World Trade Needs a
Global Cartel for Labor (OLEC)
By
Henry C.K. Liu
Part I: Background and
Theory
Part II: Rising
Wages
Solve All Problems
This
article appeared in AToL
on March 7, 2006
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 and is
robust to
different economic activities, oil price, and inflation measures,
changes in
sample coverage, and lag specification. There are several reasons why
the
relationships between oil prices and macroeconomic variables might be
difficult
to identify. One is the time series behavior of oil prices themselves.
Okun’s Law
In his original 1962 research “Potential GNP: Its
Measurement and Significance,” economist Arthur M. Okun (1928-80),
chairman of
the Council of Economic Advisors under Lyndon Johnson, found that a 1% decline in the
unemployment rate was, on
average, associated with additional output growth of about 3%. Okun’s
Law is
now widely accepted as stating that a 1% decrease in the unemployment
rate is
associated with additional output growth of about 2%. But since data
from the
period validating the law fell only within the range of unemployment
rates from
3 to 7.5%, Okun’s Law is interpreted as not applicable to zero
unemployment. In 1993, Okun’s law would
have had GDP growth
increasing substantially, whereas it in fact fell relative to 1992. The
reverse
occurred in 1996: GDP growth was higher than in the prior year, despite
the
decline predicted by Okun’s Law. Of course Okun’s Law did not take into
account
the impact of globalization on growth and unemployment. Okun believed
that
wealth transfers by taxation from the relatively rich to the relatively
poor
are an appropriate policy for government, by recognizing the loss of
efficiency
inherent in the redistribution process, he set limits on the benefits
of
redistribution. But the solution is not
to take from the rich, but to prevent more from flowing unfairly to the
rich.
Granger Causality
The stock market is the score-keeping arena of capitalism. The
procedure for testing statistical causality between stock prices and
the
economy is the direct “Granger causality” test proposed by C. J.
Granger in
1969. Granger causality may have more to do with precedence, or
prediction,
than with causation in the usual sense. It suggests that while the past
can
cause/predict the future, the future cannot cause/predict the past.
According to Granger, X is said to cause Y if the past
values of X can be used to predict Y more accurately than simply using
the past
values of Y alone. In other words, if past values of X statistically
improve
the prediction of Y, then we can conclude that X "Granger-causes" Y. Given the controversy surrounding the Granger
causality method, empirical results and conclusions drawn from them
should be
considered as suggestive rather than absolute. This is especially
important in
light of the recurring “false signals” that the stock market has
generated in
the past. The stock market has traditionally been viewed as an
indicator or
“predictor” of the economy. Many believe that large decreases in stock
prices
are reflective of a future recession, whereas large increases in stock
prices
suggest future economic growth. But everyone knows that stock prices do
not
always reflect market fundamentals, only market participant sentiments,
which
is the stuff of technical analysis. Such
sentiment includes herd instinct and panic. There is also the dynamics
of
overshoots and over-corrections. Yet in
the age of finance capitalism, finance dictates the fate of the real
economy.
Granger Causality has been used to compare stock market
prices with changes in GDP, allowing phase correlations between the two
to
predict future GDP based on prior stock market trends (the 1987 crash
being a
paradigm shift engineered by the Wizard of Bubbleland?). It is thus
primarily a
creature of econometric models. An absurd
example of statistical causality would be: John drives to work on the
highway
around 8 am every morning, Monday to Friday, but not Saturday or
Sunday. On
exactly the same days, a torrent of traffic hits the highway about 15
minutes
after he drives on it, but not on the days that he doesn't. Therefore
there is
statistical causality in that John causes the tide of traffic to follow
him 15
minutes after his passage. That's the kind of nonsense that Granger
Causality
can get you into. Economists use it with great caution as it has many
hidden
traps, such as the quality of input data and ignorance or oversight of
other
external causal variables.
The traditional valuation model of stock prices suggests
that stock prices reflect expectations about the future economy, and
can therefore
predict the economy with self-fulfilling dependability. The “wealth
effect”,
former Fed Chairman Alan Greenspan’s frequent term, contends that stock
prices
lead economic activity by actually causing activities in the economy,
thus is regarded
as support for the stock market’s predictive ability. Critics, however,
point
to a number of reasons not to trust the stock market as an indicator of
future
economic activity. They argue that the stock market has previously and
repeatedly generated “false signals” about the economy, and therefore,
should
not be relied on as an economic indicator. The 1987 stock market crash
is one
example in which stock prices falsely predicted the direction of the
economy
before and after the crash. Instead of reflecting continuing growth,
the market
hit a brick wall and the economy entering into a recession which many
expected
to last a few years, but with the Fed liquidity cure, the economy
quickly
recovered and continued to grow until the early 1990's.
Even when stock prices do precede economic activity, a
question that arises is how much lead or lag time should the market be
allowed.
For example, do decreases in stock prices today signal a recession in
six
months, one year, two years, or will a recession even occur? An
examination of
historical data yields mixed results with respect to the stock market’s
predictive ability. From 1956-1983, stock prices generally started to
decline
two to four quarters before recessions began. Stock prices also began
to rise
in all cases before the beginning of an economic expansion, usually
about
midway through the contraction. Other studies have found evidence that
does not
support the stock market as a leading economic indicator. A study
indicates
that between 1955 and 1986, out of eleven cases in which the Standard
and
Poor's Composite Index of 500 stocks (S&P500) declined by more than
7% (the
smallest pre-recession decline in the S&P500), only six were
followed by
recessions. Furthermore, another study found that stock price collapses
predicted three recessions for the years 1963, 1967 and 1978 that did
not
occur.
Now, the question is: can unemployment be eliminated through
growth? The answer seems clearly no, if
unemployment is viewed in macroeconomics as a flexible but necessary
component
to keep inflation low for growth. The
Phillips Curve seems to suggest that unemployment is necessary for
growth. In
truth, the only cure for unemployment is to make unemployment
unacceptable,
like a pandemic disease. Policymakers
need to set full employment as a goal even if it means a lower growth
rate, or
to assign a heavier penalty for unemployment in the measurement of
growth. In other words, there can be no
growth
registered if there is unemployment. Zero
unemployment must be the sine
quo non of registering growth. By definition, 1% unemployment must
be
registered as 2% negative growth, rising on a geometric rate, with 2%
unemployment
registered as 4% negative growth. Then
policymakers would not be toasting themselves with Champaign for their
incredible growth rates while ten of millions are still out of work. A global cartel for labor can act as an
institutional lobby for changing anti-labor economic concepts and
formulae.<>
The Idea of a General
Glut
Classical and neoclassical theories are mostly based on the
simplistic, even tautological assertion of supply creating its own
demand.
