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     Jul 28, 2005
Scarcity economics and overcapacity

By Henry C K Liu

(For other parts in the series, click here)

Neo-classical economics developed at a time when wealth was limited to what a relatively primitive industrial society could produce, and demand for goods was always greater than their supply. It is the economics of scarcity rooted in the medieval rule of parsimony, or principle of economy, frequently used by Franciscan monk William of Ockham (circa 1285-1349), which came to be known as Ockham's Razor. Or to put it another way, scarcity, leading to the need for economy, is the determinant behind economics theory. The Franciscans, with their devotion to the poor and opposition to an opulent church, were the modern-day communists of the medieval Church.

Marxism is rooted in German philosophy. Dialectic materialism as expanded by Karl Marx (1818-83) is based on Hegelian dialectics, a term for the natural tendency of the mind to proceed by creating contrasting opposites. A thesis inevitably produces an antithesis, which would equally inevitably be followed by a reconciliation and fusion into a synthesis, which in turn becomes the new thesis, to be opposed by a new antithesis. It is a cyclical concept of life discovered by the Taoists more than two millennia before Georg Wilhelm Friedrich Hegel (1770-1831), albeit that the Taoists emphasize fundamental constancy while Hegel emphasizes conceptual change. The more things change, the more they stay the same, according to Taoists.

Hegelian dialectics introduced philosophy into the Western study of history as a view of human social evolution through time. Social reality is a process developing through time, a consequential unfolding of connected events, necessary, logical and deterministic. By materialism, Marx asserts that the basic element in social organization is economic. Rejecting Hegelian idealism of ideas forming society, Marx asserts that ideas are formed by the economic institutions of society, at the base of which are the "relations of production" which determine the shapes of religion, politics, philosophy, law and morality.

Yet Hegelian ideals are the stuff of revolution, the speeding up by tour de force the natural evolution of dialectics. Communism is a transitional stage rooted still in the neo-classical economics of scarcity. It is through communism that society will eventually evolve into socialism based on an economics of plentitude. Yet communists are not evolutionists; they are revolutionaries who want to leapfrog the evolutionary process. They are in essence idealists. Thus communists are Marxist in the theory and Hegelian in practice.

Christianity is not known for its tolerance. It is a religion of "tough love". Niccolo Machiavelli (1469-1527) recounted the pious cruelty of Christianity. David Hume (1711-76) exposed the intolerance of Christians in comparison with the Pagans. Friedrich Wilhelm Nietzsche (1844-1900) attacked Christian love as a fraudulent disguise for virulent hatred for all that was humanly vigorous, beautiful and noble. The history of Christianity is replete with militant religious intolerance.

The history of Christianity is closely linked to the evolution of capitalism, notwithstanding that Jesus overturned the tables of the money lenders and expelled them from the Temple because those responsible for maintaining the holiness of the holy were unable to separate service to God from service to Mammon, the demon of love of money. Christianity subscribes to the notion of collective genetic guilt, as capsulated in the concept of original sin. By that concept, all Germans are perpetually guilty of the sins their ancestors committed in the Holocaust, all North Americans are perpetually guilty of the sins committed by their ancestors on native Americans and all whites are perpetually guilty of the sins committed against blacks and other colored peoples. The Bible records that Abraham confronted God's decision of punitive destruction for Sodom and Gomorrah with the demands of justice, urging him to consider the innocent along with the wicked. God's decision on Sodom and Gomorrah was an act of indiscriminate religious terrorism. It set a morally questionable precedent for state terrorism such as the Blitz of London, the bombing of Dresden, the two atomic bombs dropped on Japan, the bombings of Vietnam and modern-day insurgent terrorism.

While critical of clerical corruption, Martin Luther mounted an attack on what he regarded as a structural flaw in Christian theology, by declaring the right of every individual to be his own priest through revelation from the Bible, in the name of the spiritual equality of all believers. The Reformation was misnamed. Luther was not interested in saving a corrupt Church through reform; he aimed to save Christianity by dismantling orthodox theology. But the Bible, the source of Luther's religious revolution, is a holy book with many dark sides.

Monotheism, scarcity and imperialism
Biblical faith itself has been a stunning moral source for the critique of biblically based religious doctrine. The monotheism myth, the belief in the one true God, creator of heaven and Earth, constitutes a system in which identity depends on the rejection of multiculturalism and the subjugation of personal free will and independence. Some modern writers have placed monotheism at the root of evil in the Western world. Monotheism's vehement legacy is the implied consequence of the law of scarcity, which is built upon a logic that rules the scarcity paradigm that proclaims that there will never be enough of the blessings and good things necessary for prosperity, such as land, resources, even food and water, let alone oil, to go around for all to enjoy freely.

But the law of scarcity, like monotheism, is a baseless myth, because it does not reflect the visible truth about the real world. The scarcity myth has come to be regarded as a law in large measure through the enormous influence that the Bible has exerted on the making of the Western mind, and thus the Western fixation on material accumulation. There is ample evidence that scarcity is the result of man-made maldistribution rather than a natural state.

