the two separate cases, the two results are totally incompatible. What is the difference between a union colluding with employers to impose work hour restrictions on third parties and a union colluding with employers to impose union-scale wages on third parties? The simple fact is that a majority of justices decided to vote one way in one of the cases and another majority decided to vote the other way in the other case. The balancing test is really just a balancing game in which the rules change from play to play.

Finally, consider this question that will never be tried in any court. In 1999 the Cal- ifornia legislature passed a bill that prohibited local governments from granting permits for stores that are larger than 100,000 square feet and include at least 15,000 square feet for food and drugs. The bill was carried by Assemblyman Richard Floyd at the behest of regular supermarkets and the unions that represent their employees. Its purpose is to halt the growth of increasingly popular combination discount/food stores such Wal-Mart and Costco whose employees are mainly union free. As an economist I see this as a conspiracy in restraint of trade that involves collusion between unions and employers and politicians acting as the agents of the unions and employers. If the unions and employers somehow acted to quash competition from Wal-Mart and Costco without enlisting the aid of the politicians, they might be liable to antitrust prosecution. Depending on the judges they would draw, not on the actions they took, they might be convicted. By including the politicians in their scheme they converted a conspiracy in restraint of trade into public policy advocacy beyond the reach of any court. Dwight Lee, economist at the University of Georgia, has a good name for this: malice in plunderland.

VI. Anticompetitive Features of the NLRA

Since 1935 the standard case history of unions and antitrust has been concerned with the anticompetitive consequences of union boycotts, strikes, picketing, and the imposition of collective bargaining terms on third parties. The courts have accepted the NLRA itself as legitimate. As Professor Schwochau explains, the unions' nonstatutory antitrust exemption is based on the presumption that no acts permitted by NLRA can be proscribed on antitrust grounds no matter how anticompetitive they may be. Quite apart from union activities that have been subjects in the standard case history, there are at least three features of the structure of unions under the NLRA that also ought to be scrutinized on antitrust grounds.

Exclusive Representation. Economists generally regard labor unions as devices for monopolizing, or attempting to monopolize, the supply of labor to a firm or an


industry. However, they are also devices for monopolizing the market for worker representation services. Section 9(a) of the NLRA forbids workers to designate collective bargaining representatives of their own individual choosing. Instead, at the firm level, unions are certified as monopoly bargaining agents by a majority of the workers who cast votes in representation elections. A union that gets a majority of the votes cast in such an election is, perforce of law, imposed on workers who may have voted for another union, or voted for no union, or who simply didn't vote. Once a union is des- ignated as a monopoly (the law uses the euphemism "exclusive") bargaining agent, individual workers are even forbidden to represent themselves on matters that come under the scope of collective bargaining. Moreover, once a union wins a representation election it is presumed to continue to have majority support indefinitely. There are no regularly scheduled re-elections. Competition from other unions and from nonunion modes of representation is simply made illegal.

Monopoly union representation is justified by its supporters as workplace democ- racy. They say we select members of Congress by majority rule, so we should also select bargaining agents by majority rule. But the analogy with Congress isn't apt. What is proper, even necessary, in the case of government, which by definition has a monopoly on the legal use of force, is neither proper nor necessary in the case of a private association of individuals such as a labor union. Unlike governments, unions are not natural monopolists. There is no reason why there cannot be more than one union represent- ing workers at a firm. Indeed, such plural union representation is standard all over the world except in the U.S. and Canada. It was common in the U. S. until the NLRA made it illegal in 1935. If Congress were serious about promoting competition it would repeal exclusive representation. If consumers need antitrust protection when they buy goods and services, workers need antitrust protection when they hire agents to represent them in the sale of their labor services. Workers are consumers in the market for representation services. Why should Congress subject these consumers to monopoly power?

Union Security. Section 8(a)3 of the NLRA empowers unions with monopoly bargaining privileges to agree with employers that all the workers represented by the unions must join the union or at least pay union dues, but it also allows states to forbid such arrangements within their respective borders. Twenty-one states have chosen to do so. In the other twenty-nine states workers who do not want to be represented by a union (but are forced to be because of monopoly representation) must pay for that unwanted representation or be fired. Unions justify this coercion by a free-rider argument. Unions that have won monopoly bargaining privileges by majority vote must represent all workers, whether those workers like it or not. Therefore, the argument goes, without the imposition of forced dues some workers would choose to receive the benefits of union representation but not pay for them. They would be free riders. All workers, the argument concludes, should pay their fair share of the unions' costs of providing representation services.

