Why the H. R. Nicholls Society might help sink the Liberal Government

Gerard Jackson
BrookesNews.Com
Monday 19 November 2007

I suggest that the main reason why the Liberal Government is in danger of losing the coming election is that its hierarchy is not interested in economic ideas. Its failure to develop a decent labour market reform package is a telling example of this failure. A failure that was all too predictable considering that Liberal politicians made the grave mistake of looking toward the now discredited H. R. Nicholls Society for advice on the need for free labour markets. Peter Costello’s public denunciation of the HRNS in Parliament does nothing to help the government, though it does show that the government now realises it made a grave error in relying on this organisation for sound economic advice.

The HRNS’s basic problem — apart from its offensive ‘intellectual’ inbreeding — is that it adamantly refuses to use historical data that completely refutes the unions’ case against labour market reform. No wonder its economics is so lousy. For instance, it strongly argues that free labour markets drive productivity. Stuart Wood — a member of the HRNS board — contended that free labour markets raise real wages by increasing productivity. That free labour markets can go hand-in-hand with a collapse in real wages (think Germany 1922) is a fact that completely eluded him.

Any first year economics undergraduate ought to know that after reducing some of the constraints that burden heavily regulated labour markets one should expect an immediate fillip to productivity followed by a steady decline as more and more workers are hired. Which is precisely what happened in Australia. Unfortunately Mr Wood’s arrogance is such that he seems to believe that defending Corrigan in its dispute with the MUA made him an authority on the economics of labour markets.

Wood is not alone in making preposterous statements about the determination of real wages and free labour markets. In Mr Des Moore’s opinion real wage rates are determined by the number of firms competing for labour. It is true that in a free market competition between firms for labour determines relative wage rates. But it is the capital-labour ratio that determines the height of real wages. In other words, it is capital that puts a floor under wage rates and not the number of firms in existence. The HRNS committed the egregious economic fallacy of confusing competition for labour with the intensity of demand for labour.

Yet this distinction was made perfectly clear more than 170 years ago. Thomas Malthus pointed out that the intensity of demand is what people are prepared to spend on a product or service, the greater the intensity the more they are prepared to pay. (Principles of Political Economy, Augustus M. Kelley 1974, from the 2nd edition 1836, pp. 63-66). The intensity of demand for labour services is nothing more than the value of labour’s productivity.

The greater the productivity of labour the greater will be the intensity of demand for labour — regardless of the number of competing firms. But where does this productivity come from? Malthus made the commonsense observation that wages are determined by supply and demand. (Ibid. p. 221). He went on to stress

. . . that no permanent and continued increase of wealth can take place without a continued increase of capital; and I cannot agree with Lord Lauderdale in thinking that this increase can be effected in any other way than by saving from the stock which might have been destined for immediate consumption, and adding it to that which is to yield a profit; or in other words, by the conversion of revenue into capital. (Ibid. p. 314).
If one fourth of the capital of a country were suddenly destroyed . . . this scantiness of capital would certainly occasion great inconvenience to consumers, and great distress among the working classes. (Ibid. p. 414).

It’s a abundantly clear that it was understood at the time that capital accumulation by capitalists raised real wages and not competition between capitalists. The actual process by which labour benefited from capital accumulation was carefully explained by Mountifort Longfield, an Irish lawyer and economist, in his ground-breaking work on marginal productivity theory. (Lectures on Political Economy, Richard Milliken and Son 1834, Ch. IX).

It’s now 2007 and all the HRNS can do is serve up economic fallacies that have done enormous damage to the case for labour market reform. Not content with that, it plays the role of a peevish lover betrayed by the Government’s failure to implement the necessary reforms. It is not Ray Evans, Des Moore, Stuart Wood. Hugh Morgan, etc., who have to face the electorate. It is Howard and Costello who have to do that. In its overweening arrogance the HRNS the gall to demand of the Government something that only a dictator could deliver.

The attitude of this bunch of egotists is pretty rich considering how little they have achieved. Their idea of a campaign is to have an annual self-celebratory dinner at which they can praise their own ineffectual efforts by bragging about the number of articles they had published. A truly nauseating spectacle by a self-serving mob that has absolutely no empathy for the average working Australian. This was made clear by Hugh Morgan — a multimillionaire — who went on Lateline (ABC 10 August 2005) to complain that those on the minimum wage were making too much money. This pompous clown is now trying to get a subsidy from the government for a project he has in mind. Mr Morgan clearly a true man of principle.

Labour market reform required the kind of work ethic, imagination, empathy and knowledge that the HRNS simply does not possess.

What is needed is to convince the majority. It is not because the majority is always right. On the contrary, I would say that majority is very often wrong . . . [There is] only one method — to talk to the people, to write, and to talk. (Ludwig von Mises, Marxism Unmasked: From Delusion to Destruction, Foundation for Economic Education, 2006, p. 49).

Mises understood the necessity of reaching out to the man in the street. On the other hand, the HRNS’s idea of reaching out is to try and mix with people who matter. As for the masses — they can get stuffed.