Buddhism views the world as a place of plenty, thus Buddhists have no desire or need to accumulate material things. For Buddhists, the only accumulation worthy of effort is good deeds. Joy belongs to the giver. The law of scarcity does not derive its all-inclusive power and its pervasive influence from facts about the real world or communal human experiences. Its authority flows from faulty metaphysical principles and misguided Christian beliefs about the nature of God. Scarcity is encoded in the Bible as a principle of oneness (one land, one people, one nation) and in monotheistic thinking (one deity). It becomes a demand of exclusive allegiance that threatens with violence of exclusion. Imperialism and globalization are direct geopolitical outcomes of the Christian quest for the holy grail of oneness.

While the dark side of the Bible sanctions the formation of a collective identity that is singular, static and exclusionary, it also provides hopeful glimpses of an identity that is multiple and mobile, inclusive and evolving, governed by the good "principle of plentitude" and not the evil law of scarcity. The principle of plentitude affirms that there are enough of the good things to go around, and proclaims the ethical imperative of generosity, and envisages a world of ceaseless giving. Neo-classical economics dismisses the principle of plentitude as being outside of the concerns of economics. Charity is a voluntarism in the province of morality, not economics. When US President George W Bush promotes voluntarism as a substitute for public welfare programs, he is advocating the abdication of government responsibilities, declaring that compassion is a personal and not a state function, while he injects self-righteous morality in US foreign policy. Because Americans are a compassionate people, they are expected to exempt their government from being compassionate also. As for the all-volunteer army, there is nothing voluntary about it; it is all economic coercion.

Economic science needs to repudiate scarcity and to rehabilitate plentitude. Today the monotheistic notion of market fundamentalism is given expression through the doctrine of free trade, with an unbalanced preoccupation with human political rights rather than human economic rights and welfare, and the flawed assumption that political equality can be achieved without economic equality, all of which are distorted moral principles that are so taken for granted in the neo-liberal West that it tends to view as a symptom of deformed mentality questions regarding the value system that underlies such warped morality. Neo-liberals have become decadently self-satisfied with unquestioned slogans of the indisputable economic benefits of political freedom and equality. They have become happily trapped in self-delusions that deny glaring realities that reflect neither freedom nor equality, nor economic benefits to the majority. They find solace in blaming the undeniably obscene outcome on the bad decisions by market participants rather than the structural fault of the market system. Cathedrals, the greatest achievement in medieval Europe, were not built by market forces. Postmodernists are even worse; they are notoriously dismissive of the inquiring search for historical foundations to seek self-celebration in devising new meanings for well-understood words to justify contemporary anomalies and timeless truth.

The importance of the idea that every individual is created in the image of God is dramatically revealed in the concept of the Garden of Eden. The story of the expulsion by God of the first man and woman from the plentiful Garden of Eden is viewed as a fall from an initial blessed state of wholeness, peace, and perfection, a descent from a regime of plentitude to one governed by the law of scarcity. The law of scarcity stands for a regressive and destructive world view. Scarcity, the assumption that someone can only prosper when someone else does not, proliferates fratricide and genocide. Scarcity is an idea that the writers of the Bible invented and sadistically inscribed in the mind of the faithful, a law manufactured by monotheism out of necessities in a primitive society in which insufficiency was the norm, and the desire to stand apart and excel was necessary for survival of the species and must not be viewed as something shameful. To have more than others in a world of scarcity is regarded as a sign of heroic accomplishment. Selfish love is not conceptually inconsistent, and not even undesirable, for it is a permissive basis for drawing sharp boundaries between the beloved and the rest of the world.

The ideal of plentitude
Although generally overwhelmed in the Bible by the law of scarcity, God's making man in his image exemplifies the ideal of plentitude. The law of plentitude means the rejection of one God in favor of many gods; and it requires not merely diminishing the distance between the divine and the human but heroically eliminating it. As reality shows man in a great variety, the image of God must also be multidimensional.

The biblical story of the Tower of Babel is a mythical tale of God crushing man's godly ambitions and punishing him with divisiveness. The consequence of unsuppressed pride and rebelliousness to God on the part of the people is bondage to human overlords. And thus the division of people into peoples of many different tongues is God's strategy for keeping humans human in order to preserve deity. Striving to preserve unity and aspiring to godliness, the people resolved to build a city, construct a tower toward God and make for themselves a name. The name of the city where men sought to reach God was Babel, a word that comes from a root meaning "confusion" and which contains a Hebrew word for "heart". The story of Babel thus prizes not monumental structures conceived by human minds and produced by human hands, but the human heart, which brings man closer to God. A single world nation united by a universal language promotes a false sense of human powers, of what human beings can accomplish by taking matters into their own hands. Monotheism abhors pluralism, but pluralism is a gift that God bestows on humankind to make us more human. Like Adam and Eve, the builders of Babel were cast out of a peaceful, easy life of plenty and fell to a realm of the scarcity for challenging God. Scarcity is a device to keep humans ungodly.

Much of neo-classical economics has to do with improving efficiency to increase production to come closer to eliminating undefeatable scarcity. The objective is always to increase supply through new investment for greater productivity and efficiency. Yet for neo-classical economics, the quest for the elimination of scarcity is like trying to catch the hood ornament of a moving car from the driver's seat, with the goal remaining unreachable at any speed, or any amount of investment. But the world economy now, through technological progress and deregulated markets, has entered a stage of global overcapacity in which neo-classical economics of scarcity has become obsolete and the management of aggregate demand is the necessary solution. Material overcapacity is a result of mental undercapacity.

