OLEC PART 2: Rising wages to right
historic wrongs By Henry
C K Liu
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 US 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
needs to be resisted by the formation of a global
labor cartel, which in this series we have named
the Organization of Labor-intensive Exporting
Countries (OLEC).
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 more than 600 workers, and
installed a steam engine to supplement power from
two large waterwheels that 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
(1730-95) 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 weavers 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
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. In New York state, a Watt engine
drove Robert Fulton's experimental steam vessel
Clermont up the Hudson River from New York City 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 19th 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, and 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 1844-47. 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 70 years. In the United States the increase
was greater than 3%, which was readily absorbed by
a practically uninhabited continent with abundant
natural resources. In contrast, the population of
France remained static after the 18th century,
which partly explained the decline of that country
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 that
decreased the death rate and added to the
population base, with the rapid growth of cities.
The factory-owning bourgeoisie use the
discontent of the peasants to gain control of the
government from the landed aristocrats. But 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. In Britain, 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 that
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 Adam 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 that determine the share of each,
Ricardo's theory of rent is a fundamental based on
which economists developed the notion of economic
rent, which will be dealt with later in the
article. He attributed his inspiration to Malthus'
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 that has to be cultivated
to meet the demand; and this land pays no rent.
Rent, therefore, is the price 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 that 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 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: first, rising land rent cuts into
profits of capitalists from one side; and second,
rising prices of wage goods cut 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 of the premise 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 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 investment sunk 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, when 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
US$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 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 was due to speculation that the
nation's currency would appreciate, issued new
rules in October tightening control over foreign
debt in a bid to curb speculative inflows of funds
from abroad. The yuan was revalued 2.1% against
the US dollar on July 21, 2005. As of the end of
September, 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. Some economists predict
that reserves could exceed $1 trillion by the end
of this year.
China's foreign debt total
at the end of September 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 3.4 trillion yuan
($411 billion). Total outstanding tradable debt
now exceeds $600 billion (60% of gross domestic
product, or 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 Standard &
Poor's (S&P) upgraded China's sovereign rating
by one notch to A-minus, citing the country'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 buildup of foreign-exchange reserves
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.
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 that 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, 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
costs 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, among educated scientists,
engineers, managers, sales personnel 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 low-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 the taxation on gasoline is directly reserved
for the Highway Trust Fund (18.3 cents per gallon,
or 4.8 cents per liter, federal gasoline tax and
24.3 cents per gallon - 6.4 cents per liter -
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 could 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 or she would be willing to
perform for only $1 million under different
circumstances, so his or her 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 corporations get compensation
packages in the range of hundreds of millions 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 tenfold 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 or
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 toward 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 for too long accepted the malignant effects of
human construct as natural laws, rather than
treating exploitation, greed and injustice as
flaws in the human condition that need 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 a
gold-backed dollar, fixed exchange rates and
restricted cross-border flow of funds, the
resultant international financial architecture of
fiat currencies based on the US 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 happened rarely
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 that 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 again to 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 because of 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 contradict 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 that 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
oilfields need workers.
The reason
money-market funds pay rent for 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
neo-classical economics is defined primarily as
wage-pushed. Thus even idle assets need rising
wages to keep their 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 increased 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 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 welfare laws
are in force, the maintenance of the poor would
progressively increase until 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 the result not of the rich
getting more than the poor, but 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,
then 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 because of 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 such as China and
India are trading in their progressive socialist
programs for Dickensian industrial hell while
advanced economies such as the United States 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.
Need 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 Abbe
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, with 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 exist.
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. Subsistence wages mean
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 that prompted Karl Marx to call on workers
in 1848 with a battle cry of "nothing to lose 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 competitors 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 patterns 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 worldwide
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 even the low-price
goods sold in Wal-Mart stores. Wal-Mart takes away
the good shirt off the US worker's back plus his
or her health insurance by outsourcing his or her
job and sells back to him or her a lower-priced
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 United States. Demand
management had been generally accepted as
indispensable in market economies since the New
Deal when US president Franklin Roosevelt adopted
Keynesianism after the 1929 stock-market crash. An
aging population coupled with a fall in birth 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 Market valid only under
full employment Supply-side economists
have in recent decades 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 Lyon 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 Etienne Claviere
(1735-93), who later became 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 relaunch 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 tradeoff, 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 (1818-83) 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, 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 returned them to
power, 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. Charles Dickens, who having
critically exposed the everyday evils of
industrial capitalism, went on to condemn the
French Revolution for being excessively inhumane.
Tomorrow: Competing theories on the
value of labor
Henry C K Liu
is chairman of a New York-based private investment
group. His website is at
http://www.henryckliu.com.
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2006 Asia Times Online Ltd. All rights reserved.
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