Classical economists were aware of the existence of widespread systemic
unemployment, which was later called structural unemployment by
monetarists,
and that markets could and regularly did fail if unregulated. But in their quest for universal truth at the
expense of pragmatic reality, they concluded that these were due to
excess
supplies and demands of particular
commodities and not excess supplies (or gluts) of commodities on a
macro scale;
in other words, problems of sub-optimization caused by market
inefficiency. But markets exist only
because of sub-optimization inefficiency, otherwise, if everyone
produces only
what he needs or what his neighbors would readily absorb, there will be
no
surplus to trade. Ricardo was supported
by James Mill (1773-1836), father of John Stuart Mill (1806-1873) of On Liberty fame. A partisan
of the Banking School, James Mill
also participated in the Bullionist Controversies of the time, arguing
against
gold parity. (see: http://www.atimes.com/atimes/Global_Economy/DK06Dj01.html)
He wrote an essay which
reviewed the
history of the Corn Laws, calling for the removal of all export
bounties and
import duties on grains and criticizing Malthus for defending
them. Mill opposed
the views of William Cobbett (1763 - 1835) who championed traditional
rural
England against the changes wrought by the Industrial Revolution, and
Thomas Spence
(1750-1814), who was strongly influenced by Tom Paine and argued that
all land
should be nationalized. Cobbett argued
that land (rather than industry) was the source of wealth, that there
were
losses to foreign trade between nations; that the public debt was not a
burden; that
taxes were productive and that crises were caused by a general glut of
goods. A general glut is the equivalent of
overcapacity in today’s global economy.
Mill’s Commerce Defended (1808) attacked all of these
arguments, dismantling them point by point. Ricardo
extended this proposition to savings
and investment. If one produces more than
one consumes, then
the surplus is saved and by definition traded or invested.
No one would produce in excess of consumption
needs if one does not have a desire to either exchange the products or
invest
its profits. Supply, therefore, creates demand. Virtually all classical
economists held this to be an irrefutable truth. James Mill's Elements
of
Political Economy, (1821) quickly became the leading textbook
exposition of
doctrinaire Ricardian economics.
But in a truly efficient market, only a fool will produce more
than he can consume through exchange. Markets
are the composite of well-meaning
fools thinking they act in
their self interest, but in fact act in their own self disadvantage
which they
then seek to recover through the market. Thus
a general glut is unavoidable through
aggregate sub-optimization. It
is by extending this mentality that Ben Bernanke, the new chairman of
the
Federal Reserve, concludes that free trade has produced a global glut
of
savings, by denying that in this post-industrial age of finance
capitalism, it
is demand that creates it own supply, not the other way around. And rising demand comes only from full
employment at rising wages for a growing population.
Inadequate demand creates gluts.
Thus demand management is the challenge of
the post-industrial finance economy. To meet this challenge, a global
cartel
for labor is necessary.
Ricardo also suggested the impossibility of a "general
glut" (an excess supply of all goods) as over production in one sector
results necessarily in underproduction in other sectors so that an
aggregate
general glut cannot emerge. While this
assertion is theoretically promising, it has since been invalidated by
events
in recent decades when overcapacity has become the curse of the global
economy,
albeit that the overcapacity in manufacturing is actually the result of
under-capacity
of social services.
Rent Must Be Spent on
Worker Benefits to Prevent a General Glut
Ironically, Malthus and the French economist, J.C.L. Simonde
de Simondi in their belief in the inevitability of a general glut,
became
exceptions to the classical economist’s faith in perfect markets. They argued that income comes as wages to
workers, as profit to entrepreneurs and as rent to landowners.
Classical
economics ordains that wages are consumed and profits reinvested, but
make no
stipulation as to what happens to the rent received by landowners who
presumably may choose to consume or not to consume it.
As long as profits are positive, worker
income is mathematically less than output, a general glut of goods will
result even
if the investment-savings equivalence holds, if land owners fail to
consume
their rent in peace or waste it on war.
Under feudalism, before the ascendance of the bourgeoisie,
rent goes mostly to building of palaces and elaborate manor estates and
patronage of art and architecture to prevent the emergence of a general
glut. Malthus
made the famous argument that landlord consumption functionally
increased to
“fill” the general glut, an argument that framed itself as a scientific
apology
for feudalism in which the aristocracy owned the land by birthright and
consumed conspicuously, leaving behind in posterity a network of
tourist
attractions in the form of grand palaces and heroic monuments. Since landlords do not produce anything,
nothing is added to output by their conspicuous consumption, but their
very
unproductiveness is actually functionally necessary since it maintains
demand
for goods and services, particularly those not affordable by the poor,
while at
the same time reduces investment that may lead to a general glut, not
to
mention bringing art and culture into civilization.
But if landlords should hold back consumption
in peace time, a general glut will be unavoidable that would inevitably
lead to
war. In post-monarchal societies, the
state has replaced the land-owning aristocracy, and the state must
spent its
rent income in the form of social services, such as heath care,
education,
retirement benefits, environmental protection and cultural subsidies,
the soft
monuments of civilization, to prevent a general glut.
Instead of palaces, the state must build
universities and research centers, physical and social infrastructure.
This is
the strongest economic argument for a welfare state, not
humanitarianism. To
the extend wages are raised to high levels, and rent reduced, the
threat of a
general glut will be reduced. Thus only
high wages with full employment can remove the regressive need for
welfare
statehood, not volunteerism in charity. A
global cartel for labor then is the best way
to do away with the
humanitarian need for a welfare state and to allow the state to refocus
on it
economic role of spending rent on education, physical and social
infrastructure
and environmental preservation.
Malthus's identification of the landlord class as
functionally necessary and beneficial stands in stark contrast to
Ricardo view
of its members as parasites. It had been
the fundamental question behind the class struggle between the
land-owning
aristocracy and the rising bourgeoisie that gave rise to the French
Revolution
which had influenced the views of both Ricardo and Malthus. The post-Revolution French bourgeoisie gained
economic dominance by manipulating the hungry masses against the
aristocrats,
yet politically failed to achieve full control of the state apparatus. The power struggle after the French
Revolution and during the Age of Napoleon between the land-owning
bourgeoisie
and the rising factory-owning industrialists had no class content, only
an
intra-class rivalry, as reflected in the British Corn Law controversy
(http://atimes.com/global-econ/DE01Dj01.html),
not until the industrialists won and produced a social structure of
mobile
capital investing in labor productivity that led to the Revolutions of
1848 in
which the first modern class struggle ended in failed democratic
revolutions.
The original Corn Laws in 1360 were a set of regulations restricting
the export
or import of grain to keep English grain prices low, in defiance of the
Law of
One Price. The purpose of the laws was to assure a stable and
sufficient supply
of grain from domestic sources, yet allowing for import in time of
dearth. The
Corn Law of 1815, in contrast, was designed to maintain high farm
prices, also
in defiance of the Law of One Price, much like today’s agricultural
subsidies,
and to prevent an agricultural depression after the Napoleonic Wars.
