From: glevy@PRATT.EDU
Date: Sun May 21 2006 - 11:09:43 EDT
World Trade Needs a Global Cartel for Labor (OLEC)
Part II: Rising Wages Solve All Problems
By
Henry C.K. Liu
Part I: Background and Theory
According to the current terms of global trade under
dollar hegemony, the penalty for a non-dollar economy
that uses dollar foreign capital is a low domestic
standard of living to support a high return denominated
in dollars on foreign capital. Since dollar profits for
foreign capital cannot be used in the local non-dollar
economy, such profits must leave the domestic economy in
one form or another, either through direct repatriation,
or in economies with currency control, through central
bank foreign exchange reserves. Thus there are no
recycling economic benefits to the non-dollar domestic
economy from dollar profits earned by foreign
investment. Such is the pugnacious nature of foreign
direct investment (FDI). Under finance globalization,
the unregulated competition among non-dollar economies
for dollar-denominated FDI condemns domestic living
standards to negative growth. The quest to profit from
the lowest wages through cross-border wage arbitrage has
been the driving force behind trade globalization,
reducing trade from a process of gaining comparative
advantage between trading economies to one of
reinforcing absolute advantage for capital at the
expense of labor for the benefit of global capital
denominated in dollars. Cross-border wage arbitrage can
hardly be classified as a proper division of labor in
the Smithian sense, which implies rising wages through
specialization. Structural systemic low wages are
exploitation, not specialization of labor. Such
exploitation need to be resisted by the formation of a
global labor cartel such as an Organization of
Labor-intensive Exporting Countries (OLEC).
*Classical Economics - Rationalization of the Industrial
Revolution*
By 1700, the tendency of the agricultural state and the
craft guilds to resist industrialization was weakening.
In 1762, Matthew Boulton built a factory in England with
over six hundred workers, and installed a steam engine
to supplement power from two large waterwheels which ran
a variety of lathes and polishing and grinding machines.
In Staffordshire an industry developed to export
low-price, good-quality pottery, using hand-made
chinaware brought in from China by the East India
Trading Company as models. Josiah Wedgewood (1730-1795)
revolutionized the mass production and sale of low-price
pottery, causing eating and drinking to be consequently
more hygienic, thus contributing to a reduction of
diseases and an increase in population. The textile
industry overcame the production mismatch between
spinners and looms as well as yarns and weavers with the
introduction of a machine known as ''Crompton's mule,''
which mass produced quantities of fine strong yarn to
keep weaver from idly waiting for yarns. Between 1780
and 1860 other textile processes were mechanized with
automated looms, and when the power loom became
efficient, low-wage women replaced men as weavers. By
1812 the cost of making cotton yarn had dropped 90%, and
by 1800 the number of workers needed to turn wool into
yarn had been reduced by 80%. And by 1840 the labor cost
of making the best woolen cloth had fallen by at least
half. The history of industrialization is one of
forcing wages down, until the advent of labor unions.
The steam engine accelerated the industrial development
of Europe. In 1763 James watt, an instrument-maker for
Glasgow University, perfected a true steam engine with a
crank and flywheel to provide rotary motion that could
be harvested for a great variety of production work. In
1774 the industrialist Michael Boulton took Watt into
partnership, and their firm produced some 500 engines
before Watt's patent expired 26 years later in 1800. The
steam engine liberated the factory from water power and
its streamside location and relocated it to regions that
produced coal, making coal producing countries
industrial powers. A Watt engine drove Robert Fulton's
experimental steam vessel Clermont up the Hudson from
New York to Albany in 1807.
It was not until 1873 that a dynamo capable of prolonged
operation was developed, but as early as 1831 Michael
Faraday demonstrated how electricity could be
mechanically produced. Through the nineteenth century
the use of electric power was limited by small
productive capacity, short transmission lines, and high
cost. Up to 1900 the only cheap electricity was that
produced by generators making use of falling water in
the mountains of southeastern France and northern Italy.
Hilly Italy, without coal resources, with a historical
experience in handling water, soon had hydroelectricity
in every village north of Rome. Electric current ran
Italian textile looms and, eventually, automobile
factories. As early as 1890 Florence boasted the world's
first electric streetcar. The coming of the railroads
greatly facilitated the industrialization of Europe. The
big railway boom in Britain came in the years 1844 to
1847. The railway builders had to fight vested
interests, canal stockholders, turnpike trusts, and
horse breeders. By 1850, aided by cheap iron and better
machine tools, a network of railways had been built
linking inland factories with exporting ports. After
1850 the state had to intervene to regulate what
amounted to a monopoly of inland transport in Britain.
Alexander Graham Bell in 1876 transmitted the human
voice over a wire. At the end of the century the
wireless telegraph became a standard safety device on
oceangoing vessels. Radio did not come until 1920. The
world continued to shrink at a great rate as new means
of transport and communication speeded the pace of life.
The Industrial Revolution brought with it a sharp
increase in population and urbanization, as well as new
social classes. England and Germany showed an annual
growth rate greater than 1% which would double the
population every seventy years. In the United States the
increase was greater than 3% which was readily absorbed
by a practically uninhabited continent with abundant
natural resources. Only the population of France
remained static after the eighteenth century which
partly explained the decline of France as a major modern
power until it embarked on a policy of colonization. The
general population increase was aided by a greater
supply of low-cost food made available by the previous
Agricultural Revolution, and by the growth of medical
science and public health measures which decreased the
death rate and added to the population base, with the
rapid growth of cities.<!--[if
!supportLineBreakNewLine]--><!--[endif]-->
The factory-owning bourgeoisie use the discontent of the
peasants to gain control of the government from the
landed aristocrats. Their rule over a new working class
created by the Industrial Revolution was harsher than
that of the aristocrats over the peasants. Skilled
artisans were degraded to faceless production laborers
as machines began to mass produce the products formerly
made by loving hand. Wages fell, working hours
lengthened and working conditions became inhumane and
unsafe. The industrial workers had helped to pass the
Reform Bill of 1832, but they had not been enfranchised
by it because of their poverty, as the control of
government fell to the bourgeoisie.
*Law of Rent is Regressively Anti-labor*
Classical economics grew out of the Industrial
Revolution which began first in Britain. It was natural
for it to be dominated by the opinions of British
observers of conditions created by early
industrialization. British classical economist David
Ricardo's law of rent was seminally influenced by
Malthusian concepts on population dynamics. Thomas
Robert Malthus (1766-1834), another British economist,
sociologist and pioneer in population theory, asserted
that population growth is difficult to check and would
quickly outstrip economic growth and cause increasing
misery all around. In his An Essay on the Principle of
Population (1798), Malthus contended that poverty is
unavoidable without population control since natural
population increase is geometric while the increase of
the means of subsistence is arithmetical. Thus famine
and disease can be viewed as natural constraints on
population and war as a political constraint, all having
socio-economic causes rooted in overpopulation. In
1803, Malthus admitted the preventive check of "moral
restraint", paving the way for neo-Malthusian birth
control theories which influenced other classical
economists, especially David Ricardo (1772-1823).
Malthus never explained why urban centers of high
population density became centers of high civilization
and culture, and why prosperous nations with large
population become great powers, such as Britain, Germany
and the US, or China, Russia and the Ottoman Empire
before the Industrial Revolution.
Accepting the Malthusian claim, Ricardo modified Smith's
theory of economic growth by including diminishing
returns on land. Output growth requires growth of factor
inputs, which are goods and services used in the process
of production, such as land, labor, capital and
enterprise. But unlike labor, land as observed by
Ricardo is "variable in quality and fixed in supply."
This means that as economic growth proceeds, with
improvement of the quality of land use reaching upper
limits, more land must be brought into use to sustain
growth. Yet land cannot be increased without
geographical expansion through conquest, which leads
economic growth in a capitalist regime inevitably to the
age of empire and imperialism.
Ricardo was concerned not so much with the "nature and
causes" as with the distribution of wealth. This
distribution has to be made between the classes
concerned in the production of wealth, namely, the
landowner, the capitalist, and the laborer. In seeking
to show the conditions which determine the share of
each, Ricardo's theory of rent is fundamental based on
which economists develop the notion of economic rent
which will be dealt with later in the article. He
attributed his inspriation to Malthus's Inquiry into the
Nature and Progress of Rent and others. Rent, Ricardo
argued, does not enter into the cost of production; it
varies on different farms according to the fertility of
the soil and the advantages of their situation. But the
price of the produce is the same for all and is fixed by
the conditions of production on the least favorable land
which has to be cultivated to meet the demand; and this
land pays no rent. Rent, therefore, is the price which
the landowner is able to charge for the special
advantages of his land; it is the difference between its
return to a given amount of capital and labor and the
similar return of the least advantageous land which has
to be cultivated. Consequently, it rises as the margin
of cultivation spreads to less fertile soils. Obviously,
this doctrine leads to a strong argument in favor of the
free importation of foreign goods, especially corn. It
also breaks with the economic optimism of Adam Smith,
who thought that the interest of the country gentleman
harmonized with that of the mass of the people, for it
shows that the rent of the landowner rises as the
increasing need of the people compels them to have
resort to inferior land for the production of their
food.
Prior to the imperialistic age, there were two
self-neutralizing effects on economic growth: firstly,
rising land rent cuts into profits of capitalists from
one side; and secondly, rising price of wage goods cuts
into capitalist profits from another as workers need
higher wages for subsistence. This introduces a quicker
limit to economic growth than Smith allowed, but Ricardo
also claimed that this decline could be happily checked
by technological improvements in mechanization and the
specialization brought on by the growth of trade.
However, Ricardo's concept of trade for comparative
advantage is fundamentally different from trade for
absolute advantage under the current age of
globalization. Still, the flaw in the Law of Rent is
Ricardo's rejection that labor can also be variable in
quality though education and fixed in supply through a
global labor cartel.
*Automation Creates Unemployment Unless Wages Rise to
Create Marginal Demand to Absorb Marginal Productivity.*
Nevertheless, in the third edition of his Principles,
Ricardo modified his position on mechanization (and by
implication, automation). He observed that when
machinery displaces labor, the labor "set free" may not
be reabsorbed elsewhere in the economy because capital
is not simultaneously "set free", trapped in sunk
investment in machinery. This creates downward pressure
on wages and lowers aggregate labor income, with the
difference absorbed by the long-term investment and
financing cost of capital goods. It is true that
capital goods also require intellectual labor to
produce, but the productive lifespan of capital goods is
exponentially longer than their initial intellectual
labor input, which also brings about rising need for
long-term finance. This characteristic is altered in
the age of communication and information technology
where technical obsolescence has accelerated the
technological imperative. Yet this new ratio of
intellectual labor input to enhance productivity has not
translated into higher wages even for the intellectual
worker. Much of the surplus value went to a handful of
intellectual property rights holders and their corporate
metamorphoses, creating new super-rich robber barons
personified by the likes of Bill Gates. Capital goods
need decades of reduced labor cost to pay for their
capital input and financing cost in the form of interest
payable throughout the course of the loan or lease term.
Such interest payments require additional reduced labor
cost over the life of the financing.
This has been the experience in China in the past two
decades of industrialization with foreign capital, paid
for by export earnings. Up to 70% of China's export
trade is financed by foreign capital and traded by
foreign traders. China's outstanding foreign debt stood
at $267.46 billion at the end of September, 2005 up
8.07% or $19.97 billion from the end of 2004. The State
Administration of Foreign Exchange (SAFE), an arm of the
central bank, said that the increase was due to a rise
in short-term debt, and most of that was trade related.
