[A-List] Henry C. K. Liu: OLEC - Part 4

["Sabri Oncu" <soncu@xxxxxxxxxxx>]

PART 4: Toward living wages in the modern era

Modern finance has shown that the bulk of capital comes nowadays from the
pension funds of workers, which is the deferred income of currently employed
labor.

In the US economy, no one saves voluntarily anymore, not because of a change
in Americans' character, but because with low wages and rising asset values
not registered as inflation, no one can afford to save, having to spend all
income plus accumulating debt just to manage. This is why the entire US
economy is operating on debt. Most savings now come from pension funds, to
which the average worker has no legal choice but to contribute, with his
company matching payments from his first day of work, with benefits not
collectable until some three decades later.

Pension funds such as CalPERS (the California Public Employee Retirement
System), not even a private-sector fund as it serves only government
employees, are huge, and they are the new institutional capitalists. CalPERS
alone holds shares in 1,600 US companies, with assets of US$167 billion in
2004. It owns so much equity and bonds that in many cases, such as the
Disney Co, it cannot sell its shareholdings without adversely affecting the
price of the rest of its holdings, much like foreign central bank holdings
of dollars. Pension funds are forced to stage shareholder revolts within
corporate governance to change ineffective management to get the market
price of their shareholdings back up. That is how Michael Eisner lost
support of 45% of the voting shares and had to resign his chairmanship of
Disney.

CalPERS also opposed the reappointment of former Citicorp chairman Sanford
Weill and chief executive officer Charles Prince as company directors.
CalPERS held 26,712,930 Citigroup shares out of 5.05 billion shares
outstanding. It said Citigroup would be "better served" by having an
independent director in the place of Weill. It withheld votes for six other
Citigroup directors. It also withheld support from Warren Buffett, who was
running for re-election to the Coca-Cola Co's board. The fund also withheld
votes for directors at 10 other companies: Sprint, Wachovia, PG&E,
Burlington Resources, Charter One Financial, Mellon Financial, South Trust,
State Street, Stryker and Washington Mutual. Yet no pension has gone on
record to disinvest from corporations that outsource their clients' jobs.

These pension funds operate like insurance companies, spreading out their
risk through the theory of large numbers by hiring an army of fund managers
among whom they expect 5% would lose money, 40% would break even with the
S&P 500, 50% would beat the S&P 500, and 5% would do spectacularly, with
thousandfold returns. Every year, they fire the underperforming 5% and bring
in a new crop of replacement fund managers. Also, the actuary is such that
pensioners die and stop collecting retirement benefits long before the
principals are consumed, so the funds get bigger and bigger over time, like
a giant mushroom in a financial science fiction. These pension funds are
like a virus, feeding on workers whose retirement money they control for
their own institutional obsession on growth at the expense of job security.
If the US ever privatizes Social Security, all US workers will be enslaved
by these institutional tyrants.

In the new economy of finance capitalism, with capital coming also from
labor, the high return on labor's retirement funds from cross-border wage
arbitrage is robbing the same workers of their jobs. As Pogo used to say,
the enemy, they are us. The new capitalism uses worker capital to exploit
workers while financiers skim off huge profits without having to risk any
capital of their own. Investment bankers routinely make between $2 million
and $30 million in annual income by "creating value" out of thin air,
arranging IPOs (initial public offerings), mergers, and structured finance
deals that pension funds, known collectively as institution investors, buy
into.

An institutional salesman on Wall Street is one who talks pension funds into
investing in deals like the one that Orange county in California fell into
that eventually led to its bankruptcy in 1994. The salesman is the power
behind every Wall Street firm. The salesman does not even dream up the
deals, which are put together by bright young graduates in math and physics
augmented with MBAs (master of business administration degrees), who are
paid only $1 million to $2 million working 18-hour days that burn them out
in a few years. That is how New York condos can sell for $10 million at
$3,000 per square foot ($32,000 per square meter). And none of these
financiers save. They are all leveraged to the hilt out of pride, not
necessity, for they all know it's not how much you own, but how much you owe
that counts. Die with all the debt you can accumulate. Only fools die with
savings.

By British classical economist David Ricardo's theory of distribution, as
the economy continues to grow, profits would eventually be squeezed out by
rents and wages. At the limit, Ricardo argued, a "stationary state" would be
reached where capitalists would be making near-zero profits and no further
accumulation would occur. Ricardo suggested two things that might hold this
law of diminishing returns at bay and keep accumulation going at least for a
while longer: technical progress, which was later spelled out more fully by
Joseph Schumpeter (1883-1950) as "creative destruction", and foreign trade
to reduce the market inefficiency imposed by political and economic
nationalism, which later transformed into British imperialism in the name of
free trade.

