From the Preface to the New American Edition – by Ludwig von Mises
ECONOMICS TEACHES that there is but one method available to raise wage rates for all those eager to earn wages, viz., to increase the per-head quota of capital invested and thereby the marginal productivity of labor. At the wage rate established on a free labor market all those who are eager to hire workers can hire as many as they want and all those who want to earn wages can find a job. On a free labor market there prevails a tendency to make unemployment disappear. Not to interfere with the operation of the labor market is the only effective full-employment policy. If either by government decree or by union pressure and compulsion wage rates are raised above the potential market rate, unemployment of a part of the potential labor force becomes a lasting phenomenon. It is impossible for the unions to raise wage rates for all those eager to earn wages and to find jobs. If they win for some groups of workers higher compensation than what they would have collected on an unhampered market, they victimize other groups.
In week two, several of the students seemed to struggle with the concepts posited by Adam Smith and how they related with current day labor. One of the difficulties with Smith (in addition to the arcane language) is that he operated under a discredited theory of value, i.e., the labor theory of value [forgive the Wikipedia reference, it is for a simple definition and is well referenced]. In the late 19th Century three economists, Leon Walras, Carl Menger, and William Stanley Jevons, independently identified the subjective theory of value [ditto] … that the value of a thing is in the perception of the buyer and the seller.
As suggested by Smith, productivity gains are the basis for increased wages. In Collective Bargaining, Hutt quotes Professor Cannan “”Modern doctrine teaches plainly enough that combinations of earners can only raise earnings if they can raise the value or quantity of the product . . .”20 “ Hutt adds that this “clearly cuts out any theory of collective bargaining, for that is concerned with the distribution and not the size or value of the product.” What Hutt is saying is that collective bargaining cannot raise the level of wages in the market without a concomitant rise in the productivity. A supply and demand curve for labor expresses this as well:
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