economics – Double Aspect

The Road to Serfdom at 75: Part II

Hayek’s proposals for resisting collectivism

In the last 10 days, I gave two talks ― one to the Runnymede Society chapter at the University of Victoria and one at the Université de Sherbrooke ― on Friedrich Hakey’s The Road to Serfdom. In yesterday’s post and in this one, I reproduce my notes for these talks. Yesterday’s post covered the context in which The Road to Serfdom was written and presented Hayek’s criticism of collectivism. This one reviews some of his proposed solutions. The page numbers refer to the 50th Anniversary Edition, which is the one I have in my possession.

What, then, is the alternative to collectivism? It is, naturally, individualism. Individualism, Hayek insists, is not selfishness. It is, rather, the “recognition of the individual as the ultimate judge of his ends, the belief that as far as possible his own views ought to govern his actions”. (66) The sovereignty of individual belief over individual action is, indeed, a burden as much as a right. Hayek reminds us “[t]hat life and health, beauty and virtue, honor and peace of mind, can often be preserved only at considerable material cost”, and “that we all are sometimes not prepared to make the material sacrifices necessary to protect those higher values”. (107) Individualism insists on “the right of choice, [which] inevitably also carries the risk and the responsibility of that right”. (112) But the alternative to making choices, however unpleasant, for ourselves is that others will make them for us.

Note that, from the insistence on the primacy of the individual follows naturally what Hayek calls “[t]he fundamental principle that in the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion”. (21) Hayek is especially well known for his insistence on the importance of this principle in the economic realm, but it applies much more broadly, as we shall see. Between collectivism and individualism as fundamental organizing principles of society, between “the order governed by the impersonal discipline of the market or that directed by the will of a few individuals”, (219) Hayek sees no middle ground, no possibility of compromise. The methods of collectivism are such that individual liberty cannot be preserved once they are being thoroughly applied, regardless of the purpose to which they are put. From that, it follows “[t]hat democratic socialism, the great utopia of the last few generations, is not only unachievable, but that to strive for it produces something so utterly different that few of those who now wish it would be prepared to accept the consequences”. (36) It is the ruthless, rather than the sincere democrats, who are able and willing to impose their values on the rest of society.

So what is to be done to secure this fundamental principle, and the supremacy of the individual on which it rests? I will focus on Hayek’s suggestions in three areas: the law, not only because this is my area of expertise, but also because Hayek’s first degree was, in fact, in law, and he deserves to be much better appreciated than he is as a legal philosopher; the economy, because after all Hayek is usually thought of as an economist (though he was much more than that), and a Nobel Memorial Prize winning one at that; and the relationship between the individual and society, because, I think that this, if anything, even more important both to Hayek himself, and especially to us as readers in an age where the preoccupations of collectivism are, ostensibly, not only or even primarily, economic.

Let me begin, then, with the law. Hayek sees its function as that of “creating conditions under which the knowledge and initiative of individuals are given the best scope so that they can plan most successfully”. (40; emphasis Hayek’s.) A sound legal framework is what enables competition and markets to serve “as a means of co-ordinating human efforts” (41) and so to provide for the needs and wants of individuals. Hayek is no anarchist; he is not, like Thoreau, saying that that government is best which governs not at all. (Indeed, he claims, in The Road to Serfdom, that “[i]n no system that could be rationally defended would the state just do nothing. An effective competitive system needs an intelligently designed and continuously adjusted legal framework as much as any other.” (45) (In Law, Legislation and Liberty, Hayek’s views on the design of legal frameworks change quite dramatically.)

But government, if it is to respect the ability of individuals to be masters of their own lives, must not only create and sustain a legal framework, but also bind itself by rules. In other words―in words that are of central importance to Hayek―we need the Rule of Law. As Hayek defines this phrase, it “means that government in all its actions is bound by rules fixed and announced beforehand―rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of that knowledge”. (80) In this way, “the government is prevented from stultifying individual efforts by ad hoc action”. (81)

This means that the law must consist of “formal rules which do not aim at the wants and needs of particular people”, (81; emphasis Hayek’s) and are not meant to produce substantive justice, whether defined in terms of equality or of some conception of merit. An attempt to produce rules―whether laws or administrative rulings―aiming at modifying the lot of particular people means that the law “ceases to be a mere instrument to be used by the people and becomes instead an instrument used by the lawgiver upon the people and for his ends”. (85) Laws that are qualified “by reference to what is ‘fair’ or ‘reasonable’”, (86) which can only be applied on a case-by-case basis, are antithetical to the Rule of Law; they result in “increasing arbitrariness and uncertainty of, and consequent disrespect for, the law and the judicature, which in these circumstances could not but become an instrument of policy”. (87)

Relatedly, “the discretion left to the executive organs wielding coercive power should be reduced as much as possible”, (81) which has the added benefit of enabling democratic control over the exercise of this coercive power. Such control, Hayek argues, is only possible when the executive works towards ends determined by a democratic process―that is, ends on which political consensus can exist, rather than being manufactured by the executive itself―and in accordance with standards compliance with which can actually be assessed. In the absence of such standards, there is no Rule of Law, even if the executive is ostensibly authorized to act by vague and broad delegations of power. (91)

It is important to note that Hayek’s rejection of the pursuit of substantive equality by means of laws targeting particular groups or authorizing discretionary administrative decision-making does not proceed from a lack of interest in rights, or indeed equality. On the contrary, he endorses a substantive conception of the Rule of Law, which incorporates “limitations of the powers of legislation [that] imply the recognition of the inalienable right of the individual”. (93) He also warns that state control of the economy will be used “to pursue a policy of ruthless discrimination against national minorities” (96) or against otherwise unpopular groups or persons.

This brings me to the realm of economics. The Road to Serfdom emphasizes the importance of competition between producers―including both firms and workers. Competition is preferable to allocation of resources according to some pre-defined plan, or to the views of government decision-maker, “not only because it is in most circumstances the most efficient method known but even more because it is the only method by which our activities can be adjusted to each other without coercive or arbitrary intervention of authority”. (41) The world is so complex that no planner, whether an individual or a government agency, can embrace the whole picture of the resources available to a society, the needs and desires of individuals, the ideas they are generating.

