World Trade Needs a Global Cartel for Labor (OLEC)

Part II: Rising Wages Solve All Problems


By
Henry C.K. Liu

Part I: Background and Theory


 

According to the current terms of global trade under dollar hegemony, the penalty for a non-dollar economy that uses dollar foreign capital is a low domestic standard of living to support a high return denominated in dollars on foreign capital.  Since dollar profits for foreign capital cannot be used in the local non-dollar economy, such profits must leave the domestic economy in one form or another, either through direct repatriation, or in economies with currency control, through central bank foreign exchange reserves. Thus there are no recycling economic benefits to the non-dollar domestic economy from dollar profits earned by foreign investment. Such is the pugnacious nature of foreign direct investment (FDI).  Under finance globalization, the unregulated competition among non-dollar economies for dollar-denominated FDI condemns domestic living standards to negative growth.  The quest to profit from the lowest wages through cross-border wage arbitrage has been the driving force behind trade globalization, reducing trade from a process of gaining comparative advantage between trading economies to one of reinforcing absolute advantage for capital at the expense of labor for the benefit of global capital denominated in dollars.  Cross-border wage arbitrage can hardly be classified as a proper division of labor in the Smithian sense, which implies rising wages through specialization.  Structural systemic low wages are exploitation, not specialization of labor. Such exploitation need to be resisted by the formation of a global labor cartel such as an Organization of Labor-intensive Exporting Countries (OLEC).

Classical Economics - Rationalization of the Industrial Revolution

By 1700, the tendency of the agricultural state and the craft guilds to resist industrialization was weakening. In 1762, Matthew Boulton built a factory in England with over six hundred workers, and installed a steam engine to supplement power from two large waterwheels which ran a variety of lathes and polishing and grinding machines. In Staffordshire an industry developed to export low-price, good-quality pottery, using hand-made chinaware brought in from China by the East India Trading Company as models. Josiah Wedgewood (1730-1795) revolutionized the mass production and sale of low-price pottery, causing eating and drinking to be consequently more hygienic, thus contributing to a reduction of diseases and an increase in population. The textile industry overcame the production mismatch between spinners and looms as well as yarns and weavers with the introduction of a machine known as ''Crompton's mule,'' which mass produced quantities of fine strong yarn to keep weaver from idly waiting for yarns. Between 1780 and 1860 other textile processes were mechanized with automated looms, and when the power loom became efficient, low-wage women replaced men as weavers. By 1812 the cost of making cotton yarn had dropped 90%, and by 1800 the number of workers needed to turn wool into yarn had been reduced by 80%. And by 1840 the labor cost of making the best woolen cloth had fallen by at least half.  The history of industrialization is one of forcing wages down, until the advent of labor unions.

The steam engine accelerated the industrial development of Europe. In 1763 James watt, an instrument-maker for Glasgow University, perfected a true steam engine with a crank and flywheel to provide rotary motion that could be harvested for a great variety of production work. In 1774 the industrialist Michael Boulton took Watt into partnership, and their firm produced some 500 engines before Watt's patent expired 26 years later in 1800. The steam engine liberated the factory from water power and its streamside location and relocated it to regions that produced coal, making coal producing countries industrial powers. A Watt engine drove Robert Fulton's experimental steam vessel Clermont up the Hudson from New York to Albany in 1807.

It was not until 1873 that a dynamo capable of prolonged operation was developed, but as early as 1831 Michael Faraday demonstrated how electricity could be mechanically produced. Through the nineteenth century the use of electric power was limited by small productive capacity, short transmission lines, and high cost. Up to 1900 the only cheap electricity was that produced by generators making use of falling water in the mountains of southeastern France and northern Italy. Hilly Italy, without coal resources, with a historical experience in handling water, soon had hydroelectricity in every village north of Rome. Electric current ran Italian textile looms and, eventually, automobile factories. As early as 1890 Florence boasted the world's first electric streetcar.  The coming of the railroads greatly facilitated the industrialization of Europe. The big railway boom in Britain came in the years 1844 to 1847. The railway builders had to fight vested interests, canal stockholders, turnpike trusts, and horse breeders.  By 1850, aided by cheap iron and better machine tools, a network of railways had been built linking inland factories with exporting ports. After 1850 the state had to intervene to regulate what amounted to a monopoly of inland transport in Britain. Alexander Graham Bell in 1876 transmitted the human voice over a wire. At the end of the century the wireless telegraph became a standard safety device on oceangoing vessels. Radio did not come until 1920. The world continued to shrink at a great rate as new means of transport and communication speeded the pace of life.

