The Economics of Welfare
By Arthur C. Pigou
WHEN a man sets out upon any course of inquiry, the object of his search may be either light or fruit—either knowledge for its own sake or knowledge for the sake of good things to which it leads. In various fields of study these two ideals play parts of varying importance. In the appeal made to our interest by nearly all the great modern sciences some stress is laid both upon the light-bearing and upon the fruit-bearing quality, but the proportions of the blend are different in different sciences. At one end of the scale stands the most general science of all, metaphysics, the science of reality. Of the student of that science it is, indeed, true that “he yet may bring some worthy thing for waiting souls to see”; but it must be light alone, it can hardly be fruit that he brings. Most nearly akin to the metaphysician is the student of the ultimate problems of physics. The corpuscular theory of matter is, hitherto, a bearer of light alone. Here, however, the other aspect is present in promise; for speculations about the structure of the atom may lead one day to the discovery of practical means for dissociating matter and for rendering available to human use the overwhelming resources of intra-atomic energy. In the science of biology the fruit-bearing aspect is more prominent. Recent studies upon heredity have, indeed, the highest theoretical interest; but no one can reflect upon that without at the same time reflecting upon the striking practical results to which they have already led in the culture of wheat, and upon the far-reaching, if hesitating, promise that they are beginning to offer for the better culture of mankind. In the sciences whose subject-matter is man as an individual there is the same variation of blending as in the natural sciences proper. In psychology the theoretic interest is dominant—particularly on that side of it which gives data to metaphysics; but psychology is also valued in some measure as a basis for the practical art of education. In human physiology, on the other hand, the theoretic interest, though present, is subordinate, and the science has long been valued mainly as a basis for the art of medicine. Last of all we come to those sciences that deal, not with individual men, but with groups of men; that body of infant sciences which some writers call sociology. Light on the laws that lie behind development in history, even light upon particular facts, has, in the opinion of many, high value for its own sake. But there will, I think, be general agreement that in the sciences of human society, be their appeal as bearers of light never so high, it is the promise of fruit and not of light that chiefly merits our regard. There is a celebrated, if somewhat too strenuous, passage in Macaulay’s Essay on History: “No past event has any intrinsic importance. The knowledge of it is valuable, only as it leads us to form just calculations with regard to the future. A history which does not serve this purpose, though it may be filled with battles, treaties and commotions, is as useless as the series of turnpike tickets collected by Sir Matthew Mite.” That paradox is partly true. If it were not for the hope that a scientific study of men’s social actions may lead, not necessarily directly or immediately, but at some time and in some way, to practical results in social improvement, not a few students of these actions would regard the time devoted to their study as time misspent. That is true of all social sciences, but especially true of economics. For economics “is a study of mankind in the ordinary business of life”; and it is not in the ordinary business of life that mankind is most interesting or inspiring. One who desired knowledge of man apart from the fruits of knowledge would seek it in the history of religious enthusiasm, of martyrdom, or of love; he would not seek it in the market-place. When we elect to watch the play of human motives that are ordinary—that are sometimes mean and dismal and ignoble—our impulse is not the philosopher’s impulse, knowledge for the sake of knowledge, but rather the physiologist’s, knowledge for the healing that knowledge may help to bring. Wonder, Carlyle declared, is the beginning of philosophy. It is not wonder, but rather the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science. Here, if in no other field, Comte’s great phrase holds good: “It is for the heart to suggest our problems; it is for the intellect to solve them…. The only position for which the intellect is primarily adapted is to be the servant of the social sympathies.”… [From the text]
First Pub. Date
London: Macmillan and Co.
The text of this edition is copyright © 1932. This book is available through Transaction Publishers, Inc. Direct all requests for permissions and copyrights to Transaction Publishers, Inc.
