[A-List] Henry C. K. Liu: OLEC - Part 2

["Sabri Oncu" <soncu@xxxxxxxxxxx>]

http://www.atimes.com/atimes/Global_Economy/HC07Dj01.html

PART 2: Rising wages to right historic wrongs 

According to the current terms of global trade under dollar hegemony, the
penalty for a non-dollar economy that uses dollar foreign capital is a low
domestic standard of living to support a high return denominated in US
dollars on foreign capital. Since dollar profits for foreign capital cannot
be used in the local non-dollar economy, such profits must leave the
domestic economy in one form or another, either through direct repatriation
or, in economies with currency control, through central-bank
foreign-exchange reserves. Thus there are no recycling economic benefits to
the non-dollar domestic economy from dollar profits earned by foreign
investment. 

Such is the pugnacious nature of foreign direct investment (FDI). Under
finance globalization, the unregulated competition among non-dollar
economies for dollar-denominated FDI condemns domestic living standards to
negative growth. The quest to profit from the lowest wages through
cross-border wage arbitrage has been the driving force behind trade
globalization, reducing trade from a process of gaining comparative
advantage between trading economies to one of reinforcing absolute advantage
for capital at the expense of labor for the benefit of global capital
denominated in dollars. 

Cross-border wage arbitrage can hardly be classified as a proper division of
labor in the Smithian sense, which implies rising wages through
specialization. Structural, systemic low wages are exploitation, not
specialization of labor. Such exploitation needs to be resisted by the
formation of a global labor cartel, which in this series we have named the
Organization of Labor-intensive Exporting Countries (OLEC). 

Rationalization of the Industrial Revolution

By 1700, the tendency of the agricultural state and the craft guilds to
resist industrialization was weakening. 

In 1762, Matthew Boulton built a factory in England with more than 600
workers, and installed a steam engine to supplement power from two large
waterwheels that ran a variety of lathes and polishing and grinding
machines. In Staffordshire, an industry developed to export low-price,
good-quality pottery, using hand-made chinaware brought in from China by the
East India Trading Company as models. Josiah Wedgewood (1730-95)
revolutionized the mass production and sale of low-price pottery, causing
eating and drinking to be consequently more hygienic, thus contributing to a
reduction of diseases and an increase in population. 

The textile industry overcame the production mismatch between spinners and
looms as well as yarns and weavers with the introduction of a machine known
as "Crompton's mule", which mass-produced quantities of fine, strong yarn to
keep weavers from idly waiting for yarns. Between 1780 and 1860 other
textile processes were mechanized with automated looms, and when the power
loom became efficient, low-wage women replaced men as weavers. By 1812 the
cost of making cotton yarn had dropped 90%, and by 1800 the number of
workers needed to turn wool into yarn had been reduced by 80%. And by 1840
the labor cost of making the best woolen cloth had fallen by at least half.
The history of industrialization is one of forcing wages down, until the
advent of labor unions. 

The steam engine accelerated the industrial development of Europe. In 1763
James Watt, an instrument-maker for Glasgow University, perfected a true
steam engine with a crank and flywheel to provide rotary motion that could
be harvested for a great variety of production work. In 1774 industrialist
Michael Boulton took Watt into partnership, and their firm produced some 500
engines before Watt's patent expired 26 years later in 1800. The steam
engine liberated the factory from water power and its streamside location
and relocated it to regions that produced coal, making coal-producing
countries industrial powers. In New York state, a Watt engine drove Robert
Fulton's experimental steam vessel Clermont up the Hudson River from New
York City to Albany in 1807. 

It was not until 1873 that a dynamo capable of prolonged operation was
developed, but as early as 1831 Michael Faraday demonstrated how electricity
could be mechanically produced. Through the 19th century the use of electric
power was limited by small productive capacity, short transmission lines,
and high cost. Up to 1900 the only cheap electricity was that produced by
generators making use of falling water in the mountains of southeastern
France and northern Italy. Hilly Italy, without coal resources, and with a
historical experience in handling water, soon had hydroelectricity in every
village north of Rome. Electric current ran Italian textile looms and,
eventually, automobile factories. As early as 1890 Florence boasted the
world's first electric streetcar. 

The coming of the railroads greatly facilitated the industrialization of
Europe. The big railway boom in Britain came in the years 1844-47. The
railway builders had to fight vested interests, canal stockholders, turnpike
trusts, and horse breeders. By 1850, aided by cheap iron and better machine
tools, a network of railways had been built linking inland factories with
exporting ports. After 1850 the state had to intervene to regulate what
amounted to a monopoly of inland transport in Britain. 