As of the end of September, outstanding short-term debt
was $143.97 billion, up 16.86% from the end of 2004.
Medium- and long-term debt was down 0.65%, or $801
million, at $123.49 billion. SAFE, concerned that some
of the inflow is due to speculation that the nation's
currency would appreciate, issued new rules in October
2005 tightening control over foreign debt in a bid to
curb speculative inflows of funds from abroad. The yuan
was revalued 2.1% against the dollar on July 21, 2005.
As of the end of September, 2005 short-term obligations
accounted for 53.83% of all outstanding foreign debt,
compared with 53.1% at the end of June. The rise in
foreign debt is unlikely to pose much of a problem as
the nation's foreign exchange reserves have been
climbing at a rapid pace, reaching $794.2 billion at the
end of November, 2005. Some economists predict that
reserves could exceed $1 trillion by the end of 2006.
China's foreign debt total at the end of September 2005
included registered foreign debt of $189.46 billion,
inclusive of outstanding trade credits of $78 billion.
The total supply of tradable domestic bonds in China at
the end of June 2003 was RMB 3.4 trillion (US$ 411
billion). Total outstanding tradable debt now exceeds
$600 billion (60% of GDP) against foreign exchange
reserves of $800 billion. This leaves a net cushion of
less than $200 billion for all of China's remaining debt
obligations, hardly a picture of unqualified financial
strength. Still, in July 2005 S&P upgraded China's
sovereign rating by one notch to A-minus, citing China's
aggressive overhaul of its financial sector and improved
profitability. China is rated 'A2' by Moody's Investors
Service and 'A' by Fitch Ratings.
The foreign exchange reserves build-up by the People's
Bank of China (PBoC), China's central bank, present a
misleading picture about the financial benefits China
receives from foreign trade. The profit mostly goes to
foreign capital, while the PBoC's dollar reserves have
come from the sale of domestic sovereign debt to remove
trade-surplus dollars from the Chinese economy in a
process known as sterilization in monetary economics.
China does not own these dollars which have been earned
by foreign capital on Chinese soil paying low wages to
Chinese workers. China merely exchanges its own
sovereign debt instruments for the foreign dollar
profits in its economy to buy US Treasuries to sustain
the US capital account surplus.<>
In order to reabsorb the labor displaced by
mechanization or automation, the rate of capital
accumulation must continuously increase. But with
foreign direct investment, there is no mechanism for
this to happen domestically since the profit belongs to
foreign entities which will eventually carry the loot
back to their own home bases. Globally, given the
tendency for profit and thus savings to decline over
time from overinvestment in relation to worker
purchasing power, a perpetual surplus of labor is the
result.
The mismatch of the long functional life cycle of
products to their shorter financial life cycle leads to
the irrational phenomenon of planned obsolescence in
which products are planned to last not as good
engineering permits, but as their financial life allows,
in order to produce recurring market demand
artificially. In a high tech-economy, which Ricardo did
not have the opportunity to observe in his lifetime,
fast technological obsolescence tends to require a
higher and recurring level of mental labor input,
rescuing high-tech workers from the effects of Ricardo's
Iron Law of Wages. Under globalization, high-tech
workers, while freed by technological imperative from
the Iron Law of Wages, are re-enslaved by global wage
arbitrage made possible through instant and low-cost
data telecommunication and low shipping cost of greatly
reduced physical output. Thus a labor cartel is also
needed in high-tech sectors to resist this new
enslavement.
Ricardo did not deal with the problem of uneven market
demand on different grades of labor created by
mechanization, between educated
scientists/engineers/managers/sales and uneducated
factory workers. In the early years of
industrialization, educated professional and managerial
personnel were part of management, not labor. With the
emergence of large corporate entities, upgrades in
quality caused labor as a category to expand to include
high-skilled, professional and managerial workers. Until
the introduction of universal education in the advanced
economies, which is an industrial policy program to
intervene in the labor market, unskilled or low-skilled
laborers were so lowly paid that they simply could not
afford education for their children, thus condemning
them to the ranks of the unemployable for life through
hereditary poverty. A shortage of educated workers
developed along with an oversupply of unskilled labor,
exacerbating widening income disparity. Mechanization
absorbs the highly-skilled in the design and engineering
phase and displaces the unskilled in the production
phase at unbalanced rates.
As income rise comes to depend on education level, the
cost of education increases and requires financing over
longer periods of schooling and more sophisticated
teaching and research facilities and institutions,
further limiting low-income access. Competitive
scholarships to the poor but deserving caused a brain
drain from the working poor, leaving them genetically
inadequate to resist. Free universal education then is a
critical component of economic democracy. Privatization
of education is the death knell of free markets for
labor. The US system of funding public education with
property taxes leads to location-related disparity of
education opportunity. Just as much of gasoline taxes
are directly reserved for the Highway Trust Fund (18.3
cents per gallon federal gasoline tax and 24.3 cents per
gallon diesel tax), a fixed portion of a progressive
income tax structure should be devoted to a national
education trust fund. Those enjoying high income are
benefiting from their earlier educational subsidies and
should be asked to fund educational opportunities of
future generations. A cartel for global labor can
retrieve universal free education for all to upgrade the
quality of labor.
*Economic Rent and Excess Profit*
Ricardo correctly observed that rent is a result and not
a cause of price. Rent has two different meanings for
economists. The first is the commonplace definition: the
income from hiring out an asset, such as money, land or
other durable goods or labor. The second, known as
economic rent, is a measure of market power: the
difference between what a factor of production costs and
how much it would need to be paid to remain in its
current use. A star entertainer may be paid $10 million
a year when he/she would be willing to perform for only
$1 million under different circumstances, so his
economic rent is $9 million a year. In a manner of
speaking, economic rent is a form of excess profit. US
executives enjoy the world's highest economic rent for
management. Under perfect competition, there would be
no sustainable economic rents of duration, as new
entertainers are attracted by a high economic rent
market and compete until economic rent falls to near
zero.
Reducing economic rent does not change production
decisions, so economic rent can be taxed to reduce
income disparity without any adverse impact on the real
economy. No baseball star would take up washing dishes
in a restaurant to protest high taxes on his economic
rent. When chief executive officers in large
corporation get compensation packages in the range of
hundreds of million of dollars, much of that is economic
rent for exercising market power over employees under
the executives' management. The CEO of Yahoo, Terry S.
Semel was paid $231 million in 2005. There is no
economic logic in the obscene disparity between
executive pay and worker wages, which has increased by
more than ten folds in past decades in the US,
particularly when increased earnings are often achieved
by shrinking the company through massive layoffs. It
defies logic why a company laying off employees should
be considered a good investment, just as why a nation
with a declining population should be considered a
healthy nation. It is sheer insanity that a CEO should
be rewarded with millions in pay and perks for putting
tens of thousands of workers in his/her company out of
work.
*The Iron Law of Wages Fallacy*
Upon these odd concepts natural only to unique
conditions associated with early industrialization and
in the 19th century milieu of fascination with natural
laws, Ricardo propounded his Iron Law of Wages, a
blatantly anti-labor theory of value. The Iron Law of
Wages asserts that wages naturally drift towards minimum
levels and cannot possibly rise above subsistence
levels, notwithstanding the purpose of civilization
being to modify the adverse effects of nature.
Economics, as a dismal science, has too long been
accepting the malignant effects of human construct as
natural laws, rather than treating exploitation, greed
and injustice as flaws in the human condition that needs
to be contained by a rational structure that rewards
good and penalizes evil. To be logical is not always the
equivalent of being rational. The labor theory of value
maintains that in exchange, the value, though not the
market price, of goods is measured by the amount of
labor expended in their production. The intrinsic value
of labor then is the starting point against which all
other values are constructed. When the intrinsic value
of labor is high in an economic system, the resultant
society is good in the philosophical sense of the word.
When the intrinsic value of labor is low, the resultant
society is not good. When the market price differs from
intrinsic value, it causes either inflation or
deflation, producing drags on economic growth. With the
current international financial architecture of fiat
currencies lorded over by dollar hegemony, differential
between market price and intrinsic value is magnified,
usually at the expense of those producing the goods, for
the benefit of those in command of market power. Current
Wall Street philosophical rationalization
notwithstanding, greed is not good. Greed is not to be
confused with merely benignly wanting more; it is
"wanting more" to the point of blindly risking self
destruction.
On interest, the rent for money, Ricardo had little to
say. He observed that money, by which he meant specie
money based on gold which Britain does not produce and
must import, not fiat money which any sovereign
government could produce at will if freed from dollar
hegemony, "is subject to incessant variations from its
being a commodity obtained from a foreign country, from
its being the general medium of exchange between all
civilized countries, and from its being also distributed
among those countries in proportions which are ever
changing with every improvement in commerce and
machinery, and with every increasing difficulty of
obtaining food and necessaries for an increasing
population. In stating the principles which regulate
exchangeable value and price, we should carefully
distinguish between those variations which belong to the
commodity itself, and those which are occasioned by a
variation in the medium in which value is estimated, or
price expressed." After the collapse in 1971 of the
Bretton Woods regime of gold-backed dollar, fixed
exchange rates and restricted cross-border flow of
funds, the resultant international financial
architecture of fiat currencies based on the dollar as
the head of the snake of fiat currencies, has made
impossible such distinction between intrinsic variation
of commodities and variation in the medium of exchange.
This has created a disconnection between price and value
in international trade, in favor of the dollar economy
at the expense of all non-dollar economies.
*Natural Price and Market Price of Labor*
Ricardo asserted that a rise in wages due to inflation
produces no real effect on profits as prices of products
also rise. This is known in modern times as cost of
living increases of wages or inflation indexation. A
rise in real wages ahead of inflation has a direct
effect in lowering profits unless the economy is plagued
with overcapacity which rarely happened if at all during
the early decades of industrialization that Ricardo
observed. Labor, when purchased and sold as a
commodity, may increase or diminish quantitatively in
supply and has a natural price and a market price. The
natural price of labor, according to Ricardo, is that
price which is necessary to enable laborers to subsist
and "to perpetuate their race without either increase or
diminution." But there is nothing "natural" about
Ricardo's natural price of labor. What Ricardo called
natural was actually merely a pervasive artificial
socio-political regime. In that regime, as then existed
in Britain, population grew naturally without
intervention and the growth tended to be concentrated on
the laboring poor who had the least capacity to
intervene on their fate in society. Ricardo's natural
price of labor depends on the price of the food,
necessities, and conveniences required for the support
of the laborer and his often large family. But in a
functional economy in a civilized society, the natural
price of labor should be based on society's concept of a
good and decent life, which includes ample leisure to
cultivate body and spirit, opportunity for advancement,
occupational safety, health care and insurance, free
education, affordable housing and retirement benefits.
Subsistence has taken on different, more equitable and
humane meanings since the early days of the Industrial
Revolution.
Ricardo granted that with technological and social
progress, the natural price of labor always has a
tendency to rise, while the natural price of
commodities, excepting raw material and labor, has a
tendency to fall because of innovation that improves
productivity. The market price of labor is supposed to
be determined by supply and demand. Unemployment then
is a condition that depresses the market price of labor
by increasing the supply of labor to saturate demand.
