OLEC PART 4: Toward living wages
in the modern era By Henry C K Liu
(For the other articles in this series, click
here.)
Modern finance has shown that the bulk of capital comes nowadays from the
pension funds of workers, which is the deferred income of currently employed
labor.
In the US economy, no one saves voluntarily anymore, not because of a change in
Americans' character, but because with low wages and rising asset values not
registered as inflation, no one can afford to save, having to spend all income
plus
accumulating debt just to manage. This is why the entire US economy is
operating on debt. Most savings now come from pension funds, to which the
average worker has no legal choice but to contribute, with his company matching
payments from his first day of work, with benefits not collectable until some
three decades later.
Pension funds such as CalPERS (the California Public Employee Retirement
System), not even a private-sector fund as it serves only government employees,
are huge, and they are the new institutional capitalists. CalPERS alone holds
shares in 1,600 US companies, with assets of US$167 billion in 2004. It owns so
much equity and bonds that in many cases, such as the Disney Co, it cannot sell
its shareholdings without adversely affecting the price of the rest of its
holdings, much like foreign central bank holdings of dollars. Pension funds are
forced to stage shareholder revolts within corporate governance to change
ineffective management to get the market price of their shareholdings back up.
That is how Michael Eisner lost support of 45% of the voting shares and had to
resign his chairmanship of Disney.
CalPERS also opposed the reappointment of former Citicorp chairman Sanford
Weill and chief executive officer Charles Prince as company directors. CalPERS
held 26,712,930 Citigroup shares out of 5.05 billion shares outstanding. It
said Citigroup would be "better served" by having an independent director in
the place of Weill. It withheld votes for six other Citigroup directors. It
also withheld support from Warren Buffett, who was running for re-election to
the Coca-Cola Co's board. The fund also withheld votes for directors at 10
other companies: Sprint, Wachovia, PG&E, Burlington Resources, Charter One
Financial, Mellon Financial, South Trust, State Street, Stryker and Washington
Mutual. Yet no pension has gone on record to disinvest from corporations that
outsource their clients' jobs.
These pension funds operate like insurance companies, spreading out their risk
through the theory of large numbers by hiring an army of fund managers among
whom they expect 5% would lose money, 40% would break even with the S&P
500, 50% would beat the S&P 500, and 5% would do spectacularly, with
thousandfold returns. Every year, they fire the underperforming 5% and bring in
a new crop of replacement fund managers. Also, the actuary is such that
pensioners die and stop collecting retirement benefits long before the
principals are consumed, so the funds get bigger and bigger over time, like a
giant mushroom in a financial science fiction. These pension funds are like a
virus, feeding on workers whose retirement money they control for their own
institutional obsession on growth at the expense of job security. If the US
ever privatizes Social Security, all US workers will be enslaved by these
institutional tyrants.
In the new economy of finance capitalism, with capital coming also from labor,
the high return on labor's retirement funds from cross-border wage arbitrage is
robbing the same workers of their jobs. As Pogo used to say, the enemy, they
are us. The new capitalism uses worker capital to exploit workers while
financiers skim off huge profits without having to risk any capital of their
own. Investment bankers routinely make between $2 million and $30 million in
annual income by "creating value" out of thin air, arranging IPOs (initial
public offerings), mergers, and structured finance deals that pension funds,
known collectively as institution investors, buy into.
An institutional salesman on Wall Street is one who talks pension funds into
investing in deals like the one that Orange county in California fell into that
eventually led to its bankruptcy in 1994. The salesman is the power behind
every Wall Street firm. The salesman does not even dream up the deals, which
are put together by bright young graduates in math and physics augmented with
MBAs (master of business administration degrees), who are paid only $1 million
to $2 million working 18-hour days that burn them out in a few years. That is
how New York condos can sell for $10 million at $3,000 per square foot ($32,000
per square meter). And none of these financiers save. They are all leveraged to
the hilt out of pride, not necessity, for they all know it's not how much you
own, but how much you owe that counts. Die with all the debt you can
accumulate. Only fools die with savings.
By British classical economist David Ricardo's theory of distribution, as the
economy continues to grow, profits would eventually be squeezed out by rents
and wages. At the limit, Ricardo argued, a "stationary state" would be reached
where capitalists would be making near-zero profits and no further accumulation
would occur. Ricardo suggested two things that might hold this law of
diminishing returns at bay and keep accumulation going at least for a while
longer: technical progress, which was later spelled out more fully by Joseph
Schumpeter (1883-1950) as "creative destruction", and foreign trade to reduce
the market inefficiency imposed by political and economic nationalism, which
later transformed into British imperialism in the name of free trade.