The Industrial Revolution brought with it a sharp increase in population and urbanization, as well as new social classes.  England and Germany showed an annual growth rate greater than 1% which would double the population every seventy years. In the United States the increase was greater than 3% which was readily absorbed by a practically uninhabited continent with abundant natural resources. Only the population of France remained static after the eighteenth century which partly explained the decline of France as a major modern power until it embarked on a policy of colonization. The general population increase was aided by a greater supply of low-cost food made available by the previous Agricultural Revolution, and by the growth of medical science and public health measures which decreased the death rate and added to the population base, with the rapid growth of cities.

The factory-owning bourgeoisie use the discontent of the peasants to gain control of the government from the landed aristocrats. Their rule over a new working class created by the Industrial Revolution was harsher than that of the aristocrats over the peasants. Skilled artisans were degraded to faceless production laborers as machines began to mass produce the products formerly made by loving hand. Wages fell, working hours lengthened and working conditions became inhumane and unsafe. The industrial workers had helped to pass the Reform Bill of 1832, but they had not been enfranchised by it because of their poverty, as the control of government fell to the bourgeoisie.

Law of Rent is Regressively Anti-labor

Classical economics grew out of the Industrial Revolution which began first in Britain.  It was natural for it to be dominated by the opinions of British observers of conditions created by early industrialization. British classical economist David Ricardo’s law of rent was seminally influenced by Malthusian concepts on population dynamics.  Thomas Robert Malthus (1766-1834), another British economist, sociologist and pioneer in population theory, asserted that population growth is difficult to check and would quickly outstrip economic growth and cause increasing misery all around.  In his An Essay on the Principle of Population (1798), Malthus contended that poverty is unavoidable without population control since natural population increase is geometric while the increase of the means of subsistence is arithmetical.  Thus famine and disease can be viewed as natural constraints on population and war as a political constraint, all having socio-economic causes rooted in overpopulation.  In 1803, Malthus admitted the preventive check of “moral restraint”, paving the way for neo-Malthusian birth control theories which influenced other classical economists, especially David Ricardo (1772-1823). Malthus never explained why urban centers of high population density became centers of high civilization and culture, and why prosperous nations with large population become great powers, such as Britain, Germany and the US, or China, Russia and the Ottoman Empire before the Industrial Revolution.

Accepting the Malthusian claim, Ricardo modified Smith’s theory of economic growth by including diminishing returns on land. Output growth requires growth of factor inputs, which are goods and services used in the process of production, such as land, labor, capital and enterprise.  But unlike labor, land as observed by Ricardo is “variable in quality and fixed in supply.”  This means that as economic growth proceeds, with improvement of the quality of land use reaching upper limits, more land must be brought into use to sustain growth. Yet land cannot be increased without geographical expansion through conquest, which leads economic growth in a capitalist regime inevitably to the age of empire and imperialism.

Ricardo was concerned not so much with the “nature and causes” as with the distribution of wealth. This distribution has to be made between the classes concerned in the production of wealth, namely, the landowner, the capitalist, and the laborer. In seeking to show the conditions which determine the share of each, Ricardo’s theory of rent is fundamental based on which economists develop the notion of economic rent which will be dealt with later in the article. He attributed his inspriation to Malthus’s Inquiry into the Nature and Progress of Rent and others. Rent, Ricardo argued, does not enter into the cost of production; it varies on different farms according to the fertility of the soil and the advantages of their situation. But the price of the produce is the same for all and is fixed by the conditions of production on the least favorable land which has to be cultivated to meet the demand; and this land pays no rent. Rent, therefore, is the price which the landowner is able to charge for the special advantages of his land; it is the difference between its return to a given amount of capital and labor and the similar return of the least advantageous land which has to be cultivated. Consequently, it rises as the margin of cultivation spreads to less fertile soils. Obviously, this doctrine leads to a strong argument in favor of the free importation of foreign goods, especially corn. It also breaks with the economic optimism of Adam Smith, who thought that the interest of the country gentleman harmonized with that of the mass of the people, for it shows that the rent of the landowner rises as the increasing need of the people compels them to have resort to inferior land for the production of their food.

Prior to the imperialistic age, there were two self-neutralizing effects on economic growth: firstly, rising land rent cuts into profits of capitalists from one side; and secondly, rising price of wage goods cuts into capitalist profits from another as workers need higher wages for subsistence. This introduces a quicker limit to economic growth than Smith allowed, but Ricardo also claimed that this decline could be happily checked by technological improvements in mechanization and the specialization brought on by the growth of trade.  However, Ricardo’s concept of trade for comparative advantage is fundamentally different from trade for absolute advantage under the current age of globalization.  Still, the flaw in the Law of Rent is Ricardo’s rejection that labor can also be variable in quality though education and fixed in supply through a global labor cartel.

Automation Creates Unemployment Unless Wages Rise to Create Marginal Demand to Absorb Marginal Productivity.

