The global
economy as currently constituted does not operate
with a free market by any stretch of imagination,
the propaganda of neo-liberal free-traders
notwithstanding. For this reason, there is a need
for a global cartel for labor.
Three
related facts combine to make the global market
not free. The first fact is that global trade is
carried out under an
international finance
architecture based on dollar hegemony, which is a
peculiar arrangement in which the US dollar, a
fiat paper currency backed by nothing of intrinsic
value, can be printed at will by the United
States, and only the United States, thus making
export for dollars a game of shipping real wealth
overseas for paper that is only usable in the
dollar economy and useless domestically in all
other non-dollar countries.
Key
commodities, such as oil, are denominated in
dollars primarily because of US geopolitical
prowess. Most economies need dollars to buy
imported oil, but the exporting economies buy much
more oil than they otherwise need domestically
merely to satisfy the energy needs of their export
sectors. The net monetized trade surplus from
exports in the form of dollars, after paying for
dollar-denominated oil and other imports, remains
useless in the domestic markets of the exporting
economies. Thus dollar hegemony reduces the
non-dollar exporting economies to an absurd
position: the more dollars from trade surplus they
accumulate, the poorer they become domestically.
This situation is exacerbated if domestic wages
are kept low by export policy in order to compete
for more global market share to earn dollars. It
is a case of starving one's own children to
provide free child labor to serve ice cream to
outsiders. It is bad enough to exchange valuable
goods for fiat paper; it is outright foolhardiness
to keep domestic wages low merely to earn fiat
paper that cannot even be spent in one's own
economy.
The second fact that makes the
global market not free comes from neo-classical
economics' flawed definition of labor productivity
as the amount of market value a worker can produce
with a given unit of capital investment.
Since according to monetary economics,
market value, which is expressed as price, needs
to remain stable to prevent inflation, labor
productivity in financial terms can only be
increased with declining wages per unit of
capital. Further, price competition for market
share directly depresses wages. Even if wages can
at times rise in monetary terms, the ratio of
wages to the market value of production must
constantly fall in order for increased labor
productivity to be monetized as profit. Thus
profits from trade under this flawed definition of
productivity ultimately can only be derived from
falling wages.
The concept of surplus
value within the context of the labor theory of
value as explained by Karl Marx embodies this
structural compulsion. Yet Marx was speaking of
the structural effect of fair profits, not the
obscene profits that are now the norm from
sweatshops in the deregulated global market.
Neo-classical economics replaces the labor theory
of value with the theory of marginal utility, in
which price is defined as the intersection of
supply and demand in a free market. William
Stanley Jevon (Theory of Political Economy,
1817), Carl Menger (Principles of
Economics, 1871), and Leon Walrus (Elements
of Pure Economics, 1877) promulgated the
marginal-utility, neo-classical revolution.
Yet today's allegedly free market in
effect deprives labor of any pricing power over
its market value. Since capitalism does not
recognize any ceiling for fair profit, always
celebrating the tenet of "the more the merrier",
it must by implication oppose any floor for fair
wages, to validate the opposite tenet of "the
lower the merrier". The terms of global trade,
then, are based on seeking the lowest wages for
the highest profit, rather than fair wages for
fair profit. This is the linkage between
neo-liberal capitalistic globalization and wage
arbitrage, both in the domestic labor market and
across national borders. Yet in a consumer-based
global market economy, low wages lead directly to
overcapacity, because consumer demand depends on
high wages. The adverse effect on consumer demand
from the quest for maximum profit is the critical
internal contradiction of the deregulated
capitalistic market economy.
The third
fact that makes the global market not free is that
while financial globalization facilitates
unrestricted cross-border mobility of capital
around the globe, obdurate immobility of workers
across national borders continues to be maintained
through government restrictions on immigration.
Free-trade advocates, from Adam Smith
(1723-90) to David Ricardo (1772-1823), in
considering the relationship between capital and
labor, treat the mobility disparity between
capital and labor as a natural state, never
entertaining that it is a mere political
idiosyncrasy. This "natural" immobility of labor
might have been reality in the 18th century, but
it is no longer natural in the jet-age global
economy of the 21st century in which mobility has
become a natural characteristic. Labor immobility
deprives labor of pricing power in a global market
by preventing workers from going where they are
needed most and where market wages are highest,
while capital is free to go where it is needed
most and where return on investment is highest.
This econo-political regime against labor
mobility, coupled with unrestrained cross-border
mobility of capital, maintains a location-bound
wage disparity that has created profit
opportunities for cross-border wage arbitrage, in
a downward spiral for all wages everywhere.
Greenspan supports more
immigration In January 2000, when the US
unemployment rate reached 4.1% (4.7% in January
2006), the low end of structural unemployment
without wage-pushed inflation, employers found it
difficult to fill low-paid agricultural, meat- and
poultry-packing, and health-services jobs, as well
as high-paid high-tech information-technology and
software-design jobs. The problem led the Federal
Reserve to become concerned about possible
wage-pushed inflation. It forced lawmakers to
sponsor legislation that would make it easier for
farmers, meat processors, and high-tech industries
to import temporary workers through exemptions in
immigration restrictions.
Fed chairman
Alan Greenspan told Congress that increasing
immigrant numbers in areas where workers are
difficult to find could relieve stress in the job
market and therefore wage-pushed inflation.
Consistent with the Fed's warped mission of
maintaining structural unemployment to contain
inflation, Greenspan said: "Aggregate demand is
putting very significant pressures on an
ever-decreasing available supply of unemployed
labor. The one obvious means that one can use to
offset that is expanding the number of people we
allow in. Reviewing our immigration laws in the
context of the type of economy which we will be
enjoying in the decade ahead is clearly on the
table, in my judgment." Congress showed no
enthusiasm for Greenspan's suggestion of permanent
immigration liberalization along with global
finance liberalization.
Agricultural
growers in the US had hoped to increase the number
of immigrant farm workers by attaching a provision
in their interest to the highly favored
high-technology industry's legislation to increase
the number of high-tech immigrant workers. In
2000, high-tech-immigration legislation seemed
likely to pass Congress until the administration
of president Bill Clinton began attaching
legislative riders that would give Latin American
refugees legal permanent residency. In addition,
the Clinton administration wanted to grant amnesty
to a large number of illegal immigrants, most of
whom were Hispanics. This political maneuvering
stopped the pending high-tech legislation dead in
its tracks because Republicans feared that the
Democrats were attaching such legislative riders
to gain support from the large number of Hispanic
voters.