On technical progress, Ricardo was ambivalent. On the one hand, he recognized
that technical improvements would help push the marginal product of land
cultivation upward and thus allow for more growth. But in his famous Chapter 31
"On Machinery" (added in 1821 to the third edition of his Principles),
he noted that technical progress requires the introduction of labor-saving
machinery. This is costly to purchase and install, and so will reduce funds for
wages. In this case, either wages must fall or workers must be fired. Some of
these unemployed workers may be mopped up by the greater amount of accumulation
that the extra profits will permit, but it might not be enough. A pool of
unemployed might remain, placing downward pressure on wages and leading to the
general misery of the working classes.
Technological progress, according to Ricardo, was not a many-splendored thing
for labor or the economy. It was left to Schumpeter to argue that "creative
destruction" creates more than it destroys for the economy, while labor is
still waiting for someone to show it how technological progress can be good for
labor. A global cartel for labor might well perform that function.
Trade and comparative advantage
On foreign trade, Ricardo set forth his famous theory of comparative advantage.
Using the example of Portugal and England and two commodities (wine and cloth),
Ricardo argued that trade would be beneficial even if Portugal held an absolute
cost advantage over England in both commodities. Ricardo's argument was that
there are gains from trade if each nation specializes completely in the
production of the good in which it has a "comparative" cost advantage in
producing, and then trades with the other nation for the other good.
Notice that the differences in initial position mean that the labor theory of
value is not assumed to hold across countries, Ricardo argued, because factors,
particularly labor, are not mobile across borders. As far as growth is
concerned, foreign trade may promote further accumulation and growth if wage
goods (not luxuries) are imported at a lower price than they cost domestically
- thereby leading to a lowering of the real wage and a rise in profits. But the
main effect, Ricardo noted, is that overall income levels would rise in both
nations regardless, although income disparity would also widen. Ricardo did not
anticipate dollar or even sterling hegemony under which, while national income
in the exporting national may rise, most of the dollar or sterling income
cannot be spend locally. The ultimate economic imperialism is one in which
one's wealth must be denominated in another's currency.
The theory of comparative advantage in free trade, challenged by economist
Friedrich List (1789-1846) as mere British national opinion valid only for
British conditions in the industrial age, has yet to test valid in today's
globalized trade. Ricardo underestimated the political problem of uneven income
distribution while overall income increases, both within a nation and
internationally. In financial capitalism, most of the saving/investment comes
from pension funds, in the form of deferred wages of well-paid workers, proving
that wages can include savings if they are allowed to rise above subsistence
levels. What is more, a high-wage regime is good economics as it eliminates
overcapacity.
Trade wars are now fought through volatile currency valuations. Yet dollar
hegemony has reduced all currencies to the status of derivatives of the US
dollar. The dollar enables the United States to use its trade deficit as the
bait for its capital-account surplus. Trade is no longer a valid measure of
global competition. Today, transnational firms compete with unparalleled
success in the global marketplace through foreign-affiliate sales instead of
exports. This has created a gap between gross domestic product (GDP) and gross
national product (GNP). To mask this tilted playing field and inequitable
international finance architecture, GNP has been quietly replaced by GDP as a
statistical measure for growth.
GDP measures the total value of a country's output, income or expenditure
produced within the country's physical/political borders. GNP is GDP plus
"factor income" - income earned from investment or work abroad. GNP is the
total value of final goods and services produced in a year by a country's
nationals, including profits from capital held abroad. With globalization,
these two technical measurements have taken on new meanings and relationships.
In 1991, GDP replaced GNP as a standard statistical measure for growth - a
quiet change that had very large implications, as the 1990s were the decade of
rapid globalization.
GNP attributes the earnings of a transnational firm to the country where the
firm is owned and where profits would eventually return as factor income. GDP,
however, attributes the profits to the country where factories or mines or
financial institutions are located, regardless of ownership, even though profit
and investment may not stay there permanently. This accounting shift has turned
many struggling, exploited economies into statistical boom towns, while
seducing local leaders to embrace a global economy. The rich nations at the
core are walking off with the periphery's resources and profiting obscenely
from local slave wages while calling it a statistical gain for the periphery,
with the help of the local elite - a new compradore class whose members are
celebrated by the neo-liberal press as national heroes.