Companies increase short-term profit by laying off
workers, notwithstanding that an increase in
unemployment shrinks aggregate demand that eventually
reduces corporation profits. When the market price of
labor exceeds its natural price, the condition of the
laborer is flourishing and happy. But Ricardo reasoned
that high wages give rise to population growth,
increasing the supply of labor to cause wages to again
fall to their natural price, and indeed from
overreaction sometimes fall below it. So goes the
argument for population control for the good of the
laboring class, or as Ricardo put it, "the laboring
race" since the characteristics and economic role of
workers were largely hereditary due to social
immobility. The Christian Church, having for most of its
history allied itself with establishment interests,
opposes birth control for more than religious and moral
reasons in the industrial age, when a surplus of workers
was always good for business. Actual data contradicts
this theory. Birth rates in advanced economies where
wages are high actually fall as middle class families
discover the financial advantage of not having too many
children and the low income families also find having
many children a financial burden, particularly after the
introduction of child labor laws.
When the market price of labor is below its natural
price, the condition of laborers is wretched and poverty
results. It is only after their privations have reduced
population increase, or the demand for labor has
increased through economic growth, that the market price
of labor will rise to its natural price, and that the
laborer will have the moderate comforts which the
natural rate of wages will afford. Ricardo argued that
notwithstanding the tendency of wages to conform to
their natural rate, their market rate may be constantly
above it in an improving and progressive society for an
indefinite period. Thus, with every improvement of
society, with every increase in capital, the market
wages of labor will rise; but the sustainability of
their rise will depend on whether the natural price of
labor has also risen; and this again will depend on the
rise in the natural price of those necessities on which
the wages of labor are expended. As population
increases, these necessities will be constantly rising
in price, because more labor will be necessary to
produce them and more people are consuming them.
If the money wages of labor should fall, while every
commodity on which the wages of labor are expended rise,
workers would be doubly affected, and would soon be
totally deprived of subsistence. Instead of the money
wages of labor falling, they would rise; but they would
not rise sufficiently to enable the laborer to purchase
as many comforts and necessaries as he did before the
rise in the price of those commodities. Ricardo
concluded that these are the iron laws by which wages
are regulated, and by which the happiness of far the
greatest part of every community is governed. Labor
then has a self interest in assuring the profitability
of employers. This has been a self-regulating attitude
since adopted by the labor union movement, putting labor
at a constant disadvantage in contract negotiations.
Employee ownership is usually offered only when company
profit falls toward or below zero.
*Capital Needs Labor More Than Labor Needs Capital*
Yet the real natural law is that capital needs labor
more than labor needs capital. Without capital, labor
can still produce, albeit less efficiently, but without
labor, capital cannot exist and remains only as idle
assets. Money does not invest in the desert, even oil
fields need workers. The reason money market funds pay
rent for the money in the form of interest is that the
money is lent to some entity that invests in enhancing
labor productivity. The holding of idle assets can only
be profitable under conditions of inflation in which
price appreciation exceeds the real and opportunity cost
of holding. But inflation in neoclassical economics is
defined primarily as wage-pushed. Thus even idle assets
need rising wages to keep its value. The market price of
labor should always be such as to eliminate economic
rent (excess profit) for capital. Labor has the power
to eliminate economic rent on capital, for capital has
nowhere else to go besides investing to increase labor
productivity. At this point of confrontation,
government, controlled by capital, usually steps in to
break up strikes for higher wages, to make owners of
capital rich at the expense of labor, by making society
pay the hidden price of a lower level of national
wealth.
Ricardo argued that like all other contracts, wages
should be left to the fair and free competition of the
market, and should never be interfered with by
government. He saw the clear and direct tendency of the
welfare laws and labor regulations as in direct
opposition to these obvious principles: it is not, as
social legislation benevolently intended, to amend the
condition of the poor, but to deteriorate the condition
of both poor and rich; instead of making the poor rich,
they are calculated to make the rich poor, thus
forfeiting savings and investment needed for economic
growth. And while the welfare laws are in force, the
maintenance of the poor would progressively increase
till it has absorbed all the net revenue of the nation.
"This pernicious tendency of these laws is no longer a
mystery, since it has been fully developed by the able
hand of Mr. Malthus; and every friend to the poor must
ardently wish for their abolition," Ricardo wrote.
While this observation is narrowly rational, Ricardo did
not point out that the way to get out of the welfare
trap is through full employment with living and rising
wages.
In Ricardo's view, poverty is not the result of the rich
getting more than the poor, but the result of economic
underdevelopment due to lack of savings. This has been
the position adopted by most market liberals. Yet it is
a fantasy to claim the existence of a free market for
labor or that unemployment can provide savings for the
unemployed. The labor market remains the most
politically regulated commodity market in the
international political economy where disparity of
mobility between capital and labor is extreme. At the
height of the high-tech bubble, Alan Greenspan, chairman
of the US Federal Reserve Board, testified before
Congress that if low-wage workers overseas cannot move
to fill jobs in the developed economies due to
immigration constraints, the jobs will have to migrate
to the workers in the developing economies to avoid
inflation. The new Iron Law of Wages now operates in
the globalized economy on cross-border wage arbitrage to
produce low prices for consumer products in the
high-wage economies that fewer and fewer consumers can
afford because of rising job loss in high-wage
economies. Countries like China and India are trading
in their progressive socialist programs for Dickensian
industrial hell while advanced economies like the US
have become voluntary victims of home-grown economic
imperialism that comes with dollar hegemony. There was
never a more ripe time to revive labor solidarity as
now. The most promising solution appears to be a global
cartel for labor in the form of OLEC.
*A Global Cartel for Labor Is Needed to Reverse
Anti-labor Terms of Global Trade*
The year of US independence, 1776, was a year of grand
treatises in economics and politics. Adam Smith
published his Wealth of Nations, the Abbé de Condillac
his Commerce et le Gouvernement, Jeremy Bentham his
Fragments on Government and Tom Paine his Common Sense.
British mercantilism had led to a rebellion by the
colonists in North America to establish a home-grown
liberal republican government dedicated to
laissez-faire, a statist policy against monopolistic
mercantilism and in opposition to British
"free-to-exploit" trade in the name of free trade.
Today, job protection by governments should not be
mistaken as trade protectionism. As long as a world
order of nation states exists, economic nationalism must
be the basis of international trade. Trade must enhance
national wealth for all participating nations, not
merely to enrich global transnational capital at the
expense of universal economic democracy. National
wealth is directly dependent on high wages. In a global
economy, the decline in wealth in some nations will
cause the decline in wealth in all nations. Terms of
trade that depress wages are economically regressive,
and should be reordered by a global cartel for labor.
Markets are not natural phenomena. As Karl Polanyi
(1886-1964) pointed out, markets are recent developments
in human history. Capitalism is a historical anomaly
because while previous economic arrangements were
"embedded" in social relations, in capitalism, the
situation is reversed - social relations are defined by
economic arrangements. In human history, rules of
reciprocity, redistribution and communal obligations
were far more frequent than market arrangements.
Furthermore, not only does capitalism not exhibit
historical humanistic values, its ascendancy actually
destroys such values irreversibly.
Free markets are an oxymoron. Government is
fundamentally involved in markets through the very
creation and enforcement of property rights, an
artificial socio-political concept without which markets
cannot exit. Government regulation is also
indispensable in preventing the natural emergence of
monopolies in unregulated markets. Free markets for
labor do not exist because of a disparity of market
power between employers and employees. Workers must
work to earn current income to feed their families
daily. Subsistent wage means workers have no savings to
get them through rainy days. Entrepreneurs can delay
investing their capital until the market price of labor
is right. Hunger quickly destroys labor's market power
and lowers the market price of labor to near or even
below subsistence levels. Thus the prevalent monopoly
of capital needs to be countered by a cartel for labor.
*Problems with the Iron Law of Wages*
Notwithstanding the disparity of bargaining power
between capital and labor which prompted Marx to call on
workers in 1848 with a battle cry of "nothing to loose
but your chains," there are two other problems with
Ricardo's Iron Law of Wages. The first is something
Henry Ford figured out a century after Ricardo. Ford
realized that workers who were paid at subsistence
levels could not afford to buy the cars they made in his
factories. Ford worked out a wage-price ratio under
which his workers would have enough money after basic
living expenses to buy and finance the cars they
produced. In the new industrial democracy, Ford was
able to sell many more cars than his competitors who
eventually went bankrupt selling only to the very rich.
By paying his workers well, Ford became super rich, more
than his competitor who sold only to the rich. The more
workers he hired, the more cars he sold. Before
globalization, US auto giants helped build the world's
most affluent middle class by paying wages far above
subsistence levels and by providing generous vacation,
health and pension plans. Auto sector wage pattern
spurred other sectors to raise compensation levels
creating continuous rises in consumer demand.
This happy approach to high wage income has been
reversed in past decades by the likes of Wal-Mart, with
$256 billion in annual sales and 20 million shoppers
visiting its stores world-wide each day. Wal-Mart is now
doing just the opposite of what Henry Ford did. Wal-Mart
profits from its regressively low wages and meager
employee benefits: paying its US retail workers less
than $18,000 a year on average (below the 2005 US
poverty line of $22,610 for families with three
children) and its outsourced supplier workers overseas
less than $4 a day, or $1,000 a year. Wal-Mart workers
cannot afford the low-price goods sold in Wal-Mart
stores. Wal-Mart takes away the good shirt off the US
worker's back plus his/her health insurance by
outsourcing his/her job and sells back to him/her a
lower-price shirt made overseas without the health
insurance.
Population growth can be translated into growth markets
with rising wages. That formula had been the
fountainhead of the rapid growth of national wealth in
the US. Demand management had been generally accepted
as indispensable in market economies since the New Deal
when US President Franklin D. Roosevelt adopted
Keynesianism after the 1929 stock market crash. An
aging population coupled with a fall in births rate will
drain demand from the economy and contract the national
wealth. The process is exacerbated by the need to
maintain structural unemployment and low wages to
preserve the value of money.
The second problem with Ricardo's Iron Law of Wages is
that it fails to recognize that the working population
is the fundamental asset from which a nation derives its
wealth. By adopting policies based on an economic
theory that structurally keeps wages at their lowest
levels, a nation condemns itself to the lowest possible
level of national wealth. Post-1978 Chinese reform
policies, by using low wages as the main competitive
factor of production, supported by lax regulation
against environmental abuse, is a classic example of
policy-induced below-par generation of national wealth,
despite its high GDP growth rate and rising labor
productivity.
*Say's Law of Markets (Supply Creates Its Own Demand)
Valid Only Under Full Employment*
Supply-side economists have in recent decade promoted
the arguments of Say's Law. In 1803, Jean-Baptiste Say
(1767-1832) published his Treatise on Political Economy
in which he outlined his famous Law of Markets. Say's
Law claims that total demand in an economy cannot exceed
or fall below total supply, or as James Mill (1773-1876)
elegantly restated it, "supply creates its own demand."
In Say's language, "products are paid for with products"
or "a glut can take place only when there are too many
means of production applied to one kind of product and
not enough to another." Yet, as post-Keynesian
economist Paul Davison has pointed out insightfully,
Say's Law only applies under conditions of full
employment, a condition that cannot exist under
supply-side theory of using unemployment as a necessary
device to keep down wages, the increase of which is
defined as the main cause of inflation. If aggregate
effective demand is sufficient to make it profitable for
employers to hire all the available workers - even if
they have to pay more than subsistence wages, they will
gladly do that, to expand the size of the market. The
message of Keynesian economics is that in a full
employment economy, workers and entrepreneurs are not
adversaries. Monetarists use tight money to keep
unemployment at as high a level as politically
acceptable to control inflation, that is to say, to
protect the value of money at the expense of worker
income. This approach leads inevitably to overcapacity,
for while a general glut of goods may be theoretically
impossible, a general glut of savings is now a reality.
The flood of corporate profit is having difficulty
finding new reinvestment opportunities because wages are
too low to sustain needed consumer demand.
