From: glevy@PRATT.EDU
Date: Sun May 21 2006 - 11:07:49 EDT
A two-part article by Henry C.K. Liu. What do you think about the
theory and the practice of this proposal?
In solidarity, Jerry
World Trade Needs a Global Cartel for Labor (OLEC)
Part I: Background and Theory
By
Henry C.K. Liu
This series appeared in Asia Times in February-March 2006
The global economy as currently constituted does not
operate with a free market by any stretch of
imagination, the propaganda of neo-liberal free traders
notwithstanding. For this reason, there is a need for a
global cartel for labor.
Three related facts combine to make the global market
not free. The first fact is that global trade is
carried out under an international finance architecture
based on dollar hegemony, which is a peculiar
arrangement in which the dollar, a fiat paper currency
backed by nothing of intrinsic value, can be printed at
will by the US, and only the US, thus making export for
dollars a game of shipping real wealth overseas for
paper that is only usable in the dollar economy and
useless domestically in all other non-dollar countries.
Key commodities, such as oil, are denominated in dollars
primarily because of US geopolitical prowess. Most
economies need dollars to buy imported oil, but the
exporting economies buy much more oil than they
otherwise need domestically merely to satisfy the energy
needs of their export sectors. The net monetized trade
surplus from exports in the form of dollars, after
paying for dollar-denominated oil and other imports,
remains useless in the domestic markets of the exporting
economies. Thus dollar hegemony reduces the non-dollar
exporting economies to an absurd position of the more
dollars from trade surplus they accumulate, the poorer
they become domestically. This absurd position is
further exacerbated if domestic wages are kept low by
export policy in order to compete for more global market
share to earn dollars. It is a case of starving one's
own children to provide free child labor to serve ice
cream to outsiders. It is bad enough to exchange
valuable goods for fiat paper; it is outright
foolhardiness to keep domestic wages low merely to earn
fiat paper that cannot even be spent in one's own
economy.
The second fact that makes the global market not free
comes from neoclassical economics' flawed definition of
labor productivity as the amount of market value a
worker can produced with a given unit of capital
investment. Since according to monetary economics,
market value, which is expressed as price, needs to
remain stable to prevent inflation, labor productivity
in financial terms can only be increased with declining
wages per unit of capital. Further, price competition
for market share directly depresses wages. Even if wages
can at times rise in monetary terms, the ratio of wages
to the market value of production must constantly fall
in order for increased labor productivity to be
monetized as profit. Thus profits from trade under this
flawed definition of productivity ultimately can only be
derived from falling wages. The concept of surplus
value within the context of the labor theory of value as
explained by Marx embodies this structural compulsion.
Yet Marx was speaking of the structural effect of fair
profits, not the obscene profits that are now the norm
from sweatshops in the deregulated global market.
Neoclassical economics replaces the labor theory of
value with the theory of marginal utility in which price
is defined as the intersection of supply and demand in a
free market. William Stanley Jevon (Theory of Political
Economy 1817), Carl Menger (Principles of Economics
1871), and Leon Walrus (Elements of Pure Economics 1877)
promulgated the marginal utility, neoclassical
revolution. Yet today's allegedly free market
effectively deprives labor of any pricing power over its
market value. Since capitalism does not recognize any
ceiling for fair profit, always celebrating the tenet of
the more the merrier, it must by implication oppose any
floor for fair wages, to validate the opposite tenet of
the lower the merrier. The terms of global trade then
are based on seeking the lowest wages for the highest
profit, rather than fair wages for fair profit. This is
the linkage between neo-liberal capitalistic
globalization and wage arbitrage, both in the domestic
labor market and across national borders. Yet in a
consumer-based global market economy, low wages lead
directly into overcapacity because consumer demand
depends on high wages. The adverse effect on consumer
demand from the quest for maximum profit is the critical
internal contradiction of the deregulated capitalistic
market economy.
The third fact that makes the global market not free is
that while financial globalization facilitates
unrestricted cross-border mobility of capital around the
globe, obdurate immobility of workers across national
borders continues to be maintained through government
restrictions on immigration. Free trade advocates, from
Adam Smith (1723-1790) to David Ricardo (1772-1823), in
considering the relationship between capital and labor,
treat the mobility disparity between capital and labor
as a nature state, never entertaining that it is a mere
political idiosyncrasy. This "natural" immobility of
labor might have been reality in the 18th Century, but
it is no longer natural in the jet-age global economy of
the 21st Century in which mobility has become a natural
characteristic. Labor immobility deprives labor of
pricing power in a global market by preventing workers
to go to where they are needed most and where market
wages are highest, while capital is free to go where it
is need most and where return on investment is highest.
This econ-political regime against labor mobility,
coupled with unrestrained cross-border mobility of
capital, maintains a location-bound wage disparity that
has created profit opportunities for cross-border wage
arbitrage, in a downward spiral for all wages
everywhere.
*Greenspan Supports More Immigration for the US Economy*
In January 2000, when the US unemployment rate reached
4.1% (4.7% in January 2006), the low end of structural
unemployment without wage-pushed inflation, employers
found it difficult to fill low-pay agricultural, meat
and poultry packing and health services jobs, as well as
high-pay high-tech information technology and software
design jobs. The problem led the Federal Reserve to
become concerned about possible wage-pushed inflation.
It forced lawmakers to sponsor legislation which would
make it easier for farmers, meat processors, and
high-tech industries to import temporary workers through
exemptions in immigration restrictions. Fed Chairman
Alan Greenspan told Congress that increasing immigrant
numbers in areas where workers are difficult to find
could relieve stress in the job market and therefore
wage-pushed inflation. Consistent with the Fed's warped
mission of maintaining structural unemployment to
contain inflation, Greenspan said: "Aggregative demand
is putting very significant pressures on an
ever-decreasing available supply of unemployed labor.
The one obvious means that one can use to offset that is
expanding the number of people we allow in. Reviewing
our immigration laws in the context of the type of
economy which we will be enjoying in the decade ahead is
clearly on the table in my judgment." Congress showed no
enthusiasm for Greenspan's suggestion of permanent
immigration liberalization along with global finance
liberalization.
Farm growers in the US had hoped to increase the number
of immigrant farm workers by attaching a provision in
their interest to the highly favored high-technology
industry's legislation to increase the number of
high-tech immigrant workers. In 2000, high-tech
immigration legislation seemed likely to pass Congress
until the Clinton administration began attaching
legislative riders that would give Latin American
refuges legal permanent residency. In addition, the
Clinton administration wanted to grant amnesty to a
large number of illegal immigrants, most of whom were
Hispanics. This political maneuvering stopped the
pending high-tech legislation dead in its tracks because
Republicans feared that the Democrats were attaching
such legislative riders in order to gain support from
the large number of Hispanic voters. The shortage of
high-tech workers forced the industry to move operations
overseas, at first not to save money on wages, but to
find available workers. The labor unions reacted to
immigration with traditional phobia, viewing it as a
development that would keep wages low, rather than a new
source for reversing the steady decline in membership.
