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Unions, capital and living standards
Gerard Jackson
Once again our unionocracy is talking about wage rises as if they can be freely extracted from a hidden pool of wealth. This brings to mind the economic views of Grant Belchamber, senior research officer for the ACTU. Some years ago Belchamber asserted that “labour market ‘deregulation’ is essentially an abstract notion . . .” This statement is a damning indictment of the economic illiteracy of the unionocracy and goes along way to explaining why so many union apparatchiks express stupid statements on economics.
In the free market there is always a tendency for every factor of production to receive the full value of its product, its additional output, especially labour. If unions set wages above the value of the worker’s marginal product then unemployment is inevitable. It is a vicious myth that unions raise real wages for everyone. There is only on way to do that and that is by raising the amount of capital invested per head of the population. Increased capital accumulation raises labour’s marginal product which in turn raises its purchasing power. (History demonstrates that the American economy is an excellent example of this fact).
This happens not only because an expanding capital structure employing more complex stages of production makes labour increasingly scarce relative to capital thus raising real wages, but because investment also embodies new technologies. Should the capital structure shrink or population growth exceed capital growth, real wages must fall. Any attempt to resist this movement only results in unemployment followed by calls from unioncrats to use subsidies to cut the cost of labour, i.e. wages.
It is vital, I believe, to stress that because capital is heterogeneous, expanding the capital structure means that not only does the structure become more complex as new capital combinations emerge (embodying new technologies) but an increasing division of capital goods develops as more and more capital items become more specialised. It is this process that enables capital growth to overcome the law of diminishing returns.
It should now be clear that the division of capital is just as important as the division of labour. And this is where the unions are at their most insidious. Labour and capital are complementary factors. Therefore any process of uniform wage-setting not only hinders the division of labour it also hinders the division of capital. This is guaranteed to keep living standards lower than they would otherwise be.
Not only does economics mock the unionocracy’s phoney claim that it raises living standards but so does history. Fourteenth century England provides a vivid example of a rapid increase in real wages. Between 1348 and 1377 the population was slashed from 4.8 million to about 2.9 million by successive waves of the Black Death. This caused a massive increase in the ratio of land and capital to labour resulting in real wages rising by about 50 per cent. In 1351 the crown passed maximum wage laws based on the average for the period 1325-1331. They were an utter failure. (One can easily see how unrestricted immigration would drastically lower real wages for all apart from a very lucky few).
In the late sixteenth century Samuel Pepys bitterly complained in his diary about how much he had to pay his cook: “. . . the first time I ever did give so much” (Pepys’ Diary). In 1725 Defoe expressed disgust that the scarcity of women servants was driving up wages. In his own words: “. . . they hire themselves to you at their own will. That is a month’s wages or a month’s warning. “But Defoe also delighted in describing the rising living standards of the English masses (Plan of the English Commerce, 1728).
It has been estimated that real wages of English labourers at the time were twice as high as those of French workers. The process accelerated in the nineteenth century. Between 1810 and 1850 average real wages doubled. And if it had not been for the French Wars the increase would have been very much greater. During the same period the population rose from 9 million to about 28 million. This increase in population made the real increase in real wages all the more remarkable.
(It has to be borne in mind that it is extremely difficult to calculate the real change in nineteenth century living standards because the range of goods had expanded along with improvements in quality. This also includes the “quality of life” idea. If anyone thinks London slums were bad in 1850, they should reflect on what they were like in 1750 or 1550.)
One thing is crystal clear: It is only capital accumulation that raises living standards and not union action or government edicts. In fact, politicians can exercise a malign influence on economic growth by imposing confiscatory capital gains taxes that badly hinder the process of capital formation. As for giving people a “fair go”, a favourite union slogan, perhaps unioncrats and their academic and media mates will tell us what is fair about pricing people out of work. Perhaps they will also explain the justice of distributing income from those who had jobs to those who get to keep them.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 29 October 2006