The shortage of high-tech workers
forced the industry to move operations overseas,
at first not to save money on wages, but to find
available workers. The labor unions reacted to
immigration with traditional phobia, viewing it as
a development that would keep wages low, rather
than as a new source for reversing the steady
decline in membership. Yet employment data showed
that high-tech immigrant workers did not lower
wages during the high-tech boom in the US. What
eventually did lower high-tech wages in the US was
overcapacity resulting from overinvestment caused
by excessive debt and inadequate consumer demand
resulting from stagnant wages. After its collapse,
the US high-tech sector recovered by outsourcing
manufacturing jobs to low-wage countries, leaving
consumer demand to be sustained by an expanding
debt-driven asset bubble.
Three years
later, Greenspan took up another argument on
behalf of immigration: this time in response to
the actuary dilemma facing social security. On
February 27, 2003, Greenspan, testifying before
the Senate Special Committee on Aging, chaired by
Republican Senator Larry Craig, described the
economic impact of an aging US population, which
would lead to slow natural population growth that
would result in slow economic growth, diminishing
growth in the labor force, and an increase in the
ratio of the retired elderly to the working-age
population.
By 2030, the growth of the US
workforce will slow from 1% to 0.5%, according to
census projections cited by Greenspan. At the same
time, the percentage of the population over 65
years old will rise from 13% to 20%. Greenspan
described how the aging population would have
significant adverse fiscal effects.
"In
particular, it makes our Social Security and
Medicare programs unsustainable in the long run,
short of a major increase in immigration rates, a
dramatic acceleration in productivity growth well
beyond historic experience, a significant increase
in the age of eligibility for benefits, or the use
of general revenues to fund benefits," Greenspan
warned.
According to Greenspan,
immigration could prove a most potent antidote for
slowing growth in the working-age population. As
the influx of foreign workers in response to the
tight labor markets of the 1990s showed,
immigration does respond to labor shortages. An
expansion of labor-force participation by
immigrants and the healthy elderly offers some
offset to an aging population.
"Fortunately, the US economy is uniquely
well suited to make those adjustments," said
Greenspan. "Our open labor markets can adapt to
the differing needs and abilities of our older
population. Our capital markets can allow for the
creation and rapid adoption of new labor-saving
technologies, and our open society has been
receptive to immigrants. All these factors put us
in a good position to adjust to the [impacts] of
an aging population."
Short of a major
increase in immigration, economic growth cannot be
safely counted upon to eliminate deficits and the
difficult choices that will be required to restore
fiscal discipline, said Greenspan's semi-annual
report to Congress on monetary policy, submitted
on February 11, 2003. Also, immigrants tend to
have higher birth rates than native-born citizens.
This would moderate the aging population trend.
Still, anti-immigration phobia continued
to rise in the US, as reflected by CNN personality
Lou Dobbs, recipient of the 2004 Man of the Year
Award from the Organization for the Rights of
American Workers for his tilted coverage of the
national debate on jobs, global trade and
outsourcing. Dobbs was also a recipient of the
Eugene Katz Award for Excellence in the Coverage
of Immigration from the Center for Immigration
Studies for his ongoing series Broken
Borders, which criticized US policy on illegal
immigration and the Bush administration's "guest
worker" program and proposals for immigration
amnesty, notwithstanding that if his crusade
should bear fruit, there would be no one to clean
his broadcast studio every night.
Time
is ripe for a global cartel for labor In a
world operating under the rules of political
economy, the idea of a global cartel for labor, to
be known as the Organization of Labor-intensive
Exporting Countries (OLEC), can help to level the
playing field between capital and labor. It is a
timely political concept with important positive
economic implications in this age of deregulated
finance globalization.
In finance
capitalism, both capital and labor are viewed as
mere commodities, not unlike other basic
commodities, most notably oil. All commodities
command a price in the market by their sellers
exercising fair pricing power. They do this by
withholding supply from the market until the price
is right and fair. If OPEC (Organization of
Petroleum Exporting Countries) members can form a
global cartel for oil to control and raise oil
prices in the global market for their collective
benefit, at the same time claiming benefits for
the global economy, low-wage manufacture-exporting
countries can also form a similar cartel for
global labor to control and raise wages worldwide
with a long-range strategy that would be good for
the global economy.
The objectives of OLEC
would be to coordinate and unify labor policies
among member countries 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
would be to implement a trade regime in which
profitability is tied to rising wages. Toward
these objectives, the successful experience of
OPEC can be a useful guide. Just as OPEC allows
different grades of oil to command different
prices tied to a benchmark, OLEC would aim to set
a price benchmark for labor around which flexible
price ranges would reflect factors that affect
productivity. The aim is to stop the downward
spiral of wages caused by predatory wage policies.
OPEC is a permanent intergovernmental
organization created at the Baghdad Conference on
September 10-14, 1960, by Iran, Iraq, Kuwait,
Saudi Arabia and Venezuela. The five founding
members were later joined by eight other members:
Qatar (1961), Indonesia (1962), Libya (1962), the
United Arab Emirates (1967), Algeria (1969),
Nigeria (1971), Ecuador (1973-92) and Gabon
(1975-94). Headquartered in Geneva in the first
five years of its existence, OPEC moved to Vienna
on September 1, 1965.
Each member country
selects representatives who choose a governor for
their country. These governors attend two regular
OPEC meetings every year and they also choose the
organization's chairman. All decisions are to be
unanimous. The OPEC Statutes identify the main
objective as setting prices of oil and oil
products and keeping the price and supply stable
with fair returns to the investors by adjusting
production rates according to market conditions.
OPEC operates as a market-sharing cartel within a
framework of non-collusive cooperation with
imperfect information.
For the first
decade of OPEC history, the transnational oil
companies, the so-called "seven sisters" (Esso,
BP, Shell, Gulf, Standard Oil of California,
Texaco and Mobil), managed to use their
overwhelming financial power to ignore it,
continuing their decade-old strategy of keeping
oil prices low, with low royalties to the producer
governments, to subsidize the advanced consumer
economies while maintaining high corporate profit.
In 1947, the price of oil was about US$2.20 a
barrel, while exporter-government taxes were less
than 50 cents a barrel and production costs were
between 10 and 20 cents a barrel. These figures
remained relatively constant until the cartel
effects of OPEC took form in the 1970s. Up to
1973, oil was selling for less than $3 per barrel
just before the OPEC oil embargo, a rise of less
than 80 cents in 26 years, way behind inflation.
In 1967, during the Six Day War, OPEC
member nations, namely Saudi Arabia, Kuwait and
Libya, provided financial support to Jordan, Egypt
and Syria. OPEC also successfully embargoed oil to
Israel and the countries that supported Israel. In
1970, Libyan leader Muammar Gaddafi used OPEC's
influence to put pressure on the other independent
Middle Eastern states to increase oil prices and
raise taxes on oil-company incomes, and in some
cases to nationalize the oil companies dominated
by foreign joint-venture partners. But it was not
until 1973 that OPEC began to gain real market
power. By that year, US oil production was falling
because of rising dependence on low-priced oil
from the Middle East. The oil crisis of the 1970s
was a pricing problem rather than a shortage
problem. In 1973, a barrel of Arabian crude sold
for $3, and in 1980, the price peaked at $37 a
barrel. In 1978, the "second oil crisis" was
triggered by the Iranian revolution, causing its
production to drop from 6 million barrels per day
in September 1978 to 2.4mmb/d by December 1978.