The free-rider argument in this context is wholly without merit. If unions represented only their voluntary members and no one else, there could be no free riders. The unions' free rider problem is an artifact of the NLRA. The unions created the problem


themselves when they convinced the authors of the NLRA to permit monopoly bargaining. Now they use monopoly bargaining as an excuse for forced dues.

The other reason that the unions' free-rider argument fails is the problem of the forced rider - - a worker who experiences net harms from a unions' activities and is nevertheless forced to pay for them. Many workers might get better terms of trade rep- resenting themselves or hiring a nonunion representative to do the job. Moreover, while a union may get higher wages for a worker, the worker may so resent the forced association with the union that, on balance, the union makes him worse off. Whether a worker is made better off or worse off by a union's activities cannot be proven. The rel- evant costs and benefits are subjective. So any worker whom a union labels a free rider, could just as well be a forced rider. The unions' free-rider argument is specious.

Suppose an organization of business enterprises tried to impose "organizational security" under which any enterprise would have to pay fees to the organization before it would be permitted to sell its goods and services in a market. This would clearly be illegal under the Sherman Act. If we are to have antitrust regulation it should apply equally to all organizational security arrangements, whether run by businesses or by unions.

Proscription of Company Unions. Section 8(a)2 of the NLRA forbids employers to be involved with the "formation or administration" of any "labor organization." Congress intended to prevent employers from forming "sham unions" to avoid dealing with "real unions" under the procedural rules of the NLRA. Before the NLRA employers were free to set up company unions to meet the procedural requirements of Section 7(a) of the National Industrial Recovery Act, and the independent unions claimed this harmed workers. In the Electromation case (1992) and in the DuPont case (1993) the National Labor Relations Board (NLRB) used Section 8(a)2 to strike down employee involvement (El) programs at the two firms. But El programs are not sham unions. They involve shared decision making between workers and management on such matters as production processes, quality control, work rules, and safety. The Employment Policy Foundation reports that El programs increase worker productivity by from thirty to forty percent. But unions feel threatened by El programs, because they represent labor-management cooperation without unions. Electromation was a union-free firm, and DuPont was a unionized firm in which the union was either unwilling or unable to deal with shared decision making. In effect, the NLRB ruled that labor-management cooperation, even in union-free firms, may violate the NLRA. The only kind of labor-management cooperation that is guaranteed not to break the law is union-management cooperation.

The NLRA presumes that workers and employers are natural enemies, and only independent unions can protect worker interests. Both presumptions are silly. Labor and capital are complementary factors of production. It is in the interest of workers and the owners of capital to discover ways to cooperate with each other. When the law impairs that discovery procedure both workers and owners of capital are harmed. Who knows what sort of effective forms of labor-management cooperation might have been discovered if the law permitted unrestrained experimentation with ideas offered by labor-management innovators? Different ideas would compete with each other. Those


that work would be adopted, and those that don't would be discarded. Monopoly unions, protected by statute-based privileges, are mainly interested in finding and implement- ing devices to perpetuate those privileges. Chances are that if unions didn't have these privileges many ways of protecting worker interests would be discovered to be supe- rior to monopoly unionism.

VII. Why Favor Labor Unions ?

The case law is filled with references to the intent of Congress to favor labor unions by granting the antitrust exemption. No court has ever addressed the issue of whether such favor is justified on constitutional grounds. Congress has spoken, and that is the end of the story. But why did Congress think it was proper to make this choice in the 1930s, and why does Congress not reverse this choice today? There are at least three expla- nations for Congress' determination to favor labor unions.

Muddled Thinking. Politicians are often guilty of woolly, sentimental thinking. For example, Section 6 of the Clayton Act proclaims that unions deserve special privileges because "the labor of a human being is not a commodity or article of commerce." This is nonsense. People, of course, are not commodities or articles of commerce, i.e., they are not bought and sold, but labor is, no matter what politicians say. A person's labor consists of the useful services that he or she is able to perform. People offer those services for sale, and other people buy (hire) those services in countless labor markets every day. In fact, when people who seek to sell their labor cannot find willing buyers the same politicians who deny that labor is a commodity rush to subsidize the disappointed sellers, just as they rush to subsidize other disappointed sellers of commodities such as corn.