Alexander Graham Bell in 1876 transmitted the human voice over a wire. At
the end of the century the wireless telegraph became a standard safety
device on oceangoing vessels. Radio did not come until 1920. The world
continued to shrink at a great rate as new means of transport and
communication speeded the pace of life. 

The Industrial Revolution brought with it a sharp increase in population and
urbanization, as well as new social classes. England and Germany showed an
annual growth rate greater than 1%, which would double the population every
70 years. In the United States the increase was greater than 3%, which was
readily absorbed by a practically uninhabited continent with abundant
natural resources. In contrast, the population of France remained static
after the 18th century, which partly explained the decline of that country
as a major modern power until it embarked on a policy of colonization. 

The general population increase was aided by a greater supply of low-cost
food made available by the previous Agricultural Revolution, and by the
growth of medical science and public health measures that decreased the
death rate and added to the population base, with the rapid growth of
cities. 

The factory-owning bourgeoisie use the discontent of the peasants to gain
control of the government from the landed aristocrats. But their rule over a
new working class created by the Industrial Revolution was harsher than that
of the aristocrats over the peasants. Skilled artisans were degraded to
faceless production laborers as machines began to mass-produce the products
formerly made by loving hand. Wages fell, working hours lengthened and
working conditions became inhumane and unsafe. In Britain, the industrial
workers had helped to pass the Reform Bill of 1832, but they had not been
enfranchised by it because of their poverty, as the control of government
fell to the bourgeoisie. 

Law of Rent is regressively anti-labor

Classical economics grew out of the Industrial Revolution, which began first
in Britain. It was natural for it to be dominated by the opinions of British
observers of conditions created by early industrialization. 

British classical economist David Ricardo's Law of Rent was seminally
influenced by Malthusian concepts on population dynamics. Thomas Robert
Malthus (1766-1834), another British economist, sociologist and pioneer in
population theory, asserted that population growth is difficult to check and
would quickly outstrip economic growth and cause increasing misery all
around. In his "An Essay on the Principle of Population" (1798), Malthus
contended that poverty is unavoidable without population control, since
natural population increase is geometric while the increase of the means of
subsistence is arithmetical. Thus famine and disease can be viewed as
natural constraints on population and war as a political constraint, all
having socio-economic causes rooted in overpopulation. 

In 1803, Malthus admitted the preventive check of "moral restraint", paving
the way for neo-Malthusian birth-control theories that influenced other
classical economists, especially David Ricardo (1772-1823). Malthus never
explained why urban centers of high population density became centers of
high civilization and culture, and why prosperous nations with large
population become great powers, such as Britain, Germany and the US, or
China, Russia and the Ottoman Empire before the Industrial Revolution. 

Accepting the Malthusian claim, Ricardo modified Adam Smith's theory of
economic growth by including diminishing returns on land. Output growth
requires growth of factor inputs, which are goods and services used in the
process of production, such as land, labor, capital and enterprise. But
unlike labor, land, as observed by Ricardo, is "variable in quality and
fixed in supply". This means that as economic growth proceeds, with
improvement of the quality of land use reaching upper limits, more land must
be brought into use to sustain growth. Yet land cannot be increased without
geographical expansion through conquest, which leads economic growth in a
capitalist regime inevitably to the age of empire and imperialism. 

Ricardo was concerned not so much with the "nature and causes" as with the
distribution of wealth. This distribution has to be made between the classes
concerned in the production of wealth, namely the landowner, the capitalist,
and the laborer. In seeking to show the conditions that determine the share
of each, Ricardo's theory of rent is a fundamental based on which economists
developed the notion of economic rent, which will be dealt with later in the
article. He attributed his inspiration to Malthus' Inquiry into the Nature
and Progress of Rent and others. 

Rent, Ricardo argued, does not enter into the cost of production; it varies
on different farms according to the fertility of the soil and the advantages
of their situation. But the price of the produce is the same for all and is
fixed by the conditions of production on the least favorable land that has
to be cultivated to meet the demand; and this land pays no rent. Rent,
therefore, is the price the landowner is able to charge for the special
advantages of his land; it is the difference between its return to a given
amount of capital and labor and the similar return of the least advantageous
land that has to be cultivated. Consequently, it rises as the margin of
cultivation spreads to less fertile soils. 

Obviously, this doctrine leads to a strong argument in favor of the free
importation of foreign goods, especially corn. It also breaks with the
economic optimism of Adam Smith, who thought the interest of the country
gentleman harmonized with that of the mass of the people, for it shows that
the rent of the landowner rises as the increasing need of the people compels
them to have resort to inferior land for the production of their food. 