- Preface to the Third Edition
- Note to the Fourth Edition
- Part I, Chapter 1
- Part I, Chapter 2
- Part I, Chapter 3
- Part I, Chapter 4
- Part I, Chapter 5
- Part I, Chapter 6
- Part I, Chapter 7
- Part I, Chapter 8
- Part I, Chapter 9
- Part I, Chapter 10
- Part I, Chapter 11
- Part II, Chapter 1
- Part II, Chapter 2
- Part II, Chapter 3
- Part II, Chapter 4
- Part II, Chapter 5
- Part II, Chapter 6
- Part II, Chapter 7
- Part II, Chapter 8
- Part II, Chapter 9
- Part II, Chapter 10
- Part II, Chapter 11
- Part II, Chapter 12
- Part II, Chapter 13
- Part II, Chapter 14
- Part II, Chapter 15
- Part II, Chapter 16
- Part II, Chapter 17
- Part II, Chapter 18
- Part II, Chapter 19
- Part II, Chapter 20
- Part II, Chapter 21
- Part II, Chapter 22
- Part III, Chapter 1
- Part III, Chapter 2
- Part III, Chapter 3
- Part III, Chapter 4
- Part III, Chapter 5
- Part III, Chapter 6
- Part III, Chapter 7
- Part III, Chapter 8
- Part III, Chapter 9
- Part III, Chapter 10
- Part III, Chapter 11
- Part III, Chapter 12
- Part III, Chapter 13
- Part III, Chapter 14
- Part III, Chapter 15
- Part III, Chapter 16
- Part III, Chapter 17
- Part III, Chapter 18
- Part III, Chapter 19
- Part III, Chapter 20
- Part IV, Chapter 1
- Part IV, Chapter 2
- Part IV, Chapter 3
- Part IV, Chapter 4
- Part IV, Chapter 5
- Part IV, Chapter 6
- Part IV, Chapter 7
- Part IV, Chapter 8
- Part IV, Chapter 9
- Part IV, Chapter 10
- Part IV, Chapter 11
- Part IV, Chapter 12
- Part IV, Chapter 13
- Appendix I
- Appendix II
- Appendix III
§ 1. JUST as differences may prove too hard for voluntary conciliation schemes, so too they may defy the efforts of mediators. The possibility, or rather, except in the developed industries of countries which have reached a high stage of industrial peace, the frequent occurrence of these intractable controversies makes it necessary to inquire whether, and how far, resort should be had to the coercive powers of the State. Intervention of this kind may take place in four principal ways. Of these the simplest and mildest merely makes provision for disputants to enter the net of compulsory adjudication whenever both of them wish to do so. Examples are fairly numerous. In New South Wales the Industrial Arbitration Act of 1901 empowered any industrial union to make an agreement relatively to any industrial matter with another union or with an employer, which, “if made for a specified term not exceeding three years, and, if a copy be filed with the registrar, will be binding on the parties thereto and on every person while he is a member of any union which is a party to the agreement”; and declares “that any such agreement, as between the parties bound by the same, shall have the same effect, and may be enforced in the same way, as an award of the Court of Arbitration.”
*32 The New Zealand law makes industrial agreements enforceable in the same way as awards of the national Court of Arbitration. Mr. Mundella’s abortive English Act of 1872, the Massachusetts provision that, when both parties refer a difference to the State Board, the decision automatically becomes binding,
and the Federal Railway Act of 1898, enabling interstate carriers voluntarily to establish Arbitration Boards with compulsory powers,
*33 were similar in character and intention. The English law has proved a dead letter, and was repealed in 1896, but those of Massachusetts and New Zealand have had a considerable measure of success.
In opposition to this arrangement it may be urged, first, that, when once arbitration has been agreed upon, a sense of what is fair and a wholesome respect for public opinion already afford an adequate guarantee that awards will be obeyed; secondly, that the introduction of a legal sanction would so far destroy the honourable one—the payment of the penalty being felt to condone the offence
net sanction would be no stronger than before; and thirdly, that, through the association in the popular mind of the idea of compulsion with that of arbitration, “resort to [Conciliation Boards] for their various purposes would be made less freely than at present.”
