No one has argued the omnipresence of the law of supply and demand more persuasively than businessmen themselves—spokesmen for the steel industry not excluded. It is therefore ironic that steel succeeded last summer in accomplishing what had been denied as a possibility: The law of supply and demand—through the use of the strike as lockout—was temporarily repealed.
With an eye to the enormous profit margins in steel, not a few observers have implied that what we witnessed was indeed a lockout. Steel could well have afforded to grant immediately a substantial wage increase, they argued, on the basis of productivity gains, as well as current profits. The industry’s refusal to bargain realistically implied that it would just as soon close shop for a few months. To steel’s reply that a wage increase would have been inflationary, they responded with the unanswered and unanswerable question: If you are so concerned about inflation, why not lower prices?
But why did the industry want a lockout? This is the question that so far has not been raised, except by inference. The liberal view—that the strike was a showdown battle over the issue of work rules and other “managerial prerogatives” is partially true and certainly necessary for a full understanding of the strike; but it needs supplementing. A more strictly economic interpretation, such as I will here suggest, has the value of revealing a sequence of events linking the recent strike with that of the summer of 1956.
THE STEEL INDUSTRY, for purposes of analysis, can be treated as a monopoly. There is not, it is true, one seller of steel, but many in the industry; yet there is a price leader (U.S. Steel) on whom the other firms depend for their pricing policies. Two crucial facts confront the price leader. One is the relationship between costs and demand, from which can be derived a price (and output) which will maximize total profits. Second is the obvious but seldom remembered fact that the higher the price, the smaller will be the demand for any commodity. Like most goods and services, substitutes are available for steel in many of its uses; and if prices are abnormally high, the demand for steel—unlike that for food, for example—can often (with time) be postponed altogether. Suppose now that the price leader has found a price and level of output which maximizes profits. The “price followers” will enjoy relatively more or less profits on the basis of this price, depending upon their own unit costs. Suppose also that the leader’s costs suddenly increase sharply; his immediate response—given that the cost-demand nexus which maximizes profits has been altered—is to raise prices. If the demand for steel shared the characteristics of, say, that for cigarettes, steel sales would fall off immediately as consumers adjust their purchases to the new price. And that would be the end of the story. However, unlike buyers of Brand ...
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