The Australian labour market increasingly exhibits the classical signs of market failure due to positive externalities.
The best approximation to Paul Krugman in Australia is the economic correspondent for The Guardian Greg Jericho. Economic literacy is a critical component of citizenship in capitalist society, and the great value of Jericho’s work is that it cuts through the mystification and deceit that so much accompanies economic discourse. This is important because economic policy has dominated debate on public policy in Australia since the end of the era of high and sustained economic growth in the early to mid 1970s.
One of the areas of economic concern now in Australia is the state of the labour market. When you read carefully Jericho’s analyses you can discern, in between the lines as it were, that the highly deregulated Australian labour market is exhibiting the tell tale signs of market failure due to externalities, in this case a positive externality.
Consider, first, what Jericho tells us about contemporary dynamics in the Australian labour market here and here. The level of wages growth in Australia is less than what has historically been associated with the current headline, or official, rate of unemployment, that is 2.1% annual wages growth rather than 3.7%. The unemployment rate, in turn, obscures the increasing level of underemployment in Australia. Furthermore, the level of wages growth does not tally with rising labour productivity. That’s interesting because the neoliberal reforms to the Australian labour market have always been justified by the claim that growth in wages must be reflective of growth in labour productivity, and the way to ensure this is through a deregulated and decentralised labour market. The mismatch between the two becomes further noteworthy when we factor in that the wage-profit share of national income has seen a marked shift toward profits during the neoliberal era.
Wage growth lags labour productivity growth at a time when corporate profits have been doing handsomely.
Where the matter of market failure comes into the picture is that none of this is good for the economy as a whole given that it drags down aggregate demand through persistently weak private consumption, the big component of GDP. The Australian economy continues to be propped up by public infrastructure spending. Weak wages growth is also deflationary, as the head of the Reserve Bank, Philip Lowe, has pointed out
“Wages growth of 2% and reasonable labour productivity growth are unlikely to make for 2.5% inflation on a sustained basis,” he said.
“Some pick-up in wages growth would be a welcome development. It would help deliver a rate of inflation consistent with the target, it would help with the debt situation and it would add to our sense of shared prosperity
Weak wages growth that feds into secular stagnation has been a feature of post global financial crisis economies in the advanced industrial states.
The performance of the Australian labour market, then, is less than socially optimal even by the admission of the chief of the Reserve Bank. The key dynamic at play here is a type of rational irrationality, and whenever you see rational irrationality you know that what you are seeing is a classic sign of market failure. This is how Jericho, in the first linked article above, describes the analysis of Lowe
But the one crucial thing about wage rises is that businesses will always resist giving them even if they know they are in the interests of the economy.
Lowe might be pushing for higher wages, but he is not meeting with much success because, he notes, business owners “agree in principle that the country would be better off having wage growth of a three-point-something than a two-point-something, but not in their business!”
From a social perspective it would be rational for corporations to increase wages. Moreover, productivity growth and profit rates combined with corporate tax cuts suggest that corporations have the capacity to raise wages. But from the perspective of an individual corporate manager charged with maximising returns on holders of capital that would be an irrational act. So, we have a rational irrationality.
A positive externality is associated with production or consumption of goods and services that is less than socially optimal, a negative externality by contrast with a level that is greater than socially optimal. When we observe that the private rate of wages growth, in our case 2.1% p.a., is less than the rate of wages growth than is socially optimal, in our case let us say 3.7% p.a., then we can start thinking about the presence of a positive externality effect and its underlying causes. Individual corporations will not provide the shortfall to workers between the two wage growth rates because it is more than what corporations can command in the market, and so from a rational managers perspective it is akin to providing a public good that detracts from short-term profit making indeed it would be seen as a type of free riding by workers even though wage growth lags behind labour productivity.
This all cuts against the neoliberal mantra that has governed Australian public discourse since the late 1970s, namely that markets are efficient or rational and that the rational society ought to be based on free and deregulated markets. Yet the deregulation of the Australian labour market through successive neoliberal reforms, always one of the central pillars of the neoliberal experience in Australia, has seen a gradual shift from centralised wage fixing to a decentralised system that subjects corporations to less regulatory oversight but labour to more.