Nevertheless, in the third edition of his Principles, Ricardo modified his position on mechanization (and by implication, automation).  He observed that when machinery displaces labor, the labor "set free" may not be reabsorbed elsewhere in the economy because capital is not simultaneously "set free”, trapped in sunk investment in machinery.  This creates downward pressure on wages and lowers aggregate labor income, with the difference absorbed by the long-term investment and financing cost of capital goods.   It is true that capital goods also require intellectual labor to produce, but the productive lifespan of capital goods is exponentially longer than their initial intellectual labor input, which also brings about rising need for long-term finance.  This characteristic is altered in the age of communication and information technology where technical obsolescence has accelerated the technological imperative. Yet this new ratio of intellectual labor input to enhance productivity has not translated into higher wages even for the intellectual worker. Much of the surplus value went to a handful of intellectual property rights holders and their corporate metamorphoses, creating new super-rich robber barons personified by the likes of Bill Gates. Capital goods need decades of reduced labor cost to pay for their capital input and financing cost in the form of interest payable throughout the course of the loan or lease term.  Such interest payments require additional reduced labor cost over the life of the financing.

This has been the experience in China in the past two decades of industrialization with foreign capital, paid for by export earnings.  Up to 70% of China’s export trade is financed by foreign capital and traded by foreign traders. China’s outstanding foreign debt stood at $267.46 billion at the end of September, 2005 up 8.07% or $19.97 billion from the end of 2004. The State Administration of Foreign Exchange (SAFE), an arm of the central bank, said that the increase was due to a rise in short-term debt, and most of that was trade related. As of the end of September, outstanding short-term debt was $143.97 billion, up 16.86% from the end of 2004. Medium- and long-term debt was down 0.65%, or $801 million, at $123.49 billion. SAFE, concerned that some of the inflow is due to speculation that the nation's currency would appreciate, issued new rules in October 2005 tightening control over foreign debt in a bid to curb speculative inflows of funds from abroad. The yuan was revalued 2.1% against the dollar on July 21, 2005. As of the end of September, 2005 short-term obligations accounted for 53.83% of all outstanding foreign debt, compared with 53.1% at the end of June. The rise in foreign debt is unlikely to pose much of a problem as the nation's foreign exchange reserves have been climbing at a rapid pace, reaching $794.2 billion at the end of November, 2005. Some economists predict that reserves could exceed $1 trillion by the end of 2006.

China's foreign debt total at the end of September 2005 included registered foreign debt of $189.46 billion, inclusive of outstanding trade credits of $78 billion. The total supply of tradable domestic bonds in China at the end of June 2003 was RMB 3.4 trillion (US$ 411 billion). Total outstanding tradable debt now exceeds $600 billion (60% of GDP) against foreign exchange reserves of $800 billion. This leaves a net cushion of less than $200 billion for all of China’s remaining debt obligations, hardly a picture of unqualified financial strength. Still, in July 2005 S&P upgraded China’s sovereign rating by one notch to A-minus, citing China’s aggressive overhaul of its financial sector and improved profitability. China is rated ‘A2’ by Moody's Investors Service and ‘A’ by Fitch Ratings.

The foreign exchange reserves build-up by the People’s Bank of China (PBoC), China’s central bank, present a misleading picture about the financial benefits China receives from foreign trade.  The profit mostly goes to foreign capital, while the PBoC’s dollar reserves have come from the sale of domestic sovereign debt to remove trade-surplus dollars from the Chinese economy in a process known as sterilization in monetary economics. China does not own these dollars which have been earned by foreign capital on Chinese soil paying low wages to Chinese workers. China merely exchanges its own sovereign debt instruments for the foreign dollar profits in its economy to buy US Treasuries to sustain the US capital account surplus.<>

In order to reabsorb the labor displaced by mechanization or automation, the rate of capital accumulation must continuously increase.  But with foreign direct investment, there is no mechanism for this to happen domestically since the profit belongs to foreign entities which will eventually carry the loot back to their own home bases. Globally, given the tendency for profit and thus savings to decline over time from overinvestment in relation to worker purchasing power, a perpetual surplus of labor is the result.

The mismatch of the long functional life cycle of products to their shorter financial life cycle leads to the irrational phenomenon of planned obsolescence in which products are planned to last not as good engineering permits, but as their financial life allows, in order to produce recurring market demand artificially.  In a high tech-economy, which Ricardo did not have the opportunity to observe in his lifetime, fast technological obsolescence tends to require a higher and recurring level of mental labor input, rescuing high-tech workers from the effects of Ricardo’s Iron Law of Wages.  Under globalization, high-tech workers, while freed by technological imperative from the Iron Law of Wages, are re-enslaved by global wage arbitrage made possible through instant and low-cost data telecommunication and low shipping cost of greatly reduced physical output.  Thus a labor cartel is also needed in high-tech sectors to resist this new enslavement.