Born in Lyons to a family of textile merchants of
Huguenot extraction, Say, after spending two years in
England apprenticed to a merchant, took a job in 1787 at
an insurance company in Paris run by Étienne Clavière
(1735-1793) who later to become Minister of Finance. An
ardent republican, Say supported the French Revolution
and served as a volunteer in the 1792 military campaign
to repulse the allied armies aiming to restore the
Monarchy. Say was also influenced by Adam Smith and
became a laissez-faire economist, known in France as the
ideologues, who sought to re-launch the spirit of
Enlightenment liberalism in republican France, pursuing
classical economics while rationalizing the role of
utility and demand. They also avoided classicalist
pessimism on the Iron Law of Wages, the unavoidable rise
of rents, the wage-profit trade-off, inevitable
unemployment caused by labor-saving mechanization,
general gluts, etc., preferring instead to emphasize the
happier harmonies between unequal economic classes and
the infallibility self-regulating markets. Politically,
that meant upholding a radical laissez-faire line,
washing it of its statist component. Ideologues were
French counterparts of the British Manchester School but
with more vigorous theory and a good deal of optimism.
Karl Marx (1803-1883) would later deride them as the
"vulgar" economists.
The rise of Napoleon Bonaparte, who sought to create an
imperial war economy buffeted by economic super-national
protectionism and regulation within the Continental
System, led to official suppression of the global vision
of the Ideologues. Yet, the radical laissez-faire
notions expounded in Say's 1803 Treatise caught the
attention of the revolutionary in Napoleon. Summoning
Say to a private audience, Napoleon demanded that Say
rewrite parts of the Treatise to conform to the
Napoleonic imperial war economy, built on super-national
protectionism and regulation within the French empire,
to which Say respectfully refused. Napoleon then banned
the Treatise and had Say ousted from the powerful
Tribunate in 1804. Declining the offer of another post
as compensation, Say moved to Pas-de-Calais and set up a
cotton factory at Auchy-les-Hesdins. Defying his own
theory, Say grew fabulously rich supplying cloth not to
the market but to meet the war demand for uniforms by
the Grande Armee, protected by a protectionist
Napoleonic Continental System from formidable British
competition. In 1812, Say sold his factory at great
profit and returned to Paris to live as a war speculator
with his capital. After 1815, the restored Bourbon
rulers, eager to please the victorious British who
restored them, showered the remnants of the Ideologues
with honors and recognition, initiating in France the
long British tradition of close alliance between
liberalism and the establishment, along the line of
Charles Dickens, who having critically exposed the
everyday evils of industrial capitalism, went on to
condemn the French Revolution for being excessively
inhumane.
*Dysfunctional Economic Theories on Unemployment*
Phillips Curve
The "Phillips curve" purports to show that the annual
percentage rate of inflation consistently increases
whenever the percentage rate of unemployment decreases.
The observation originated in 1958 when A.W. Phillips
documented a relationship between unemployment rates and
changes in wage rates in the United Kingdom, again
before globalization. Other economists liked the idea,
but not the details, and replaced wages with prices,
predicting that the unemployment rate would be
negatively correlated with the annual inflation rate,
being that inflation is defined as primarily
wage-pushed. This re-invented relationship was confirmed
by US economic data for the 1950's and 60's, but was
contradicted by U.S. data for later years.
The U.S. economy achieved combinations of growth and
inflation in recent years that many economists thought
were no longer attainable. With the unemployment rate
below most estimates of the NAIRU (Non Accelerating
Inflation Rate of Unemployment) and falling for the few
years before 2000, many Phillips curve-based forecasts
predicted that inflation should be rising. However,
inflation has generally remained stable or even declined
because of globalization (cheap imports). Many observers
have attributed this anomalous behavior to special
factors, such as large declines in import prices
associated with the 1997 Asian financial crisis and the
appreciation of the dollar by default.
Important among those imports was crude oil, whose price
fell from roughly $23 per barrel in the fourth quarter
of 1996 to just over $10 at the end of 1998. Oil is now
over $60 and most analyst anticipate it to stay above
that level for the foreseeable future Since energy
prices are a component of many Phillips curve
models--the principal tool used by economists to explain
inflation--answers to these questions could be read
directly from model estimates. However, the Phillips
curve literature has largely ignored a substantial and
growing body of evidence that oil prices have asymmetric
and nonlinear effects on real activity, as well as that
structural instabilities exist in those relationships.
Since around 1980, oil price changes seem to affect
inflation mostly through their direct share in a price
index, with little or no pass-through into core
measures. By contrast, before 1980 oil shocks
contributed substantially to core inflation. The
econometric evidence for this result is highly
significant and is robust to different economic
activities, oil price, and inflation measures, changes
in sample coverage, and lag specification. There are
several reasons why the relationships between oil prices
and macroeconomic variables might be difficult to
identify. One is the time series behavior of oil prices
themselves.
Okun's Law
In his original 1962 research "Potential GNP: Its
Measurement and Significance," economist Arthur M. Okun
(1928-80), chairman of the Council of Economic Advisors
under Lyndon Johnson, found that a 1% decline in the
unemployment rate was, on average, associated with
additional output growth of about 3%. Okun's Law is now
widely accepted as stating that a 1% decrease in the
unemployment rate is associated with additional output
growth of about 2%. But since data from the period
validating the law fell only within the range of
unemployment rates from 3 to 7.5%, Okun's Law is
interpreted as not applicable to zero unemployment. In
1993, Okun's law would have had GDP growth increasing
substantially, whereas it in fact fell relative to 1992.
The reverse occurred in 1996: GDP growth was higher than
in the prior year, despite the decline predicted by
Okun's Law. Of course Okun's Law did not take into
account the impact of globalization on growth and
unemployment. Okun believed that wealth transfers by
taxation from the relatively rich to the relatively poor
are an appropriate policy for government, by recognizing
the loss of efficiency inherent in the redistribution
process, he set limits on the benefits of
redistribution. But the solution is not to take from
the rich, but to prevent more from flowing unfairly to
the rich.
Granger Causality
The stock market is the score-keeping arena of
capitalism. The procedure for testing statistical
causality between stock prices and the economy is the
direct "Granger causality" test proposed by C. J.
Granger in 1969. Granger causality may have more to do
with precedence, or prediction, than with causation in
the usual sense. It suggests that while the past can
cause/predict the future, the future cannot
cause/predict the past.
According to Granger, X is said to cause Y if the past
values of X can be used to predict Y more accurately
than simply using the past values of Y alone. In other
words, if past values of X statistically improve the
prediction of Y, then we can conclude that X
"Granger-causes" Y. Given the controversy surrounding
the Granger causality method, empirical results and
conclusions drawn from them should be considered as
suggestive rather than absolute. This is especially
important in light of the recurring "false signals" that
the stock market has generated in the past. The stock
market has traditionally been viewed as an indicator or
"predictor" of the economy. Many believe that large
decreases in stock prices are reflective of a future
recession, whereas large increases in stock prices
suggest future economic growth. But everyone knows that
stock prices do not always reflect market fundamentals,
only market participant sentiments, which is the stuff
of technical analysis. Such sentiment includes herd
instinct and panic. There is also the dynamics of
overshoots and over-corrections. Yet in the age of
finance capitalism, finance dictates the fate of the
real economy.
Granger Causality has been used to compare stock market
prices with changes in GDP, allowing phase correlations
between the two to predict future GDP based on prior
stock market trends (the 1987 crash being a paradigm
shift engineered by the Wizard of Bubbleland?). It is
thus primarily a creature of econometric models. An
absurd example of statistical causality would be: John
drives to work on the highway around 8 am every morning,
Monday to Friday, but not Saturday or Sunday. On exactly
the same days, a torrent of traffic hits the highway
about 15 minutes after he drives on it, but not on the
days that he doesn't. Therefore there is statistical
causality in that John causes the tide of traffic to
follow him 15 minutes after his passage. That's the kind
of nonsense that Granger Causality can get you into.
Economists use it with great caution as it has many
hidden traps, such as the quality of input data and
ignorance or oversight of other external causal
variables.
The traditional valuation model of stock prices suggests
that stock prices reflect expectations about the future
economy, and can therefore predict the economy with
self-fulfilling dependability. The "wealth effect",
former Fed Chairman Alan Greenspan's frequent term,
contends that stock prices lead economic activity by
actually causing activities in the economy, thus is
regarded as support for the stock market's predictive
ability. Critics, however, point to a number of reasons
not to trust the stock market as an indicator of future
economic activity. They argue that the stock market has
previously and repeatedly generated "false signals"
about the economy, and therefore, should not be relied
on as an economic indicator. The 1987 stock market crash
is one example in which stock prices falsely predicted
the direction of the economy before and after the crash.
Instead of reflecting continuing growth, the market hit
a brick wall and the economy entering into a recession
which many expected to last a few years, but with the
Fed liquidity cure, the economy quickly recovered and
continued to grow until the early 1990's.
Even when stock prices do precede economic activity, a
question that arises is how much lead or lag time should
the market be allowed. For example, do decreases in
stock prices today signal a recession in six months, one
year, two years, or will a recession even occur? An
examination of historical data yields mixed results with
respect to the stock market's predictive ability. From
1956-1983, stock prices generally started to decline two
to four quarters before recessions began. Stock prices
also began to rise in all cases before the beginning of
an economic expansion, usually about midway through the
contraction. Other studies have found evidence that does
not support the stock market as a leading economic
indicator. A study indicates that between 1955 and 1986,
out of eleven cases in which the Standard and Poor's
Composite Index of 500 stocks (S&P500) declined by more
than 7% (the smallest pre-recession decline in the
S&P500), only six were followed by recessions.
Furthermore, another study found that stock price
collapses predicted three recessions for the years 1963,
1967 and 1978 that did not occur.
Now, the question is: can unemployment be eliminated
through growth? The answer seems clearly no, if
unemployment is viewed in macroeconomics as a flexible
but necessary component to keep inflation low for
growth. The Phillips Curve seems to suggest that
unemployment is necessary for growth. In truth, the only
cure for unemployment is to make unemployment
unacceptable, like a pandemic disease. Policymakers
need to set full employment as a goal even if it means a
lower growth rate, or to assign a heavier penalty for
unemployment in the measurement of growth. In other
words, there can be no growth registered if there is
unemployment. Zero unemployment must be the sine quo
non of registering growth. By definition, 1%
unemployment must be registered as 2% negative growth,
rising on a geometric rate, with 2% unemployment
registered as 4% negative growth. Then policymakers
would not be toasting themselves with Champaign for
their incredible growth rates while ten of millions are
still out of work. A global cartel for labor can act as
an institutional lobby for changing anti-labor economic
concepts and formulae.<>
*The Idea of a General Glut*
Classical and neoclassical theories are mostly based on
the simplistic, even tautological assertion of supply
creating its own demand. Classical economists were aware
of the existence of widespread systemic unemployment,
which was later called structural unemployment by
monetarists, and that markets could and regularly did
fail if unregulated. But in their quest for universal
truth at the expense of pragmatic reality, they
concluded that these were due to excess supplies and
demands of particular commodities and not excess
supplies (or gluts) of commodities on a macro scale; in
other words, problems of sub-optimization caused by
market inefficiency. But markets exist only because of
sub-optimization inefficiency, otherwise, if everyone
produces only what he needs or what his neighbors would
readily absorb, there will be no surplus to trade.