On technical progress, Ricardo was ambivalent. On the one hand, he
recognized that technical improvements would help push the marginal product
of land cultivation upward and thus allow for more growth. But in his famous
Chapter 31 "On Machinery" (added in 1821 to the third edition of his
Principles), he noted that technical progress requires the introduction of
labor-saving machinery. This is costly to purchase and install, and so will
reduce funds for wages. In this case, either wages must fall or workers must
be fired. Some of these unemployed workers may be mopped up by the greater
amount of accumulation that the extra profits will permit, but it might not
be enough. A pool of unemployed might remain, placing downward pressure on
wages and leading to the general misery of the working classes.

Technological progress, according to Ricardo, was not a many-splendored
thing for labor or the economy. It was left to Schumpeter to argue that
"creative destruction" creates more than it destroys for the economy, while
labor is still waiting for someone to show it how technological progress can
be good for labor. A global cartel for labor might well perform that
function.

Trade and comparative advantage

On foreign trade, Ricardo set forth his famous theory of comparative
advantage. Using the example of Portugal and England and two commodities
(wine and cloth), Ricardo argued that trade would be beneficial even if
Portugal held an absolute cost advantage over England in both commodities.
Ricardo's argument was that there are gains from trade if each nation
specializes completely in the production of the good in which it has a
"comparative" cost advantage in producing, and then trades with the other
nation for the other good.

Notice that the differences in initial position mean that the labor theory
of value is not assumed to hold across countries, Ricardo argued, because
factors, particularly labor, are not mobile across borders. As far as growth
is concerned, foreign trade may promote further accumulation and growth if
wage goods (not luxuries) are imported at a lower price than they cost
domestically - thereby leading to a lowering of the real wage and a rise in
profits. But the main effect, Ricardo noted, is that overall income levels
would rise in both nations regardless, although income disparity would also
widen. Ricardo did not anticipate dollar or even sterling hegemony under
which, while national income in the exporting national may rise, most of the
dollar or sterling income cannot be spend locally. The ultimate economic
imperialism is one in which one's wealth must be denominated in another's
currency.

The theory of comparative advantage in free trade, challenged by economist
Friedrich List (1789-1846) as mere British national opinion valid only for
British conditions in the industrial age, has yet to test valid in today's
globalized trade. Ricardo underestimated the political problem of uneven
income distribution while overall income increases, both within a nation and
internationally. In financial capitalism, most of the saving/investment
comes from pension funds, in the form of deferred wages of well-paid
workers, proving that wages can include savings if they are allowed to rise
above subsistence levels. What is more, a high-wage regime is good economics
as it eliminates overcapacity.

Trade wars are now fought through volatile currency valuations. Yet dollar
hegemony has reduced all currencies to the status of derivatives of the US
dollar. The dollar enables the United States to use its trade deficit as the
bait for its capital-account surplus. Trade is no longer a valid measure of
global competition. Today, transnational firms compete with unparalleled
success in the global marketplace through foreign-affiliate sales instead of
exports. This has created a gap between gross domestic product (GDP) and
gross national product (GNP). To mask this tilted playing field and
inequitable international finance architecture, GNP has been quietly
replaced by GDP as a statistical measure for growth.

GDP measures the total value of a country's output, income or expenditure
produced within the country's physical/political borders. GNP is GDP plus
"factor income" - income earned from investment or work abroad. GNP is the
total value of final goods and services produced in a year by a country's
nationals, including profits from capital held abroad. With globalization,
these two technical measurements have taken on new meanings and
relationships. In 1991, GDP replaced GNP as a standard statistical measure
for growth - a quiet change that had very large implications, as the 1990s
were the decade of rapid globalization.

GNP attributes the earnings of a transnational firm to the country where the
firm is owned and where profits would eventually return as factor income.
GDP, however, attributes the profits to the country where factories or mines
or financial institutions are located, regardless of ownership, even though
profit and investment may not stay there permanently. This accounting shift
has turned many struggling, exploited economies into statistical boom towns,
while seducing local leaders to embrace a global economy. The rich nations
at the core are walking off with the periphery's resources and profiting
obscenely from local slave wages while calling it a statistical gain for the
periphery, with the help of the local elite - a new compradore class whose
members are celebrated by the neo-liberal press as national heroes.