Yet employment data showed that high-tech immigrant
workers did not lower wages during the high-tech boom in
the US. What eventually lowered high-tech wages in the
US was overcapacity resulting from overinvestment caused
by excessive debt and inadequate consumer demand
resulting from stagnant wages. After its collapse, the
US high-tech sector recovered by outsourcing
manufacturing jobs to low-wage countries, leaving
consumer demand to be sustained by an expanding
debt-driven asset bubble.
Three years later, Greenspan took up another argument on
behalf of immigration: this time in response to the
actuary dilemma facing social security. On February 27,
2003, Greenspan, testifying before the Senate Special
Committee on Aging, chaired by Sen. Larry Craig (R-ID),
described the economic impact of an aging US population,
which would lead to slow natural population growth that
would result in slow economic growth, diminishing growth
in the labor force, and an increase in the ratio of the
retired elderly to the working-age population. By 2030,
the growth of the US workforce will slow from 1% to ½%,
according to census projections cited by Greenspan. At
the same time, the percentage of the population over 65
years old will rise from 13% to 20%. Greenspan described
how the aging population would have significant adverse
fiscal effects. "In particular, it makes our social
security and Medicare programs unsustainable in the long
run, short of a major increase in immigration rates, a
dramatic acceleration in productivity growth well beyond
historic experience, a significant increase in the age
of eligibility for benefits, or the use of general
revenues to fund benefits," Greenspan warned. According
to Greenspan, immigration could prove a most potent
antidote for slowing growth in the working-age
population. As the influx of foreign workers in response
to the tight labor markets of the 1990s showed,
immigration does respond to labor shortages. An
expansion of labor-force participation by immigrants and
the healthy elderly offers some offset to an aging
population. "Fortunately, the US economy is uniquely
well suited to make those adjustments" said Greenspan.
"Our open labor markets can adapt to the differing needs
and abilities of our older population. Our capital
markets can allow for the creation and rapid adoption of
new labor-saving technologies, and our open society has
been receptive to immigrants. All these factors put us
in a good position to adjust to the [impacts] of an
aging population." Short of a major increase in
immigration, economic growth cannot be safely counted
upon to eliminate deficits and the difficult choices
that will be required to restore fiscal discipline,"
said Greenspan's semiannual report To Congress on
monetary policy , submitted Feb. 11, 2003. Also,
immigrants tend to have higher birth rate than
native-born citizens. This would moderate the aging
population trend.
Still, anti-immigration phobia continue to rise in the
US, as reflected by CNN personality Lou Dobbs, recipient
of the 2004 Man of the Year Award from The Organization
for the Rights of American Workers for his tilted
coverage of the national debate on jobs, global trade
and outsourcing. Dobbs was also a recipient of the
Eugene Katz Award for Excellence in the Coverage of
Immigration from the Center for Immigration Studies for
his ongoing series "Broken Borders," which criticizes US
policy on illegal immigration and the Bush
Administration's "guest worker" program and proposals
for immigration amnesty, not withstanding that if his
crusade should bear fruit, there would be no one to
clean his broadcast studio every night.
*Time is Ripe for a Global Cartel for Labor*
In a world operating under the rules of political
economy, the idea of a global cartel for labor, to be
known as Organization of Labor-intensive Exporting
Countries (OLEC), can help to level the playing field
between capital and labor. It is a timely political
concept with important positive economic implications in
this age of deregulated finance globalization. In
finance capitalism, both capital and labor are viewed as
mere commodities, not unlike other basic commodities,
most notably oil. All commodities command a price in
the market by their sellers exercising fair pricing
power. They do this by withholding supply from the
market until the price is right and fair. If OPEC
(Organization of Petroleum Exporting Countries) members
can form a global cartel for oil to control and raise
oil prices in the global market for their collective
benefit at the same time claiming benefits for the
global economy, low-wage manufacture exporting countries
can also form a similar cartel for global labor to
control and raise wages worldwide with a long-range
strategy that would be good for the global economy.
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 profitability is tied
to rising wages. Towards these objectives, the
successful experience of OPEC can be a useful guide.
Just as OPEC allows different grades of oil to command
different prices tied to a bench mark, OLEC will aim to
set a price bench mark for labor around which flexible
price ranges will reflect factors that affect
productivity. The aim is to stop the downward spiral of
wages caused by predatory wage policies.
OPEC is a permanent, intergovernmental Organization,
created at the Baghdad Conference on September 10-14,
1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.
The five Founding Members were later joined by eight
other Members: Qatar (1961); Indonesia (1962); Socialist
Peoples Libyan Arab Jamahiriya (1962); United Arab
Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador
(1973-1992) and Gabon (1975-1994). Headquartered in
Geneva in the first five years of its existence, OPEC
moved to Vienna on September 1, 1965. Each member
country selects representatives who choose a governor
for their country. These governors attend two regular
OPEC meetings every year and they also choose the OPEC
chairman. All decisions are to be unanimous. The OPEC
Statutes identify the main objective as setting prices
of oil and oil products and keep the price and supply
stable with fair returns to the investors by adjusting
production rates according to market conditions. OPEC
operates as a market-sharing cartel within a framework
of non-collusive cooperation with imperfect information.
For the first decade of OPEC history, the transnational
oil companies, the so-called "seven sisters" (Esso, BP,
Shell, Gulf, Standard Oil of California, Texaco and
Mobil) managed to use their overwhelming financial power
to ignore it, by continuing their decade-old strategy of
keeping oil prices low, with low royalty to the producer
governments to subsidize the advance consumer economies
while maintaining high corporate profit. In 1947, the
price of oil was around $2.20/barrel, while exporter
government taxes were less than 50 cents/barrel and
production costs were between 10 to 20 cents/barrel.
These figures remain relatively constant until the
cartel effects of OPEC took form in the 1970s. Up to
1973, oil was selling for less than $3 per barrel just
before the OPEC oil embargo, a rise of less than 80
cents in 26 years, way behind inflation.
In 1967, during the Six Day War, OPEC member nations,
namely Saudi Arabia, Kuwait, Libya, provided financial
support to Jordan, Egypt and Syria. OPEC also
successfully embargoed oil to Israel and the countries
that supported Israel. In 1970, Libyan leader Muhammar
Quadaffi used OPEC's influence to put pressure on the
other independent Middle Eastern states to increase oil
prices and raised taxes on oil company incomes and in
some cases to nationalize the oil companies dominated by
foreign joint venture partners. But it was not until the
1973 that OPEC began to gain real market power. By 1973,
US oil production was falling due to rising dependence
on low-price oil from the Middle East. The oil crisis of
the 1970's was a pricing problem rather than a shortage
problem. In 1973, a barrel of Arabian crude sold for $3,
and in 1980, the price peaked at $37 a barrel. In 1978,
the "second oil crisis" was triggered by the Iranian
revolution, causing its production to drop from 6 MMB/D
in September 1978 to 2.4 MMB/D by December 1978.
