I recently called Obama a profoundly ignorant man, much to the chagrin of Democrats if my mail box is anything to go by. What is frightening about Obama's ignorance is the arrogance that accompanies it. But what else can we to expect from a person whose 'education' consisted of studying law and leftwing tracts. Making it worse is his greatly inflated view of his own intelligence and abilities, which an equally ignorant and corrupt media has encouraged. His attitude to unions gives us an insight into his intellectual shortcomings.
Here's my basic principle that wages and incomes have flatlined over the last decade. That part of that has to do with forces that are beyond everybody's control: globalization, technology and so forth. Part of it has to do with workers have very little leverage and that larger and larger shares of our productivity go to the top and not to the middle or the bottom. I think unions serve an important role in that. I think that the way the Bush Administration managed the Department of Labor, the NLRB, and a host of other aspects of labor management relations put the thumb too heavily against unions. I want to lift that thumb. There are going to be steps that we can take other than the Employee Free Choice Act that will make a difference there. (Interview with the Washington Post, 15 January 2009).
This is absolute rubbish. One would have to be a complete economic illiterate which he is to imagine that greedy industrialists and Wall Street financiers could actually confiscate productivity gains. It has been 175 years since Mountifort Longfield developed marginal productivity theory in which he brilliantly explained how capital accumulation raised real wage rates for everyone and why capitalists could not capture these benefits for themselves. (Mountifort Longfield Lectures in Political Economy, Richard Milliken and Son, 1834, pp. 180-199). But don't take my word for it. We have no less a personage that Professor Krugman making exactly the same point with the statement:
History offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. (Pop Internationalism, The MIT Press, 1997, pp. 55-56 ).
The following charts are just one of many that show wages moving in tandem with productivity.
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Labor productivivity and labor compensation 1960-2000: Productivity is output per hour of all persons in the business sector. Data from the Council of Economic Advisers 2001, cited in Douglas A. Irwin's Free Trade Under Fire, Princeton University Press 2002, p. 96 |
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Real wages and labor productivity in manufacturing, South Korea 1972-93 (1987=100). Data from the World Bank Tables, cited in Douglas A. Irwin's Free Trade Under Fire, Princeton University Press 2002, p. 213.
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It should be clear that as there is a tendency for labour to receive the full value of its marginal product it follows that if for any reason labour is paid in excess of that value then persistent unemployment must emerge. For this we have an abundance of statistical evidence. The shaded area in the chart below shows that wages exceeded productivity by a significant amount throughout the 1930s with the result that America suffered a terrible level of unemployment.
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Source: This chart is designed so that a constant percentage increase would appear as a straight line. The values of product and wages are both expressed in dollars of constant buying power. The data for product are for the private sector, and are from the series by John W. Kendrick in his paper, National Productivity and Its Long-Term Projection (National Bureau of Economic Research, May 1951), brought up to date by the National Industrial Conference Board. For the data on wage rates, see Chapter 1, p. 11.
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The following table was constructed by me and shows that throughout this period PARW (productivity adjusted real wage) was greatly in excess of productivity, just as marginal productivity theory predicts.
|
Unemployment |
PARW |
| 1929 |
3.2 |
100 |
| 1930 |
8.7 |
113.0 |
| 1931 |
15.9 |
125.7 |
| 1932 |
23.6 |
128.3 |
| 1933 |
24.9 |
130.4 |
| 1934 |
21.7 |
125.6 |
| 1935 |
20.1 |
117.6 |
| 1936 |
16.9 |
114.9 |
| 1937 |
14.3 |
122.4 |
| 1938 |
19.0 |
132.1 |
| 1939 |
17.2 |
134.1 |
Precisely the same phenomenon emerged in Australia during the 1920s. Professor C. Benham compared the average value of production with total labour costs (the real gross wage). The following table was the illuminating result.
Table 1
Queensland: Wages, Production
and Unemployment |
| Year |
Average
Wages |
Value of production
per worker |
%.Unemployed |
1916
1917
1918
1919
1920
1921
1922
1923
1924 |
Ј d
60 4
65 5
69 6
78 7
91 6
96 8
93 10
94 2
94 11*
|
Ј
287.60
325.19
316.62
305.40
362.57
338.91
339.84
370.00
424.78
|
5.8
7.0
9.3
11.1
13.3
15.5
10.0
7.1
6.4
|
| *Average for nine months |
Benham observed that unemployment rose as wages rose "relatively to the value produced per worker". In his own words: "It would be hard to find a clearer proof of our thesis [that excessive wage rates cause unemployment]". (The Prosperity of Australia, P. S. King & Son, LTD, Orchard House, Westminster, 1928). By now it should be clear that unions do not raise real wages for everyone, only capital accumulation can do that. If it were otherwise then there would be a correlation between the two. But as Benham also noted:
[t]here is hardly any correlation between the growth of wage regulation and rising real wages, Nor is there any evidence that wage-fixing has made average real wages higher than they would otherwise have been. Women and juniors are within the ambit of wage-regulation to a smaller extent than adult males, yet during recent years their wages have risen more than those of adult males. In the United States and Canada where there is relatively little wage-fixing, average real wages have risen more than in Australia (Ibid. pp. 206-7).
