Aaron Director and Labor Problems

Any frustration Samuelson felt about the impossibility of following his interest in international relations with a diplomatic career must have been short-lived, for in the same quarter he took the course that was to move him decisively toward economics: Labor Problems, taught by Aaron Director.

The course syllabus gave no clues about the position that would be taken toward labor, or the type of analysis that would be used. It offered

A general survey—analytical, causal, historical—of the main forces and factors which give rise to modern labor conditions and problems, and which must be taken into consideration in the attempted solution of specific labor problems, together with a brief discussion of social programs, organized labor and labor legislation.¹³

There was clearly a thorough explanation of the institutions of the labor mar­ket and also of “points of view and social programs;” beyond that there is little indication of the material covered.

However, what does survive is an essay that Samuelson wrote for this course and which, surprisingly, was later included, not just in his papers

d. Samuelson remembered taking the course a second time, with Douglas, so that he would know something about wages and unions. Had Director covered an idiosyncratic syllabus, or was Samuelson skeptical about Director’s coverage of these problems? Either is possible.

but also in his publications list: “The Limitations of Collective Bargaining.”¹⁴ Aside from the odd sentence in his diary, it is his earliest surviving piece of economic writing. It adds support for his claim to have been an economic conservative at Chicago, for he attempts a sustained critique of the idea that collective bargaining, by trade unions, can be beneficial. Samuelson began with a statement of social philosophy.

A few hundred years ago men believed that social conditions were the result of natural or divine laws, any interference with which was doomed to failure. More recently, however, arose the doctrine that soci­ety can be what we make it; that whatever is, is not necessarily right; that whatever has been, is not necessarily what should have been.

This shift in belief from natural genesis to social telesis has been a powerful justification for volitional change. But in our reaction, often we have gone too far. Whereas the burden of proof should be upon those who contemplate innovations inasmuch as random change is bad in a complex, highly adjusted society, actually we seem to have come to value change for its own self.¹⁵

This was particularly true, he argued, in economic matters, where there was a tendency to assume that if conditions were not perfect, they would be improved, without thinking sufficiently carefully about what would actually result from the actions being pursued. This was Knight's reason for skepti­cism about reform. Free markets might be bad, but intervention might well make things worse.

Samuelson then quoted, at some length, the remarks of a “trade union theorist,” John Mitchell, one-time president of the United Mine Workers of America, hailed in Spring Valley, Colorado, after a successful negotiation, as “the father of the eight-hour day.”¹⁶ In this passage, taken from Organized Labor (1903), Mitchell argued that bargaining power between workers and employers was very unequal, resulting in exploitation.

Samuelson countered this by arguing that if there was free competition among both workers and employers, wages would not be driven down to sub­sistence. Employers would not pay more than the marginal product, but they would nonetheless need to pay more than any other employer would pay— otherwise the workers would go elsewhere. He cited Marshall in support of this argument that inequality in bargaining power did not matter, but where Marshall treated this as a theoretical point, Samuelson believed that it was a fact: “Any realistic appraisal of actualities in the labor market establishes a presumption that there is free competition amongst buyers for labor.”¹⁸ The problem, Samuelson argued, arose from the fact that people considered bar­gaining between an employer and an individual worker in isolation from the existence of other workers, reaching the mistaken conclusion that the wage was indeterminate. Those who believed that inequality in bargaining power led to exploitation did not understand the theory of free competition.

Given this, there were only two ways in which unions could raise wages. Collective bargaining might be able to get workers a share of monopoly prof­its, and in a growing economy they might be able to reduce the extent to which wages lagged behind productivity. Against this, Samuelson argued that unions would not be able to identify industries where workers were getting paid too little and that they would likely force wages too high. In addition, he argued that maintaining wages would tend to prolong depres­sions. Even if productivity were rising, it would not be beneficial for unions to raise wages because lower wages might result in faster expansion of the industry: “By prematurely raising wages, trade unions have forestalled a bet­ter allocation of resources and thus decreased the potential national income increase.

This essay, which exhibited flaws such as one would expect from an eighteen-year-old who had previously studied very little economics, offered a purely theoretical argument, confidently criticizing Adam Smith, Clark, Taussig, and Alfred Marshall for being inconsistent. Samuelson claimed that they had asserted there would be indeterminacy in the wage bargain that could be exploited by unions, even under free competition, a phrase Samuelson underlined both in his summary of their views and in building his own case against them. He denied that this was true. The essay shows evi­dence of wide reading. He had presumably read Mitchell’s Organized Labor, the work of a committed trade unionist, as well as W. H. Hutt’s (1930) con­trary appraisal of collective bargaining and the relevant chapter of Marshall’s Principles of Economics (1920). A handwritten footnote strongly suggests that he had read Joan Robinson’s Economics of Imperfect Competition (1933a), even if he had not understood the implications of imperfect competition for his claims.¹⁹ Samuelson also cited an article, “The Economics of Unionism,” by Alvin Hansen (1922), to whom he would later become extremely close. He cited Hansen as his source for the list of techniques unions might use to maintain artificially high wages and it would seem likely that his discussion of wages and industrial growth owed something to his reading of this article. However, there is no evidence about whether he had engaged with Hansen's dynamic arguments about population growth or explored the link between biological differences among people and inequality of rewards in a free mar­ket economy.

Typically for a young tyro, Samuelson supported his arguments by claim­ing boldly that he was being scientific and that those whom he was criticiz­ing were not. His closing paragraph reads,

In reading the literature on collective bargaining, one is surprised by the constant tendency of writers to go to almost any extremes to jus­tify trade unions. In an effort, perhaps, to show that economics is not a “dismal science,” they make it appear as if economics is, indeed, no science at all. Almost unanimously they have joined with other wish­ful thinkers in the vast army of “Thobbers.”²⁰

A Thobber was someone who, as Samuelson learned from Henshaw Ward's Thobbing (1926), recommended reading on the previous year's social science course, preferred guesswork to investigation, and used pseudo-science as a shortcut to solutions. Unfortunately we do not know what Director made of this uncompromising dismissal of those who questioned the efficiency of freely competitive labor markets. All we know is that Samuelson's perfor­mance on the course was “Satisfactory.”