GDP figures are "gross" because GDP does not allow for the depreciation of
physical capital or environmental degradation, let alone the abuse and
depreciation of human resources. When the value of income from abroad is
included, then GDP becomes the GNP. Because of purchasing-power disparity
between currencies in different economies, the real loss for a country with
negative GNP is respectively magnified. A declining GNP is particularly
damaging for economies with large trade sectors, which includes many
developing countries that have been forced to rely on exports financed by
foreign direct investment as the sole development path.

The role of interest 

The role of interest income is a problem more than how to account for
interest income. With a debt economy, debt has replaced equity (capital) and
become capital itself. So return on capital is now profit from arbitrage on
open interest parity, the spread between cost of 100% financing (or
sometimes 150% in the case of bubbles) and asset appreciation caused by that
very same debt financing.

With the low interest rates dictated by former US Federal Reserve chairman
Alan Greenspan, M&A (mergers and acquisitions) returned like a tidal wave
from ample liquidity in the form of low-cost debt, which adds to
unemployment and GDP growth at the same time. Freddie Mac (the Federal Home
Loan Mortgage Corp) and Ginnie Mae (the Government National Mortgage
Association) are good examples. Their huge debt portfolio is financed
entirely on GSEs' (government-sponsored enterprises) cost-of-funds advantage
over the general market, and the risk they have assumed is made manageable
by the rise in asset price of the collaterals propelled by the very same
risk, a self-propelling bubble that produces a wealth effect that fuels more
debt. The problem is that this process is exponential and accelerates as it
approaches the danger point like a phoenix rushing toward the sun, as
illustrated by a recent astronomy photo of a black hole tearing apart a
star.

While labor earns wages, capital earns profit and landlords earn rent, there
also is a fourth major flow: finance capital earns interest. But nowhere is
this apparent in classical economics, which treats the economy as if it
rests on a barter theory. Ricardo himself is largely responsible for
creating a model of the economy that manages to avoid the existence of debt
altogether. Yet Ricardo was a bond broker. It is as if he wanted to direct
attention away from the problems that his own profession caused. Debt
service and other financial charges absorb money from the flow of income
between employees and the products they buy (Say's Law), and channel it into
the property and financial markets. Karl Marx said that a permanent economic
crisis was not likely under capitalism. Remarkably, Marx was an optimist
regarding the financial sector, imagining that it would become subordinate
to the needs of industrial capital. History has proved otherwise.

The Labor Theory of Value (LTV) conflicts with the Marginal Utility Theory
of Value (MUTV) on which much classical and neo-classical economics is
based. If one plays within the rules of a market economy, then the LTV is
irrelevant. The entire structure of the market is built on the concept of
marginal utility. But as Karl Polanyi pointed out, the market economy is not
a natural human affair, but rather a recent development. This now-familiar
system was of very recent origin and only emerged fully formed as recently
as the 19th century, in conjunction with industrialization. The current
neo-liberal globalization is also of recent, post-Cold War origin, in
conjunction with the advent of the information age and finance capitalism.

Adam Smith was concerned primarily with economic growth, away from "natural
equilibrium" circular flows posited in a supply-side driven model of growth.
Output is derived from labor and capital and land inputs. Consequently
output growth was driven by population growth, investment and land growth
and increases in overall productivity.

Population growth, Smith proposed in the conventional notion of his time,
was endogenous: it depended on the sustenance available to accommodate the
expanding workforce. Investment was also endogenous: determined by the rate
of savings (mostly by capitalists); land growth was dependent on conquest of
new lands (eg colonization) or technological improvements on fertility of
old lands or construction of skyscrapers. Technological progress could also
increase growth overall: Smith's famous thesis that the division of labor
(specialization) improves growth was a fundamental argument of soft
technology. Smith also saw improvements in machinery and international trade
as engines of growth as they facilitated further specialization.

Smith also believed that "division of labor is limited by the extent of the
market" - thus positing an economies-of-scale argument. As division of labor
increases output (increases "the extent of the market"), it then induces the
possibility of further division and labor and thus further growth. Thus,
Smith argued, growth was self-reinforcing as it exhibited increasing returns
to scale.

