When I was younger it was fair to say I had Socialist leanings, as I have grown older I’ve educated myself in Economics, Finance and I’ve worked in businesses and my views have shifted away from that perspective.  I’ll try to explain succinctly below why trade union action can (occasionally) be justified, but is often wrong.  In short this is worth reading (however painful, or cognitive dissonance inducing) as an individual with Socialist leanings.

Note: the following thinking is true of a relatively free-market system; not one with massive market-distorting agents which infere with the underlying market mechanics.

Profitability.

Profitability is the lifeblood of private commerce; without profit businesses fail and people are laid off.  Profit is not a capitalist construct, it is a fact of life.  It refers to the positive balance of the efficiency of work done between the productive elements (labor, factories, machinery etc.)

This is not a PURELY economic concept. This can be categorized within the real economy in physical terms and physicists and engineers often do calculate this.

Also be aware, market distortions are often introduced through agents with vested interests, like governments, monopolists, cartels etc.

In simple terms:

Total Profit = Total Revenues – Total Costs

Furthermore profits are often REINVESTED to keep growing the company and maintain future profitability.

The_hand_that_will_rule_the_world

So why are unions often wrong?

There is precisely one scenario when unions are (potentially) justified in their action.  I will detail this one scenario below, and from there it follows that in every other conceivable scenario, union action is incorrect.  If you follow any other scenario through, given the above equation and based on how companies operate, you will see that this has to hold.

In the scenario where profitability is high AND the real economy is growing AND the company has more profit than reinvestment opportunities AND the divergence between the pay scales of the owners/management versus the workers is VAST then union action may be justified.

You’ll notice this is a lot of “ands”- this is why trade union action often fails.  Trade unions tend to apply action any time workers receive pay cuts in real terms. In a shrinking economy, or during times of shrinking profitability, this tends to lead to failed businesses where everyone loses.

Also be aware, ownership and management should ALWAYS accrue a risk premium for their efforts.  There is significant risk in owning and managing businesses (in the face of being acquired by another business, management may well be laid off, whereas the workers tend to remain with the firm).  Additionally, depending on the legal structure of the business, owners may lose their shirt too.

Are there any other negative issues posed by trade unions?

Yes, absolutely.  Unions tend to increase the unit cost of labor for firms- in absence of the above scenario, this will increase unemployment.  Workers will be laid off to reduce the overall costs of the business and maintain profitability.  It is the equivalent of a minimum wage hike (although that will affect the entire labor economy).

In short, unions only function well when the ownership is deliberately acting in an unscrupulous manner- sometimes this is true, but often this is not the case. I would argue that given the propensity for worker dissatisfaction and disruption to business activities, unscrupulous ownership and management is poor ownership and management.

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