Ricardo did not deal with the problem of uneven market demand on different grades of labor created by mechanization, between educated scientists/engineers/managers/sales and uneducated factory workers.  In the early years of industrialization, educated professional and managerial personnel were part of management, not labor. With the emergence of large corporate entities, upgrades in quality caused labor as a category to expand to include high-skilled, professional and managerial workers. Until the introduction of universal education in the advanced economies, which is an industrial policy program to intervene in the labor market, unskilled or low-skilled laborers were so lowly paid that they simply could not afford education for their children, thus condemning them to the ranks of the unemployable for life through hereditary poverty.  A shortage of educated workers developed along with an oversupply of unskilled labor, exacerbating widening income disparity.  Mechanization absorbs the highly-skilled in the design and engineering phase and displaces the unskilled in the production phase at unbalanced rates.

As income rise comes to depend on education level, the cost of education increases and requires financing over longer periods of schooling and more sophisticated teaching and research facilities and institutions, further limiting low-income access.  Competitive scholarships to the poor but deserving caused a brain drain from the working poor, leaving them genetically inadequate to resist. Free universal education then is a critical component of economic democracy.  Privatization of education is the death knell of free markets for labor.  The US system of funding public education with property taxes leads to location-related disparity of education opportunity.  Just as much of gasoline taxes are directly reserved for the Highway Trust Fund (18.3 cents per gallon federal gasoline tax and 24.3 cents per gallon diesel tax), a fixed portion of a progressive income tax structure should be devoted to a national education trust fund.  Those enjoying high income are benefiting from their earlier educational subsidies and should be asked to fund educational opportunities of future generations.  A cartel for global labor can retrieve universal free education for all to upgrade the quality of labor.

Economic Rent and Excess Profit

Ricardo correctly observed that rent is a result and not a cause of price.  Rent has two different meanings for economists. The first is the commonplace definition: the income from hiring out an asset, such as money, land or other durable goods or labor. The second, known as economic rent, is a measure of market power: the difference between what a factor of production costs and how much it would need to be paid to remain in its current use.  A star entertainer may be paid $10 million a year when he/she would be willing to perform for only $1 million under different circumstances, so his economic rent is $9 million a year. In a manner of speaking, economic rent is a form of excess profit. US executives enjoy the world’s highest economic rent for management.  Under perfect competition, there would be no sustainable economic rents of duration, as new entertainers are attracted by a high economic rent market and compete until economic rent falls to near zero.

Reducing economic rent does not change production decisions, so economic rent can be taxed to reduce income disparity without any adverse impact on the real economy.  No baseball star would take up washing dishes in a restaurant to protest high taxes on his economic rent.  When chief executive officers in large corporation get compensation packages in the range of hundreds of million of dollars, much of that is economic rent for exercising market power over employees under the executives’ management.  The CEO of Yahoo, Terry S. Semel was paid $231 million in 2005. There is no economic logic in the obscene disparity between executive pay and worker wages, which has increased by more than ten folds in past decades in the US, particularly when increased earnings are often achieved by shrinking the company through massive layoffs.  It defies logic why a company laying off employees should be considered a good investment, just as why a nation with a declining population should be considered a healthy nation.  It is sheer insanity that a CEO should be rewarded with millions in pay and perks for putting tens of thousands of workers in his/her company out of work.

The Iron Law of Wages Fallacy

Upon these odd concepts natural only to unique conditions associated with early industrialization and in the 19th century milieu of fascination with natural laws, Ricardo propounded his Iron Law of Wages, a blatantly anti-labor theory of value.  The Iron Law of Wages asserts that wages naturally drift towards minimum levels and cannot possibly rise above subsistence levels, notwithstanding the purpose of civilization being to modify the adverse effects of nature.  Economics, as a dismal science, has too long been accepting the malignant effects of human construct as natural laws, rather than treating exploitation, greed and injustice as flaws in the human condition that needs to be contained by a rational structure that rewards good and penalizes evil. To be logical is not always the equivalent of being rational. The labor theory of value maintains that in exchange, the value, though not the market price, of goods is measured by the amount of labor expended in their production.  The intrinsic value of labor then is the starting point against which all other values are constructed. When the intrinsic value of labor is high in an economic system, the resultant society is good in the philosophical sense of the word. When the intrinsic value of labor is low, the resultant society is not good. When the market price differs from intrinsic value, it causes either inflation or deflation, producing drags on economic growth. With the current international financial architecture of fiat currencies lorded over by dollar hegemony, differential between market price and intrinsic value is magnified, usually at the expense of those producing the goods, for the benefit of those in command of market power. Current Wall Street philosophical rationalization notwithstanding, greed is not good. Greed is not to be confused with merely benignly wanting more; it is “wanting more” to the point of blindly risking self destruction.