Since its
repeal in 1846, industrialism became the governing force in England and
worldwide
free trade its policy which consolidated British control of the sea and
the
spread of official British imperialism and its network of colonies that
constituted the British Empire. The Opium War in China took place in
1840.
This development accelerated the growing consolidation of industrial
capitalism
with colonialism under government protection. National income for the
imperialist countries grew, but a relatively small portion of it went
to
domestic workers beyond subsistence. National wealth grew independent
of
domestic wages through the exploitation of colonies. National income
between
the home country and its colonies also polarized, as between those
nations with
empires and those without, setting off a race to acquire colonies even
among
minor European states such as Holland and Belgium.
The national wealth of Britain skyrocketed
with modern factories, palatial country estates and financial
institution
stocked with gold alongside slums of the working poor.
The new industrial empires were built on low
wages both domestically and overseas.
The accumulation of capital led to a need for a regime for the export
of
capital in the overseas quest for low cost raw material and labor, as a
way of
keeping domestic wages low even as general living standards rose. Workers were then told by the Manchester
School
intellectuals that the income of workers is set by ineluctable laws of
economic
science, that it is best and necessary to keep wages low and that the
way to a
better life is to leave the working class and to ape the employer, or
eventually become a Labor Lord through unionism. This advice was given
notwithstanding
that British society at that time provided not the slightest social
mobility
dues to its rigid class structure institutionalized by an education
system
based on exclusionary social manners and elocution. Elaborate labor
price
theories were concocted with circular data justifying the theories,
explaining
circularly that very same data as scientific truth, eventually leading
to the
theory of non-accelerating inflation rate of unemployment (NAIRU), a
theory
that argues circularly that structural unemployment is necessary to
curb
inflation and that uncurbed inflation only creates more unemployment.
The Concept of a Labor Market
The concept of a labor market was promoted by market liberalism
as a reigning doctrine to reinstitute a new form of slavery for the
industrial
age. The institution of slavery is predicated on the legal treatment of
humans
as property to be bought and sold. In a fundamental sense, slavery is
dependent
on the rule of law in the protection of property over morality and
humanity.
The growing wealth of Rome and the protection of property by Roman law
led to a
sharp increase of in both domestic and estate/plantation slaves whose
land-owning masters had absolute power over them. Manumission was
mostly a
financial transaction. Spartacus led a slave revolt against Rome in 73
B.C. He
was killed in battle and the slave revolt suppressed within a year.
Pompey,
back from conquest of Spain, annihilated the movement, crucifying 6,000
captured
slaves along the Capua-Rome highway as a warning for future generations. Nevertheless, the revolt served as warning to
landowners against excessive mistreatment of slaves.
At the end of World War I, Karl Liebnecht and Rosa Luxemburg
led a group of radical German socialists to form the Spartacus Party to
typify
the modern wage slave in revolt like the Roman Spartacus.
Spartacists demand
the dictatorship of the proletariat by
mass action and officially
transform themselves as the German Communist Party. On January 5, 1919,
a
massive workers demonstration was brutally suppressed and Liebnecht and
Luxemburg were arrested in few days later and murdered while in custody.
Both Christianity and Islam accepted slavery. The
manorial economy of feudalism transformed
slaves into the serfs or villeins. The Black Death (1347) depleted the
supply
of labor and opened a window of freedom for European serfs by giving
them more
market power. In China, Marxist
historians view the struggle of the emerging landlord class to replace
the
slave-owning society that began in the Zhou dynasty (1027 to 221 BC)
part of a
revolutionary dialectics.
In the industrial age, emancipated slaves became free agents
but labor remained a commodity, sold by the laborer and bought by the
employer
in a fantasized free market, the ideal of which would be totally free
labor -
at zero net cost to the employer beyond the cost of keeping the worker
alive.
Thus the English language is insightful that "free" means both the
ability to choose and a state of no cost for something not quite
worthless in a
price regime. Yet the value of capital is fundamentally different. The rent for money is interest, while the
intrinsic value of money is its purchasing power. With labor, the rent
of labor
is wages, while there is no intrinsic value for labor without
employment and
the capitalized value of labor is the discounted value of a worker’s
lifetime
aggregate wage potential. Thus humanity
is denied of capital value by neoclassic economics. Yet the mobility of
capital
is not matched by mobility for labor, which remains fixed in location
by
exclusionary immigration laws. The US was the only nation that had a
welcoming
immigration policy, albeit openly racist until recently, which
contributed
significantly to the rapid rise of US national wealth.
The hourly wage serves the employer better than no-wage slavery
served slave-owners. The employer is not even obliged to pay living
wages,
passing much of the cost of a decent life onto state-financed social
welfare programs,
as the slave owner had to bear the fixed cost of keeping slaves alive
and
healthy for productive work. The labor market is described as being
governed by
the laws of supply and demand. Employers
can layoff workers to response to business cycles caused mostly by
overinvestment. Low wages are tolerated
as the neutral result of impersonal market forces, not immorality on
the part
of unprincipled management or misguided government policies. And surplus labor supply, like goods which
are stored in warehouses, are to be warehoused by poor relief to
prevent social
unrest. The economic concept of a free market for labor is that it is a
mechanism
to realize the lowest price for the buyer rather than the highest price
for the
seller, as in a cartel, which in modern industrial enterprises is
called a
union shop. The New Poor Law of 1834 in Britain safeguarded the labor
market
for employers by making unemployment relief more unpleasant than
below-living-wage
employment, supported with stern, self-righteous precepts of the dismal
science
as set out by Ricardo and Malthus.
Karl Marx’s critique of Malthus started from a position of
agreement. Marx's idea of capitalist production, however, is
characterized by
his concentration on the division of labor and his observation that
goods are
produced for sale for money in a market economy and not for consumption
or
barter for other goods. In other words,
goods are produced simply for the intention of transforming output into
money
as capital to purchase other commodities for more investment. Thus
advertising
becomes the means with which to convince the public to buy goods they
otherwise
do not need or want. The possibility of a lack of effective demand
therefore is
held only in the possibility that there might be a time lag between the
sale of
a product (the acquisition of money) and the purchase of another
commodity (its
disbursement) to add value by labor. This possibility, also originally
crafted
by Simondi in 1819, endorsed the idea that the circularity of
transactions was
not always, and in fact seldom if ever, complete and immediate. If
money is
held, Marx contended, even if for a little while, there is a breakdown
in the
exchange process and a general glut can occur. Moreover,
in finance capitalism, which arrived
after Marx’ life time,
money does get held speculatively to produce a general glut as an
opportunity
to buy cheaply for future profit.