Being left to pursue their interests and opportunities within a general framework of rules, individuals and firms will create more, not only in terms of material wealth, but also of innovation and opportunity, than if they worked at the direction of government. A bureaucracy attempting to direct them simply could not anticipate what possibilities might arise, and what prospects its orders might foreclose. It is worth pointing out that Hayek sees a role for regulation, whether to protect the rights of workers or even the environment. At least in The Road to Serfdom―his views on this become more uncompromising later―Hayek claims that “preservation of competition [is not] incompatible with an extensive system of social services―so long as the organization of these services is not designed in such a way as to make competition ineffective over wide fields”, (43) and they are, instead “provided for all outside of and supplementary to the market system”. (133)

On the other side―as consumers―a competitive economy leaves us choices that regulation or government control would take away. Hayek explains that “[o]ur freedom of choice in a competitive society rests on the fact that, if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist we are at his mercy. And an authority directing the whole economic system would be the most powerful monopolist conceivable.” (102) While the market does not always provide us with as many opportunities as we would like, it at least leave us the choice of how to direct our limited resources, instead of leaving us dependent on others’ views “of what we ought to like or dislike” (103) or how we ought to value the different aims that we would like to pursue. (99) The market does not distribute wealth and resources “according to some absolute and universal standard of right”―which in any case does not exist―, but nor does it make distribution subject to “the will of a few persons”. (112) In a market economy, “who is to get what … depends at least partly on the ability and enterprise of the people concerned and partly on unforeseeable circumstances”. (112-113)

I turn, finally, to the question of the relationship of the free individual to a free polity. The commitment to individualism imposes significant burdens on both―or rather, on both the individual as a private agent and on the same individual as a citizen and member of a political community.

In politics, we must learn to recognize the reality of the constraints and limitations within which we make our choices: in particular, of economic constraints. We must accept that they are not the product of some sinister will, but of forces no less real for being impersonal. Hayek explains and warns that

[a] complex civilization like ours is necessarily based on the individual’s adjusting himself to changes whose cause and nature he cannot understand: why he should have more or less, why he should have to move to another occupation, why some things he wants should become more difficult to get than others, will always be connected with such a multitude of circumstances that no single mind will be able to grasp them; or, even worse, those affected will put all the blame on an obvious immediate and avoidable cause, while the more complex interrelationships which determine the change remain inevitably hidden from them. (223)

We must understand that while “[i]t may sound noble to say, ‘Damn economics, let us build up a decent world’”, this “is, in fact, merely irresponsible”. (230) The attempt to build up a decent world risks empowering the demagogues offering easy solutions that solve nothing, and destroy what we already have.

To resist them, we need also to accept that ends do not justify all means; that collectivist and a fortiori dictatorial instruments cannot be put in the service of the right ideals, or entrusted to the right people, without either corrupting them or being seized by the more ruthless and corrupt; that “power itself” is “the archdevil”, (159) and that power concentrated in the hands of the state “is … infinitely heightened” (159) in comparison with that wielded by private actors. Once again, the echoes of The Lord of Rings are unmistakable.

We need, moreover, to firmly reject “the presumption of any group of people to claim the right to determine what people ought to think or believe”. (180) Perhaps most controversially for our time, Hayek cautions against a loss of “belief in Western civilization” and “a readiness to break all cultural ties with the past and to stake everything on the success of a particular experiment”. (203) (It would perhaps not be superfluous to note that Hayek would later write an essay called “Why I Am Not a Conservative”; he always considered himself a liberal―in the European, not the American, sense of the word.)

Last but not least, we ought to remember that morality is not measured by the intensity of our “indignation about the inequities of the existing social order” (230) but “by standards [of] individual conduct, and on the seriousness with which we uphold moral principles against the expediencies and exigencies of social machinery”. (231) We are acting morally, in other words, not when we are engaged in virtue-signalling or being “unselfish at someone else’s expense”, or indeed “being unselfish if we have no choice”, (231) but when we choose to put our own self-interest on the line for our principles. On this point, it is worth emphasizing that voting, in particular, is no test of individual morality, since it requires no “sacrifice of those of [those] values [one] rates lower to those [one] puts higher”. (233)

It is in our private conduct that we ought to be unselfish, concerned with equality, and generally do what we think is right. We must recall, Hayek says, that “[r]esponsibility, not to a superior, but to one’s conscience, the awareness of a duty not exacted by compulsion, the necessity to decide which of the things one values are to be sacrificed to others, and to bear the consequences of one’s own decision, are the very essence of any morals which deserve the name”. (231-32) We ought also to practice actively those “individualist virtues” to which I already referred: willingness to stand up for our opinions also ability to respect for those who disagree with us; magnanimity not to punch down and courage not to kiss up; good humour and presumption of good faith. We need, in other―Abraham Lincoln’s―words, to act “with malice toward none, with charity for all, with firmness in the right as God gives us to see the right”. Importantly, Hayek reminds us that “these individualist virtues are at the same time eminently social virtues”, (163) in that they make a society where they are practiced a much more pleasant place to live than one where they are forgotten.

Firmness in the right as we are given to see the right is perhaps an especially important theme for Hayek, though unlike Lincoln, he writes of individual conscience as what gives us to see the right. He insists on the importance of “readiness to do what one thinks right … at the sacrifice of one’s own desires and perhaps in the face of hostile public opinion”, (232) “to back one’s own conviction against a majority”. (233) Related to this is the imperative to hold on to the “old meaning” of the word “truth” as “something to be found, with the individual conscience as the sole arbiter of whether in any particular instance the evidence (or the standing of those proclaiming it) warrants a belief”, (178-79) and not whatever the authorities want us to believe for the sake of maintaining social cohesion.

As an academic, I especially want to highlight the need to stand up to the tendency to put “the disciplines dealing directly with human affairs and therefore most immediately affecting political views, such as history, law, or economics”, in the service of “the vindication of the official views” rather than a search for truth. (176) We must not allow law schools, or history departments, to be made into “factories of the official myths which the rulers use to guide the minds and wills of their subjects”. (176) As Hayek wrote all these years ago, “contempt for intellectual liberty is not a thing which arises only once the totalitarian system is established but one which can be found everywhere among intellectuals who have embraced a collectivist faith”. (179) Runnymede is fighting the good fight in opposition to this contempt.