GDP figures are "gross" because GDP does not allow for the depreciation of
physical capital or environmental degradation, let alone the abuse and
depreciation of human resources. When the value of income from abroad is
included, then GDP becomes the GNP. Because of purchasing-power disparity
between currencies in different economies, the real loss for a country with
negative GNP is respectively magnified. A declining GNP is particularly
damaging for economies with large trade sectors, which includes many developing
countries that have been forced to rely on exports financed by foreign direct
investment as the sole development path.
The role of interest
The role of interest income is a problem more than how to account for interest
income. With a debt economy, debt has replaced equity (capital) and become
capital itself. So return on capital is now profit from arbitrage on open
interest parity, the spread between cost of 100% financing (or sometimes 150%
in the case of bubbles) and asset appreciation caused by that very same debt
financing.
With the low interest rates dictated by former US Federal Reserve chairman Alan
Greenspan, M&A (mergers and acquisitions) returned like a tidal wave from
ample liquidity in the form of low-cost debt, which adds to unemployment and
GDP growth at the same time. Freddie Mac (the Federal Home Loan Mortgage Corp)
and Ginnie Mae (the Government National Mortgage Association) are good
examples. Their huge debt portfolio is financed entirely on GSEs'
(government-sponsored enterprises) cost-of-funds advantage over the general
market, and the risk they have assumed is made manageable by the rise in asset
price of the collaterals propelled by the very same risk, a self-propelling
bubble that produces a wealth effect that fuels more debt. The problem is that
this process is exponential and accelerates as it approaches the danger point
like a phoenix rushing toward the sun, as illustrated by a recent astronomy
photo of a black hole tearing apart a star.
While labor earns wages, capital earns profit and landlords earn rent, there
also is a fourth major flow: finance capital earns interest. But nowhere is
this apparent in classical economics, which treats the economy as if it rests
on a barter theory. Ricardo himself is largely responsible for creating a model
of the economy that manages to avoid the existence of debt altogether. Yet
Ricardo was a bond broker. It is as if he wanted to direct attention away from
the problems that his own profession caused. Debt service and other financial
charges absorb money from the flow of income between employees and the products
they buy (Say's Law), and channel it into the property and financial markets.
Karl Marx said that a permanent economic crisis was not likely under
capitalism. Remarkably, Marx was an optimist regarding the financial sector,
imagining that it would become subordinate to the needs of industrial capital.
History has proved otherwise.
The Labor Theory of Value (LTV) conflicts with the Marginal Utility Theory of
Value (MUTV) on which much classical and neo-classical economics is based. If
one plays within the rules of a market economy, then the LTV is irrelevant. The
entire structure of the market is built on the concept of marginal utility. But
as Karl Polanyi pointed out, the market economy is not a natural human affair,
but rather a recent development. This now-familiar system was of very recent
origin and only emerged fully formed as recently as the 19th century, in
conjunction with industrialization. The current neo-liberal globalization is
also of recent, post-Cold War origin, in conjunction with the advent of the
information age and finance capitalism.
Adam Smith was concerned primarily with economic growth, away from "natural
equilibrium" circular flows posited in a supply-side driven model of growth.
Output is derived from labor and capital and land inputs. Consequently output
growth was driven by population growth, investment and land growth and
increases in overall productivity.
Population growth, Smith proposed in the conventional notion of his time, was
endogenous: it depended on the sustenance available to accommodate the
expanding workforce. Investment was also endogenous: determined by the rate of
savings (mostly by capitalists); land growth was dependent on conquest of new
lands (eg colonization) or technological improvements on fertility of old lands
or construction of skyscrapers. Technological progress could also increase
growth overall: Smith's famous thesis that the division of labor
(specialization) improves growth was a fundamental argument of soft technology.
Smith also saw improvements in machinery and international trade as engines of
growth as they facilitated further specialization.
Smith also believed that "division of labor is limited by the extent of the
market" - thus positing an economies-of-scale argument. As division of labor
increases output (increases "the extent of the market"), it then induces the
possibility of further division and labor and thus further growth. Thus, Smith
argued, growth was self-reinforcing as it exhibited increasing returns to
scale.