In the 1980's, OPEC learned from experience that the
higher oil prices of the 1970s decreased demand,
stimulated conservation, encouraged new exploration and
production and quest for alternative energy sources,
expanding the life span of the oil age. In May 1990, the
first Gulf War caused a temporary oil shortage. In
response to the crisis, OPEC increased supplies from
fields not affected by the Iraq-Kuwait crisis,
stabilizing prices. After the 1997 Asian financial
crisis, oil fell to below $10. The second Gulf War
caused oil prices to increased more than six folds to
reach above $70 per barrel, despite US pressure on OPEC
to increase production. Few if any market analysts
currently expect oil to fall below $50 in the
foreseeable future. The impact of high oil prices,
while stimulating conservation, has not been fatal to
the global economy. See: The Real Problems With $50 Oil
(http://www.atimes.com/atimes/Global_Economy/GE26Dj02.html)
OPEC came into existence in 1960, but emerged as an
effective cartel only following Arab Oil embargo which
began on October 19-20, 1973 and ended on March 18,
1974. During that period the price for benchmark Saudi
Light increased from $2.59 in September 1973 to $11.65
in March. OPEC has since been setting bottom benchmark
prices for its various crudes. Yet oil price immediately
before the current crisis dipped below $10 after the
Asian Financial Crisis of 1997 and eventually stabilized
around $20. Today, OPEC is the source of slightly more
than a third of the world's oil supply. The margin for
turning three barrels of crude oil into two barrels of
gasoline and one of heating oil fell to $3.086 a barrel
on February 9, 2006, based on futures prices in New
York, the lowest since June 2003. The profit for turning
a barrel of crude into gasoline fell below $1 a barrel
for the first time since September 1994; the margin
plunged from $3.17 on Sept. 1, 2005. Oil reached a
record $70.85 on Aug. 30, the day after Hurricane
Katrina made landfall on the U.S. Gulf Coast, wrecking
oil platforms, pipelines and refineries, and cutting
production in the world's largest energy market. Oil
may rise to a record $96 a barrel in August 2006 when
hurricanes typically cut U.S. output, said Mitsui & Co.,
Japan's second-largest trading company on February 6.
China kicked off the trading of fuel oil futures on the
Shanghai Futures Exchange on August 25 2005 for the
first time in a deca<>de.
There is a fundamental relationship between wages and
prices. Pricing policies of firms as they are actually
practiced in the real world, both by cartels such as
OPEC in oil, by other commodity producers, market
leaders in pharmaceuticals, software, communication, and
in fact the price of money (interest rates), have one
thing in common. Pricing policies across all these
different economic sectors are predicated on the
proposition that price is seldom, if ever, set by the
intersection of supply and demand, as neo-classical
economics textbooks teach. The bottom line is that price
is determined not by supply and demand but by strategies
that aim at optimizing the long-term value of assets and
political considerations.
OPEC pricing is a good example. Because of OPEC, oil
prices have become a key factor in the global economy.
Throughout the history of oil, price has been set by
highly complex considerations and supply has always been
adjusted to maintain the set price. In pharmaceuticals,
price is set neither by cost nor demand. The pricing
model of any new drug aims at achieving maximum lifetime
value of the drug that has very little to do with
current supply and demand. Microsoft's pricing model for
Windows has nothing to do with supply and demand, or
marginal costs, which are close to zero. Telephone
charges are similarly disconnected from supply and
demand, or marginal costs. Even in the auto industry,
the dinosaur of the old economy, where cost input is
high and discounted return on capital low, pricing is
based more on complex considerations than demand. With
80 percent of autos financed or leased, subsidy of
financing costs is the name of the game, not sticker
price. Farm commodities prices are definitely not set by
the intersection of supply and demand. They are set
artificially high by political considerations of
practically all producer governments; and both supply
and demand are artificially distorted to maintain the
politically set price. The general consensus of
mainstream economists on the global steel overcapacity
problem is to reduce capacity, not to let prices fall.
Price in fact is the most manipulated component in
trade. That is the fundamental flaw of market
fundamentalism. Friedrich Hayek's rejection of socialist
thinking is based on his view that prices are an
instrument of communication and guidance, which embodies
more information than each market participant
individually processes. The Hayek uses the aggregate
effective of individual misjudgments as the correct
judgment. To Hayek, it is impossible to bring about the
same price-based order based on the division of labor by
any other means. Similarly, the distribution of incomes
based on a vague concept of merit or need is impossible.
Prices, including the price of labor, are needed to
direct people to go where they can do the most good. The
only effective distribution is one derived from market
principles. On that basis, Hayek intellectually rejects
government regulation of market. The only trouble with
this view is that Hayek's notion of price is a romantic
illusion and nowhere practiced. That was how the Native
Americans sold Manhattan to the Dutch for a handful of
beads which under modern commercial law would be
categorized as a fraudulent transaction. The Bank of
Sweden Prize in Economic Sciences (Nobel Prize) was
awarded to Joseph Stiglitz, George Akerlof and A Michael
Spence for "their analyses of markets with asymmetric
information". In his acceptance press conference,
Stiglitz said, "Market economies are characterized by a
high degree of imperfections." Further, and most
significantly, Hayek's argument is predicated on labor
being able to go where it can do the most good, a
precondition that is denied by immigration constraints.
*The Nature of Cartel*
A global cartel can take on many variant forms with
different characteristics and impacts on the global
market. Although every cartel is unique, from oil to
diamond, the common attributes of any effective cartel
are agreement among members for deliberate restraint on
supply to the market to achieve a consistently higher
price than that from predatory competition among sellers
with no market pricing power. Theoretically, an ideal
cartel can act as a monopoly operated by a number of
separate but related yet independent entities. The
multi-entity monopoly cartel assumes that it is a cartel
authority rather than individual cartel members who
makes price and supply decisions such that the cartel as
a whole obtains the maximum possible monopoly revenue
and profits from the market, and cartel members do not
compete with each other but share the total profits in a
pre-agreed manner. Under these terms, the cartel
authority actually acts as a monopolist, but not
necessarily a total monopolist. OPEC controls only one
third of the world's oil supply. The marginal cost curve
is determined by using up the lowest cost area first,
regardless of which member country the supply area
belongs to. Given the market demand curve for the
cartel's supply, the cartel authority calculates the
marginal revenue pattern and equates it to the jointly
decided marginal cost curve. The equilibrium will set
the cartel's profit-maximizing supply level and the
corresponding monopoly price. The central determination
of price and supply by the cartel authority can
guarantee maximum profit to the organization as a whole.
