Hayek’s spotty record as a prophet in the Road to Serfdom – part 2: what about the post-colonial Third World?

Gordon Tullock used Sweden to argue that  the problem with The Road to Serfdom was:

“that it offered predictions which turned out to be false. The steady advance of government in places such as Sweden did not lead to any loss of non-economic freedoms.”

But was socialism good for democratic consolidations in the post-colonial third world? Was that not a better hunting ground for Hayek’s fears?

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The people and parties, very often with a socialist hew, who won the election after the colonial government left town are not always all that keen to give up the reins of power.

Remember Huntington’s Two Turnover Test: when a nation moves from an emergent to a stable democracy, it must undergo two democratic and peaceful turnovers of ruling parties.

After an emerging democracy’s first turnover, the new administration often reverts to authoritarian rule. Russia under Yeltsin and Putin are examples.

Would Singapore be an example of central planning and state ownership leading to serfdom and a one-party state?

The state controls and owns firms that comprise at least 60% of the GDP through government entities. The vast majority (more than 80%) of Singaporeans live in public housing;

Although initially styling itself an anti-Communist and Social Democratic, the People Action Party (PAP) was expelled from the Socialist International in 1976 because it suppressed dissent and jailed opposition leaders. Hayek would be vindicated?!

The Index of Economic Freedom says that Singapore is a nominally democratic state ruled by the PAP since the country became independent in 1965, and that certain rights, such as freedom of assembly and freedom of speech, remain restricted

The Freedom House 2010 country report notes that Singapore is not an electoral democracy despite elections free of irregularities and mentions that all domestic newspapers, radio stations, and television channels are owned by government-linked companies, which limits free speech. The PAP has used the Government’s extensive powers to place formidable obstacles in the path of political opponents.

Daron Acemoglu has written on the role of institutions on post-colonial development in his why nations fail research agenda.

  • In Africa, Central America, the Caribbean and South Asia, European powers set up extractive states. These institutions did not introduce much protection for private property nor did they provide checks and balances against government expropriation. The explicit goal of the Europeans, in one form or another, was the extraction of resources from these colonies.
  • This colonization strategy contrasts with the institutions that the Europeans set up in colonies in which they settled in large numbers, e.g., the United States, Canada, Australia and New Zealand. In these colonies, life was modelled after that in the home country; the emphasis was on the enforcement of property rights for a broad cross-section of society, especially smallholders, merchants and entrepreneurs.

The same British colonists established different institutions in very different parts of the world:

  • If Europeans settled in a colony, institutions were developed for their own future benefits.
  • If Europeans did not settle in a colony, they set up a highly centralized state apparatus and other similar institutions to oppress the native population and to facilitate the extraction of resources in the short run

Acemoglu has written on Singapore as a stable non-democracy that can persist without significant repression.

Singapore was able through industrialization in the post-colonial period to ease social tensions and thus eliminate the need for democratic consolidation and also the need for repression. China’s ruling elite has the same current goal.

Why has Singapore not democratized? Acemoglu suggests is it is because Singapore is a very equal society. There is no traditional wealthy landed elite and the economy relies on external capital and businesses.

Most people appear to be relatively happy with the status-quo, at least not so unhappy that they want to engage in serious, and potentially costly, collective action to induce a major change in political institutions.

All and all, political economy has come on in leaps and bounds since 1944. Hayek should be judged against the other predictions of his times. Few socialist countries in the post-colonial Third World stayed democratic for long.

BBC World Service – Documentaries – Useful Idiots

The phrase ‘useful idiots’, supposedly Lenin’s, refers to Westerners duped into saying good things about bad regimes.

In political jargon it was used to describe Soviet sympathisers in Western countries and the attitude of the Soviet government towards them.

Useful idiots, in a broader sense, refers to Western journalists, travellers and intellectuals who gave their blessing – often with evangelistic fervour – to tyrannies and tyrants, thereby convincing politicians and public that utopias rather than Belsens thrived.