Marx, like Malthus, also accepted the savings-investment
linked identification but reached a different conclusion. Since
investment is
part of aggregate demand, circulation does continue in time even if
money is
held. The drive for accumulation, Marx concluded, will continue
unhindered and
thus a general glut crisis of the sort Malthus described can never
happen and
if it did, would be practically inconsequential. What can happen, as
Ricardo
originally claimed, is that a single good may be oversupplied causing a
very
temporary and small adjustment of proportions which might seem as a
general
glut but in fact is not. Thus, all
classical
economists, except for Malthus and Simondi, were generally in agreement
over
the validity of Say's Law, at least in the long run and under
conditions of
full employment. They all also agree on the linked identification of
savings
and investment as well as the possibility of separating output and
price
theory. Thus when supply-siders
promote
supply-pushed economic stimulation while they accept unemployment as
structurally necessary for combating inflation, they are walking on
only one
leg of Say’s two-legged Law. This
shortcoming is significant because as long as unemployment is view as
necessary
for sound money, overcapacity will plaque the economy.
In 1815, Ricardo published his ground-breaking Essay on
Profits, in which he
introduced the differential theory of rent and the law of diminishing
returns
to land cultivation. With wages stuck at their natural level,
Ricardo
argued that rate of profit and rents were determined residually in the
agricultural sector. He then used the concept of arbitrage to
claim that agricultural
profit and wage rates would be equal to their counterparts in
industrial
sectors, showing that a rise in wages did not lead to higher prices,
but merely
lowered profits. In his formidable 1817 treatise, Principles
of
Political Economy and Taxation, Ricardo articulated and integrated
a theory
of value into his theory of distribution. For Ricardo, the
appropriate theory was the “labor-embodied theory of value”, or LETV,
i.e. the
argument that the relative ‘natural’ prices of commodities are
determined by
the relative hours of labor expended in their production at the natural
price
of labor.
With prices pinned down by the LETV, Ricardo restated
his original theory of distribution. Dividing the economy into
landowners
(who spend their rental income on luxuries or wars), workers (who spend
their
wage income on subsistence necessities) and capitalists (who save most
of their
profit income and reinvest it), Ricardo argued how the size of profits
is
determined residually by the extent of cultivation on land and the
historically-given real wage. He then added on a theory of
growth.
Specifically, with profits determined by the gap of market price over
natural
price, the amount of capitalist saving, accumulation and labor demand,
growth
could also be deduced. This, in turn, would increase population
and thus
bring more land of less and less quality into cultivation and use, such
as the
founding of colonies overseas or desert cities such as Los Angles and
Las
Vegas. Moreover, mechanization and innovation improve the yield
from land
and release labor from the agriculture sector into the industrial
sector which
pays higher wages, generating more demand and economic growth. Ricardo did not anticipate the emergence of
finance capitalism in which labor from industry would be released into
service
sectors and growth can be driven by financial engineering. Still,
wealth cannot
be detached from human capital. If the value of labor expressed as
wages is
kept low, growth can only come as financial bubbles. For this reason, a
global
cartel for labor is the solution to the current debt bubble in the
global
economy.
Modern Capital Comes
From Worker Pensions
As for accumulation of capital, modern finance has shown
that the bulk of capital comes nowadays from the pension funds of
workers,
which is the deferred income of currently employed labor. In the US
economy, no
one saves voluntarily any more, not because a change in the US
character, but
because with low wages and rising asset values not registered as
inflation, no
one can afford to save, having to spend all income plus accumulating
debt just
to manage. This is why the entire
economy is operating on debt. Most savings now come from pension funds
payment into
which the average worker has no legal choice but to contribute with
company
matching from his/her first day of work, with benefits not collectable
until
some three decades later.
Pension funds like CalPERS (California Public Employee
Retirement System), not even a private sector fund as it is all
government
employees, are huge and they are the new institutional
capitalists.
CalPERS alone holds shares in 1,600 US companies with assets of $167
billion in
2004. It owns so much equity and bonds that in many cases, such as The
Disney
Company, they cannot sell their share holdings without adversely affect
the
price of the rest of their holdings, much like foreign central bank
holdings of
dollars. Pension funds are forced to
stage shareholder revolts within corporate governance to change
ineffective
management to get the market price of its share-holdings back up.
That is
how Michael Eisner, Chairman of Disney, lost support of 45% of the
voting
shares and had to resign his chairmanship. CalPERS also opposed the
reappointment of former Citicorp Chairman Sanford I. Weill, and Chief
Executive
Officer Charles O. Prince as company directors. CalPERS
holds 26,712,930 Citigroup shares out
of 5.05 billion shares
outstanding. It said Citigroup would be "better served" by having an
independent director in the place of Mr. Weill. It
withheld votes for six other Citigroup
directors. It also withheld support from
Warren E.
Buffett, who was running for re-election to the Coca-Cola Company’s
board. The
fund also withheld votes for directors at ten other companies: Sprint,
Wachovia, PG&E, Burlington Resources, Charter One Financial, Mellon
Financial, South Trust, State Street, Stryker and Washington Mutual. Yet no pension has gone on record to
disinvest from corporations that outsource their clients jobs.
These pension funds operate like insurance companies,
spreading out their risk through the theory of large numbers by hiring
an army
of fund managers among whom they expect 5% would lose money, 40% would
break
even with the SP500 and 50% will beat the SP500 and 5% would do
spectacularly
with thousand-fold returns. Every year, they fire the
underperforming 5%
and bring in a new crop of replacement fund managers. Also the
actuary is
such that pensioners die and stop collecting retirement benefits way
before the
principle are consumed, so the funds get bigger and bigger over time,
like a
giant mushroom in a financial science fiction. These pension
funds are
like a virus, feeding on workers whose retirement money they control
for their
own institutional obsession on growth at the expense of worker job
security. If the US ever privatizes social security, all US
workers will
be enslaved by these institutional tyrants.
In the new economy of finance capitalism, with capital coming also from
labor;
and the high return on labor's retirement funds from cross-border wage
arbitrage is robbing the same workers of their jobs. As Pogo used
to say:
the enemy, they are us. The new capitalism uses worker capital to
exploit
workers while financiers skim off huge profits without having to risk
any
capital of their own. Investment bankers routinely make between
$2-30
million in annual income by “creating value” out of thin air, arranging
IPOs,
mergers, and structured finance deals that pension funds, known
collectively as
institution investors, buy into. An institutional salesman on Wall
Street is
one who talks pension funds into investing in deals like the one that
Orange
County in California fell into that eventually led to its bankruptcy in
1994.
The salesman is the power behind every Wall Street firm. The
salesman
does not even dream up the deals which are put together by bright young
graduates in math and physics augmented with MBAs, who are
paid only $1-2
million working 18 hour days that burn them out in a few years. That is
how New
York condos can sell for $10 million at US$3000 per square foot.
And none
of these financiers save. They are all leveraged to the hilt out
of
pride, not necessity, for they all know it’s not how much you own, but
how much
you owe that counts. Die with all the debt you can
accumulate. Only
fools die with savings.
