Leftwing history v. economic theory
Gerard Jackson
Readers frequently ask me to explain why so graduates are ignorant of economic history and the benefits of capitalism. This caused me to pull out of my files a letter that Professor Sybil J. Jack (department of history, University of Sydney) wrote to The Australian (25 March 1997) in which she claimed that Howard's work-for-the-dole scheme was similar to the Poor Law of the late 18th and early 19th century that was allegedly used to provide cheap labour for "employers" who could then depress the real wages of any competing labour.
Naturally, according to the professor, it was only the absence of unions that permitted this monstrous process of exploitation to succeed. Just as naturally, the same thing would happen under Howard because previous "experience suggests that if work for the dole is introduced a fall in the real level of the basic wage is bound to follow." What we have here is a mixture of junk history and lousy economics. And that is putting it politely. The Speenhamland system of outdoor relief (the poor law she referred to) was introduced by Berkshire magistrates in 1795 to cope with rising distress caused mainly by bad harvests. The intention was not to create cheap labour — as our history professor inferred — but to institute a minimum living standard under which no one would fall.
Her statement that the consequences, intended or otherwise, of the scheme was to create a pool of cheap labour by indirectly subsidising employers who could then depress the wages of unsubsidised labour does not hold up. After all, who did she think paid the poor-rates that funded the scheme? (Unless she thinks it was costless). The total cost of poor law relief in 1785 was nearly £2 million; by 1817 it had almost £8 million, 17 per cent of government spending.
Now the system was confined to the southern counties and it was they who had to fund it. So heavy was the tax burden that it bankrupted the village of Cholesbury and brought a number of other villages to the brink of financial ruin. The burden on one Buckinghamshire village in 1832 exceeded the parish rental for the whole year. The only people who were forced pay the rates were landholders, many of whom were [would-be] employers.
The system of payments was carefully scaled according to need. A married man got more than a single man, his payments increasing with the size of his family, sometimes even exceeding the local average wage. Far from benefiting from the scheme, farmers, virtually the only employers in the region, strongly opposed it. (Note that Professor Jack used employer rather than farmer, thus conjuring up a picture of exploiting factory owners and "dark satanic mills").
The fallacy that poor relief drove down real wages is a subtle and common error. However, careful economic reasoning leads us to draw a very different conclusion. Wages are determined by supply and demand, the latter being a schedule of the value of labour's product which is ultimately determined by consumers' preferences.
It follows that employers will only hire labour up to the point where the cost of its services does not exceed the value of its product; payments below the market rate create profits which encourages the hiring of more labour. Therefore, whether labour has an alternative source of income is totally irrelevant to the demand for labour and is just another variant of the discredited "pin-money" theory of low wages.
To drive down wages employers would have to act as one and labour would have to be totally immobile. To a large degree, the latter was true of labour in those counties of that time. But no one has ever made the absurd and easily refuted suggestion that employers acted in concert to drive down wages. Yet real wages did actually fall.
To explain this phenomenon we have to examine some salient facts that are usually overlooked. Between 1750 and 1801 the population of England and Wales increased from 6 million to 9 million, reaching 16 million by 1831. This increase was made possible only by the Industrial Revolution. However, industrialisation was not evenly spread geographically, with most industrial investment taking place to the north of London. This meant that agricultural wages in industrialising regions would rise as employers competed for labour.
The southern counties experienced a rising population but no industrial development to employ it. The results were predictable. Wages in the north rose while those in the south stagnated or even fell in some case. Even as late as 1851 Sir James Caird estimated that the average agricultural wage in 20 southern counties to be 8s 5d compared with 11s 6d for 12 northern counties. The real reason for increasing pauperism and falling wages in these areas now becomes apparent: a rising population pressing against a limited means of agricultural employment.
So the Speenhamland system of supplementing low wages was a response to a situation of falling or stagnant wages caused by an expanding population, even though its architects seemed unaware of this fact. (It must be mentioned that the magistrates who devised the system never expected it to become a widespread and permanent measure). To blame outdoor relief for falling wages, therefore, is like being deceived by the magician's mirror.
If it were true, as Professor Jack claimed, that the Speenhamland system allowed "employers" to exploit labour by forcing wage rates down below their market rates then the increased profitability of their farms would be reflected in higher rents and capitalised into higher property values. What we do find is that in many of the parishes the pressure exerted by the poor-rates (property taxes) had reduced rents by 50 per cent and even more in some cases, causing some farmers to surrender their tenancies. This stark fact is enough by itself to sink Jack's argument.
Nevertheless, there is a grain of truth in the fallacy — but only the tiniest grain. It centres on the immobility of labour and an absence of alternative employment. Given that the Speenhamland system had guaranteed a growing population a minimum standard of living in the face of virtually unchanged means of employment, poor rates would obviously have to rise. (That such systems actually encourage pauperism is not relevant to the current argument).
The greater the growth in population, the greater the rise in the poor rates. As poor rates are really property taxes, a continuing rise in these taxes would have the effect of reducing the profitability of the farms. As we have seen, this was reflected in falling rents. Now since these areas resembled closed economic systems in some ways, the effect of falling rents would not only make themselves felt by reducing the value of property but also in a falling demand for other factors of production, especially labour, because property taxes are shifted backwards.
In short, the increasing burden of the poor rates had the perverse effect of reducing the demand for labour thus helping to depress wages further. In the light of this chain of reasoning, Jack's argument that Howard's work-for-the-dole scheme "will lower the real level of the basic wage" is a case of very bad economics married to left-wing ideology.
The lesson of the Speenhamland 'experiment' is very relevant to our own times. Unfortunately, it is a lesson that few have learnt, especially the likes of Professor Jack. No wonder some of our graduates are so hostile to capitalism.
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 30 November 2009