Finally, because savings of capitalists are what creates investment and
hence growth, he saw income distribution as being one of the most important
determinants of how fast (or slow) a nation would grow. However, savings are
in part determined by the profits of stock: as the capital stock of a
country increases, Smith posited, profit declines - not because of
decreasing marginal productivity, but rather because the competition of
capitalists for workers will bid wages up. So lowering the living standards
of workers was another way to maintain or improve growth (although the
counter-effect would be to reduce labor-supply growth). Despite rising
returns, Smith did not see growth as eternally rising: he posited a ceiling
(and floor) in the form of the "stationary state" where population growth
and capital accumulation were both zero.

Marx modified the classical economics vision. For "modern" growth theory,
Marx's achievement was critical: he not only provided, through his famous
"reproduction" schema, perhaps the most rigorous formulation to date of a
growth model, but he did so in a multi-sector context and provided in the
process such critical ingredients as the concept of "steady-state" growth
equilibrium. Unlike Smith or Ricardo, Marx did not accept that labor supply
was endogenous to wage levels. As a result, Marx had wages determined not by
necessity or "natural/cultural" factors but rather by bargaining between
capitalists and workers.

In fact, Marx was the only true free marketer among classical economists in
that only he saw the need for equality of market/pricing power in the
transactional relationship between capital and labor. And this process would
be influenced by the amount of unemployed laborers in the economy (the
"reserve army of labor", as he put it). Marx also saw profits and "raw
instinct" as the determinants of savings and capital accumulation. Thus,
contrary to Smith, Marx saw a declining rate of profit doing nothing to stem
capital accumulation and bring the "stationary state about", but only as an
inducement for capitalists to further reduce wages and thus increase the
misery of labor.

Like other classical economists, Marx believed there was a declining rate of
profit over the long term. The long-run tendency for the rate of profit to
decline is brought about not by competition increasing wages (as in Smith),
nor by the diminishing marginal productivity of land (as in Ricardo), but
rather by the "rising organic composition of capital", which Marx defined as
the ratio of what he called "constant capital" to "variable capital". It is
important to realize that constant capital is what today is called fixed
capital or capital investment such as plants and equipment, rather
circulating capital such as raw materials. Marx's "variable capital" is
defined as advances to labor, ie, total wage payments, or heuristically,
value is equal to wages times the labor employed.

The rate of profits, Marx claimed, is determined by the surplus and advances
to labor. Surplus is the amount of total output produced above total
advances to labor. It is important to note that for Marx, only labor
produces surplus value. Capital gets return only after labor acts on it,
while labor can still produce without capital, albeit less efficiently. A
factory without workers cannot produce, while workers without factories can.
This was to become a sore point of debate between the neo-Ricardians and the
neo-Marxists in later years. Marx called the ratio of surplus to variable
capital the "exploitation rate" (surplus produced for every dollar spent on
labor). Marx referred to the ratio of constant to variable capital as the
organic composition of capital (which can be viewed as a sort of
capital-labor ratio). The rate of profit can be expressed as a positive
function of the exploitation rate and a negative function of the organic
composition of capital.

Marx then argued that the exploitation rate tended to be fixed, while the
organic composition of capital tended to rise over time, thus the rate of
profit has a tendency to decline. Classical economics assumes a static
economy with no labor-supply growth. As the surplus accrues to capitalists
and, necessarily, capitalists invest that surplus into expanding production,
output will rise over time while the labor supply remains constant. Thus the
labor market gets gradually "tighter", and so wages will rise. But this
profit decline is temporary, since a rise in wages would induce population
growth which would then loosen the labor markets and bring wages back down
again.

Marx did not accept this classical version. For Marx, wages were set by
"bargaining" in the labor market, not by labor supply. Thus there was no
"extra supply of labor" being encouraged by the higher wages. Marx argued
that capitalists could boost their profit rate back up by introducing
labor-saving machinery into production - thereby releasing labor into
unemployment, because the cost of unemployment is an externality to the
business. The primary incentive for the invention of machinery is to reduce
the cost of labor, and the primary vehicle is layoffs.

There are two effects of this relationship. The first is that wage cost
declines because labor is released and, concurrently, the employment of
machinery implies that fixed capital rises. Thus the introduction of
labor-saving machinery does not change anything: the fall in labor cost from
using less labor is counteracted by the rise in fixed capital. The second
effect is that the concurrent expansion in unemployment - the "reserve army
of labor" - will by itself weaken bargaining power of labor and reduce wages
down to or below subsistence. But wage decline negates the financial
rationale behind the introduction of machinery, which is to capture the cost
benefit of labor-saving machines. Thus the net effect of labor-saving
technology is to reduce the rate of profit.