Ricardo was supported by James Mill (1773-1836), father
of John Stuart Mill (1806-1873) of On Liberty fame. A
partisan of the Banking School, James Mill also
participated in the Bullionist Controversies of the
time, arguing against gold parity. (see:
http://www.atimes.com/atimes/Global_Economy/DK06Dj01.html)
He wrote an essay which reviewed the history of the
Corn Laws, calling for the removal of all export
bounties and import duties on grains and criticizing
Malthus for defending them. Mill opposed the views of
William Cobbett (1763 - 1835) who championed traditional
rural England against the changes wrought by the
Industrial Revolution, and Thomas Spence (1750-1814),
who was strongly influenced by Tom Paine and argued that
all land should be nationalized. Cobbett argued that
land (rather than industry) was the source of wealth,
that there were losses to foreign trade between nations;
that the public debt was not a burden; that taxes were
productive and that crises were caused by a general glut
of goods. A general glut is the equivalent of
overcapacity in today's global economy.
Mill's Commerce Defended (1808) attacked all of these
arguments, dismantling them point by point. Ricardo
extended this proposition to savings and investment. If
one produces more than one consumes, then the surplus is
saved and by definition traded or invested. No one
would produce in excess of consumption needs if one does
not have a desire to either exchange the products or
invest its profits. Supply, therefore, creates demand.
Virtually all classical economists held this to be an
irrefutable truth. James Mill's Elements of Political
Economy, (1821) quickly became the leading textbook
exposition of doctrinaire Ricardian economics.
But in a truly efficient market, only a fool will
produce more than he can consume through exchange.
Markets are the composite of well-meaning fools thinking
they act in their self interest, but in fact act in
their own self disadvantage which they then seek to
recover through the market. Thus a general glut is
unavoidable through aggregate sub-optimization. It is by
extending this mentality that Ben Bernanke, the new
chairman of the Federal Reserve, concludes that free
trade has produced a global glut of savings, by denying
that in this post-industrial age of finance capitalism,
it is demand that creates it own supply, not the other
way around. And rising demand comes only from full
employment at rising wages for a growing population.
Inadequate demand creates gluts. Thus demand management
is the challenge of the post-industrial finance economy.
To meet this challenge, a global cartel for labor is
necessary.
Ricardo also suggested the impossibility of a "general
glut" (an excess supply of all goods) as over production
in one sector results necessarily in underproduction in
other sectors so that an aggregate general glut cannot
emerge. While this assertion is theoretically
promising, it has since been invalidated by events in
recent decades when overcapacity has become the curse of
the global economy, albeit that the overcapacity in
manufacturing is actually the result of under-capacity
of social services.
*Rent Must Be Spent on Worker Benefits to Prevent a
General Glut*
Ironically, Malthus and the French economist, J.C.L.
Simonde de Simondi in their belief in the inevitability
of a general glut, became exceptions to the classical
economist's faith in perfect markets. They argued that
income comes as wages to workers, as profit to
entrepreneurs and as rent to landowners. Classical
economics ordains that wages are consumed and profits
reinvested, but make no stipulation as to what happens
to the rent received by landowners who presumably may
choose to consume or not to consume it. As long as
profits are positive, worker income is mathematically
less than output, a general glut of goods will result
even if the investment-savings equivalence holds, if
land owners fail to consume their rent in peace or waste
it on war.
Under feudalism, before the ascendance of the
bourgeoisie, rent goes mostly to building of palaces and
elaborate manor estates and patronage of art and
architecture to prevent the emergence of a general glut.
Malthus made the famous argument that landlord
consumption functionally increased to "fill" the general
glut, an argument that framed itself as a scientific
apology for feudalism in which the aristocracy owned the
land by birthright and consumed conspicuously, leaving
behind in posterity a network of tourist attractions in
the form of grand palaces and heroic monuments. Since
landlords do not produce anything, nothing is added to
output by their conspicuous consumption, but their very
unproductiveness is actually functionally necessary
since it maintains demand for goods and services,
particularly those not affordable by the poor, while at
the same time reduces investment that may lead to a
general glut, not to mention bringing art and culture
into civilization. But if landlords should hold back
consumption in peace time, a general glut will be
unavoidable that would inevitably lead to war. In
post-monarchal societies, the state has replaced the
land-owning aristocracy, and the state must spent its
rent income in the form of social services, such as
heath care, education, retirement benefits,
environmental protection and cultural subsidies, the
soft monuments of civilization, to prevent a general
glut. Instead of palaces, the state must build
universities and research centers, physical and social
infrastructure. This is the strongest economic argument
for a welfare state, not humanitarianism. To the extend
wages are raised to high levels, and rent reduced, the
threat of a general glut will be reduced. Thus only
high wages with full employment can remove the
regressive need for welfare statehood, not volunteerism
in charity. A global cartel for labor then is the best
way to do away with the humanitarian need for a welfare
state and to allow the state to refocus on it economic
role of spending rent on education, physical and social
infrastructure and environmental preservation.
Malthus's identification of the landlord class as
functionally necessary and beneficial stands in stark
contrast to Ricardo view of its members as parasites.
It had been the fundamental question behind the class
struggle between the land-owning aristocracy and the
rising bourgeoisie that gave rise to the French
Revolution which had influenced the views of both
Ricardo and Malthus. The post-Revolution French
bourgeoisie gained economic dominance by manipulating
the hungry masses against the aristocrats, yet
politically failed to achieve full control of the state
apparatus. The power struggle after the French
Revolution and during the Age of Napoleon between the
land-owning bourgeoisie and the rising factory-owning
industrialists had no class content, only an intra-class
rivalry, as reflected in the British Corn Law
controversy
(http://atimes.com/global-econ/DE01Dj01.html), not until
the industrialists won and produced a social structure
of mobile capital investing in labor productivity that
led to the Revolutions of 1848 in which the first modern
class struggle ended in failed democratic revolutions.
The original Corn Laws in 1360 were a set of regulations
restricting the export or import of grain to keep
English grain prices low, in defiance of the Law of One
Price. The purpose of the laws was to assure a stable
and sufficient supply of grain from domestic sources,
yet allowing for import in time of dearth. The Corn Law
of 1815, in contrast, was designed to maintain high farm
prices, also in defiance of the Law of One Price, much
like today's agricultural subsidies, and to prevent an
agricultural depression after the Napoleonic Wars. Since
its repeal in 1846, industrialism became the governing
force in England and worldwide free trade its policy
which consolidated British control of the sea and the
spread of official British imperialism and its network
of colonies that constituted the British Empire. The
Opium War in China took place in 1840.
This development accelerated the growing consolidation
of industrial capitalism with colonialism under
government protection. National income for the
imperialist countries grew, but a relatively small
portion of it went to domestic workers beyond
subsistence. National wealth grew independent of
domestic wages through the exploitation of colonies.
National income between the home country and its
colonies also polarized, as between those nations with
empires and those without, setting off a race to acquire
colonies even among minor European states such as
Holland and Belgium. The national wealth of Britain
skyrocketed with modern factories, palatial country
estates and financial institution stocked with gold
alongside slums of the working poor. The new industrial
empires were built on low wages both domestically and
overseas.
The accumulation of capital led to a need for a regime
for the export of capital in the overseas quest for low
cost raw material and labor, as a way of keeping
domestic wages low even as general living standards
rose. Workers were then told by the Manchester School
intellectuals that the income of workers is set by
ineluctable laws of economic science, that it is best
and necessary to keep wages low and that the way to a
better life is to leave the working class and to ape the
employer, or eventually become a Labor Lord through
unionism. This advice was given notwithstanding that
British society at that time provided not the slightest
social mobility dues to its rigid class structure
institutionalized by an education system based on
exclusionary social manners and elocution. Elaborate
labor price theories were concocted with circular data
justifying the theories, explaining circularly that very
same data as scientific truth, eventually leading to the
theory of non-accelerating inflation rate of
unemployment (NAIRU), a theory that argues circularly
that structural unemployment is necessary to curb
inflation and that uncurbed inflation only creates more
unemployment.
*The Concept of a Labor Market*
The concept of a labor market was promoted by market
liberalism as a reigning doctrine to reinstitute a new
form of slavery for the industrial age. The institution
of slavery is predicated on the legal treatment of
humans as property to be bought and sold. In a
fundamental sense, slavery is dependent on the rule of
law in the protection of property over morality and
humanity. The growing wealth of Rome and the protection
of property by Roman law led to a sharp increase of in
both domestic and estate/plantation slaves whose
land-owning masters had absolute power over them.
Manumission was mostly a financial transaction.
Spartacus led a slave revolt against Rome in 73 B.C. He
was killed in battle and the slave revolt suppressed
within a year. Pompey, back from conquest of Spain,
annihilated the movement, crucifying 6,000 captured
slaves along the Capua-Rome highway as a warning for
future generations. Nevertheless, the revolt served as
warning to landowners against excessive mistreatment of
slaves.
At the end of World War I, Karl Liebnecht and Rosa
Luxemburg led a group of radical German socialists to
form the Spartacus Party to typify the modern wage slave
in revolt like the Roman Spartacus. Spartacists demand
the dictatorship of the proletariat by mass action and
officially transform themselves as the German Communist
Party. On January 5, 1919, a massive workers
demonstration was brutally suppressed and Liebnecht and
Luxemburg were arrested in few days later and murdered
while in custody.
Both Christianity and Islam accepted slavery. The
manorial economy of feudalism transformed slaves into
the serfs or villeins. The Black Death (1347) depleted
the supply of labor and opened a window of freedom for
European serfs by giving them more market power. In
China, Marxist historians view the struggle of the
emerging landlord class to replace the slave-owning
society that began in the Zhou dynasty (1027 to 221 BC)
part of a revolutionary dialectics.
In the industrial age, emancipated slaves became free
agents but labor remained a commodity, sold by the
laborer and bought by the employer in a fantasized free
market, the ideal of which would be totally free labor -
at zero net cost to the employer beyond the cost of
keeping the worker alive. Thus the English language is
insightful that "free" means both the ability to choose
and a state of no cost for something not quite worthless
in a price regime. Yet the value of capital is
fundamentally different. The rent for money is
interest, while the intrinsic value of money is its
purchasing power. With labor, the rent of labor is
wages, while there is no intrinsic value for labor
without employment and the capitalized value of labor is
the discounted value of a worker's lifetime aggregate
wage potential. Thus humanity is denied of capital
value by neoclassic economics. Yet the mobility of
capital is not matched by mobility for labor, which
remains fixed in location by exclusionary immigration
laws. The US was the only nation that had a welcoming
immigration policy, albeit openly racist until recently,
which contributed significantly to the rapid rise of US
national wealth.
The hourly wage serves the employer better than no-wage
slavery served slave-owners. The employer is not even
obliged to pay living wages, passing much of the cost of
a decent life onto state-financed social welfare
programs, as the slave owner had to bear the fixed cost
of keeping slaves alive and healthy for productive work.
The labor market is described as being governed by the
laws of supply and demand. Employers can layoff workers
to response to business cycles caused mostly by
overinvestment. Low wages are tolerated as the neutral
result of impersonal market forces, not immorality on
the part of unprincipled management or misguided
government policies. And surplus labor supply, like
goods which are stored in warehouses, are to be
warehoused by poor relief to prevent social unrest. The
economic concept of a free market for labor is that it
is a mechanism to realize the lowest price for the buyer
rather than the highest price for the seller, as in a
cartel, which in modern industrial enterprises is called
a union shop. The New Poor Law of 1834 in Britain
safeguarded the labor market for employers by making
unemployment relief more unpleasant than
below-living-wage employment, supported with stern,
self-righteous precepts of the dismal science as set out
by Ricardo and Malthus.