*35 It may be replied, however, that, at the worst, since non-coercive arbitration would still be open to those who preferred it, there is little reason to believe that differences, which, save for the change, would have been settled peaceably, will now involve a conflict. Furthermore, the effect of coercive sanctions, in checking resort even to those Courts which wield them, is much slighter than is generally supposed. In some circumstances their influence would actually tend in the opposite direction. In differences where each party considered itself, and knew that the other party considered itself, the stronger, there might be no settlement, procurable under a system of weak sanctions, from which one or other of them would not think it worth while to break away. Consequently, arbitration might be declined from dislike to the risk of these ineffective sanctions. If, however, the sanctions offered were strong, the position would be different. A series of possible settlements would be
opened up, which, when awarded, could not be profitably violated by either side, and the risk of which both would be willing to incur, since the extra loss involved in failure would be balanced by an extra gain in success. Finally, the power to invoke legal sanctions may strengthen the hands of the leaders of either organisation against their discontented followers. This consideration is especially important where, as in the United States, the direct control of Union executives over individual members is comparatively slight. It is not, however, to be ignored even in this country, for, though, in our greater Unions, breaches of award in defiance of the central authority are rare, among the low-skilled industries they are fairly common. On the whole, therefore, the case seems to be made out for some system under which opportunities for referring differences to a Court with coercive powers is given to those who desire to avail themselves of it.
§ 2. The second way in which the State may intervene is by enabling organisations of employers and employed to invoke government aid in extending to the whole of a trade in a district or country an agreement that has been entered into by associations representing the main body of employers and workpeople engaged in it. In South Australia an Act of 1910 provides that, in trades where there are no Wages Boards, three-fifths of the employers and of the employed may make an agreement and require the government to promulgate it, so that it becomes binding upon the whole trade. The English Munitions Act of 1917 contained a substantially similar provision. The principal argument in favour of legislation of this kind is that, in the absence of it, agreements entered into by the great majority of those engaged in an industry are liable to be disrupted by the competition of a few “bad” employers. For often an employer or group of employers would lose nothing by paying better wages or working shorter hours, provided that all their competitors did the same, but would lose a great deal by doing this, and would, consequently, refuse to do it, if that condition was not fulfilled. Thus it has been stated that “one of the provoking causes of the second and disastrous transport strike in London was the
withdrawal of a firm of carters from an agreement which it had signed, in order to compete with the other firms by paying a lower scale of wages than they did.”
*36 On the other side, however, several considerations of weight may be advanced. In the first place, State action of the kind contemplated would dangerously facilitate the formation of rings and alliances to the detriment of consumers. Secondly, there would sometimes be very great practical difficulty in determining the lengths to which extension should be carried. For the similarity between the products of different districts in an industry is often more apparent than real, and, when this is so, the maintenance of a parallel movement between the rates prevailing in them might work against peace rather than in favour of it. This difficulty may be illustrated from certain voluntary arrangements which have prevailed at one time or another in this country. Thus in 1874 a combined scale was constructed for the iron trade of the Midlands and the North of England. In the North, however, iron rails were still the chief product, while in the Midlands manufacturers were already engaged in producing bars, plates and angles. For the former the market was falling, but it was rising for the latter, with the result that the employers of the North were compelled, at the first adjustment under the scale, to raise wages by 3d., although the price of their own chief ware was falling. Consequently, the scale collapsed within the year. Similarly, there existed for some time in many parts of Lancashire an understanding that the wages of cotton-spinners should rise and fall with advances and reductions in the Oldham district. But “the increasing specialisation of districts, with respect to the yarns produced in them, was instrumental in rendering unworkable an arrangement which had at least been possible, if not desirable, some time before. What had been one market for yarns, roughly speaking, became many markets; and the prices for different ranges and qualities of yarn beginning to move more independently, rendered any sliding arrangements between the lists unsatisfactory.”
*37 It is true, no doubt, that a policy of extension does not absolutely exclude adjustment
to the varying conditions of different districts. But it can hardly be doubted that the task of making these adjustments would often demand greater elasticity in the extensions than the patience and wisdom of the officials concerned are competent to provide. Thirdly, it may be urged that, where the workpeople’s organisation is powerful, extension by authority is superfluous, because private enterprise is sufficient to ensure it. The employers are anxious to have recalcitrant competitors brought into line, and the workpeople are no less anxious to help them. Hence, “Trade Unions assist employers’ associations to coerce employers into submission to an agreement which they have not signed,” and “collective bargaining thus extends over a much larger field than Trade Unionism.”