Under this framework, the producers with high marginal
cost might not produce at all if their marginal cost is
higher than the cartel's marginal revenue. Therefore, a
unanimously accepted profit-share arrangement must be
pre-agreed and post-enforced. However, such a perfect
cartel cannot be sustained in reality by OPEC which is
composed of constituent sovereign nations. The large
producer (Saudi Arabia) would have to act as the "swing
producer", absorbing the demand and supply fluctuations
in order to maintain the monopoly price. A cartel for
labor would have to operate under rules responsive to
the unique problems of labor markets, the details of
which will have be workout depending of the membership
make-up and the negotiated outcome among the members.
But the prospect of common benefit will insure that the
appropriate operational mechanics can be worked out. For
OLEC, China and India can be swing suppliers to absorb
labor supply and demand fluctuations to maintain stable
and rising global wages for the common benefit of all
OLEC members.
A market-sharing cartel is one in which the members
decide on the share of the market that each is allotted
as a cartel member to achieve fair sharing of benefits
and costs. In order to achieve this objective the
members may then meet regularly to reach consensual
measures in light of changing market conditions
monitored by a staff of specialists. Since each member
country in OPEC retains sovereign power over its own
production rate and no individual one (except, possibly,
Saudi Arabia as a swing producer) has the power to fix
the price favorable to the cartel, it is predictable
that member countries would adopt the market-sharing
strategy as the way to achieve the cartel objective. The
members join together to restrain their production for
higher prices to gain optimum profit. Violating the
cartel quota would serve no purpose as individual member
may sell more oil but total revenue would fall because
of lower prices. Theoretically, if cartel members have
similar marginal cost curves, the ideal market-sharing
strategy can achieve the same goals as the joint
profit-maximizing ideal cartel model, outcomes of which
are equivalent to those of a monopolist operating a
number of plants.
Third World economies with surplus labor operate
separately from a collective disadvantaged position in
global trade because global capital obeys the Law of One
Price while global labor is exempt form the Law of One
Price. As dollar hegemony forces all foreign investments
into the export sectors of non-dollar economies to earn
dollars from trade, it produces a structural shortage of
capital for non-export domestic development in all
developing countries. These non-dollar economies then
suffer from an imbalance between excess labor and a
shortage of capital that prevents them from achieving
full employment and to improve overall labor
productivity. This imbalance translates into low wages
that depress domestic consumer demand that in turn
discourages investment in a downward vicious cycle of
perpetual domestic underdevelopment. This widespread
local underdevelopment in turn prevents the global
economy from developing its full growth potential from
rising consumer demand. This hurts not only the
developing economies, but the advanced economies as
well. On the one hand, cross-border wage disparity has
given rise to predatory outsourcing that threatens
employment and wage levels in the advanced economies. On
the other hand, low wages around the world prevents
needed growth of exports from the advanced economies to
balance trade. Thus raising wages around the world to
reduce or even eliminate cross-border wage disparity is
good for all economies. It would be the win-win
proposition that neo-liberal free traders promised but
never delivered. The current regressive terms of global
trade need to be altered by a progressive global labor
cartel.
*An International Labor Cartel is a Positive and
Progressive Undertaking*
Since competition for global capital in a deregulated
global financial market tends to depress wages worldwide
to the detriment of all, it follows that a cartel to
give labor fair pricing power in international trade
would be a positive and progressive undertaking. Dollar
hegemony has deprived Third World economies the option
of using sovereign credit for domestic development,
leaving export trade as the only available alternative.
Yet economic and monetary policy sovereignty of all
Third World nations has been under relentless attack
from neo-liberal terms of trade. But creating a cartel
for labor along the lines of OPEC, a political
organization with an economic agenda, i.e. a cartel for
oil, is something that Third World leaders can do while
they are still in command of political sovereignty. OPEC
of course got its inspiration from the De Beer diamond
cartel. The Zaibatsu was a finance cartel in pre-war
Japan. When the US occupation broke up the Zaibatsu, the
dispersed companies quickly reformed in Keiretsu of
horizontally-integrated alliances across industries
around a major bank. The Keiretsu has been instrumental
to Japan's post-war economic recovery.
The OPEC leaders achieved pricing power in the global
oil market with two preconditions: ownership of oil in
the ground (not movable) they occupy and political
sovereignty. With that they managed to raise the price
of oil, albeit with occasional failures and at the same
time reduce the abusive waste of energy in the consuming
countries, especial the advanced economies. Now the
labor-intensive exporting countries have two similar
preconditions: 1) workers that cannot leave because of
immigration regimes of all advanced countries and 2)
political sovereignty. They can do the same in pricing
labor as OPEC did in pricing oil to provide a bench mark
global wage platform and to steadily raise wages to
alter the current destructive terms of trade in the
globalized market. The idea should also get support from
the US corporations and labor movement and the likes of
Lou Dobbs.
The way to do this is to make it impossible for global
capital to exploit cross-border wage arbitrage for
profit without raising wages to close to wage gap, and
if necessary, with countervailing charges or taxes.
Conversely, tax preference can be tied to a rising wage
policy. Globalization itself is not a bad development.
What is destructive is the current terms of trade behind
globalization which operates as a "beggar thy neighbor
process" while trumpeting a win-win fallacy. The idea
of economic development is not to redistribute wealth by
making the rich poor, but to create new wealth by making
the poor rich at an accelerated pace to reverse the
widening gap between rich and poor. Current terms of
globalized trade widens the income and wealth gap by
driving wages down and making low wages as the main
factor in measuring competitiveness. The neo-liberal
financial system provides credit only to firms that
profit from driving wages down and withholds credit from
firms that raise wages. What the world needs is a
credit allocation regime and a profit measuring system
to link corporate profitability with raising wage levels
rather than lowering them. Lest we should forget, this
is a very American idea. Henry Ford did it in the US by
voluntarily paying higher wages than the market norm so
that his workers could afford to buy the cars they
produced. The US experience has proved that the poor can
be made richer without the rich getting poorer. This can
be done by enlarging the pie while benignly re-dividing
it so that no one gets less than before while the poor
get more faster, rather than just re-dividing a
shrinking pie. The US itself provided very good lessons
on how it could be done. The US has a superior Gini
coefficient, which measures net income equality, than
many underdeveloped economies. And the US is a richer
nation by far. This shows that if global Gini
coefficient improves with more income equality, the
global economy can also be richer. Much of the problems
currently faced by the US economy have to do with the
use of debt to mask a declining Gini coefficient.
