Trade Union Boomerang

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In early September, employees of the Kutaisi metallurgic plant walked off the job with encouragement from the Georgian Trade Union Confederation (GTUC). The striking employees demanded that plant owner Eurasia Steel improve working conditions, which the GTUC leadership alleges are appalling and degrading.

Allegations leveled by the Georgian trade union follow the usual narrative which GTUC and its predecessor and affiliate unions have employed since the late Nineteenth Century. Back then, political parties with socialist orientation began using so-called professional “unions” to achieve political aims in several European countries.

The union narrative is now rather antiquated. Reduced to slogan, it is still a call to protect workers’ rights. Curiously, it is assumed that only an employee is a “worker” and, by inference, that an employer or owner does nothing other than unconscionably benefit from the fruit of others’ labors. That an owner invests capital in a business venture, and risks monetary loss to pay advance wages to employees, regardless of whether or not the venture proves successful, is somehow not regarded as a “job.”

The raison d’être of trade unions rests on several faulty assumptions. The first assumption implies the existence of some exceptional rights for employees which need to be protected. Yet, any process of exchange in a free economic environment rests on a voluntary choice. People exchange money for a certain commodity, service for money, and so on and so forth. We all have one and the same right; that is, to exchange what belongs to us – be it product, service, money or labor – for something that we want in return. An employer enjoys a right identical to that of an employee. An employer exchanges his/her own capital (money) for a certain service (labor) rendered by an employee. A job-seeker has the right to either agree or to disagree with such an exchange. Beyond that, it is not at all clear what additional or exceptional rights an employee should have – or why.

The second union assumption applies relatively complex theoretic constructions to justify a socialist economic agenda. Centuries ago, when people started thinking about commodity prices and what constitutes a “fair” price for this or that product or service, the labor theory of value emerged. This theory posits that the value of a commodity can be measured objectively by the labor cost required to produce it and the rate of profit. For example, the value of a car could be measured by the cost of labor required to manufacture it and the profit of the capitalist. This theory was quite popular for some time. It was so popular that even Adam Smith, widely recognized as the father of modern capitalism and the free-market economy, elaborated on it in his magnum opus, “An Inquiry into the Nature and Causes of the Wealth of Nations.” Smith’s theory of exchangeable value was further elaborated by David Ricardo - another free market champion considered perhaps the second most famous economist after Adam Smith. Ricardo hypothesized that, in the long term, profit, wages and rent (on land) would all be equalized. That meant the economic process is geared toward equalizing those three variables. Simply stated, an entrepreneur always makes efforts to keep production costs – land and labor – as low as possible; a land owner always tries to lease land at the highest rent obtainable; an employee (worker) always tries to sell labor at the best wage available. In the long term, the income of the entrepreneur (profit), the income of the landowner (rent) and the income of the employee (wages) must all be equalized – or everyone’s income (profit) must be equal.

The labor theory of value was a cornerstone of traditional Marxian economics and was used expansively by Marxists to achieve their aims. If one assumes that the profit of every person – capitalist, entrepreneur and employee – would be equal at some indefinite time in the future, then why not calculate right now how much that profit should be and try to equalize it artificially for everyone? If it turns out that a capitalist receives a “super-profit” – a higher profit than considered “fair” – the greedy capitalist would be an enemy of society. It is precisely this type of equality for which Marxists fought. Bolsheviks were no different in this respect. Their system of centralized planning of the Soviet economy was also based on this theory: If one can calculate a price for anything, then why is there any need for a free market or private property?

As it turned out, all was not that simple. The labor theory of value was first questioned when economists started mulling over the reality that some commodities that required less labor to produce were more expensive and in higher demand than other commodities whose production required much more time and energy. Even that realization did not factor in how the labor of all people could possibly be quantified with a single measurement. To this day no one knows how “acceptable” or “unacceptable” income should be calculated. Eventually, the labor theory of value was more or less rejected by most schools of economics. Surprisingly enough, even Marxists rejected it – albeit only after numerous futile attempts to defend it.

Ricardo’s hypothesis based on this theory – that economic regularity requires that profit, rent and salary all be equal – shared the same fate. Historic experience and later works of economists have shown that even if such a tendency were spotted, it could never be sustained to attain the result envisaged by Ricardo. It has been proved scientifically that Ricardo’s equilibrium could only be attained under static conditions; that is, when economy comes to a complete standstill or when people stop acting (existing).

The labor theory of value has long since been swept into the dustbin of history along with other once-widely accepted theories. But its demise has not stopped socialists from still fighting against capitalist greed and debating fair price and “super-profit” and, even now, talking about the need to equalize income, etcetera.

The development of modern economic thought has logically arrived at the conclusion that no objective or fair price for any product or service exists in nature. Every market price derives from subjective opinions/demands of people. A diamond is not a commodity of broad application, yet it costs much more than more widely consumed commodities because people give it such a high value. Water is essential to life and arguably the most vital of all commodities, yet it costs far less than diamonds. And because a fair price does not exist in nature, it is logically impossible to determine the fair cost of any given service or commodity (for instance, what a “fair” monthly salary of employees of the Kutaisi metallurgic plant should be). This is called the theory of subjective utility of value.

The discarded labor theory of value provides the conceptual rationale for trade unions in Georgia and elsewhere, even though Georgian trade union leaders themselves may never have heard of it. The Georgian Trade Union Confederation claims that it “fights” for social equality, labor rights, welfare of “workers.” In reality, narrow organizational interests are more likely behind its overwrought declarations and statements. What else might one expect from a Soviet-era structure whose only apparent aim is survival and whose only apparent objective is to justify its existence in any way possible?

