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Gerard
Jackson
My post
on the minimum wage got me involved in a couple of exchanges regarding the
determination of wages rates in the market place, hence this post. Now free
market economists are perfectly correct in pointing out that unions justify
their existence on the basis of the alleged “imbalance of bargaining power”
that lies with employers. According to union apologists, particularly in the
media and the Australian Industrial Relations Commission, employees must
combine if they are to get a fair wage.
Unfortunately,
these economists rarely attempt to explain why the “imbalance of power”
concept is another dangerous fallacy. This is a particularly egregious
failing on their part considering that union apologists have sometimes even
drawn on the writing of Adam Smith in support of their actions. In fact, one
could even argue that it was Adam Smith who fathered the “imbalance of power”
idea. According to Smith:
It is
not, however, difficult to foresee which of the two parties must, upon all
ordinary occasions, have the advantage in the dispute, and force the other
into compliance with their terms*.
So we
have it from the very ‘Father of Economics’ that labour is always at a
disadvantage that this situation can only be corrected by collective action.
Furthermore, did not Smith admit that that the capitalists’ advantage was due
to them being “fewer in number”? A closer reading of Smith, however, reveals
that he contradicted himself on this subject. He further argued that in any
dispute the “master must generally have the advantage”. In the next sentence,
however, he declared that there is “a certain wage rate below which it seems
impossible to reduce, for any considerable time, the ordinary wages even of
the lowest species of labour”. (Ibid. p. page 85.)
In
plain English, Smith admitted that you cannot permanently keep wage rates
below their market clearing levels: no matter how hard you try they will
always rise. This is something an uncomprehending crown discovered in England
after the Black Death struck in 1348. This, of course, tells us nothing about
the economic forces at work. However, Smith gave us the answer when he said:
It is
not the actual greatness of national wealth, but its continual increase,
which occasions a rise in the wages of labour. It is not, accordingly, in the
richest countries, but in the most thriving, or in those which are growing
rich the fastest, that the wages of labour are highest. (Ibid. p. 87).
Smith
also tells the reader:
As the
accumulation of stock [capital] is previously necessary for carrying on this
great improvement in the productive powers of labour [emphasis added], so
that accumulation naturally leads to improvement”. (Ibid. p. 277).
It
seems to me that Smith’s thoughts on why real wages and living standards rise
explains why he did not pursue the “imbalance of power” argument.
Unfortunately the proponents of ‘collective bargaining’ are still free to
selectively quote Smith while their opponents remain wilfully oblivious to
his ambivalence on the subject. Now a modern economist would simply say that
it is capital accumulation raises wage rates and the standard of living.
At this
point I think should be noted that the number of competing firms is
irrelevant to this process. This needs to be stressed because it has been
argued by our right that it is the number of firms in Australia that puts a
floor under the height of real wage rates. This is pure nonsense. Labour is
paid according to the value of its marginal product. This in turn is
basically determined by the length of the capital structure. In other words,
the fundamental flaw in what one could call the “numbers argument” is that it
completely ignores the crucial role of capital accumulation in raising the
standard of living.
That
advocates of market reform have failed to stress that which really raises and
maintains the standard of living is, I think, a remarkable failure on their
part. Equally remarkable has been their failure to address the indeterminacy
argument that is implied in union pleas for wage hikes. Indeterminacy assumes
a bargaining zone in which unions can raise real wages at the expense of
capital without causing unemployment. Even if all wage rates were
indeterminate this would not justify so-called collective bargaining. The
reason is the profit motive.
Firms
will continue to hire people so long as the value of their services does not
exceed their wages. Were indeterminacy to prevail throughout the economy then
firms would still compete to drive up wage rate rates until they reached the
upper limit of the zone, beyond which the demand for labour would be elastic,
the sensitive to any further increases in wage rates. So long as labour is
paid below the upper limit an economic profit can be made from hiring more
labour. Moreover, in such a situation there would be a general labour
shortage.
At the
end of the day, the union argument rests on the assumption that wage rates
are at the mercy of capital. Yet in 1834 Mountifort Longfield published his
Lectures on Political Economy in which he was the first to describe how the
accumulation of capital raised wage rates. We now call this productivity
theory. Once again we can see that the actual number of firms is irrelevant.
I
intend to elaborate on these comments in a later article, particularly with
respect to indeterminacy.
*Wealth of Nations Vol. 1
LibertyClassics edition 1981 p. 83.
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