*US Prosperity Built on High Wages*
The US economy emerged after WWII as the strongest, the
most productive and the most dynamic in the world, not
only because Europe, Britain, Japan and the USSR and
were all in war ruins, and the rest of the world was
left barren from a century of plundering by Western
imperialism, but because the US model was operatively
superior. This superiority was based on three factors:
1) high socio-economic mobility, 2) high wages with
relatively equality of income and 3) heavy public
investment in physical and social infrastructure such as
transportation, education and research and public
health.
Socio-economic mobility manifested itself in a flowering
of creative entrepreneurship and innovation. It was easy
to turn new ideas and innovations into new small
businesses because of pent-up demand from the war years
and a friendly posture of banks that provided easy
credit for returning veterans who aspired to be small
business owners. Big business applied its war-time
management techniques to concentrate on heavy industry,
benefiting from technological and management
breakthroughs made in war research and systems analysis,
leaving small and medium business opportunities to young
new entrepreneurs to exploit innovations to fill the
needs of a market economy in transition from war
production to peace production. Communication and
transportation were relatively costly and cumbersome,
keeping centralized management from being cost-effective
in pervasive control of local markets, thus enabling
small local entrepreneurs to compete effectively with
big business through nearness to market and sheer
nimbleness to change. A new middle class of good and
rising income came quickly into existence that was
confident, dynamic and independent. This came to be
recognized around the world as the American Spirit, the
belief that the combination of good ideas and hard work
will lead to success in a free and open market, even
though only a very small part of the US market was
really free and open. China is now at the beginning of
this path of development with spectacular success.
High wages and full employment in post-war US led to
strong consumer demand and a happy working class whose
economic interests were effectively promoted by a strong
labor movement that had developed productive symbiotic
relationships with management from war production. Home
ownership was promoted by government subsidies through
credit guarantees and interest ceilings. All that was
need to realize the American dream was a job, the income
from which was closely calibrated to pay for a home, a
car, a good life, free education, affordable health care
and comfortable retirement, all accomplished with
consumer financing. The concept of pay as you go
liberated Americans from the slavery of save first,
consume later, which would produce overcapacity while
consumer needs remained unsatisfied. And jobs were
plentiful because consumer demand war strong. There was
living democracy in the workplace, with bosses forced to
treat workers with equality and with the respect awarded
to customers in order to retain them. The income gap
between factory workers and professionals (engineers,
lawyer, doctors, etc.) were narrow. Many hourly-paid
union tradesmen such as plumbers, carpenters, metal
workers, electricians, etc. actually enjoyed higher
income than professional engineers, at least in the
early decades of their careers. Aside from old money,
income disparity among the working population was small,
giving society de-facto socio-economic-cultural
democracy. This happy outcome was because work was
fairly and highly compensated.
The GI Bill obliterated the elitist tradition of higher
education. Children of working class, farming and
immigrant background went to college and graduate school
for the first time in US history and went on to be
titans of industry and academia. This public-funded
investment in human capital was the single largest
contributor to US prosperity for the post-war decades
until this generation reached retirement age in the mid
1970s.
Despite the anti-communist ideology behind the Cold War,
the US economy benefited greatly from socialistic
programs that began in the New Deal while the core of
the US economy remained firmly rooted in capitalism. The
combination of a capitalistic core and a socialist
infrastructure produced one of the greatest prosperities
in human history, relatively free of oppressive
exploitation. Within limits, the US was undeniably the
freest and riches society in the world. With such a
wondrously successful system, it was a puzzle why
Americans were told by their leaders to fear communism
since the whole world was trying to copy the US. Even
the USSR was copying the US model with the ideological
modification of state capitalism at the core. Where the
USSR erred was that it failed to allow a consumer market
of small entrepreneurs, a mistake China is now avoiding.
<!--[if !supportLineBreakNewLine]-->
<!--[endif]-->Income Disparity Hurts the US Economy
<!--[if !supportLineBreakNewLine]-->
<!--[endif]-->The good times in the US did not last
forever, but the decay came imperceptibly slowly. Cold
War paranoia in the US reversed the populist policies
and arrested the economic ascendance of the middle class
in the US while it turned the young socialist economies
around the world into victims of garrison state
politics. The Korea War set the US on a path against all
national liberation movements in all former colonies
which constituted two thirds of the world's population
that had risen from the post-war ashes of European
imperialism. The Vietnam War was a continuation of that
misguided geopolitical posture. These counterproductive
wars not only did not achieve their misguided
geopolitical objectives, they forced the US to rely on
Japan as a convenient and docile ally both militarily
and economically, shutting out the rest of Asia, and
most importantly, its vast market by self-negating
embargos imposed by US foreign policy. In Europe,
confrontation with Soviet communism after the Berlin
Crisis forced the US to build up defeated Germany as a
key military and economic client state. These policies
set up the US in a new role of neo-imperialist in a
global struggle of the rich against the poor. To support
Germany and Japan and to incorporate them economically
into a reactionary West led by the US, the US decided to
allocate the sunset industries to their economies, such
as auto manufacturing, while the US kept the high-tech
industries such as aircraft manufacturing, television
and computers and most importantly defense industries.
Japan and South Korea were later given steel-making and
shipbuilding to help support US logistics in Asian wars.
The original idea was that subsidized imports to the US
from these new allies were to be tolerated only on a
temporary basis, that they were expected to supply
low-priced goods to the parts of the global market that
were too poor to buy US goods produced at high wages.
But the Cold War embargos put all such markets off limit
to US allies, forcing the US market to stay permanently
open to Japan and Germany. In time, the US came to
depend on relatively inexpensive imports from Japan and
Germany to help contain inflation. Both German and
Japan failed to recover to this day as truly sovereign
powers to fulfill their full potential as independent
states.
Meanwhile, domestically the worst aspects of both
capitalism and socialism were working hand-in-hand to
weaken the US economy. The organization man emerged from
US corporate bureaucratic culture, robbing the economy
of creativity and initiative. The likes of IBM, General
Motors and General Electric became ruthless predators
that chewed up independent entrepreneurs for breakfast
by their market monopoly. A MIT professor of
electronics with a new technology would start a
successful company by servicing IBM which then would
force a fire sale of the new company to IMB by
threatening to stop buying from it. Within a year of its
success, the new innovative company would become another
IBM subsidiary managed by the huge bureaucracy of a
gigantic enterprise. And the professor would retire from
creative work with the sale proceeds. In this manner,
IBM grew into a sluggish giant on a diet of other
people's ingenuity. Unionism turned into a drag on
productivity and efficiency and the main resistant
against change, rather than the driving force of
innovation to protect labor's pricing power. Finance and
banking evolved in ways that discriminated against small
business and those with inadequate capital, and pushed
innovative entrepreneurs to seek funding from venture
capitalist firm whose main aim to sell the new companies
to big business for a quick profit. Risk-taking
eventually became too costly for entrepreneurs, but
cheap for speculators. The US trade deficit grew along
with war-induced fiscal deficits threatening the
gold-backed dollar. Keynesian deficit financing,
instead of a formula to moderate the business cycle,
became a permanent feature even in boom times to support
ever higher levels of structural unemployment. Nixon was
finally forced by recurring trade deficits and fiscal
irresponsibility to take the dollar off gold in 1971;
and by 1973, OPEC was allowed to raise oil prices on
condition that petroldollars would be recycled backed to
the US to limit damage to the US economy. As the US
economy continued to stagnate, offering low returns on
investment, petrodollars went to so-called newly
industrialized countries (NIC). This was the beginning
of globalization which at first was called
interdependence, as half of the world was still under
communist rule. The US was compensating for the
slowdown in domestic growth with overseas expansion, by
arguing that the US economy was merely growing beyond
its borders rather than shrinking domestically, which
would only be true if the US accepted a restructuring of
its economy: by shifting from domestic manufacturing to
global finance.