In the 1980s, OPEC learned from experience
that the higher oil prices of the 1970s decreased
demand, stimulated conservation, and encouraged
new exploration and production as well as quests
for alternative energy sources, expanding the life
span of the oil age. In May 1990, the first Gulf
War caused a temporary oil shortage. In response
to the crisis, OPEC increased supplies from fields
not affected by the Iraq-Kuwait crisis,
stabilizing prices. After the 1997 Asian financial
crisis, oil fell to below $10. The second Gulf War
caused oil prices to increase more than sixfold to
exceed $70 per barrel, despite US pressure on OPEC
to increase production. Few if any market analysts
currently expect oil to fall below $50 in the
foreseeable future. The impact of high oil prices,
while stimulating conservation, has not been fatal
to the global economy (see The real problems with $50
oil, May 26, 2005).
OPEC came
into existence in 1960, but emerged as an
effective cartel only after the Arab oil embargo
that began on October 19-20, 1973, and ended on
March 18, 1974. During that period the price for
benchmark Saudi Light increased from $2.59 a
barrel in September 1973 to $11.65 in March. OPEC
has since been setting bottom benchmark prices for
its various crudes. Yet oil prices immediately
before the current crisis dipped below $10 after
the Asian financial crisis of 1997 and eventually
stabilized around $20.
Today, OPEC is the
source of slightly more than a third of the
world's oil supply. The margin for turning three
barrels of crude oil into two barrels of gasoline
and one of heating oil fell to $3.086 a barrel on
February 9, 2006, based on futures prices in New
York, the lowest since June 2003. The profit for
turning a barrel of crude into gasoline fell below
$1 a barrel for the first time since September
1994; the margin plunged from $31.708 on September
1, 2005. Oil reached a record $70.85 on August 30,
the day after Hurricane Katrina made landfall on
the US Gulf Coast, wrecking oil platforms,
pipelines and refineries, and cutting production
in the world's largest energy market. Oil may rise
to a record $96 a barrel this August, a month when
hurricanes typically cut US output, Mitsui &
Co, Japan's second-largest trading company, said
on February 6. China kicked off the trading of
fuel oil futures on the Shanghai Futures Exchange
last August 25 for the first time in a decade.
There is a fundamental relationship
between wages and prices. Pricing policies of
firms as they are actually practiced in the real
world, whether by cartels such as OPEC, by other
commodity producers, or by market leaders in
pharmaceuticals, software, communication and in
fact money (interest rates), have one thing in
common. Pricing policies across all these
different economic sectors are predicated on the
proposition that price is seldom, if ever, set by
the intersection of supply and demand, as
neo-classical economics textbooks teach. The
bottom line is that price is determined not by
supply and demand but by strategies that aim at
optimizing the long-term value of assets and
political considerations.
OPEC pricing is
a good example. Because of OPEC, oil prices have
become a key factor in the global economy.
Throughout the history of oil, price has been set
by highly complex considerations and supply has
always been adjusted to maintain the set price.
With pharmaceuticals, price is set neither
by cost nor demand. The pricing model of any new
drug aims at achieving a maximum lifetime value of
the drug that has very little to do with current
supply and demand. Microsoft's pricing model for
Windows has nothing to do with supply and demand,
or marginal costs, which are close to zero.
Telephone charges are similarly disconnected from
supply and demand, or marginal costs. Even in the
auto industry, the dinosaur of the old economy,
where cost input is high and discounted return on
capital low, pricing is based more on complex
considerations than demand. With 80% of autos
financed or leased, subsidization of financing
costs is the name of the game, not sticker price.
Farm-commodity prices are definitely not set by
the intersection of supply and demand. They are
set artificially high by political considerations
of practically all producer governments, and both
supply and demand are artificially distorted to
maintain the politically set price. The general
consensus of mainstream economists on the global
steel-overcapacity problem is to reduce capacity,
not to let prices fall.
Price in fact is
the most manipulated component in trade. That is
the fundamental flaw of market fundamentalism.
Friedrich Hayek's rejection of socialist thinking
is based on his view that prices are an instrument
of communication and guidance, which embodies more
information than each market participant
individually processes. Hayek uses the aggregate
effect of individual misjudgments as the correct
judgment. To Hayek, it is impossible to bring
about the same price-based order based on the
division of labor by any other means. Similarly,
the distribution of incomes based on a vague
concept of merit or need is impossible. Prices,
including the price of labor, are needed to direct
people to go where they can do the most good. The
only effective distribution is one derived from
market principles. On that basis, Hayek
intellectually rejects government regulation of
market.
The only trouble with this view is
that Hayek's notion of price is a romantic
illusion and nowhere practiced. That was how the
native Americans sold Manhattan to the Dutch for a
handful of beads, which under modern commercial
law would be categorized as a fraudulent
transaction. The Bank of Sweden Prize in Economic
Sciences (Nobel Prize) was awarded to Joseph
Stiglitz, George Akerlof and A Michael Spence for
"their analyses of markets with asymmetric
information". In his acceptance press conference,
Stiglitz said, "Market economies are characterized
by a high degree of imperfections." Further, and
most significant, Hayek's argument is predicated
on labor being able to go where it can do the most
good, a precondition that is denied by immigration
constraints.
The nature of
cartels A global cartel can take on many
variant forms with different characteristics and
impacts on the global market. Although every
cartel is unique, from oil to diamonds, the common
attribute of any effective cartel is agreement
among members for deliberate restraint on supply
to the market to achieve a consistently higher
price than that from predatory competition among
sellers with no market pricing power.
Theoretically, an ideal cartel can act as
a monopoly operated by a number of separate but
related yet independent entities. The multi-entity
monopoly cartel assumes that it is a cartel
authority rather than individual cartel members
who make price and supply decisions, such that the
cartel as a whole obtains the maximum possible
monopoly revenue and profits from the market, and
cartel members do not compete with one another but
share the total profits in a pre-agreed manner.
Under these terms, the cartel authority actually
acts as a monopolist, but not necessarily a total
monopolist. OPEC controls only one-third of the
world's oil supply.