In part one John Sweeney looks at Stalin’s Western apologists at http://downloads.bbc.co.uk/podcasts/worldservice/docarchive/docarchive_20100804-0905a.mp3

In part two he explores how present day stories of human rights abuses across the world are still rewritten at http://downloads.bbc.co.uk/podcasts/worldservice/docarchive/docarchive_20100811-1059a.mp3

 

via BBC World Service – Documentaries – Useful Idiots

Steve Jobs and the Twitter Left

We saw the movie Jobs:

  • I could not work out what Steve Jobs actually achieved on his own by the time the film ended in about 2001.
  • Jobs was portrayed as a thoroughly unlikable fellow who was a terrible CEO who deserved to be fired in the mid-1980s.
  • If he had been hit by a bus in 2000, no one would remember him now. I read a biography of Jobs around that time.

By 2012, Jobs had been labelled “Greatest entrepreneur of our time”, “brilliant, visionary, inspiring”, and “the quintessential entrepreneur of our generation” and CEO of the decade.

My estimations of Jobs did go up later when I found out that after resuming control of Apple in 1997, Jobs eliminated all corporate philanthropy programmes. Jobs said he felt that expanding Apple would do more good than giving money to charity. This is a great point by him about the role of economic progress in abolishing poverty. There is no public record of Jobs giving money to charity apart from product RED.


Good to see that having a driven personality can still get you a pass on your membership of the top 0.1% of income earners in the eyes of the Twitter Left or should it be the IPhone Left.

Hayek’s spotty record as a prophet in The Road to Serfdom – Part 1

Gordon Tullock used Sweden to support his argument that the basic problem with The Road to Serfdom was:

“that it offered predictions which turned out to be false. The steady advance of government in places such as Sweden did not lead to any loss of non-economic freedoms.”

Hayek discusses the Road to Serfdom

When looking back longingly at the mixed economies of 1950s and 1960s, people often forget who won elections much of the time back then.

The period that managed to combine a large degree of state ownership and control of the UK economy with a free and diverse media and political pluralism was often under Tory rule (1951 to 1964) with the Labor governments (1964-1970) often with a margin of a few seats.

Then there was the Menzies era in Australia with Liberal party rule from 1949 to 1972; and then 1975 to 1983. Much the same in New Zealand. The Left rarely held power in the mid-20th century.

The Christian democrats usually ran both Italy and Germany in coalitions, as I recall, up until the late 1960 or the early 1970s. Gaullist France? The LDP in Japan?

That is where Hayek got it wrong. The left-wing parties were not the face of the future.

Power rotated in Schumpeterian sense. Governments were voted out when they disappointed voters with the replacement not necessarily having very different policies.

The right-wing parties won many western European elections by that well-proven old trick of being slightly to the right of the left-wing parties. Hayek failed to predict this.

Hayek was himself a major critic of detailed predictions:

“We can build up beautiful theories which would explain everything, if we could fit into the blanks of the formulae the specific information; but we never have all the specific information.

Therefore, all we can explain is what I like to call “pattern prediction.”

You can predict what sort of pattern will form itself, but the specific manifestation of it depends on the number of specific data, which you can never completely ascertain. Therefore, in that intermediate field — intermediate between the fields where you can ascertain all the data and the fields where you can substitute probabilities for the data–you are very limited in your predictive capacities.”

“Our capacity of prediction in a scientific sense is very seriously limited. We must put up with this.

We can only understand the principle on which things operate, but these explanations of the principle, as I sometimes call them, do not enable us to make specific predictions on what will happen tomorrow.”

Hayek’s warnings in The Road to Serfdom was against a background where democracy was still young and insecure in Europe and peacetime democratic governments were, up until then, not much bigger than a post office and a military. The big governments of his day were not democratic.

As Popper and Kuhn understood it, bold, risky hypotheses are at the heart of great advances in the sciences and scholarship generally.

Is the Blogosphere an Infotopia or an Echo Chamber – the Daily Me?

Cass Sunstein made some astute observations in Republic.com 2.0 about how the blogosphere forms into information cocoons and echo chambers. People can avoid the news and opinions they don’t want to hear.

This is not all that surprising. Many do not read the newspaper, or read those newspapers that fuel their initial beliefs. London is famous for its partisan newspapers each pandering to their own slice of the political spectrum.

The standard J.S. Mill view of deliberation is that group discussion is likely to lead to better outcomes, if only because competing views are stated and exchanged.