By Ricardo’s theory of distribution, as the economy
continues to grow, profits would eventually be squeezed out by rents
and
wages. At the limit, Ricardo argued, a "stationary state" would
be reached where capitalists will be making near-zero profits and no
further
accumulation would occur. Ricardo suggested two things which might hold
this
law of diminishing returns at bay and keep accumulation going at least
for a
while longer: technical progress, which was later spelled out more
fully by
Joseph A. Schumpeter (1883-1950) as “creative destruction,” and foreign
trade
to reduce the market inefficiency imposed by political and economic
nationalism,
which later transformed into British imperialism in the name of free
trade.
On technical progress, Ricardo was ambivalent. One the
one hand, he recognized that technical improvements would help push the
marginal product of land cultivation upwards and thus allow for more
growth. But, in his famous Chapter 31 "On Machinery" (added in
1821 to the third edition of his Principles), he noted that
technical
progress requires the introduction of labor-saving machinery.
This is
costly to purchase and install, and so will reduce funds for
wages. In
this case, either wages must fall or workers must be fired. Some
of these
unemployed workers may be mopped up by the greater amount of
accumulation that
the extra profits will permit, but it might not be enough. A pool
of
unemployed might remain, placing downward pressure and wages and
leading to the
general misery of the working classes. Technological progress,
according
to Ricardo, was not a many splendored thing for labor or the economy. It left to Schumpeter
to argue that “creative destruction” creates more than
it destroys for the economy, while labor is still waiting for someone
to show
it how technological progress can be good for labor.
A global cartel for labor may well perform
that function.
Trade and Comparative
Advantage
On foreign trade, Ricardo set forth his famous theory of comparative
advantage.
Using the example of Portugal and England and two commodities (wine and
cloth),
Ricardo argued that trade would be beneficial even if Portugal held an absolute cost advantage over England
in both commodities. Ricardo’s argument was that there are gains from
trade if
each nation specializes completely in the production of the good in
which it
has a "comparative" cost advantage in producing, and then trades with
the other nation for the other good. Notice that the differences
in
initial position mean that the labor theory of value is not assumed to
hold
across countries, Ricardo argued, because factors, particularly labor,
are not
mobile across borders. As far as growth is concerned, foreign
trade may
promote further accumulation and growth if wage goods (not luxuries)
are
imported at a lower price than they cost domestically -- thereby
leading to a
lowering of the real wage and a rise in profits. But the main
effect,
Ricardo noted, is that overall income levels would rise in both nations
regardless, albeit income disparity would also widen. Ricardo did not
anticipate dollar or even sterling hegemony under which while national
income
in the exporting national may rise, most of the dollar or sterling
income
cannot be spend locally. The ultimate economic imperialism is one in
which
one’s wealth must be denominated in another’s currency.
The theory of comparative advantage in free trade,
challenged by economist Freiderich List (1789-1846) as mere British
national
opinion valid only for British conditions in the industrial age, has
yet to
test valid in today’s globalized trade. Ricardo
underestimated the political problem
of uneven income
distribution while overall income increases, both within a nation and
internationally. In financial
capitalism, most of the saving/investment comes from pension funds, in
the form
of deferred wages of well-paid workers, proving that wages can include
savings
if they are allowed to rise above subsistence levels. What is more, a
high wage
regime is good economics as it eliminates overcapacity.
Trade wars are now fought through volatile currency
valuations. Yet dollar hegemony has reduced all currencies to the
status of
derivatives of the dollar. The dollar enables the US to use its trade
deficit
as the bait for its capital account surplus. Trade
is no longer a valid measure of global
competition. Today,
transnational firms compete with unparalleled success in the global
marketplace
through foreign affiliate sales instead of exports. This has created a
gap
between gross domestic product (GDP) and gross national product (GNP).
To mask
this tilted playing field and inequitable international finance
architecture,
GNP has been quietly replaced by GDP as a statistical measure for
growth.
GDP measures the total value of a country's output, income
or expenditure produced within the country's physical/political
borders. GNP is
GDP plus "factor income" - income earned from investment or work
abroad. GNP is the
total value of final goods and services produced in a
year by a country’s nationals including profits from capital held
abroad. With
globalization, these two technical measurements have taken on new
meanings and
relationships. In 1991, GDP replaced GNP as a standard statistical
measure for
growth - a quiet change that had very large implications as the 1990s
were the
decade of rapid globalization. GNP attributes the earnings of a
transnational
firm to the country where the firm is owned and where profits would
eventually
return as factor income.
GDP, however, attributes the profits to the country where
factories or mines or financial institutions are located, regardless of
ownership, even though profit and investment may not stay there
permanently.
This accounting shift has turned many struggling, exploited economies
into
statistical boomtowns, while seducing local leaders to embrace a global
economy. The rich nations at the core are walking off with the
periphery's
resources and profiting obscenely from local slave wages while calling
it a
statistical gain for the periphery, with the help of the local elite –
a new
compradore class whose members are celebrated by the neo-liberal press
as
national heroes.
GDP figures are “gross” because GDP does not allow for the
depreciation of physical capital or environmental degradation, let
alone the
abuse and depreciation of human resources. When the value of income
from abroad
is included, then GDP becomes the GNP. Because of purchasing power
disparity
between currencies in different economies, the real loss for a country
with
negative GNP is respectively magnified. A declining GNP is particularly
damaging for economies with large trade sectors, which includes many
developing
countries that have been forced to rely on exports financed by foreign
direct
investment as the sole development path.
The Role of Interest
The role of interest income is a problem more
than how to
account for interest income. With a debt economy, debt have replaced
equity
(capital) and become capital itself. So return on capital is now
profit
from arbitrage on open interest parity, the spread between cost of 100%
financing (or sometime 150% in the case of bubbles), and asset
appreciation
caused by that very same debt financing. Currently, with low
interest
rates dictated by Greenspan, M&A is returning like a tidal wave
from ample
liquidity in the form of low-cost debt, which adds to unemployment and
GDP
growth at the same time. Freddie and Ginnie Mae are good
examples.
Its huge debt portfolio is financed entirely on GSE (Government
Sponsored Enterprises) cost of funds advantage
over the general market and the risk they have assumed is made
manageable by
the rise in asset price of the collaterals propelled by the very
same
risk, a self-propelling bubble that produces a wealth
effect which
fuels more debt. The problem is that this process is exponential
and
accelerates as it approaches the danger point like phoenix rushing
toward the
sun, as illustrated by a recent astronomy photo of a black-hole tearing
apart a
star.
While labor earns wages, capital earns profit and landlords
earn rent, there also is a fourth major flow: finance capital earns
interest. But nowhere is this apparent
in classical economics which treats the economy as if it rests on a
barter
theory. Ricardo himself is largely
responsible for creating a model of the economy that manages to avoid
the
existence of debt altogether. Yet Ricardo was a bond broker. It is as
if he
wanted to direct attention away from the problems that his own
profession
caused. Debt service and other financial
charges absorb money from the flow of income between employees and the
products
they buy (Say's Law), and channel it into the property and financial
markets. Marx said that a permanent
economic crisis was not likely under capitalism. Remarkably, Marx was
an
optimist regarding the financial sector, imagining that it would become
subordinate to the needs of industrial capital. History
has proved otherwise.