Prior to the imperialistic age, there were two self-neutralizing effects on
economic growth: first, rising land rent cuts into profits of capitalists
from one side; and second, rising prices of wage goods cut into capitalist
profits from another as workers need higher wages for subsistence. This
introduces a quicker limit to economic growth than Smith allowed, but
Ricardo also claimed that this decline could be happily checked by
technological improvements in mechanization and the specialization brought
on by the growth of trade. 

However, Ricardo's concept of trade for comparative advantage is
fundamentally different from trade for absolute advantage under the current
age of globalization. Still, the flaw in the Law of Rent is Ricardo's
rejection of the premise that labor can also be variable in quality though
education and fixed in supply through a global labor cartel. 

Automation creates unemployment unless wages rise 
In the third edition of his Principles, Ricardo modified his position on
mechanization (and, by implication, automation). He observed that when
machinery displaces labor, the labor "set free" may not be reabsorbed
elsewhere in the economy because capital is not simultaneously "set free",
trapped in investment sunk in machinery. This creates downward pressure on
wages and lowers aggregate labor income, with the difference absorbed by the
long-term investment and financing cost of capital goods. It is true that
capital goods also require intellectual labor to produce, but the productive
lifespan of capital goods is exponentially longer than their initial
intellectual labor input, which also brings about rising need for long-term
finance. 

This characteristic is altered in the age of communication and information
technology, when technical obsolescence has accelerated the technological
imperative. Yet this new ratio of intellectual labor input to enhance
productivity has not translated into higher wages even for the intellectual
worker. Much of the surplus value went to a handful of
intellectual-property-rights holders and their corporate metamorphoses,
creating new super-rich robber barons personified by the likes of Bill
Gates. 

Capital goods need decades of reduced labor cost to pay for their capital
input and financing cost in the form of interest payable throughout the
course of the loan or lease term. Such interest payments require additional
reduced labor cost over the life of the financing. 

This has been the experience in China in the past two decades of
industrialization with foreign capital, paid for by export earnings. Up to
70% of China's export trade is financed by foreign capital and traded by
foreign traders. China's outstanding foreign debt stood at US$267.46 billion
at the end of September 2005, up 8.07% or $19.97 billion from the end of
2004. The State Administration of Foreign Exchange (SAFE), an arm of the
central bank, said the increase was due to a rise in short-term debt, and
most of that was trade-related. As of the end of September, outstanding
short-term debt was $143.97 billion, up 16.86% from the end of 2004. Medium-
and long-term debt was down 0.65%, or $801 million, at $123.49 billion. 

SAFE, concerned that some of the inflow was due to speculation that the
nation's currency would appreciate, issued new rules in October tightening
control over foreign debt in a bid to curb speculative inflows of funds from
abroad. The yuan was revalued 2.1% against the US dollar on July 21, 2005.
As of the end of September, short-term obligations accounted for 53.83% of
all outstanding foreign debt, compared with 53.1% at the end of June. The
rise in foreign debt is unlikely to pose much of a problem as the nation's
foreign-exchange reserves have been climbing at a rapid pace, reaching
$794.2 billion at the end of November. Some economists predict that reserves
could exceed $1 trillion by the end of this year. 

China's foreign debt total at the end of September included registered
foreign debt of $189.46 billion, inclusive of outstanding trade credits of
$78 billion. The total supply of tradable domestic bonds in China at the end
of June 2003 was 3.4 trillion yuan ($411 billion). Total outstanding
tradable debt now exceeds $600 billion (60% of gross domestic product, or
GDP) against foreign-exchange reserves of $800 billion. This leaves a net
cushion of less than $200 billion for all of China's remaining debt
obligations, hardly a picture of unqualified financial strength. Still, in
July Standard & Poor's (S&P) upgraded China's sovereign rating by one notch
to A-minus, citing the country's aggressive overhaul of its financial sector
and improved profitability. China is rated A2 by Moody's Investors Service
and A by Fitch Ratings. 

The buildup of foreign-exchange reserves by the People's Bank of China
(PBoC), China's central bank, present a misleading picture about the
financial benefits China receives from foreign trade. The profit mostly goes
to foreign capital, while the PBoC's dollar reserves have come from the sale
of domestic sovereign debt to remove trade-surplus dollars from the Chinese
economy in a process known as sterilization in monetary economics. China
does not own these dollars, which have been earned by foreign capital on
Chinese soil paying low wages to Chinese workers. China merely exchanges its
own sovereign debt instruments for the foreign dollar profits in its economy
to buy US Treasuries to sustain the US capital-account surplus. 

To reabsorb the labor displaced by mechanization or automation, the rate of
capital accumulation must continuously increase. But with foreign direct
investment, there is no mechanism for this to happen domestically since the
profit belongs to foreign entities that will eventually carry the loot back
to their own home bases. Globally, given the tendency for profit and thus
savings to decline over time from overinvestment in relation to worker
purchasing power, a perpetual surplus of labor is the result. 

