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Liberal Government fails on labour market reform and the right throws a tantrum
Gerard Jackson
Des Moore’s Gutless reforms dash Liberal hopes (The Age 18 August 2005) exposed only too clearly the intellectual deficiencies of Australia’s so-called New Right when it comes to dealing with the causes and consequences of government and union intervention in labour markets.
No serious scientist ever disconnects from first principles, and the same should go for economists. Unfortunately, first principles are something that our self-appointed advocates of free labour markets seem incapable of applying, particularly when it comes to the pricing of labour. And this is why, after more than 20 years of intellectual grandstanding, they have failed dismally to persuade the great majority of Australians that effective minimum wage rates destroy jobs, especially those of marginal workers. Instead of engaging in a little introspection, not to mention humility, they are now pointing the finger of blame at John Howard.
The left, unlike our free marketeers, understands the power and influence of symbols and myths. Minimum wages, state awards, the Australian Industry Relations Commission, etc., are powerful symbols for the left of the necessity for the state, and also unions, to meddle in labour market processes. These symbols arise from a single myth, the myth of the exploitation of labour by capital unless the power of capital is curbed.
It follows, at least to those of us who have given the issue serious thought, that if the idea of free labour markets is to become overwhelmingly accepted by the population then the myth of exploitation by capital must be publicly demolished. This is a vitally important fact that our labour market advocates have yet to even recognise. And that is why we have to put up with the economic nonsense that socialist professors like Hugh Stretton, Frank Stillwell and John Quiggin can spew out with total impunity.
Let us now get down to some fundamentals of economic theory. We know that many people fear that free labour markets would lower real wages for workers who lack ‘bargaining power’. Mr Moore’s response has been to argue that the number of firms competing for labour would prevent this from happening. But the number of existing firms has nothing to do with the level of real wages, meaning real wage rates.
For example, real wages can fall even as the number of firms expand, and vice versa. Taken to its logical conclusion, the quantitative-firm approach, as I call it, could lead to the absurd conclusion that mergers depress real wages because they reduce the number of firms competing for labour: therefore all mergers should be forbidden by law.
As every economist should know, real wage rates are determined by the amount of capital invested per worker. This capital forms a highly complex heterogeneous structure consisting of stages of production. The longer and more complex the stages of production the higher will be the value of labour’s output and hence real wage rates. This nails as fallacious the idea that the quantity of firms is relevant to the height of real wage rates.
Regardless of the drivel that economic deconstructionists (aka post-Keynesians), such as Dr Steve Keen and Alex Millmow, arrogantly peddle there is such a thing as labour markets, supply curves do slope upwards and demand curves always slope downwards. The demand curve for labour is really a schedule of its descending marginal value productivities. The point at which the supply curve intersects the demand curve determines the wage rate at which the market for particular types of labour clears. (We should never lose sight of the fact that labour is also heterogeneous).
Raising wages above the market rate only leads to unemployment. In fact, it’s a process by which incomes that would have gone to the unemployed workers are in part transferred to those who are fortunate enough to keep their jobs. Logic and decency clearly dictate that this is indeed an unjust and exploitative situation that should be remedied by allowing the market to clear. Professor Stilwell, however, views the matter differently, arguing that this would be at the expense of higher paid workers and would be “contractionary” (Changing Track, Pluto Press, 2000, P. 74).
Firstly, allowing the market to clear would ensure that those who were priced out of work would now be priced into work, thus remedying the previous unjust situation. Secondly, this process would probably raise total payrolls, an important observation that our rightwing commentators ignore. Thirdly, and this vital fact is never referred to by our free marketeers, the process would also release withheld capacity which in turn would expand demand. The idea that allowing labour markets to clear would be “contractionary” is thus absurd to the point of utter stupidity. (For a comprehensive view of payrolls, withheld capacity and wage rates see William H. Hutt’s The Keynesian Episode: A Reassessment, LibertyPress, 1979).