The Labor Theory of Value (LTV) conflicts with the Marginal
Utility Theory of Value (MUTV) on which much classical and
neo-classical
economics is based. If one plays within
the rules of a market economy, then the LTV is irrelevant. The entire
structure
of the market is built on the concept of marginal utility.
But as Polanyi pointed out, the market
economy is not a natural human affair, but rather a recent development. This now familiar system was of very recent
origin and had emerged fully formed only as recently as the nineteenth
century,
in conjunction with industrialization. The current neo-liberal
globalization is
also of recent post-Cold War origin, in conjunction with the advent of
the
information age and finance capitalism.
Adam Smith was concerned primarily with economic growth, away
from “natural equilibrium” circular flows
posited in a supply-side
driven model of growth. Output is derived from labor and capital
and land
inputs. Consequently output growth was driven by population growth,
investment
and land growth and increases in overall productivity.
Population growth, Smith proposed in the conventional
notion of his time, was endogenous: it depends on the sustenance
available to
accommodate the expanding workforce. Investment was also endogenous:
determined
by the rate of savings (mostly by capitalists); land growth was
dependent on
conquest of new lands (e.g. colonization) or technological improvements
on
fertility of old lands or construction of skyscrapers. Technological
progress
could also increase growth overall: Smith's famous thesis that the
division of
labor (specialization) improves growth was a fundamental argument of
soft
technology. Smith also saw improvements in machinery and
international trade as engines of growth as they facilitated further
specialization.
Smith also believed that “division of labor is limited
by the extent of the market” - thus positing an economies of scale
argument. As
division of labor increases output (increases “the extent of the
market”) it
then induces the possibility of further division and labor and thus
further
growth. Thus, Smith argued, growth was self-reinforcing as it exhibited
increasing returns to scale.
Finally, because savings of capitalists is what
creates investment and hence growth, he saw income distribution as
being one of
the most important determinants of how fast (or slow) a nation would
grow.
However, savings is in part determined by the profits of stock: as the
capital
stock of a country increases, Smith posited, profit declines - not
because of
decreasing marginal productivity, but rather because the competition of
capitalists for workers will bid wages up. So lowering the living
standards of
workers was another way to maintain or improve growth (although the
counter-effect would be to reduce labor supply growth).
Despite rising returns, Smith did not see
growth as eternally rising: he posited a ceiling (and floor) in the
form of the
“stationary state” where population growth and capital accumulation
were both zero.
Karl Marx (1867-1894) modified the classical economics
vision. For “modern” growth theory, Marx’s achievement was
critical: he
not only provided, through his famous “reproduction” schema, perhaps
the most
rigorous formulation to date of a growth model, but he did so in a
multi-sector
context and provided in the process such critical ingredients as the
concept of
“steady-state” growth equilibrium. Unlike Smith or Ricardo, Marx
did not accept
that labor supply was endogenous to wage levels. As a result,
Marx had
wages determined not by necessity or “natural/cultural” factors but
rather by
bargaining between capitalists and workers. In
fact, Marx was the only true free marketer
among classical economists
in that only he saw the need for equality of market/pricing power in
the
transactional relationship between capital and labor. And this process
would be
influenced by the amount of unemployed laborers in the economy (the
“reserve
army of labor”, as he put it). Marx also saw profits and
“raw
instinct” as the determinants of savings and capital
accumulation. Thus,
contrary to Smith, Marx saw a declining rate of profit doing nothing to
stem
capital accumulation and bring the “stationary state about”, but only
as an
inducement for capitalists to further reduce wages and thus increase
the misery
of labor.
Like other classical economists, Marx believed there
was a declining rate of profit over the long-term. The long-run
tendency
for the rate of profit to decline is brought about not by competition
increasing wages (as in Smith), nor by the diminishing marginal
productivity of
land (as in Ricardo), but rather by the “rising organic composition of
capital”,
which Marx defined as the ratio of what he called “constant capital”
to “variable capital”. It
is important to realize
that constant capital is what today is called fixed capital or
capital
investment such as plants and equipment, rather circulating capital
such as raw
materials. Marx's “variable capital” is defines as advances to
labor, i.e.
total wage payments, or heuristically, value is equal to wages times
the labor
employed.
The rate of profits, Marx claimed, is determined by
the surplus and advances to labor. Surplus is the amount of total
output
produced above total advances to labor. It is
important to
note that for Marx, only labor produces surplus value.
Capital
gets return only after labor acts on it while labor can still produce
without
capital, albeit less efficiently. A factory without workers cannot
produce,
while workers without factories can. This was to become a sore point of
debate
between the Neo-Ricardians and the Neo-Marxists in later years. Marx
called the
ratio of surplus to variable capital, the "exploitation rate"
(surplus produced for every dollar spent on labor). Marx
referred
to the ratio of constant to variable capital, as the organic
composition of
capital (which can be viewed as a sort of capital-labor
ratio). The rate of profit can be expressed as a positive
function
of the exploitation rate and a negative function of the organic
composition of
capital.
Marx then argued that the exploitation rate tended
to be fixed, while the organic composition of capital tended to rise
over time,
thus the rate of profit has a tendency to decline. Classical
economics assumes
a static economy with no labor supply growth. As the surplus accrues to
capitalists and, necessarily, capitalists invest that surplus into
expanding
production, output will rise over time while the labor supply remains
constant. Thus, the labor market gets gradually "tighter" and
so wages will rise. But this profit decline is temporary, since a rise
in wages
would induce population growth which would then loosen the labor
markets and
bring wages back down again. Marx does not accept this classical
version. For Marx, wages are set by “bargaining” in the labor
market, not
by labor supply. Thus, there is no "extra supply of labor"
being encouraged by the higher wages. Marx argued capitalists can
boost
their profit rate back up by introducing labor-saving machinery into
production
-- thereby releasing labor into unemployment, because the cost of
unemployment
is an externality to the business. The primary incentive for the
invention
of machinery is to reduce the cost of labor and the primary vehicle is
layoffs.
There are two effects of this relationship. The
first is that wage cost declines because labor is released and
concurrently,
the employment of machinery implies that fixed capital
rises. Thus,
the introduction in labor-saving machinery does not change anything:
the fall
in labor cost from using less labor is counteracted by the rise in
fixed
capital. The second effect is that the concurrent expansion in
unemployment
-- the “reserve army of labor” -- will by itself weaken bargaining
power of
labor and reduce wages down to or below subsistence. But wages decline negates the financial rationale behind the
introduction of machinery which is to capture the cost benefit of
labor-saving
machines. Thus the net effect of a labor-saving technology
is to reduce
the rate of profit.<>
One way to prevent this decline in the rate of
return would be to increase the exploitation rate in proportion to
which
variable capital declines relative to constant capital.