The case of the Kutaisi metallurgic plant follows the usual narrative of trade unions. Here as well, on the premise of protecting labor rights, the GTUC encourages employees to demand improved working conditions, increased salaries and other benefits by walking off their jobs. Here as well, the trade union plays the role of defender of the downtrodden for the dual purpose of attracting new members and demonstrating its power to existing members. So what’s the problem? Doesn’t every organization fight for existence, to become stronger, to dominate the market?

The problem is this: a trade union is fundamentally different from a private company. When a private company tries to gain a dominant position in the market, it does so by offering its product or service at a lower cost and/or at a higher quality than its competitors in order to benefit the greatest number of customers. When a trade union tries to become stronger, it resorts to activities which, in the short term, demand benefits for its members at the expense of non-member citizens. In the long run, the activities of trade unions are damaging to everyone – member and non-member citizens alike.

Working conditions in the Kutaisi plant owned by the Indian company Eurasia Steel may indeed be bad. The majority of the readers of this article most likely would never want such a job. We may strongly wish that such working conditions never existed anywhere in the world. But the question which needs to be asked here is not whether or not we condone such conditions, but whether trade union tactics will do anything to improve those conditions.

Any investor who infuses capital in a business does so only after making certain estimates. One of the simplest coefficients a capital owner applies in deciding whether or not to start a business is return on investment (ROI) per invested dollar. Naturally, the higher the profit margin, the higher the likelihood of investment. In making that decision, an investor looks not only at a minimal margin of ROI which is acceptable to the investor, but also at other investment projects which compete with each other for free capital. In the end, the money invested should yield the capital investor the highest ROI with the lowest risk level.

We can presume that the owner of the Kutaisi metallurgic plant has also made such calculations. The owner would expect a certain amount of profit per invested dollar. If the owner realizes less profit than expected, it means the owner loses money by having invested in the Kutaisi plant rather than in some other project that would have yielded higher gains. The owner’s estimations must necessarily reflect the cost of human resources. If those costs increase substantially, then the plant owner’s profit margin decreases substantially. Trade union demands serve this very end. At first blush the union goal may seem commendable, but the consequences of union tactics (the strike, in the case of the Kutaisi plant) are dire.

If the state does not interfere and force the plant owner to meet demands of the protesters, the owner of the metallurgic plant can be expected to try to retain the estimated profit margin by not exceeding planned costs for human resources. To do that, the owner could fire the employees who are out on strike and recruit new employees to take their place. So far, more than twenty employees have already been fired. Given the high demand for jobs in Georgia, the owner of the plant could easily find job seekers (regardless of conditions there). Indeed, the owner has already filled a number of jobs at the plant with 150 Indian specialists and could fill all the rest with other invited employees. Under these circumstances, the 350 local employees currently employed there would lose their jobs.

Conversely, if the state ignores its primary duty to protect private property from infringement even on the part of striking workers and interferes in the employer-employee relationship by pressuring the owner to accommodate trade union demands, the owner would be left with two options. The owner could either (1) agree to provide the benefits demanded by remaining employees and still avoid an overall increase in labor costs with a reduced local workforce or (2) close down the business and relocate outside Georgia to avoid problems from the state.

In either of those scenarios, it is the employees themselves who lose. They decided to work at that plant not because they like the working conditions there, but because they have no better alternative. The trade union action which initially seemed to serve the interest of workers in reality ultimately harms them. It cannot be taken for granted that the plant owner will not pull out of the country and will instead agree to decrease estimated profit and continue operations because it would cost too much to close down the plant. Even if the union approach proves effective in the case of this one investor, any state policy tantamount to holding a foreign investor’s capital hostage would necessarily deter other foreign investors in Georgia. Without free capital flowing into the country, there would be a loss of jobs and no new jobs created. Economic growth would slow down or stop, undermining all of the achievements realized in recent years.

A separate issue is the particular interest of trade unions in the Kutaisi metallurgic plant, which was created entirely with Indian capital. The constant reference to the ethnicity of the employer which trade union leaders have emphasized in protest statements only fans xenophobic sentiments among supporters. Why haven’t Georgian trade unions staged protests at other enterprises (even those created with Russian capital)? Surely the Kutaisi plant does not have the worst working conditions in Georgia. This type of xenophobia is not a Georgian phenomenon. Historically, trade unions of various countries have displayed animosity toward “strangers” (especially immigrants willing to work for lower wages) because they have traditionally been seen as rivals for jobs.

The Georgian Trade Union Confederation enjoys strong support from rather influential international organizations pursuing social agenda, as well as from European structures. For its part, GTUC does its best to convince international circles that it is deeply concerned about the lot of oppressed people. It seizes every opportunity to depict Georgia as a country of “wild capitalism,” where poor people are trampled upon and the state turns a blind eye to deplorable labor conditions. Such rhetoric runs the risk of providing ostensible justification for postponing the start of Georgian negotiations on a free trade agreement with the United States and the European Union (EU). For political reasons, the Obama Administration and the EU have already made every effort to protract this process. At the end of the day, the EU will always protect its own market first and attempt to render Georgian production as noncompetitive as possible before allowing Georgia to enter the EU market. A permanent lobbying effort by trade unions for tight labor market regulation probably serves the same aim.

A long-term and sustainable solution to this situation is the maintenance of a free labor market. Only in a free market economy will we be able to attract more capital and create more job opportunities. The opportunity to accept alternative job offers is the strongest lever employees have when demanding better working conditions from an employer. Only in this way will we be able to maintain a competitive local market, which is a prerequisite for economic growth. What Georgian trade unions are doing now at the Kutaisi metallurgic plant is playing with the fate of all Georgian workers and manipulating the Georgian free market economy with outdated Marxist notions.

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