Bingo! A king hit with their opening salvo. Unfortunately for them their statement is complete rubbish. What neoclassical economics actually says is that if wages rates are forced above their market clearing level unemployment will emerge. This is why nineteenth century Britain was not cursed with mass unemployment despite the colossal and unprecedented rise in real wage rates and population growth.

The continuous increase in capital accumulation (what the Austrian school calls the extension of the capital structure) raised the marginal productivity of labour and hence living standards. Any person who does not know or understand this fact has no business calling himself an economist – does he, Mr. Belchamber?

Belchamber and his little helpers then went for the moral high ground, stating that “The ACTU believes that all workers in society should receive a fair distribution of the economic growth that they help create”. But marginal productivity explains why labour tends to receives the full value of its product. We can now see more clearly why these union hacks are desperate to discredit marginal productivity theory. If the theory is correct, and it is, then what is the point of having collective bargaining?

I have pointed out more than once the role Adam Smith has played in sowing confusion with regards to wage rates. It is this confusion that allowed Belchamber to summon forth the spectre of Smith in defence of the unions’ job-destroying activities. Paying homage to Smith, but only selectively, Belchamber piously states that fairness “is hardly a concept belonging to the Trade Union movement: Adam Smith in his Inquiry into the Nature and Causes of the Wealth of Nations said in 1776: …”

They should receive a wage sufficient at least to support a standard of living that allows them to participate actively and fully in the community.

Fortunately for the free market cause some of us have actually read Smith. Therefore allow me to shed a little more light on the subject. Smith expressed the view that in any dispute the “master must generally have the advantage”. From this it is easy to draw the conclusion that employers should not use their advantage to exploit their employees. However, Smith immediately contradicted himself with the observation that there is “a certain wage rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour”. In other words, there is a market rate for wages”.

Modern economics shows that what puts a floor under wage rates is the capital-labour ratio and not union officials or the number of employers. That Smith had an inkling of this was revealed in Book II page 277 where he said:

As the accumulation of stock [capital] is previously necessary for carrying on this great improvement in the productive powers of labour [emphasis added], so that accumulation naturally leads to improvement.

Perhaps my copy of the Wealth of Nations differs from Mr. Belchamber’s, but I don’t see anything in there about unions being responsible for raising living standards or for accumulating capital or for the “division of labour, from which so many advantages are derived…”

And since Mr. Belchamber is into quoting Adam Smith, let us take a look at his views on any activity that violates a man’s right to dispose of his own labour as he sees fit:

The property which every man has in his own labour, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman and those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, so it hinders the others from employing whom they think proper. To judge whether he is fit to be employed may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver test they should employ an improper person is evidently as impertinent as it is oppressive. (Wealth of Nations, LibertyClassics edition, p. 138, 1981

This paragraph hardly suggests that Smith would support closed shops, picketing, intimidation and job-destroying minimum wage rates.

Skipping Smith for the modern world, Belchamber contended that

… the labour market is not just like any other market. It is the only market where the seller (worker) and the commodity (labour) can not be separated. The commodity is not homogenous. The exchange of labour power for wages is a repeated trade, not a once-off contract.

This is absolute rubbish. The worker is selling his services (actually he is renting them out) and heterogeneity and contractual arrangement do not change that fact or the pricing process. Capital is also heterogeneous and is either rented or sold. If it is sold then its value will be the sum of future anticipated rents. The same goes for land, which is also heterogeneous and frequently rented. According to Mr. Belchamber’s ‘economic logic’ it should be impossible to “separate” the value contributions of these factors. But this is exactly what market processes do.

There is absolutely no economic difference between renting out the services of capital goods and renting out the services of labour – none whatsoever. What Belchamber is really arguing in his convoluted way is that the price of labour is indeterminate and that there is a strict taxonomic difference between how the products of labour are priced and how its services are priced. The implication is that unioncrats are needed to raise wage rates to the upper zone of the indeterminate range*. In other words, the demand for labour is not influenced by labour costs!

What Belchamber seems to have missed is that labour pricing can only be indeterminate if labour is a specific factor, i.e., it can only be used in the production of a specific good. Therefore specificity is the key to determinacy. If a factor has a degree of specificity, meaning it can be used in several production processes, its value can be isolated from the contributions of other factors. Therefore, as labour is the most non-specific of all factors its price is determinate.

To labour the point further, when any factor has a degree of specificity it will have a range of value uses. Competition for factors allocates them to their most valued use and then the next most valued use and so on in descending order. It is this process that gives us a downward sloping demand curve for labour as well as capital goods. This curve is a schedule of a factor’s marginal productivities and the point at which it is intersected by the supply curve for labour is the market price. It therefore follows from this that market processes will drive the price of labour up to the full value of its marginal product, regardless of what Mr. Belchamber would have us believe.

Aching with desperation to discredit marginal productivity theory they resurrected the discredited Card and Krueger study**. Now the Nobel-Prizewinning economist George Stigler had a very dim view of Card and Krueger’s methodology, arguing that by

“using these methods you could prove that no soldier was killed in WW II—a comfortable conclusion but one whose validity is open to considerable doubt”. (Thomas Sowell, Basic Economic: a Citizen’s Guide to the Economy, Basic Books, 2000, p. 155).

You would not credit it from Belchamber’s glowing support of Card and Krueger’s findings but they were actually quite cautious about their results.

“It was Card who stated that advocates “overreacted to the New Jersey study.” In other words, Card and the others only suggest that it is when the minimum wage is ‘low’ that rises will have little effect on employment. Nowhere did Card actually say that raising wages above the market level will not cause unemployment”. (Liberal Party, labour market reform and the unions’ minimum wage myth)

Being a good Keynesian Belchamber naturally called on Keynes for intellectual support. But what did Keynes actually say? How about this:

“Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, in as much as they resist reductions of money-wages . . . whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment . . .” (The General Theory of Employment, Interest and Money, Macmillan, St Martin’s Press for the Royal Economic Society, 1973, Book I, p. 14. Also see p. 8).

In plain English, Keynes is saying that we can cure unemployment by using inflation to cut real wages because those dummies on the factory floor are too stupid to spot the con. (Anyone who is this stupid wouldn’t be allowed out on his own). But this can only mean that wage had been raised above their market clear rates. It is clear that Keynes’ statement is a direct contradiction (Keynes was full of contradictions) of Belchamber’s view that the demand for labour is divorced from the cost of labour.

Belchamber also resorted to monopsony to justify the unions’ wage-fixing activities. The irony obviously escaped him. The economic case against monopsony rests on marginal productivity theory, the same theory that he and his union mates attack as fallacious.

I think it’s pretty obvious that Belchamber is the kind of man who doesn’t mind playing fast and loose with economic theory as well as with the welfare of workers. All the more reason for market reform advocates to expose this so-called 'study' as a piece of union inspired anti-market propaganda

*Unions, wages & the H R Nicholls Society

**Liberal Party, labour market reform and the unions’ minimum wage myth

Gerard Jackson is Brookes’ economics editor