Address to the 2019 Friedman Conference
Sydney, Australia, 25 May 2019
Kurt Wallace, Research Fellow, Institute of Public Affairs
Although the push to introduce a living wage in Australia may have experienced a recent setback, the concept has become a standard part of policy prescriptions on the left, along with the related idea of a universal basic income. This is illustrated in the platforms of the Democratic presidential candidates in the U.S.
In Australia we’ve had calls from the ACTU to institute a living wage so that “no full-time Australian worker lives below the poverty line.” And the Shorten led Labor party promised to turn the minimum wage into a living wage ahead of the recent election.
The idea of a “living wage” is to increase the minimum wage to a level capable of providing the wage earner with some predetermined acceptable standard of living. Every job in the economy would be required to meet this standard.
Proposals for a universal basic income have taken various forms, but the general idea is that everyone would be provided with an income stream direct from the government to provide for basic needs.
I want to begin by talking about how these two policies are often built on the same philosophical foundations, and why it is important to understand and oppose the ideals behind the policies, and not just argue about their economic impracticality.
I’m reminded of an excerpt from Ayn Rand’s ‘We the Living’, where a Communist party member says to the protagonist Kira, “I know what you’re going to say. You’re going to say, as so many of our enemies do, that you admire our ideals, but loathe our methods.” To which Kira responds, “I loathe your ideals.”
It is not just the policy methods that we oppose, we should also recognise and oppose the faulty utopian ideals being aimed at and argue for our own ideals in their place.
There are a number of related philosophical commitments that underpin the current support on the left of a mandated “living wage” and a Universal Basic Income.
The first commitment is to an expanding view of positive rights. There are probably a number of different conceptions of rights in this room, but I think we can agree that there are real dangers in redefining human needs or goods as ‘human rights’. When housing, food, utilities, healthcare services, education are included as ‘human rights’ the political and economic implications are radical.
The core problem with the conception of positive rights is that they necessitate violating actual rights and freedoms of property and association. A positive right gives someone the right to be provided something by someone else. If I have an absolute right to household utilities I must be entitled to force someone to install my Internet and unblock my plumbing.
This conception of rights underpins the argument for a living wage. ‘A worker is entitled to be given a wage capable of providing for a certain standard of living,’ we are told. In other words, businesses should be forced to pay a certain wage, and the worker has a right to this wage.
Many arguments for a universal basic income are built on the same assumptions. While there is a pragmatic libertarian case for a UBI (not one I agree with), many proponents appeal to a universal right for basic goods and services. And of course a universal basic income must be enacted. If you have a right to a certain standard of living, surely this right doesn’t only apply if you have a job. A universal basic income ensures that everybody can obtain what they “deserve” by virtue of being human, even including those who are unwilling to work.
The use of the concept of rights in this way allows people to take the moral high ground when arguing for these policies. Forcing business to pay wages and in practice preventing them from employing labour, and hiking taxes to pay for an explosion in the welfare state are excused for the redefined greater good.
As Murray Rothbard notes, “if one side is granted ethics and the “ideal” from the start, then that side will be able to effect gradual but sure changes in its own direction; and as these changes accumulate, the stigma of “impracticality” becomes less and less directly relevant.”
The second principle is the related idea of inequality as a moral evil. As free markets have proven to be an unprecedented engine of poverty relief and increased human prosperity throughout the world over the last couple of hundred years, the attacks on markets have shifted to inequality.
We have even seen a widely accepted redefining of ‘poverty’ to be a technical measure of inequality within a country. The official ‘poverty line’ has been brought up in Australia in the context of arguing for a living wage and increasing welfare.
We hear lines such as: ‘No one should be paid a wage that keeps them in poverty’ or ‘welfare needs to be increased so that recipients are not below the poverty line’. This may sound plausible to many until you look at how ‘poverty’ is defined and see the level of deception. Earning below half or sometimes 60% the median income is defined as poverty.
Without bothering with an actual argument, the language implies that it is somehow unethical for anyone to receive a wage or welfare payment below half the median income of the country he or she lives in regardless of job status or hours worked.
This doesn’t pass a basic test of common sense, it is based on a radical ideal of absolute undifferentiated equality, an ideal that leads logically, not to minor industrial and welfare reforms, but to full-fledged socialism.