Karl Marx's critique of Malthus started from a position
of agreement. Marx's idea of capitalist production,
however, is characterized by his concentration on the
division of labor and his observation that goods are
produced for sale for money in a market economy and not
for consumption or barter for other goods. In other
words, goods are produced simply for the intention of
transforming output into money as capital to purchase
other commodities for more investment. Thus advertising
becomes the means with which to convince the public to
buy goods they otherwise do not need or want. The
possibility of a lack of effective demand therefore is
held only in the possibility that there might be a time
lag between the sale of a product (the acquisition of
money) and the purchase of another commodity (its
disbursement) to add value by labor. This possibility,
also originally crafted by Simondi in 1819, endorsed the
idea that the circularity of transactions was not
always, and in fact seldom if ever, complete and
immediate. If money is held, Marx contended, even if for
a little while, there is a breakdown in the exchange
process and a general glut can occur. Moreover, in
finance capitalism, which arrived after Marx' life time,
money does get held speculatively to produce a general
glut as an opportunity to buy cheaply for future profit.
Marx, like Malthus, also accepted the savings-investment
linked identification but reached a different
conclusion. Since investment is part of aggregate
demand, circulation does continue in time even if money
is held. The drive for accumulation, Marx concluded,
will continue unhindered and thus a general glut crisis
of the sort Malthus described can never happen and if it
did, would be practically inconsequential. What can
happen, as Ricardo originally claimed, is that a single
good may be oversupplied causing a very temporary and
small adjustment of proportions which might seem as a
general glut but in fact is not. Thus, all classical
economists, except for Malthus and Simondi, were
generally in agreement over the validity of Say's Law,
at least in the long run and under conditions of full
employment. They all also agree on the linked
identification of savings and investment as well as the
possibility of separating output and price theory.
Thus when supply-siders promote supply-pushed economic
stimulation while they accept unemployment as
structurally necessary for combating inflation, they are
walking on only one leg of Say's two-legged Law. This
shortcoming is significant because as long as
unemployment is view as necessary for sound money,
overcapacity will plaque the economy.
In 1815, Ricardo published his ground-breaking Essay on
Profits, in which he introduced the differential theory
of rent and the law of diminishing returns to land
cultivation. With wages stuck at their natural level,
Ricardo argued that rate of profit and rents were
determined residually in the agricultural sector. He
then used the concept of arbitrage to claim that
agricultural profit and wage rates would be equal to
their counterparts in industrial sectors, showing that a
rise in wages did not lead to higher prices, but merely
lowered profits. In his formidable 1817 treatise,
Principles of Political Economy and Taxation, Ricardo
articulated and integrated a theory of value into his
theory of distribution. For Ricardo, the appropriate
theory was the "labor-embodied theory of value", or
LETV, i.e. the argument that the relative 'natural'
prices of commodities are determined by the relative
hours of labor expended in their production at the
natural price of labor.
With prices pinned down by the LETV, Ricardo restated
his original theory of distribution. Dividing the
economy into landowners (who spend their rental income
on luxuries or wars), workers (who spend their wage
income on subsistence necessities) and capitalists (who
save most of their profit income and reinvest it),
Ricardo argued how the size of profits is determined
residually by the extent of cultivation on land and the
historically-given real wage. He then added on a theory
of growth. Specifically, with profits determined by the
gap of market price over natural price, the amount of
capitalist saving, accumulation and labor demand, growth
could also be deduced. This, in turn, would increase
population and thus bring more land of less and less
quality into cultivation and use, such as the founding
of colonies overseas or desert cities such as Los Angles
and Las Vegas. Moreover, mechanization and innovation
improve the yield from land and release labor from the
agriculture sector into the industrial sector which pays
higher wages, generating more demand and economic
growth. Ricardo did not anticipate the emergence of
finance capitalism in which labor from industry would be
released into service sectors and growth can be driven
by financial engineering. Still, wealth cannot be
detached from human capital. If the value of labor
expressed as wages is kept low, growth can only come as
financial bubbles. For this reason, a global cartel for
labor is the solution to the current debt bubble in the
global economy.
*Modern Capital Comes From Worker Pensions*
As for accumulation of capital, modern finance has shown
that the bulk of capital comes nowadays from the pension
funds of workers, which is the deferred income of
currently employed labor. In the US economy, no one
saves voluntarily any more, not because a change in the
US character, but because with low wages and rising
asset values not registered as inflation, no one can
afford to save, having to spend all income plus
accumulating debt just to manage. This is why the
entire economy is operating on debt. Most savings now
come from pension funds payment into which the average
worker has no legal choice but to contribute with
company matching from his/her first day of work, with
benefits not collectable until some three decades later.
Pension funds like CalPERS (California Public Employee
Retirement System), not even a private sector fund as it
is all government employees, are huge and they are the
new institutional capitalists. CalPERS alone holds
shares in 1,600 US companies with assets of $167 billion
in 2004. It owns so much equity and bonds that in many
cases, such as The Disney Company, they cannot sell
their share holdings without adversely affect the price
of the rest of their holdings, much like foreign central
bank holdings of dollars. Pension funds are forced to
stage shareholder revolts within corporate governance to
change ineffective management to get the market price of
its share-holdings back up. That is how Michael Eisner,
Chairman of Disney, lost support of 45% of the voting
shares and had to resign his chairmanship. CalPERS also
opposed the reappointment of former Citicorp Chairman
Sanford I. Weill, and Chief Executive Officer Charles O.
Prince as company directors. CalPERS holds 26,712,930
Citigroup shares out of 5.05 billion shares outstanding.
It said Citigroup would be "better served" by having an
independent director in the place of Mr. Weill. It
withheld votes for six other Citigroup directors. It
also withheld support from Warren E. Buffett, who was
running for re-election to the Coca-Cola Company's
board. The fund also withheld votes for directors at ten
other companies: Sprint, Wachovia, PG&E, Burlington
Resources, Charter One Financial, Mellon Financial,
South Trust, State Street, Stryker and Washington
Mutual. Yet no pension has gone on record to disinvest
from corporations that outsource their clients jobs.
These pension funds operate like insurance companies,
spreading out their risk through the theory of large
numbers by hiring an army of fund managers among whom
they expect 5% would lose money, 40% would break even
with the SP500 and 50% will beat the SP500 and 5% would
do spectacularly with thousand-fold returns. Every
year, they fire the underperforming 5% and bring in a
new crop of replacement fund managers. Also the actuary
is such that pensioners die and stop collecting
retirement benefits way before the principle are
consumed, so the funds get bigger and bigger over time,
like a giant mushroom in a financial science fiction.
These pension funds are like a virus, feeding on workers
whose retirement money they control for their own
institutional obsession on growth at the expense of
worker job security. If the US ever privatizes social
security, all US workers will be enslaved by these
institutional tyrants.
In the new economy of finance capitalism, with capital
coming also from labor; and the high return on labor's
retirement funds from cross-border wage arbitrage is
robbing the same workers of their jobs. As Pogo used to
say: the enemy, they are us. The new capitalism uses
worker capital to exploit workers while financiers skim
off huge profits without having to risk any capital of
their own. Investment bankers routinely make between
$2-30 million in annual income by "creating value" out
of thin air, arranging IPOs, mergers, and structured
finance deals that pension funds, known collectively as
institution investors, buy into. An institutional
salesman on Wall Street is one who talks pension funds
into investing in deals like the one that Orange County
in California fell into that eventually led to its
bankruptcy in 1994. The salesman is the power behind
every Wall Street firm. The salesman does not even
dream up the deals which are put together by bright
young graduates in math and physics augmented with MBAs,
who are paid only $1-2 million working 18 hour days that
burn them out in a few years. That is how New York
condos can sell for $10 million at US$3000 per square
foot. And none of these financiers save. They are all
leveraged to the hilt out of pride, not necessity, for
they all know it's not how much you own, but how much
you owe that counts. Die with all the debt you can
accumulate. Only fools die with savings.
By Ricardo's theory of distribution, as the economy
continues to grow, profits would eventually be squeezed
out by rents and wages. At the limit, Ricardo argued, a
"stationary state" would be reached where capitalists
will be making near-zero profits and no further
accumulation would occur. Ricardo suggested two things
which might hold this law of diminishing returns at bay
and keep accumulation going at least for a while longer:
technical progress, which was later spelled out more
fully by Joseph A. Schumpeter (1883-1950) as "creative
destruction," and foreign trade to reduce the market
inefficiency imposed by political and economic
nationalism, which later transformed into British
imperialism in the name of free trade.
On technical progress, Ricardo was ambivalent. One the
one hand, he recognized that technical improvements
would help push the marginal product of land cultivation
upwards and thus allow for more growth. But, in his
famous Chapter 31 "On Machinery" (added in 1821 to the
third edition of his Principles), he noted that
technical progress requires the introduction of
labor-saving machinery. This is costly to purchase and
install, and so will reduce funds for wages. In this
case, either wages must fall or workers must be fired.
Some of these unemployed workers may be mopped up by the
greater amount of accumulation that the extra profits
will permit, but it might not be enough. A pool of
unemployed might remain, placing downward pressure and
wages and leading to the general misery of the working
classes. Technological progress, according to Ricardo,
was not a many splendored thing for labor or the
economy. It left to Schumpeter to argue that "creative
destruction" creates more than it destroys for the
economy, while labor is still waiting for someone to
show it how technological progress can be good for
labor. A global cartel for labor may well perform that
function.
*Trade and Comparative Advantage*
On foreign trade, Ricardo set forth his famous theory of
comparative advantage. Using the example of Portugal
and England and two commodities (wine and cloth),
Ricardo argued that trade would be beneficial even if
Portugal held an absolute cost advantage over England in
both commodities. Ricardo's argument was that there are
gains from trade if each nation specializes completely
in the production of the good in which it has a
"comparative" cost advantage in producing, and then
trades with the other nation for the other good. Notice
that the differences in initial position mean that the
labor theory of value is not assumed to hold across
countries, Ricardo argued, because factors, particularly
labor, are not mobile across borders. As far as growth
is concerned, foreign trade may promote further
accumulation and growth if wage goods (not luxuries) are
imported at a lower price than they cost domestically --
thereby leading to a lowering of the real wage and a
rise in profits. But the main effect, Ricardo noted, is
that overall income levels would rise in both nations
regardless, albeit income disparity would also widen.
Ricardo did not anticipate dollar or even sterling
hegemony under which while national income in the
exporting national may rise, most of the dollar or
sterling income cannot be spend locally. The ultimate
economic imperialism is one in which one's wealth must
be denominated in another's currency.
The theory of comparative advantage in free trade,
challenged by economist Freiderich List (1789-1846) as
mere British national opinion valid only for British
conditions in the industrial age, has yet to test valid
in today's globalized trade. Ricardo underestimated the
political problem of uneven income distribution while
overall income increases, both within a nation and
internationally. In financial capitalism, most of the
saving/investment comes from pension funds, in the form
of deferred wages of well-paid workers, proving that
wages can include savings if they are allowed to rise
above subsistence levels. What is more, a high wage
regime is good economics as it eliminates overcapacity.
Trade wars are now fought through volatile currency
valuations. Yet dollar hegemony has reduced all
currencies to the status of derivatives of the dollar.
The dollar enables the US to use its trade deficit as
the bait for its capital account surplus. Trade is no
longer a valid measure of global competition. Today,
transnational firms compete with unparalleled success in
the global marketplace through foreign affiliate sales
instead of exports. This has created a gap between gross
domestic product (GDP) and gross national product (GNP).
To mask this tilted playing field and inequitable
international finance architecture, GNP has been quietly
replaced by GDP as a statistical measure for growth.