Sunstein has argued that there are limitless news and information options and, more significantly, there are limitless options for avoiding what you do not want to hear:

  • Those in search of affirmation will find it in abundance on the Internet in those newspapers, blogs, podcasts and other media that reinforce their views.
  • People can filter out opposing or alternative viewpoints to create a "Daily Me."
  • The sense of personal empowerment that consumers gain from filtering out news to create their Daily Me creates an echo chamber effect and accelerates political polarisation.

A common risk of debate is group polarisation. Members of the deliberating group move toward a more extreme position relative to their initial tendencies!

How many blogs are populated by those that denounce those who disagree? This is the role of the mind guard in group-think.

Debate is over-rated as compared to brute experience. Milton Friedman said this in his Nobel price lecture:

Government policy about inflation and unemployment has been at the centre of political controversy. Ideological war has raged over these matters.

Yet the drastic  change that has occurred in economic theory has not been a result of ideological warfare.

It has not resulted from divergent political beliefs or aims.

It has responded almost  entirely to the force of events: brute experience proved far more potent than the  strongest of political or ideological preferences

The market process succeeds because it relies on a bare minimum of knowledge and hardly any deliberation but a lot of learning from experience.

A purpose of voting through secret ballots is both to bring the debate to a close and to clip the wings of those that shout the loudest and longest.

Sunstein in Infotopia wrote about how people use the Internet to spend too much time talking to those that agree with them and not enough time looking to be challenged:

In an age of information overload, it is easy to fall back on our own prejudices and insulate ourselves with comforting opinions that reaffirm our core beliefs. Crowds quickly become mobs.

The justification for the Iraq war, the collapse of Enron, the explosion of the space shuttle Columbia–all of these resulted from decisions made by leaders and groups trapped in "information cocoons," shielded from information at odds with their preconceptions. How can leaders and ordinary people challenge insular decision making and gain access to the sum of human knowledge?

Conspiracy theories had enough momentum of their own before the information cocoons and echo chambers of the blogosphere gained ground.

Must everything be the result of a grand plan? As Karl Popper explains:

…a theory which is widely held but which assumes what I consider the very opposite of the true aim of the social sciences; I call it the "conspiracy theory of society."

It is the view that an explanation of a social phenomenon consists in the discovery of the men or groups who are interested in the occurrence of this phenomenon (sometimes it is a hidden interest which has first to be revealed), and who have planned and conspired to bring it about.

This view of the aims of the social sciences arises, of course, from the mistaken theory that, whatever happens in society – especially happenings such as war, unemployment, poverty, shortages, which people as a rule dislike – is the result of direct design by some powerful individuals and groups.

Cass Sunstein in another book defines a conspiracy theory as:

An effort to explain some event or practice by reference to the machinations of powerful people, who have also managed to conceal their role.

He goes on to argue that millions hold conspiracy theories – that powerful people work together to withhold the truth about some important practice or terrible event.

Conspiracy theories attribute extraordinary powers to political leaders and bureaucracies to plan, to control others, and to maintain secrets. Conspiracy theories overestimate the competence and discretion of these political leaders and bureaucracies, who are assumed to be able to make and carry out sophisticated secret plans, despite ample evidence that most government actions do not remain secret for long.

Conspiracy theories also assume that these nefarious secret plans are easily detected by members of the public without the need for special access to the key information or any investigative resources.

Sunstein also argued that a distinctive feature of conspiracy theories is their self-sealing quality. Conspiracy theorists are not persuaded by an attempt to dispel their theories and look at these attempts as further proof of the conspiracy.

Karl Popper argued that conspiracy theories overlook the pervasive unintended consequences of political and social action; they assume that all consequences must have been intended by someone.

Most people lack direct or personal information about the explanations for terrible events, and they are often tempted to attribute such events to some nefarious actor as a way of coping with an uncertain world. More than a few blogs help them round-up the usual suspects.

Congestion pricing – Swedish style

Sweden had a novel approach to introducing a road congestion charge. The congestion toll is put in place in 2006 for six months and then was lifted for another seven months.

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A local referendum was then held on whether to bring the road tolls back or stay with the old traffic congestion. Road traffic passing in and out of the cordon in Stockholm Municipality reduced by between 20-25% during the period of the trial.

Neat.

A taxonomy of political disagreement

It is just too comforting to think that those you disagree with are ignorant or steeped in moral turpitude, preferably both.