Another example is Archibald Cox's "justification" of the exemption: "The antitrust laws are designed to ensure free markets by preserving and enforcing competition among a sufficient number of sellers of goods and services having such equal power as to prevent any one of them from controlling prices, supplies, or quality to the detriment of consumers. But labor unions do not compete against one another in the sale of labor" (1960). In other words, labor unions do not want to compete with each other so the law should not force them to do so. This is not an argument, it is simply Cox's opin- ion. Unions control wages, labor supplies, and labor qualities to the detriment of consumers, but Cox believes they are not supposed to compete with each other. Of course employers, in the same industry don't want to compete with each other either; but, Cox implies, that is different. They are supposed to compete. Why are employers supposed to compete while unions are not? Cox offers no explanation. He merely implies that since unions don't compete they shouldn't be forced to compete. Notwithstanding Hume's admonition, he derives an ought from an is.

Unequal Bargaining Power. Perhaps the most important reason is the widespread belief, in the 1930s and now, that individual workers have an inherent bargaining power disadvantage relative to employers and that labor unions are the only effective way for workers to overcome that disadvantage. Indeed, the NLRA asserts that "The inequal- ity of bargaining power between employees who do not possess full freedom of asso-


ciation or actual liberty of contract, and employers who are organized in the corporate or other forms of ownership association" is one of the principal wrongs the Act is intended to redress. But this inherent bargaining power disadvantage is little more than a hoary myth.

In any market, whether for labor or fish, sellers compete with other sellers to strike deals with buyers, and buyers compete with other buyers to strike deals with sellers. Whether a buyer or a seller, a person's bargaining power depends on the quantity and quality of exchange alternatives he or she has. In the labor market the buyers are employers and the sellers are workers. In an open labor market, workers compete with other workers to be hired by employers, and employers compete with other employers to hire workers. If a worker has many alternative employment opportunities, i.e., if there are many employers eager to hire him, he will have a lot of bargaining power vis-a-vis any one employer. If there is only one employer for whom he could work, he will have very little bargaining power vis-a-vis that employer. Similarly, if an employer has many workers who apply for a particular job, he will have a lot of bargaining power vis-a-vis any one worker. If there is only one worker willing to offer to sell labor services to him, he will have very little bargaining power vis-a-vis that worker.

For any given degree of competition among employers to hire, workers will have more bargaining power when there is less competition among workers to be hired. That is what unions are all about. They seek to quash competition among workers to be hired. (They say they want to "take wages out of competition.") They seek to eliminate hiring alternatives of employers by trying to impose standard union wages and trying to exclude union-free workers from union-impaired markets. A union that succeeds in doing so in any particular market becomes a monopolist in that market.

Likewise, for any given degree of competition among workers, employers will have more bargaining power when there is less hiring competition among employers. If there is no competition among employers - - either because there is only one employer in a particular labor market, or because the employers in that market have formed a hiring cartel - - workers in that market will have almost no bargaining power. Economists call this situation a monopsony (literally, a single buyer).

In the early and mid-19th Century there were many labor markets in which employers had monopsony power. The extent of this power gradually waned over the last third of the century, and in the first half of the 20th Century it all but disappeared. Henry Ford did more to increase the bargaining power of workers in general than any labor union has ever done by mass producing his early automobiles at low prices which made them available to ever increasing numbers of people. Automobiles increased the effective job search area for more and more workers. While workers without automobiles had access to very few alternative employment alternatives, workers with automobiles had many, many more. Today, technological progress in transportation and communication has eliminated monopsony power in almost all labor markets.

Evidence supporting the claim that monopsony power was waning long before labor unions played any significant role has been compiled by Reynolds (1995). Briefly,


over the 19th century, the trend of real wages and workers' material circumstances was strongly positive, worker initiated job-switching increased steadily and substantially, and large firms (ones likely to have any monopsony power that existed) consistently paid increasingly higher wages than small firms (Reynolds, 1995, pp. 12-13). All this took place without labor unions.

Purchasing Power Fallacy, A third explanation of why politicians think it is proper to favor labor unions is what has come to be called the purchasing power fallacy, It is alleged that in order for an economy to have sufficient aggregate demand to sustain full employment, workers must have high purchasing power at their disposal. The NLRA specifically says that "depressing wage rates and the purchasing power of wage earn- ers" has the effect of "aggravating recurrent business depressions" and that unioniza- tion ameliorates that problem. After all, many argue, to spend money people first must have money to spend.