On interest, the rent for money, Ricardo had little to say. He observed that money, by which he meant specie money based on gold which Britain does not produce and must import, not fiat money which any sovereign government could produce at will if freed from dollar hegemony, “is subject to incessant variations from its being a commodity obtained from a foreign country, from its being the general medium of exchange between all civilized countries, and from its being also distributed among those countries in proportions which are ever changing with every improvement in commerce and machinery, and with every increasing difficulty of obtaining food and necessaries for an increasing population.  In stating the principles which regulate exchangeable value and price, we should carefully distinguish between those variations which belong to the commodity itself, and those which are occasioned by a variation in the medium in which value is estimated, or price expressed.”  After the collapse in 1971 of the Bretton Woods regime of gold-backed dollar, fixed exchange rates and restricted cross-border flow of funds, the resultant international financial architecture of fiat currencies based on the dollar as the head of the snake of fiat currencies, has made impossible such distinction between intrinsic variation of commodities and variation in the medium of exchange.  This has created a disconnection between price and value in international trade, in favor of the dollar economy at the expense of all non-dollar economies.

Natural Price and Market Price of Labor

Ricardo asserted that a rise in wages due to inflation produces no real effect on profits as prices of products also rise.  This is known in modern times as cost of living increases of wages or inflation indexation.  A rise in real wages ahead of inflation has a direct effect in lowering profits unless the economy is plagued with overcapacity which rarely happened if at all during the early decades of industrialization that Ricardo observed.  Labor, when purchased and sold as a commodity, may increase or diminish quantitatively in supply and has a natural price and a market price. The natural price of labor, according to Ricardo, is that price which is necessary to enable laborers to subsist and “to perpetuate their race without either increase or diminution.”  But there is nothing “natural” about Ricardo’s natural price of labor. What Ricardo called natural was actually merely a pervasive artificial socio-political regime.  In that regime, as then existed in Britain, population grew naturally without intervention and the growth tended to be concentrated on the laboring poor who had the least capacity to intervene on their fate in society.  Ricardo’s natural price of labor depends on the price of the food, necessities, and conveniences required for the support of the laborer and his often large family.  But in a functional economy in a civilized society, the natural price of labor should be based on society’s concept of a good and decent life, which includes ample leisure to cultivate body and spirit, opportunity for advancement, occupational safety, health care and insurance, free education, affordable housing and retirement benefits.  Subsistence has taken on different, more equitable and humane meanings since the early days of the Industrial Revolution.

Ricardo granted that with technological and social progress, the natural price of labor always has a tendency to rise, while the natural price of commodities, excepting raw material and labor, has a tendency to fall because of innovation that improves productivity.  The market price of labor is supposed to be determined by supply and demand.  Unemployment then is a condition that depresses the market price of labor by increasing the supply of labor to saturate demand.  Companies increase short-term profit by laying off workers, notwithstanding that an increase in unemployment shrinks aggregate demand that eventually reduces corporation profits. When the market price of labor exceeds its natural price, the condition of the laborer is flourishing and happy.  But Ricardo reasoned that high wages give rise to population growth, increasing the supply of labor to cause wages to again fall to their natural price, and indeed from overreaction sometimes fall below it.  So goes the argument for population control for the good of the laboring class, or as Ricardo put it, “the laboring race” since the characteristics and economic role of workers were largely hereditary due to social immobility. The Christian Church, having for most of its history allied itself with establishment interests, opposes birth control for more than religious and moral reasons in the industrial age, when a surplus of workers was always good for business. Actual data contradicts this theory.  Birth rates in advanced economies where wages are high actually fall as middle class families discover the financial advantage of not having too many children and the low income families also find having many children a financial burden, particularly after the introduction of child labor laws.

When the market price of labor is below its natural price, the condition of laborers is wretched and poverty results.  It is only after their privations have reduced population increase, or the demand for labor has increased through economic growth, that the market price of labor will rise to its natural price, and that the laborer will have the moderate comforts which the natural rate of wages will afford.  Ricardo argued that notwithstanding the tendency of wages to conform to their natural rate, their market rate may be constantly above it in an improving and progressive society for an indefinite period.  Thus, with every improvement of society, with every increase in capital, the market wages of labor will rise; but the sustainability of their rise will depend on whether the natural price of labor has also risen; and this again will depend on the rise in the natural price of those necessities on which the wages of labor are expended.  As population increases, these necessities will be constantly rising in price, because more labor will be necessary to produce them and more people are consuming them.