A new economics of plentitude
According to the rules of neo-classical economics, over-consumption is a path to financial ruin. But overcapacity is also a path to financial ruin in a market economy.

Capacity represents sunken investment that requires continuous positive returns. Under-utilization of capacity translates directly into inefficiency, a deadly sin in economics because idle plants are non-performing assets that result in financial losses. Overcapacity is not merely a temporary under-utilization of capacity; it is the systemic inability to achieve full or at least optimum utilization. Yet overcapacity is a structural condition in the world of scarcity economics, because excess capacity is the condition needed to prevent the emergence of shortages, which is another name for scarcity. But scarcity is needed to maintain economic value as expressed in market prices. Thus the market model of neo-classical economics must constantly be plagued with the curse of scarcity while simultaneously preventing scarcity with the more fatal disease of overcapacity. This contradiction is the internal paradox of neo-classical economics that traps the market economy in an arrangement of never being able to enjoy the full capacity of its productivity.

The insecurity generated by looming scarcity drives savings, which as investment add to overcapacity. And savings reduce current consumption, meaning lowering demand, which adds to overcapacity. The challenge of a market economy in an age of structural overcapacity then shifts from how to produce more to how to sell more. Marketing becomes the critical task of management. The answer for decades has been to use planned obsolescence to ensure recurring demand. Another answer was to lower prices to broaden the market. Advertising stimulates the desire for goods, but only rising income increases demand for goods.

A more rational solution than planned obsolescence would be to end its inherent waste and to manage real demand to sustain full utilization of capacity to produce lasting, quality products. This means consumers need to have sufficient income to buy quality goods and services produced by the market economy. But neo-classical monetary economics has created a financial scheme in which the people producing the goods cannot afford to buy them unless profit is greatly reduced if not eliminated, and the people receiving the profit from goods production cannot consume more of these goods. The reservoir of productivity is overflowing while the defective plumbing of neo-classical monetary economics continues to block the delivery of goods to a public deliberately kept thirsty for more goods. At times, needed aggregate demand is created by irresponsible monetary policy, either with the depreciation of money, which is the monetary effect of inflation, or with easy credit, leading to debt bubbles that can cause severe economic damage at times of reckoning. It is time to shift from the economics of scarcity to a new economics based on the concept of plentitude to cure the modern-day plague of scarcity in a land of overcapacity.

Mercantilism and fiat money
Unless products are sold for gold to Martians, or at least to foreigners or colonial subjects in a mercantilist trade regime, lowering prices requires a corresponding lowering of wages, which in turn shrinks effective demand further. Mercantilism is not merely a quest by nations for gold, but a quest for national purchasing power in the international market as expressed by the relatively constant monetary value of gold. In a world of fiat currencies not backed by gold, mercantilism cannot exist by definition. Any nation that habitually incurs trade deficits will find its fiat currency not accepted by its trading partners. Any nation that incurs export trade surpluses denominated in a foreign fiat currency is engaged in reverse mercantilism, ie, shipping real wealth overseas for paper.

Thus it is outrageously preposterous for the United States, a country of recurring trade deficits denominated in fiat dollars, to accuse its exporting trade-surplus partners of practicing mercantilism when the US trade deficit is in essence an undisguised abuse of unearned privilege of inexhaustible national purchasing power in the form of dollar hegemony - an international monetary anomaly that permits the US to print paper dollars in exchange for real products from its trading partners exporting to the US market. Dollar hegemony is based on oil being denominated in dollars in the world market. When the United States, in the name of national security, would not permit a Chinese company, such as China National Offshore Oil Corp (CNOOC), to use its trade surplus denominated in fiat dollars to purchase a US-based oil company, 80% of whose assets are located in Asia and will never enter the US domestic oil market, it is not a move to protect oil supply in the United States. It is in fact a move to protect dollar hegemony.

Protecting dollar hegemony
But such a policy to protect dollar hegemony in effect makes the fiat dollar less fungible. The latest report shows CNOOC being put in a box of no escape in its effort to outbid rival Chevron Corp in the competition to buy Unocal Corp. The Unocal board was reported on July 20 to be backing a sweetened offer from Chevron that will pay US$63 a share in cash and stock, up from a previous offer of $60.50 a share. CNOOC's all-cash offer stood at $67 a share on July 20. CNOOC needs to raise its cash offer to $70 a share to win, but the higher offer would solicit more political opposition from the US government over the use of dollar loans from Chinese state-owned banks. The competition will then move further from one over money into the arena of geopolitics.

Apparently, the US dollar is less useful when held by the Chinese state. But when money is not useful to some, it is not useful to all. Money must stay fully fungible to preserve its full function and value. Money not accepted from anyone to buy anything anywhere cannot be acceptable universally. When the dollar is not universally accepted, it presents a greater threat to US national security than the sale of any one oil company.

The answer to overcapacity
The size of the US market, great as it is, is insufficient to absorb the continuous growth of the world's new productive potential unleashed by the promise of globalization. It is not possible, let alone moral, for 4% of the world's population to consume the full productive capacity of the world. For the global economy to grow to its full potential, the whole population of the world needs to be allowed to participate with its fair share of consumption.