In his comments on the House version of Taft-Hartley Act (1947) passed by the House, which would have applied antitrust laws to unions, Senator Robert Wagner wrote:

To apply the antitrust laws to business encourages competition in prices and is eco- nomically desirable. To apply the antitrust laws, however, to break up unions would promote competition to reduce wages and the purchasing power of the workers. The way to industrial peace is not through rendering unions impotent to raise and protect the standard of living and the purchasing power of the mass of consumers. That is the route to ruin, not only for labor but for business as well (Legislative History, p. 936).

The purchasing power fallacy confuses real and nominal wages. Lower wages do not mean lower purchasing power if prices are also lower. It also confuses real and nominal aggregate demand. When unions are able to obtain above-market real wages for the employees they represent, the effect is to reduce real aggregate demand in the economy. Looking beyond the veil of money, within a system of voluntary exchange, the production of one good is a source of demand for other goods. People produce wine, for example, in order to be able to exchange the wine for things other than wine, The production of wine is a source of the demand for things other than wine. The production of wine gives rise to incomes for all the people involved in producing wine. Workers receive wages and salaries, owners of assets receive interest, dividends and rents, and entrepreneurs receive profits. These incomes come from the difference between the prices consumers pay for wine and the prices the producers of wine have to pay to suppliers of intermediate goods (goods produced by one firm to be used by other firms as inputs, e.g., bottles and corks). These incomes are used by their recipients to purchase the goods they individually are interested in buying. Some portion may be spent on wine, but most is spent on things other than wine. Of course, the production of substi- tutes for wine, e.g., beer, directs some demand away from wine, so the source of the demand for any good is primarily the production of noncompeting goods (Hutt, 1974).

Now, the only way that a union can successfully obtain above-market real wages for workers is by restricting the supply of labor relative to the demand for it. Restrict-


ing the supply of labor in wine production results in curtailed production of wine. Thus the demand for all the noncompeting goods for which the unproduced wine was des- tined to be exchanged is diminished. Although the labor that is shut out of wine production will be hired in union-free markets to produce other goods, its productivity will be lower in these alternative employments because it will have been inefficiently allocated. (In open markets, resources, including labor, are allocated to their most highly valued uses. The union's entry restrictions prevent this from happening).

Similarly, the source of the demand for wine is the production of all the other goods that enable consumers of wine to purchase wine. If the production of some of those other goods is also curtailed by union activity, the demand for wine and many other noncompeting goods must decrease. Furthermore, unions usually impose work- rule restrictions that reduce labor productivity for each quantity of labor hired. From an aggregate perspective real output is the product of the quantity of labor engaged in production and the average productivity of that labor. Unions reduce both of those factors and therefore reduce the flow of output that is the source of real aggregate demand.

In sum, there are no logical, as opposed to sentimental, grounds for favoring labor unions over business enterprises in the area of antitrust or any other area. If we are to have antitrust laws they ought to apply equally to both types of organizations.

VIII. Two Possible Remedies

An apparent solution to the injustice of applying antitrust regulation to business enterprises but not to unions, is to treat the latter as the law currently treats the former. So, for example, since General Motors, Ford, and DaimlerChrysler cannot join together to fix prices of cars, apply the same rule to the employees of those firms. Require that a union cannot represent the workers of more than one firm. So there would be a union for General Motors employees, a separate one for Ford employees, and a third for DaimlerChrysler employees. Require also that those separate unions cannot collude with each other on any matters that come under the scope of collective bargaining. Sec- tion 9(f) of the House version of the Taft-Hartley Act would have done precisely this, but the Senate wouldn't go along and the provision was dropped (Legislative History, pp. 187-88). This has come to be called the "limitest" approach (Lewis, 1951). Under it, a union's collective bargaining activities would be limited to the one firm whose employees it represents. This could be done either by amending the Sherman Act or the NLRA, or both. Of course, if unions are forbidden to collude on collective bargaining issues, the same rule must apply to employers. This would eliminate all multi-employer collective bargaining. All legal collective bargaining would be one-on-one.