If the money wages of labor should fall, while every commodity on which the wages of labor are expended rise, workers would be doubly affected, and would soon be totally deprived of subsistence.  Instead of the money wages of labor falling, they would rise; but they would not rise sufficiently to enable the laborer to purchase as many comforts and necessaries as he did before the rise in the price of those commodities.  Ricardo concluded that these are the iron laws by which wages are regulated, and by which the happiness of far the greatest part of every community is governed.   Labor then has a self interest in assuring the profitability of employers.  This has been a self-regulating attitude since adopted by the labor union movement, putting labor at a constant disadvantage in contract negotiations.  Employee ownership is usually offered only when company profit falls toward or below zero.

Capital Needs Labor More Than Labor Needs Capital

Yet the real natural law is that capital needs labor more than labor needs capital.  Without capital, labor can still produce, albeit less efficiently, but without labor, capital cannot exist and remains only as idle assets.  Money does not invest in the desert, even oil fields need workers. The reason money market funds pay rent for the money in the form of interest is that the money is lent to some entity that invests in enhancing labor productivity. The holding of idle assets can only be profitable under conditions of inflation in which price appreciation exceeds the real and opportunity cost of holding. But inflation in neoclassical economics is defined primarily as wage-pushed. Thus even idle assets need rising wages to keep its value. The market price of labor should always be such as to eliminate economic rent (excess profit) for capital.  Labor has the power to eliminate economic rent on capital, for capital has nowhere else to go besides investing to increase labor productivity.  At this point of confrontation, government, controlled by capital, usually steps in to break up strikes for higher wages, to make owners of capital rich at the expense of labor, by making society pay the hidden price of a lower level of national wealth.

Ricardo argued that like all other contracts, wages should be left to the fair and free competition of the market, and should never be interfered with by government.  He saw the clear and direct tendency of the welfare laws and labor regulations as in direct opposition to these obvious principles: it is not, as social legislation benevolently intended, to amend the condition of the poor, but to deteriorate the condition of both poor and rich; instead of making the poor rich, they are calculated to make the rich poor, thus forfeiting savings and investment needed for economic growth.  And while the welfare laws are in force, the maintenance of the poor would progressively increase till it has absorbed all the net revenue of the nation.  “This pernicious tendency of these laws is no longer a mystery, since it has been fully developed by the able hand of Mr. Malthus; and every friend to the poor must ardently wish for their abolition,” Ricardo wrote.  While this observation is narrowly rational, Ricardo did not point out that the way to get out of the welfare trap is through full employment with living and rising wages.

In Ricardo’s view, poverty is not the result of the rich getting more than the poor, but the result of economic underdevelopment due to lack of savings.  This has been the position adopted by most market liberals.  Yet it is a fantasy to claim the existence of a free market for labor or that unemployment can provide savings for the unemployed.  The labor market remains the most politically regulated commodity market in the international political economy where disparity of mobility between capital and labor is extreme.  At the height of the high-tech bubble, Alan Greenspan, chairman of the US Federal Reserve Board, testified before Congress that if low-wage workers overseas cannot move to fill jobs in the developed economies due to immigration constraints, the jobs will have to migrate to the workers in the developing economies to avoid inflation.  The new Iron Law of Wages now operates in the globalized economy on cross-border wage arbitrage to produce low prices for consumer products in the high-wage economies that fewer and fewer consumers can afford because of rising job loss in high-wage economies.  Countries like China and India are trading in their progressive socialist programs for Dickensian industrial hell while advanced economies like the US have become voluntary victims of home-grown economic imperialism that comes with dollar hegemony.  There was never a more ripe time to revive labor solidarity as now.  The most promising solution appears to be a global cartel for labor in the form of OLEC.

A Global Cartel for Labor Is Needed to Reverse Anti-labor Terms of Global Trade

The year of US independence, 1776, was a year of grand treatises in economics and politics.  Adam Smith published his Wealth of Nations, the Abbé de Condillac his Commerce et le Gouvernement, Jeremy Bentham his Fragments on Government and Tom Paine his Common Sense.  British mercantilism had led to a rebellion by the colonists in North America to establish a home-grown liberal republican government dedicated to laissez-faire, a statist policy against monopolistic mercantilism and in opposition to British “free-to-exploit” trade in the name of free trade.  Today, job protection by governments should not be mistaken as trade protectionism. As long as a world order of nation states exists, economic nationalism must be the basis of international trade.  Trade must enhance national wealth for all participating nations, not merely to enrich global transnational capital at the expense of universal economic democracy.  National wealth is directly dependent on high wages.  In a global economy, the decline in wealth in some nations will cause the decline in wealth in all nations. Terms of trade that depress wages are economically regressive, and should be reordered by a global cartel for labor.