The issue of trade, another possible check to the
decline in profit rate, was seen by Marx as an inducement to produce on
an even
greater scale - thereby increasing the organic composition of capital
further
(and reducing profit quicker). The connection between trade with
non-capitalist
economies to prevent of the decline in profit rate was for later
Marxians like
Rosa Luxemburg (1913) to propose in their theories of imperialism.
However, despite all their efforts, Marx claimed
that there were social limits to the extent to which capitalists could
increase
the exploitation rate, while no such thing limited the growing organic
composition of capital. Consequently, Marx envisioned that greater and
greater
cut-throat competition among capitalists for that declining
profit. Then
a crisis occurs: large firms buy up the small firms at cheaper rates
and thus
the total number of firms declines. This will boost the surplus
value as
firms can now purchase capital. As capital becomes more
concentrated in
fewer . The increasing increasing the tendency for capital
to be
concentrated in fewer and fewer hands, combined with the greater misery
of
labor would culminate in ever greater "crises" which would destroy
capitalism as a whole. Marx had only temporary "stationary states",
punctuating the secular tendency to breakdown.
Adam Smith (1723 - 1790), having come in contact with the
Physiocrats in France led by a physician to Louis XV, Francois Quesnay
(1694-1774), who believed that all wealth originates from land, wrote An Inquery into the Nature and Causes of the
Wealth of Nations in 1776, in which he postulated the theory of
division of
labor and observed that value, not price, arises from labor expended in
the
process of production. The Physiocrat
maxim states that only abundance combined with high prices could create
prosperity, a rejection of the theory of price as being set by the
intersection
of supply and demand in a free market. To
the Pysiocrats, price theory based on
supply and demand causes
abundance to drive down prices and leads to producer bankruptcies and
economic
depressions, preventing the sustenance of abundance, which is a
requirement for
prosperity. The neoclassical economists
rejected this notion of value by introducing the notion of marginal
utility
which by itself is not anti-labor until neo-liberals began to labor of
marginal
utility value in the market. In the modern market economy, labor
performs two
marginal utility functions: it enhances marginal return on capital
through
increased productivity and if fairly compensated for such marginal
utility,
rising wages supports marginal demand for increased production. This
notion is
behind the Keynesian idea of demand management through high wages and
full
employment, even at the cost of moderate inflation.
Money has the highest marginal utility when
placed at the hand of those who need it most and will spend it
immediately in a
technological economy in which overcapacity is an inherent
characteristic. The
most cited of Smith’s ideas is the belief that in a laissez-faire
economy, the impulse of self interest would bring
about the optimum public welfare. The
most misunderstood of Smith’s ideas is the interpretation that the term
laissez-faire, which in French means to leave alone, means not the absence of
government interference in a market economy, but the need for
government
interference to keep markets free. Smith’s
idea of a free domestic market is one without monopolies, which he
opposed as
destroyers of free markets. He also opposed mercantilism in
international
trade, which aims to accumulate gold through monopolistic trade. Smith supported restriction to free trade,
such as the Navigation Act of 1651, forbidding the importation of
foreign goods
and commodities from overseas colonies except in English-owned ships,
as
necessary national economic defense measures. In
1778, Smith was appointed commissioner of
customs for Scotland, an
ironic post for a free trader in today’s common understanding of the
term.
Henry George and the
Single Tax on Land
Smith in the Introduction to
his Wealth of Nations identified real
wealth as the annual produce of the land and labor of the
society. Henry George (1839-97)
virtually repeated the single tax on land argument of Victor de
Mirabeau,
Quesnay’s ardent disciple and father to Honore Mirabeau, popular
revolutionary
and statesman, spokesman for the Third Estate. "We
must make land common property," George
declared. Georgists identify three basic
types of
property: common, government and private. Common
property belongs to all people in common; it is that which
all have an equal right to use and enjoy, such as public parks. Government property belongs to the
state and is subject to the direction of the government. Private
property is that which
individuals (or corporations as legal persons) have the exclusive right
to own,
profit from and dispose of as they see fit. Common property is not the
same as
government property. Common property in the ocean is generally
recognized; the
oceans do not belong to any government beyond the costal economic zones. Common property is different from private
property in that common property permits private use, but implies an
obligation
to the community since the rights of others must be recognized. By its very nature, land is common property
and laws and traditions in capitalist countries already go far toward
recognizing it as such. The principle of eminent domain asserts the
superior
claim of society to land. The New York State Constitution states: "The
people of the State, in their right of sovereignty, possess the
original and
ultimate property in and to all lands within the jurisdiction of the
State." English and American laws generally recognize absolute
ownership
of goods - but not of land. The law deals with the land "owner" as a
land holder - land is held under the sovereignty of the people and is
subject
to their conditions.
To preserve common property in land, George proposed that
the rent of land should be paid to the community. This payment
expresses the
exact amount that would satisfy the equal rights of all other members
of the
community. Individuals would retain title to land, fixity of tenure and
undisturbed possession. This method of making land “common property”
may also
be called “conditional private property in land” (payment of rent to
the
community) as opposed to “absolute private property in land” (private
collection of rent). Thomas
Jefferson (1743 - 1826) said:
“The earth is given as a common stock for men to labor and live on.” Karl Marx (1818 - 1883) said: Assuming the
capitalist mode of production, then the capitalist is not only a
necessary
functionary but the dominating functionary in production. The landowner
on the
other hand is superfluous in this mode of production. If landed
property became
people’s property the whole basis of capitalist production would go.” Adam Smith said: “Ground rents are a
species of revenue which the owner, in many cases, enjoys without any
care or
attention of his own. Ground rents are, therefore, perhaps a species of
revenue
which can best bear to have a peculiar tax imposed upon them.” Tom
Paine (1737 - 1809) said: “Men did not make the earth.... It is
the
value of the improvement only, and not the earth itself, that is
individual
property.... Every proprietor owes to the community a ground rent for
the land
which he holds.” John
Stuart Mill (1806 - 1873) said: “Landlords grow richer in
their sleep without working, risking, or economizing. The increase in
the value
of land, arising as it does from the efforts of an entire community,
should
belong to the community and not to the individual who might hold title.” Abraham
Lincoln (1809 - 1865) said: “The land, the earth God gave man
for his
home, sustenance, and support, should never be the possession of any
man,
corporation, society, or unfriendly government, any more than the air
or
water....” Sun Yat-Sen
(1866 - 1925) said: “The land tax as the only means of
supporting the government is an infinitely just, reasonable, and
equitably
distributed tax, and on it we will found our new system.”