Finally, because savings of capitalists are what creates investment and hence
growth, he saw income distribution as being one of the most important
determinants of how fast (or slow) a nation would grow. However, savings are in
part determined by the profits of stock: as the capital stock of a country
increases, Smith posited, profit declines - not because of decreasing marginal
productivity, but rather because the competition of capitalists for workers
will bid wages up. So lowering the living standards of workers was another way
to maintain or improve growth (although the counter-effect would be to reduce
labor-supply growth). Despite rising returns, Smith did not see growth as
eternally rising: he posited a ceiling (and floor) in the form of the
"stationary state" where population growth and capital accumulation were both
zero.
Marx modified the classical economics vision. For "modern" growth theory,
Marx's achievement was critical: he not only provided, through his famous
"reproduction" schema, perhaps the most rigorous formulation to date of a
growth model, but he did so in a multi-sector context and provided in the
process such critical ingredients as the concept of "steady-state" growth
equilibrium. Unlike Smith or Ricardo, Marx did not accept that labor supply was
endogenous to wage levels. As a result, Marx had wages determined not by
necessity or "natural/cultural" factors but rather by bargaining between
capitalists and workers.
In fact, Marx was the only true free marketer among classical economists in
that only he saw the need for equality of market/pricing power in the
transactional relationship between capital and labor. And this process would be
influenced by the amount of unemployed laborers in the economy (the "reserve
army of labor", as he put it). Marx also saw profits and "raw instinct" as the
determinants of savings and capital accumulation. Thus, contrary to Smith, Marx
saw a declining rate of profit doing nothing to stem capital accumulation and
bring the "stationary state about", but only as an inducement for capitalists
to further reduce wages and thus increase the misery of labor.
Like other classical economists, Marx believed there was a declining rate of
profit over the long term. The long-run tendency for the rate of profit to
decline is brought about not by competition increasing wages (as in Smith), nor
by the diminishing marginal productivity of land (as in Ricardo), but rather by
the "rising organic composition of capital", which Marx defined as the ratio of
what he called "constant capital" to "variable capital". It is important to
realize that constant capital is what today is called fixed capital or capital
investment such as plants and equipment, rather circulating capital such as raw
materials. Marx's "variable capital" is defined as advances to labor, ie, total
wage payments, or heuristically, value is equal to wages times the labor
employed.
The rate of profits, Marx claimed, is determined by the surplus and advances to
labor. Surplus is the amount of total output produced above total advances to
labor. It is important to note that for Marx, only labor produces surplus
value. Capital gets return only after labor acts on it, while labor can still
produce without capital, albeit less efficiently. A factory without workers
cannot produce, while workers without factories can. This was to become a sore
point of debate between the neo-Ricardians and the neo-Marxists in later years.
Marx called the ratio of surplus to variable capital the "exploitation rate"
(surplus produced for every dollar spent on labor). Marx referred to the ratio
of constant to variable capital as the organic composition of capital (which
can be viewed as a sort of capital-labor ratio). The rate of profit can be
expressed as a positive function of the exploitation rate and a negative
function of the organic composition of capital.
Marx then argued that the exploitation rate tended to be fixed, while the
organic composition of capital tended to rise over time, thus the rate of
profit has a tendency to decline. Classical economics assumes a static economy
with no labor-supply growth. As the surplus accrues to capitalists and,
necessarily, capitalists invest that surplus into expanding production, output
will rise over time while the labor supply remains constant. Thus the labor
market gets gradually "tighter", and so wages will rise. But this profit
decline is temporary, since a rise in wages would induce population growth
which would then loosen the labor markets and bring wages back down again.
Marx did not accept this classical version. For Marx, wages were set by
"bargaining" in the labor market, not by labor supply. Thus there was no "extra
supply of labor" being encouraged by the higher wages. Marx argued that
capitalists could boost their profit rate back up by introducing labor-saving
machinery into production - thereby releasing labor into unemployment, because
the cost of unemployment is an externality to the business. The primary
incentive for the invention of machinery is to reduce the cost of labor, and
the primary vehicle is layoffs.
There are two effects of this relationship. The first is that wage cost
declines because labor is released and, concurrently, the employment of
machinery implies that fixed capital rises. Thus the introduction of
labor-saving machinery does not change anything: the fall in labor cost from
using less labor is counteracted by the rise in fixed capital. The second
effect is that the concurrent expansion in unemployment - the "reserve army of
labor" - will by itself weaken bargaining power of labor and reduce wages down
to or below subsistence. But wage decline negates the financial rationale
behind the introduction of machinery, which is to capture the cost benefit of
labor-saving machines. Thus the net effect of labor-saving technology is to
reduce the rate of profit.