Let me conclude with a warning and an exhortation. The warning is that reading The Road to Serfdom will not fill you with joy. It is dispiriting to see just how much Hayek’s warnings about the dangers of collectivism are still applicable today, three quarters of a century after he wrote. It would be much easier to think of whatever problems we are facing in our time as temporary aberrations rather than as avatars of a long, perhaps a permanent, dark streak in human nature, which is what their persistence suggests they are.

But the exhortation is to pick up The Road to Serfdom regardless and, having read it, to do what you can to push back against the trends that it describes. As Hayek says, “[i]t is because nearly everybody wants it that we are moving in this direction. There are no objective facts which make it inevitable.” (7) As Gandalf points out in The Lord of the Rings, “all who live to see [evil] times” wish them away, “[b]ut that is not for them to decide. All we have to decide is what to do with the time that is given us.”

L’Uber et l’argent d’Uber

Une poursuite contre Uber carbure à l’ignorance économique

Certaines personnes qui ont eu recours aux service d’Uber la nuit du Nouvel an ont payé cher. Très cher même, dans certains cas. Car, contrairement aux taxis traditionnels dont les prix sont toujours les mêmes, Uber pratique ce que l’entreprise appelle le « prix dynamique » ― un prix qui fluctue, parfois très rapidement, en fonction de la demande pour ses voitures qui existe à un endroit et à un moment donné. Puisque la demande était très forte et très concentrée à la fin des festivités du réveillon, les prix ordinaires ont été multipliés par un facteur parfois très élevé ― facteur dont un client qui commandait une course était avisé, et qu’il devait même entrer, manuellement, dans l’application afin de pouvoir passer sa commande.

Or, on apprenait vendredi qu’une des clientes d’Uber, Catherine Papillon, qui a payé 8,9 fois le prix ordinaire pour sa course, veut intenter un recours collectif contre l’entreprise, à moins que celle-ci ne la rembourse. Représentée par Juripop, elle prétend avoir été lésée par le prix « anormalement élevé[…] » qu’elle a payé. Quant au consentement qu’elle a donné en commandant sa course, elle soutient que celui-ci ne peut lui être opposé vu la lésion qu’elle a subie. Elle affirme, du reste, ne pas avoir compris ce que le « 8,9 » qu’elle a entré en passant sa commande voulait dire.

Patrick Lagacé explique bien, dans une chronique parue dans La Presse, pour les personnes dans la situation de Mme Papillon ne méritent pas notre sympathie:

La nuit du Nouvel An, vous le savez sans doute, est la pire nuit où tenter de trouver un taxi. J’ai personnellement frôlé l’amputation du gros orteil droit, un 1er janvier de la fin du XXe siècle, en tentant de trouver un taxi au centre-ville de Montréal pour me ramener à bon port, au petit matin. Des centaines, peut-être des milliers d’autres cabochons dans la même situation que moi cherchaient eux aussi des taxis, introuvables…

Un détail révélateur du récit de Mme Papillon suggère qu’elle aussi se retrouvait dans une situation similaire : elle « a expliqué qu’elle s’est inscrite sur Uber “en cinq minutes”, peu avant de faire appel à la compagnie dans la nuit du 31 décembre au 1er janvier ». On ne sait pas encore pourquoi elle l’a fait, mais on peut deviner, n’est-ce pas? (Et les avocats d’Uber ne manqueront pas, j’en suis sûr, de lui poser la question pour confirmer la réponse dont on se doute.) Alors, écrit M. Lagacé, quand les gens acceptent de payer un prix, fût-il exorbitant, qui leur est clairement annoncé, pour s’épargner la recherche futile d’un taxi qui n’arrive jamais, eh bien, c’est un choix qu’ils font et dont ils devraient assumer la responsabilité.

Le droit voit-il les choses d’une manière différente? Je ne suis pas civiliste, encore moins spécialiste du droit de la consommation. Je ne prétendrai donc pas émettre de pronostic sur l’issue de la cause de Mme Papillon. Je crois, cependant, pouvoir émettre une opinion sur ce que le résultat de ce recours devrait être si les juges qui en disposeront s’en tiennent aux principes élémentaires qu’il met en cause.

Ces principes sont non seulement, et peut-être même pas tant, moraux qu’économiques. Les biens et les services n’ont pas de valeur intrinsèque qui pourrait servir à déterminer leur prix « juste ». Leur prix sur un marché libre dépend de l’offre et de la demande. Il s’agit, en fait, d’un signal. Si un service ― par exemple une course en taxi ― commande un prix élevé, les vendeurs ― par exemple, les chauffeurs ― savent qu’ils feront beaucoup d’argent en offrant le service en question. Plusieurs vendeurs s’amènent donc sur le marché ― par exemple, dans les rues du Vieux-Montréal ― pour offrir leurs services aux acheteurs. En même temps, le prix élevé signale aux acheteurs que s’ils le veulent acquérir le service, il leur en coûtera cher. Ceux qui tiennent à l’obtenir le feront, alors que d’autres trouveront des alternatives ou attendront. C’est ainsi que le nombre de vendeurs et d’acheteurs s’équilibre, et que ceux qui sont prêts à payer sont servis rapidement. Uber prétend que ceux qui ont voulu utiliser son service le matin du Jour de l’An n’ont attendu qu’un peu plus de quatre minutes, en moyenne, grâce au nombre record de chauffeurs qui étaient sur la route. Personne parmi eux, on peut parier, n’a « frôlé l’amputation du gros orteil droit », comme M. Lagacé jadis.