The marginal cost
curve is determined by using up the lowest cost
area first, regardless of which member country the
supply area belongs to. Given the market demand
curve for the cartel's supply, the cartel
authority calculates the marginal revenue pattern
and equates it to the jointly decided marginal
cost curve. The equilibrium will set the cartel's
profit-maximizing supply level and the
corresponding monopoly price. The central
determination of price and supply by the cartel
authority can guarantee maximum profit to the
organization as a whole. Under this framework, the
producers with high marginal cost might not
produce at all if their marginal cost is higher
than the cartel's marginal revenue. Therefore, a
unanimously accepted profit-share arrangement must
be pre-agreed and post-enforced. However, such a
perfect cartel cannot be sustained in reality by
OPEC, which is composed of constituent sovereign
nations. The large producer (Saudi Arabia) would
have to act as the "swing producer", absorbing the
demand and supply fluctuations in order to
maintain the monopoly price.
A cartel for
labor would have to operate under rules responsive
to the unique problems of labor markets, the
details of which will have to be worked out
depending on the membership make-up and the
negotiated outcome among the members. But the
prospect of common benefit will ensure that the
appropriate operational mechanics can be worked
out. For OLEC, China and India can be swing
suppliers to absorb labor supply and demand
fluctuations to maintain stable and rising global
wages for the common benefit of all OLEC members.
A market-sharing cartel is one in which
the members decide on the share of the market that
each is allotted as a cartel member to achieve
fair sharing of benefits and costs. To achieve
this objective, the members may then meet
regularly to reach consensual measures in light of
changing market conditions monitored by a staff of
specialists. Since each member country in OPEC
retains sovereign power over its own production
rate and no individual one (except, possibly,
Saudi Arabia as a swing producer) has the power to
fix the price favorable to the cartel, it is
predictable that member countries would adopt the
market-sharing strategy as the way to achieve the
cartel objective. The members join together to
restrain their production for higher prices to
gain optimum profit. Violating the cartel quota
would serve no purpose, as an individual member
may sell more oil but total revenue would fall
because of lower prices. Theoretically, if cartel
members have similar marginal cost curves, the
ideal market-sharing strategy can achieve the same
goals as the joint profit-maximizing ideal cartel
model, outcomes of which are equivalent to those
of a monopolist operating a number of plants.
Third World economies with surplus labor
operate separately from a collective disadvantaged
position in global trade because global capital
obeys the Law of One Price while global labor is
exempt from this law. As dollar hegemony forces
all foreign investments into the export sectors of
non-dollar economies to earn dollars from trade,
it produces a structural shortage of capital for
non-export domestic development in all developing
countries. These non-dollar economies then suffer
from an imbalance between excess labor and a
shortage of capital that prevents them from
achieving full employment and improving overall
labor productivity. This imbalance translates into
low wages that depress domestic consumer demand,
which in turn discourages investment, in a
downward vicious cycle of perpetual domestic
underdevelopment. This widespread local
underdevelopment in turn prevents the global
economy from developing its full growth potential
from rising consumer demand. This hurts not only
the developing economies, but the advanced
economies as well.
On the one hand,
cross-border wage disparity has given rise to
predatory outsourcing that threatens employment
and wage levels in the advanced economies. On the
other hand, low wages around the world prevent
needed growth of exports from the advanced
economies to balance trade. Thus raising wages
around the world to reduce or even eliminate
cross-border wage disparity would be good for all
economies. It would be the win-win proposition
that neo-liberal free-traders promised but never
delivered. The current regressive terms of global
trade need to be altered by a progressive global
labor cartel.
A positive and
progressive undertaking Since competition
for global capital in a deregulated global
financial market tends to depress wages worldwide
to the detriment of all, it follows that a cartel
to give labor fair pricing power in international
trade would be a positive and progressive
undertaking.
Dollar hegemony has deprived
Third World economies of the option of using
sovereign credit for domestic development, leaving
export trade as the only available alternative.
Yet economic and monetary policy sovereignty of
all Third World nations has been under relentless
attack from neo-liberal terms of trade. But
creating a cartel for labor along the lines of
OPEC, a political organization with an economic
agenda, ie a cartel for oil, is something that
Third World leaders can do while they are still in
command of political sovereignty.
The OPEC
leaders achieved pricing power in the global oil
market with two preconditions: ownership of oil in
the ground (not movable) they occupy and political
sovereignty. With that they managed to raise the
price of oil, albeit with occasional failures, and
at the same time reduce the abusive waste of
energy in the consuming countries, especial the
advanced economies. Now the labor-intensive
exporting countries have two similar
preconditions: 1) workers who cannot leave because
of the immigration regimes of all advanced
countries and 2) political sovereignty. They can
do the same in pricing labor as OPEC did in
pricing oil, to provide a benchmark global wage
platform and to raise wages steadily to alter the
current destructive terms of trade in the
globalized market. The idea should also get
support from the US corporations and labor
movement, and from the likes of Lou Dobbs.
The way to do this is to make it
impossible for global capital to exploit
cross-border wage arbitrage for profit without
raising wages to close the wage gap and, if
necessary, with countervailing charges or taxes.
Conversely, tax preference can be tied to a
rising-wage policy.
Globalization itself
is not a bad development. What is destructive are
the current terms of trade behind globalization,
which operate as a "beggar thy neighbor process"
while trumpeting a win-win fallacy.
The
idea of economic development is not to
redistribute wealth by making the rich poor, but
to create new wealth by making the poor rich at an
accelerated pace to reverse the widening gap
between rich and poor. Current terms of globalized
trade widen the income and wealth gap by driving
wages down and making low wages the main factor in
measuring competitiveness. The neo-liberal
financial system provides credit only to firms
that profit from driving wages down and withholds
credit from firms that raise wages. What the world
needs is a credit-allocation regime and a
profit-measuring system to link corporate
profitability with raising wage levels rather than
lowering them.
Lest we should forget, this
is a very American idea. Henry Ford did it in the
US by voluntarily paying higher wages than the
market norm so that his workers could afford to
buy the cars they produced. The US experience has
proved that the poor can be made richer without
the rich getting poorer. This can be done by
enlarging the pie while benignly re-dividing it so
that no one gets less than before while the poor
get more faster, rather than just re-dividing a
shrinking pie. The US itself provided very good
lessons on how it could be done. The US has a
superior Gini coefficient, which measures net
income equality, to many underdeveloped economies.
And the US is a richer nation by far. This shows
that if the global Gini coefficient improves with
more income equality, the global economy can also
be richer. Many of the problems currently faced by
the US economy have to do with the use of debt to
mask a declining Gini coefficient.
US
prosperity built on high wages The US
economy emerged after World War II as the
strongest, the most productive and the most
dynamic in the world, not only because Europe,
Britain, Japan and the USSR and were all in war
ruins, and the rest of the world was left barren
from a century of plundering by Western
imperialism, but because the US model was
operatively superior. This superiority was based
on three factors: 1) high socio-economic mobility,
2) high wages with relatively equality of income
and 3) heavy public investment in physical and
social infrastructure such as transportation,
education and research and public health.