GDP measures the total value of a country's output,
income or expenditure produced within the country's
physical/political borders. GNP is GDP plus "factor
income" - income earned from investment or work abroad.
GNP is the total value of final goods and services
produced in a year by a country's nationals including
profits from capital held abroad. With globalization,
these two technical measurements have taken on new
meanings and relationships. In 1991, GDP replaced GNP as
a standard statistical measure for growth - a quiet
change that had very large implications as the 1990s
were the decade of rapid globalization. GNP attributes
the earnings of a transnational firm to the country
where the firm is owned and where profits would
eventually return as factor income.
GDP, however, attributes the profits to the country
where factories or mines or financial institutions are
located, regardless of ownership, even though profit and
investment may not stay there permanently. This
accounting shift has turned many struggling, exploited
economies into statistical boomtowns, while seducing
local leaders to embrace a global economy. The rich
nations at the core are walking off with the periphery's
resources and profiting obscenely from local slave wages
while calling it a statistical gain for the periphery,
with the help of the local elite - a new compradore
class whose members are celebrated by the neo-liberal
press as national heroes.
GDP figures are "gross" because GDP does not allow for
the depreciation of physical capital or environmental
degradation, let alone the abuse and depreciation of
human resources. When the value of income from abroad is
included, then GDP becomes the GNP. Because of
purchasing power disparity between currencies in
different economies, the real loss for a country with
negative GNP is respectively magnified. A declining GNP
is particularly damaging for economies with large trade
sectors, which includes many developing countries that
have been forced to rely on exports financed by foreign
direct investment as the sole development path.
*The Role of Interest*
The role of interest income is a problem more than how
to account for interest income. With a debt economy,
debt have replaced equity (capital) and become capital
itself. So return on capital is now profit from
arbitrage on open interest parity, the spread between
cost of 100% financing (or sometime 150% in the case of
bubbles), and asset appreciation caused by that very
same debt financing. Currently, with low interest rates
dictated by Greenspan, M&A is returning like a tidal
wave from ample liquidity in the form of low-cost debt,
which adds to unemployment and GDP growth at the same
time. Freddie and Ginnie Mae are good examples. Its
huge debt portfolio is financed entirely on GSE
(Government Sponsored Enterprises) cost of funds
advantage over the general market and the risk they have
assumed is made manageable by the rise in asset price of
the collaterals propelled by the very same risk, a
self-propelling bubble that produces a wealth effect
which fuels more debt. The problem is that this process
is exponential and accelerates as it approaches the
danger point like phoenix rushing toward the sun, as
illustrated by a recent astronomy photo of a black-hole
tearing apart a star.
While labor earns wages, capital earns profit and
landlords earn rent, there also is a fourth major flow:
finance capital earns interest. But nowhere is this
apparent in classical economics which treats the economy
as if it rests on a barter theory. Ricardo himself is
largely responsible for creating a model of the economy
that manages to avoid the existence of debt altogether.
Yet Ricardo was a bond broker. It is as if he wanted to
direct attention away from the problems that his own
profession caused. Debt service and other financial
charges absorb money from the flow of income between
employees and the products they buy (Say's Law), and
channel it into the property and financial markets.
Marx said that a permanent economic crisis was not
likely under capitalism. Remarkably, Marx was an
optimist regarding the financial sector, imagining that
it would become subordinate to the needs of industrial
capital. History has proved otherwise.
The Labor Theory of Value (LTV) conflicts with the
Marginal Utility Theory of Value (MUTV) on which much
classical and neo-classical economics is based. If one
plays within the rules of a market economy, then the LTV
is irrelevant. The entire structure of the market is
built on the concept of marginal utility. But as
Polanyi pointed out, the market economy is not a natural
human affair, but rather a recent development. This now
familiar system was of very recent origin and had
emerged fully formed only as recently as the nineteenth
century, in conjunction with industrialization. The
current neo-liberal globalization is also of recent
post-Cold War origin, in conjunction with the advent of
the information age and finance capitalism.
Adam Smith was concerned primarily with economic growth,
away from "natural equilibrium" circular flows posited
in a supply-side driven model of growth. Output is
derived from labor and capital and land inputs.
Consequently output growth was driven by population
growth, investment and land growth and increases in
overall productivity.
Population growth, Smith proposed in the conventional
notion of his time, was endogenous: it depends on the
sustenance available to accommodate the expanding
workforce. Investment was also endogenous: determined by
the rate of savings (mostly by capitalists); land growth
was dependent on conquest of new lands (e.g.
colonization) or technological improvements on fertility
of old lands or construction of skyscrapers.
Technological progress could also increase growth
overall: Smith's famous thesis that the division of
labor (specialization) improves growth was a fundamental
argument of soft technology. Smith also saw
improvements in machinery and international trade as
engines of growth as they facilitated further
specialization.
Smith also believed that "division of labor is limited
by the extent of the market" - thus positing an
economies of scale argument. As division of labor
increases output (increases "the extent of the market")
it then induces the possibility of further division and
labor and thus further growth. Thus, Smith argued,
growth was self-reinforcing as it exhibited increasing
returns to scale.
Finally, because savings of capitalists is what creates
investment and hence growth, he saw income distribution
as being one of the most important determinants of how
fast (or slow) a nation would grow. However, savings is
in part determined by the profits of stock: as the
capital stock of a country increases, Smith posited,
profit declines - not because of decreasing marginal
productivity, but rather because the competition of
capitalists for workers will bid wages up. So lowering
the living standards of workers was another way to
maintain or improve growth (although the counter-effect
would be to reduce labor supply growth). Despite rising
returns, Smith did not see growth as eternally rising:
he posited a ceiling (and floor) in the form of the
"stationary state" where population growth and capital
accumulation were both zero.
Karl Marx (1867-1894) modified the classical economics
vision. For "modern" growth theory, Marx's achievement
was critical: he not only provided, through his famous
"reproduction" schema, perhaps the most rigorous
formulation to date of a growth model, but he did so in
a multi-sector context and provided in the process such
critical ingredients as the concept of "steady-state"
growth equilibrium. Unlike Smith or Ricardo, Marx did
not accept that labor supply was endogenous to wage
levels. As a result, Marx had wages determined not by
necessity or "natural/cultural" factors but rather by
bargaining between capitalists and workers. In fact,
Marx was the only true free marketer among classical
economists in that only he saw the need for equality of
market/pricing power in the transactional relationship
between capital and labor. And this process would be
influenced by the amount of unemployed laborers in the
economy (the "reserve army of labor", as he put it).
Marx also saw profits and "raw instinct" as the
determinants of savings and capital accumulation. Thus,
contrary to Smith, Marx saw a declining rate of profit
doing nothing to stem capital accumulation and bring the
"stationary state about", but only as an inducement for
capitalists to further reduce wages and thus increase
the misery of labor.
Like other classical economists, Marx believed there was
a declining rate of profit over the long-term. The
long-run tendency for the rate of profit to decline is
brought about not by competition increasing wages (as in
Smith), nor by the diminishing marginal productivity of
land (as in Ricardo), but rather by the "rising organic
composition of capital", which Marx defined as the ratio
of what he called "constant capital" to "variable
capital". It is important to realize that constant
capital is what today is called fixed capital or capital
investment such as plants and equipment, rather
circulating capital such as raw materials. Marx's
"variable capital" is defines as advances to labor, i.e.
total wage payments, or heuristically, value is equal to
wages times the labor employed.
The rate of profits, Marx claimed, is determined by the
surplus and advances to labor. Surplus is the amount of
total output produced above total advances to labor.
It is important to note that for Marx, only labor
produces surplus value. Capital gets return only after
labor acts on it while labor can still produce without
capital, albeit less efficiently. A factory without
workers cannot produce, while workers without factories
can. This was to become a sore point of debate between
the Neo-Ricardians and the Neo-Marxists in later years.
Marx called the ratio of surplus to variable capital,
the "exploitation rate" (surplus produced for every
dollar spent on labor). Marx referred to the ratio of
constant to variable capital, as the organic composition
of capital (which can be viewed as a sort of
capital-labor ratio). The rate of profit can be
expressed as a positive function of the exploitation
rate and a negative function of the organic composition
of capital.
Marx then argued that the exploitation rate tended to be
fixed, while the organic composition of capital tended
to rise over time, thus the rate of profit has a
tendency to decline. Classical economics assumes a
static economy with no labor supply growth. As the
surplus accrues to capitalists and, necessarily,
capitalists invest that surplus into expanding
production, output will rise over time while the labor
supply remains constant. Thus, the labor market gets
gradually "tighter" and so wages will rise. But this
profit decline is temporary, since a rise in wages would
induce population growth which would then loosen the
labor markets and bring wages back down again. Marx
does not accept this classical version. For Marx, wages
are set by "bargaining" in the labor market, not by
labor supply. Thus, there is no "extra supply of labor"
being encouraged by the higher wages. Marx argued
capitalists can boost their profit rate back up by
introducing labor-saving machinery into production --
thereby releasing labor into unemployment, because the
cost of unemployment is an externality to the business.
The primary incentive for the invention of machinery is
to reduce the cost of labor and the primary vehicle is
layoffs.
There are two effects of this relationship. The first is
that wage cost declines because labor is released and
concurrently, the employment of machinery implies that
fixed capital rises. Thus, the introduction in
labor-saving machinery does not change anything: the
fall in labor cost from using less labor is counteracted
by the rise in fixed capital. The second effect is that
the concurrent expansion in unemployment -- the "reserve
army of labor" -- will by itself weaken bargaining power
of labor and reduce wages down to or below subsistence.
But wages decline negates the financial rationale behind
the introduction of machinery which is to capture the
cost benefit of labor-saving machines. Thus the net
effect of a labor-saving technology is to reduce the
rate of profit.<> One way to prevent this decline in
the rate of return would be to increase the exploitation
rate in proportion to which variable capital declines
relative to constant capital.
The issue of trade, another possible check to the
decline in profit rate, was seen by Marx as an
inducement to produce on an even greater scale - thereby
increasing the organic composition of capital further
(and reducing profit quicker). The connection between
trade with non-capitalist economies to prevent of the
decline in profit rate was for later Marxians like Rosa
Luxemburg (1913) to propose in their theories of
imperialism.
However, despite all their efforts, Marx claimed that
there were social limits to the extent to which
capitalists could increase the exploitation rate, while
no such thing limited the growing organic composition of
capital. Consequently, Marx envisioned that greater and
greater cut-throat competition among capitalists for
that declining profit. Then a crisis occurs: large
firms buy up the small firms at cheaper rates and thus
the total number of firms declines. This will boost the
surplus value as firms can now purchase capital. As
capital becomes more concentrated in fewer . The
increasing increasing the tendency for capital to be
concentrated in fewer and fewer hands, combined with the
greater misery of labor would culminate in ever greater
"crises" which would destroy capitalism as a whole. Marx
had only temporary "stationary states", punctuating the
secular tendency to breakdown.
Adam Smith (1723 - 1790), having come in contact with
the Physiocrats in France led by a physician to Louis
XV, Francois Quesnay (1694-1774), who believed that all
wealth originates from land, wrote An Inquery into the
Nature and Causes of the Wealth of Nations in 1776, in
which he postulated the theory of division of labor and
observed that value, not price, arises from labor
expended in the process of production. The Physiocrat
maxim states that only abundance combined with high
prices could create prosperity, a rejection of the
theory of price as being set by the intersection of
supply and demand in a free market. To the Pysiocrats,
price theory based on supply and demand causes abundance
to drive down prices and leads to producer bankruptcies
and economic depressions, preventing the sustenance of
abundance, which is a requirement for prosperity. The
neoclassical economists rejected this notion of value by
introducing the notion of marginal utility which by
itself is not anti-labor until neo-liberals began to
labor of marginal utility value in the market. In the
modern market economy, labor performs two marginal
utility functions: it enhances marginal return on
capital through increased productivity and if fairly
compensated for such marginal utility, rising wages
supports marginal demand for increased production. This
notion is behind the Keynesian idea of demand management
through high wages and full employment, even at the cost
of moderate inflation.
