This view, like so many economic fallacies, does contain a grain of truth, which is that wage flexibility does accelerate recovery from recessions. The rest simply demonstrates an appalling ignorance of economic history and the real nature of the so-called boom/bust cycle. America's 1920-21 depression supplies a grim refutation of the Council's naive belief that wage flexibility would go any distance in eliminating booms and busts.

When the depression struck it was swift and especially painful. Unemployment leapt from 1.3 per cent in 1920 to 11.2 per in 1921. The wholesale price index stood at 248 in May 1920 — by August 1921 it had plummeted to 141, with 100 points falling from August to August. (Incidentally, the wholesale price index covered a far greater range of goods than the consumer price index). According the United States Bureau of Labor statistics the wage index 1920 for non-agricultural wages was 229 (1914=100). This had dropped to 204 by 1922, an 11 per cent fall.

Of course, it ought to go without saying that this wage average concealed variations, with declines in some industries exceeding the average. Retail prices fell by about 20 per cent, with the fall in food prices being particularly steep. It's possible that the fall in retail prices has been understated as retail prices began to fall as early as May with some New York stores cutting prices by as much as 20 per cent.

But the inescapable fact is that, despite variations between industries, real wages did not fall overall because the drop in general prices was greater. The reason why the fall in wholesale prices greatly exceeded the fall in wages can be explained by (a) immigration being shut off by the war and (b) rapid capital accumulation. Therefore the wage situation is explained by labour becoming more scarce relative to capital. This is why real wages did not, despite the depression, fall back to prewar levels even though commodity prices did. The economy had begun to recover by late 1921 with labour shortages appearing in the first half of 1923 as industrial production rose to new levels.

Four things need to be noted: Though factor prices, especially wage rates, were highly flexible employment still jumped to over 11. per cent. Moreover, wage flexibility did not "ensure that the burden of adjustment [was] shared broadly through the economy" and, above all, it did not prevent the depression, though it did accelerate the recovery. That real wages did not fall clearly demonstrates what really matters is not wage rates (total labour costs) per se but the cost of labour relative to the value of labour's services.

It's absurd to even contemplate the thought that economic adjustments have to be "shared broadly through the economy." Money is never neutral. This means that monetary expansion must misdirect production*. From this it follows that those lines of production upon which monetary expansion has had the greatest influence will have to make the greatest adjustments. Naturally wage rate flexibility will speed up these adjustments and thus stimulate economic recovery. Therefore wage rate flexibility can never stop unemployment rising once a recession takes hold. From this we can easily see why implementing the council's scheme would have the unintended consequences of discrediting the argument for free labour markets.

In brief: though wage flexibility is no cure for recessions its absence prolongs recessions and generates widespread persistent unemployment by keeping real labour costs above their market clearing values.

*The vital importance of this fact is never raised in the Australian media or even discussed by Australian economists.

Gerard Jackson is Brookesnews' economics editor

Subscribe to BrookesNews Bulletin