World Trade Needs a Global Cartel for Labor (OLEC)

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:  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 (, 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.


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