Money has the highest marginal utility when placed at
the hand of those who need it most and will spend it
immediately in a technological economy in which
overcapacity is an inherent characteristic. The most
cited of Smith's ideas is the belief that in a
laissez-faire economy, the impulse of self interest
would bring about the optimum public welfare. The most
misunderstood of Smith's ideas is the interpretation
that the term laissez-faire, which in French means to
leave alone, means not the absence of government
interference in a market economy, but the need for
government interference to keep markets free. Smith's
idea of a free domestic market is one without
monopolies, which he opposed as destroyers of free
markets. He also opposed mercantilism in international
trade, which aims to accumulate gold through
monopolistic trade. Smith supported restriction to free
trade, such as the Navigation Act of 1651, forbidding
the importation of foreign goods and commodities from
overseas colonies except in English-owned ships, as
necessary national economic defense measures. In 1778,
Smith was appointed commissioner of customs for
Scotland, an ironic post for a free trader in today's
common understanding of the term.
*Henry George and the Single Tax on Land*
Smith in the Introduction to his Wealth of Nations
identified real wealth as the annual produce of the land
and labor of the society. Henry George (1839-97)
virtually repeated the single tax on land argument of
Victor de Mirabeau, Quesnay's ardent disciple and father
to Honore Mirabeau, popular revolutionary and statesman,
spokesman for the Third Estate. "We must make land
common property," George declared. Georgists identify
three basic types of property: common, government and
private. Common property belongs to all people in
common; it is that which all have an equal right to use
and enjoy, such as public parks. Government property
belongs to the state and is subject to the direction of
the government. Private property is that which
individuals (or corporations as legal persons) have the
exclusive right to own, profit from and dispose of as
they see fit. Common property is not the same as
government property. Common property in the ocean is
generally recognized; the oceans do not belong to any
government beyond the costal economic zones. Common
property is different from private property in that
common property permits private use, but implies an
obligation to the community since the rights of others
must be recognized. By its very nature, land is common
property and laws and traditions in capitalist countries
already go far toward recognizing it as such. The
principle of eminent domain asserts the superior claim
of society to land. The New York State Constitution
states: "The people of the State, in their right of
sovereignty, possess the original and ultimate property
in and to all lands within the jurisdiction of the
State." English and American laws generally recognize
absolute ownership of goods - but not of land. The law
deals with the land "owner" as a land holder - land is
held under the sovereignty of the people and is subject
to their conditions.
To preserve common property in land, George proposed
that the rent of land should be paid to the community.
This payment expresses the exact amount that would
satisfy the equal rights of all other members of the
community. Individuals would retain title to land,
fixity of tenure and undisturbed possession. This method
of making land "common property" may also be called
"conditional private property in land" (payment of rent
to the community) as opposed to "absolute private
property in land" (private collection of rent). Thomas
Jefferson (1743 - 1826) said: "The earth is given as a
common stock for men to labor and live on." Karl Marx
(1818 - 1883) said: Assuming the capitalist mode of
production, then the capitalist is not only a necessary
functionary but the dominating functionary in
production. The landowner on the other hand is
superfluous in this mode of production. If landed
property became people's property the whole basis of
capitalist production would go." Adam Smith said:
"Ground rents are a species of revenue which the owner,
in many cases, enjoys without any care or attention of
his own. Ground rents are, therefore, perhaps a species
of revenue which can best bear to have a peculiar tax
imposed upon them." Tom Paine (1737 - 1809) said: "Men
did not make the earth.... It is the value of the
improvement only, and not the earth itself, that is
individual property.... Every proprietor owes to the
community a ground rent for the land which he holds."
John Stuart Mill (1806 - 1873) said: "Landlords grow
richer in their sleep without working, risking, or
economizing. The increase in the value of land, arising
as it does from the efforts of an entire community,
should belong to the community and not to the individual
who might hold title." Abraham Lincoln (1809 - 1865)
said: "The land, the earth God gave man for his home,
sustenance, and support, should never be the possession
of any man, corporation, society, or unfriendly
government, any more than the air or water...." Sun
Yat-Sen (1866 - 1925) said: "The land tax as the only
means of supporting the government is an infinitely
just, reasonable, and equitably distributed tax, and on
it we will found our new system."
*Effect of Demographics on Wages*
One reason for China's dynamic growth is that it is
currently at a demographic optimum. The massive
reduction in infant mortality achieved by China's
barefoot doctors program of free universal public health
care is now yielding a surge of young workers. This
added up to an extra 13.6 million working-age adults a
year on top of a labor force of over 800 million during
the period of the just ended Tenth Five-Year Plan
(2001-2005). China's challenge up to now has been
focused on absorbing population growth into the labor
force. The massive population flow from the rural
countryside to overcrowded cities also has kept wages
low even with fast growth. The advantage is that there
is a low ratio of pensioners and young workers at this
phase. China's population above the age of 16 will
grow by 5.5 million annually on average in the next 20
years and the total population of working age will reach
940 million by 2020, according to a government white
paper titled "China's Employment Situation and Policies"
issued by the Information Office of the State Council in
2004. In this period, China will face severe employment
pressure due to its huge population base, the age
structure, continuing migration to urban centers and the
process of social and economic development. While the
population of working age keeps increasing, there are
now 150 million rural surplus laborers who need to be
transferred, and over 11 million unemployed and laid-off
workers who need to be employed or reemployed. As
mechanization of agriculture proceeds, more labor would
be released into non-farm sectors. One way to relieve
urban crowding is to introduce non-farming sectors into
rural villages. If left only to market forces, widening
wage disparity between urban and rural locations will
lead to development imbalances that can threaten social
stability. A domestic labor cartel can help solve the
problem of migrant labor toward urban centers.
Within the goals of building a moderately prosperous
society, China plans to foster socio-economic
development by the upgrading and rationally deploying
its abundant human resources by providing gainful
employment with advancement opportunities and rising
income without massive relocation of population. To
achieve this goal, China will have to maintain a high
growth rate, adjust its economic structure to maximized
employment opportunities, raise education levels,
strength vocational training, and match human resources
to the changing needs of socio-economic development;
make rational arrangements for social security. As early
as 2015, China's working age population will actually
start falling. By 2040, today's young workers will be
pensioners - in fact the world's second largest category
of population, after India, will be Chinese pensioners.
There could well be 100 million Chinese citizens aged
over 80, more than the current worldwide total. Because
of China's one-child policy there will be fewer new
workers under its so-called "4, 2, 1" population
structure - four grandparents, two parents and one
child. This is a demographic transition that many
countries go through as they industrialize. But a
process that previously took a century in the advanced
economies will take less than four decades in China.
Only a drastic rise in wages can solve this demographic
problem of a China growing old before it grows rich. The
median age in China has risen from 20 to 33 since 1978.
By 2050, China's median age is estimated to be 45,
against 43 for the UK and 41 for the US, if current
population policy continues. Older populations can lead
to incremental improvements in productivity that came
from age and experience, but they are not good at the
type of performance improvements that require by
innovation. Radical innovation comes more naturally from
youth.
Chinese culture is based on strong family ties. The
elderly are the moral responsibility of their families.
This is a cultural strength that should not be diluted
by massive migrating of workers far away from their
aging parents. About two-thirds of people aged over 65
in China live with their adult children, performing
child care and household duties. Only 1% of those over
80 are in old people's homes, compared with 20% in the
US.
The controversial one-child policy is having
extraordinary social effects that are not all positive.
In Chinese culture, a son is responsible for providing
for the family which includes both the young and the
aging parents; a daughter looks after the family into
which she marries. A society with one child families
leaves those with daughters without support or care in
old age. This creates a gender imbalance that also
creates enormous problems in term of matching marriage
needs between male and female. China will soon have to
import brides for its men of marrying age. Gender
balance can shape a society's values. A society with an
excess of young males whose income cannot support two
aging parents and attract a wife from a dwindling supply
of marriage age females is one faced with latent
instability.
The economic function of the elderly in an economy of
structural overcapacity is to keep consumption demand
rising to absorb overcapacity. Young workers will be
happy to pay for the consumption by the elderly if they
realize that their jobs are dependent on consumption by
the elderly. The social security problem in the US is
not related to an expanding retired population,
conventional wisdom notwithstanding. It is related to
young workers not getting high enough wages because of
outsourcing. This is why the idea of OLEC will also
receive political support in the US.
*Conclusion*
A cartel for labor is not unprecedented in history. The
concept first found expression in the guild system
during the Middle Ages. Each line of business had its
own guild, butchers, bakers, dyers, shoemakers, masons,
carpenters, tanners, and many others, even lawyers and
doctors. The purpose of the guild was to make sure its
members produced high quality goods and were treated
fairly in the market. Guilds became politically powerful
in towns toward the end of the Middle Ages, passing laws
that controlled unfair competition among merchants,
established fair prices and wages, and limited the hours
during which merchandise could be sold and workers were
required to work. The ordained the frequency of markets.
If an outsider enters the market in a town, he could not
sell his goods unless he paid a toll and obeyed the
guilds rules. The guild also took care of the widow and
children of a member who died and those who became sick
and punished members who used false weights or poor
materials. Guilds also ensured that new craftsmen were
properly trained. They built cathedrals as monuments to
their piety communities. Guilds and its later
manifestation in the form of trade unions eventually
lost their effectiveness because of their representation
of special interests and stood in the path of economic
progress. Even industrial unionism tends to promote the
interest of particular industries, such as mining,
autos, transportation, communication, etc while
neglecting universal solidarity. The aspect that is new
about the concept of OLEC is its representation of
universal labor. It is based on the needs of a modern
economy for managing consumer demand to overcome
structural overcapacity. Such demand can only come from
rising wages and full employment. The rules of economic
democracy mandate that capital in a modern economy is
formed from the savings of labor which in turn depends
of rising wages. This economic truism is the rational
basis why the concept of OLEC should be supported by
all.
OLEC will be an intergovernmental organization whose
members are sovereign nations with labor-intensive
export sectors. The objectives of OLEC would be to
coordinate and unify labor policies among member
countries in order to secure fair, uniform and stable
prices for labor in the global market and an efficient,
economic and regular supply of labor to provide a fair
return on capital to maximize growth in the global
economy. The ultimate aim is to implement a trade
regime in which corporate profitability is tied to
rising wages that will increase aggregate demand.
Towards these objectives, the successful experience of
OPEC can be a useful guide. The economic objectives are
to stop the downward spiral of wages caused by predatory
wage policies, to adopt full employment as a policy goal
and to reject structural unemployment as a necessary
pre-requisite for non-inflationary growth. OLEC will be
a market-sharing cartel in which the members decide on
the share of the market that each is allotted so as to
achieve fair sharing of benefits and costs. In order to
achieve these objectives the members should meet
regularly to reach consensual measures in light of
changing market conditions monitored by a staff of
specialists and theoretical breakthrough constructed by
creative innovators.
February 2006
Part I: Background and Theory
This archive was generated by hypermail 2.1.5 : Wed May 31 2006 - 00:00:03 EDT