*38 The United States Industrial Commission found, for example, that in Illinois the United Mine Workers’ Society is expected to strike or threaten to strike in order to bring recalcitrant employers to terms, and that in practice it is generally successful in securing this result.
*39 This last consideration, however, is obviously not relevant to industries in which the workpeople’s organisation is weak. On the whole, in spite of the possible risks to consumers and of the practical difficulties set out above, and in spite also of the danger that “the extension of the benefits of organisation to the unorganised may tend to perpetuate the class of non-union hangers-on of labour and unfederated hangers-on of capitalists, men who reap the benefit of organisation but refuse to pay their share,”
*40 it would seem that opinion in this country is not now unfavourably disposed towards this strictly limited form of coercive intervention in industrial disputes. Definite support was given to it in the Report of the Industrial Council (1912), subject to the condition that the Board of Trade should not entertain any application for the extension of an agreement, unless such application was received from both the parties to the agreement. In the Coal Mining Industry Act of 1920 it is provided that recommendations made by District Committees, by Area Boards,
or by the National Board shall be made compulsory on persons engaged in the industry, if the Board of Trade so directs: and in the Corn Production Act (Repeal) of 1921—superseded three years later by the establishment of a system of Agricultural Wages Boards—the decisions of the voluntary conciliation committees as to minimum wage rates might, if a committee so desired, be made enforceable at law throughout their districts after confirmation by the Board of Agriculture.
§ 3. The third way of State intervention is by laws compelling industrial differences to be referred to some tribunal before any strike or lock-out in the industries covered by the law is permitted. This system is best illustrated by the Canadian Industrial Disputes Investigation Act of 1907. That Act has been imitated in South Africa and elsewhere, and served as model for a United States enactment, covering disputes extending over several States, passed in 1925.
*41 In January 1925, after eighteen years of operation, it was declared
ultra vires by the Judicial Committee of the Privy Council, on the ground that it infringed the rights of the provincial governments. In consequence of this ruling an amending Act was passed, which somewhat restricted its range but left its substance unchanged.
*42 The Act is not of general application, but refers exclusively to certain industries in which there is reason to believe that a stoppage of work would prove exceptionally injurious to the community as a whole. The industries covered are mining, transportation, all forms of railway service, the supply of electricity and other motive power, the working of steamships, the telegraph and telephone services, gas supply and water supply. Practically speaking, the Act comes into play in these industries whenever a stoppage of work is seriously threatened, and it cannot be successfully evaded by a joint refusal of both parties to invoke it. The principal provisions are as follows. Thirty days’ notice must be given of any proposed change in the terms of contract between employers and employed. If the proposed change is resisted by the other side, a strike or lock-out in reference to it is prohibited,
under penalties, until the dispute has been investigated by a Board appointed by public authority and until this Board has made a report, together with recommendations as to the proper terms of settlement, for publication by the Minister of Labour. When the report has been published, there is no obligation upon either party to accept its recommendations, and a stoppage of work may legally take place. But, until the report is published, a stoppage is prohibited by law and renders any individual taking part in it liable to a fine; for employers engaging in a lock-out, of from 100 to 1000 dollars per day; for workpeople engaging in a strike, of from 10 to 50 dollars per day.
This law, it will be noticed, has three distinct aspects. First, it goes a long way towards ensuring serious discussion between the parties—this is practically involved in the Board’s investigations—and an attempt to settle their differences under the guidance, and with the help, of an impartial authority. Secondly, it gives full power to a tribunal appointed by the government “to investigate the matter in dispute, with similar powers in regard to witnesses, production of documents and inspection as are vested in a court of record in civil cases, with a view, if conciliation fails, to recommendations being made as to what are believed to be fair terms.”
*43 Thirdly, it makes a stoppage of work unlawful until the investigation of the difference has been completed and a report presented. It has been held by competent authorities who have studied the working of the law that the first of these aspects is, in practice, the most valuable. The Reporter to the United States Bureau of Labour writes: “The principal service of the Board is in bringing the parties to the controversy together for an amicable discussion and in guiding the negotiations to a voluntary settlement.”