The mismatch of the long functional life cycle of products to their shorter
financial life cycle leads to the irrational phenomenon of planned
obsolescence, in which products are planned to last not as good engineering
permits, but as their financial life allows, to produce recurring market
demand artificially. In a high-tech economy, which Ricardo did not have the
opportunity to observe in his lifetime, fast technological obsolescence
tends to require a higher and recurring level of mental labor input,
rescuing high-tech workers from the effects of Ricardo's Iron Law of Wages.
Under globalization, high-tech workers, while freed by technological
imperative from the Iron Law of Wages, are re-enslaved by global wage
arbitrage made possible through instant and low-cost data telecommunication
and low shipping costs of greatly reduced physical output. Thus a labor
cartel is also needed in high-tech sectors to resist this new enslavement. 

Ricardo did not deal with the problem of uneven market demand on different
grades of labor created by mechanization, among educated scientists,
engineers, managers, sales personnel and uneducated factory workers. In the
early years of industrialization, educated professional and managerial
personnel were part of management, not labor. With the emergence of large
corporate entities, upgrades in quality caused labor as a category to expand
to include high-skilled, professional and managerial workers. Until the
introduction of universal education in the advanced economies, which is an
industrial policy program to intervene in the labor market, unskilled or
low-skilled laborers were so low-paid that they simply could not afford
education for their children, thus condemning them to the ranks of the
unemployable for life through hereditary poverty. A shortage of educated
workers developed along with an oversupply of unskilled labor, exacerbating
widening income disparity. Mechanization absorbs the highly skilled in the
design and engineering phase and displaces the unskilled in the production
phase at unbalanced rates. 

As income rise comes to depend on education level, the cost of education
increases and requires financing over longer periods of schooling and more
sophisticated teaching and research facilities and institutions, further
limiting low-income access. Competitive scholarships to the poor but
deserving caused a brain drain from the working poor, leaving them
genetically inadequate to resist. Free universal education, then, is a
critical component of economic democracy. Privatization of education is the
death knell of free markets for labor. 

The US system of funding public education with property taxes leads to
location-related disparity of education opportunity. Just as much of the
taxation on gasoline is directly reserved for the Highway Trust Fund (18.3
cents per gallon, or 4.8 cents per liter, federal gasoline tax and 24.3
cents per gallon - 6.4 cents per liter - diesel tax), a fixed portion of a
progressive income-tax structure should be devoted to a national education
trust fund. Those enjoying high income are benefiting from their earlier
educational subsidies and should be asked to fund educational opportunities
of future generations. A cartel for global labor could retrieve universal
free education for all to upgrade the quality of labor. 

Economic rent and excess profit

Ricardo correctly observed that rent is a result and not a cause of price.
Rent has two different meanings for economists. The first is the commonplace
definition: the income from hiring out an asset, such as money, land or
other durable goods or labor. The second, known as economic rent, is a
measure of market power: the difference between what a factor of production
costs and how much it would need to be paid to remain in its current use. A
star entertainer may be paid $10 million a year when he or she would be
willing to perform for only $1 million under different circumstances, so his
or her economic rent is $9 million a year. 

In a manner of speaking, economic rent is a form of excess profit. US
executives enjoy the world's highest economic rent for management. Under
perfect competition, there would be no sustainable economic rents of
duration, as new entertainers are attracted by a high-economic-rent market
and compete until economic rent falls to near zero. 

Reducing economic rent does not change production decisions, so economic
rent can be taxed to reduce income disparity without any adverse impact on
the real economy. No baseball star would take up washing dishes in a
restaurant to protest high taxes on his economic rent. When chief executive
officers in large corporations get compensation packages in the range of
hundreds of millions of dollars, much of that is economic rent for
exercising market power over employees under the executives' management. The
CEO of Yahoo, Terry S Semel, was paid $231 million in 2005. 

There is no economic logic in the obscene disparity between executive pay
and worker wages, which has increased by more than tenfold in past decades
in the US, particularly when increased earnings are often achieved by
shrinking the company through massive layoffs. It defies logic why a company
laying off employees should be considered a good investment, just as why a
nation with a declining population should be considered a healthy nation. It
is sheer insanity that a CEO should be rewarded with millions in pay and
perks for putting tens of thousands of workers in his or her company out of
work. 

The Iron Law of Wages fallacy

Upon these odd concepts natural only to unique conditions associated with
early industrialization and in the 19th-century milieu of fascination with
natural laws, Ricardo propounded his Iron Law of Wages, a blatantly
anti-labor theory of value. The Iron Law of Wages asserts that wages
naturally drift toward minimum levels and cannot possibly rise above
subsistence levels, notwithstanding the purpose of civilization being to
modify the adverse effects of nature. 