Socio-economic mobility manifested itself
in a flowering of creative entrepreneurship and
innovation. It was easy to turn new ideas and
innovations into new small businesses because of
pent-up demand from the war years and a friendly
posture of banks that provided easy credit for
returning veterans who aspired to be
small-business owners. Big business applied its
wartime management techniques to concentrate on
heavy industry, benefiting from technological and
management breakthroughs made in war research and
systems analysis, leaving small and medium
business opportunities to young new entrepreneurs
to exploit innovations to fill the needs of a
market economy in transition from war production
to peace production.
Communication and
transport were relatively costly and cumbersome,
keeping centralized management from being
cost-effective in pervasive control of local
markets, thus enabling small local entrepreneurs
to compete effectively with big business through
nearness to market and sheer ability to change. A
new middle class of good and rising income came
quickly into existence that was confident, dynamic
and independent. This came to be recognized around
the world as the American Spirit, the belief that
the combination of good ideas and hard work will
lead to success in a free and open market, even
though only a very small part of the US market was
really free and open. China is now at the
beginning of this path of development, with
spectacular success.
High wages and full
employment in the postwar US led to strong
consumer demand and a happy working class whose
economic interests were effectively promoted by a
strong labor movement that had developed
productive symbiotic relationships with management
from war production. Home ownership was promoted
by government subsidies through credit guarantees
and interest ceilings. All that was needed to
realize the American dream was a job, the income
from which was closely calibrated to pay for a
home, a car, and a good life including free
education, affordable health care and comfortable
retirement, all accomplished with consumer
financing.
The concept of "pay as you go"
liberated Americans from the slavery of "save
first, consume later", which would produce
overcapacity while consumer needs remained
unsatisfied. And jobs were plentiful because
consumer demand was strong. There was living
democracy in the workplace, with bosses forced to
treat workers with equality and with the respect
awarded to customers in order to retain them. The
income gap between factory workers and
professionals (engineers, lawyers, doctors, etc)
were narrow. Many hourly paid union tradesmen such
as plumbers, carpenters, metalworkers,
electricians, etc, actually enjoyed higher incomes
than professional engineers, at least in the early
decades of their careers. Aside from old money,
income disparity among the working population was
small, giving society de facto
socio-economic-cultural democracy. This happy
outcome was because work was fairly and highly
compensated.
The GI Bill obliterated the
elitist tradition of higher education. Children of
working-class, farming and immigrant background
went to college, university and graduate school
for the first time in US history and went on to be
titans of industry and academia. This
public-funded investment in human capital was the
single largest contributor to US prosperity for
the postwar decades until this generation reached
retirement age in the mid-1970s.
Despite
the anti-communist ideology behind the Cold War,
the US economy benefited greatly from socialistic
programs that began in the New Deal while the core
of the US economy remained firmly rooted in
capitalism. The combination of a capitalistic core
and a socialist infrastructure produced one of the
greatest prosperities in human history, relatively
free of oppressive exploitation. Within limits,
the US was undeniably the freest and richest
society in the world. With such a wondrously
successful system, it was a puzzle why Americans
were told by their leaders to fear communism,
since the whole world was trying to copy the US.
Even the Soviet Union was copying the US model
with the ideological modification of state
capitalism at the core. Where the USSR erred was
that it failed to allow a consumer market of small
entrepreneurs, a mistake China is now avoiding.
Income disparity hurts the US
economy The good times in the United States
did not last forever, but the decay came
imperceptibly slowly. Cold War paranoia in the US
reversed populist policies and arrested the
economic ascendance of the middle class while it
turned the young socialist economies around the
world into victims of garrison-state politics.
The Korean War set the US on a path
against all national-liberation movements in all
former colonies, which constituted two-thirds of
the population of a world that had risen from the
postwar ashes of European imperialism. The Vietnam
War was a continuation of that misguided
geopolitical posture. These counterproductive wars
not only did not achieve their misguided
geopolitical objectives, they forced the US to
rely on Japan as a convenient and docile ally both
militarily and economically, shutting out the rest
of Asia and, most important, its vast market by
self-negating embargoes imposed by US foreign
policy. In Europe meanwhile, confrontation with
Soviet communism after the Berlin Crisis forced
the US to build up defeated Germany as a key
military and economic client state.
These
policies set up the US in a new role of
neo-imperialist in a global struggle of the rich
against the poor. To support Germany and Japan and
to incorporate them economically into a
reactionary West led by the United States, the US
decided to allocate the sunset industries to their
economies, such as auto manufacturing, while the
US kept the high-tech industries such as aircraft
manufacturing, television and computers and, most
important, defense industries. Japan and South
Korea were later given steelmaking and
shipbuilding to help support US logistics in Asian
wars.
The original idea was that
subsidized imports to the US from these new allies
were to be tolerated only on a temporary basis,
that they were expected to supply low-priced goods
to the parts of the global market that were too
poor to buy US goods produced at high wages. But
the Cold War embargoes put all such markets off
limits to US allies, forcing the US market to stay
permanently open to Japan and Germany. In time,
the US came to depend on relatively inexpensive
imports from Japan and Germany to help contain
inflation. Both Germany and Japan have failed to
recover to this day as truly sovereign powers to
fulfill their full potential as independent
states.
Meanwhile, domestically the worst
aspects of both capitalism and socialism were
working hand-in-hand to weaken the US economy. The
organization man emerged from US corporate
bureaucratic culture, robbing the economy of
creativity and initiative. The likes of IBM,
General Motors and General Electric became
ruthless predators that chewed up independent
entrepreneurs for breakfast by their market
monopoly. A Massachusetts Institute of Technology
professor of electronics with a new technology
would start a successful company by servicing IBM,
which then would force a fire sale of the new
company to IBM by threatening to stop buying from
it. Within a year of its success, the new
innovative company would become another IBM
subsidiary managed by the huge bureaucracy of a
gigantic enterprise. And the professor would
retire from creative work with the sale proceeds.
In this manner, IBM grew into a sluggish giant on
a diet of other people's ingenuity.
Unionism turned into a drag on
productivity and efficiency and the main
resistance against change, rather than the driving
force of innovation to protect labor's pricing
power. Finance and banking evolved in ways that
discriminated against small business and those
with inadequate capital, and pushed innovative
entrepreneurs to seek funding from
venture-capitalist firms whose main aim was to
sell the new companies to big business for a quick
profit. Risk-taking eventually became too costly
for entrepreneurs, but cheap for speculators.