One way to prevent this decline in the rate of return would be to increase the
exploitation rate in proportion to which variable capital declines relative to
constant capital. The issue of trade, another possible check to the decline in
profit rate, was seen by Marx as an inducement to produce on an even greater
scale - thereby increasing the organic composition of capital further (and
reducing profit quicker).
However, despite all their efforts, Marx claimed that there were social limits
to the extent to which capitalists could increase the exploitation rate, while
no such thing limited the growing organic composition of capital. Consequently,
Marx envisaged that greater and greater cutthroat competition among capitalists
for that declining profit. Then a crisis occurs: large firms buy up the small
firms at cheaper rates and thus the total number of firms declines. This will
boost the surplus value, as firms can now purchase capital. The increasing
tendency for capital to be concentrated in fewer and fewer hands, combined with
the greater misery of labor, would culminate in ever greater "crises" that
would destroy capitalism as a whole. Marx had only temporary "stationary
states", punctuating the secular tendency to breakdown.
Adam Smith (1723-90), having come in contact with the Physiocrats in France led
by a physician to King Louis XV, Francois Quesnay (1694-1774), who believed
that all wealth originates from land, wrote An Inquiry into the Nature and
Causes of the Wealth of Nations in 1776, in which he postulated the
theory of division of labor and observed that value, not price, arises from
labor expended in the process of production. The Physiocrat maxim states that
only abundance combined with high prices could create prosperity, a rejection
of the theory of price as being set by the intersection of supply and demand in
a free market. To the Physiocrats, price theory based on supply and demand
causes abundance to drive down prices and leads to producer bankruptcies and
economic depressions, preventing the sustenance of abundance, which is a
requirement for prosperity.
The neo-classical economists rejected this notion of value by introducing the
notion of marginal utility. In the modern market economy, labor performs two
marginal-utility functions: it enhances marginal return on capital through
increased productivity, and if fairly compensated for such marginal utility,
rising wages support marginal demand for increased production. This notion is
behind the Keynesian idea of demand management through high wages and full
employment, even at the cost of moderate inflation. Money has the highest
marginal utility when placed in the hands of those who need it most and will
spend it immediately in a technological economy in which overcapacity is an
inherent characteristic.
The most cited of Smith's ideas is the belief that in a laissez-faire economy,
the impulse of self-interest would bring about the optimum public welfare.
Smith's idea of a free domestic market is one without monopolies, which he
opposed as destroyers of free markets. He also opposed mercantilism in
international trade, which aims to accumulate gold through monopolistic trade.
Smith supported restriction to free trade, such as the Navigation Act of 1651,
forbidding the importation of foreign goods and commodities from overseas
colonies except in English-owned ships, as necessary national economic defense
measures. In 1778, Smith was appointed commissioner of customs for Scotland, an
ironic post for a free trader in today's common understanding of the term.
Henry George and the single tax on land
Smith in the Introduction to his Wealth of Nations identified real
wealth as the annual produce of the land and labor of the society. Henry George
(1839-97) virtually repeated the single-tax-on-land argument of Victor de
Mirabeau, Quesnay's ardent disciple and father to Honore Mirabeau, popular
revolutionary and statesman, spokesman for the Third Estate. "We must make land
common property," George declared.
Georgists identify three basic types of property: common, government and
private. Common property belongs to all people in common; it is that which all
have an equal right to use and enjoy, such as public parks. Government property
belongs to the state and is subject to the direction of the government. Private
property is that which individuals (or corporations as legal persons) have the
exclusive right to own, profit from and dispose of as they see fit.
Common property is not the same as government property. Common property in the
ocean is generally recognized; the oceans do not belong to any government
beyond the costal economic zones. Common property is different from private
property in that the former permits private use, but implies an obligation to
the community since the rights of others must be recognized. By its very
nature, land is common property, and laws and traditions in capitalist
countries already go far toward recognizing it as such.
The principle of eminent domain asserts the superior claim of society to land.
The New York state constitution states: "The people of the State, in their
right of sovereignty, possess the original and ultimate property in and to all
lands within the jurisdiction of the State." English and US laws generally
recognize absolute ownership of goods - but not of land. The law deals with the
land "owner" as a land holder - land is held under the sovereignty of the
people and is subject to their conditions.
