Classical liberalism is very unlike the other ideologies out there such as socialism, nationalism or the centrist mix between the two (national socialism). All these other ideologies are collectivist and they typically adhere to a big welfare state with high taxes and massive government intervention. Classical liberalism represents individualism and therefore requires an entirely different mindset. Those who “convert” from a collectivist ideology to a classical liberal position very rarely change their minds because they represent something fundamentally different. It does however happen, and here is an example of it.

[youtube]http://www.youtube.com/watch?v=N5BoC5qSgbA[/youtube]

A video blogger from Norway tells about his conversion from classical liberalism to communism and then finally ending up in a national socialist position smack in the center of Norwegian politics.

What I find interesting about this video is the reasons he cites for changing his mind, and these reasons are largely economic and factually based. This gives me hope because all the reasons he cites are falsehoods. That is, he has been told marxist myths and economic falsehoods and this has led him to conclude that laissez-faire leads to a bad society. I will therefore respond to the consequentialist reasons in detail. By showing him that the things he has been told are utterly wrong, I hope to re-change his mind back to classical liberalism.

Myth #1: laissez-faire leads to a “race to the bottom”

This guy tells us that without unions the wages and working conditions in society for most people would fall, even back to the level seen in the early parts of the industrial revolution. This is a version of the Marxist “iron law of wages” or “the race to the bottom” as it is sometimes also referred to. The economic principle underlying this iron law can be summarized as follows:

Capital accumulation in a free society (by a minority of capitalists) puts a downward pressure on wages and working conditions because the capitalists get in an ever better negotiation position.

This sounds somewhat plausible, except that it is exactly 180 degrees 100% wrong. In fact, the exact opposite is true and can be stated as follows:

Capital accumulation in a free society (even by a minority of capitalists) puts an upward pressure on wages and working conditions because the capitalists get in an ever worse negotiation position.

This is not immediately obvious and so it needs an explanation. To make this really easy to understand it is best if we start with a super-simple economy consisting of only two products: wheat and cotton. These are continuously produced and demanded by the people participating in the economy. To make it even clearer what is going on we will make it a barter economy. No money is involved, only exchange of goods.

Every year 1 ton of cotton is produced for sale, and 1 ton of wheat is produced for sale. What will roughly the exchange rate between cotton and wheat be? Roughly 1:1. You need approximately 1 kg of cotton to get hold of 1 kg wheat. Totally 1 ton of cotton is exchanged for 1 ton of wheat. So what happens to the exchange rate between cotton and wheat if the amount of wheat produced per year is doubled? Well, since there is now half as much cotton for sale as wheat the exchange rate will be roughly 1:2. In other words, you now need 2 kg of wheat to buy 1 kg of cotton. The price of cotton relative to wheat has risen.

Why? Because wheat has now become a less rare commodity. There is more wheat on the market to be sold and so the producers of wheat now come in a worse negotiation position relative to the cotton producers. In general: the more common a commodity is, the weaker the negotiation position of that commodity, and thus the lower the price it commands.

Let’s now switch our example to the two most important goods in society which are continuously produced, sold and consumed: labor and capital. In a capitalist society the population (and hence labor) growth is pretty low, perhaps around 1%. The accumulation of capital in a capitalist society, however, is much greater, perhaps 5%. So roughly speaking every year capital becomes about 4% less rare than labor. Roughly speaking then there is 4% more capital chasing labor every year, and hence the price of labor — wages — will be pushed up roughly 4% every year. Some of that wage increase is taken out in the form of more vacation, and some is used to improve working conditions.

Essentially this means that labor unions have done virtually nothing to improve working conditions and wages of the working class. All average wage increases are due to capital accumulation and productivity increases, and it is fairly easy to prove this. In Norway around a third of all workers are unionized in the largest union known as the National Union. (Landsorganisasjonen) However, a significant portion of workers are not unionized at all and for some mysterious reason they experience exactly the same wage growth and improvement in working conditions as the unionized workers.

This has greatly annoyed the National Union because the unions believe that they are the cause of wage increases. They are therefore calling the non-unionized workers “free riders” because they allegedly benefit from the agreements negotiated by the National Union. But that is awfully strange, isn’t it? Think about it. Why on earth would businesses be so generous as to simply raise the wages of people who are not in a position to demand a higher wage simply because some other people were in that position? Why do that if they don’t have to? To this the unions have no answer.

But we have already answered the question above: they do have to raise the wages of the non-unionized workers because when there is more capital to chase the limited labor available the businesses are in a worse negotiation position and must pay more for work. This explains all general wage increases.

Myth #2: Child labor, low wages and horrible working conditions were created by capitalism

In the first part of the 19th century there were loads of Oliver Twists running around in the streets of London and other cities. Child labor was common, working conditions were horrible, hours were long and wages were very low compared to what we are used to today. According to an unholy alliance between the upper class feudal lords and Marxists it was capitalism that created these conditions. Yes, you heard me right. The upper class supporters of feudalism were against capitalism and blamed it for poverty. In fact, they hated capitalism, they hated the industrialists who had not inherited their wealth and they wanted to go back to the good old days when all the workers were happily working in the fields of the feudal lords out in the country side.

Hmmmmmm. Doesn’t that strike you as…odd? Why did the filthy rich people who inherited wealth and legal privileges to own land and serfs strongly oppose capitalism? Well, here is a clue: the farmers left the country side voluntarily to take jobs in the city. Why did they do that? Because the industrialists paid so much better wages than the feudal lords. The lords found that they were unable to compete with these industrialists and so they used their significant influence over the culture to slander the industrialists. They did this by painting life in the country as a peach and the work in the cities as horrible and underpaid.

But if that were true, why did the farmers flee the countryside voluntarily to become factory workers in the city? The truth is that there was just as much child labor, hard work and horrible working conditions in the 18th century farm as there was in the factories in the cities. The difference was that industrialists were paying much better, and as capital accumulated the payment increased more and more.

In fact, they paid so much more after a while that child labor was abolished altogether! Imagine that. For 10.000 years there had been child labor in Britain, and then only 50 years after the industrial revolution child labor was mostly gone. The parents now earned so much that they could afford to keep their children at home and send them to school and get an education. And it was entirely due to capitalism. The bad working conditions, child labor and low wages were a remnant of the feudal past inherited, but was displaced by a better life for all in a matter of only 50-100 years. So capitalism did not create poverty, child labor and bad working conditions. On the contrary, it abolished them.

Conclusion

Hopefully I have presented powerful arguments that the labor unions have done nothing to improve living standards whereas capitalism, the accumulation of profit and the competition between capitalists is the real reason for our improved lives. It does not matter if the capital is owned by a few or by many so long as it is legal for all to own and accumulate capital and to use it peacefully. Then capital will tend to accumulate among those who are good at making capital accumulate. This benefits all because it maximizes capital accumulation in society, and hence maximizes wage increases and benefits to all.