Yet economic and monetary policymakers everywhere continue to view full employment and rising fair wages as the direct cause of undesirable inflation, which is deemed a threat to sound money. To be valuable, money is made scarce, meaning some must have less than enough, thus making money desirable. Thus relative poverty is at the heart of neo-classical monetary economics. Being rich requires others to be kept in relative poverty, meaning some must have less money. If being rich is celebrated as a prized luxury, then the majority needs to remain relatively poor. Wealth is not viewed as God's gift to all by neo-classical economics, but a scarce reward worth fighting over. The competitive quest for wealth is the driving force of the market economy and in turn human civilization under capitalism. The fear of poverty keeps the population working and the existence of pervasive poverty sustains the privileges of the rich.

Yet the work ethic has been detached from wealth since the advent of finance capitalism. The game now is to do the least amount of work for the richest reward. In any modern city, if those making more than $1 million a year suddenly stopped work, it would take weeks before it was even noticed, but if all those making less than $50,000 suddenly stopped working, there would be chaos and total collapse of urban life within days. Neo-classical economics as practiced in a market economy is an inherently undemocratic system that rejects economic equality and freedom from scarcity. Thus it is a contradiction for the United States to promote democracy and freedom around the world through the spread of market capitalism.

Dollar hegemony causes US job loss
The coming global trade war being launched by the rich economies of the world is equivalent to a hunter shooting himself in the foot to scare away the ants attracted by the honey overflowing from his backpack.

Economist John Kenneth Galbraith famously quipped that the trickle-down theory of prosperity means if you feed the horse enough oats, the sparrow will eventually benefit from the horse's droppings. Democracy in the developed economies is increasingly being co-opted to impose trade restraining tariffs against the low-wage exporting economies that have been shipping real wealth produced at slave wages to the United States for paper dollars. With such advantageous terms of trade, it is nothing but foolhardy for the US to impose tariffs to curb this joyride made possible by dollar hegemony. Unemployed US workers do not understand that it is not cheap imported goods made by low-wage labor overseas that are the real cause of the loss of jobs in the US. Rather, the real cause of job loss in the US is the global monetary regime of dollar hegemony that makes it unnecessary for the US economy to have production jobs inside the US.

Under dollar hegemony, all the US needs to do is to print paper dollars with which to exchange real goods from other countries in the name of global trade. But it is more convenient to blame foreign workers than to fault central bankers hiding behind the respectable shield of acclaimed monetary experts. The trouble is that the benefits of this monetary joyride at the expense of low-wage workers in the developing economies are not fairly distributed even within the rich economies, with US factory workers bearing all the pain while those in the finance sector keeping all the joy. Jobs will only return to the US if US wages become lower than those in the developing countries. Either way, the lowering of wages or the loss of high-wage jobs, causes pain for US workers while producing profit for the shareholders. In a democracy, this maldistribution of pain and benefits leads to misguided protectionism that hurts the US as a nation and threatens world stability. The combination of dollar hegemony and misguided protectionism in the US in the form of recriminatory cycles of rising tariffs among trading partners will also launch the world into another global trade war that will lead to another global great depression, which in turn will lead to new shooting wars and political revolutions.

No single economy can profit unfairly for long at the expense of the rest of an interdependent world. There is an urgent need to restructure the global finance architecture to return to exchange rates based on purchasing-power parity, and to reorient the world trading system toward true comparative advantage based on global full employment with rising wages and living standards. The key starting point is to focus on dollar hegemony, not foreign low-wage workers. World trade needs to be financed by a multi-currency regime in which exports are paid in the currencies of the exporting nations, not in fiat dollars. This will enable the exporting nations to reap the benefits of earned external demand for their currencies that can be satisfied only by equivalent imports to keep international trade balanced.

Keeping the poor poorer
Internationally, the rich nations, and domestically, the rich within rich nations, have been gaining control over a fast-expanding portion of the world's wealth and becoming increasingly ruthless in furthering the expansion of that control, particularly as key resources become overstretched, pollution mounts and the number of malnourished multiplies around the world. Supply-side economics has been distorted to keep supply lean in order to maximize market value of assets. Yet internationally, the rich countries are feeling increasingly threatened by rising middle-income nations, and domestically, the rich inside rich nations are feeling threatened by economic democracy.

A recent study by Goldman Sachs, a major global investment bank, predicted that by 2050, four developing countries - China, India, Brazil and Russia - could have a combined economy larger than that of the six biggest economies today - the United States, Japan, Germany, the United Kingdom, France and Italy. Yet there is no reason for that to be alarming to the rich countries. Those four developing countries have a population of 2.7 billion, more than quadruple the population of the six biggest economies today of 681 million. It's a puzzle why Goldman Sachs left out Indonesia, which has a population larger than Brazil's; perhaps it was because Indonesia is still solidly under US domination. And 2050 is almost half a century away, at which time the average per capita gross domestic product of the four developing countries would still be less than a quarter of that in the six big economies. At any rate, if current terms of trade continue, much of the GDP in the newly rich nations would be owned and controlled by the currently rich nations.

Yet there are signs that the rich economies are determined to resist this equalizing prospect by trying to co-opt the elite in these developing economies as a new comprador class to help perpetuate the historical dominance of the rich nations. The Western financial media tirelessly feature sensational success stories of new internationalist entrepreneur billionaires in the developing economies while playing down achievements of the national bourgeoisie and state-owned enterprises.