Economics, as a dismal science, has for too long accepted the malignant
effects of human construct as natural laws, rather than treating
exploitation, greed and injustice as flaws in the human condition that need
to be contained by a rational structure that rewards good and penalizes
evil. To be logical is not always the equivalent of being rational. The
labor theory of value maintains that in exchange, the value, though not the
market price, of goods is measured by the amount of labor expended in their
production. The intrinsic value of labor then is the starting point against
which all other values are constructed. 

When the intrinsic value of labor is high in an economic system, the
resultant society is good in the philosophical sense of the word. When the
intrinsic value of labor is low, the resultant society is not good. When the
market price differs from intrinsic value, it causes either inflation or
deflation, producing drags on economic growth. With the current
international financial architecture of fiat currencies lorded over by
dollar hegemony, differential between market price and intrinsic value is
magnified, usually at the expense of those producing the goods, for the
benefit of those in command of market power. Current Wall Street
philosophical rationalization notwithstanding, greed is not good. Greed is
not to be confused with merely benignly wanting more; it is "wanting more"
to the point of blindly risking self-destruction. 

On interest, the rent for money, Ricardo had little to say. He observed that
money, by which he meant specie money based on gold, which Britain does not
produce and must import, not fiat money, which any sovereign government
could produce at will if freed from dollar hegemony, "is subject to
incessant variations from its being a commodity obtained from a foreign
country, from its being the general medium of exchange between all civilized
countries, and from its being also distributed among those countries in
proportions which are ever changing with every improvement in commerce and
machinery, and with every increasing difficulty of obtaining food and
necessaries for an increasing population. In stating the principles which
regulate exchangeable value and price, we should carefully distinguish
between those variations which belong to the commodity itself, and those
which are occasioned by a variation in the medium in which value is
estimated, or price expressed." 

After the collapse in 1971 of the Bretton Woods regime of a gold-backed
dollar, fixed exchange rates and restricted cross-border flow of funds, the
resultant international financial architecture of fiat currencies based on
the US dollar as the head of the snake of fiat currencies has made
impossible such distinction between intrinsic variation of commodities and
variation in the medium of exchange. This has created a disconnection
between price and value in international trade, in favor of the dollar
economy at the expense of all non-dollar economies. 

Natural price and market price of labor

Ricardo asserted that a rise in wages due to inflation produces no real
effect on profits as prices of products also rise. This is known in modern
times as cost-of-living increases of wages or inflation indexation. A rise
in real wages ahead of inflation has a direct effect in lowering profits
unless the economy is plagued with overcapacity, which happened rarely if at
all during the early decades of industrialization that Ricardo observed. 

Labor, when purchased and sold as a commodity, may increase or diminish
quantitatively in supply and has a natural price and a market price. The
natural price of labor, according to Ricardo, is that price that is
necessary to enable laborers to subsist and "to perpetuate their race
without either increase or diminution". 

But there is nothing "natural" about Ricardo's natural price of labor. What
Ricardo called natural was actually merely a pervasive artificial
socio-political regime. In that regime, as then existed in Britain,
population grew naturally without intervention and the growth tended to be
concentrated on the laboring poor who had the least capacity to intervene on
their fate in society. Ricardo's natural price of labor depends on the price
of the food, necessities, and conveniences required for the support of the
laborer and his often large family. 

But in a functional economy in a civilized society, the natural price of
labor should be based on society's concept of a good and decent life, which
includes ample leisure to cultivate body and spirit, opportunity for
advancement, occupational safety, health care and insurance, free education,
affordable housing and retirement benefits. Subsistence has taken on
different, more equitable and humane meanings since the early days of the
Industrial Revolution. 

Ricardo granted that with technological and social progress, the natural
price of labor always has a tendency to rise, while the natural price of
commodities, excepting raw material and labor, has a tendency to fall
because of innovation that improves productivity. The market price of labor
is supposed to be determined by supply and demand. Unemployment, then, is a
condition that depresses the market price of labor by increasing the supply
of labor to saturate demand. Companies increase short-term profit by laying
off workers, notwithstanding that an increase in unemployment shrinks
aggregate demand that eventually reduces corporation profits. 

When the market price of labor exceeds its natural price, the condition of
the laborer is flourishing and happy. But Ricardo reasoned that high wages
give rise to population growth, increasing the supply of labor to cause
wages again to fall to their natural price, and indeed from overreaction
sometimes fall below it. So goes the argument for population control for the
good of the laboring class or, as Ricardo put it, "the laboring race", since
the characteristics and economic role of workers were largely hereditary
because of social immobility. 