Effect of
Demographics on Wages
One reason for China’s dynamic growth is that it is currently
at a demographic optimum. The massive reduction in infant mortality
achieved by
China's barefoot doctors program of free universal public health care
is now
yielding a surge of young workers. This added up to an extra 13.6
million working-age
adults a year on top of a labor force of over 800 million during the
period of
the just ended Tenth Five-Year Plan (2001-2005). China's challenge up
to now has
been focused on absorbing population growth into the labor force. The
massive
population flow from the rural countryside to overcrowded cities also
has kept wages
low even with fast growth. The
advantage is that there is a low ratio of pensioners and
young workers at this phase. China's
population above the age of 16 will
grow by 5.5 million annually on average in the next 20 years and the
total
population of working age will reach 940 million by 2020, according to
a
government white paper titled "China's Employment Situation and
Policies" issued by the Information Office of the State Council in
2004.
In this period, China will face severe employment pressure due to its
huge
population base, the age structure, continuing migration to urban
centers and
the process of social and economic development. While the population of
working
age keeps increasing, there are now 150 million rural surplus laborers
who need
to be transferred, and over 11 million unemployed and laid-off workers
who need
to be employed or reemployed. As mechanization of agriculture proceeds,
more
labor would be released into non-farm sectors. One
way to relieve urban crowding is to
introduce non-farming sectors
into rural villages. If left only to
market forces, widening wage disparity between urban and rural
locations will
lead to development imbalances that can threaten social stability. A
domestic
labor cartel can help solve the problem of migrant labor toward urban
centers.
Within the goals of building a moderately prosperous
society, China plans to foster socio-economic development by the
upgrading and
rationally deploying its abundant human resources by providing gainful
employment with advancement opportunities and rising income without
massive
relocation of population. To achieve this goal, China will have to
maintain a
high growth rate, adjust its economic structure to maximized employment
opportunities, raise education levels, strength vocational training,
and match
human resources to the changing needs of socio-economic development;
make
rational arrangements for social security. As early as 2015, China's
working
age population will actually start falling. By 2040, today's young
workers will
be pensioners - in fact the world's second largest category of
population,
after India, will be Chinese pensioners. There could
well be 100 million Chinese citizens
aged over 80, more than
the current worldwide total. Because of
China's one-child policy there will be fewer new workers under its
so-called
“4, 2, 1” population structure - four grandparents, two parents and one
child.
This is a demographic transition that many countries go through as they
industrialize. But a process that previously took a century in the
advanced
economies will take less than four decades in China.
Only a drastic rise in wages can solve this demographic problem of a China growing old before it grows
rich. The median age in China has risen from 20 to 33 since 1978. By
2050, China's
median age is estimated to be 45, against 43 for the UK and 41 for the
US, if
current population policy continues. Older populations can lead to
incremental
improvements in productivity that came from age and experience, but
they are
not good at the type of performance improvements that require by
innovation.
Radical innovation comes more naturally from youth.
Chinese culture is based on strong family ties. The elderly
are the moral responsibility of their families. This
is a cultural strength that should not be
diluted by massive
migrating of workers far away from their aging parents.
About two-thirds of people aged over 65 in
China live with their adult children, performing child care and
household
duties. Only 1% of those over 80 are in old people's homes, compared
with 20%
in the US.
The controversial one-child policy is having extraordinary social
effects that are not all positive. In
Chinese culture, a son is responsible for providing for the family
which
includes both the young and the aging parents; a daughter looks after
the
family into which she marries. A society with one child families leaves
those
with daughters without support or care in old age. This creates a
gender
imbalance that also creates enormous problems in term of matching
marriage
needs between male and female. China will soon have to import brides
for its
men of marrying age. Gender balance can shape a society's values. A
society with
an excess of young males whose income cannot support two aging parents
and attract
a wife from a dwindling supply of marriage age females is one faced
with latent
instability.
The economic function of the elderly in an economy of structural
overcapacity is to keep consumption demand rising to absorb
overcapacity.
Young workers will be happy to pay for the consumption by the elderly
if they
realize that their jobs are dependent on consumption by the elderly.
The social
security problem in the US is not related to an expanding retired
population,
conventional wisdom notwithstanding. It is related to young workers not
getting
high enough wages because of outsourcing. This is why the idea of
OLEC
will also receive political support in the US.
Conclusion
A cartel for labor is not unprecedented in history.
The concept first found expression in the
guild system during the Middle Ages. Each line of business had its own
guild,
butchers, bakers, dyers, shoemakers, masons, carpenters, tanners, and
many
others, even lawyers and doctors. The purpose of the guild was to make
sure its
members produced high quality goods and were treated fairly in the
market.
Guilds became politically powerful in towns toward the end of the
Middle Ages,
passing laws that controlled unfair competition among merchants,
established
fair prices and wages, and limited the hours during which merchandise
could be
sold and workers were required to work. The ordained the frequency of
markets. If
an outsider enters the market in a town, he could not sell his goods
unless he
paid a toll and obeyed the guilds rules. The guild also took care of
the widow
and children of a member who died and those who became sick and
punished
members who used false weights or poor materials. Guilds also ensured
that new
craftsmen were properly trained. They built cathedrals as monuments to
their
piety communities. Guilds and its later manifestation in the form of
trade
unions eventually lost their effectiveness because of their
representation of
special interests and stood in the path of economic progress. Even
industrial
unionism tends to promote the interest of particular industries, such
as
mining, autos, transportation, communication, etc while neglecting
universal
solidarity. The aspect that is new about
the concept of OLEC is its representation of universal labor. It is
based on
the needs of a modern economy for managing consumer demand to overcome
structural overcapacity. Such demand can only come from rising wages
and full
employment. The rules of economic democracy mandate that capital in a
modern
economy is formed from the savings of labor which in turn depends of
rising
wages. This economic truism is the
rational basis why the concept of OLEC should be supported by all.
OLEC will be an intergovernmental organization whose members
are sovereign nations with labor-intensive export sectors.
The objectives of OLEC would be to coordinate
and unify labor policies among member countries in order to secure
fair,
uniform and stable prices for labor in the global market and an
efficient,
economic and regular supply of labor to provide a fair return on
capital to
maximize growth in the global economy. The
ultimate aim is to implement a trade
regime in which corporate profitability
is tied to rising wages that will increase aggregate demand. Towards
these
objectives, the successful experience of OPEC can be a useful guide. The economic objectives are to stop the
downward spiral of wages caused by predatory wage policies, to adopt
full
employment as a policy goal and to reject structural unemployment as a
necessary pre-requisite for non-inflationary growth. OLEC will be a
market-sharing cartel in which the members decide
on the share of the market that each is allotted so as to
achieve fair sharing of benefits and costs. In order to achieve these
objectives
the members should meet regularly to reach consensual measures in light
of
changing market conditions monitored by a staff of specialists and
theoretical
breakthrough constructed by creative innovators.
February 2006
Part I: Background and Theory
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