This brings me back to the deconstructionist Dr Keen whose book Debunking Economics (it ought to be called Abolishing Economics) basically argues that economics has nothing to say about wage rate determination. And how does he arrive at this conclusion? By denying the existence of marginal productivity theory. In other words he pitches his tent in the fantasy world of the Cambridge School, thanks to Piero Sraffa.
In this world factor markets do not exist, the fallacious cost-of-production theory reigns, money supply is passive and constant returns of scale prevail. The last absurdity is of particular interest because it allows these anti-economists to assert that that there can by no marginal changes in output thus making factor prices indeterminate, meaning relative product demand cannot affect relative prices. From this it follows that total output is independent of wages and prices. This would be music to our union leaders, if only they could understand the reasoning behind it.
(Every so-called economist I ever met who swallowed the Sraffian dogma had a loathing of capitalism. Is there a connection, I wonder? I think I should also add that Keen’s synopsis of the Austrian school revealed a remarkable ignorance of its teachings).
Unfortunately Australia’s self-appointed free-market club has seen fit to allow this dangerous anti-market propaganda to go unchallenged, which is not at all surprising. Nevertheless, one can still only wonder at the refusal of the H. R. Nicholls Society to challenge these post-Keynesians, not that I’m impressed with the Melbourne-based Institute of Public Affairs ‘efforts’. It too has deliberately turned a blind eye to the left’s intellectual challenges.
Complementing the right-wing’s quantitative-firm approach is the argument that because Australia’s minimum wage is 58 per cent of the median wage, the highest ratio in the OECD, this is proof that the minimum is too high. Unfortunately this statistic proves nothing. Advocates of the minimum wage could argue that it proves that the OECD minimum is too low! Moreover, they have, as I have shown, intellectual supporters who argue that minimum wages do not cause unemployment.
It should never be forgotten that statistics do not stand by themselves, they need to be explained. Let me quote at length Jean-Baptist Say’s thoughts on this subject:
Hence, there is not an absurd theory, or an extravagant opinion that has not been supported by an appeal to facts; and it is by facts also that public authorities have been so often misled. But a knowledge of facts without a knowledge of their mutual relations, without being able to show why the one is a cause, and the other a consequence, is really no better than the crude information of the office clerk…. What is theory, if it be not knowledge of the laws that connect events with their causes, or facts with facts? (A Treatise on Political Economy, Transaction Publishers, 2001, originally published in 1836 by Grigg & Elliot).
John Stuart Mill expressed similar sentiments:
Man is capable of rectifying his mistakes by discussion and experience. Not by experience
alone. There must be discussion, to show how experience is to be interpreted. Wrong opinions
and practices gradually yield to fact and argument; but facts and arguments, to produce any effect on the mind. Must be brought before it. Very few facts are able to tell their own story, without
comments to bring out their meaning. (On Liberty, Oxford University Press, 1984, p. 27)
Ludwig von Mises had this to say of economic statistics devoid of theory:
Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a
method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices [including wages] is economic history. (Human Action, Henry Regnery Company, Chicago, 1963 edition).
This has been a singular problem in Australia. Advocates of labour market reform have been supplying facts virtually without theory. Hence the 58 per cent ratio that is now being bandied about. Moreover, the idea of any kind of average wage or wage level is itself a statistical fiction. Robert A. Gordon said of this approach:
…the concentration of attention upon aggregates and upon distressingly broad vaguely defined index-number concepts – with insufficient attention being paid to those interrelations among components which may throw light on the behaviour of these aggregates. . . (American Economic Review, Papers and Proceedings, May 1948).
Instead of wagging its collective finger at Howard, our rightwing should bear in mind that he is not a dictator, that he does not rule by diktat, that it is he and not they who has to face the electorate and put up with the daily insults and distortions of a hostile media.
Criticism of Howard from those on the right who are too “gutless” to confront the left is far too much for some of us to stomach.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 22 August 2005