Son histoire est, par ailleurs, un bon rappel de ce qui arrive si les prix ne peuvent pas augmenter en réponse à une forte demande ― par exemple parce qu’ils sont fixés par décret gouvernemental, comme le sont les prix du taxi traditionnel. Puisque les prix n’augmentent pas, les vendeurs n’ont aucune raison supplémentaire d’entrer sur le marché, et il n’y en a pas plus que d’habitude. Si, en plus, le nombre de vendeurs est limité ― par exemple, parce que le gouvernement fixe un nombre maximal de licenses de taxi ― il ne peut pas augmenter pour répondre à une demande exceptionnelle par définition. Dès lors, c’est l’attente et la chance, plutôt que la volonté de payer qui déterminent qui recevra et qui ne recevra pas le service ― et les engelures s’ensuivent.

J’en arrive aux questions juridiques qui se poseront dans la poursuite contre Uber. Mme Papillon et ses avocats prétendront sans doute que le contrat qui fait en sorte qu’une course de taxi qui coûte 80$ au lieu d’une dizaine « désavantage le consommateur […] d’une manière excessive et déraisonnable », ce qui, en vertu de l’article 1437 du Code civil du Québec, donne ouverture à la réduction de l’obligation qui découle de ce contrat ― en l’occurrence, du prix payé par Mme Papillon. Ils soutiendront aussi qu’il s’agit d’un cas où « la disproportion entre les prestations respectives des parties est tellement considérable qu’elle équivaut à de l’exploitation du consommateur, ou que l’obligation du consommateur est excessive, abusive ou exorbitante », ce qui permet également au consommateur de demander la réduction de ses obligations, en vertu cette fois de l’article 8 de la Loi sur la protection du consommateur. Ils auront tort.

Car penser que la prestation d’Uber se limite au déplacement de son client, c’est ignorer les principes économiques fondamentaux que je viens d’exposer. Uber ne fait pas que déplacer son passager d’un point de départ à un point d’arrivée. Avant même de pouvoir le faire, Uber s’assure d’abord qu’il y aura une voiture pour cueillir le client ― et qu’elle sera là en un temps utile ou, du moins, assez court pour que le client ne se gèle pas les extrémités. C’est ça aussi, la prestation d’Uber, et la raison pour laquelle les gens font appel à ses services même lorsque ceux-ci sont plus chers que le taxi traditionnel. Et c’est pour s’assurer de livrer cette prestation qu’Uber doit faire augmenter ses prix lorsque la demande pour ses services est particulièrement forte. Le recours de Mme Papillon, qui fait abstraction de cette réalité, est, dès lors, fondé sur l’ignorance des règles économiques de base ou sur l’aveuglement volontaire face à celles-ci. Si les juges qui se prononcent sur ce recours comprennent ces règles, ils le rejetteront du revers de la main.

S’ils souhaitent raisonner a contrario, les juges pourront, par ailleurs, se demander quelle serait la réparation qu’ils devraient accorder s’ils faisaient droit à la demande de Mme Papillon. Il s’agirait, de toute évidence, d’une réduction du prix payé ― mais une réduction jusqu’à quel point? Si un commerçant réussit à flouer un consommateur en lui faisant payer un prix exorbitant, mais qu’il remplit, par ailleurs, ses obligations en vertu du contrat, il semble juste de réduire le prix jusqu’à celui qui prévaut sur le marché. Or, y a-t-il un tel prix dans les circonstances qui nous intéressent? Le prix du taxi traditionnel n’a rien à voir avec celui du marché, non seulement parce qu’il est le produit d’un fiat gouvernemental, mais aussi parce que, de toute évidence, ce n’est un prix d’équilibre, c’est-à-dire un prix auquel l’offre et la demande se rejoignent. Au prix du taxi traditionnel, la demande est de loin supérieure à l’offre ― d’où l’orteil gelé de M. Lagacé. Comment un tribunal s’y prendrait-il pour déterminer le prix du marché en l’absence, justement, d’un marché ― autre que celui qu’Uber a créé? Il ne pourrait le faire que d’une façon parfaitement arbitraire, ce qui serait contraire à notre compréhension habituelle du rôle des tribunaux. (J’avais déjà soulevé un problème similaire en parlant d’un recours contre la SAQ, fondé, lui aussi, sur l’article 8 de la Loi sur la protection du consommateur.) Comment est-ce qu’un tribunal saurait, en fait, que le prix exigé par Uber n’est pas le prix du marché? C’est à Mme Papillon, en tant que demanderesse, de le prouver, me semble-t-il. Je ne vois pas comment elle pourrait le faire.

Un mot, en conclusion, sur la position de Juripop dans cette histoire. Cet organisme n’est pas un bureau d’avocats ordinaire qui défend la cause de ses clients, fût-elle guidée par la plus pure cupidité. C’est soi-disant une « clinique juridique », une « entreprise d’économie sociale », dont la mission consiste à « soutenir l’accessibilité [sic] des personnes à la justice ». Or, Juripop ne se place pas du côté de la justice en appuyant Mme Papillon. Car la justice ne consiste pas à se déresponsabiliser face aux conséquences annoncées d’actions qu’on a posées, comme elle cherche à le faire. Et la justice ne peut pas se réaliser dans l’ignorance des lois économiques. Comme le disait fort sagement Friedrich Hayek dans La route de la servitude, « [i]l peut sembler noble de dire, “au diable la science économique, bâtissons plutôt un monde décent” ― mais c’est en fait simplement irresponsable » (je traduis). Les québécois le savent, d’ailleurs: ce n’est pas réclamer justice que de vouloir le beurre et l’argent du beurre.

