(Image via Oli4.D / Flickr)

Tom Orren concludes his three-part series on how the laws of economics could help us create a fair society, nation and world.

Read Part Two here.

SADLY, THE FAIRNESS situation is not much better in the land of the "fair go".

With minimum wages in Australia at $18.29 per hour, a 40-hour week yields a wage of $731.60 and an annual income of just over $35,000 before tax.

That may sound respectable compared to American standards, but it pales in comparison to the national average of just over $80,000 — especially when we consider how quickly the wealth of Australia’s richest people is growing.

The really sad part is that this growing inequality signifies the loss of something that is quintessentially Australian: a mindset based on fairness. It evolved out of the mid-19th Century Chartist Movement in Britain – to which many of our early convicts, pioneers and politicians belonged – whose motto was "a fair day’s pay for a fair day’s labour".

In the years leading up to its Federation in 1901, Australia was one the richest nations on Earth. Even so, with no aristocracy and a working class heritage, fairness was highly valued. The Eureka Rebellion of 1854 and the shearer’s strikes of the 1890s had taught us that fairness and social stability went hand in hand. And while aristocracy and landowners dominated most foreign parliaments, ours became home to working class representatives and one of the world’s first labour parties.

So it came as no surprise when, in 1904, the Commonwealth Court of Conciliation and Arbitration made a groundbreaking decision that, for the first time ever, required employers to pay reasonable (that is, fair) wages: enough to provide rent, food and basic clothing for a typical family. That became known as the "basic wage" and, because of it, fair wages became a legal obligation rather than an act of philanthropy. That was a fair society forcing business people to share some of their wealth and when progressive taxation was introduced in 1915, they were forced to share a little more.

Because those changes obeyed the law of fairness they were good for all but, at the time, opinion was divided. Many business people complained that the basic wage would ruin them. They said it would discourage employment, foreign investment and, ultimately, harm society. They were convinced that, if local industries were forced to pay higher wages than their foreign competitors, local production would cease and all goods would be imported.

If that sounds familiar, it should. They were the same arguments used to oppose the abolition of slavery and blackbirding but, more importantly, they were wrong. The basic wage didn’t make Australia slide backwards. It took our nation from strength to strength, because it obeyed the law of fairness.

Back then, few people knew what we know today: that meagre wages can be just as harmful to an economy as excessive ones. Low wages restrict spending, which causes sales to decline and in turn, that causes production to fall, workers to be laid off which, in turn, causes sales to decline even further. But that’s not all.

At the same time as government revenue from income tax is collapsing, the government is forced to support swelling numbers of unemployed citizens. That causes government deficits to blow out and forces them to cut expenditure, which only make things worse. The aftermath is a recession, or even a depression, which benefits no one — least of all businesses. But worst of all, it creates discord, incites crime and social unrest and creates an underclass.

There was one other thing they didn’t understand back then. High wages don’t hold an economy back. Far from it. They are a prerequisite for economic progress. High wages encourage the substitution of capital (technology) for labour.

Higher wages inspire efficiency, while low wages encourage a slave mentality where cheap labour is seen as the universal panacea for profit. In reality, nothing could be further from the truth. Low wages makes us work harder rather than smarter, so they make us less efficient. But more importantly, by making societies less fair, nobody wins.

However, there is a way that everyone can win, which brings us to the wealthiest man on Earth, Jeff Bezos, the founder of Amazon with assets of over US$120 billion (AU$154 billion). Just recently, Bezos unveiled a new kind of store – Amazon Go – one that is almost devoid of labour. Shoppers simply scan their phones on entry and walk out with the cost of their purchases automatically deducted from their account. Lost jobs, lost wages and mass unemployment on the horizon? Not necessarily.

You have to admit that Bezos’s new store is efficient and nobody should be scared of greater efficiency. That’s where this article began — greater efficiency is the main goal of economics. It’s also one of the laws of nature. Anything in nature that is more efficient than its rivals will have a better chance of surviving.

As humans in nature, we have the advantage. We can communicate, cooperate and share and if we can use those abilities to figure out more efficient ways to do things, we can satisfy more wants with the same – or less – energy.

What people should be scared of, is that the benefits of this new technology are not shared. Consider why Jeff Bezos is the wealthiest person on Earth. The answer is that he figured out how to make retailing more efficient by substituting technology for labour and, by doing so, he diverted the incomes of potentially millions (perhaps billions) of workers into his own pockets.

Is it fair that he should profit by coming up with that new technology? Yes, it is. But the bigger question is, how much should society allow Bezos to profit from his technological innovation, especially when such a large number of people may have to suffer because of it?

My answer is, enough to make him moderately wealthy but not enough to give him more money than he could ever spend. That is definitely "too much" money and the law of diminishing returns tells us that he will gain very little extra benefit from it. Moreover, those excess assets could do far more good for society if they were shared.

A fair society would make sure that everyone benefitted from Bezos’s new technology by making sure that everybody’s standard of living rose as a result of it. And the simplest way to do that is to make sure that everyone still has a job that pays a reasonable wage — even if it means lowering the numbers of hours, days (or even years) that each of them has to work. In other words, the solution is to share both the wealth and the efficiency.

Yet many business people continue to insist that low wages actually help an economy — real economists do not. The truth is that reasonable wages have never harmed an economy. Unreasonable wages do, both too high or too low. It’s not a zero-sum game of profits or wages. Reasonable wages are better for all concerned. However, they do have to be in a kind of "Goldilocks zone". The hard part is knowing exactly where that is.

This is where economics comes to the rescue, in a way that business or politics or science cannot. Adjusting an economy is like adjusting the fuel-air mixture of an engine. In an economy, the fuel is income and the mixture is the ratio of wages to profits — the split between the income going to employees and employers. If it’s too lean or too rich, the economy will splutter and stall, but if it’s just right it will purr.

As the old business axiom goes, "there has to be butter on both sides of the bread". Wages need to be low enough for businesses to make a profit but not too low, or society will begin to unravel due to unfairness. If a crucial threshold of unfairness is crossed, it will ignite social discord and could create a backlash that hurts everyone. Just ask the last Tsar of Russia or look no further than the unrest that is currently sweeping across the United States.

In Australia, the mixture has been getting leaner and leaner as more workers have been dipping below the poverty line (the basic wage). According to the Australian Bureau of Statistics, the first decade of this century saw a 4% fall in the wage share, from 57% to 53%, reaching an all-time low of 51.5% in 2017. But even the situation in 2000 was far from normal (if there is such a thing).

From 1948 to 1978, the wage share averaged 58.47% (nearly 7% higher than in 2017) and, in 1974/75, it reached a high of 65.5% (14% higher than in 2017). So the long-term decline has been even more pronounced. Meanwhile, the profit share has been rising steadily.

To be fair, the decline in the wages-share isn’t entirely due to growing profits and rising inequality. Some of it is due to structural changes, like privatisation and more people working as independent contractors, but you don’t have to be Einstein to work out that some groups are benefitting more than others.

The law of fairness is being violated but, in the end, it must prevail. Greed will only end up hurting the greedy while sharing can make everyone better off — and economics agrees. The benefits of greater efficiency must be shared.

 

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License

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