Markets are not natural phenomena.  As Karl Polanyi (1886-1964) pointed out, markets are recent developments in human history.  Capitalism is a historical anomaly because while previous economic arrangements were "embedded" in social relations, in capitalism, the situation is reversed - social relations are defined by economic arrangements.  In human history, rules of reciprocity, redistribution and communal obligations were far more frequent than market arrangements. Furthermore, not only does capitalism not exhibit historical humanistic values, its ascendancy actually destroys such values irreversibly.

Free markets are an oxymoron. Government is fundamentally involved in markets through the very creation and enforcement of property rights, an artificial socio-political concept without which markets cannot exit.  Government regulation is also indispensable in preventing the natural emergence of monopolies in unregulated markets.  Free markets for labor do not exist because of a disparity of market power between employers and employees.  Workers must work to earn current income to feed their families daily. Subsistent wage means workers have no savings to get them through rainy days.  Entrepreneurs can delay investing their capital until the market price of labor is right.  Hunger quickly destroys labor’s market power and lowers the market price of labor to near or even below subsistence levels.  Thus the prevalent monopoly of capital needs to be countered by a cartel for labor.

Problems with the Iron Law of Wages

Notwithstanding the disparity of bargaining power between capital and labor which prompted Marx to call on workers in 1848 with a battle cry of “nothing to loose but your chains,” there are two other problems with Ricardo’s Iron Law of Wages. The first is something Henry Ford figured out a century after Ricardo. Ford realized that workers who were paid at subsistence levels could not afford to buy the cars they made in his factories. Ford worked out a wage-price ratio under which his workers would have enough money after basic living expenses to buy and finance the cars they produced.  In the new industrial democracy, Ford was able to sell many more cars than his competitors who eventually went bankrupt selling only to the very rich. By paying his workers well, Ford became super rich, more than his competitor who sold only to the rich.  The more workers he hired, the more cars he sold.  Before globalization, US auto giants helped build the world's most affluent middle class by paying wages far above subsistence levels and by providing generous vacation, health and pension plans. Auto sector wage pattern spurred other sectors to raise compensation levels creating continuous rises in consumer demand.

This happy approach to high wage income has been reversed in past decades by the likes of Wal-Mart, with $256 billion in annual sales and 20 million shoppers visiting its stores world-wide each day. Wal-Mart is now doing just the opposite of what Henry Ford did. Wal-Mart profits from its regressively low wages and meager employee benefits: paying its US retail workers less than $18,000 a year on average (below the 2005 US poverty line of $22,610 for families with three children) and its outsourced supplier workers overseas less than $4 a day, or $1,000 a year.  Wal-Mart workers cannot afford the low-price goods sold in Wal-Mart stores. Wal-Mart takes away the good shirt off the US worker’s back plus his/her health insurance by outsourcing his/her job and sells back to him/her a lower-price shirt made overseas without the health insurance.

Population growth can be translated into growth markets with rising wages.  That formula had been the fountainhead of the rapid growth of national wealth in the US.  Demand management had been generally accepted as indispensable in market economies since the New Deal when US President Franklin D. Roosevelt adopted Keynesianism after the 1929 stock market crash.  An aging population coupled with a fall in births rate will drain demand from the economy and contract the national wealth.  The process is exacerbated by the need to maintain structural unemployment and low wages to preserve the value of money.

The second problem with Ricardo’s Iron Law of Wages is that it fails to recognize that the working population is the fundamental asset from which a nation derives its wealth.  By adopting policies based on an economic theory that structurally keeps wages at their lowest levels, a nation condemns itself to the lowest possible level of national wealth.  Post-1978 Chinese reform policies, by using low wages as the main competitive factor of production, supported by lax regulation against environmental abuse, is a classic example of policy-induced below-par generation of national wealth, despite its high GDP growth rate and rising labor productivity.

Say’s Law of Markets (Supply Creates Its Own Demand) Valid Only Under Full Employment

Supply-side economists have in recent decade promoted the arguments of Say’s Law.  In 1803, Jean-Baptiste Say (1767-1832) published his Treatise on Political Economy in which he outlined his famous Law of Markets.  Say's Law claims that total demand in an economy cannot exceed or fall below total supply, or as James Mill (1773-1876) elegantly restated it, “supply creates its own demand.”  In Say’s language, “products are paid for with products” or “a glut can take place only when there are too many means of production applied to one kind of product and not enough to another.”  Yet, as post-Keynesian economist Paul Davison has pointed out insightfully, Say’s Law only applies under conditions of full employment, a condition that cannot exist under supply-side theory of using unemployment as a necessary device to keep down wages, the increase of which is defined as the main cause of inflation.  If aggregate effective demand is sufficient to make it profitable for employers to hire all the available workers - even if they have to pay more than subsistence wages, they will gladly do that, to expand the size of the market. The message of Keynesian economics is that in a full employment economy, workers and entrepreneurs are not adversaries.  Monetarists use tight money to keep unemployment at as high a level as politically acceptable to control inflation, that is to say, to protect the value of money at the expense of worker income. This approach leads inevitably to overcapacity, for while a general glut of goods may be theoretically impossible, a general glut of savings is now a reality. The flood of corporate profit is having difficulty finding new reinvestment opportunities because wages are too low to sustain needed consumer demand.

