So-called ethics, wages and economic stupidity
Gerard Jackson
My readers really are a charitable bunch. They think I was far too severe on the socialist-minded Simon Longstaff just because he wrote a bigoted article condemning free markets. Unfortunately Longstaff has been doing this kind of thing for years — and getting away with it.
Back in 1997 he wrote an article for The Australian attacking Stan Wallis, then-president of the Business Council of Australia, for apparently suggesting that low-income earners should be helped through the tax system rather than have the state arbitrarily raise their wage rates. To Longstaff’s strange leftwing turn of mind, Wallis’s sensible suggestion was at variance with business calls for less government!
What Longstaff could not grasp is that businesses do not pay wages, consumers do that. Businesses are, as Professor Coase brilliantly explained, intermediaries that emerge to remove a whole range of market transaction from the market place. Included among these transactions are direct contracts between consumers and individual producers (employees).
Thus it follows from this that insisting on companies paying an effective minimum i.e., one that exceeds the market rate, will cause unemployment because it is above what consumers will pay. What the likes of Longstaff are really argue for is more unemployment. (He does not seem to find anything unethical about pricing people out of work).
According to Longstaff the community makes large subsidies to businesses and their shareholders by providing them with massive infrastructure. In return for this largess business increases the “stock of common goods to be enjoyed by society — jobs, wealth and a host of other goods”.
This is collectivist claptrap. To begin with, virtually all the infrastructure that he has in mind can be provided for by markets in any case, railways, docks, telecommunication, education, etc. Moreover, where does he think the source of all our incomes really lie — not with the state but private investment.
Longstaff does not understand that businesses are legal fictions: they only exist in law. Businesses do not receive subsidies, people do; businesses do not pay taxes or wages, people do. It is the investments made by people in business enterprises that creates the resources that builds our taxpayer-funded infrastructure and, incidentally, finds employment for the likes of him.
It is these investments, taxed and curbed as they are by governments and unions, that fuels economic growth. For Longstaff’s absurd claim to be correct, all businesses would have to be tax consumers. That is to say they would have to receive more in taxes than they collectively pay.
His other silly claim that jobs and wealth are common goods to be enjoyed by everyone is just juvenile socialist dogma. This conjures up an absurd picture of a vast community pool of jobs and wealth to which everyone has an equal share, but the greedy ones manage to get more than their fair share.
He also obviously has no real idea of what a job is. Labour rents its services out to employers who use it, in combination with other factors, to produce other goods or services, each factor being paid up to the value of its marginal product (at least in a free market). Therefore jobs are not goods: they are transactions that involve the sale of labour services.
The factor combinations were made by entrepreneurs who used savings (not necessarily their own) to initially purchase the services of the other complementary factors of production, which are then recovered through time out of sales. It should be clear, even to Longstaff’s collectivist mentality, that there is no ‘community’ ownership here.
Everything is individually owned and allocated according to consumers’ preferences. The goods that Longstaff thinks are held in common are owned by those who have paid for the services of those factors that produced the goods. Ownership will pass to consumers when they purchase the goods.
Longstaff then compounded these economic absurdities with the equally absurd assertion that Wallis’ suggestion to use tax relief instead of arbitrary wage rises to help the low-paid is just an attempt by business to obtain another subsidy. In reality, all job subsidies go to employees, not the employers. (The reasoning behind this is apparently too complex for Longstaff to figure out). We then got the statement that “even the wealthiest corporation might try to get away with paying the lowest wages possible”. Three thing must be noted here:
1) No company can maintain wages below the market rate.
2) Maintaining wages above the market rate causes widespread persistent unemployment.
3) Real wages are determined by the size of the capital structure relative to the size of the population.
Longstaff finished his article with the absurd assertion that by rejecting the idea of state dictated wage rates business wants “to have its cake and eat it too”.
I shall leave the last words to that remarkable group of men known as the Spanish Scholastics who made it clear that the ‘just wage’ is the market wage. Imposing any other wage would be unethical.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 20 February 2006