Subscribe to BrookesNews’ Bulletin
Kevin Rudd’s economic illiteracy and his attack on Hayek
Gerard Jackson
In an article for The Australian (Child of Hayek 20 December 2006) Kevin Rudd managed to further strengthen my belief that social democrats are incapable of learning from history. Virtually every sentence in his article seemed to me to damn him as a shallow thinker struggling with rightwing phantoms. Firmly convinced of his moral and intellectual superiority he tells us that “Friedrich Hayek, ... argued that the only determinant of human freedom was the market”. This is a gross distortion by a man who is as ignorant of the history of economic thought as he is of economic theory and economic history.
Hayek stated that centrally planned economies are incompatible with liberty. He was not alone in pointing out the inevitable eclipse of liberty if the state should succeed in eliminating the market. This is a fact that recent history has amply confirmed but which Mr Rudd has yet to recognize. Rudd states that “Hayek also argued that any form of altruism was dangerous because it distorted the market”. Rudd is either malicious or truly ignorant of Hayek’s work. Unlike most people Hayek never confused altruism with compassion and charity, humane attributes that he greatly admired and possessed in abundance.
By altruism Hayek meant those practices found in small primitive tribes that inhibit social and intellectual progress. In other words, Hayek was condemning atavism, something belonging to primitive societies that has no place in our modern world. (The Fatal Conceit: The Errors of Socialism, Routledge 1988, ch. I. New Studies in Philosophy, Politics, Economics and the History of Ideas, Routledge & Kegan Paul, 1978, ch. 5).
Rudd categorically states that “we don’t believe in market fundamentalism. We don’t believe in an unconstrained market”. Unfortunately he makes no attempt to tell us what he means by “market fundamentalism”. It might come as a shock to Rudd but the likes of John Stone (an “arch economic rationalist”) happen to agree with him. Stone supported Donald Horne’s silly assertion that “economic fundamentalists — unlike ordinary economists — confuse the idea of market (and competition) with the idea of laisssez-faire policy . . . .” Stone then averred that this was one reason why “economic fundamentalist views have not carried any significant weight within the great body of mainstream economic thought”. (A Defence of Economic Rationalism, Allen & Unwin, 1993, p. 101).
Like Rudd neither Horne nor Stone made any attempt to tell us what they meant by “fundamentalist economics”. Dictionaries will tell you that fundamental means basic, roots foundations, etc, where as fundamentalist refers to a religious movement that teaches the infallibility of the Bible. Obviously, calling some economists fundamentalists is meant to suggest incompetence or irrelevance.
But would Stone and Rudd call a physicist a fundamentalist because he defended basic scientific laws? Would they call a mathematician a fundamentalist or even dogmatic because he emphatically stated that two plus two always equals four? Surely not. Yet their abuse of those that are sneeringly called “economic fundamentalists”, apart from its Orwellian ring, comes down to this absurd level.
An “economic fundamentalist” can only mean an economist who sticks to fundamental economic laws just as physicists adhere to fundamental physical laws. Would Stone or any other member of Melbourne’s inept Free Market Club attack an economist for defending the law of comparative advantage or the law of diminishing marginal utility? No. The absurd claim that fundamentalists “confuse the idea of market (and competition) with the idea of laisssez-faire policy” is pure nonsense coming from those who know nothing about the origins of the phrase “laisssez-faire”.
Laissez-faire polices are free market policies. All that laissez-faire basically means is that markets should be free to allocate resources to their most productive lines of production and that property rights need to be respected. It should be clear that the pursuit of free markets inexorably leads to laissez faire policies. That Stone and other members of the FMC are unable to see this should defy belief until we realise that this is the same man who has never been able to fully break free of his Keynesian shackles.
Rudd and Stone have obviously swallowed the statist propaganda that effectively smeared laissez faire as a selfish and inhuman doctrine that let the poor starve and cast widows and orphans onto the streets. Unfortunately it is this vicious caricature that has come to dominate the popular imagination, feeding anti-market sentiments in the process.
Rudd piously declared:
We don’t therefore believe that human beings should be treated as any other economic commodity to be traded on the market, as the Prime Minister has demonstrated with his most recent and radical changes to the labour market.
Once again Rudd reveals his economic illiteracy and rubbery logic. Only slave societies treated other humans as commodities to be bought and sold. Mr Rudd evidently does not realise that slavery is a fundamental (there’s that word again) violation of the principle of free exchange. What does happen in free labour markets is that labour rents its services out to the highest bidding employers. Furthermore, in a free market there is always the tendency for labour to be paid the full value of its output in accordance with marginal productivity theory.
When someone like Rudd manages to raise the cost of labour above its market clearing rate unemployment emerges. When this happens the likes of Rudd start screaming about “market failure”. Government failure never enters their heads. As the demonised Friedrich von Hayek put it:
. . 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 Constitution of Liberty, Gatway Editions LTD 1972, p. 270).
Hayek’s observation is not something the market-hating Rudd would care to contemplate. According to Rudd free market economists treat labour as mere economic commodities whose wages would be even lower if it were not social democrats like himself. But free market economists have had to put up with these smears from day one. Professor Cannan nailed this canard more than 100 years ago when he said of the classical economists:
Of all the libels upon them invented by socialist and semi-socialist writers this is about the worst. They may have been, they certainly were, wrong about the cause of high wages, but they were always in favour of them. (W. H. Hutt, Theory of Collective Bargaining, Tonbridge Printers Limited, 1975, p. 16).
Hayek also warned of the potential consequences for economic growth of pushing wage rates above the marketing clearing level:
A rise of wages enforced by combinations of labour...sets up conflicting tendencies which are very difficult to disentangle. In so far as it leads to an increase in the aggregate demand for consumers’ goods it tends to bring about a consumption of capital. (The Pure Theory of Capital, The University of Chicago Press, 1975, pp. 346-347).
What free market economists do not favour, unlike Rudd and his union mates, is wage rates that put people out of work and consume capital. As I said at the beginning: social democrats never learn. According to them interventionist policies are needed to remove market failure. And what is market failure? Any market outcome they don’t like. Rudd seems to honestly believe that “revenues from the resources boom to invest in this nation's long-term human capital”. But capital is the material means of production and labour is labour.
What raises living standards is capital formation — not education. Does anyone really believe that if Australia was populated by Ph.Ds there would be a massive rise in living standards? What is not widely understood is that it is sustained economic growth (a rise in the ratio of capital to labour) that raises living standards.
The British Labour Party believed that a national health service was essential because the medical market could not cater to the less well off . (An obvious case of market failure). Now The 1942 Beveridge Report estimated the annual cost of a national health service at £170 million. Estimated costs for the fiscal year 2007 is £86,500 billion which is about AUS$21,216,250 billion. And this for a health service that is falling apart.
Ludwig von Mises Socialism LibertyClassics, 1981.
Ludwig von Mises Interventionism Arlington House, 1977.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 8 January 2007