I think the obvious equality of treatment of unions and employers in the limitest approach would have broad political appeal. The problem is that it would be very dif- ficult to enforce. Collective bargaining calendars of separate unions in an industry are likely to overlap. Suppose, as a result of collusion, two or more unions make the same collective bargaining demands in the same industry at the same time. How would antitrust enforcement prove that it was collusion? The law could not prevent leaders of


different unions from getting together socially. It could not prevent conversations between these leaders about market conditions and bargaining strategies. It could only prevent the leaders from making explicit agreements to take specific collective bargaining positions. Those leaders could always claim that they came to the same collective bargaining strategies independently. They just happened to read market conditions in the same way. Moreover, just as it is possible today for a business firm to act as a price leader while avoiding antitrust prosecution, under the limitest approach it would be just as possible for a union to be a bargaining leader while avoiding prosecution. No law can prevent one union leader from saying to another, "That sounds like an interesting collective bargaining strategy. I shall be very interested to see how it works." The limitest approach would keep lawyers and judges busy; but, I am afraid, it would do little else.

With regard to the problems of boycotts, picketing, and strikes, it may be useful to repeal the Norris-LaGuardia Act 's expansive definition of a labor dispute. It could be made very clear that the only union activities that would enjoy immunity to antitrust laws would be labor disputes in which "the disputants stand in the proximate relation of employer and employee." This would mean, for example, that picketing of a strike target could only be done by actual employees of the target. No strangers bused over from union headquarters could join the picket line. This would also mean that all sec- ondary boycotts and strikes would be prohibited. Furthermore, it could be made clear that only peaceful primary strikes and boycotts would enjoy antitrust or any other kind of immunity. It is outrageous that under present law violence is privileged when it is undertaken in pursuit of "legitimate" union ends [e.g., U.S.v. Enmons, 410 US 396 (1973)].

The problem with this approach is that it does not go far enough, It does not, for example, address the anticompetitive nature of the NLRA itself. Collective bargaining on the NLRA model is inherently anticompetitive. Unions should not be protected from competition by exclusive representation, union security, and the proscription of company unions. Unions are cartels, and government should not be in the business of supporting cartels. Nor does government have to be in the business of prohibiting cartels.

IX. Why Any Antitrust Regulation ?

Milton Friedman, for one, thinks we would be better off without any antitrust regulation.

My own views about the antitrust laws have changed greatly over time. When I started in this business, as a believer in competition, I was a great supporter of antitrust laws; I thought enforcing them was one of the few desirable things that the government could do to promote more competition. But as I watched what actually happened, I saw that, instead of promoting competition, antitrust laws tended to do exactly the opposite, because they tended, like so many government activities, to be taken over by the people they were supposed to regulate and control. And so over time I have gradually come to the conclusion that antitrust laws do far more harm than good and that we would be better off if we didn't have them at all, if we could get rid of them (1999, pp. 6-7).


Most economists who understand the competitive market process argue that at best antitrust regulation is irrelevant, and at worst it is insidiously destructive. So long as combinations in restraint of trade are not supported by government, they are unlikely ever to be successfully launched, and when some are launched they very quickly collapse as individual members of the combination resort to various types of competitive activities. Competition is not a tender plant that can be easily killed. It is more like a weed. No matter how hard people try to kill it, it always comes back.

Briefly, there are at least four reasons why combinations in restraint of trade that are not supported by government will self-destruct.

The Problem oflnitial Agreement. Sellers who compete with each other are not carbon copies of each other. They may all agree that it would be nice to join together and, in solidarity, act as a monopolist would act, but then they have to agree on the details. Which prices should the cartel try to impose? A price that is optimal for a particular cartel member may be undesirable to other members. How should the cartel divide up the market? Since the sellers are likely be of unequal size, equal shares will not seem fair except to the very small members. Who should get bigger shares, and who should be content with small shares? Even if an economist could calculate the optimal shares for all members, they would be optimal from the point of view of the whole, not from the point of view of individual members. In short, most cartels that are proposed never get launched because the parties cannot agree on the rules. And if they are launched, the rules are always a subject of disagreement among members. Of course, if government imposes the rules there is no initial agreement problem. Gov- ernment imposes the rules for unions through the NLRA.

