This is pure nonsense. If Thornton (a pseudonym by the way) had stated that a freer labour market would have encouraged greater savings and hence greater investment it would not have been so bad. But to argue that capital accumulation (economic growth) would automatically flow from liberating the labour market has no substance to it whatsoever. So long as there is sufficient land and capital to employ labour widespread unemployment will not emerge as long as wage rates are at market clearing levels. This argument holds even where capital consumption is taking place.

I believe that the HRNS (H. R. Nicholls Society) is largely responsible for the lousy economic advice that Liberal politicians and party hacks unthinkingly swallowed. Let us, for example, refer to Mr Stuart Wood. Now Mr Wood is no ordinary member of the HRNS, far from it. He is actually a member of the board. He also represented Corrigan during the docks dispute with the MUA. It seems that Mr Wood has adopted the preposterous notion that his experience with the Corrigan-MUA dispute granted him profound insights into economic theory. (I am not making any of this up).

In a fawning article praising Peter Reith Wood boldly asserted that labour reforms would in themselves raise productivity. (The Australian Financial Review, A wreath for Reith: we’ll miss you, 6 March 2001). As I point out at the time — and before the time as well as after — this proposition has no theoretical legs. What would happen, I predicted, is that productivity would initially rise as the old factor combinations where restructured. But this would be a one-off situation. Once the results had worked their way through the economy we would find that productivity would start falling as more people were employed. Only by quickly raising per capita investment could this process be prevented. What all this amounts to is that Wood is a complete and utter economic illiterate.

It gets even worse, believe it or not. The HRNS has been preaching the ideal that it is the number of competing firms that puts a floor under wages. This is pure baloney. Even an incompetent economist could have told this clueless mob that it is the capital-labour ratio that determines the height of real wage rates while competition determines individual rates according to the tenets of marginal productivity theory. The error here is the self-evident one of confusing the intensity of demand for labour with simple competition for labour services. In fact, the number of competing firms can rise significantly while real wage rates dive, as was the case in Weimar Germany 1922. In other words, there can be no lasting increase in productivity without additional investment. As von Mises vividly put it:

Tools and machinery are primarily not labor-saving devices, but means to increase output per unit of input. They appear as labor saving devices if looked upon exclusively from the point of view of the individual branch of business concerned. Seen from the point of view of the consumers and the whole of society, they appear as instruments that raise the productivity of human effort. They increase supply and make it possible to consume more material goods and to enjoy more leisure. Which goods will be consumed in greater quantity and to what extent people will prefer to enjoy more leisure depends on people’s value judgments. (Human Action, (3rd revised edition, Henry Regnery Company, 1966, p. 774).

Bad as Stuart Wood is he cannot get worse than the absurd Hugh Morgan — another leading member of the HRNS — whose intellectual pretensions are source of much amusement to quite a number of people. This multimillionaire who lives in a Toorak mansion had the gall to appear on television and tell a reporter that Australians on the minimum wage are making too much money. (Lateline ABC, 10 August 2005). The pompous Christopher Pearson — and HRNS fellow-traveller — used the pages of The Australian to take a swipe at the low-paid. (No job? No cash? Sod off, 29 October 2005). And Pearson did this after being advised on the true state of our labour markets.

Now we are faced with a genuine puzzle: why is it that our so-called free marketeers have not made any real attempt to explain the fall in unemployment? They would argue that reforms can explain falling unemployment. But if that is so how do they account for the 1960s when unemployment averaged about 1.6 per cent even though the labour market was heavily regulated and a minimum wage enforced? The sad truth is that our free market warriors are not what one might call intellectually inquisitive, particularly when it comes to economic history and the history of economic thought².

The answer to the unemployment question is a simple one and can be found in any standard economic textbook if one thinks hard about it. Every textbook makes it clear that once labour , is paid in excess of the value of its marginal product unemployment will emerge. It follows that a loose monetary policy in the form of credit expansion will increase the demand for labour by reducing the money wage until it is at least equal to the labourers marginal product. Should this monetary policy reduce real wages below the market rate labour shortages will appear³. Keynes made this abundantly clear when he wrote:

It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing...Labour is not more truculent in the depression [he obviously forgot the general strike] than in the boom — far from it. Nor is its physical productivity less. (The General Theory of Employment, Interest and Money, Macmillan, St Martin’s Press for the Royal Economic Society, 1973, p. 9).

Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, in as much as they resist reductions of money-wages . . . whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment . . (Ibid. p. 14).

In fact, a movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices. (Ibid. p. 264)

Keynes’ aggregate approach concealed the enormous differences between various types of workers. The Austrians, however, knew where the Keynesian approach would lead, as the following quotes show:

... even if there is unemployment, the supply of special kinds of labour or of other productive factors may be scarce. The rise in consumer purchasing power and the relative diminution in investment purchasing power will then lead, via a rise in costs, to dislocations in the capital goods industries. (Fritz Machlup, The Stock Market, Credit and Capital Formation, William Hodge and Company, Limited, 1940, p.178).

It is practically indisputable that unemployment ca n be diminished by credit expansion provided simultaneous increases in money wages are prevented, or provided at least that such increases lag behind the tempo of the credit expansion. What is open to doubt, apart from the question of whether such a wage policy is likely to be pursued, is only whether the expansion of credit which is undertaken in face of unemployment contains the seed of a reaction or not. (Ibid. p.194).

All leading economists (with almost no exceptions) are of the opinion that, in general and under given conditions, an increase in employment is only possible if there is a (temporary) fall in real wage rates. (Ibid. p.197)

Anyone with a passing knowledge of the history of economic could point out that there was absolutely nothing new in the Keynes’ approach to unemployment. In his discussion of the classical school’s approach to forced savings Jacob Viner noted that one version of the doctrine recognised

that an increase in money meant an increase in production, it was argued that an increase in the quantity of money would increase the monetary volume of purchases more rapidly than it would increase prices, with the result that there would be a substantial interval during which the increase of spendable funds would be absorbed by increased employment in the production of consumers’ goods rather than by increased prices. In this form of the doctrine, the increase in money results in increased real consumption, whereas in the forced-saving form it results in increased investment, but in both forms it makes possible increased employment⁴. (Jacob Viner, Studies in the Theory of International Trade, Harper & brothers, 1937, p. 189).

So why is our rightwing monumentally ignorant of facts that are vital to understanding the present situation? Because they have effectively prevented the emergence of any kind of corrective process. To these people a corrective process is seen as a challenge to their authority. This is why we have had so much nonsense from the IPA and the HRNS. The only good news is that the influence of the HRNS in the Liberal Party is at an end, or so I was told by someone who just returned from Canberra.

1. Labor thrashes the Liberal Party on wages and deregulated labour markets

2. The March 2007 issue of the IPA Review contained an article titled Islam’s free market heritage and authored by Chris Berg — the Review’s editor — and Andrew Kemp, a university student. The article was total rubbish and a damned disgrace. If the IPA had a shred of integrity would immediately withdraw the article and apologise to its readers. A fat chance of that ever happening. The same issue also had an article by John Humphreys — an adjunct scholar at the CIS — called Beginners guide to Austrian Economics. It too was grossly misleading. But they are not alone. Peter Saunders — also with the CIS — defended “trickle down economics”. It seems someone forgot to him it was a leftwing canard.

(See Liberal Government screws up labour market reform and The Society of St Vincent de Paul’s Marxist claptrap and its attack on the free market. Then there is the HNRS: Liberal Government fails on labour market reform and the right throws a tantrum).

This lot rightly believe that the left should be held accountable for their actions. It’s a pity they don’t apply the same standard to their own work.

Prodos Worldwide has a link to an interview I gave in which I explained why the IPA’s article on Islamic economics was shameless rubbish. I also addressed a videoed meeting on the same subject. The video will appear on YouTube in the near future.

3.This doesn’t mean that every labour shortage is the result of credit expansion. Labour shortages will also occur when a rapid process of capital accumulation has taken place.

4. In 1932 Jacob Viner called for increased government spending denounced efforts to balance the budget. I was always puzzled by this — given his classical underpinnings — until a few years ago when I acquired his Studies in the Theory of International Trade. This book suggested to me that Viner was really promoting credit expansion as a means of driving down real wage rates.

Gerard Jackson is Brookes’ economics editor

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