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Milton Friedman argued that people agree on most social objectives, but they differ often on the predicted outcomes of different policies and institutions.

This leads us to Robert and Zeckhauser’s taxonomy of disagreement:

Positive disagreements can be over questions of:
1. Scope: what elements of the world one is trying to understand?
2. Model: what mechanisms explain the behaviour of the world?
3. Estimate: what estimates of the model’s parameters are thought to obtain in particular contexts?

Values disagreements can be over questions of:
1. Standing: who counts?
2. Criteria: what counts?
3. Weights: how much different individuals and criteria count?

Any positive analysis tends to include elements of scope, model, and estimation, though often these elements intertwine; they frequently feature in debates in an implicit or undifferentiated manner.

Likewise, normative analysis will also include elements of standing, criteria, and weights, whether or not these distinctions are recognised.

The origin of political disagreement is a broad church indeed in a liberal democracy. Those you disagree with are not evil, they just disagree with you. As Karl Popper observed:

There are many difficulties impeding the rapid spread of reasonableness. One of the main difficulties is that it always takes two to make a discussion reasonable. Each of the parties must be ready to learn from the other.

A nice case against the notion of the ignorance and moral turpitude of your opponents is the obituary by Brad DeLong for Milton Friedman which was as good as any written saying:

His wits were smart, his perceptions acute, his arguments strong, his reasoning powers clear, coherent, and terrifyingly quick. You tangled with him at your peril. And you left not necessarily convinced, but well aware of the weak points in your own argument

AND

Milton Friedman’s thought is, I believe, best seen as the fusion of two strongly American currents: libertarianism and pragmatism. Friedman was a pragmatic libertarian. He believed that–as an empirical matter–giving individuals freedom and letting them coordinate their actions by buying and selling on markets would produce the best results… For right-of-center American libertarian economists, Milton Friedman was a powerful leader. For left-of-center American liberal economists, Milton Friedman was an enlightened adversary. We are all the stronger for his work. We will miss him.

Why do recessions cheer the Left up?

Why is it that the further to the Left that people go, the more cheerful they seem to be in recessions and economic crises? They are miserable when times are good.

The Left supported the discretionary fiscal, monetary and regulatory policies that caused the recession and then supported crisis management policies that deepen the recession. The Left always wants to tax and regulate their way out of every recession.

Most crisis management policies distort the incentives to hire and invest and reduce competition and efficiency. While different sorts of shocks lead to ordinary downturns, it is overreactions by governments to stem the crisis that prolong and deepen economic downturns, turning them into depressions.

One in three EU unemployed are Spanish because of employment protection laws. Cahuc et al. 2012 estimated that Spanish unemployment would be 45% lower if Spain adopted the less strict French laws! Differences in their employment protection laws accounted for nearly half of the dramatic rise in Spanish unemployment since 2007. Who is for and against these terrible laws?

The Greatest Speech Ever – Robert F Kennedy Announcing The Death Of Martin Luther King

This speech will take your breath away.

HT: Mohammad Azzam

 

Video

The Household Demand for Low Carbon Public Policies

Matt Kahn at Environmental and Urban Economics: Carbon Politics and Economic Research.

How biased is the Australian media?

Camped firmly over the middle-ground. Sorry to disappoint.


Leigh and Gans in "How Partisan is the Press? Multiple Measures of Media Slant" in The Economic Record 2012 employed several different approaches to find that the Australian media are quite centrist, with very few outlets being statistically distinguishable from the middle of Australian politics.

The minor exceptions were ABC Channel 2 and perhaps the Melbourne Age in its news slant in the 2004 election. Their media slants were small.

Australian newspapers tended to endorse the Liberal-National coalition in the federal elections from 1996 to 2007 although The Australian, right-wing rag that it is, backed the Labor Party in 2007! I agree that this was a serious lapse of judgement.

Another lapse is the editorial of April 6, 1995, where the Australian said: "The scientific consensus that global warming is occurring unnaturally, primarily as a result of industrial development and deforestation, is no longer seriously disputed in the world." Murdoch’s paper supports global action on climate change based on science.

The editorial endorsements series should have been longer in the analysis of Leigh and Gans because some newspapers back winners just before they become winners and oppose the re-election of tired and smelly governments that have being there too long no matter what their party.