The Christian Church, having for most of its history allied itself with
establishment interests, opposes birth control for more than religious and
moral reasons in the industrial age, when a surplus of workers was always
good for business. Actual data contradict this theory. Birth rates in
advanced economies where wages are high actually fall as middle-class
families discover the financial advantage of not having too many children
and the low-income families also find having many children a financial
burden, particularly after the introduction of child labor laws. 

When the market price of labor is below its natural price, the condition of
laborers is wretched and poverty results. It is only after their privations
have reduced population increase, or the demand for labor has increased
through economic growth, that the market price of labor will rise to its
natural price, and that the laborer will have the moderate comforts that the
natural rate of wages will afford. Ricardo argued that notwithstanding the
tendency of wages to conform to their natural rate, their market rate may be
constantly above it in an improving and progressive society for an
indefinite period. Thus, with every improvement of society, with every
increase in capital, the market wages of labor will rise; but the
sustainability of their rise will depend on whether the natural price of
labor has also risen; and this again will depend on the rise in the natural
price of those necessities on which the wages of labor are expended. As
population increases, these necessities will be constantly rising in price,
because more labor will be necessary to produce them and more people are
consuming them. 

If the money wages of labor should fall, while every commodity on which the
wages of labor are expended rise, workers would be doubly affected, and
would soon be totally deprived of subsistence. Instead of the money wages of
labor falling, they would rise; but they would not rise sufficiently to
enable the laborer to purchase as many comforts and necessaries as he did
before the rise in the price of those commodities. Ricardo concluded that
these are the iron laws by which wages are regulated, and by which the
happiness of far the greatest part of every community is governed. Labor
then has a self-interest in assuring the profitability of employers. This
has been a self-regulating attitude since adopted by the labor-union
movement, putting labor at a constant disadvantage in contract negotiations.
Employee ownership is usually offered only when company profit falls toward
or below zero. 

Capital needs labor more than labor needs capital

Yet the real natural law is that capital needs labor more than labor needs
capital. Without capital, labor can still produce, albeit less efficiently,
but without labor, capital cannot exist and remains only as idle assets.
Money does not invest in the desert; even oilfields need workers. 

The reason money-market funds pay rent for money in the form of interest is
that the money is lent to some entity that invests in enhancing labor
productivity. The holding of idle assets can only be profitable under
conditions of inflation in which price appreciation exceeds the real and
opportunity cost of holding. But inflation in neo-classical economics is
defined primarily as wage-pushed. Thus even idle assets need rising wages to
keep their value. The market price of labor should always be such as to
eliminate economic rent (excess profit) for capital. Labor has the power to
eliminate economic rent on capital, for capital has nowhere else to go
besides investing to increased labor productivity. At this point of
confrontation, government, controlled by capital, usually steps in to break
up strikes for higher wages, to make owners of capital rich at the expense
of labor, by making society pay the hidden price of a lower level of
national wealth. 

Ricardo argued that like all other contracts, wages should be left to the
fair and free competition of the market, and should never be interfered with
by government. He saw the clear and direct tendency of welfare laws and
labor regulations as in direct opposition to these obvious principles: it is
not, as social legislation benevolently intended, to amend the condition of
the poor, but to deteriorate the condition of both poor and rich; instead of
making the poor rich, they are calculated to make the rich poor, thus
forfeiting savings and investment needed for economic growth. And while
welfare laws are in force, the maintenance of the poor would progressively
increase until it has absorbed all the net revenue of the nation. "This
pernicious tendency of these laws is no longer a mystery, since it has been
fully developed by the able hand of Mr Malthus; and every friend to the poor
must ardently wish for their abolition," Ricardo wrote. While this
observation is narrowly rational, Ricardo did not point out that the way to
get out of the welfare trap is through full employment with living and
rising wages. 

In Ricardo's view, poverty is the result not of the rich getting more than
the poor, but of economic underdevelopment due to lack of savings. This has
been the position adopted by most market liberals. Yet it is a fantasy to
claim the existence of a free market for labor or that unemployment can
provide savings for the unemployed. The labor market remains the most
politically regulated commodity market in the international political
economy, where disparity of mobility between capital and labor is extreme. 

At the height of the high-tech bubble, Alan Greenspan, then chairman of the
US Federal Reserve Board, testified before Congress that if low-wage workers
overseas cannot move to fill jobs in the developed economies because of
immigration constraints, the jobs will have to migrate to the workers in the
developing economies to avoid inflation. The new Iron Law of Wages now
operates in the globalized economy on cross-border wage arbitrage to produce
low prices for consumer products in the high-wage economies that fewer and
fewer consumers can afford because of rising job loss in high-wage
economies. 

