Making the economy respond to ballots, not dollars, leads to consequences that are sometimes painful, sometimes funny, but always perverse.

Politics has always held the ultimate whip hand over the economy simply by virtue of its power to make laws and its command of the police and the armed forces. However, there were long periods in history when it exercised the whip hand very little. Under oligarchic governments such as the Italian city states during the Renaissance (and Venice for much longer), or during Holland’s “Golden Century” (the 17th), one might even say that politics was used in the service of economic prosperity, rather than the reverse. There was the “brilliant episode” of liberal government in much of the 19th century where the most advanced Western governments left the economy almost wholly alone. These periods, though were the exception rather than the rule. In our own time, with universal suffrage, competitive politics exploits to the utmost the lure for a majority of being able to bend the economy to its purposes. A democratic electoral programme is now overwhelmingly an economic programme having to do with taxes, trade policy, welfare “rights”, labour law, the regulation of industry and commerce, subsidies and so forth. To say that most of this is no business of the government would be as sacrilegious, and as sure an election-loser, as to say that the people’s livelihood is none of the people’s business.

Mixed-up Roles, Mixed-up incentives

By one of those laws that have set the course of Germany after her defeat in World War II, corporate government had to be a two-tier one: the managing board was meant to run the business on behalf of the owners, and above it the supervisory board hired and fired the managing board, determined its pay and approved, or vetoed, its major decisions. So far, this was straightforward and in no wise perverse, though it could become a little cumbersome. It was no more fertile ground for cronyism and self-dealing than the single board system of Anglo-American corporate organisation However, the German system was to be more democratic. The supervisory board was (and still is) a mixed body, with half its members representing the owners, the other half the workers. In practice, the worker representatives are usually, though not necessarily, union officials.

In other words, half of the managers’ own bosses are representatives of the workers the managers are supposed to manage. This is an idyllic state of affairs, and could hardly be more democratic, but it only works in fair weather. It is quite unfit for crises, conflicts and hard times, when painful, unpopular management decisions are called for but do not get past the supervisory board.

A funny case—if funny is the right word—that bears this out is the scandal at Volkswagen that has been entertaining Germany most of this summer. The management board has bribed a couple of worker representatives on the supervisory board to vote for unpopular measures the representatives’ constituents, the workers, would presumably wish them to veto. For the system to work, responsible people had to be corrupted,

A more general case of mixing up the roles of employer and employee is the state enterprise. The state in many countries owns and runs enterprises in public transport, power generation and distribution, mining and metals as well as in some unexpected odds and ends. Their tariffs (prices) are a prime subject of democratic politics; raising them is usually no vote-catcher.

From time to time, preferably ahead of some important election, wage claims arise. It is the employees’ role in a market economy to push these claims, and it is the employer’s role to resist them, until a bargained solution reflecting the supply and demand for labour emerges, with or without resort to a strike. However, the state as employer cannot behave like any ordinary employer. After all, its employees are the voters who are its democratic masters. The settlement of the wage claim is an eminently political matter, no less so than the fixing of public transport and utility tariffs. The politically most feasible solution is to bow to the will of the voters, grant the wage claim or most of it, and not pass the extra cost on in higher transport or utility prices. Along the line of least resistance, democracy triumphs, and state enterprises merrily pay out to wage-earners and public transport and utility customers the money of the unknown, invisible taxpayer. That money is all the more impersonal, coming out of nobody’s pocket, as state enterprises first run up deficits for a few years before their depleted resources have to be replenished from the public purse. Very few people see clearly enough, or at all, the relation between the democratic fixing of public sector wages and prices and the level of taxation.

In all such situations of role reversal and role usurpation, “we” by virtue of our democratic voting power pay ourselves more of “their” money, instinctively feeling good about the result, for we seldom identify “them” as being ultimately “us”.

Squatting the Jobs

It is a perfectly normal aspiration for every wage-earner to be free to leave his job without much ado, but for his employer not to be free to lay him off except with much ado, if at all. The wage-earner wants to own his job, or at least to “squat it”.

Bit by small bit, nearly a century of “socially minded” labour legislation has added various “squatter’s rights” to the employment code, concerning notice, unfair dismissal and severance pay. The employee has come a little closer to “owning his job”. In the last couple of decades in Western Europe, adding more and more valuable “rights” of this kind has mounted to a paroxysm, and every new step in this direction was naturally sure of majority support. Opposing apple pie and motherhood would be a less certain method of political suicide than opposing job protection.

Obviously, the more securely a worker “owned his job”, the riskier and the less profitable it appeared to employers to offer employment. Thus, ever more comprehensive job protection became one of the prime causes of ever more endemic unemployment.

However, one of the perfectly natural and predictable effects of chronic unemployment is that labour cannot afford to be militant except in the public sector where wages and employment continue to be determined by politics. This is glaringly manifest in France, where strikes and strike threats flourish in public employment, education and the railways and wages in these sectors keep creeping up, while in the private sector there is dead calm with workers keeping their heads down as they are bereft of nearly all bargaining power. They are relatively content to squat on what they have, grateful for job protection, and utterly oppose any step toward what is politely called “labour market flexibility”. The primacy of politics over economics creates for them a perverse incentive to freeze hiring and firing, though they would no doubt be better off in an “old-fashioned” labour market where movement was free both ways. But then what would be the use of casting and counting ballots?


*Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State (Oxford, 1985), Social Contract, Free Ride (Oxford 1989) and Against Politics (London,1997). His latest book, Justice and Its Surroundings, was published by Liberty Fund in the summer of 2002.

The State is also available online on this website.

For more articles by Anthony de Jasay, see the Archive.