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Why Austrailia's Trade Unions Sponsored Work Study is Worthless

Politics / Austrailia Dec 11, 2007 - 01:53 PM GMT

By: Gerard_Jackson

Politics The aim of Buchanan and Woonay's Australia at Work study is to persuade people that free labour markets drive down real wage rates because labour lacks the power to defend itself against capitalists. Yet every single critic of this so-called study missed this vital point. What we got were conservative economic illiterates like Janet Albrechtsen, Andrew Bolt and Imre Saluszinsky (all of whom are from the Murdoch stable) engaging in ad hominem attacks instead of dealing with Buchanan and Woonroy's underlying assumption that free labour markets are exploitive.

However, Harry Clark, an economist, adopted the honest approach and tried to deal with the report on its own grounds. Alex Robson and Sinclair Davidson (both of whom are economists) took a similar line, exposing some of the study's damning contradictions and omissions.

Every time I write about labour markets a I stress that in a free market there is a tendency for every factor of production to receive the full value of its marginal product — particularly labour. Not only are Buchanan and Woonay denying this, our three economists never even referred to it. However, one of Clark's asinine readers did assert that workers cannot be paid "their marginal product" because it cannot be calculated. This is the kind of economic illiteracy that supporters of free markets continually face from the left.

Let me be abundantly clear on this point: employers do not need to calculate the marginal product because the miracle of the market place does the processing for them. Anyone with even a basic grasp of marginal productivity theory would know this. In his brilliant breakthrough on capital and marginal productivity Mountifort Longfield gave a detailed explanation of this process. (Lectures on Political Economy, Richard Milliken and Son 1834, Ch. IX). Paul Samuelson's Economics, the standard economics textbook for several decades, also detailed the process. (Tenth edition, McGraw-Hill, 1976, pp. 541-47). A particularly interesting exposition was provided by Fritz Machlup in Theories of Decision-Making in Economic and Behavioral Science. (Micro-Economics: Selected Readings, edited by Edwin Mansfield, 2nd edition, W. W. Norton & Co. Inc., 1975).

When I stated in a previous article (Rightwing columnists stuff up labour market reform debate) that the Buchanan and Woonay study was deeply flawed I was not referring to their sample but to the fact that it was a question-begging exercise: it assumed as true that which it was supposed to prove. In order to do this they had to eschew economic theory and deny that wage rates are determinate. This in itself made their results utterly worthless. What critics should have done is point out that even if their findings were completely accurate they would still not prove their case against free labour markets. Another vital point that our free marketeers missed.

The market allocates factors, including labour, to their most valued lines of production. In doing so it tends to ensure that each factor receives the full value of its marginal product. However, economics also shows that if labour services are valued in excess of its MVP then unemployment will tend to emerge, unless the other labour markets are still free. The result is that the raising of wages rates above their market rates forces wages rates down in other lines of production. In other words, 'collective' bargaining that successfully raises real wages above the market rate drive down real wages elsewhere. Arthur Smithies nailed this when he wrote:

Concerted action by the whole labour movement to increase money wages will leave real wages unchanged. Real wage gains by a single union are won at the expense of real wages elsewhere. (Cited in Willam H. Hutt’s The Keynesian Episode: A Reassessment, LibertyPress, 1979, p. 267. Also Hutt's Hutt's Theory of Idle Resources, Liberty Press, 1977).

Friedrich von Hayek made this point very clear, a point that every competent economist should understand, when he wrote:

. . workers can raise real wages above the level that would prevail on a free market only by limiting the supply, that is, by withholding part of labour. The interest of those who will get employment at the higher wage will therefore always be opposed to the interest of those who, in consequence, will find employment only in the less highly paid jobs [suboptimal employment] or who will not be employed at all. . . [The unions] success in raising real wages beyond that point, if it is to be more than temporary, can benefit only a particular group at the expense of others. It will therefore serve only a sectional interest even when it obtains the support of all. (The Constitution of Liberty, Gatway Editions LTD 1972, p. 270).

Seeing as Hayek has become a hate figure for the Labor Party1 we should quote him further:

But, while the real wages of all the employed can be raised by union action only at the price of unemployment, unions in particular industries or crafts may well raise the wages of their members by forcing others to stay in less well-paid occupations [emphasis added]. (Ibid. 271).

That Keynes fully understood the true nature of a persistent level of a high rate of unemployment was revealed by his statement that though workers will

resist reductions of money-wages . . . whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged . . . Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment . . . (The General Theory of Employment, Interest and Money, Macmillan, St Martin’s Press for the Royal Economic Society, 1973, p. 14).

This explains why unemployment in the 1960s averaged about 1.6 per cent despite heavy unionization and a mountain of regulations governing wage rates and the hiring of labour. Inflation was used to lower real labour costs below the value of labor's MVP2. This explains the labour shortages that afflicted the economy at the time3.

As Hayek said of Keynes:

The development of Lord Keynes's theories started from the correct insight that the regular cause of excessive unemployment is real wages that are too high. . . Hence he concluded that real wages must be lowered by the process of lowering the value of money. This is really the reasoning underlying the whole "full employment" policy, now so widely accepted.. (Ibid. 280).

Making a swift though painful journey through Australia at Work I could not help but be reminded of the words of S. G. Shumilin, a Stalinist 'economist', who declared:

Our task is not to study economics but to change it. We are bound by no laws
Buchanan and Woonay have neither morality, economic theory nor history on their side. The mystery here is why critics (apart from our ignorant conservative columnists) have let this pair off so lightly. I have spent years stressing the need to confront the reactionaries who oppose labour market reform. And what did we get? The risible H. R. Nicholls Society, a self-celebratory and hopelessly incompetent group that has probably set reform back another generation. This group's arrogance and stupidity has provided gross economic illiterates like Tim Dunlop and the crowd at Larvatus Prodeo considerable cause for well justified mirth at the expense of free market economics.


1. Prime Minister Rudd believes, on the advice of David McKnight, that so-called 'Hayekian economics' generates exploitation and creates poverty. The anti-Hayek ramblings of this pair expose them as ignorant clowns.

Kevin Rudd’s economic illiteracy and his attack on Hayek

Kevin Rudd’s imaginary contradiction

2. Of course, a general shortage of labour would also appear when a country was accumulating capital at rate that significantly exceeded population growth.. I do not believe this was the case with respect to Australia.

3. Julian Sheezel is the State Director of the Victorian Liberal Party. When I tried to bring to his attention the severe flaws and contradictions in the government's labour market reform arguments and warned that this could result in disaster, he brushed my facts aside on the grounds that they did not fit the script he was given. It was ignorant buffoons like Sheezel who helped sink the Liberal Government

Monopsony and labour markets: our rightwing screw it up again

Rightwing columnists stuff up labour market reform debate

Why industrial relations reforms flopped with the public

Liberal Government and labour market reform: more fallacious attacks

Minimum wages and capital accumulation: lefty economists fail again

Thanks to the “WMC Club” the Liberal Government's workplace reform package is in trouble

Liberal Party stuffs up its workplace reform arguments against the unions

Labour Market Wars

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Gerard Jackson Archive

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