Countries such as China and India are trading in their progressive socialist
programs for Dickensian industrial hell while advanced economies such as the
United States have become voluntary victims of home-grown economic
imperialism that comes with dollar hegemony. There was never a more ripe
time to revive labor solidarity as now. The most promising solution appears
to be a global cartel for labor in the form of OLEC. 

Need to reverse anti-labor terms of global trade

The year of US independence, 1776, was a year of grand treatises in
economics and politics. Adam Smith published his Wealth of Nations, the Abbe
de Condillac his Commerce et le Gouvernement, Jeremy Bentham his Fragments
on Government and Tom Paine his Common Sense. British mercantilism had led
to a rebellion by the colonists in North America to establish a home-grown
liberal republican government dedicated to laissez-faire, a statist policy
against monopolistic mercantilism and in opposition to British
"free-to-exploit" trade in the name of free trade. 

Today, job protection by governments should not be mistaken as trade
protectionism. As long as a world order of nation-states exists, economic
nationalism must be the basis of international trade. Trade must enhance
national wealth for all participating nations, not merely to enrich global
transnational capital at the expense of universal economic democracy.
National wealth is directly dependent on high wages. In a global economy,
the decline in wealth in some nations will cause the decline in wealth in
all nations. Terms of trade that depress wages are economically regressive,
and should be reordered by a global cartel for labor. 

Markets are not natural phenomena. As Karl Polanyi (1886-1964) pointed out,
markets are recent developments in human history. Capitalism is a historical
anomaly because while previous economic arrangements were "embedded" in
social relations, with capitalism the situation is reversed - social
relations are defined by economic arrangements. In human history, rules of
reciprocity, redistribution and communal obligations were far more frequent
than market arrangements. Furthermore, not only does capitalism not exhibit
historical humanistic values, its ascendancy actually destroys such values
irreversibly. 

Free markets are an oxymoron. Government is fundamentally involved in
markets through the very creation and enforcement of property rights, an
artificial socio-political concept without which markets cannot exist.
Government regulation is also indispensable in preventing the natural
emergence of monopolies in unregulated markets. 

Free markets for labor do not exist because of a disparity of market power
between employers and employees. Workers must work to earn current income to
feed their families daily. Subsistence wages mean workers have no savings to
get them through rainy days. Entrepreneurs can delay investing their capital
until the market price of labor is right. Hunger quickly destroys labor's
market power and lowers the market price of labor to near or even below
subsistence levels. Thus the prevalent monopoly of capital needs to be
countered by a cartel for labor. 

Problems with the Iron Law of Wages

Notwithstanding the disparity of bargaining power between capital and labor
that prompted Karl Marx to call on workers in 1848 with a battle cry of
"nothing to lose but your chains", there are two other problems with
Ricardo's Iron Law of Wages. 

The first is something Henry Ford figured out a century after Ricardo. Ford
realized that workers who were paid at subsistence levels could not afford
to buy the cars they made in his factories. Ford worked out a wage-price
ratio under which his workers would have enough money after basic living
expenses to buy and finance the cars they produced. In the new industrial
democracy, Ford was able to sell many more cars than his competitors, who
eventually went bankrupt selling only to the very rich. By paying his
workers well, Ford became super-rich, more than his competitors who sold
only to the rich. The more workers he hired, the more cars he sold. 

Before globalization, US auto giants helped build the world's most affluent
middle class by paying wages far above subsistence levels and by providing
generous vacation, health and pension plans. Auto-sector wage patterns
spurred other sectors to raise compensation levels, creating continuous
rises in consumer demand. 

This happy approach to high wage income has been reversed in past decades by
the likes of Wal-Mart, with $256 billion in annual sales and 20 million
shoppers visiting its stores worldwide each day. Wal-Mart is now doing just
the opposite of what Henry Ford did. Wal-Mart profits from its regressively
low wages and meager employee benefits, paying its US retail workers less
than $18,000 a year on average (below the 2005 US poverty line of $22,610
for families with three children) and its outsourced supplier workers
overseas less than $4 a day, or $1,000 a year. Wal-Mart workers cannot
afford even the low-price goods sold in Wal-Mart stores. Wal-Mart takes away
the good shirt off the US worker's back plus his or her health insurance by
outsourcing his or her job and sells back to him or her a lower-priced shirt
made overseas without the health insurance. 

Population growth can be translated into growth markets with rising wages.
That formula had been the fountainhead of the rapid growth of national
wealth in the United States. Demand management had been generally accepted
as indispensable in market economies since the New Deal when US president
Franklin Roosevelt adopted Keynesianism after the 1929 stock-market crash.
An aging population coupled with a fall in birth rate will drain demand from
the economy and contract the national wealth. The process is exacerbated by
the need to maintain structural unemployment and low wages to preserve the
value of money. 