Sales revenues of major state-owned enterprises (SOEs) in China reached more than 5.55 trillion yuan ($671 billion) in 2004, an increase of 25.8% year-on-year, bringing in a profit of 478.46 billion yuan ($58 billion), a rise of 57.6% over the same period a year earlier, with total assets up to 9 trillion yuan ($1.1 trillion, or $4.4 trillion on a purchasing-power-parity basis). Eight Chinese SOEs were listed among the Fortune 500 companies in 2004. The state-owned sector is growing at a faster rate than the Chinese economy as a whole. State-owned enterprises connote a bad image in the mind of neo-liberals. On the one hand, they condemn SOEs as economically inefficient. On the other hand, they accuse them of unfair competition for private enterprises. And foreign SOEs are considered national-security threats by the United States.

But what is a state-owned enterprise? It is one owned by the state, which is in turn is owned by all the people. It is equivalent to a public corporation or a public authority in a market economy. A so-called private corporation is owned by private shareholders, among whom sometimes are government-owned entities acting as private investors. And if state-owned enterprises are inherently inefficient, there is no need to fear unfair competition from them. China operates on a socialist market economy, which means that SOEs are a key component. US-China trade cannot expand to its full potential if the US considers Chinese SOEs unwelcome threats.

Wealth by divine right
Forbes magazine's 100 richest people in China in 2004 had $29.2 billion in combined assets, a growth of 42% compared with those for the year-earlier ranking. Worldwide, Bill Gates alone was listed as having a net worth of $58.2 billion in 2004, while five Walton family members had a combined asset of more than $100 billion. One individual in the US is more than twice as rich as the richest 100 in China put together.

And Forbes might have undercounted Gates' wealth. On January 4, 2000, Microsoft (MSFT) stock price peaked at $116.56, putting Bill Gates' wealth at $228 billion, or $131.6 billion by acceptable accounting standards after capital-gain tax calculations if he were to liquidate his shares under then-governing tax laws. The number of MSFT shares owned by Gates, according to a 1995 Microsoft Proxy Statement, was 141,159,990. Adjusted for splits in December 1996, February 1998, and March 1999, Gates was reported to own 1.95 billion shares of MSFT, roughly 20% of the company. At peak market price, Gates was worth $227.3 billion. Microsoft has a total of 10.7 billion shares outstanding, worth a total of $1.24 trillion at its peak market price, greater than China's GDP in 2000. If Gates had never sold any of his MSFT stock since the company went public, his share in the company would be worth $384.27 billion at peak price.

Gates' assets outside of MSFT shares are not public. They are estimated to be at least equal to his holdings in MSFT as a conservative diversification strategy. His venture-capital investment gains in new start-ups are incalculable. Fortune magazine estimates that Gates' MSFT wealth alone expands at an average rate of $50 million per day or $35,000 per minute.

The gap between Mr Rich and Mr and Ms Average is 311 times as great in the Age of Gates as it was in the Age of Rockefeller, and historians called that the Age of Robber Barons. We have now the Age of Wealth by Divine Right in which one person can have his wealth increased by $50 million a day while almost half of the people of the world have to survive on less than $2 per day. "Obscenity" is not an adequate term to describe this disparity.

Helplessness of small nations
The small nations of the world, unlike Brazil, China, India and Russia, are too weak to resist oppressive policies foisted on them in the name of free trade by international trade and finance organizations controlled by the rich nations.

The World Development Movement has just produced a report on the West African nation of Senegal, detailing a depressingly familiar tale of a debt-stricken country forced to adopt the full range of stabilization measures prescribed by the International Monetary Fund and the World Bank: cut public spending, tighten monetary and fiscal policies, focus on export-led growth, push trade and investment liberalization, deregulate internal prices, privatize state-owned enterprises, roll back the state's role in the economy and abrogate the sovereign right to guide its own economic destiny.

The neo-liberal prescriptions of the Washington Consensus are supposed to save countries like Senegal from poverty. Yet the reality is that the liberalization of agriculture has deprived native peasants of their traditional livelihoods. The percentage of malnourished in the Senegalese population rose to 25% during the 1990s and 80% of people live on less than $2 a day. Senegal was an obvious candidate for debt relief, but such relief is contingent on the "conditionalities" attached to the Senegalese poverty-reduction strategy, by selling off the country's public assets and natural resources to multinational corporations from the industrialized world.

In Malawi, agents of the Washington Consensus demanded that the government reduce subsidies for small farmers, remove price controls and regulations and privatize the state-run body that ensured food was available across the country and let the market work its wonders. The result was that prices rose 400%, with widespread hoarding in the market while famine spread. In Zambia, agricultural tariffs were removed, subsidized farm credit halted, food-import quotas removed, and the currency devalued to aim for unrealistic export-led growth. The result was that exports as a percentage of a shrinking GDP fell from 36% in 1991 to 27% in 2001.

US paranoia toward China alienating allies
Predictably, China again emerges as the main target of blame and fear. Talks of preemptive strikes and militant alliances against a rising China are again rampant in US political/military circles.

The Australian Broadcasting Corp reported that in June 2003, the Bush administration decided China's expanding role on the world stage required an annual forum among US allies to discuss issues surrounding China, and invited the UK, Canada, New Zealand, Japan and Australia to participate. The meetings were kept ultra-secret, in order to create an atmosphere open to frank discussion that would not be restrained by possible adverse reaction in world opinion. At the first meeting, those attending decided to call themselves the Halibut Group. The name grew out of an in joke - none of the China experts present could work out how to say "halibut" in Mandarin.