The “Unequal Bargaining Power” Trope

Defenders of trade unions generally, and of constitutional protections for union rights, notably the right to force an unwilling employer into collective bargaining and the right to strike, usually invoke the “unequal bargaining power” of workers and employers in support of their position. The Supreme Court relied on this claim when it constitutionalized the right to collective bargaining in Mounted Police Association of Ontario v. Canada (Attorney General), 2015 SCC 1, [2015] 1 S.C.R. 3, and the right to strike in Saskatchewan Federation of Labour v. Saskatchewan, 2015 SCC 4, [2015] 1 S.C.R. 245. In Mounted Police, the majority claimed that

Without the right to pursue workplace goals collectively, workers may be left essentially powerless in dealing with their employer or influencing their employment conditions. … Individual employees typically lack the power to bargain and pursue workplace goals with their more powerful employers. Only by banding together in collective bargaining associations, thus strengthening their bargaining power with their employer, can they meaningfully pursue their workplace goals. [68, 70]

The problem with this statement is that it is simply not true. I said so here and in a National Post op-ed. But you don’t have to take it from me. Take it from the economist Bryan Caplan, who has a detailed, point-for-point reply to an “unequal bargaining power” argument over at EconLog. Hard as it is to resist the temptation to copy and paste the whole thing here, I’ll content myself with just two quotes:

Everyone talks as if bosses have the better end. But talk is very different from action. If everyone were trying to start their own businesses and hire workers, that would count as “acting as if bosses have the better end of the deal.” Most workers, however, make no effort to become entrepreneurs. You could object that most workers don’t have the money to open their own businesses, but most rich workers make no effort to become entrepreneurs either.

And:

Most workers in the U.S. aren’t in unions. Most aren’t even close to being in unions. Yet most U.S. workers earn well above the minimum wage. A simple supply-and-demand story can explain this. [The “unequal bargaining power means unions are necessary”] story doesn’t.

Please, please, please read the whole thing ― and pass the link on to a Supreme Court judge the first chance you have. Thank you!

Laboured Thoughts

Over the last few weeks, the Supreme Court re-wrote yet another part of the Constitution ― this time, the Charter’s freedom of association provision. Section 2(d) now means that labour unions have a constitutional right to participate in a “meaningful process of collective bargaining,” created in Mounted Police Association of Ontario v. Canada (Attorney General), 2015 SCC 1, and in many if not in all cases, to strike in order to achieve their goals within that process, created in Saskatchewan Federation of Labour v. Saskatchewan, 2015 SCC 4. After the first of these decisions, Omar Ha-Redeye wrote that “everything we thought we knew” ― everything, that is, that the Supreme Court itself had been telling us ― “about labour law in Canada and s. 2(d) changed.” And then, a couple of weeks later, it changed some more. Mr. Ha-Redeye’s posts, over at Slaw (here and here), set out, with some sympathy if I read him right, the labour law story. In this post, I want to say something about the assumptions behind that story. As will quickly become obvious, for my part, I have no sympathy whatsoever for what the Court has done.

The foundations of the Supreme Court’s freedom of association jurisprudence, and especially its recent decisions, are shaky in several respects. I will skip over its cavalier approach its own recent precedents, which Mr. Ha-Redeye describes, pointing out that “when the law and interpretation of the constitution shifts so drastically, it also leads to some very creative legal writing,” including an “interpretation of existing case law” that is “open to dispute.” Geoff Plant, at Plant’s Rant, has also criticized the court (here and here) ― harshly and, in my view, with good reason. I, instead, will focus on the Court’s economics, methodology, and view of its own powers.

The Court’s utter failure to understand the economics of trade unionism taints its interpretation of the s. 2(d) right. The Court believes that “[w]ithout the right to pursue workplace goals collectively, workers may be left essentially powerless in dealing with their employer or influencing their employment conditions” (Mounted Police, para. 68). Trade unions, and the imposition on employers of a duty to bargain with them, are in its view required to redress this imbalance of power. This is simply not true. A majority of workers in Canada are not unionized. Are they all at the mercy of their employers, unable to obtain reasonable employment conditions? Of course not. At the very least, judges ought to be aware that Bay Street lawyers ― including associates ― are not exactly starving because they are not unionized. Nor are, say, executives, or the employees of Google. In a competitive market, an employer will not be able to impose unfair employment conditions on workers, no more than the buyers of goods are able to impose their conditions on the sellers. Sure, the labour market is not perfectly competitive. But nor is any other. The Court does not even attempt to explain why the labour market is somehow uniquely unbalanced.

Admittedly, it is true that in a competitive market, a worker by himself has almost no ability to “influence his employment conditions” ― but the exact same thing is true of the employer. Employment conditions for a given category of worker, like the price of any good in a competitive market, are those at which the market reaches equilibrium. They are outside the control of anyone ― worker or employer. So the Court is right to say that trade unions are necessary to give workers power to influence their working conditions. But that’s because in order to give anyone such power, the labour market must be distorted and made uncompetitive. This is exactly what trade unions do, by cartelizing labour supply and reducing the competition between workers that helps, like competition between suppliers in any market, keep the prices at equilibrium. In economics terms, labour unions extract monopoly rents from their employers ― who, of course, pass on the cost to consumers, if the employer is a private firm, or to taxpayers, if the employer is the government. (Another consequence of the artificially inflated cost of workers which the unions create is, as in any other market, the demand for labour goes down ― in other words, fewer workers will be employed. The Court seems to be blissfully unaware of this.)

Now some labour markets may be particularly uncompetitive. For instance, for some jobs, the government is (almost) the only employer, and might be able to exercise a monopsony power to drive down the price it pays for labour below what it would be in a competitive market. For these specific occupations, there might be a case for a prima facie right to bargain collectively, though even there, the costs it generates might be such that restrictions to that right would be well justified. But they are exceptions, and cannot justify extending, as a matter of constitutional law, a right to bargain collectively, and to strike, to all workers.

This discussion leads me to a second problem with the basis of the Supreme Court’s section 2(d) jurisprudence, which I referred to, above, as a methodological one ― its lack of grounding in the sort of social science evidence which it has been favouring in some of its recent decisions, such as Canada (Attorney General) v. Bedford, 2013 SCC 72, [2013] 3 S.C.R. 1101. As support for its claim about the purported imbalance of bargaining power, the Court cites not some economic study, but an almost-octogenarian decision of the U.S. Supreme Court. Indeed, the lengthy list of “authors cited” in the Court’s two recent decisions (which includes citations by the dissenters as well the majority opinions) consists largely of labour law scholarship, with a sprinkling of industrial relations studies, and not a single economics one. It is bad enough when judges, in Richard Posner’s words “duck, bluff, weave, change the subject” because “they don’t understand the activity from which a case before them has arisen” (Reflections on Judging, 85-86). But it is worse when think they understand it, but are in fact, proceeding on the basis of ideas that are little better than folklore. To quote Judge Posner once more, “[w]e need evidence-based law across the board, just as we need evidence-based medicine across the board, and not a combination of scientific and folk medicine” (62).