Jimmy Carter presided over this restructuring transition
of the US economy and saw a "national malaise" of
spiritual despondency and economic stagflation that was
inevitable when the population failed to understand the
transition of the US from a strong nation to a hegemonic
empire, a fact that US transnational corporations could
not level with the US public due to US self-image. The
same thing happened to the controversy over Corn Laws
during the early days of the British Empire. Silly talks
of Japan and Germany overtaking the US were widely
circulated in clueless segments of the US, lamenting the
disappearance of the good old days from the rearview
mirror, unable to see when the rest of the nation was
heading without them. Paul Volcker administered a
blood-letting cure on US inflation and restored health
to the US financial sector by sacrificing US industry
which was increasingly forced to go global, leaving the
US worker jobless on the roadside.<>
*Neo-liberal Global Trade with Dollar Hegemony Depress
Wages Worldwide*
Bill Clinton was the first neo-liberal president. Just
as life-long anti-communist Nixon could strike a deal
with communist China without being accused domestically
of being soft on communism, something that a populist
JFK could never have done during the Cold War, Clinton
was more helpful to US transnational big business by
undercutting organized labor than any Republican dared
venture. Clinton was able to silent US labor
protestation against job outsourcing in globalization
because the union vote had no other candidate to vote
for. Union wrath was deflected from US management to
off-shore labor first in Japan, then Southeast Asia and
then China, exploiting deep-rooted racial hostility in
US labor movements. But it was Robert Rubin, consummate
bond trader from Goldman Sachs, who devised dollar
hegemony as a way of financing a perpetual trade deficit
by forcing US trade partners to recycle their trade
surpluses denominated in dollars back into US capital
accounts by buying US Treasuries that yield low returns.
Thus dollar hegemony allows the US to enjoy a rising
current account deficit by a guaranteed capital account
surplus and the benefits of a strong dollar and low
interest rate all at the same time. The Clinton
Administration effectively resisted political pressure
from US export manufacturers to devalue the dollar,
arguing that devaluation, while helpful to US export, is
not good for overall US national interest, which lies in
the global dominance of finance. And US global financial
dominance depends on a strong dollar made possible by
dollar hegemony. Financial dominance is the caviar and
the trade deficit is in fact the bait to capture
sturgeons in the form of trade partners. By export more
to the US for dollars than they import from the US
payable in dollars, the trading partners of the US are
fooled into thinking that their trade surpluses with the
US are a good deal while they are shipping real wealth
produced by underpaid labor to the US in exchange for
paper money that can only be invested in the US while
their own domestic sectors are starved for capital.<>
The economic transformation of the industrial base in
New England in the US was accomplished in the 1950s by
shifting textile manufacturing to the low-wage south.
This was repeated by shifting manufacturing from the
Midwest to overseas in the 1990s, but unlike New England
in the 1950s which transformed into a new economy of
finance and high tech, the Midwest remained mostly a
rust belt that never recovered. This is because the
profit from the economic transition, instead of going to
start new, more efficient plants, foes to finance debt
that keeps US consumers spending. Robert Rubin, a Wall
Street bond trader par excellence who became US Treasury
Secretary, is an internationalist whose idea of America
does not extend beyond west of the Hudson River.
Politically, the Wall Street internationalists, not all
of whom are Jewish, appeased the opposition by
deregulation of the banking and finance sector, so that
non-New-York financial firms could get in on the action.
In reality, the New York banks end up turning all banks
across the nation as their local branches. Banks in the
US, instead of being local financial pillars that
prosper only with the local economy of their domicile,
now can profit from destroying the local economies.
Early financial globalization was pioneered by
super-WASP Citibank led by Walter Wriston who championed
lending petro-dollars to Third World governments who
were expected to be bankrupt proved when profitable
investment with good returns were getting hard to come
by in the US domestic market.
The battle between those who sold their labor and those
who manipulated finances was won hands down by the
financiers in the age of globalization. This is because
cross-border wage arbitrage, unlike financial arbitrage
that often eliminates market inefficiency by lifting the
market value of the coupled instruments, works only to
depress wages, never to lift them. Workers are not
allowed to go to where wages are high, yet capital is
encouraged to go where wages are low. Thus while the aim
financial arbitrage is to lift asset value to enhance
profit, the aim of wage arbitrage is to lower wage value
to enhance profit. To defuse political backlash of
falling wages in the advanced economies caused by
outsourcing to low-waged economies, an asset bubble,
including housing, was allowed to give the masses in the
advanced economies capital gain income to compensate of
reduced income from work. The formula was to take jobs
from high-pay US workers and give them to low-wage
oversea workers, and to compensate US workers with
rising prices on their homes, low price imports and
larger return for their pension fund investments
overseas. This formula worked for a while, but it
requires an escalating expansion of the money supply to
support a debt bubble. The Fed under Greenspan managed
to accommodate debt-driven expansion for over a decade,
until the problem reached a point when further expansion
of the money supply does not leave money in the US, but
goes only to the global dollar economy off shore. US
corporations are lining up to shed their pension
obligation in the name of maintaining global
competitiveness. The US housing bubble will burst from
insufficient and stagnant income even if mortgage rates
should remain low.
Thus while it may still be in US imperial interest to
expand the dollar economy globally, this expansion is
facing domestic political opposition because an
expanding global dollar economy leads to imbalances in
the US economy with clear winners and losers that will
soon translate into political expressions in future
elections. In a democracy, when losers exceed winners in
numbers, even if not in aggregate monetary value, the
electoral impact can be immediate. The dollar economy,
which benefits primarily the financial sectors in the US
and other money center locations, continues to expand
while the non-financial sectors of the US economy
collapse. With domestic political opposition building in
the US, it is of critical importance how US policy will
deal with the challenge of domestic imbalances created
by globalization.
