MUA---Here to Stay ...Today!

Further Reflections on the Master--Servant Relationship

Ken Phillips

Overview

I seem to have developed a regular spot at the yearly HRN conferences with a recurring theme investigating the nature of "employment" and its impact on the behaviours of employees, managers, firms and the broader economy.

The perspectives I have offered have always had a slant on practical issues simply because my daily work with businesses of undertaking workplace reform is all about finding practical solutions to practical problems.

Today I intend to be considerably more theoretical and conceptual focusing on the idea of markets and in particular of labour markets. I want to show how legal understandings of labour operations directly conflict with broader understandings of the operations of market based economies.

In fact I offer the thesis that the very nature of the legal employment relationship prevents labour markets operating, is the primary cause of lack of workplace reform and constrains and limits the development of market based economies.

Employment by legal definition and practice imposes anti-market monopoly practices on market based economies.

Current Politics

In the current political context of the rise of One Nation and the shift away from bipolar politics, my comments have particular relevance. In politics the emotion of fear is normally a more potent weapon than the emotion of love. Political parties need to be able to point to a fearful foreign devil to galvanise support. Fear of communism as the object of hate and fear has for some time favoured and united conservative forces in Australia. The collapse of the Berlin Wall has changed that political dynamic.

Currently, the primary political object of fear is fear of economic rationalism. For economic rationalism, read the market. Economic rationalism in its political context has split Australian conservative forces, found a natural political base in the Greens and the Democratics and has pushed the Labour Party closer to its traditional roots.

We should all however be fearful of the reduction in the wealth of our nation should the political backlash against economic rationalism translate into national economic policy. Demonstrably evidence exists that this process may have began.

In its simplest understanding, economic rationalism argues that policy should to the greatest extent possible allow the free choice of the individual through markets, to prevail over government intervention. The limited role of government is to provide a stable environment for markets and to frustrate monopoly creation.

Economic rationalism confronts our nation and us as individuals with the harsh and unforgiving reality of the local and international market place. Anti-economic rationalists, one assumes economic irrationalists, want government to protect us from the market. Ultimately however, no one, not even government, can protect us from the market. We are the market and the sum total of us all acting as free individuals is bigger than any institution.

The political problem of encouraging markets to function is that long-term gain is at short term restructuring pain. Further, the greatest economic pains are suffered by individuals and not by those it seems who are proponents and designers of market based policies. It is hard to see an economic bureaucrat in possession of a secure job convincing a farmer who has lost his/her wheat farm due to cheap, subsidised wheat flooding the world, that the long term economic gain is worth the short term pain of the farmers bankruptcy. The farmer will probably die before the benefits are realised. Pain it appears is individual, intimate and immediate. Gain appears remote and long term. Therein is the political problem and source of support for anti-market forces.

History

Yet if we are to take an historical perspective, the long-term wealth creating benefits of allowing markets to operate are clear. In addition the political squabble over to have or not have free markets, has a longer political tradition than that of the battle between the ideology of the left and the ideology of the right.

The idea of markets is that the sum total of many individuals acting of their own free will, will result in productive output which no central planner can emulate. It is this notion of the freedom of the individual which is at the heart of market realities.

The understanding of the primacy of the free individual had its roots in the writings of the philosopher John Locke in the late 1600s. With development Locke"s ideas were embedded in the American Constitution and saw continued development in Adams Smith's enunciation of economic policy principals during the late 1700s.

It cannot be ignored that the creative explosion which was the industrial revolution found its birth and greatest sustenance in Britain where the ideology of laissez-faire political economy was dominant.

It is no coincidence that the wealthiest economy in the world, the USA, has the idea of individual freedom ingrained in its constitution.

It is also no coincidence that internationalists in the post WW2 period argued with some reason that the global crisis of the 1930s had been in large part caused by protective tariffs, unfair economic competition, restricted access to raw materials and government policy geared to insular economies. In short the 1930s depression was in large part a product of government policies which strangled free markets.