When the Halibut Group started, the US deputy secretary of state at the time, Richard Armitage, telephoned the Australian ambassador in Washington, Michael Thawley, to invite Australia to participate. But there were conflicting opinions in Canberra about whether to get involved. Some saw it as a good chance to present to US policymakers Australia's view on China; but the prevailing view was that Australia would gain more through bilateral contacts with the US and, at the same time, avoid any offense to Beijing. So Australia told its best friend and ally it preferred not to participate, to the disappointment of the United States. Most nations, including longtime US allies, will not support any revival of US policies of containing China.

The textile quota issue
The US in May reimposed quotas on seven kinds of Chinese textiles and clothing products in response to a 54% import rise above the 2004 level. The dispute over textile quotas is merely a transitional issue over the phasing in of World Trade Organization rules on the expiration of quotas. Textiles, like agriculture, have been one of the most contentious issues in the WTO, as they were in the former GATT (General Agreement on Tariffs and Trade) system. The issue has gone through fundamental changes under a 10-year schedule agreed to in the Uruguay Round of multilateral trade negotiations launched at Punta del Este, Uruguay, in September 1986 and concluded in Geneva in December 1993, signed by trade ministers in Marrakesh, Morocco, in April 1994.

The system of import quotas that had dominated textile trade since the early 1960s was to be phased out in April 2004. By January 1, 2005, the sector became fully integrated into normal WTO rules. In particular, textile quotas came to an end, and importing countries will no longer be able to discriminate between exporters. The Agreement on Textiles and Clothing itself no longer exists: it was the only WTO agreement that had self-destruction built in. The export growth of Chinese textiles is a normal temporary phenomenon in a process of returning to free trade. The unreasonable arrangement and overprotection made by the US and the European Union in the process of integration of textiles are the main causes of the problem.

The original quota system distorted severely the textile trade of the world and restricted the exports of Chinese textiles by assigning a quota for China far short of its capacity. Textile integration eliminates this trade distortion. It is normal that rapid increase of Chinese textile exports will happen temporarily before normalizing. The latest textile research report by WTO shows that the increase of textile export from China will be lower than expected after textile integration takes full effect due to factors involving tariff limitation and the labor cost advantage in other developing countries.

Textile integration brings development opportunity not only to China, but to the whole world. China is a production power in textiles and also a big textile-consuming country. Eighty percent of the textiles produced in China are sold domestically because textiles are the first consumer goods a poor population can afford to buy. China's market, with a population of 1.3 billion, will offer immense opportunities for global exports of garments, textiles for home and industrial purposes, textile raw materials such as cotton and wool, synthetic fibers, in addition to design services and manufacturing machineries that are made mostly in advanced economies. After entry into the WTO on December 11, 2001, China fulfilled its promise ahead of schedule with the general tariff level reduced to 10.4%. With the exception of quotas on the import of cotton and wool, there are no restrictive measures in the import of textiles.

China took decisive action in April to ease rising concern among trading partners by hiking textile tariffs on more than 70 products by 400% effective June 1. The announced rise sent panic through the country's textile and garment industry. Some predicted factory closures and job losses. The Ministry of Finance said in a statement that tariffs would rise from 0.2 yuan (2.4 US cents) to 1 yuan (12 cents) per unit. The largest tariff increase would be from 0.3 yuan to 4 yuan per unit. And a new tariff of 3 yuan per kilogram will be imposed on exports of flax yarn. Chinese textile manufacturers said their profit will be squeezed as they currently earn only 1-2 yuan from each shirt. Earlier protective measures initiated by the United States had practically shut Chinese companies producing cotton shirts out of the US market. Some entrepreneurs predicted that a large number of textile manufactures would go bankrupt by August or September.

"We are encouraged by this move that the United States and China may be able to resolve other trade differences with a similar sense of fairness and moderation," said Charlie Martin, president of the American Chamber of Commerce in China. He said this voluntary step by Beijing demonstrated that China was adopting a constructive approach and was sensitive to the hardships which the removal of quotas has brought for some American workers. Unfortunately, the US initiated safeguard measures against three categories of Chinese textile products in early May; similar measures were imposed on another four categories before the end of May.

The textile industry in China employs 19 million people, about the size of the population of Australia, and jobs will be lost because of the restrictions. As a result, analysts predicted, about 100,000 Chinese workers in this sector might lose their jobs. Youngor Group Companies, China's biggest maker of men's suits and shirts and a supplier to Marks & Spencer Group Plc of Britain and Polo Ralph Lauren Corp of the US, said on June 9 it was losing orders to rivals in India. Hong Kong-based Zhongxing Cotton Ltd sells about 200,000 tonnes of cotton to Chinese manufacturers a year, sourcing from the United States, West Africa and Uzbekistan. Zhongxing also represents Cargill Cotton of the US. Consumption of cotton "will be moderated", Jeff Coey, director of China and Southeast Asia at Cotton Council International, said on May 31. Cotton Council is the international division of the Memphis, Tennessee-based National Cotton Council of America. Cotton prices on the New York Board of Trade dropped 5.3% in 12 months, according to Bloomberg data. China's cotton imports were down 56%, in the first four months of 2005, compared with the year-earlier period, according to customs data. An April 26 report by the US Foreign Agricultural Service said US cotton production this year is forecast at 5.5 million tons, 13 per cent less than last year.