Inequality is not an evil that must be eradicated, it is a simple reality of the natural order. Moreover, it is essential to any political economic system based on freedom. While there can be unjust inequality caused by state interventions, inequality in general is not a bug of capitalism, but a feature. The reason a market system works, is because of the decentralised role of the entrepreneur. The market system possesses the right incentives, and diverts resources to those who have proven proficient at creating value. The profit and loss system that generates inequality is the reason we live in unprecedented prosperity.
Third, a closely related idea to the evils of inequality, that too often goes unchallenged, is the view that there is an unjust distribution of income. On the topic of social justice, F.A. Hayek stated the following in a lecture given in Sydney in 1976
There can be no distributive justice where no one distributes. Justice has meaning only as a rule of human conduct, and no conceivable rules for the conduct of individual persons supplying each other with goods and services in a market order would produce a distribution which could be meaningfully described as just or unjust. Individuals might conduct themselves as justly as possible, but as the results for separate persons would be neither intended nor foreseeable by others, the resulting state of affairs could neither be called just nor unjust.
When a business hirers an individual, the two come together and agree on an employment arrangement. Both parties benefit from the exchange. The business acts ethically in the agreement without calculating the subjective needs of the employee or where the agreed wages place the employee in the statistical distribution of income in the area.
Now, it is also important to consider these policies economically and practically.
To quote Rothbard again, “If an ethical ideal is inherently ‘impractical,’ that is, if it cannot work in practice, then it is a poor ideal and should be discarded.”
A living wage cannot possibly work for all the reasons that all price controls don’t work. Creating a price floor above the market price for a good will result in excess supply. In the labour market, we call this unemployment. If businesses are forced to pay a worker more than the value he contributes, businesses will be forced to lay the worker off or reduce hours. No amount of econometric fiddling with marginal changes in noisy natural experiments can attack this truth.
There is also the serious problem of determining the amount of a living wage. Who decides what this basic standard of living is? And how do you standardise this with a single wage rate across the country? The needs of a single income earner with a dependent spouse and children with a mortgage in an expensive area of the country, are not comparable to a dual income household with no children living in an affordable area.
Wages reflect economic realities. You cannot legislate controls for inequality in income distribution. The only way to increase wages is to increase productivity. This can is achieved through investment and capital accumulation, not by declarations from bureaucrats in Canberra.
Now let’s look at the case for a UBI. Of course not all arguments for a UBI are based on positive rights and inequality, a number of libertarians have made a pragmatic case for the UBI as a means of replacing exiting welfare and reducing bureaucratic waste.
But when you look at the numbers they simply don’t add up. If you were to give 20.5 million adult Australians no strings attached payments of $40,000 a year in lieu of the current welfare system it would cost $820 billion. This is compared to total current federal government spending of $500 billion.
If you halved the amount to $20,000 a year, the $410 billion spend would still be $230 billion more than the current welfare spend of $180 billion.
Even if you lowered the UBI to $12,000 a year, the $250 billion spend would still be more than our current spending on welfare, education, and health combined. And it would be a decrease on the current Newstart allowance.
The only way you can have a universal basic income is if you committed to a massive expansion of government and tax hikes. If implemented, there will be no end to the calls to equalisation through welfare increases.
There are also further negative social impacts. The expansion of welfare with no strings attached plays into the idea that people have a right to this money, and that it is in no way connected to charity. It normalises welfare dependence and diminishes the incentive for individuals to be involved in work that creates value for others in the market.
I started by going through some of the principles that underlie the arguments for these policies relating to work. It is important that we present our own principles in opposition.
We need to argue for better ideals to guide policy.
Personal responsibility needs to be defended as a value of a free society. Yes, this means that there will a disparity of outcomes in society. But this is a by-product of being free to pursue our own ends, and taking responsibility for our own lives.
Voluntary charitable giving through civil society needs to be defended as virtuous. Government crowds out civil society, and reduces private charity. We need to argue for the importance of society outside government in families, churches, clubs and societies, and make the moral case for helping the poor and unfortunate through private enterprise.
And the best way to help these people is by giving them a job. A job cannot be reduced to its monetary benefits. When you work you are contributing to society by creating value for others. You are earning your money honesty, and fulfilling a central part of what it is to be human. Working reinforces personal responsibility that makes up the fabric of our society and allows people to build better lives. This simply cannot be replaced by a direct cash payment from the government.
These are principles that should underpin our approach to labour market policies, so that we can ensure that everyone can experience the dignity of work.