In English so plain that even Davidson can understand it: If unions insist on pricing people out of jobs then the government must use inflation to price them back into work.. It's not too difficult to see that this completely contradicts Davidson's silly thesis that arbitrarily raising wages rate will increase economic growth. Let us now put this in a historical setting. In 1928 Professor Benham pointed out that in Australia

[t]here is hardly any correlation between the growth of wag-regulation and rising real wages, Nor is there any evidence that wage-fixing has made average real wages higher than they would otherwise have been. women and juniors are within the ambit of wage-regulation to a smaller extent than adult males, yet during recent years their wages have risen more than those of adult males. In the United States and Canada where there is relatively little wage-fixing, average real wages have risen more than in Australia (Professor Frederic C. Benham, The Prosperity of Australia, P. S. King & Son Ltd, Orchard House, Westminster, 1928, pp. 206-7).

Moreover, at that time union membership “per 100 non-agricultural workers” in Canada was 11.6 per cent; it was 46.2 per cent in Australia and about 9 per cent in the US. Guess what, Ken? Unemployment in heavily unionised Australia averaged 8 per cent during the 1920s while it averaged about 3.6 for the US. Thanks to the unions employment, real wages and productivity lagged behind the US and Canada. (In the early 1920s the US experienced an extraordinary burst of productivity).

In the first part of the 1920s Benham was teaching in Queensland where he studied the link between the state's level of unemployment and changes in the value of output. Here's another one for you, Ken: Benham found — just as economics predicts — that whenever wage rates fell relative to the value of output unemployment also fell. Conversely, when wages rose relative to the value of output unemployment rose. No wonder Benham remarked that “[i]t would be hard to find a clearer proof of our thesis”, meaning the marginal productivity theory of wages. (Ibid. p. 210).

Benham was not shy at pointing the finger of blame at the state's wage-fixing arrangements, the sort of arrangements that poor Mr Davidson assures us lead to greater investment and higher living standards. Using what he called the Index of Productive Efficiency with 1911=1000 Benham found that from 1911 to 1925-26 productivity in manufacturing rose by a staggering 0.08 per cent. (Ibid. p. 148). No wonder he said that “[i]t would be hard to find a clearer proof of our thesis”, meaning that wage rates in excess of the value of the marginal product raises unemployment. (Ibid. p. 210)

Davidson's opinion leads to the conclusion that the more unionised a country is the greater the level of wage rates and productivity. Although we have shown that to utter nonsense, there is no reason to stop now. My personal favourite is the situation of pre-WWI New York maidservants. In 1914 their average weekly was $3.50 (living expenses were provided by employers) but by 1922 it had leapt to about $14: in the meantime the consumer price index rose from 30 to 50. This means that these girls’ real wage rates had at least doubled in real terms. (1967=100, Handbook of Labor Statistics, US Department of Labor Bureau of Labor Statistics). Ironically enough, the same situation occurred again. The average annual wage of domestic servants

in the United States in 1947 were 2.72 as high as they had been in 1939, while at the end of the same period the wages of the comprehensively organised steel workers had risen only to 1.98 time the initial level. (The Impact of the Union cited in A Tiger by the Tail: The Keynesian Legacy of Inflation, F. A. Hayek, IEA, 1978, p. 72).

Of course there is nothing new in the fallacious idea that unions raise living standards. More than 100 years ago Professor Fetter gave this idea a well-deserved slap on the backside with the observation that real wages in England “increased ninety per cent in the thirty years between 1860 and 1891”. He then emphasized that unions could not have been responsible for this increase because in 1900 only about 10 percent of the labour force was unionised: he added, unless union supporters are prepared to argue “that one tenth of the labor supply fixes the value of all”. (Professor Francis A. Fetter, The Principles of Economics with Application to Practical Problems, New York, The Century Co., 1905, p. 130).

*Wage rates are in terms of what could be bought with an hour's wage. **Union membership is in per cent of all gainful workers. Source: The Tucker series, converted to hourly rates and adjusted to cost of living, Employment and Wages in the United States by W. S. Woytinsky and Associates (New York: The Twentieth Century Fund, 1953), pages 582-583 for years 1855 to 1890; from 1891 to 1955, linked series from same source, page 586, with hourly wage rates adjusted by consumer's price index, page 176; and Economic Report of the President, January 1955, page 162; and Survey of Current Business, United States Department of Commerce. Membership of Unions from Employment and Wages in the United States by W. S. Woytinsky and Associates (New York: The Twentieth Century Fund, 1953), pages 233, 234, and 642; Statistical Abstract, 1955, page 219; Historical Statistics of the United States,1789-1945, page 72. Gainfully employed workers, from Historical Statistics of the United States, 1789-1945, pages 64 and 65 (interpolated from census years' data for 1855 figure); Statistical Abstract, 1955, page 187. Economic Almanac, 1953-1954, National Industrial Conference Board, pages 418-419.

The above chart is particularly interesting because it reveals no correlation between unions and wage rates. Now a really knowledgeable journalist could argue that this result is only to be expected because union membership never exceeded 9 per cent of labour force during that period. The chart below, however, puts that argument to rest. Note the period 1930 to 1940. It clearly shows that hourly wages exceeded "the product per hour". This was a period of tragically high unemployment. So why didn't firms become more innovative and capital intensive?

Source: This chart is designed so that a constant percentage increase would appear as a straight line. The values of product and wages are both expressed in dollars of constant buying power. The data for product are for the private sector, and are from the series by John W. Kendrick in his paper, National Productivity and Its Long-Term Projection (National Bureau of Economic Research, May 1951), brought up to date by the National Industrial Conference Board. For the data on wage rates, see Chapter 1, p. 11.

Firstly, capitalists do not need lefty journalists and trade union officials to teach them when to innovate and invest. Market processes perform this task. Those capitalists who fail to make the right decisions will find themselves out-competed by those with greater entrepreneurial decision-making abilities.

Fifth rate economists invariably commit the fallacy of composition where a part is taken for the whole. Assume for a moment that in response to union wage pressure a firm buys more capital equipment. Does this mean the capital structure has expanded by the same amount? Certainly not. To begin with capital goods come out of savings¹. All that this capitalist would have done is to bid away capital goods from other firms. The effect of this would be to bring about less efficient factor combinations. Remember: if this new 'investment' had been profitable he would have undertaken anyway.

A failure on his part to make the right decision simply means — as already stated — that more capable entrepreneurs would over-take him. This is called competition. It is utterly ludicrous to think that the demands of trade unions can in anyway improve on competition. Australia's high levels of unemployment testify to that fact. Moreover, the result of installing capital goods in these circumstances would lead — as Davidson admitted, hence the non sequitur — to dismissals. Furthermore, it's ironic that the leaders of the union movement that Davidson seeks to defend actually deny the very existence of marginal productivity, calling it, as Grant Belchamber put it, "a false theory"².

What is really annoying is that Australia's self-appointed free market club refuses to make any serious attempt to refute the kind of economic baloney that the likes of Davidson peddle. But then we should bear in mind that this is the same outfit that sold a Liberal Government the economic fallacy (should that be snake-oil?) that free labour markets in themselves are sufficient to raise productivity. Then there was their other fallacy of arguing that the height of real wages is determined by the number of firms competing for labour³.

No wonder I am left with the gloomy opinion that the right and the likes of Davidson deserve each other.

1. It appears that Mr Davidson has a problem in relating investment to savings: Without savings there can be no economic growth

2. Liberal Government labour market reform: unions attack economics

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

Labour market reform and productivity: who got it right and who got it wrong

The Australian economy, falling productivity and recession

Gerard Jackson is Brookesnews' economics editor