China announced days after the European Union sought formal talks with Beijing over two types of textile imports - flax yarn and T-shirts - that it will abolish export tariffs on 81 categories of textile products and scrap scheduled tariff increases on 74 types of textiles as trade tensions with the EU and US escalated, bringing the EU a step closer to imposing limits. The announcement came ahead of a visit to Beijing by US Commerce Secretary Carlos Gutierrez.

China's cost advantages are limited to lower labor cost. There are big gaps in capital, design and development, brand-name building and marking between China and the other advanced countries in the world market. Much opportunity awaits exploration in exchange and cooperation in textile areas between China and other countries. Quantitative growth is not an objective China is pursuing in textiles export. The orientation going forward includes improvement of industrial structure, raising added value, promotion of brand names and improving on design and marketing. Chinese textiles export to the US in 2004 was valued at $9.06 billion, accounting for only 5% of the total trade volume between the two countries. The current dispute over textiles is a political friction unilaterally created by the United States, along with currency valuation and restriction on Chinese direct investment in the US.

The World Bank's spokesman on Asia, Peter Stephens, said in a June 29 speech that proposals by US and European lawmakers to impose restrictions on low-price Chinese imports were unfair and hypocritical. In a compromise worked out with the EU in early June, China agreed to limit the growth of exports in 10 categories of textiles to Europe to between 8% and 12.5% a year through 2007. "Trying to deal with the emergence of China and the rise of India through antiquated measures like tariff protection is like trying to hold back the tide with a little wall of sand," Stephens said, adding that the US and EU should engage in more dialogue with Asia. "The notion that somehow by increasing tariffs on Chinese textiles, jobs in textiles are going to return magically to the US is incredible," Stephens said at a luncheon of the Singaporean-German Chamber of Commerce.

China also suffers from job loss
There is a general misconception that job losses in the United States are caused by the growth in Chinese manufacturing. Studies have shown that much of the job loss in the US has been caused by structural shifts in the US economy. There is evidence that such job loss is a design by US policy.

Federal Reserve chairman Alan Greenspan told Congress in public testimony that thinking jobs are better than doing jobs. The US will keep higher-paying jobs in financial services, management, design, development, sales and distribution and let the emerging economies have the low-paying assembly line jobs in factories owned by US companies.

Even small business, a key component in job creation, is increasingly taking advantage of low-cost telecommunication and transportation to play the wage arbitrage game through cross-border outsourcing. When US job growth slows, the US stock market, which measures the global performance of listed companies, rises. US labor unions have helplessly watched drastic drops in membership that translate into loss of political leverage in shaping economic policy. But now that effects of cross-border wage arbitrage are hitting the high-tech sector, laying off highly paid US high-tech workers and giving their jobs to cheaper workers overseas, the political reverberations are louder. In this jobless recovery, these better-educated workers have the political clout to turn US policy toward protectionism.

Such structural shifts are also occurring in the Chinese economy. A 2004 study by the US Conference Board found that China has been losing more manufacturing jobs than the United States as productivity surges in the world's most populous nation. China lost 15 million manufacturing jobs between 1995 and 2002, compared with 2 million shed in the US. This is not surprising, since industrialization has been occurring at a faster pace and from a lower base in underdeveloped China than in already developed US. Yet US job losses have led some US politicians and business leaders to complain that jobs have been outsourced to countries such as China where pay is lower. But few economists have proposed ways to make trade lift Chinese wages.

Rising productivity is behind the loss of factory jobs everywhere in the world, even in China. The US economy is the only one in the world that enjoys productivity gains without actually producing more real goods. But worse than in the US, rising productivity has translated even less into higher wages in China. This is because 60% of the Chinese export sector is financed by foreign direct investment, which has no incentive to raise local wages, since demand for their export products is independent of local purchasing power.

Chinese labor productivity grew at an annual rate of 17% between 1995 and 2002, meaning factories in the country were producing more with less labor. But rises in wages have been averaging below 10% annually from an already excessively low base, discounted by an average annual inflation rate of over 5%. The year 2001 saw a per-capita annual wage rise of 14.6%, the number of employed workers decreased to 54.41 million and the wage sum totaled 572.18 billion yuan, a growth of 12.2%. Average total income per worker, including wages and welfare funds, amounted to 11,881 yuan in 2001, a 14.1% rise over 2000, with an 18% gap from the productivity growth rate. This means Chinese wages measured by productivity were actually falling. Because of widening wage disparity, both average and median income rose at a slower rate than GDP. Twenty-six of China's 38 major industries registered job losses over the period surveyed, according to data from 51,000 companies. At the same time, jobs in China's service sector were increasing, consistent with economic development.

This disconnection between productivity and wages also occurred in the United States. Between 2000 and 2004, US productivity rose 3.8% annually on average while the median family income fell by 0.9%. During the three decades between 1975 and 2004, US productivity growth consistently outpaced family income growth, with productivity doubling while median family income rose only about 12%, according to findings from the Economic Policy Institute. In both countries, workers have not been getting their fair share of economic growth.

Growth and job loss
These significant empirical data validate what has been suspected for some time in theory. The implications are mind-boggling.

