The ramifications of Mill’s observation are of profound importance. What is being said is that capital accumulation is what drives real wage rates upwards — not consumption. This fact completely destroys the view that it is the number of competing firms that puts a floor under real wages.

Note very carefully Mill’s statement that “I conceive that a person who buys commodities and consumes them himself, does no good to the labouring classes”. What he is saying that consumption spending does nothing to raise real wages. Hence, should the number of firms increase along with increased spending on consumption at the expense of maintaining the capital structure, real wage rates will fall.

As Mill pointed out:

… let us suppose capital advancing and population stationary; the facilities of production, both natural and acquired, being, as before, unaltered. The real wages of labour, instead of falling, will now rise. (Op. cit.)

This is how Professor von Mises responded to union apologists who took issue with this:

The union doctrinaires are intent upon obscuring this primary issue. They never refer to the only point that matters, viz., the relation between the number of workers and the quantity of capital goods available. (Human Action, Henry Regnery Company, Chicago, 1963 edition).

In his Economics [chap. 37, pp 731, 10 edition, 1976] Paul Samuelson produced a simple output table relating the output of a growing labour force to a fixed quantity of land. Substitute the capital stock for labour and labour for land and we get a model explaining how real wages rise.

A modern economist would merely say that if the ratio of capital to labour rises so will real wage rates. This analysis is carried out without once referring to the number of competing firms. It should be perfectly clear from Mill’s analysis why the number of firms should be considered irrelevant to the level of real wages. A constant reference to the ratio of firms to the labour force only serves to distort the debate – not that we really have one.

A union apologist could argue that this is all very well in theory but in reality there exists a zone of indeterminacy along the demand curve in which unions can raise real wage rates without causing unemployment. In the absence of union action wage rates would therefore tend to settle at the lower end of the zone, leaving labour at the mercy of capital and so allowing it to reap profits at the expense of labour.

What advocates of indeterminacy overlook is that if such a demand curve existed and wage rates were at the lower end of the curve a labour shortage would emerge and the demand for labour would rise as firms moved to compete away the profit. This process would continue until wage rate reached the limit of upper zone, at which point the demand for labour would become elastic.

What is scary about the indeterminacy argument is that Mountifort Longfield demolished it over 170 years ago. In 1834 he 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. Isaac Butt, a contemporary and admirer of Longfield, brilliantly applied his analysis of pricing capital goods to other factors of production.

The indeterminacy argument should be carefully noted because it is it and not the Marxist concept of exploitation that implicitly underpins the unions’ myth that only they can be counted on to raise real wage rates.

We now see that the argument that it is the number of firms that need to be taken into account when dealing with the level of real wage rates is completely false and should be immediately abandoned before it does further damage.

I do not know from whom Mr Costello and Kevin Andrews get their economic advice on labour markets, but it seems to me that their advisers know nothing of economic history or the history of economic thought. Even worse, it looks as if their grasp of economic theory is not that hot either

The response from our establishment rightwing on this vitally important issue leaves far too much to be desired. We have had Peter Saunders of the Centre for Independent Studies defend ‘trickle-down’ economics, despite the fact that it is nothing but a leftwing canard. The Institute for Private Enterprise publishes articles on labour markets, the main theme of many appears to be the number of competing firms. Dr Mike Nahan, executive director of the Institute of Public Affairs, really did the free market cause a favour by arguing that many workers need unions to help them deal with their employers.

As evidence that our rightwing simply do not get it one need look no further than Ken Phillips’ IPA article theShift must come from within, the basic premise of which is that it is “management that must carry IR reform forward”. It evidently never occurred to Mr Phillips that reform of this kind must have sufficient public support if it is to be widespread and permanent. Professor von Mises made this clear when he wrote:

Everything that is thought, done and accomplished is a performance of individuals. New ideas and innovations are always an achievement of uncommon men. But these great men cannot succeed in adjusting social conditions to their plans if they do not convince public opinion.

The flowering of human society depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority. (Op. cit.)

The idea that these reforms must be imposed from the top is elitist, anti-democratic and doomed to failure in the long run. It is typical of our right-wingers that they prefer to take what they think is the easy way out rather than try to “convince public opinion” of the rightness of the free market cause.

Cracks are already appearing in the Coalition’s ranks with Nationals senator-elect Barnaby Joyce attacking the reforms and West Australian Liberal senator David Johnston threatening to cross the floor to vote against the Government’s labour market reform proposals. See what I mean about the Liberal Party not even educating its own people.

No wonder the Government is losing the public relations war.