What is happening flatly contradicts the decades long discourse that a deregulated labour market is a rational labour market, and it also demonstrates that whatever tales we might tell ourselves about the history of neoliberalism and neoclassical economic theory in its essence neoliberalism is a gift to corporate power. The neoliberal era can be interpreted in no other way other than as a manifestation of a one sided class war waged by big business backed by the coercive instruments of the state.
The increase in corporate power under the back of these deregulatory labour market reforms gives corporations the capability to command wage growth rates in the labour market less than what is socially optimal, and that further provides evidence that markets are neither rational and nor are they central to neoliberal ideology. Even the head of the Reserve Bank places corporate power at the centre of his analysis of contemporary dynamics in the Australian labour market. It is the centrality of power that has even seen bourgeois economic commentators support changes to the industrial relations system to give labour more power to demand higher wages, a sentiment that lies behind the ACTU “change the rules” campaign.
The neoliberal reforms to the labour market, fascinatingly enough, were initially justified on the basis of an opposite effect to the one hitherto discussed. Namely, that wages growth was higher than what could considered socially optimal, as a wage-price spiral allegedly helped to entrench stagflation in the mid to late 1970s. This was known as the “real wage overhang.” The thing about that, pretty much in sync with the entire political history of the neoliberal era in Australia, is that the real wage overhang was fraudulent as this ACTU Working Paper, citing Bob Gregory a noted labour market economist, demonstrates (pdf).
Bob Hawke and Paul Keating, not just the troglodytes of the HR Nicholls Society, used the real wage overhang to justify their pursuit of neoliberal policies, with the left of the industrial wing of the labour movement coming in for vociferous criticism given that at the time, under the system of arbitration, the metal workers union and metal industry award set the tone for wage raises that flowed on through the labour market. An accord between the ACTU and the Labor Party, known literally as “The Accord,” went on to become the key instrument in the early rounds of labour market deregulation in Australia put into place by the Labor government. This is of significance because we must remember that the neoliberal labour market in Australia was initiated by a class collaborationist trade union movement acting in accord with the state in ways that knowingly enhanced the structural power of capital.
It is not enough, therefore, to simply “change the rules” of the industrial relations system to give enfeebled trade union officials more power to bargain for higher wages. Their main concern is arresting the decline of union membership and increasing it a few percentage points to meet the threat to their privileged status in the labour movement, by now even reaching existential levels. They are doing this, in part, by mobilising their base and a broader social movement to demand change to some aspects of the Australian industrial relations system but when, or should, they arrest the decline in membership and get themselves a few more members they will do what they do best and that is betray the working class.
The rules within the labour movement, both its political and industrial wings, need to be changed as well to give members and activists more sway over policy and action. In Australia nothing like the Corbyn and Sanders phenomena is discernible, with even the titular head of the parliamentary left in the Labor Party, Anthony Albanese, in a widely touted recent speech, praising the Hawke-Keating neoliberal reforms. That makes sense as the left, both within the union movement and the Labor Party, is a patron-client network that ultimately serves itself. The Corbyn and Sanders phenomena have been made possible by a revival of democratic forms of political action, the key ingredient missing in the Australian labour movement.
This all something that has historically been emphasised in anarchosyndicalist thought, which long has maintained that when the industrial and political wings of the labour movement become dominated by a professional cadre of bureaucratic officials they will tend toward class collaboration. This is a prediction of anarchist thought well borne out by the empirical data. This adds to other noted anarchist predictions that have rung true, such as Bakunin’s prediction that Marx’s statist vanguardism would not lead to the emancipation of the working class but rather to a statist tyranny that would “beat the people with the people’s stick.”
We have ourselves here a most intriguing paradox. On the one hand anarchist political thought is the least theoretical of any form of political thinking. On the other the predictions it makes are the most precise that we have in the social sciences, a domain of human intellectual endeavour with an especially poor track record of empirically verified predictions.
Yet anarchist political thinking is the most ignored within the academy. I rather suspect that a Martian political theorist would be deeply captivated by this and that our paradox would be one of his central concerns when analysing politics among humans, and when analysing the way that humans analyse politics among humans.
I can think of two reasons why anarchism does so well in the prediction stakes. The first is that anarchist political thinking, at the analytical level, is based on the centrality and ubiquity of power in social relations. Notice that the question of power permeated this article. The second is that power systems are first and foremost devoted to their own preservation and aggrandisement.
When you put these two insights together much can you analyse of and predict in human affairs.