A favorite reply of union advocates69 to the above analysis is this: “Oh, that is all very well, but you are overlooking the indeterminacy of wage rates. Wage rates are determined by marginal productivity in a zone rather than at a point; and within that zone unions have an opportunity to bargain collectively for increased wages without the admittedly unpleasant effects of unemployment or displacement of workers to poorer jobs.” It is curious that many writers move smoothly through rigorous price analysis until they come to wage rates, when suddenly they lay heavy stress on indeterminacy, the huge zones within which the price makes no difference, etc.

In the first place, the scope of indeterminacy is very small in the modern world. We have seen above that, in a two-person barter situation, there is likely to be a large zone of indeterminacy between the buyer’s maximum demand price and the seller’s minimum supply price for a quantity of a good. Within this zone, we can only leave the determination of the price to bargaining. However, it is precisely the characteristic of an advanced monetary economy that these zones are ever and ever narrowed and lose their importance. The zone is only between the “marginal pairs” of buyers and sellers, and this zone is constantly dwindling as the number of people and alternatives in the market increase. Growing civilization, therefore, is always narrowing the importance of indeterminacies.

Secondly, there is no reason whatever why a zone of indeterminacy should be more important for the labor market than for the market for the price of any other good.

Thirdly, suppose that there is a zone of indeterminacy for a labor market, and let us assume that no union is present. This means that there is a certain zone, the length of which can be said to equal a zone of the discounted marginal value product of the factor. This, parenthetically, is far less likely than the existence of a zone for a consumers’ good, since in the former case there is a specific amount, a DMVP, to be estimated. But the maximum of the supposed zone is the highest point at which the wage equals the DMVP. Now, competition among employers will tend to raise factor prices to precisely that height at which profits will be wiped out. In other words, wages will tend to be raised to the maximum of any zone of the DMVP.

Rather than wages being habitually at the bottom of a zone, presenting unions with a golden opportunity to raise wages to the top, the truth is quite the reverse. Assuming the highly unlikely case that any zone exists at all, wages will tend to be at the top, so that the only remaining indeterminacy is downward. Unions would have no room for increasing wages within that zone.

• 69See the excellent critique by Hutt, Theory of Collective Bargaining, passim.

It is often alleged that the buyers of labor—the employers—have some sort of monopoly and earn a monopoly gain, and that therefore there is room for unions to raise wage rates without injuring other laborers. However, such a “monopsony” for the purchase of labor would have to encompass all the entrepreneurs in the society. If it did not, then labor, a nonspecific factor, could move into other firms and other industries. And we have seen that one big cartel cannot exist on the market. Therefore, a “monopsony’‘ cannot exist.

The “problem” of “oligopsony”—a “few” buyers of labor—is a pseudo problem. As long as there is no monopsony, competing employers will tend to drive up wage rates until they equal their DMVPs. The number of competitors is irrelevant; this depends on the concrete data of the market. Below, we shall see the fallacy of the idea of “monopolistic” or “imperfect” competition, of which this is an example. Briefly, the case of “oligopsony” rests on a distinction between the case of “pure” or “perfect”competition, in which there is an allegedly horizontal—infinitely elastic—supply curve of labor, and the supposedly less elastic supply curve of the “imperfect” oligopsony. Actually, since people do not move en masse and all at once, the supply curve is never infinitely elastic, and the distinction has no relevance. There is only free competition, and no other dichotomies, such as between pure competition and oligopsony, can be established. The shape of the supply curve, furthermore, makes no difference to the truth that labor or any other factor tends to get its DMVP on the market.

One common prounion argument is that unions benefit the economy through forcing higher wages on the employers. At these higher wages the workers will become more efficient, and their marginal productivity will rise as a result. If this were true, however, no unions would be needed. Employers, ever eager for greater profits, would see this and pay higher wages now to reap the benefits of the allegedly higher productivity in the future. As a matter of fact, employers often train workers, paying higher wages than their present marginal product justifies, in order to reap the benefits of their increased productivity in later years.

A more sophisticated variant of this thesis was advanced by Ricardo and has been revived by Hayek. This doctrine holds that union-induced higher wage rates encourage employers to substitute machinery for labor. This added machinery increases the capital per worker and raises the marginal productivity of labor, thereby paying for the higher wage rates. The fallacy here is that only increased saving can make more capital available. Capital investment is limited by saving. Union wage increases do not increase the total supply of capital available. Therefore, there can be no general rise in labor productivity. Instead, the potential supply of capital is shifted (not increased) from other industries to those industries with higher wage rates. And it is shifted to industries where it would have been less profitable under nonunion conditions. The fact that an induced higher wage rate shifts capital to the industry does not indicate economic progress, but rather an attempt, never fully successful, to offset an economic retrogression—a higher cost in the manufacture of the product. Hence, the shift is “uneconomic.”

A related thesis is that higher wage rates will spur employers to invent new technological methods to make labor more efficient. Here again, however, the supply of capital goods is limited by the savings available, and there is almost always a sheaf of technological opportunities awaiting more capital anyway. Furthermore, the spur of competition and the desire of the producer to keep and increase his custom is enough of an incentive to increase productivity in his firm, without the added burden of unionism.70

• 70On the Ricardo effect, see Mises, Human Action, pp. 767–70. Also see the detailed critique by Ford, Economics of Collective Bargaining, pp. 56–66, who also points to the union record of hindering mechanization by imposing restrictive work rules and by moving quickly to absorb any possible gain from the new equipment.