Born in Lyons to a family of textile merchants of Huguenot extraction, Say, after spending two years in England apprenticed to a merchant, took a job in 1787 at an insurance company in Paris run by Étienne Clavière (1735-1793) who later to become Minister of Finance.  An ardent republican, Say supported the French Revolution and served as a volunteer in the 1792 military campaign to repulse the allied armies aiming to restore the Monarchy.  Say was also influenced by Adam Smith and became a laissez-faire economist, known in France as the ideologues, who sought to re-launch the spirit of Enlightenment liberalism in republican France, pursuing classical economics while rationalizing the role of utility and demand.  They also avoided classicalist pessimism on the Iron Law of Wages, the unavoidable rise of rents, the wage-profit trade-off, inevitable unemployment caused by labor-saving mechanization, general gluts, etc., preferring instead to emphasize the happier harmonies between unequal economic classes and the infallibility self-regulating markets.  Politically, that meant upholding a radical laissez-faire line, washing it of its statist component.  Ideologues were French counterparts of the British Manchester School but with more vigorous theory and a good deal of optimism.  Karl Marx (1803-1883) would later deride them as the “vulgar” economists.

The rise of Napoleon Bonaparte, who sought to create an imperial war economy buffeted by economic super-national protectionism and regulation within the Continental System, led to official suppression of the global vision of the Ideologues.  Yet, the radical laissez-faire notions expounded in Say’s 1803 Treatise caught the attention of the revolutionary in Napoleon.  Summoning Say to a private audience, Napoleon demanded that Say rewrite parts of the Treatise to conform to the Napoleonic imperial war economy, built on super-national protectionism and regulation within the French empire, to which Say respectfully refused.  Napoleon then banned the Treatise and had Say ousted from the powerful Tribunate in 1804.  Declining the offer of another post as compensation, Say moved to Pas-de-Calais and set up a cotton factory at Auchy-les-Hesdins.  Defying his own theory, Say grew fabulously rich supplying cloth not to the market but to meet the war demand for uniforms by the Grande Armee, protected by a protectionist Napoleonic Continental System from formidable British competition.   In 1812, Say sold his factory at great profit and returned to Paris to live as a war speculator with his capital.  After 1815, the restored Bourbon rulers, eager to please the victorious British who restored them, showered the remnants of the Ideologues with honors and recognition, initiating in France the long British tradition of close alliance between liberalism and the establishment, along the line of Charles Dickens, who having critically exposed the everyday evils of industrial capitalism, went on to condemn the French Revolution for being excessively inhumane.

Dysfunctional Economic Theories on Unemployment

Phillips Curve

The “Phillips curve” purports to show that the annual percentage rate of inflation consistently increases whenever the percentage rate of unemployment decreases. The observation originated in 1958 when A.W. Phillips documented a relationship between unemployment rates and changes in wage rates in the United Kingdom, again before globalization. Other economists liked the idea, but not the details, and replaced wages with prices, predicting that the unemployment rate would be negatively correlated with the annual inflation rate, being that inflation is defined as primarily wage-pushed. This re-invented relationship was confirmed by US economic data for the 1950’s and 60’s, but was contradicted by U.S. data for later years.

The U.S. economy achieved combinations of growth and inflation in recent years that many economists thought were no longer attainable. With the unemployment rate below most estimates of the NAIRU (Non Accelerating Inflation Rate of Unemployment) and falling for the few years before 2000, many Phillips curve-based forecasts predicted that inflation should be rising. However, inflation has generally remained stable or even declined because of globalization (cheap imports). Many observers have attributed this anomalous behavior to special factors, such as large declines in import prices associated with the 1997 Asian financial crisis and the appreciation of the dollar by default.

Important among those imports was crude oil, whose price fell from roughly $23 per barrel in the fourth quarter of 1996 to just over $10 at the end of 1998. Oil is now over $60 and most analyst anticipate it to stay above that level for the foreseeable future  Since energy prices are a component of many Phillips curve models--the principal tool used by economists to explain inflation--answers to these questions could be read directly from model estimates. However, the Phillips curve literature has largely ignored a substantial and growing body of evidence that oil prices have asymmetric and nonlinear effects on real activity, as well as that structural instabilities exist in those relationships. Since around 1980, oil price changes seem to affect inflation mostly through their direct share in a price index, with little or no pass-through into core measures. By contrast, before 1980 oil shocks contributed substantially to core inflation. The econometric evidence for this result is highly significant