Ask the Economist: The Benefits of Right-to-Work Laws; and What Is Inflation?

Viewers of the Mackinac Center web site can take advantage of a feature called "Ask The Economist," in which Mackinac Center experts will answer your economic questions online. See the instructions for proper use of this feature at The following is a response to one of our web site correspondents who asked two questions, one about right-to-work laws and the other about inflation.

Dear Sir:

Thank you for submitting your question using the Mackinac Center for Public Policy’s "Ask the Economist" web feature. My name is Lawrence Reed and I am president of the Mackinac Center.

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You asked, "Would right-to-work laws benefit the economy wherever they are put into place? For example, some people I've talked to have said that the same benefits we see from right-to-work laws might not appear in the U.S. territories." You also asked, "I've heard that inflation in small doses is good for the economy. Is this true?"

The Benefits of Right-to-Work Laws

Right-to-work laws benefit the economy anywhere and everywhere they are put into place, whether in states or U.S. territories. This is because they are premised on the time-honored principles of economic progress: competition and freedom of choice.

Because right-to-work laws make it unlawful to compel a person to join or to pay dues to a labor organization as a condition of employment, they foster competition among groups that wish to provide labor representation. And competition provides the incentive such groups need to perform well and to please their members, who are their customers.

No true competitor can take his customers for granted. Under a right-to-work law, workers can easily take their patronage elsewhere if they become dissatisfied with how they are being represented. This tends to keep unions and their leadership focused on pleasing their members. By allowing freedom of choice in labor representation, right-to-work laws foster an environment in which workers are treated like responsible adults instead of like captive children.

Such laws do not outlaw unions, nor do they necessarily weaken them. They simply respect a worker's individual right not to join a union, or to quit one and join another. This tends to create a situation in which unions are more accountable to their members, workers are more mobile, their work hours are more flexible, and their morale is higher than in states where there are no right-to-work laws. All of these characteristics foster economic vitality.

What Is Inflation?

As for your second question, about inflation, a bit of definition is in order. Inflation is simply an increase in the quantity of money and credit. It is not "rising prices," contrary to the impression left on people’s minds by most news reports. Rising prices are one of many symptoms of an increase in the quantity of money and credit. We must not confuse causes with symptoms. I point this out because how you define inflation is crucial to providing the best answer to your question.

Is a small amount of increase in money and credit ever "good" for the economy? I would answer this the same way I would answer the question, "Is a small increase in the quantity of green beans good for the economy?"

Yes, if that’s what market participants want, as reflected in their purchases in the marketplace. No, if the increase in green beans is the result of government taking one person’s tax money and handing it over to a green bean farmer to grow more beans, or in any other ways interfering in the market in ways that artificially boost supplies or curtail them.

In the first instance, you have no compulsion involved, no tax power exercised, simply free choice in the market. More people want more beans, their demand pushes up the price of beans, and the result is a genuine, market-based signal to farmers to grow more of them. In the second instance, people may not want any more beans at all — but politicians have decided to manipulate price and supply through subsidies or other artifices, for reasons having more to do with currying favor with a desired constituency rather than with economic reality.

Similarly with inflation, in a genuine free market, in which banking is free of government control and the market regulates the money supply, sometimes there is indeed an increase in the demand for a medium of exchange (money). This will be reflected in such signals as an increase in the price of gold, for instance. That increased value then sends a signal to producers to produce more, just as for any other commodity in a free market.

Those of us who advocate free markets and less political control over the money supply would never argue for an eternally fixed supply of money any more than we would argue for an eternally fixed supply of green beans. We would argue for a flexible, market-based and market-supplied monetary system in which changes in supply and demand govern the money supply. We would argue against the idea of politicians, who arrogantly believe they can know what the proper supply of money should be, manipulating that supply for political reasons. The market would regulate it for sound, economic reasons.

In a free market, any increase (or "inflation") of the money supply tends to be responsive to market conditions and is self-limiting for the same reasons you will never find green bean producers producing endless increases in the supply of green beans. If they get to the point where they’ve overproduced, then green bean prices fall to unprofitable levels and the farmers then quit adding to supply. That’s the market's way of saying, "Hey, we have enough of this stuff. Go use scarce resources to produce something else that is in greater demand."

The problem when government assumes control over money is that such signals from the market can be ignored. Governments that inflate the money supply can do so to the point that they destroy the economy, if they so choose or if their sheer incompetence or venality leads in that direction. That has happened many times in world history. All along the way, the market is screaming, "Enough!" in the form of soaring prices for goods and declining value of money, but unlike the green bean farmer, politicians don’t have to worry in the near term about bankruptcy. They can just keep on printing paper money, and many governments in history have done just that, destroying their money and the economy in the process.

When nations adopt the discipline of market-based money such as gold, the supply of money never gets out of hand, just as in free markets, there always seems to be just the right amount of green beans. You never have to worry about going into a grocery store one day and finding mountains of unwanted green beans and then going in the next day and finding none at all. Ask any former citizen of the old Soviet Union what happens when government is in charge of producing green beans or any other commodity.

If you visit the "Ask the Economist" archives on our Web page, you will also find answers to related questions about money, inflation, etc.

I hope this is helpful.

Lawrence W. Reed
Mackinac Center for Public Policy