The US trade deficit grew along with
war-induced fiscal deficits threatening the
gold-backed dollar. Keynesian deficit financing,
instead of a formula to moderate the business
cycle, became a permanent feature even in boom
times to support ever higher levels of structural
unemployment. President Richard Nixon was finally
forced by recurring trade deficits and fiscal
irresponsibility to take the dollar off gold in
1971; and by 1973, OPEC was allowed to raise oil
prices on condition that petrodollars would be
recycled backed to the US to limit damage to the
US economy.
As the US economy continued to
stagnate, offering low returns on investment,
petrodollars went to so-called newly
industrialized countries (NICs). This was the
beginning of globalization, which at first was
called interdependence, as half of the world was
still under communist rule. The United States was
compensating for the slowdown in domestic growth
with overseas expansion, by arguing that the US
economy was merely growing beyond its borders
rather than shrinking domestically, which would
only be true if the US accepted a restructuring of
its economy: by shifting from domestic
manufacturing to global finance.
Jimmy
Carter presided over this restructuring transition
of the US economy and saw a "national malaise" of
spiritual despondency and economic stagflation
that was inevitable when the population failed to
understand the transition of the US from a strong
nation to a hegemonic empire, a fact on which US
transnational corporations could not level with
the American public because of US self-image. The
same thing happened to the controversy over Corn
Laws during the early days of the British Empire.
Silly talk of Japan and Germany overtaking the
United States were widely circulated in clueless
segments of the US, lamenting the disappearance of
the good old days from the rear-view mirror,
unable to see where the rest of the nation was
heading without them. Paul Volcker administered a
blood-letting cure on inflation and restored
health to the US financial sector by sacrificing
US industry, which was increasingly forced to go
global, leaving the American worker jobless on the
roadside.
Neo-liberal global trade with
dollar hegemony depress wages worldwide
Bill Clinton was the first neo-liberal
president of the United States. Just as life-long
anti-communist Nixon could strike a deal with
communist China without being accused domestically
of being soft on communism, something that a
populist John Kennedy could never have done during
the Cold War, Clinton was more helpful to US
transnational big business by undercutting
organized labor than any Republican dared venture.
Clinton was able to silence US labor
protestation against job outsourcing under
globalization because the union vote had no other
viable presidential candidate to vote for. Union
wrath was deflected from US management to offshore
labor, first in Japan, then Southeast Asia and
then China, exploiting deep-rooted racial
hostility in US labor movements.
But it
was Robert Rubin, consummate bond trader from
Goldman Sachs, who devised dollar hegemony as a
way of financing a perpetual trade deficit by
forcing US trade partners to recycle their trade
surpluses denominated in dollars back into US
capital accounts by buying US Treasuries that
yield low returns. Thus dollar hegemony allows the
US to enjoy a rising current-account deficit by
way of a guaranteed capital-account surplus and
the benefits of a strong dollar and low interest
rate all at the same time.
The Clinton
administration in effect resisted political
pressure from US export manufacturers to devalue
the dollar, arguing that devaluation, while
helpful to US exports, is not good for the overall
US national interest, which lies in the global
dominance of finance. And US global financial
dominance depends on a strong dollar made possible
by dollar hegemony. Financial dominance is the
caviar and the trade deficit is in fact the bait
to capture sturgeon in the form of trade partners.
By exporting more to the US for dollars than they
import from the US payable in dollars, the United
States' trading partners are fooled into thinking
their trade surpluses with the US are a good deal,
while they are shipping real wealth produced by
underpaid labor to the US in exchange for paper
money that can only be invested in the US and
their own domestic sectors are starved for
capital.
The economic transformation of
the industrial base in New England was
accomplished in the 1950s by shifting textile
manufacturing to the low-wage southern United
States. This was repeated by shifting
manufacturing from the Midwest to overseas in the
1990s, but unlike New England in the 1950s, which
transformed into a new economy of finance and high
tech, the Midwest remained mostly a rust belt that
never recovered. This is because the profit from
the economic transition, instead of going to start
new, more efficient plants, goes to finance debt
that keeps US consumers spending.
Rubin, a
Wall Street bond trader who became US Treasury
secretary, is an internationalist whose idea of
America does not extend west of the Hudson River.
Politically, the Wall Street internationalists,
not all of whom are Jewish, appeased the
opposition by deregulation of the banking and
finance sector so that non-New York financial
firms could get in on the action. In reality, the
New York banks ended up turning all banks across
the nation into their local branches. Banks in the
US, instead of being local financial pillars that
prosper only with the local economy of their
domicile, now can profit from destroying the local
economies.
The battle between those who
sold their labor and those who manipulated
finances was won hands down by the financiers in
the age of globalization. This is because
cross-border wage arbitrage, unlike financial
arbitrage that often eliminates market
inefficiency by lifting the market value of the
coupled instruments, works only to depress wages,
never to lift them. Workers are not allowed to go
to where wages are high, yet capital is encouraged
to go where wages are low. Thus while the aim of
financial arbitrage is to lift asset value to
enhance profit, the aim of wage arbitrage is to
lower wage value to enhance profit.
To
defuse political backlash of falling wages in the
advanced economies caused by outsourcing to
low-waged economies, an asset bubble, including
housing, was allowed to give the masses in the
advanced economies capital-gains income to
compensate for reduced income from work. The
formula was to take jobs from high-paid US workers
and give them to low-wage overseas workers, and to
compensate US workers with rising prices on their
homes, low-price imports and larger return for
their pension-fund investments overseas. This
formula worked for a while, but it requires an
escalating expansion of the money supply to
support a debt bubble. The Fed under Greenspan
managed to accommodate debt-driven expansion for
more than a decade, until the problem reached a
point when further expansion of the money supply
did not leave money in the US, but went only to
the global dollar economy offshore. US
corporations are lining up to shed their pension
obligations in the name of maintaining global
competitiveness. The US housing bubble will burst
from insufficient and stagnant income even if
mortgage rates should remain low.
Thus
while it may still be in US imperial interests to
expand the dollar economy globally, this expansion
is facing domestic political opposition because an
expanding global dollar economy leads to
imbalances in the US economy with clear winners
and losers that will soon translate into political
expressions in future elections. In a democracy,
when losers exceed winners in numbers, even if not
in aggregate monetary value, the electoral impact
can be immediate. The dollar economy, which
benefits primarily the financial sectors in the US
and other money-center locations, continues to
expand while the non-financial sectors of the US
economy collapse. With domestic political
opposition building in the US, it is of critical
importance how US policy will deal with the
challenge of domestic imbalances created by
globalization.
The need to reduce
global wage disparity US policies need be
changed to stop the destructive impact of dollar
hegemony on both the US economy as well as the
global economy. The global dollar economy is
shaping up to benefit unfairly only a small number
of financial speculators and manipulators, not the
world's population. The key is to eliminate as
quickly as possible global income disparity that
enable destructive cross-border wage arbitrage.