*44 He adds: “The Government in appointing Boards, and the most successful Boards in conducting proceedings, have interpreted the Act as a statute for conciliation by informal methods, looking towards a voluntary agreement between the parties as its object.”
*45 In like manner, Lord (then Sir George) Askwith, in his Report to the British Board
of Trade in 1913, expressed the opinion “that the forwarding of the spirit and intent of conciliation is the more valuable portion of the Canadian Act.”
*46 None the less, the provision for the promulgation at need of an authoritative report and recommendations may also, on occasions, yield good results. It is true that in trifling disputes, in which the general public takes small interest, little pressure from public opinion can be evoked, and that in all disputes, when once the passion of conflict has been aroused, even strong pressure may be ignored. But, when the issue is one which seriously affects the whole community, by threatening to disorganise,
e.g., the railway service or the coal supply, public opinion is a force which must at least be reckoned with; and it is interesting to observe that, on a number of occasions, when one or other of the parties at first refused to accept the recommendations of the Board and a strike or lock-out took place, the dispute was ultimately settled substantially on the basis of the Board’s proposals. The third aspect of the law, that which makes a strike or lock-out unlawful until after the Board has reported, is the one about which the most serious doubts have been expressed. There is the objection that, given determined opposition, it may prove impracticable to enforce the law;
*47 and the objection that the success of a strike often depends upon its suddenness, so that any enforced delay necessarily handicaps the workpeople. These objections are undoubtedly substantial, though there are some industries,
e.g. the transport industries, in which the strike weapon is not appreciably weakened by delay in resort to it. On the other side, stress is laid upon the fact that, when once industrial war has broken out, the issue chiefly in dispute is apt to be lost in a fight for mastery, which only exhaustion can end, and that, therefore, even though the law should often fail to prevent an outbreak, the chance that it will sometimes succeed, and so obviate
grave injury to the community, constitutes for it an adequate defence. Plainly on this issue no decision of a general kind is possible. What ought, in fact, to be done depends chiefly on what workpeople and employers think ought to be done, and are, therefore, prepared to support. It is, however, now generally agreed that an Act on the Canadian model, without penal clauses against strikes and lock-outs prior to the promulgation of the Board’s recommendations, and accompanied, so far as possible, by safeguards to prevent injurious reactions upon the development of voluntary schemes of conciliation and arbitration, is, in Lord Askwith’s words, “suitable and practicable for this country.” Part II. of the Industrial Court Act of 1919 in effect constitutes such an Act. It empowers the Minister of Labour, when a dispute either exists or is apprehended, to appoint a court of inquiry, armed with the power to compel evidence on oath, whose business it shall be to make an impartial report on the merits of the dispute—a report which the Minister, if he thinks fit, may make public. At present it could not safely include the critical penal clause. But there is much to be said for that clause; and, if the League of Nations proves its ability to enforce delay in the outbreak of political war, public opinion may presently become ready to accept a similar restraint upon the outbreak of industrial war.
§ 4. The fourth and last way of State intervention is what is commonly and loosely known as compulsory arbitration. Under the Canadian Act, if the parties remain intractable alike to efforts at conciliation and to the suasion of opinion, strikes and lock-outs can ultimately take place without any infringement of the law. It was left to the Australasian colonies to initiate a type of legislation under which, not only does a publicly appointed Board recommend terms for the settlement of differences, but the terms so recommended are legally binding and a strike or lock-out against them is a punishable offence. This type of legislation, when fully developed, closes that loop-hole for a stoppage of work which the Canadian law leaves open. Generally speaking, some effort is made not unduly to discourage settlement by discussion and conciliation, but the principal stress is laid on
preventing resort to a strike or lock-out in those difficult conflicts where less heroic expedients have failed. In New Zealand, indeed, a loop-hole is still left. For the compulsory arbitration law of that colony applies only to unions of workpeople registered under the arbitration law, other work-people being governed, under an Amendment of 1913, by a variant of the Canadian type of law.