If notwithstanding all the outsourcing from the US as a result of cross-border wage arbitrage, the world's fastest-growing economy is also losing manufacturing jobs because of a faster rise in productivity (17%) than GDP growth rate (9%), then the world's industrial economy is going through what its agricultural economy went through a century ago. Overcapacity is the plague of the modern industrial economy, as agricultural overproduction was the plague of the agricultural economy of an earlier age. The farm workers went to the cities and into factories, and not a few went to die in high-casualty wars in the 19th and 20th centuries. Where will the factory workers of the world go in a market economy of finance capitalism? Even war deaths have been greatly reduced in number through new war technology. Some have gone into the service sectors where, except in financial services, wages are generally lower than in factories.

Are jobs necessary for prosperity?
Perhaps the idea of a job as a way of generating income needs to be re-examined in the post-industrial society.

The job is the creation of the industrial revolution. Prior to that, under agricultural feudalism, people had livelihoods, doing what they excelled in and enjoyed. The job is a venue through which impersonal labor and time are sold for money at a rate that prevents the worker from buying and consuming all of what he or she produces so that the excessive production can be turned into profit, what Marx called surplus value. When the domestic market stagnated from this structural imbalance of demand and supply, goods were sold overseas to earn the profit needed to pay for the capital goods that increased productivity and to provide returns on capital required to finance the capital goods. This was the impetus behind mercantilism, which John Hobson and Lenin observed as leading to imperialism.

The victim economies of imperialism were misled by neo-liberals that foreign trade was the way to reverse the flow of economic benefits by exporting to the imperialist economies. What policymakers in developing economies failed to realize was that the imperialist economies had evolved into finance capitalism in which they no longer needed to export goods to accumulate wealth. Because the developing economies needed foreign direct investment to finance their export sector, they did not receive any of the financial benefits from historical mercantilism as the imperialist economies once did by robbing the wealth of their colonies by selling them high-price manufactured goods in exchange for cheap raw materials.

Each new millionaire requires 100,000 job losses
Nowadays, the export of both manufactured products and profits from the exporting economies is the neo-imperialism that the developing economies did not recognize until they were solidly hooked by dollar hegemony under which the trade surplus they earned cannot be invested or spent in their own local economies. The problem is exacerbated when, in the developing economies, capital goods and raw material are imported, draining money away from domestic recycling. But even if capital goods are locally produced, their production does not require enough labor to recirculate enough money to support mass consumption.

One way to look at the unemployment statistics is that in China, where some 15,000 new millionaires have been created in recent decades, with urban unemployment at 15 million, the creation of each millionaire requires the loss of 100,000 jobs. The wealth of the new millionaires came from the low wages of workers as well as the unpaid wages of the unemployed.

Treating unemployment as paying jobs
Raising wages is scant compensation if unemployment in the economy keeps increasing from structural job losses. Job creation then becomes a priority and a policy prerequisite in a modern economy. Government must adopt policies to create new jobs to achieve full employment at high and rising wages to absorb the loss of jobs from rising productivity and use sovereign credit to sustain consumption to obliterate overcapacity that weakens economic growth. Charlie Chaplin's Modern Times has finally arrived in the modern post-industrial economy.

Perhaps the economic definition of a job needs to be reconsidered. What about treating involuntary unemployment as paying jobs? The logic is immaculate. If structural unemployment is necessary to keep money sound and valuable, it can be argued that a "natural rate" of unemployment to prevent inflation is a profitable arrangement to the economy and the unemployed should be paid for their selfless service to society.

In television programming, there is a contractual concept known as "play or pay", meaning the network will play the program and pay the producer for it, or it can refuse to run the program but still has to pay the producer for it. For labor contracts, there should also be "work or pay". The economy should either provide a job for everyone looking for work and pay him or her wages, or keep him or her unemployed to fight inflation but still pay him or her wages. If farmers are paid to reduce production, why shouldn't factory workers be paid for being involuntarily unemployed? The reason is that farmers historically have more voting power than factory workers in the US political system, which has evolved from an agricultural economy.

Individual sovereign credit entitlement
Or perhaps every citizen should be born with his or her quotient of sovereign credit as a civil-right entitlement with which to keep the economy humming. Why should the heirs of the privately rich be the only ones enjoying the legacy of a rich pedigree?

Citizens of rich nations can also be born with inheritance from a society of abundant national wealth. What kind of democracy is it if the national wealth is not the property of the people? Instead of running the economy on consumer debt, as the US economy under Fed chairman Alan Greenspan has been doing, why not run it with sovereign credit channeled through consumers that eventually returns to government as taxes?

Marx appeared to have been outdated in his urging that workers of the world should unite, for they have nothing to lose but their chains. The fact is that in the new economy of finance capitalism, workers have to lose their jobs to keep the world economy working. If the numbers of workers are shrinking as the economy expands, workers can become an endangered species and the dictatorship of the proletariat can be a meaningless fantasy.

In a market economy, if income is dependent on work, and if work is shrinking as the economy expands from rising productivity, then income cannot possibly increase fast enough to support the consumption needed to eliminate overcapacity. To avoid the market economy collapsing, ways needs to be found to deliver basic income to the consumer independent of employment beyond undignified welfare payments.

Next: Trade-Related Aspects of Intellectual Property Rights (TRIPS)

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

Wanted: Millions of decent jobs (Feb 17, '05)

China trade costs US 1.5 million jobs (Feb 9, '05)

The jobless: Victims of China's economic success (Apr 1, '04)



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