The United States should promote, even
impose, terms of trade that reduce wage disparity
both domestically and globally. This would allow
both the US and the global economy to expand
faster. Since it is economically painful and
politically dangerous to lower wages in the
advanced economies, the only option is to raise
wages at a rapid rate in the currently low-wage
regions to reduce global wage disparity. This can
be done only if global wage parity is set as a
policy objective, rather than letting market
forces dictate a downward spiral of falling wages.
As global wages reach parity, manufacturing will
be redistributed to locations of true overall
competitiveness, rather than being based on the
single-dimensional factor of wages. Global trade
and exports will be conducted to benefit domestic
development rather than to deter domestic
development. Global income will rise, creating
more consumer demand to reduce or even eliminate
current global overcapacity.
Without an
OLEC cartel to protect the pricing power of labor
in a global financial market, the Law of One Price
will discriminate against labor by pushing wages
down. The Law of One Prices echoes David Ricardo's
Iron Law of Wages, which supplements Thomas
Malthus' population theory by asserting that wages
tend to stabilize at the lowest subsistence level
as a result of unregulated market forces. Malthus
observed that population growth would
mathematically outstrip the means of subsistence,
giving economics the label of the "dismal
science".
The theory of marginal utility
as espoused by William Stanley Jevons in England,
Leon Walrus in France, Eugene Bohm-Bawerk in
Austria, and Irving Fisher and Alfred Marshall in
the US asserts that the market value of a
commodity is determined by the demand for it and
the relative scarcity at any given time and
situation, and not by any intrinsic value.
Marginal price is the price above which no buyer
will buy. Marginal land is land that will not
repay the cost of labor and capital applied to its
cultivation or improvement. Marginal wage is the
wage above which employment will cease. But while
labor is a commodity, humans are not. There are
basic human needs that every economy is required
to satisfy before market rules can be applied. For
this reason, all civilized societies forbid
slavery, child labor and other inhumane labor
practices.
The Law of One Price for labor
decrees that the Iron Law of Wages will depress
marginal wage to the lowest possible level if left
to market forces. Yet the theory of marginal value
of labor operating within a regime of neo-liberal
terms of trade only applies impeccable logic to an
artificial structure disguised as fundamental
truth. The terms of trade in a labor market in
which an anti-inflation monetary policy
structurally disallows any scarcity of labor to
emerge is inherently prejudicial to the fair
pricing of labor. Similarly, the theory of
marginal value in the flawed terms of trade in the
auto market leads Detroit to produce unsafe cars
at any speed by calculating that the cost of
lawsuits from injury and death caused by unsafe
cars is less costly than raising auto-safety
standards when the monetary value of injury and
death are set too low by the courts.
The
current global overcapacity is a direct result of
global wages being set too low by global wage
arbitrage, depriving the world of the full
potential of consumer demand. This overcapacity
can be corrected by a global labor cartel.
Purchasing-power parity and the Law of
One Price Purchasing-power parity (PPP)
between currencies measures the disconnection
between exchange rates and local prices that defy
the Law of One Price in a globalized economy.
Purchasing-power parity is reached when exchange
rates between two currencies are adjusted to
enable both currencies to buy the same amount of
goods and services at local prices. The PPP gap
between the US dollar and the Chinese yuan is
estimated to be 4, meaning that one Chinese yuan
buys four times as much in China as its current
exchange-rate equivalent in dollars buys in the
United States. A PPP gap highlights the distortion
exchange rates exert on the Law of One Price in
cross-border trade.
Purchasing-power
parity contrasts with interest-rate parity (IRP),
which assumes that the behavior of investors,
whose transactions are recorded on the capital
account, induces changes in the exchange rate. For
a dollar investor to earn the same interest rate
on his investment in a foreign economy with a PPP
gap of 4, such as the purchasing-power disparity
between the US dollar and the Chinese yuan, the
return would have to buy four times as much in
China as it could in the US. Thus for every dollar
of profit US investors require from investment in
China, four dollars' equivalent in Chinese goods
and services are needed to support the prevailing
exchange rate. Accordingly Chinese wages would
have to be at least four times lower than
(one-quarter of) US wages unless inflation in
China closes the PPP gap, or purchasing-power
disparity, between the two currencies. But
inflation in China will cause the yuan to fall
against the dollar, keeping the PPP gap constant
even as Chinese prices rise. This shows that
pushing China to revalue its currency upward is
futile, as Chinese wages would fall to compensate
for a stronger yuan. What China needs to do is to
raise Chinese wages within a stable exchange rate.
Applying the Law of One Price to global
labor The Law of One Price says that
identical goods should sell for the same price in
two separate markets when there are no
transportation costs and no differential taxes or
tariffs applied in the two markets. A global trade
regime governed by the Law of One Price should
have wages in two separate labor markets
converging through arbitrage to close the
disparity. Since it is economically regressive for
the higher wages to fall, the only productive
convergence would be for the lower wages to rise.
In finance, the Law of One Price is an
economic rule stating that in an efficient market,
a security must have a single price, no matter how
that security is created. For example, if an
option can be created using two different sets of
underlying securities, then the total price for
each would be the same; otherwise an arbitrage
opportunity would exist. Because of the Law of One
Price, put-call parity requires that the call
option and the replicating portfolio must have the
same price.
Interest-rate parity, which
plays an important role in the foreign-exchange
markets, is another example of the Law of One
Price. For the Law of One Price to hold between
two economies, purchasing-price parity,
exchange-rate parity between the paired currencies
and interest-rate parity must all exist
simultaneously.
Any violation of the Law
of One Price is an arbitrage opportunity. The same
should apply to the disaggregated labor markets in
the global economy. The issue of unified wages is
not only a matter of morality or social justice,
as liberals asserted during the Industrial
Revolution and the age of imperialism, and as
neo-liberals and market fundamentalists reject in
the age of globalization and neo-imperialism. It
is the law of a truly free global market. While
finance arbitrage uses the Law of One Price to
raise market value of securities, cross-border
wage arbitrage thus far only obstructs the Law of
One Price in separate labor markets to keep wages
low everywhere.
A common mistake traders
make is to forget the caveat that arbitrageable
price discrepancy should be isolated from factors
such as tax treatment, liquidity or credit risk.
Otherwise, they will put on what they perceive to
be an arbitrage when in fact there is no violation
of the Law of One Price beyond government
intervention. The Law of One Price underlies the
important financial engineering definition of
arbitrage-free pricing even for disparity of
prices created by government policy.