The results of Leigh and Gans should come as no surprise. Newspapers that are out of tune with their readers lose sales and risk going broke. Plenty of newspapers are losing money these days because of the digital revolution in media. There is no scope left to indulge the political preferences of the owners at the expense of circulation. Margaret Simons got it right when she said:

The market is too small to support newspapers that don’t play to the centre ground … In a marketplace full of bland centrist publications and carefully mixed stables of commentators, small deviations can look extreme.

For links discussing the quality of the analysis of Leigh and Gans, see http://offsettingbehaviour.blogspot.co.nz/2009/09/measuring-media-bias-in-oz.html and http://economics.com.au/?p=4226 for Gans’ rely to http://andrewnorton.info/2009/09/02/can-public-intellectuals-be-used-to-assess-partisan-media-slant/

Let the climate science be settled! Only the economics matter

The great tactical victory of environmentalists is keeping the debate on the science going because even if the science is right, the economic costs are small.

Let the climate science be settled. How much will global warming cost is the correct question for policy debate.

Global warming, although real, is not apt to be severe. It will lower the level of GDP by maybe 2%. The loss of one year’s income growth! Courtesy of David Friedman’s reading of the report, this is what the IPCC said this week:

With these recognized limitations, the incomplete estimates of global annual economic losses for additional temperature increases of ~2°C are between 0.2 and 2.0% of income (±1 standard deviation around the mean)

Many of the consequences of global warming will be beneficial – warmer in some places, colder in others; wetter in some places and drier in others. The sea level rises will mean local problems, not a planetary crisis.

New Zealand will have a more reliable power supply because of increased winter rainfall as well as warmer winters. Most of New Zealand’s power supply is from lakes that rely on the Spring melting of the winter snow rather than winter rainfall.

The chances of India, China and the rest of the Third World agreeing to forego or even slow their economic development to fight global warming is zero even before you consider the international collective action, verification and free rider problems.

Climate changes have a greater impact in the most under-developed countries that are yet to embrace capitalism. Agriculture provides the livelihoods of 30 per cent or more of their populations, many of whom still practice subsistence agriculture.

Yet the trend in developing countries is to be much less dependent on agriculture as a  source of employment and family incomes. If per capita income in the poor countries grows in the next forty years as rapidly as it has in the forty years just past, their vulnerability to climate change should diminish.

Adaptation and richer is safer are the only games in town for both the developed and the developing worlds.

The only case for even a token carbon tax is to avoid green tariffs in the EU and USA on exports. We may as well collect the revenue for ourselves rather than let the EU and USA pocket it.

p.s The report of the IPCC yesterday was a one-day media wonder in the country where I live. I could not find a single story today in the Dominion Post, which is the paper for the political capital for New Zealand.

One of the greatest moments in TV – The Wire – Major Colvins speech: A paper bag for drugs

the best single case made for ending the war on drugs from the greatest TV show of them all. A bit over 3 minutes long.

Years ago, I remember reading a short news note about a Rand study of occupational hazards facing drug gangs in Washington, DC in the 1970s.

In a typical career of a few years, the annual risks were these:

  1. The chances of being caught by the police was 22% – usually 18 months in prison;
  2. the chances of serious injury 7%;
  3. The chances of being murdered by a business associate or market rival was 1.4%;
  4. the pay for street dealers is rather poor and not much better than their next best job opening.

Gave up on the war on drugs right there and then. Death and injury are the main occupational hazards of a drug dealer.

Murder was the leading cause of death of young black Americans.

Another paper pointed out that one reason the death penalty did no work so well was because people spent so long on death row due to appeals that taking them out of the drug trade increased their life expectancy.

The execution rate on death row is about twice the death rate from accidents and violence for all American men, and only slightly greater than the rate of accidental and violent death for all black males aged 15 to 34.

Bad prison conditions—well known, pervasive and immediate—have a more significant deterrent role against crime. Death row is a rather safe place to be?

Video

When two refugees from the Khmer Rouge found paradise on Earth

When a Cambodian man and his pregnant wife, having fled the Khmer Rouge, were on the bus from Sydney Airport, they quickly concluded that they were in paradise. They slept on top of the blankets of the neatly made bed at the migrant hostel in 1978 because they did not want to get into any trouble for messing up the bed and be sent back to hell. Such was their ingrained fear of arbitrary power and victimisation.