One way to prevent this decline in the rate of return would be to increase
the exploitation rate in proportion to which variable capital declines
relative to constant capital. The issue of trade, another possible check to
the decline in profit rate, was seen by Marx as an inducement to produce on
an even greater scale - thereby increasing the organic composition of
capital further (and reducing profit quicker).

However, despite all their efforts, Marx claimed that there were social
limits to the extent to which capitalists could increase the exploitation
rate, while no such thing limited the growing organic composition of
capital. Consequently, Marx envisaged that greater and greater cutthroat
competition among capitalists for that declining profit. Then a crisis
occurs: large firms buy up the small firms at cheaper rates and thus the
total number of firms declines. This will boost the surplus value, as firms
can now purchase capital. The increasing tendency for capital to be
concentrated in fewer and fewer hands, combined with the greater misery of
labor, would culminate in ever greater "crises" that would destroy
capitalism as a whole. Marx had only temporary "stationary states",
punctuating the secular tendency to breakdown.

Adam Smith (1723-90), having come in contact with the Physiocrats in France
led by a physician to King Louis XV, Francois Quesnay (1694-1774), who
believed that all wealth originates from land, wrote An Inquiry into the
Nature and Causes of the Wealth of Nations in 1776, in which he postulated
the theory of division of labor and observed that value, not price, arises
from labor expended in the process of production. The Physiocrat maxim
states that only abundance combined with high prices could create
prosperity, a rejection of the theory of price as being set by the
intersection of supply and demand in a free market. To the Physiocrats,
price theory based on supply and demand causes abundance to drive down
prices and leads to producer bankruptcies and economic depressions,
preventing the sustenance of abundance, which is a requirement for
prosperity.

The neo-classical economists rejected this notion of value by introducing
the notion of marginal utility. In the modern market economy, labor performs
two marginal-utility functions: it enhances marginal return on capital
through increased productivity, and if fairly compensated for such marginal
utility, rising wages support marginal demand for increased production. This
notion is behind the Keynesian idea of demand management through high wages
and full employment, even at the cost of moderate inflation. Money has the
highest marginal utility when placed in the hands of those who need it most
and will spend it immediately in a technological economy in which
overcapacity is an inherent characteristic. 

The most cited of Smith's ideas is the belief that in a laissez-faire
economy, the impulse of self-interest would bring about the optimum public
welfare. Smith's idea of a free domestic market is one without monopolies,
which he opposed as destroyers of free markets. He also opposed mercantilism
in international trade, which aims to accumulate gold through monopolistic
trade. Smith supported restriction to free trade, such as the Navigation Act
of 1651, forbidding the importation of foreign goods and commodities from
overseas colonies except in English-owned ships, as necessary national
economic defense measures. In 1778, Smith was appointed commissioner of
customs for Scotland, an ironic post for a free trader in today's common
understanding of the term.

Henry George and the single tax on land
Smith in the Introduction to his Wealth of Nations identified real wealth as
the annual produce of the land and labor of the society. Henry George
(1839-97) virtually repeated the single-tax-on-land argument of Victor de
Mirabeau, Quesnay's ardent disciple and father to Honore Mirabeau, popular
revolutionary and statesman, spokesman for the Third Estate. "We must make
land common property," George declared.

Georgists identify three basic types of property: common, government and
private. Common property belongs to all people in common; it is that which
all have an equal right to use and enjoy, such as public parks. Government
property belongs to the state and is subject to the direction of the
government. Private property is that which individuals (or corporations as
legal persons) have the exclusive right to own, profit from and dispose of
as they see fit.

Common property is not the same as government property. Common property in
the ocean is generally recognized; the oceans do not belong to any
government beyond the costal economic zones. Common property is different
from private property in that the former permits private use, but implies an
obligation to the community since the rights of others must be recognized.
By its very nature, land is common property, and laws and traditions in
capitalist countries already go far toward recognizing it as such.

The principle of eminent domain asserts the superior claim of society to
land. The New York state constitution states: "The people of the State, in
their right of sovereignty, possess the original and ultimate property in
and to all lands within the jurisdiction of the State." English and US laws
generally recognize absolute ownership of goods - but not of land. The law
deals with the land "owner" as a land holder - land is held under the
sovereignty of the people and is subject to their conditions.

