Josh Dowlut's  Instablog

There is a huge distinction between private sector unions and public sector unions.  Adam Smith might support private sector unions.  However, he would unquestionably oppose public sector unions.  Private sector unions do not impose an added cost to society as a whole, but public sector unions absolutely do, and do so directly as well as indirectly.

Private sector unions differ most obviously from public sector unions by the fact that they are constrained by market forces.  Wages cannot be so generous as to bring the total cost of production above where the market is willing to pay.  This leads us into the second, slightly less obvious difference:  Private sector unions fight over gross margins' split between ownership and workers, essentially, wages vs. profit.  This is why Smith would likely support private sector unions, because his sympathies lay with the workers and he absolutely abhorred profit because he saw it for exactly what it is, the product of uncompetitive markets and monopoly exploitation.

Public sector unions on the other hand are not constrained by market forces and by their very nature pit a small, concentrated group (public employees) against society as a whole (tax payers).  Employees' gains come at tax payers' direct, zero sum loss.  If society as a whole is the consumer of government, and government employees are the producers of government, then a capitalist, Adam Smith philosophy would say it is absolutely counter productive to the wealth of the entire nation.  In addition to this direct cost, public sector unions bear the indirect cost of corrupting the political process.  Martin O'Malley for example, had an army of public sector union members at his disposal for his campaign.  Some of them were threatened by AFSCME leaders.  The union helps get its candidate in power, the politician rewards its loyal army with bonuses, pay raises, and more paid days off even though the state is broke as a joke.

My private sector union analysis makes the assumption that the market power of the union will not exceed the market power of the business.  There are examples of the ill effects of when this happens, the UAW and the Big Three are the most famous.  Unions should never be bigger than any business it is bargaining with.  The purpose of unions and collective bargaining is to match market power and squeeze profits, not exceed market power and put a company out of business and possibly squeeze resources from society as a whole.

Fractional reserve vs. full reserve banking tie-in to unions:  A full reserve banking system would have less lending/borrowing and more stock  issuance/ownership than a fractional reserve system would.  More workers would become owners, and productivity gains would be passed through to workers if not in wages, then in dividends and appreciation.

Even FDR saw that unions were unfit for the public sector:  "All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service...The very nature and purposes of Government make it impossible...The employer is the whole people."-Letter to the president of the National Federation of Federal Employees in 1937