university economics

Wondering why young people spout Marxist claptrap? Look no further than the universities

Gerard Jackson
BrookesNews.Com
Monday 21 December 2009

If Copenhagen reveals anything at all — apart from the stupidity of politicians — it is that the cult of socialism is alive and is as intolerant and as ignorant as ever. So where do young people get this socialist drivel from? Unfortunately much of it comes from our universities. This brings to mind Frank Stilwell, a socialist professor of economics at the University of Sydney and another example of the left's total inability to learn from history, particularly economic history. In Why bother about economic inequality (OnlineOpinion, 15 July 2002) he slagged, the name of equality, "economic rationalism, economic fundamentalism and neoliberalism", leftwing codenames for free market economics.

In support of his argument for greater equality of incomes he deferred to John Stuart Mill. In keeping with the long-discredited Ricardian system Mill made the dreadful error of divorcing 'distribution' (income) from production, which led him to conclude that "The Distribution of Wealth depend on the laws and customs of society". (John Stuart Mill. Principles of Political Economy, University of Toronto Press, 1965, p. 200.) One has only to think of the late and unlamented — unlamented among those who love liberty, that is — Soviet Union to realise how incredibly stupid Mill's view is, especially in the light of his own nascent view of imputation. (Ibid. p. 31.)

In a free market the vast majority of incomes are not 'distributed' but earned. Marginal productivity theory is the means by which economists explain market outcomes. Now in The Australian Financial Review (17 December 1998) Stilwell regurgitated the same socialist crap. This time he claimed capitalist countries had traditionally tried to ameliorate the economic inequalities that free labor markets generated. Complete nonsense. First, it has always been the tradition in Christian countries to try and alleviate the conditions of the poor. One of the great achievements of capitalism was not only to eliminate mass poverty but even poverty as it was traditionally understood. Not a hint of this from the Marxist Stilwell.

Now for a few historical facts, those things that Marxist's prefer not to debate in public forums, that will cast considerable light on the matter of living standards and wages. Nineteenth century Britain saw real wages quadruple even though the population rose by nearly 300 per cent. This was an unprecedented event. Yet Stillwell clearly insinuated, as he did in a later article, that free labour markets, meaning capitalism, had, in his own words, created "major casualties". (I wonder what he calls the100 million people killed in the last century by Marxist regimes?)

Social polices to alleviate distress were not initially designed as a means to address the phony issue of market inequalities, even though leftists eventually perverted them to that end. Stillwell pointed out that Australia's arbitration system has endeavoured to ensure that wages do not fall below the "social minimum . . . [and] prevent the emergence of a 'working poor'". He then claimed labor market deregulation "undermines these arrangements." In other words, free markets, despite conclusive evidence to the contrary, cause poverty. This is complete and utter left-wing bilge. The very thought that the state, any state, can guarantee its citizens a specified living standard is absurd, as a moment's reflection on the appalling living conditions that prevailed in former communist states proves.

Real wages are basically determined by the ratio of labour to the capital structure, not by posturing politicians, bullying unioncrats and their Marxist allies in academia — and certainly not by the "customs of society". Therefore, as a country expands its capital structure, adding to it more and more complex stages of production embodying new technology, it raises living standards. Moreover, as Stillwell knows, or should, marginal productivity theory explains why there is a tendency in the free market for workers to receive the full value of their labor, which in turn is paid by consumers and not employers.

One of the roles of a businessman is to act as an intermediary between consumers and the factors of production. This renders absurd Stillwell's claim that companies should keep up wages to avert poverty. Any attempt to raise wages above market rates will raise unemployment. The obverse is that any attempt to keep wages below market rates will cause labor shortages.

What really nails Stillwell is the fact that the "distributional hierarchy" is a socialist myth. Most incomes, as I have already pointed out, are not distributed, but earned (with the exception, perhaps, of some academics). Marxist attempts to demonstrate that labour was exploited by having part of its income (surplus value) confiscated by capitalists were completely demolished by the "marginalist revolution," and especially by the brilliant work of Eugen von Böhm-Bawerk (Capital and Interest, three volumes,1884 - 1912).

Stillwell is too shrewd a propagandist to directly use Marx's discredited exploitation theory of labor to attack free labor markets, so what he could not achieve by open debate he hoped to gain by stealth. Hence his insinuation that there is something unjust about market income disparities even though market participants tend to be paid in accordance with the value of their work.

This enabled him to confidently assert that a deregulated labor market "could certainly swell the ranks of those classified as living in poverty" despite the fact that the greatest cause of poverty in Australia was the unemployment that his beloved unions and arbitration commission created. But then again, Marxists are not generally noted for heeding inconvenient facts.