In response to market restrictive practices, the setting-up of the International Monetary Fund and the GATT after WW2 were designed to impose free markets on nations who sought financial assistance from economic malaise. It is instructive how the IMF in the current Asian crisis has tied dual measures of political liberation and market liberalisation to the IMF provision of financial rescue packages.

The long-term economic message is clear. Nations who seek to protect themselves, their businesses and citizens from the realities of the market place will suffer financial hardship. The political problem is to sustain support for free markets when the emotive argument for protection in all its forms is so strong.

Fortunately economists observing international trends since WW2 report success in the freeing of markets world wide in spite of hostile political protectionist forces. This however is a stop start progression which is having most success in financial deregulation, greatest difficulty in agricultural reform and to all reports little if any movement in labour reform.

It is in this context of free markets that I want to comment on the nature of employment and how the master servant, right to control, legal status of employment directly prevents free labour markets from emerging.

A thesis: Why the achievement of free labour markets is having greatest difficulty!

I have to admit continuing surprise when I constantly find that economists do not draw the link between how the law defines employment and the operation of markets. The laws definition of employment appears to be considered so irrelevant to economic performance as to not even be worthy of remote consideration. Generally, economists appear to see employment as a legal neuter.

My proposition however is that what the law says of employment has fundamental impact on the behaviour and economic interactions and outputs of people. Further what the law says of employment is a primary and fundamental factor constraining the development of markets in general and free labour markets in particular.

Markets are simple. Markets are about people as individuals having the right to exercise individual free choice on what products or services they wish to offer and/or to obtain. Markets are facilitated by simple offer and acceptance of contract subject to product or service availability, quality and price.

Markets are not complex although they are frequently over-analysed.

A fundamental prerequisite for the existence of markets is the legal right of the individual to exercise free choice. In markets individuals are not legally controlled by anyone. In markets individuals legally control themselves.

In employment, the reverse is the case. In employment individuals are legally controlled by another party. In employment, the right of the individual to exercise free choice is legally removed.

This essential and fundamental difference between markets and employment, namely the non-application of individual freedom, prevents labour markets from operating.

Let me expand.

Implications of what is employment at law ?

In the English legal tradition, the laws definition of employment is found in common law, not in statutes. The legal definition can only be sourced through the reading of multiple legal judgements however any law student will learn early that the common law definition is based on the medieval master servant relationship in which the employer has a legal "right to control" the employee.

I have expanded on the laws definition at other HRN conferences and had a paper published by the IPA in November last year which covered the topic in some length. 1 will not dwell on the technicalities here.

However,

• The essential point to note is that the law on employment removes from individuals their legal right to control themselves.
• Inside the legal employment environment individuals are prohibited from behaving as they would as consumers.
• An individual legally defined as an employee is prohibited from exercising free choice. In fact it is assumed by the law that an employee is incapable of exercising self-control. The only choice an individual has in work is to enter an employment relationship or not enter the employment relationship.
• The choice in not entering employment is to become an independent contractor or be without work.

As apparently absurd as this legal proposition may appear to be and as out of touch the legal control issue may be with human behaviour and the human desire for liberty, nevertheless this is the legal situation.

Some of the consequences and demonstrations of this legal construction are as follows.

1. Employment or, industrial relations regulation, only constitutionally applies to those people who have entered a legal employment situation. Employment regulation under its constitutional authority only applies to people who are in a master-servant "right to control" environment. The industrial relations system of work regulation does not have authority over people who are self employed or independent contractors or out of work.
2. Under industrial relations awards employers must give annual and public holidays. Employees do not have the right to choose to work for their employer on their holidays thus earning more income. Employment regulations deny the individual the right to choose to earn more based on the legal view that individuals do not have the capacity to decide whether or not they need holidays.
3. Under anti discrimination legislation the employer is held liable for illegal discriminatory actions of the employee. The employee is legally assumed to be incapable of self-control and so the employer is held liable. It is rare under the principles of natural justice that a third party is held liable for the actions of another party.
4. Gaming and liquor control legislation has as a presumption that these two activities are controlled through licensed gaming and liquor operators who are master/employers.