After a few weeks, they stopped stealing the sauces and other condiments from the dining hall at the hostel because they realised that the food would keep coming and there was no need to hoard. They then started to act as mentors to incoming refugees assuring them that they could sleep under the blankets, and the food would arrive three times a day, every day.

When the Salvation Army helped them and their new baby into a house in suburban Sydney, the Salvos were very embarrassed about the furniture they managed to find for them.

The Cambodian couple thought they were in paradise again. The house and furniture were better than anything they had seen in a middle-class home in their own country.

After a few years of hard work, the father saved enough to open an electrical retailing franchise store in the suburbs.

The mother went to the store one afternoon to fill in for an absent worker.

She did not come back for 7-years.

She was great at bargaining with fellow refugees. She knew that her fellow refugees only had a certain amount of money, and she bargained to find out what that was. She wrapped the goods up tightly because she knew that they took public transport home.

The word spread that her store was a good place for a bargain, and the store prospered.

Their daughter grew up to be a lawyer and wrote one of the best autobiographies I have read.

I had some Cambodian friends at graduate school in Japan in 1995 to 1997. Friendly, kind people despite growing up in hell.

They also gave me great insight into the blinding power of nationalism.

Two Cambodian friends, educated urbane people, referred to the time after the Vietnamese invasion of Cambodia as when they were a Vietnamese colony.

Another Cambodian, who no one liked, when he annoyed his Vietnamese class mates too much, they would say, “Remember 1979.”

This taunt would throw this Cambodian into a fit of nationalist pique. He raged against the invasion.

If any country would have benefited from an invasion from hell, it would have been Cambodia under Pol Pot and the Khmer Rouge by 1979. At least, the Devil waits for you to die before he torments you.

The withering away of the union wage premium

The union wage premium is supposed to be 10-15%. There is evidence that it may be close to zero and has been close to zero for some time at least in the USA.


In this paper (QJE 2004), John DiNardo and David Lee compared business establishments from 1984 to 1999 where US unions barely won the union certification election (e. g., by one vote) with workplaces where the unions barely lost.

If 50% plus 1 workers vote in favour of the union proposing to organise them, management has to bargain for a collective agreement in good faith with the certified union, if the union loses, management can ignore that union.

Most winning union certification elections resulted in the signing of a collective agreement not long after. Unions who barely win have as good a chance of securing a collective agreement as those unions that win these elections by wide margins. Few firms subsequently bargained with a union that just lost the certification election. Employers can choose to recognise a union.

Because the vote is so close, a particular workplace becoming unionised was close to a random event.

  • This closeness of the union certification election may disentangle unionisation from just being coincident with well-paid workplaces, more skilled workers and well-paid industries.
  • Unions could be organising at highly profitable firms that are more likely to grow and pay higher wages independent of any collective bargaining. The unions are claiming credit for wage rises that would have happened anyway.

DiNardo and Lee found only small impacts of unionisation on all outcomes that they examined:

  • The estimated changes for wages are close to zero.
  • Impacts on survival rates of the unionised business and their profitability were equally tiny.
  • This evidence suggests that in recent decades, requiring an employer to bargain with a certified union has had little impact because unions have been unsuccessful in winning significant wage gains.

This means that there may not be a union wage premium at all since the early 1980s in the USA.

Private sector union membership is about 7% in the USA. Private sector union membership is barely in the teens in Australia and New Zealand. Fewer people are joining unions because they are not of any value to them.

The transferability of these results to Australia are in doubt, to the extent that there is the option for compulsory arbitration, which there is. The union wage premium may be the product of the ability to lobby for wage regulation.

New Zealand and U.S. unions are more similar in that both are on their own in bargaining with employers for a wage rise. The U.S. result sends a message to New Zealand that unions are a bit of a relic in terms of wage bargaining.

Regulated industries are a little different because it is wise for employers to share the rents from the higher prices with their employees as higher wages. They then unite in a political coalition to support continued regulation and tariffs. There are far fewer industries these days where entry is regulated and prices are higher because of such anti-competitive regulation.

These results about the small size of the union wage premium, of course, would come as no surprise to Milton Friedman. He said in 1950 that most unions could not overcome market forces that would tend to keep wages aligned with competitive rates.

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