(In his brilliant seminar at the University of Vienna in the 1890s Böhm-Bawerk utterly demolished Marx's economics. Böhm-Bawerk's analysis was published in English in 1898 under the title Karl Marx and the Close of His System)

Stilwell's attack on the idea that the real wages of the lower-paid should be allowed to fall so that the market will clear is totally misconceived. It ignores the economic fact that if this group's income were excessive in relation to the value of its members' product then this involves a forcible transfer of income from displaced workers. Although he indirectly admitted this by conceding that lower wage rates could lead to more people being employed, he ignored the ramifications. Stillwell's most appalling argument against market-rate wage adjustments was the fallacy of demand deficiency. It is so bad that if I do not quote him in full readers might think I misrepresented him:

If total wage payments fall, this may lead to lower consumption levels. Unless the goods and services being produced are for export markets, this would lead to a tendency towards over-production.

(Incidentally, it is ironic that one of the most brilliant refutations of the demand-deficiency fallacy was penned by John Stuart Mill in his essay Of the Influence of Consumption on Production. Although written in 1829 or 1830 it was not published until 1844. As an aside, I'm inclined to think that Mill's reputation as an economist has — like Kenneth Galbraith's — more to do with his literary flair rather than a gift for economic analysis).

Firstly, what has "total wage payments" to do with anything? Market economists only call for cuts in wage rates that are above market clearing levels. Only Keynesians and Marxists seem to harp on about en bloc wage cuts. Even if, for example, the state was able to enforce a general wage cut the effect would not be to lower aggregate demand but to create labor shortages and encourage firms to find ways of raising incomes above the maximum to attract workers. (This phenomenon is called "wage drift" and was even documented in fourteenth century England.)

If reducing real wage rates in general caused 'demand deficiency' then Keynesian policies would never have initially succeeded because they only work by using inflation to cut real wage rates in relation to the demand for the marginal product. Secondly, raising wage rates above market clearing levels leads to withheld capacity by causing unemployment. This is just another way of saying that it reduces demand, the opposite of Stillwell's argument which is clearly based on the discredited purchasing-power theory of wages. (See W. H. Hutt's The Keynesian Episode: A Reassessment, LibertyPress, 1979.)

Now we can either express demand in terms of supplies or in terms of money, as do most economists. It follows that even if cutting wage rates did not reduce unemployment it would still not reduce monetary demand but only change its composition, which also means that demand in terms of supplies would not change either. Thirdly, by implying that by letting wage rates adjust to market clearing values the demand for labor would not increase, Stilwell, without any justification, slipped indeterminacy into his argument, thus sidestepping marginal productivity theory.

But even if these wage rates were indeterminate over a given range unemployment would still emerge if wage rates were pushed above their market rates. Thirdly, as Josiah Tucker pointed out about 250 years ago: "One man's work is another man's employment." This neatly summed up the economic truism (Say's Law) that supplies are demands; thus, pricing people back into work increases the demand for other products and restores the flow of incomes.

This is why total demand rises in these circumstances instead of falling. And this is why total payrolls (total wage payments) rise. Once again, let us turn to history. Hoover's belief in the purchasing-power theory of wages was behind his policy of maintaining money wage rates even as prices were falling. The results were tragic: by March 1933 total payrolls had fallen by about 70 per cent and unemployment had leapt to 25 per cent. So much for Stillwell's purchasing-power theory of wages. (Any wonder I consider the term Marxist economist to be an oxymoron).

In his final paragraph Stillwell impugned market economics by referring to "neo-liberal ideologies" — and this from an unrepentant Marxist ideologue. If free market economics is an ideology, as this Marxist hack claims, then I challenge him to prove it. As the 'Duke' said: "That'll be the day."

Of course, Stillwell made the usual left-wing genuflection toward "distributional equity". He did the same thing in his online article when he said that in his "view . . . there should be ceilings as well as floors in relation to income distribution, but we could reasonably debate whether the ratio of ceiling to floor should be 3:1, 10:1 or whatever". Really? I have five questions for him:

1. Why is the present pattern of 'distribution' inequitable? 2. What is an equitable 'distribution' of income? 3. Why is a pattern of 'distribution' designed by the likes of you economically and morally superior to one produced by the market place? 4. By what scientific means did you arrive at your conclusion? 5. What the devil do you mean by "whatever"?

Stilwell's casual approach to economics brings to mind S. G. Strumilin, one of Stalin's 'economists', who announced: "Our task is not to study economics but to change it. We are bound by no laws". (Cited in Robert Coquest's Harvest of Sorrow, Pimlico, 2002, p. 112.) Well we all know how that little experiment ended up.

Unfortunately, it seems Professor Stilwell's views on income differences are highly contagious. Tony Featherstone (or is that Featherbrain?), Business Review Weekly's then-managing editor, led one of his articles with this inanity: "Nearly everyone wants to be wealthier but the relationship between income and happiness is weakening." The subheading contained this dim-witted gem: "But can they [the rich] go on increasing their wealth at this rate, and what about the poor?" (14 July 2004). This journalist has no idea what the hell he is really talking about.

Note: The mark of any ideologue is a refusal to consider evidence that contradicts his position. This is why Marxists can claim that the collapse of the Marxist states and the failure of socialist 'experiments' do not prove socialism cannot succeed. And these people have got the gall to call free-marketeers ideologues.

Leftwing history v. economic theory. This is another example of the anti-capitalist bigotry that is spoonfed to students by leftwing activists.

Gerard Jackson is Brookes' economics editor