To preserve common property in land, George proposed that the rent of land
should be paid to the community. This payment expresses the exact amount that
would satisfy the equal rights of all other members of the community.
Individuals would retain title to land, fixity of tenure and undisturbed
possession. This method of making land "common property" may also be called
"conditional private property in land" (payment of rent to the community) as
opposed to "absolute private property in land" (private collection of rent).
Thomas Jefferson (1743-1826) said: "The earth is given as a common stock for
men to labor and live on." Marx said: "Assuming the capitalist mode of
production, then the capitalist is not only a necessary functionary but the
dominating functionary in production. The landowner on the other hand is
superfluous in this mode of production. If landed property became people's
property the whole basis of capitalist production would go."
Adam Smith said: "Ground rents are a species of revenue which the owner, in
many cases, enjoys without any care or attention of his own. Ground rents are,
therefore, perhaps a species of revenue which can best bear to have a peculiar
tax imposed upon them." Tom Paine (1737-1809) said: "Men did not make the earth
... It is the value of the improvement only, and not the earth itself, that is
individual property ... Every proprietor owes to the community a ground rent
for the land which he holds."
John Stuart Mill said: "Landlords grow richer in their sleep without working,
risking, or economizing. The increase in the value of land, arising as it does
from the efforts of an entire community, should belong to the community and not
to the individual who might hold title." Abraham Lincoln (1809-65) said: "The
land, the earth God gave man for his home, sustenance, and support, should
never be the possession of any man, corporation, society, or unfriendly
government, any more than the air or water."
Sun Yat-Sen (1866-1925) said: "The land tax as the only means of supporting the
government is an infinitely just, reasonable, and equitably distributed tax,
and on it we will found our new system."
Effect of demographics on wages
One reason for China's dynamic growth is that it is currently at a demographic
optimum. The massive reduction in infant mortality achieved by China's
barefoot-doctors program of free universal public health care is now yielding a
surge of young workers. This added up to an extra 13.6 million working-age
adults a year on top of a labor force of more than 800 million during the
period of the just-ended Tenth Five-Year Plan (2001-05). China's challenge up
to now has been focused on absorbing population growth into the labor force.
The massive population flow from the rural countryside to overcrowded cities
also has kept wages low, even with fast growth.
The advantage is that there is a low ratio of pensioners and young workers at
this phase. China's population above the age of 16 will grow by 5.5 million
annually on average in the next 20 years and the total population of working
age will reach 940 million by 2020, according to a government white paper
titled "China's Employment Situation and Policies" issued by the Information
Office of the State Council in 2004. In this period, China will face severe
employment pressure due to its huge population base, the age structure,
continuing migration to urban centers and the process of social and economic
development.
While the population of working age keeps increasing, there are now 150 million
rural surplus laborers who need to be transferred, and more than 11 million
unemployed and laid-off workers who need to be employed or re-employed. As
mechanization of agriculture proceeds, more labor would be released into
non-farm sectors. One way to relieve urban crowding is to introduce non-farming
sectors into rural villages. If left only to market forces, widening wage
disparity between urban and rural locations will lead to development imbalances
that can threaten social stability. A domestic labor cartel could help solve
the problem of labor migration toward urban centers.
Within the goals of building a moderately prosperous society, China plans to
foster socio-economic development by upgrading and rationally deploying its
abundant human resources by providing gainful employment with advancement
opportunities and rising income without massive relocation of population. To
achieve this goal, China will have to maintain a high growth rate, adjust its
economic structure to maximize employment opportunities, raise education
levels, strength vocational training, match human resources to the changing
needs of socio-economic development, and make rational arrangements for social
security.
As early as 2015, China's working-age population will actually start falling.
By 2040, today's young workers will be pensioners - in fact the world's
second-largest category of population, after India, will be Chinese pensioners.
There could well be 100 million Chinese citizens aged over 80, more than the
current worldwide total. Because of China's one-child policy there will be
fewer new workers under its so-called "4, 2, 1" population structure - four
grandparents, two parents and one child. This is a demographic transition that
many countries go through as they industrialize. But a process that previously
took a century in the advanced economies will take less than four decades in
China.
Only a drastic rise in wages can solve this demographic problem of a China
growing old before it grows rich. The median age in China has risen from 20 to
33 since 1978. It is estimated that by 2050, China's median age will be 45,
against 43 for the United Kingdom and 41 for the United States, if current
population policy continues. Older populations can lead to incremental
improvements in productivity that came from age and experience, but they are
not good at the type of performance improvements that require innovation.