The Free-Rider Problem. If a cartel is successfully launched, its members will be expected not to cheat on the rules. No member should cut price, exceed his production quota, or encroach on another's territory. All should refrain from competitive acts. If everyone sticks to the rules, the cartel as a whole will maximize its profit, and each member will receive the share of those profits that is specified for it in the cartel agreement. Suppose, however, that one member decides to cheat on the rules while all the others adhere to them. The cheater will end up with more profits than he would if he didn't cheat. This is because since all other members stick to the rules, they will not undertake ordinary competitive acts to defend themselves against the cheater. The cheater gets a free ride at the expense of all the other members. First one member cheats, then another does, and more and more do until the whole cartel collapses. Put another way, every member of a cartel is subject to a temptation and a fear. The temptation is to try to be a successful free rider; the fear is that someone else will try to free ride at his expense. Of course, if government forces all members to obey the rules there is no free-rider problem. Congress intends union security to protect unions from free riders. But, as I discussed above, to the extent that the unions have a legitimate free-rider problem, it is self-inflicted through monopoly bargaining. Moreover, Congress has com- pletely ignored the forced-rider problem.

The Interloper Problem. If the members of the cartel are well known to each other and they trust each other it may be possible to overcome the free-rider problem, for a


while. With everyone sticking to the rules, the cartel will be maximizing profit, and that profit will be above competitive rates of return. Above average rates of return attract interlopers like flowers attract bees, In an open market all that is necessary for an entrepreneur to enter the market as a rival seller is to assemble the necessary resources through hiring contracts with resource owners. No permission from any authority must be obtained. The cartel cannot keep out the interlopers so what is it to do? It could bring them into the cartel, but as the size of the cartel grows the costs of policing the cartel agreement rapidly increase and each member 's share of monopoly profits is diluted. The interlopers will be strangers who do not enjoy the trust of the original members. This increases the probability that the free-rider problem will emerge with all its usual consequences. Of course, if government closes the market, i.e., keeps the interlopers out, there is no interloper problem. Exclusive representation and Section 8(a)2 of the NLRA protect unions from labor representation interlopers in unionized firms; and the NLRB, through decisions like Electromation, restrict similar interlopers in union-free firms.

Creative Competition. Competition is not a tender plant. When one form of competition is cut off, other forms will emerge. For example, from 1938-1978 the federal government supported a cartel of interstate airline companies. It prohibited all price competition; it assigned routes that the carriers could fly; and it kept out interlopers. Nevertheless, by the mid 1970s the carriers were having difficulty making any profits. The reason was that since ordinary modes of competition were prohibited, the carriers began to compete on the basis of frequency of flight. Those who were permitted to fly, say, between San Francisco and Atlanta, scheduled several flights a day for the con- venience of travelers. If one missed the 12 o 'c lock flight, not to worry, there would be another flight at 1:30. This meant that many airplanes were flying with many empty seats. This increased the carriers' cost per passenger-mile and consumed profits. Inter- estingly, when the carriers tried to get the government to extend its regulations to frequency of flight, the politicians balked and totally deregulated the airlines. Since then there are many more carriers flying most routes, and airline fares have fallen by over one-third. Of course, if government stamps out new forms of competition as soon as they are noticed, a cartel doesn't have to worry about creative competition. The NLRB tries to do this for the labor unions all the time.

The reasons why many economists think antitrust laws have been insidiously destructive of the competitive market process and entrepreneurial discovery are thor- oughly discussed by Armentano (1982). It turns out that many antitrust prosecutions have been initiated not at the behest of harmed consumers but at the behest of established firms that wanted to quash interlopers and their ideas for new ways to compete. For example, small grocers fought supermarkets, and department stores fought ware- house discounters. Other antitrust prosecutions were initiated because particular firms were so good at satisfying customers that their smaller rivals had a hard time surviv- ing. The Alcoa, IBM, and, more recently, Microsoft cases are examples. Antitrust laws are represented as necessary for the protection of consumers. In fact, they are used to restrict competition and benefit firms that are poor or lazy competitors at the expense of consumers.


In a free-market, monopolies not supported by government are always fleeting. When an entrepreneur creates a new product, a variation of an established product, a new production technique, a new marketing strategy, a new financial instrument, a new organizational architecture, or a new mode of labor representation, he will be a monopolist. The first to do something is always the only one to do it at the moment of innovation. If an innovation is successful it will soon be imitated, and the innovator's monopoly will gradually erode. If it is unsuccessful it will not be imitated, and it will collapse. If antitrust regulation is used to quash free-market monopolies at the behest of established enterprises and unions that are threatened by the innovations, the rate of innovation and the gradual improvements in standards of living that come from those innovations will be substantially reduced.