To
understand the positive potential for cross-border
wage arbitrage, beyond the destructive impact of
archaic outsourcing, lessons can be learned from
how profit is generated by arbitrage plays in
financial markets. If risks from oil, weather,
environmental impact, credit and interest rates
can be arbitraged profitably, there is good reason
that risks associated with rising wages can also
be arbitraged for profit.
Using wage
arbitrage to stabilize rising wages In
finance theory, an arbitrage is a "free lunch", a
transaction or portfolio that makes a profit
without risk. Suppose a futures contract trades on
two different exchanges. If, at one point in time,
the contract is bid at $40.02 on one exchange and
offered at $40.00 on the other, a trader could
purchase the contract at one price and sell it at
the other to make a risk-free profit of a $0.02.
If the market for that security has sufficient
broadness and depth, the arbitrageur can make
millions. And if an arbitrage opportunity is
created by a central bank on two currencies, as
the Bank of England did in 1992 defending the
pound sterling, an arbitrageur like George Soros
could make billions in a couple of days at the
expense of the British economy.
In 1998,
an article Soros wrote in the Financial Times on
the inevitability of a Russian devaluation of its
currency precipitated the fall of the Russian
government, a massive default on its debts, and
widespread financial panic that brought down Long
Term Capital Management (LTCM), another
high-flying hedge fund, requiring involvement of
the US Federal Reserve in a $3.5 billion bailout.
The International Monetary Fund (IMF) plan for
Russia assumed that the maturing treasury bills
(GKOs) could be rolled over, albeit at an
astronomically high interest rate. But the holders
of the GKOs were banks that borrowed dollars to
buy the same GKOs and which could not repay the
dollars without the foreign banks agreeing to lend
them more money, which the foreign banks would
not. So the Russian banks could not roll over the
GKOs at any price, leaving a missing link in the
financial chain. As the Russian public started
withdrawing their savings from the national
savings banks, the missing link widened. What
started out as a fixable hole of $7 billion,
within a week or two became a unfixable abyss.
Soros and his partners lost their investment in a
Russian telephone company, along with countless
others.
Most arbitrage opportunities only
reflect minor pricing discrepancies between
markets or correlated instruments. Per-transaction
profits tend to be small, and they can be negated
entirely by retail transaction costs. Accordingly,
most arbitrage is performed by institutions that
have very low wholesale transaction costs and can
make up for small profit margins by doing a large
volume of transactions. Formally, theoreticians
define an arbitrage as a trading strategy that
requires the investment of no net capital, cannot
lose money, and has a positive probability of
making money. Arbitrage is the quintessential
virtual-capital play in capitalism.
Wages
in different labor markets change for complex
reasons. The gap in wages as measured by standard
productivity units changes, which produces
arbitrage opportunities. Any company whose revenue
is affected by weather has a potential need for
weather-risk management products that hedge the
company's exposure to weather deviating from
historical norms. This is true for companies that
consume oil, or are impacted by changes in
interest rates or any kind of uncertainty. In
2003, the US Defense Department considered
launching a market for terrorism futures to
improve the prediction and prevention of terrorist
outrages.
All companies are affected in
their profits by wage:productivity ratios. A labor
cartel, like an oil cartel, cannot be expected to
keep prices at a fixed level for long periods, nor
would it be necessary. Thus a wage-risk management
derivative could be structured to mitigate wage
risks and reduce resistance to wage rises caused
by fear of unexpected temporary wage declines in
competing markets. Like weather and environmental
derivatives, hedging can be a defensive use of
wage-index derivatives. Strategic planning linked
to wage uncertainties can also be financially
backed by wage-index derivatives for proactive use
to sustain wage targets set by the labor cartel.
While a market is said to be
arbitrage-free if prices in that market offer no
arbitrage opportunities, there is a second use of
the term, shunned by theoretical purists but in
wide use for several decades so as to become
standard in all markets. According to this usage,
an arbitrage is a leveraged speculative
transaction or portfolio. During the 1980s,
junk-bond financing funded an overheated
mergers-and-acquisitions market that produced new
corporations such as CNN, Microsoft and many other
firms that are now respected industrial giants.
Arbitrageurs of this period were speculators who
took leveraged equity positions either in
anticipation of a possible takeover or to put a
firm in play. They also engaged in greenmail. Ivan
Boesky was a famous arbitrageur from this period
who was ultimately convicted of insider trading.
Michael Milken, the junk-bond king, also was sent
to prison on finance-related charges. But the role
of junk bonds in financing new companies was
undeniable.
The presence of a labor cartel
to sustain rising wages that stimulate consumer
demand could also be financed by speculative
arbitrage. If the conditions should come into
existence, the almost inexhaustible creativity of
the financial markets will response to the
challenge.
Unequal pricing powers
between capital and labor David Ricardo's
interest in economics was sparked by Adam Smith's
Wealth of Nations (1776), whose thesis is
that the division of labor (specialization)
enhances economic growth. Ricardo's law of rent
was seminally influenced by Malthusian concepts.
He propounded his "Iron Law of Wages" and a labor
theory of value. To Ricardo, rent is a result and
not a cause of price.
The Iron Law of
Wages asserts that wages cannot rise above
subsistence levels. The theory of value maintains
that in exchange, the value, not the price, of
goods is measured by the amount of labor expended
in their production. Smith also saw advancements
in mechanization and international trade as
engines of growth through the facilitation of
further specialization. Because savings by the
rich were seen as what provide investment and
hence economic growth, Ricardo saw unequal income
distribution as being one of the most important
determinants of national economic growth.
This is a critical shortcoming in
Ricardo's proposition, as in the modern economy,
capital comes increasingly from the pension funds
of workers, not exclusively from the rich.
However, Ricardo posited savings to be in part
determined by the profits of stock: as the capital
stock of a country increased, profit declined -
not because of decreasing marginal productivity,
but rather because competition among capitalists
for workers would bid wages up to reduce profit.
So keeping the living standards of workers low was
another way to maintain or accelerate economic
growth.
This was the critical error
Ricardo made in his observation of industrial
capitalism. Ricardo did not understand that as
industrialization advances, overcapacity will
result unless workers are paid enough to consume
what they have produced. Ricardo did not foresee
that free markets must include free labor markets
that would enhance worker market power if economic
growth were to be maintained. Ricardo reasoned
that if labor cost rises with labor productivity,
such a rise will neutralize any marginal rise in
return to capital, which requires productivity
rising faster than wages. Ricardo thus provided
the "scientific" rationale for the anti-labor
mentality of capitalism which is not only
unnecessary but also factually incorrect.
For Ricardo, capital is deployed to
enhance labor productivity to increase return on
capital, not to raise the standard of living of
workers by raising worker income. The fixation
with regressive theory is the rationale for the
need of a labor cartel such as OLEC.
Next: Rising wages solve all problems
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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PART 1: The need for
a labor cartel