*48 But in the corresponding laws of New South Wales (prior to the relaxing amendment of 1918) and Western Australia there is no such reservation, and the same remark holds true of the Commonwealth law relating to differences that extend over more than one State. In all these laws the arbitration awards are “sanctioned” by a money fine. In New Zealand individual employers and unions of workpeople who break the law are liable to a penalty of £500, and, if a union of workpeople fails to pay, its individual members are each held liable to a fine of £10, which may be collected through a writ of attachment of wages. Western Australia, like New Zealand, relies wholly on money penalties, but the New South Wales law provides also for the imprisonment of persons who fail to pay their fines, and the Commonwealth law awards imprisonment, without the option of a fine, for a second offence. In 1923 Germany introduced what is in effect compulsory arbitration at the discretion of the government. Conciliation committees are constituted with power to intervene in industrial disputes either at the request of one of the parties or on their own initiative. “If the Board does not succeed in securing agreement between the parties, it may put forward a proposed award, which, if accepted, shall have the force of a written collective agreement. If the proposed award is not accepted by both parties, it may be declared binding if its provisions appear just and reasonable, taking into account the interests of both parties, or if its application is desirable for economic and social reasons; the conciliator of the region, or in some cases the Federal Minister, is the competent authority for
declaring an award binding.”
*49 An important dispute in the Ruhr coal-field in 1927 was settled by resort to this provision. In 1926 Italy passed a general law for compulsory arbitration in industrial disputes, with fines and imprisonment as sanctions against recusants.
*50 It is obvious, of course, that no legal prohibition and no provision of penalties can ensure that the prohibited action will
never be performed. No surprise need, therefore, be caused by the circumstance that, in the Australasian colonies, in spite of their coercive laws, stoppages of work on account of industrial disputes have, in fact, occurred. This is only to be expected. The advocates of compulsory arbitration do not deny it. Nor are they blind to the practical difficulties that may be presented by collusive evasions of the law or by determined refusals to pay fines. Their claim is, not that these laws can create a “country without strikes,” but that, by invoking a pressure more direct and potent than that of unorganised opinion, upon which alone the Canadian law in the last resort relies, they can render stoppages of work less frequent than they would otherwise be. How far this claim has been made good in the experience of New Zealand and the Australian States is a controversial question, which could only be answered satisfactorily after prolonged study on the spot. But, from the practical standpoint of English statesmen at the present time, that study is not necessary. It is common ground that legislation, to which the opinion of large masses of the population is strongly opposed, is likely to prove at once difficult to enforce and injurious to that general respect for law which it is to the interest of every community to maintain. Mr. Pember Reeves, the author of the New Zealand law, has himself declared that “to attempt to force such a statute upon an unwilling people would be foredoomed to disaster.”
*51 In England—and the same thing would seem to be true of the United States—compulsory arbitration, as distinguished from the system of Trade Boards in badly organised industries, is at present looked upon by employers and employed alike with very great distrust. To introduce it at a single stride in
the face of this general sentiment would be both impracticable and unwise. Public opinion may, no doubt, change and, at a future time, welcome what it now rejects, but at present, whatever may be thought of its abstract merits, compulsory arbitration in the United Kingdom is not practical politics in any department of industry. The partial resort that was had to it during the war does not suggest that it affords a satisfactory method of avoiding strikes—during the thirty-three months that the Munitions of War Acts were in force they were violated by some 1,500,000 workmen
*52—; and in normal times, when the pressure of national need is slighter, it would probably meet with still less acceptance and, therefore, with still less success.
The Report of the Industrial Council on Industrial Agreements, 1912, p. 7.
The Social Unrest, p. 109.
Economic Journal, 1899, p. 598.
Methods of Industrial Peace, pp. 116-17.
Industrial Commission, vol. xvii. p. 329.
The World of Labour, p. 314.
Industry and Politics, p. 131.
A Survey of Industrial Relations by the Committee on Industry and Trade, 1926, pp. 355
United States Bulletin of Labour, No. 233, 1918, p. 139. Cf. also Report of the Delegation to inquire into industrial conditions in Canada and the U.S.A. [Cmd. 2833], p. 80.
Economic Journal, 1921, p. 309).
British and Continental Labour Policy, p. 345.
The Report on Conciliation and Arbitration, to the Ministry of Reconstruction [Cd. 9099], 1918, Par. 2.
Part III, Chapter VI