Sidney and Beatrice Webb's Institutional Theory of Labor Markets and Wage Determination

• Published date: 01 July 2013
• Author: Bruce E. Kaufman
• Date: 01 July 2013
• DOI: http://doi.org/10.1111/irel.12032

Sidney and Beatrice Webb’s Institutional Theory

of Labor Markets and Wage Determination

BRUCE E. KAUFMAN*

Sydney and Beatrice Webb were among the most influential institutional labor

economists of the pre-World War II period yet this portion of their work has

fallen out of sight for more than a half-century. This paper reconstructs the

Webbs’theory of labor markets and wage determination and explains how it dif-

fers from the rival neoclassical labor theory of Alfred Marshall. Key institutional

components of their theory are developed, such as rent theory, institutional pyra-

mid, chain of bargains, inequality of bargaining power, unemployed residuum,

and common rule. The Webbs’theory is then used to explain the operation of

labor markets and why in the absence of regulation they generate numerous social

problems, including widespread poverty wages, excessive work hours and inju-

ries, substantial unemployment, and human capital exploitation. Also described is

the set of labor policies the Webbs advocate to solve these problems. Implications

for modern labor theory and policy are developed.

The labor view [was] first and most effectively developed by the Webbs,

where they set out, in a literary way, the whole notion of inequality of

bargaining power, and there wasn’t a man in the United States—or in

the world—who taught this stuff, or any writers of textbooks in succeed-

ing generations, who didn’t say this. (Wolman 1961: 55)

THE INSTITUTIONAL AND INDUSTRIAL RELATIONS SCHOOLS WERE THE DOMINANT

GROUPS IN LABOR ECONOMICS into the 1960s (Boyer and Smith 2001; Kaufman

2006), and among early writers, the British husband–wife team of Sidney and

Beatrice Webb played a particularly important role—per the Wolman epigraph

(also see Douglas 1948). Among the dozens of books and articles they wrote

over a six-decade career, the 900+page volume Industrial Democracy (1897)

* The author’saffiliations are Department of Economics, Georgia State University, Atlanta, GA, USA

Email: bkaufman@gsu.edu; Department of Human Resources and Employment Relations, and Centre for

Work, Organization, and Wellbeing, Griffith University, Brisbane, Qld, Australia and Work and Employment

Research Unit, Business School, University of Hertsfordshire, Hatfield, UK.

INDUSTRIAL RELATIONS, Vol. 52, No. 3 (July 2013). ©2013 Regents of the University of California

Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford, OX4 2DQ, UK.

765

stands out as their magnum opus. The book is an exemplar of the early institu-

tional approach in political economy (Rutherford 2011)—exhaustive on-the-

ground investigation, an inductive/empiricist approach to theory development, a

corpus of theory integrating in a literary way ideas and insights from diverse

writers and disciplines (Smith, Marx, Marshall; economics, sociology, history),

and a progressive policy program emphasizing social control and reengineering

of institutions to produce more efficient and equitable outcomes.

The Webbs are the subject of a modest literature of biography and political

thought (Cole 1971; Eriguchi 2009; Harrison 2000; Nolan 1988) centered on

their role in founding and developing the Fabian Society and its creed of evo-

lutionary state socialism. Next is a smaller body of work that examines the

Webbs’s place in the late nineteenth-century dissident movement associated

with the British version of the Methodenstreit (war over method) and corollary

efforts to develop a historical–social–institutional type of economics (Koot

1987; Rutherford 2007). Part of this story is the Webbs’decision to found the

London School of Economics (LSE) in 1895 as a way to circumvent the

orthodox hold on British economics exercised by Marshall et al. at Cambridge

and Oxford (Kadish 1993; Perlman and McCann 1998).

Next in the list are the Webbs’historical and empirical studies on labor prob-

lems, institutions, and policy. They were late nineteenth-century pioneers of the

social science research program on the conditions of labor (Harrison 2000; Kauf-

man 2012a; McNulty 1980); were widely regarded as co-founders of the field of

industrial relations for their seminal trade union studies (Frege 2008; Hyman

1989); and provided often-cited analyses and rationales for collective bargaining,

minimum wages, and the modern social welfare state (Bevir 2002; Farnham

2008; Kaufman 2005, 2009). Of these subjects, the Webbs’writings on trade

unions today still get occasional if somewhat ritualistic citation.

Least known is the Webbs’attempted reformulation of labor market theory.

Critics claim the Webbs and other labor institutionalists were antitheory and con-

tributed little beyond a mass of facts and description (Boyer and Smith 2001;

Stigler 1959). However, one notes in the preface to Industrial Democracy (1897)

the Webbs tell readers, “we have ventured into the domain of theory …[and]

have laid before the student a new analysis of the working of competition in the

industrial field”(p. viii, emphasis added). Although lost today, this “new analy-

sis”was widely known and quite influential in the pre–World War II years (e.g.,

Millis and Montgomery 1945) and provided part of the economic and social

rationale for the New Deal labor program in the United States (Kaufman 2012b).

This article describes and recasts into modern terms the labor market theory

of the Webbs. It is organized into ten linked topic areas. A history of thought

purpose is served; more important, however, is utilizing the Webbs’ideas to

further develop and strengthen the institutional economic theory base for labor

766 / BRUCE E. KAUFMAN