*The Need to Reduce Global Wage Disparity*
US policies need be changed to stop the destructive
impact of dollar hegemony on both the US economy as well
as the global economy. The global dollar economy is
shaping up to benefit unfairly only a small number of
financial speculators and manipulators, not the world's
population. The key is to eliminate as quickly as
possible global income disparity that enable destructive
cross-border wage arbitrage. The US should promote,
even impose, terms of trade that reduces wage disparity
both domestically and globally. This will allow both
the US and the global economy to expand faster. Since it
is economically painful and politically dangerous to
lower wages in the advance economies, the only option is
to raise wages at a rapid rate in the currently low-wage
regions to reduce global wage disparity. This can be
done only if global wage parity is set as a policy
objective, rather than letting market forces dictate a
downward spiral of falling wages. As global wages reach
parity, manufacturing will be redistributed to locations
of true overall competitiveness, rather being based on
the single dimensional factor of wages. Global trade and
exports will be conducted to benefit domestic
development rather than to deter domestic development.
Global income will rise, creating more consumer demand
to reduce or even eliminated current global
overcapacity.
Without an OLEC cartel to protect the pricing power of
labor in a global financial market, the Law of One Price
will discriminate against labor by pushing wages down.
The Law of One Prices echoes David Ricardo's Iron Law of
Wages which supplements Thomas Malthus' population
theory by asserting that wages tend to stabilize at the
lowest subsistence level as a result of unregulated
market forces. Malthus observed that population growth
would mathematically outstrip the means of subsistence,
giving economics the label of the "dismal science."
The theory of marginal utility as espoused by William
Stanley Jevons in England, Leon Walrus in France, Eugene
Bohm-Bawerk in Austria, Irving Fisher and Alfred
Marshall in the US asserts that the market value of a
commodity is determined by the demand for it and the
relative scarcity at any given time and situation, and
not by any intrinsic value. Marginal price is the price
above which no buyer will buy. Marginal land is land
that will not repay the cost of labor and capital
applied to its cultivation or improvement. Marginal
wage is the wage above which employment will cease. But
while labor is a commodity, humans are not. There are
basic human needs that every economy is required to
first satisfy before market rules can be applied. For
this reason, all civilized societies forbade slavery,
child labor and other inhumane labor practices.
The Law of One Price for labor decrees that the Iron Law
of Wages will depress marginal wage to the lowest
possible level if left to market forces. Yet the theory
of marginal value of labor operating within a regime of
neo-liberal terms of trade only applies impeccable logic
to an artificially structure disguised as fundamental
truth. The terms of trade in a labor market in which an
anti-inflation monetary policy structurally disallows
any scarcity of labor to emerge is inherently
prejudicial to the fair pricing of labor. Similarly, the
theory of marginal value in the flawed terms of trade in
the auto market leads Detroit to produce unsafe cars at
any speed by calculating that the cost of law suits from
injury and death by unsafe cars is less costly than
raising auto safety standards when the monetary value of
injury and death are set too low by the courts. The
current global overcapacity is a direct result of global
wages being set too low by global wage arbitrage,
depriving the world of the full potential of consumer
demand. This overcapacity can be corrected by a global
labor cartel.
*Purchasing Power Parity, the Law of One Price and
Exchange Rates*
Purchasing power parity (PPP) between currencies
measures the disconnection between exchange rates and
local prices that defy the Law of One Price in a
globalized economy. Purchasing power parity is reached
when exchange rates between two currencies are adjusted
to enable both currencies to buy the same amount of
goods and services at local prices. The PPP gap between
the US dollar and the Chinese yuan is estimated to be 4,
meaning that one Chinese yuan buys four times as much in
China than its current exchange rate equivalent in
dollars buys in the US. A PPP gap highlights the
distortion exchange rates exert on the "Law of One
Price" in cross-border trade. Purchase power parity
contrasts with interest rate parity (IRP), which assumes
that the behavior of investors, whose transactions are
recorded on the capital account, induces changes in the
exchange rate. For a dollar investor to earn the same
interest rate on his investment in a foreign economy
with a PPP gap of four times, such as the purchasing
power disparity between the US dollar and the Chinese
yuan, the return would have to buy four time more in
China than it does in the US. Thus for every dollars of
profit US investors require from investment in China,
four dollars equivalent in Chinese goods and services
are needed to support the prevailing exchange rate.
Accordingly Chinese wages would have to be at least four
times lower than US wages unless inflation in China
closes the PPP gap, or purchasing power disparity,
between the two currencies. But inflation in China will
cause the yuan to fall against the dollar, keeping the
PPP gap constant even as Chinese prices rise. This shows
that pushing China to upward revalue its currency is
futile as Chinese wage would fall to compensate for a
stronger yuan. What China needs to do is to raise
Chinese wages within a stable exchange rate.
*Applying the Law of One Price to Global Labor*
The Law of One Price says that identical goods should
sell for the same price in two separate markets when
there are no transportation costs and no differential
taxes or tariffs applied in the two markets. A global
trade regime governed by the Law of One Price should
have wages in two separate labor markets converging
through arbitrage to close the disparity. Since it is
economically regressive for the higher wages to fall,
the only productive convergence would be for the lower
wages to rise. In finance, the Law of One Price is an
economic rule which states that in an efficient market,
a security must have a single price, no matter how that
security is created. For example, if an option can be
created using two different sets of underlying
securities, then the total price for each would be the
same; otherwise an arbitrage opportunity would exist.
Because of the Law of One Price, put-call parity
requires that the call option and the replicating
portfolio must have the same price. Interest rate
parity, which plays an important role in the foreign
exchange markets, is another example of the Law of One
Price. For the Law of One Price to hold between two
economies, purchasing price parity, exchange rate parity
between the paired currencies and interest rate parity
must all exist simultaneously. Any violation of the Law
of One Price is an arbitrage opportunity. The same
should apply to the disaggregated labor markets in the
global economy. The issue of unified wages is not only
a matter of morality or social justice, as liberals
asserted during the industrial revolution and the age of
imperialism and as neo-liberals and market
fundamentalists reject in the age of globalization and
neo-imperialism. It is the law of a truly free global
market. While finance arbitrage uses the Law of One
Price to raise market value of securities, cross-border
wage arbitrage thus far only obstructs the Law of One
Price in separate labor markets to keep wages low
everywhere. A common mistake traders make is to forget
the caveat that arbitragable price discrepancy should be
isolated from factors such as tax treatment, liquidity
or credit risk. Otherwise, they will put on what they
perceive to be an arbitrage when in fact there is no
violation of the Law of One Price beyond government
intervention. The Law of One Price underlies the
important financial engineering definition of
arbitrage-free pricing even for disparity of prices
created by government policy.