This legal construction of employment distorts human behaviour, is a denial of the principles of justice, suppresses human liberty, prevents labour markets operating and perverts the operation of free markets in general.

This anti-market mechanism becomes clear when the predominant conceptual understanding of the nature of the firm is investigated.

The Firm

I have touched on the topic of the firm at prior HRN talks and have developed the theme to a greater extent in a recent article for the Centre of Independent Studies. I will summarise the major points here.

Because of the existence of the legal employment relationship, the principles of economic freedom have not been applied to the internal operations of firms in market economies. The existing model of free, market-based economies is one in which the market is restricted to operating between firms and fails to operate inside firms.

Firms are in effect islands of command and control socialism dotting the seas of market based economies.

To understand why firms are internal anti-market, pro socialist models one needs to return to the source of the economic understanding of the firm in the writings of RH Coase.

The central observation of Coase was his emphasis on transaction cost theory. Coase reasoned that interaction between players in the market does not happen costlessly; every transaction in an economy has a cost associated with it which has to be accounted for somewhere. As transactions become more complex and too difficult for single individuals to undertake, organisations form (firms) to manage and contain the transaction costs.

Coase observed the factors which cause firms to be held together. He drew on the practices of entrepreneurs and managers and observed their capacity to control and direct the people working in the firm. This control and direction of individuals inside firms by the managers is legally possible, observed Coase, due to the existence of the master and servant, common law employment relationship. Coase reasoned that if the entrepreneur did not have the legal "right to control" the people working in the firm, then transaction costs could not be contained and (presumably) the firm could not exist. This view is widely held.

In this manner Coase's observation exclusively tied the existence of firms to the maintenance of internal control through the master/servant, employer/employee legal relationship. In so doing he postulated, I think without realising, a direct interdependence between the very existence of markets and the legal right of one human to control another human.

This link is in direct contradiction to everything we know about markets, namely that markets depend for their existence on legal and actual freedom of the individual to choose.

This observation of the legal employment control structure of the firm, is not I believe an observation and explanation of free markets but rather an observation of market restrictions and perversions. Firms under master servant models are models of anti-markets. In addition, macro economic modelling based on the "right to control" assumption is anti-market.

The Ports

In the context of this conference looking at the Australian waterfront, the waterfront reform attempts witnessed during 1998 have provided a stark demonstration of how the master servant legal employment regime, distorts human behaviour and market operations. The ports experience shows how deeply the mechanisms surrounding the legal idea of the "right to control," pervades our legal and law enforcement institutions. The laws view of the 1998 ports row was of a recalcitrant master deviously attempting to reimpose his "right to control". The law used all its force to scramble to "protect" the servants.

The outcome is that no matter how the industrial relations statute had been changed, the institutions of the law worked to protect market destructive structures on the ports. It is essential to remember that these market destructive institutional practices of the industrial relations system, only function because of the existence of the master-servant, employer-employee legal relationship.

Conclusion

My proposition is that our current concepts of what a market based economy is and how it operates, is in large part based on a fraud.

We know that for markets to operate, individuals must have legal and actual freedom of choice. In the work environment this individual legal liberty is largely denied. Consequently our market-based economy is prevented from fully operating. Legal employment creates perversions which are destructive of the market.

This human control issue inhibits our success as a society in creating sustaining wealth.

Further, this legal "right to control" issue is an issue about human liberty, that impacts in a deeply individual and personal way for each and every citizen. Assessing the degree of liberty we desire involves economic, social and political choices that we must all exercise in a knowledgeable and purposeful manner. The way we choose to approach liberty in the workplace is fundamental to our success as a society. I suggest our choices at the moment are self destructive.