Radical innovation comes more naturally from youth.
Chinese culture is based on strong family ties. The elderly are the moral
responsibility of their families. This is a cultural strength that should not
be diluted by massive migration of workers far away from their aging parents.
About two-thirds of people aged over 65 in China live with their adult
children, performing child-care and household duties. Only 1% of those over 80
are in old people's homes, compared with 20% in the US.
The controversial one-child policy is having extraordinary social effects that
are not all positive. In Chinese culture, a son is responsible for providing
for the family, which includes both the young and the aging parents; a daughter
looks after the family into which she marries. A society with one-child
families leaves those with daughters without support or care in old age. This
creates a gender imbalance that in turn creates enormous problems in terms of
matching marriage needs between male and female. China will soon have to import
brides for its men of marrying age. Gender balance can shape a society's
values. A society with an excess of young males whose income cannot support two
aging parents and attract a wife from a dwindling supply of marriage-age
females is one faced with latent instability.
The economic function of the elderly in an economy of structural overcapacity
is to keep consumption demand rising to absorb overcapacity. Young workers will
be happy to pay for consumption by the elderly if they realize that their jobs
are dependent on consumption by the elderly. The Social Security problem in the
US is not related to an expanding retired population, conventional wisdom
notwithstanding. It is related to young workers not getting high enough wages
because of outsourcing. This is why the idea of an Organization of
Labor-intensive Exporting Countries (OLEC) should also receive political
support in the US.
Conclusion
A cartel for labor is not unprecedented in history. The concept first found
expression in the guild system during the Middle Ages. Each line of business
had its own guild - butchers, bakers, dyers, shoemakers, masons, carpenters,
tanners, and many others, even lawyers and doctors. The purpose of the guild
was to make sure its members produced high-quality goods and were treated
fairly in the market.
Guilds became politically powerful in towns toward the end of the Middle Ages,
passing laws that controlled unfair competition among merchants, established
fair prices and wages, and limited the hours during which merchandise could be
sold and workers were required to work. They ordained the frequency of markets.
If an outsider entered the market in a town, he could not sell his goods unless
he paid a toll and obeyed the guilds' rules. The guild also took care of the
widow and children of a member who died and those who became sick, and punished
members who used false weights or poor materials. Guilds also ensured that new
craftsmen were properly trained. They built cathedrals as monuments to their
pious communities.
Guilds and their later manifestation in the form of trade unions eventually
lost their effectiveness because of their representation of special interests
that stood in the path of economic progress. Even industrial unionism tends to
promote the interest of particular industries, such as mining, autos,
transport, communication etc while neglecting universal solidarity.
The aspect that is new about the concept of OLEC is its representation of
universal labor. It is based on the needs of a modern economy for managing
consumer demand to overcome structural overcapacity. Such demand can only come
from rising wages and full employment. The rules of economic democracy mandate
that capital in a modern economy is formed from the savings of labor, which in
turn depends on rising wages. This economic truism is the rational basis why
the concept of OLEC should be supported by all.
OLEC would be an intergovernmental organization whose members are sovereign
nations with labor-intensive export sectors. The objectives of OLEC would be to
coordinate and unify labor policies among member countries to secure fair,
uniform and stable prices for labor in the global market and an efficient,
economic and regular supply of labor to provide a fair return on capital to
maximize growth in the global economy. The ultimate aim is to implement a trade
regime in which corporate profitability is tied to rising wages that will
increase aggregate demand. Toward these objectives, the successful experience
of OPEC (the Organization of Petroleum Exporting Countries) can be a useful
guide.
The economic objectives are to stop the downward spiral of wages caused by
predatory wage policies, to adopt full employment as a policy goal and to
reject structural unemployment as a necessary prerequisite for non-inflationary
growth. OLEC will be a market-sharing cartel in which the members decide on the
share of the market that each is allotted so as to achieve fair sharing of
benefits and costs. To achieve these objectives, the members should meet
regularly to reach consensual measures in light of changing market conditions
monitored by a staff of specialists and theoretical breakthrough constructed by
creative innovators.
This is the final article in this series. For the previous articles,
click here.
Henry C K Liu is chairman of a New York-based private investment group.
His website is at Henryckliu.com.