Now the Court is probably not alone to blame for this state of affairs. If the governments that were defending their approaches to labour law failed to adduce relevant economic evidence, or indeed any economic evidence, they missed an opportunity to force the Court to consider it. Moreover, at the s. 1 justification stage, the governments did not press cost considerations as the objectives behind the statutes whose constitutionality was challenged, focusing rather on the need for effective service delivery. Perhaps they had a sense that merely financial reasons would not be regarded as sufficient to justify infringements of rights. And indeed they often shouldn’t be. But the cost of union rights is a different matter than, say, the expense of printing ballot papers which courts surely could, under s. 3 of the Charter, require a government to incur.

That’s not so much because of the amounts in issue, but because making the Court consider the cost of its decisions would have required it to confront the third, and perhaps most fundamental problem with its reasoning ― its misapprehension of its constitutional role. As Justices Rothstein and (in Saskatchewan Federation of Labour) Wagner point out, labour law involves balancing competing interests, which is something legislatures are often better than courts at doing. But the issue is, if anything, even more fundamental. To the extent that public sectors unions are involved ― and they are the ones who drove the litigation that led to these decisions, and their main, if not their only, beneficiaries ― one of the competing interests is that of the taxpayers. The Supreme Court’s intervention in the field of labour law makes public sector workers much more expensive to employ which, at least in the short and medium term, means substantial public expenditures. The issue is not simply one of institutional competence. It is one of basic legitimacy. Allowing the citizens’ elected representatives to decide how they will be taxed, and how their money will be spent is, at least historically, the first and most basic function of a democratic constitution. Charles I lost his head over this issue, James II his crown, and Britain, its American empire.

Still, institutional competence matters too, and indeed it is directly connected to the issue of democratic legitimacy. As the Supreme Court itself had recognized in Irwin Toy Ltd. v. Quebec (Attorney General), [1989] 1 S.C.R. 927,

[w]hen striking a balance between the claims of competing groups, the choice of means, like the choice of ends, frequently will require an assessment of conflicting scientific evidence and differing justified demands on scarce resources. Democratic institutions are meant to let us all share in the responsibility for these difficult choices. Thus, as courts review the results of the legislature’s deliberations, particularly with respect to the protection of vulnerable groups, they must be mindful of the legislature’s representative function.

The idea that legislatures are entitled to some deference (the extent of which, admittedly, has never been made very clear), in making decisions involving a balancing of competing claims, especially competing claims on scarce resources, has been a recurrent ― and perhaps a strengthening ― theme of the Court’s jurisprudence since then.

The defenders of the Courts’ rulings might argue that unions, perhaps especially public sector unions, are in fact “vulnerable groups,” and that the need to protect them against the government’s depredations justifies setting aside the deference to which governments might otherwise be entitled. Perhaps that’s what the Court thinks, given its acceptance of the imbalance of power myth. But experience (which, admittedly, it would be best for governments to support with empirical evidence!) disproves this idea. Public sector unions have frequently been able to hold governments to ransom, and obtain, in exchange for “labour peace,” substantial benefits and advantages for their members. This makes perfect economic sense, of course. Governments aren’t giving away their own money, but taxpayers’, when accede to the civil servants’ demands. Moreover, by paying civil servants with fringe benefits and pensions, they are able to do so relatively untransparently, and often to peddle to cost to future generations rather than imposing it on current voters. But to the extent that current voters have to pay, the government, unlike a firm selling its products on a competitive market, can make them pay more or less as much as it asks. The idea of civil servants’ unions as vulnerable groups, or “discrete and insular minorities,” is groundless.

The Supreme Court’s recent decisions on the scope of s. 2(d) of the Charter are based on economic myths, unsupported by appropriate evidence, and derogate from the Court’s normal constitutional role. They are also inconsistent with the Court’s jurisprudence in other ways, notably in that they constitutionalize organized labour’s economic rights and impose constitutional burdens on private parties, something I will discuss separately. They call for a response, and indeed a reversal, in one way or another ― something I will also discuss separately. In the meantime, they need to be denounced, loud and clear.

R.I.P. Ronald Coase

Not exactly news anymore, but I wanted to note the death of Ronald Coase. Smarter and more knowledgeable people have written and will write about the significance of his work. I will only speak to my own feelings.

“The Nature of the Firm” ― a paper Coase mostly wrote as an undergraduate and published at the ripe old age of 26 ― is the single most brilliant thing I’ve ever read. I was blown away when I read it, and I still am when I think about it. The reason for this is, I believe, the following. Most scientific work ― regardless of the discipline ― explains complicated, almost esoteric things. But every now and then, a researcher comes across a perfectly familiar phenomenon; realizes ― as perhaps nobody had before ― that though familiar, it stands in need of an explanation; and goes on to give that explanation. It is these discoveries that are, in my entirely subjective view, the most amazing. Sir Isaac Newton’s explanation for why apples, and other things, fall to the ground is of this sort. So is Hans Bethe’s explanation for how stars, including the Sun, produce light. Ronald Coase’s explanation for the existence of firms belongs to the same category. And of course, unlike gravity or stellar nucleosynthesis, Coase’s explanation for the existence of firms requires no formulae, no mathematics, nothing beyond logic and common sense. Simplicity is the mark of genius.

As Frank Easterbrook once pointed out, “we live in a world where knowledge is scarce and costly, ignorance rampant.” Coase expanded our capital of knowledge immensely, and his death is a sad loss for all of us.