In sum, antitrust laws are dangerous. They can be, and often are, abused. Since consumers don't need them for protection against combinations in restraint of trade, they ought to be abolished. What consumers need is for government to get out of the business of supporting all such combinations - - including labor unions.

X. In Conclusion: A Radical Proposal

There is only one effective way for the law to treat business enterprises and unions equally with respect to antitrust: apply antitrust regulation to neither: Depend on the open market process to maintain competition in the labor market as well as the market for nonlabor goods and services. This policy doesn't have significant enforcement problems. For it to work, government's role in both markets consists merely of keeping them open and enforcing the rules of property, contract, and voluntary exchange.

Doing away with antitrust regulation is only one part of the proposal. The crucial other part is to repeal the NLRA and replace it with a system of voluntary unionism. Without the latter, the former doesn't make sense. To those who dismiss this proposal as politically impossible, I have two replies. First, along with W. H. Hutt (1971) I assert that nothing of value will ever be accomplished if innovators only propose what seems to be politically possible. History is replete with stories of the politically impossible becoming the status quo. In the 1950s the abolition of Jim Crow laws in the United States seemed politically impossible. Until the early 1990s the abolition of apartheid in South Africa seemed politically impossible. In comparison, the abolition of compulsory unionism seems not much at all.

Second, we have an excellent real world model for the abolition of compulsory unionism - - New Zealand. Prior to the economic reforms of the middle 1980s, New Zealand was perhaps the most socialistic, democratic country in the world. Then Labour Party Minister of Finance, Roger Douglas, began by deregulating finance and bank- ing, and then markets for nonlabor goods and services including New Zealand's inter- national trade. Finally, in 1991, under the National Party, New Zealand deregulated the labor relations market with the Employment Contracts Act (ECA). The ECA eliminated almost all forms of compulsory unionism (Kasper, 1996). Today in New Zealand, individual workers are free, on an individual basis, to decide whether to represent them-


selves or to authorize an agent to represent them in bargaining for wages and salaries and other terms and conditions of employment. Authorized agents can be unions, individuals, or nonunion organizations. While employers must recognize agents chosen by individual workers as representatives, they do not have to bargain with them. That is, if an employer wants to bargain for the labor of an individual union member it must do so through the union. However, if it chooses not to bargain for the labor of that individual it simply tells the union, "thanks, but no thanks." Unions may represent only their voluntary members. There can be no forced membership or forced dues. Employ- ers and workers are free to choose whether to enter individual or collective contracts. An employer may have individual contracts with some workers and collective contracts with others. All arrangements are made and carried out on the basis of mutual consent. Competition among alternative forms of labor representation is unrestricted and unreg- ulated. New Zealand workers and employers are free to choose.

In short, in New Zealand labor unions are now treated exactly the same as all other private, voluntary organizations. In New Zealand, the rule of law has been reestablished in labor relations. We should do the same in the United States.

NOTE

*1 thank Leo Troy, Rutgers University, Newark and Steven Shmanske, California State University, Hayward tot helpful comments on an earlier draft. The usual disclaimer applies.

REFERENCES

Armentano, Dominick T. Antitrust and Monopoly." Anatomy of a Policy Failure. New York: John Wiley, 1982.

Commanger, Henry Steele. Documents o f American Histo(v, 6th ed., New York: Appleton-Century-Crofts, 1958.

Cox, Archibald, "Strikes and the Public Interest: A Proposal for New Legislation?' Atlantic Monthly (Feb- ruary 1960) (www.theatlantic.com/issues/60feb/cox.htm).

Friedman, Milton. "The Business Community's Suicidal Impulse," Cato Policy Report 21 (Washington, D.C.: Cato Institute, March/April, 1999): 6-8.

Hurt, William Harold. Politically hnposs ib le . . . ? London: Institute of Economic Affairs, 197 I.

�9 A Rehabilitation of Say's Law. Athens: Ohio University Press, 1974.

Kasper, Wolf gang. Free to Work: The Liberalisation of New Zealand's Labour Markets. St. Leonards, Aus- tralia: Centre for Independent Studies, 1996.

Legishztive History of the lx~bor Management Relations Act. Washington, D.C.: National Labor Relations Board, 1948.

Lewis, H. Gregg. "The Labor Monopoly Problem: A Positive Program." Journal of Political Economy 59 (August 1951): 277-87�9

Reynolds, Morgan O. Economics of Labor. Cincinnati: South-Western College Publishing, 1995.