To preserve common property in land, George proposed that the rent of land
should be paid to the community. This payment expresses the exact amount
that would satisfy the equal rights of all other members of the community.
Individuals would retain title to land, fixity of tenure and undisturbed
possession. This method of making land "common property" may also be called
"conditional private property in land" (payment of rent to the community) as
opposed to "absolute private property in land" (private collection of rent).

Thomas Jefferson (1743-1826) said: "The earth is given as a common stock for
men to labor and live on." Marx said: "Assuming the capitalist mode of
production, then the capitalist is not only a necessary functionary but the
dominating functionary in production. The landowner on the other hand is
superfluous in this mode of production. If landed property became people's
property the whole basis of capitalist production would go."

Adam Smith said: "Ground rents are a species of revenue which the owner, in
many cases, enjoys without any care or attention of his own. Ground rents
are, therefore, perhaps a species of revenue which can best bear to have a
peculiar tax imposed upon them." Tom Paine (1737-1809) said: "Men did not
make the earth ... It is the value of the improvement only, and not the
earth itself, that is individual property ... Every proprietor owes to the
community a ground rent for the land which he holds."

John Stuart Mill said: "Landlords grow richer in their sleep without
working, risking, or economizing. The increase in the value of land, arising
as it does from the efforts of an entire community, should belong to the
community and not to the individual who might hold title." Abraham Lincoln
(1809-65) said: "The land, the earth God gave man for his home, sustenance,
and support, should never be the possession of any man, corporation,
society, or unfriendly government, any more than the air or water."

Sun Yat-Sen (1866-1925) said: "The land tax as the only means of supporting
the government is an infinitely just, reasonable, and equitably distributed
tax, and on it we will found our new system."

Effect of demographics on wages

One reason for China's dynamic growth is that it is currently at a
demographic optimum. The massive reduction in infant mortality achieved by
China's barefoot-doctors program of free universal public health care is now
yielding a surge of young workers. This added up to an extra 13.6 million
working-age adults a year on top of a labor force of more than 800 million
during the period of the just-ended Tenth Five-Year Plan (2001-05). China's
challenge up to now has been focused on absorbing population growth into the
labor force. The massive population flow from the rural countryside to
overcrowded cities also has kept wages low, even with fast growth.

The advantage is that there is a low ratio of pensioners and young workers
at this phase. China's population above the age of 16 will grow by 5.5
million annually on average in the next 20 years and the total population of
working age will reach 940 million by 2020, according to a government white
paper titled "China's Employment Situation and Policies" issued by the
Information Office of the State Council in 2004. In this period, China will
face severe employment pressure due to its huge population base, the age
structure, continuing migration to urban centers and the process of social
and economic development.

While the population of working age keeps increasing, there are now 150
million rural surplus laborers who need to be transferred, and more than 11
million unemployed and laid-off workers who need to be employed or
re-employed. As mechanization of agriculture proceeds, more labor would be
released into non-farm sectors. One way to relieve urban crowding is to
introduce non-farming sectors into rural villages. If left only to market
forces, widening wage disparity between urban and rural locations will lead
to development imbalances that can threaten social stability. A domestic
labor cartel could help solve the problem of labor migration toward urban
centers.

Within the goals of building a moderately prosperous society, China plans to
foster socio-economic development by upgrading and rationally deploying its
abundant human resources by providing gainful employment with advancement
opportunities and rising income without massive relocation of population. To
achieve this goal, China will have to maintain a high growth rate, adjust
its economic structure to maximize employment opportunities, raise education
levels, strength vocational training, match human resources to the changing
needs of socio-economic development, and make rational arrangements for
social security. 

As early as 2015, China's working-age population will actually start
falling. By 2040, today's young workers will be pensioners - in fact the
world's second-largest category of population, after India, will be Chinese
pensioners. There could well be 100 million Chinese citizens aged over 80,
more than the current worldwide total. Because of China's one-child policy
there will be fewer new workers under its so-called "4, 2, 1" population
structure - four grandparents, two parents and one child. This is a
demographic transition that many countries go through as they industrialize.
But a process that previously took a century in the advanced economies will
take less than four decades in China.

Only a drastic rise in wages can solve this demographic problem of a China
growing old before it grows rich. The median age in China has risen from 20
to 33 since 1978. It is estimated that by 2050, China's median age will be
45, against 43 for the United Kingdom and 41 for the United States, if
current population policy continues. Older populations can lead to
incremental improvements in productivity that came from age and experience,
but they are not good at the type of performance improvements that require
innovation. Radical innovation comes more naturally from youth.