In Vino Veritas

Un article publié aujourd’hui sur le site de La Presse parle d’un recours collectif intenté contre la SAQ parce que, selon l’avocat du demandeur, « les marges bénéficiaires de la SAQ sont actuellement disproportionnées, déraisonnables et exorbitantes alors qu’elle se trouve en position de monopole ». Bien que la SAQ soit en mesure d’acheter son vin à des prix très avantageux, grâce à son pouvoir d’achat, elle le revend aux consommateurs québécois à des prix très élevés. Le demandeur prétend que “la marge bénéficiaire de la SAQ ne devrait pas dépasser 30 %, au lieu de 75 %, comme c’est le cas actuellement.” Selon ce que rapporte l’article, il s’appuie notamment sur l’article 8 de la Loi sur la protection du consommateur, L.R.Q. c. P-40.1, qui dispose que

[l]e consommateur peut demander la nullité du contrat ou la réduction des obligations qui en découlent lorsque la disproportion entre les prestations respectives des parties est tellement considérable qu’elle équivaut à de l’exploitation du consommateur, ou que l’obligation du consommateur est excessive, abusive ou exorbitante.

Je ne connais pas assez le droit de la consommation ou celui des contrats en général pour pouvoir juger des chances de succès de ce recours. Mais ce que je peux dire, c’est qu’il est une excellente illustration de deux thèmes que j’ai déjà abordés sur ce blogue―les limites de la compétence institutionnelle des tribunaux et les problèmes que cause la production de biens ou de services par le gouvernement.

Il me paraît plutôt évident que les tribunaux ne sont tout simplement pas en mesure de dicter les marges de profit des entreprises, qu’elles soient privées ou publiques. Malheureusement, La Presse n’a pas mis en ligne une copie de la demande (une bonne habitude de Radio-Canada que les autres médias devraient imiter!), alors nous ne savons pas comment le demandeur ou son avocat en sont arrivés au chiffre de 30%, qu’ils jugent acceptable. Mais de façon générale, je vois mal comment un tribunal s’y prendrait pour déterminer ce qui serait une marge de profits « appropriée ». La distribution de surplus entre producteurs et consommateurs, ou encore employeurs et travailleurs, fait partie de ces “problèmes polycentriques” qui, comme l’explique Lon Fuller dans son article magistral sur “The Forms and Limits of Adjudication,” (1978) 92 Harv. L. Rev. 353, résistent à la résolution par adjudication. Leur solution dépend de trop de facteurs, a des répercussions trop fluides et imprévisibles pour que le débat contradictoire entre deux justiciables puisse guider un tribunal chargé de la trouver.

Comme le note l’article de La Presse, il y a quelques années, la Cour supérieure a déjà rejeté une demande d’autorisation de recours collectif contre la SAQ. À l’époque, on reprochait à la SAQ de ne pas avoir fait profiter les consommateurs des économies qu’elle réalisait grâce aux taux de change avantageux. Dans Chifoi c. Société des alcools du Québec, 2008 QCCS 3871, la Cour a jugé que la demande n’identifiait aucune règle de conduite particulière s’imposant à la SAQ dont la violation aurait constitué une faute que la SAQ serait tenue de réparer.

Ce recours, fondé essentiellement sur l’article 1457 du Code civil, était différent de celui qu’on cherche maintenant à faire autoriser, tant par son fondement factuel que par la règle de droit invoquée, mais sa ratio devrait, je crois, servir de leçon au cas présent: dans le contexte commercial, il n’y a pas de règles que les tribunaux pourraient faire appliquer. Crier au scandale ou à l’injustice ne suffit tout simplement pas à orienter une décision judiciaire.

Ce qui ne veut pas dire qu’il n’y a pas d’injustice ou de matière à scandale. À titre purement anecdotique bien sûr, une même bouteille de vin coûte généralement 30, sinon 40% moins dans le magasin newyorkais où j’achète mon alcool qu’à la SAQ ― quand on peut trouver la bouteille en question à la SAQ, ce qui est très loin d’être toujours le cas. Seulement, ce n’est pas le genre de problème que les tribunaux peuvent régler.

Le problème, c’est bien sûr le fait que la SAQ est un organisme public et un monopole. L’absence de concurrence lui permet d’imposer le prix qu’elle juge approprié. Et « approprié », pour un organisme public, ne veut surtout pas dire « déterminé en fonction des coûts et de la demande ». Ce qui détermine les prix imposés par la SAQ, c’est d’abord l’objectif politique qui lui est imposé, celui de maximiser la ristourne qu’elle verse au gouvernement. Mais c’est aussi, on peut s’en douter, le désir d’acheter, avec l’argent des consommateurs, la paix avec ses syndicats, aux membres desquels elle peut, grâce à son monopole, verser des salaires plus élevés que ceux des autres employés dans le commerce de détail. Et c’est aussi une certaine vision de la façon dont le vin doit être vendu.

Comme je l’écrivais dans un récent billet sur les problèmes de la production de biens et de services par le secteur public, des mécanismes politiques peuvent en théorie simuler ou remplacer la concurrence sur un libre marché. Les problèmes du secteur public peuvent être exposés par des partis d’opposition ou des journalistes, et les élections peuvent mener au remplacement de gestionnaires incompétents ou dont les priorités ne correspondent pas à celles des électeurs. Mais, comme je l’écrivais aussi, les élections ne sont pas une panacée. Elles ne sont menées que sur quelques enjeux, et il n’est pas surprenant que le prix du vin ne soit pas parmi ceux qui décident les élections québécoises. Ainsi, le contrôle politique sur la façon dont la SAQ profite de son monopole est purement hypothétique (ce qui la distingue, par exemple, d’Hydro-Québec, dont les prix sont un enjeu assez présent dans le débat politique).

Lorsqu’un bien ou un service n’est pas un « bien public » (au sens de la théorie économique) que le marché ne produirait pas en quantités suffisantes, et qu’en plus le contrôle politique sur sa production gouvernementale est particulièrement irréaliste, la chose logique à faire serait d’en laisser la production au libre marché. Mais un autre problème de la production publique, dont je n’ai pas discuté dans mon billet sur le sujet, est que lorsque cette production est profitable, le gouvernement risque de devenir dépendant des revenus qu’elle procure. Une vérité qui, comme tant d’autres, est dans le vin.

Why?

A friend recently challenged my habitual skepticism about the government: “Why is it,” he asked, “that if something is a public service, we always question whether it should be? Isn’t that just ideology?” It’s a good question, and since the views that underpin it are widely held, it is worth answering here. Note that I will be focusing only on government supply of goods and services, not arguing for libertarianism, still less for anarchy. Furthermore, I am only arguing for a prima facie skepticism, which can be overcome in specific cases. I will say more on that at the end. And, before I begin, two disclaimers. First, none of what follows will be original. It’s just important stuff that bears repetition. And second, this will be quite long. My apologies.