To understand the positive potential for cross-border
wage arbitrage, beyond the destructive impact of archaic
outsourcing, lessons can be learned from how profit is
generated by arbitrage plays in financial markets. If
risks from oil, weather, environmental impact, credit
and interest rates can be arbitraged profitably, there
is good reason that risks associated with rising wages
can also be arbitraged for profit.
*Using Wage Arbitrage to Stabilize Rising Wages*
In finance theory, an arbitrage is a "free lunch", a
transaction or portfolio that makes a profit without
risk. Suppose a futures contract trades on two different
exchanges. If, at one point in time, the contract is bid
at $40.02 on one exchange and offered at $40.00 on the
other, a trader could purchase the contract at one price
and sell it at the other to make a risk-free profit of a
$0.02. If the market for that security has sufficient
broadness and depth, the arbitrageur can make millions.
And if an arbitrage opportunity is created by a central
bank on two currency, as the Bank of England did in 1992
defending the pound sterling, a arbitrageur like George
Soros could make billions in a couple of days at the
expense of the British economy. In 1998, an article
Soros wrote in the Financial Times on the inevitability
of a Russian devaluation of its currency precipitated
the fall of the Russian Government, a massive default on
its debts, and widespread financial panic that brought
down Long Term Capital Management (LTCM), another
high-flying hedge fund, requiring involvement of the
Federal Reserve in a $3,5 billion bailout. The IMF plan
for Russia assumed that the maturing treasury bills
(GKOs) could be rolled over at albeit astronomically
high interest rate. But the holders of the GKOs were
banks that borrowed dollars to buy the same GKOs which
could not repay the dollars without the foreign banks
agreeing to lend them more money, which the foreign
banks were not. So the Russian banks could not roll over
the GKO at any price, leaving a missing link in the
financial chain. As the Russian public started
withdrawing its savings from the national savings banks,
the missing link widened. What started out as a fixable
hole of $7 billion, within a week or two became a
unfixable abyss. Soros and his partners lost their
investment in a Russian telephone company along with
countless others.
Most arbitrage opportunities normally only reflect minor
pricing discrepancies between markets or correlated
instruments. Per-transaction profits tend to be small,
and they can be negated entirely by retail transaction
costs. Accordingly, most arbitrage is performed by
institutions that have very low wholesale transaction
costs and can make up for small profit margins by doing
a large volume of transactions. Formally, theoreticians
define an arbitrage as a trading strategy that requires
the investment of no net capital, cannot lose money, and
has a positive probability of making money. Arbitrage
is the quintessential virtual-capital play in
capitalism.
Wages in different labor markets change for complex
reasons. The gap in wages measured by standard
productivity units changes which produces arbitrage
opportunities. Any company whose revenue is affected by
weather has a potential need for weather risk management
products that hedge the company's exposure to weather
deviating from historical norms. This is true for
companies that consume oil, or impacted by changes in
interest rates or any kind of uncertainty. In 2003, US
Defense Department considered launching a market for
terrorism futures to improve the prediction and
prevention of terrorist outrages. All companies are
affected in their profit by wage/productivity ratios. A
labor cartel, like an oil cartel, cannot be expected to
keep prices at fixed level for long periods, nor would
it be necessary. Thus a wage risk management derivative
can be structured to mitigate wage risks and reduce
resistance to wage rise caused by fear of unexpected
temporary wage decline in competing markets. Like
weather and environmental derivatives, hedging can be a
defensive use of wage index derivatives. Strategic
planning linked to wage uncertainties can also be
financially backed by wage index derivatives for
pro-active use to sustain wage targets set by the labor
cartel.
While a market is said to be arbitrage free if prices in
that market offer no arbitrage opportunities, there is a
second use of the term shunned by theoretical purists
but in wide use for several decades to become standard
in all markets. According to this usage, an arbitrage is
a leveraged speculative transaction or portfolio. During
the 1980s, junk bond financing funded an overheated
mergers and acquisitions market that produced new
corporations, such as CNN, Microsoft and many of the
names that are now respected industrial giants.
Arbitragers of this period were speculators who took
leveraged equity positions either in anticipation of a
possible takeover or to put a firm in play. They also
engaged in greenmail. Ivan Boesky was a famous
arbitrager from this period who was ultimately convicted
of insider trading. Michael Milken, the junk bond king
also was sent to prison on finance-related charges. But
the role of junk bond in financing new companies which
otherwise could be secure financing was undeniable. The
presence of a labor carter to sustain rising wages that
stimulate consumer demand can also be financed by
speculative arbitrage. If the conditions should come
into existence, the almost inexhaustible creativity of
the financial markets will response to the challenge.
*Neoclassical Economics Arbitrarily Assigns Unequal
Pricing Powers between Capital and Labor*
David Ricardo's interest in economics was sparked by
Adam Smith's Wealth of Nations (1776) whose thesis is
that the division of labor (specialization) enhances
economic growth. Ricardo's law of rent was seminally
influenced by Malthusian concepts. He propounded his
"Iron Law of Wages" and a labor theory of value. To
Ricardo, rent is a result and not a cause of price. The
"Iron Law of Wages" asserts that wages cannot rise above
subsistence levels. The theory of value maintains that
in exchange, the value, not the price, of goods is
measured by the amount of labor expended in their
production. Smith also saw advancements in mechanization
and international trade as engines of growth through the
facilitation of further specialization. Because savings
by the rich was seen as what provides investment and
hence economic growth, Ricardo saw unequal income
distribution as being one of the most important
determinants of national economic growth. This is a
critical shortcoming in Ricardo's proposition, as in the
modern economy, capital comes increasingly from the
pension funds of workers, not exclusively from the rich.
However, Ricardo posited savings to be in part
determined by the profits of stock: as the capital stock
of a country increased, profit declined - not because of
decreasing marginal productivity, but rather because
competition between capitalists for workers would bid
wages up to reduce profit. So keeping the living
standards of workers low was another way to maintain or
accelerate economic growth. This was the critical error
Ricardo made in his observation of industrial
capitalism. Ricardo did not understand that as
industrialization advances, overcapacity will result
unless workers are paid enough to consume what they
produced. Ricardo did not foresee that free markets must
include free labor markets that would enhance worker
market power if economic growth were to be maintained.
Ricardo reasoned that if labor cost rises with labor
productivity, such rise will neutralize any marginal
rise in return to capital which requires productivity
rising faster than wages. Ricardo thus provided the
"scientific" rationale for the anti-labor mentality of
capitalism which is not only unnecessary but also
factually incorrect. For Ricardo, capital is deployed
to enhance labor productivity to increase return on
capital, not to raise the standard of living of workers
by raising worker income. The fixation with regressive
theory is the rationale for the need of a labor cartel
such as OLEC.
February 20, 2006
Next: Rising Wages Solve All Problems
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