Disappointing Article from an Austrian Economist

Free-Market News network (“driven by truth”), carried an article (15 December) on “Labour Market Reform and the Dismal Failure of the HR Nichols Society” by Gerard "Gerry" Jackson, described as an Austrian economist), which has just come to my attention. Reading it is like intruding on a private quarrel in which you know little about the personalities, the FEMN or the (allegedly) ‘rightwing’ HR Nicholls Society (Australia). So please forgive me if I get everything about the two contestants completely wrong, though I am confident about my presentation of Adam Smith’s real views.

Gerry Jackson writes:

“This brief diversion into economic history was necessary to expose the fallacy of blaming industrial disputation and wage-setting on Marxist thinking. These things were with us centuries before Marx and they will probably still be with us in one form or another many centuries after he is thankfully forgotten.

At the root of the problem is the view that wage rates and profits are indeterminate, meaning that there is no fixed point at which wage rates cause unemployment. We even find Adam Smith sounding like an eighteenth century Justice Henry Bourne Higgins with his opinion that labourers
“should receive a wage sufficient at least to support a standard of living that allows them to participate actively and fully in the community” (“Wealth of Nations”, Liberty Classics edition 1981).

Irrespective of what Mr Evans thinks it was clearly Adam Smith who fathered the “imbalance of power” idea and not Marx. According to Smith:

“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into compliance with their terms” (Ibid.).

So we have it from the alleged ‘Father of Economics’: labour is always at a disadvantage that can be corrected only by collective action. Furthermore, Smith argued that the capitalists’ advantage was due to them being “fewer in number”.

However, on reading Smith carefully we find that he contradicted himself on this subject. Although he argued on page 85 of the same edition that in any dispute the “master must generally have the advantage”, he declared in the next sentence that there is
“a certain wage rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.”

This, in my opinion, is an admission that wage rates cannot be permanently forced below their market clearing levels. This is something the thoroughly perplexed Crown discovered in England after the Black Death struck as evidence by the Statute of Labourers Acts of 1349 and 1351.

Unfortunately Smith’s confusion on wage rate determination helped to contribute to the notion of indeterminacy, an idea that even some classical economists had adopted to some degree by the 1860s. Mill’s apparent rejection in 1869 of the wage-fund theory of wages combined with William Thomas Thornton’s attack on competition led him to accept the idea of indeterminacy.”

Let me comment on what Gerry Jackson is saying about Adam Smith’s views on wage determination in 18th century Scotland (not 21st century Australia).

Gerry Jackson writes: “At the root of the problem is the view that wage rates and profits are indeterminate, meaning that there is no fixed point at which wage rates cause unemployment.”

This may be true or false, but extrapolating Smith’s views on specific instances is unhelpful. Wage rates are not a monolithic decision for all grades of labour, for all employees and employers, across all sectors in any economy as a result of separate decisions in every case at the same time coinciding. In some research I participated in while an undergraduate in the 1960s into wage rates in small engineering workshops in the same area of Glasgow (some of them in the same street), the same grades of skilled labour were paid different hourly rates in each workshop. We found it true for unskilled labour too. The differences in nearby workshops were known to many of those interviewed, but few reported that they sought to join the higher-paid workers within yards of their current employment, though some did.

In Australia minimum wages rates are set by Federal and State awarding bodies, leaving room upwards for wages rates. I have no information to hand on whether every single engineering employee in Australia receives the same pay, hourly or total in consequence. I would be surprised if they did. Predictable determinacy to a single pay rate seems unlikely and differences within pay bands for any grade of employment seems more likely.

That Smith suggested that labourers ‘should receive’ a wage sufficient to maintain them and their families in conditions considered normal for their communities, does not strike me as odd at all. He expressed an opinion. It was not a statement that all labourers did receive the same, or a sufficient, wage.

Gerry Jackson’s next quotation from “Wealth of Nations” tears it out of context:

“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into compliance with their terms” (Ibid.).

Unlike 20th and 21st century Australia, mid-18th-century Scotland was not an environment where impartial High Court Judges pronounced on minimum wages. These were decided by individual employers, often acting in surreptitious concert to hold wages where they were, or to engage in collective decisions to reduce them. On their side they had laws making it illegal for labourers to combine with each other to attempt to raise their wages or to resist their employers lowering them. Moreover, they had relationships as men of property with the local magistrates, who enforced the law on the labourers and their leaders (some of whom visited the colonies at His Majesty’s pleasure, such as the Americas and the Caribbean up to 1776 and, after 1788, New South Wales). Smith’s estimate of the outcome of these unequal conflicts (there were no laws against employers combining) was his point.

This leads Gerry Jackson to write a most strange conclusion:

“So we have it from the alleged ‘Father of Economics’: labour is always at a disadvantage that can be corrected only by collective action. Furthermore, Smith argued that the capitalists’ advantage was due to them being “fewer in number”.

Smith said quite the reverse. He thought that Labourers attempting to ‘correct’ this ‘disadvantage’ by "collective action" in the main was futile, because they “generally end in nothing, but the punishment or ruin of the ringleaders” (“Wealth of Nations”, I.viii.13:p 85). By clipping his quotations, Gerry gives a wholly misleading interpretation of Smith’s argument (unbecoming of an Austrian economist).

As for “the capitalists" advantage was due to them being “fewer in number”, Gerry Jackson is wholly misleading. The point was that while it was near impossible for labourers to hide their combinations from the eyes of their employers – they held mass meetings, they created a lot of noise, they demonstrated and paraded their defiance of their employers, and their leaders were easily identified. Their employers met at small private dinner parties away from public view, they agreed quietly and privately, and had no need to exhibit their collusion. So ‘being fewer in number’, as well as having the resources to subsist for much longer periods than labourers who were bereft of income after a week, was a distinct advantage for the employers.

Lastly, Gerry Jackson accuses Smith of a contradiction: there is, he says, “a certain wage rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.”

Let me quote the full statement of Smith:

“But though in disputes with their workmen, masters must generally have the advantages, there is however a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.
A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more: otherwise it would be impossible for him to bring up a family, and the race of workmen could not last beyond the first generation” (Wealth of Nations” I.viii.14-15, p 85).

Now that alters Gerry Jackson's interpretation of Smith's point I think. There is a wage rate so low that the majority of labourers cannot subsist for long, but there will always isolated instances where somebody in desperation takes the wage cut. For the majority who do not take a cut, child mortality, which hit all families severely in normal 18th century times, would be endemic, driving some to crime or prostitution. On starvation wages, and no wages, his wife and children would be early victims. He too would be vulnerable to illness and disease in a short time too, let alone grief. Has Gerry Jackson any idea of how people lived in the 18th century? Has he a heart of stone?

So whatever Gerry’s argument with HR Nicholls, I am disappointed with his misuse of selected quotations from Adam Smith that misrepresent what he wrote. This is another example of the misuse of his Legacy from a quarter I least expected to hear it from.