Of course the most familiar reason for being skeptical about anything the government does is ideological. Government action often involves coercion. This might be less obvious with public services, which citizens are not always forced to use. But they are forced to use some, and most others are funded at least in part by coercively-levied taxes. If we value freedom at all, coercion is presumptively wrong, and must be justified. But people might (1) not value freedom, or (2) not think economic freedom (that is, freedom of contract and property rights), which is mostly at stake when government expands to provide goods and services, is valuable, or (3) think that while economic freedom is of some value, it is easily outweighed by other considerations. Those are deep philosophical commitments, and I will avoid arguing about them here, because I think that the skeptical case can be made out without challenging them.

What drives the non-ideological version of the skeptical case is a concern not with liberty but with efficiency. Now, efficiency is often thought of as an ideological dirty word. It’s not. Efficiency is simply the fact of using fewer scarce resources (whether labour, capital, or natural resources) to achieve a given objective. I fail to see why anyone, whatever one’s deep philosophical commitments, would be opposed to that.

There are three main reasons why a concern with efficiency supports prima facie skepticism with government delivery of goods and services, which I will discuss in order of, I think, increasing subtlety.

The first of these reasons comes from “public choice” economics, which analyses the behaviour of the government on the assumption that the people who serve in it―whether as legislators or as bureaucrats―are self-interested agents concerned with their own welfare. Perhaps this assumption can be taken too far―I’m willing to believe that government officials are partly motivated by what they see as the public good, and not only by self-interest. Still, it would be naïve to assume that they are entirely selfless and do not care about things like financial rewards, leisure, and re-election in the case of legislators. Public choice theory warns us that government officials are likely to want to give out favours to their friends, campaign contributors, or pet causes. And the provision of goods and services by the government is a great vehicle for that. A public investment fund can be instructed to protect a favoured corporation from a hostile take-over, as the Caisse de dépôt et placement du Québec regularly is; a public company can be told to give jobs, or to provide cheap goods for the supporters of the politicians in power. Of course, allocation of resources in the basis of politicians or bureaucrats’ self-interests is seldom going to be efficient.

The second reason to question whether the government should provide goods and services comes from F.A. Hayek’s insight about the limitations imposed on government planners by their lack of information. Even if public choice theorists were wrong and government officials were invariably concerned with the public good and nothing else, they would be hampered in its pursuit by their inability to get a hold of all the information about people’s needs and wants. That information comes from price fluctuations in a free market, with increasing prices signalling increased demand for a good or service, and/or reflecting the increased scarcity of the resources necessary to produce it. When the price mechanism is replaced by government control, with prices of goods and services produced by the government determined (in some considerable part) by political considerations rather than by the cost of and demand for these goods and services, the allocation of resources to the production of these goods and services need not bear any relationship to the actual demand for them and to possibility that these resources would be better expended on something else.

The third, related, reason for skepticism about the government as a supplier of goods and services is the difficulty to know whether it is supplying them efficiently. In a free market, an inefficient producer (one that is, for example, paying two workers for doing a job that one could do, or buying supplies for an above-market price because of its owner’s relationship with the supplier, etc.) will be seen as charging more for its products than its competitors. It will have to mend its ways or to fail. But when that producer is a monopolist, as the government often is for the goods and services it provides, it is much more difficult to tell whether it is inefficient. And the case of the government is worse than that of a private monopolist. For one thing, it is not just the monopolist’s shareholders and its customers, but all the taxpayers who are paying for its inefficiency. For another, a private monopolist’s inefficiency invites competitors to enter the market and undercut it. But the government usually can prohibit would-be competitors from doing so, even if there are any, which is not always the case.

Now these claims are somewhat overstated. Democracy and other limitations on governmental power go some way towards correcting at least the extremes of self-interested behaviour by public officials. And although we usually cannot rely on the market to prevent the government from being inefficient, free and democratic polities have other mechanisms to compensate for this. Democracy makes it possible to, in effect, change (part of) the management of the government-supplier if the incumbent managers are inefficient. Public institutions such as auditors-general are empowered to investigate and maybe try to eliminate government inefficiencies. And private actors, especially journalists, can do the same thing. But these mechanisms are imperfect. Elections are fought over only a handful of issues, not all of them having to do with the incumbent officials’ public-spiritedness and managerial competence, and against a background of massive political ignorance. Many bureaucrats are subject to very limited and indirect electoral control anyway. Self-interest can move politicians and bureaucrats to impede the work of public and private investigators. And so on.

So we have good reason to be skeptical of governmental provision of goods and services. But skepticism should not make us oppose it in every case. The government is likely enough to do a bad job of providing goods and services, but the market sometimes does an even worse one. This is the case of “public goods,” that is goods or services the producers of which cannot, for any of a number of reasons, charge those who benefit from them anything like a price that would make their production worthwhile (and not to be confused with “the public good”). (For more on that, see this entry in Larry Solum’s Legal Theory Lexicon.) Still, the questions whether a given good or service is subject to such a “market failure,” and whether, if so, the market failure is greater than the “government failure” resulting from its production by the government, are always worth asking.

As I said in the beginning of this post, all that does not amount to a libertarian manifesto. Even if we are skeptical about the government providing goods and services, we might decide that the government (that is, the taxpayers) ought to pay, or help pay, for people to acquire some goods and services on the free market. That’s how social security works―instead of the government producing food and feeding the unemployed, the elderly, or the infirm, the government gives them money so that they can feed themselves. And of course even if we are skeptical about the government as a supplier of goods and services, we have good reasons to want the government to engage in (some) regulation to prevent some negative effects people’s economic activity might have on third parties, air pollution being a classic example.

Despite all these qualifications, this might not convince those who think that economics is incipiently and terminally ideological. To them, I can only quote Hayek:

It may sound noble to say, ‘Damn economics, let us build up a decent world’―but it is, in fact, merely irresponsible.