The second problem with Ricardo's Iron Law of Wages is that it fails to
recognize that the working population is the fundamental asset from which a
nation derives its wealth. By adopting policies based on an economic theory
that structurally keeps wages at their lowest levels, a nation condemns
itself to the lowest possible level of national wealth. Post-1978 Chinese
reform policies, by using low wages as the main competitive factor of
production, supported by lax regulation against environmental abuse, is a
classic example of policy-induced below-par generation of national wealth,
despite its high GDP growth rate and rising labor productivity. 

Say's Law of Market valid only under full employment
 
Supply-side economists have in recent decades promoted the arguments of
Say's Law. In 1803, Jean-Baptiste Say (1767-1832) published his Treatise on
Political Economy in which he outlined his famous Law of Markets. Say's Law
claims that total demand in an economy cannot exceed or fall below total
supply or, as James Mill (1773-1876) elegantly restated it, "supply creates
its own demand". 

In Say's language, "products are paid for with products" or "a glut can take
place only when there are too many means of production applied to one kind
of product and not enough to another". Yet, as post-Keynesian economist Paul
Davison has pointed out insightfully, Say's Law only applies under
conditions of full employment, a condition that cannot exist under
supply-side theory of using unemployment as a necessary device to keep down
wages, the increase of which is defined as the main cause of inflation. 

If aggregate effective demand is sufficient to make it profitable for
employers to hire all the available workers - even if they have to pay more
than subsistence wages - they will gladly do that, to expand the size of the
market. The message of Keynesian economics is that in a full-employment
economy, workers and entrepreneurs are not adversaries. Monetarists use
tight money to keep unemployment at as high a level as politically
acceptable to control inflation, that is to say, to protect the value of
money at the expense of worker income. This approach leads inevitably to
overcapacity, for while a general glut of goods may be theoretically
impossible, a general glut of savings is now a reality. The flood of
corporate profit is having difficulty finding new reinvestment opportunities
because wages are too low to sustain needed consumer demand. 

Born in Lyon to a family of textile merchants of Huguenot extraction, Say,
after spending two years in England apprenticed to a merchant, took a job in
1787 at an insurance company in Paris run by Etienne Claviere (1735-93), who
later became minister of finance. An ardent republican, Say supported the
French Revolution and served as a volunteer in the 1792 military campaign to
repulse the allied armies aiming to restore the monarchy. 

Say was also influenced by Adam Smith and became a laissez-faire economist,
known in France as the ideologues, who sought to relaunch the spirit of
Enlightenment liberalism in republican France, pursuing classical economics
while rationalizing the role of utility and demand. They also avoided
classicalist pessimism on the Iron Law of Wages, the unavoidable rise of
rents, the wage-profit tradeoff, inevitable unemployment caused by
labor-saving mechanization, general gluts, etc, preferring instead to
emphasize the happier harmonies between unequal economic classes and the
infallibility self-regulating markets. Politically, that meant upholding a
radical laissez-faire line, washing it of its statist component. Ideologues
were French counterparts of the British Manchester School but with more
vigorous theory and a good deal of optimism. Karl Marx (1818-83) would later
deride them as the "vulgar" economists. 

The rise of Napoleon Bonaparte, who sought to create an imperial war economy
buffeted by economic super-national protectionism and regulation within the
Continental System, led to official suppression of the global vision of the
ideologues. Yet the radical laissez-faire notions expounded in Say's 1803
Treatise caught the attention of the revolutionary in Napoleon. Summoning
Say to a private audience, Napoleon demanded that Say rewrite parts of the
Treatise to conform to the Napoleonic imperial war economy, built on
super-national protectionism and regulation within the French Empire, which
Say respectfully refused. Napoleon then banned the Treatise and had Say
ousted from the powerful Tribunate in 1804. 

Declining the offer of another post as compensation, Say moved to
Pas-de-Calais and set up a cotton factory at Auchy-les-Hesdins. Defying his
own theory, Say grew fabulously rich supplying cloth not to the market but
to meet the war demand for uniforms by the Grande Armee, protected by a
protectionist Napoleonic Continental System from formidable British
competition. In 1812, Say sold his factory at great profit and returned to
Paris to live as a war speculator with his capital. After 1815, the restored
Bourbon rulers, eager to please the victorious British who returned them to
power, showered the remnants of the ideologues with honors and recognition,
initiating in France the long British tradition of close alliance between
liberalism and the establishment. Charles Dickens, who having critically
exposed the everyday evils of industrial capitalism, went on to condemn the
French Revolution for being excessively inhumane. 

Tomorrow: Competing theories on the value of labor 

Henry C K Liu is chairman of a New York-based private investment group. His
website is at http://www.henryckliu.com.