In other words, public support, even if passive, is a vitally necessary if contentious legislation is to succeed. As we can see, the public is anything but passive with respect to labour market reform. The Government’s public relations blitz has been a public relations disaster while the unions’ counter-campaign has left the Government’s campaign for dead.

While this has been going on our establishment right has been leading from the rear –– its favourite position. For more than 20 years this mob has been preaching the benefits of free labour markets to the converted as well as themselves. We are now bearing witness to folly of this narcissistic approach.

Why didn’t our so-called rightwing try to reach out to the public? I fear the reasons are two-fold: a natural disdain for ordinary Australians and a sever aversion to hard work. And let there be no doubt about it, trying to continuously change public opinion on the need for free labour markets requires an enormous amount of commitment and empathy, neither of which this lot possess. It also requires a basic grasp of economics, a sound knowledge of economic history as well some grounding in the history of economic thought. On these subjects our rightwing reformers do very poorly indeed.

The HR Nicholls Society is, at least in my opinion, the principal cause of the right’s failure. Not once did it try to sway public opinion. This is not surprising given the makeup and attitude of its board. The intellectual arrogance of this crew also defies belief. Of the papers it has on its site it has defined eight as being economic classics: of these so-called classics four were written by the self-effacing Ray Evans, the Society’s president.

Obviously this is one organisation that definitely does not believe that modesty is a virtue. It would be different if it actually produced economic papers that contained new economic insights. Unfortunately words like mediocre, bland and prolix spring to mind whenever I think of its work. As an example let me draw your attention to Rent-Seeking, Rent-Extraction and the Role of Trade Unions in Australian Society by Ray Evans. Wading through his turgid style is bad enough, but what is really annoying is that the whole argument is based on a Ricardian fallacy.

In fairness to Mr Evans, he makes it abundantly clear that he draws on the conventional economic wisdom that argues the existence of “economic rent”. When I was first introduced to this theory my immediate response was one of puzzlement followed the firm belief that it was utter nonsense. What truly baffled me, however, was the fact that intelligent men could be taken in by it.

The real tragedy is that the Ricardian theory of rent” (which Ricardo freely admitted came from James Anderson’s An Enquiry into the Nature of the Corn Laws, 1777) was demolished by Thomas Perronet Thompson in his paper The True Theory of Rent (1826). In his own words the theory

…is founded on a fallacy…The fallacy lies, in assuming to be the cause what in reality is only a consequence…[I]t is the rise in the price of produce … that enables and causes inferior land to be brought into cultivation; and not the cultivation of inferior land that causes the rise of rent.

In plain English, Ricardo had well and truly put the cart in front of the horse. In the same year Colonel Robert Torrens thoroughly demolished the concept of rent-as-a-differential in the third edition of his Essay on the External Corn Trade. He explained that land rent was determined by the productivity of the land and was in no way dependent on the fertility-productivity of any other piece of land. According to Torrens:

Neither the gradations of soil, nor the successive applications of capital to land, with decreasing returns, are in any way essential to the appearance or the rise of rents. If all soils were of one uniform quality, and if land, after having been adequately stocked, could yield no additional produce … still the rise in the value of raw produce … would cause a portion of the surplus produce of the soil to assume the form of rent.

What he did was to use productivity theory to refute Ricardo. The irony is that in the first edition of his book in 1815 Torrens had independently discovered the idea of differential rent. It is no wonder that when he appeared in front of the Political Economy Club, which Ricardo helped found, in 1831 he declared the Ricardian system to be dead.

However, the successful attacks on rent did not end with Torrens. In 1831 the Rev. Richard Jones put the historical knife into the concept in his Essay on the Distribution of Wealth. The publication in 1850 of Johann Heinrich von Thünen’s Isolated State in which he used marginal productivity theory to explain returns to labour and land should have finished the job. Additionally, Mountifort Longfield’s Lectures on Political Economy (1834) and the subsequent work of Isaac Butt should have been sufficient in themselves to permanently put to rest Ricardo’s theory of rent. By the 1840s Ricardo’s theory of rent was as dead as Jacob Marley.

So what happened? John Stuart Mill. In 1848 his Principles of Political Economy was published. The influence of this book cannot be overestimated. With one stroke, as one might say, Mill resurrected Ricardian thought and along with it the fallacy of economic rent. However, it was Alfred Marshal who truly entrenched and then extended the concept. Without his reputation and the intellectual hegemony of Cambridge over economics in the English speaking world Ricardo’s fallacious idea of rent might have become another intellectual curiosity.

What refutations of Ricardo’s theory showed is that rent is not a surplus. Every factor, including land, earns whatever it produces. Therefore if a factor earns twice as much when used in A line of production than when employed in B line of production then that is a measure of the value of its services. The difference between the values of the two employments is just that –– an arithmetical difference that has absolutely no bearing whatever on the value of the factor’s marginal product.

The only way in which a factor could obtain a ‘surplus’ would be if it obtained a price that exceeded the value of its marginal product. But it is this kind of activity that causes prolonged unemployment. Moreover, those factors that remain employed are not receiving a surplus of any kind but, once again, only the value of their product. In other words, it’s the equivalent of moving up the demand curve by artificially restricting the supply of the factor.

The same reasoning goes for Marshall’s idea of quasi-rents, according to which durable capital goods temporarily earn “quasi-rents” while permanent land earns full rents. As Frank A. Fetter astutely observed:

The doctrine of quasi-rents, involving the idea that no income, or share, enters into market prices in short periods, cannot stand. (The Passing of the Old Rent Concept, Quarterly Journal of Economics, May 1901).

For Fetter rent applied to the services of durable goods, meaning the value of their services. In other words, factor payments. It follows that all factors earn gross rents. If a factor is hired out, it earns gross rents. If the factor is sold then its price is the sum of future discounted rents.

However, it has to be carefully noted that though all factors earn gross rents only labour and land earn net rents. This is because gross rents earned by capital goods must be imputed to gross rents that were paid to the owners of those factors that produced it. We therefore deduce that ultimately it is only land, including natural resources, and labour that earn net rents. Although capital goods cannot earn net rents they do undergo changes in value which are either profits or losses that accrue to their owners. (See Fetter’s instructive treatment of gross and net rents in his Principles of Economics, New York The Century Company, 1905).

Following in Fetter’s brilliant footsteps we come to see that rent is nothing more than the cost of hiring the unit of a service, whether it is by the hour, the week, the month or the year. Rents are therefore factor payments, which also include wages. But there is nothing new or revolutionary in defining wages as rent. Luis de Molina (1535-1600) noted that

in addition to renting his belongings and the things someone gave him to rent, one can also hire himself out to render a service to another, i.e., teaching, defending people in court or for many other services and functions.

Although, unlike certain members of the HR Nicholls Society, I am not sufficiently talented or learned to write economic classics I do at least give serious thought to the economic concepts I employ. I am also not so arrogant as to believe that I know it all. If the HRNS were to exercise a little humility and generate genuine commitment to its cause while ceasing to behave as if it were the sole repository of economic knowledge its endeavours might enjoy far more success.

Liberal Government labour market reform: unions attack economics

Unions, wages & the H R Nicholls Society

The minimum wage rise con and the failure of our right

Gerard Jackson is Brookes’ economics editor