Chinese culture is based on strong family ties. The elderly are the moral
responsibility of their families. This is a cultural strength that should
not be diluted by massive migration of workers far away from their aging
parents. About two-thirds of people aged over 65 in China live with their
adult children, performing child-care and household duties. Only 1% of those
over 80 are in old people's homes, compared with 20% in the US.

The controversial one-child policy is having extraordinary social effects
that are not all positive. In Chinese culture, a son is responsible for
providing for the family, which includes both the young and the aging
parents; a daughter looks after the family into which she marries. A society
with one-child families leaves those with daughters without support or care
in old age. This creates a gender imbalance that in turn creates enormous
problems in terms of matching marriage needs between male and female. China
will soon have to import brides for its men of marrying age. Gender balance
can shape a society's values. A society with an excess of young males whose
income cannot support two aging parents and attract a wife from a dwindling
supply of marriage-age females is one faced with latent instability.

The economic function of the elderly in an economy of structural
overcapacity is to keep consumption demand rising to absorb overcapacity.
Young workers will be happy to pay for consumption by the elderly if they
realize that their jobs are dependent on consumption by the elderly. The
Social Security problem in the US is not related to an expanding retired
population, conventional wisdom notwithstanding. It is related to young
workers not getting high enough wages because of outsourcing. This is why
the idea of an Organization of Labor-intensive Exporting Countries (OLEC)
should also receive political support in the US.

Conclusion

A cartel for labor is not unprecedented in history. The concept first found
expression in the guild system during the Middle Ages. Each line of business
had its own guild - butchers, bakers, dyers, shoemakers, masons, carpenters,
tanners, and many others, even lawyers and doctors. The purpose of the guild
was to make sure its members produced high-quality goods and were treated
fairly in the market.

Guilds became politically powerful in towns toward the end of the Middle
Ages, passing laws that controlled unfair competition among merchants,
established fair prices and wages, and limited the hours during which
merchandise could be sold and workers were required to work. They ordained
the frequency of markets. If an outsider entered the market in a town, he
could not sell his goods unless he paid a toll and obeyed the guilds' rules.
The guild also took care of the widow and children of a member who died and
those who became sick, and punished members who used false weights or poor
materials. Guilds also ensured that new craftsmen were properly trained.
They built cathedrals as monuments to their pious communities.

Guilds and their later manifestation in the form of trade unions eventually
lost their effectiveness because of their representation of special
interests that stood in the path of economic progress. Even industrial
unionism tends to promote the interest of particular industries, such as
mining, autos, transport, communication etc while neglecting universal
solidarity.

The aspect that is new about the concept of OLEC is its representation of
universal labor. It is based on the needs of a modern economy for managing
consumer demand to overcome structural overcapacity. Such demand can only
come from rising wages and full employment. The rules of economic democracy
mandate that capital in a modern economy is formed from the savings of
labor, which in turn depends on rising wages. This economic truism is the
rational basis why the concept of OLEC should be supported by all.

OLEC would be an intergovernmental organization whose members are sovereign
nations with labor-intensive export sectors. The objectives of OLEC would be
to coordinate and unify labor policies among member countries to secure
fair, uniform and stable prices for labor in the global market and an
efficient, economic and regular supply of labor to provide a fair return on
capital to maximize growth in the global economy. The ultimate aim is to
implement a trade regime in which corporate profitability is tied to rising
wages that will increase aggregate demand. Toward these objectives, the
successful experience of OPEC (the Organization of Petroleum Exporting
Countries) can be a useful guide.

The economic objectives are to stop the downward spiral of wages caused by
predatory wage policies, to adopt full employment as a policy goal and to
reject structural unemployment as a necessary prerequisite for
non-inflationary growth. OLEC will be a market-sharing cartel in which the
members decide on the share of the market that each is allotted so as to
achieve fair sharing of benefits and costs. To achieve these objectives, the
members should meet regularly to reach consensual measures in light of
changing market conditions monitored by a staff of specialists and
theoretical breakthrough constructed by creative innovators.

This is the final article in this series. For the previous articles, click
here. http://www.atimes.com/atimes/others/olec.html Henry C K Liu is
chairman of a New York-based private investment group. His website is at
http://www.henryckliu.com.