This is borne out by the fact that at the union membership "per 100 non-agricultural workers" in Canada was 11.6 per cent, 46.2 per cent in Australia and about 9 per cent in the US. Yet Unemployment in heavily unionised Australia averaged 8 per cent during the 1920s while it averaged about 3.6 for the US. Thanks to the unions Australian employment, real wages and productivity lagged behind the US and Canada. The following chart rams home the point that unions were in no way responsible for the emergence of America's middle class and high real wages.
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*Wage rates are in terms of what could be bought with an hour's wage.
**Union membership is in per cent of all gainful workers.
Source: The Tucker series, converted to hourly rates and adjusted to cost of living, Employment and Wages in the United States by W. S. Woytinsky and Associates (New York: The Twentieth Century Fund, 1953), pages 582-583 for years 1855 to 1890; from 1891 to 1955, linked series from same source, page 586, with hourly wage rates adjusted by consumer's price index, page 176; and Economic Report of the President, January 1955, page 162; and Survey of Current Business, United States Department of Commerce.
Membership of Unions from Employment and Wages in the United States by W. S. Woytinsky and Associates (New York: The Twentieth Century Fund, 1953), pages 233, 234, and 642; Statistical Abstract, 1955, page 219; Historical Statistics of the United States,1789-1945, page 72.
Gainfully employed workers, from Historical Statistics of the United States, 1789-1945, pages 64 and 65 (interpolated from census years' data for 1855 figure); Statistical Abstract, 1955, page 187. Economic Almanac, 1953-1954, National Industrial Conference Board, pages 418-419. |
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Obama's argument in favour of privileging unions was also effectively demolished more than 100 years ago by Professor Frank Fetter an eminent American economist who dryly pointed out that real wages in England had "increased ninety per cent in the thirty years between 1860 and 1891". He then emphasized that unions could not have been responsible for this increase because in 1900 only about 10 percent of the labour force was unionised: he added, unless union supporters are prepared to argue "that one tenth of the labor supply fixes the value of all". (Professor Francis A. Fetter, The Principles of Economics with Application to Practical Problems, New York, The Century Co., 1905, p. 130). So who is spoon feeding Obama this nonsense? Well Robert Reich for one. According to this genius:
For the better part of the last three decades America's job strategy has tended toward the former. But this inevitably exerts downward pressure on the real wages of a larger and larger portion of our population.
Utter tripe. Marginal productivity clearly explains why this is not possible. However, downward pressure on real wages will emerge if the workforce grows at a faster rate than capital accumulation. I think someone should remind Mr Reich that it is his beloved Democrats who have fought against stemming the tide of illegal immigrants whose first effect on wage rates would be felt by America's unskilled workers. (I have always considered Reich to be a certifiable idiot. Living proof that schooling should never be mistaken for a high degree of intelligence or education).
The American public is being conned into believing that Obama is one of the best informed as well as one of the smartest men to have become president. The following is a perfect example of this man's ignorance of economic history as well as being an excellent illustration of the economic fallacies he has evidently been soaking up and which he is clearly unable to detect.
I don't buy the argument that providing workers with collective-bargaining rights somehow weakens the economy or worsens the business environment. If you've got workers who have decent pay and benefits, theyre also customers for business. (Steven Greenhouse, In Obama, Labor Finds the Support It Expected, New York Times, 1 March 2009).
Shades of Foster and Catchings, two prominent underconsumptionists from the 1920s and 1930s, both of whom were refuted by Friedrich von Hayek. (Profits, Interest and Investment, Augustus M. Kelley Publishers, 1975, pp. 199-263). This is the old discredited purchasing power fallacy of wages, according to which wages must cover whatever is spent on the product otherwise the economy will go into recession. So why is it that his oh-so clever economic advisers neglected to point out that this could only be true if the US had but one stage of production?
Economies consist of an amazingly complex structure consisting of thousands of stages of production. Hence total expenditure on, for example, a car or a computer greatly exceeds the price to the consumer. It is also true by definition that if workers receive the value of their marginal production they do in fact buy the economy's consumption goods. It's a shocking indictment of economics faculties that so few economists seem to grasp the significance of this fact.
What Obama' thinks he knows about the American economy has come straight from equally ignorant leftwing 'thinkers'. He has absolutely no understanding whatsoever of economic matters and I have grave doubts about his ability to even come to terms with elementary economic analysis. It is also painfully evident that he has no ability to learn from history. That in itself made him the perfect Democratic candidate for the Presidency. What is even he worse, he really does not seem to care.
Any properly informed person would know that giving in to union demands is the equivalent of economic hemlock.
Gerard Jackson is Brookesnews' economics editor
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