World Trade Needs a Global Cartel for Labor  (OLEC)

Part I: Background and Theory

By
Henry C.K. Liu

This series appeared in Asia Times  in February-March 2006


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 dollar, a fiat paper currency backed by nothing of intrinsic value, can be printed at will by the US, and only the US, 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 of the more dollars from trade surplus they accumulate, the poorer they become domestically.  This absurd position is further 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 neoclassical economics’ flawed definition of labor productivity as the amount of market value a worker can produced 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 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. Neoclassical 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, neoclassical revolution. Yet today’s allegedly free market effectively 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 into 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 (1723-1790) 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 to go to where they are needed most and where market wages are highest, while capital is free to go where it is need most and where return on investment is highest.  This econ-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 for the US Economy

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-pay agricultural, meat and poultry packing and health services jobs, as well as high-pay 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 which 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: “Aggregative 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.

Farm 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 Clinton administration began attaching legislative riders that would give Latin American refuges 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 in order 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 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 lowered 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 Sen. Larry Craig (R-ID), 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 ½%, 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 semiannual report To Congress on monetary policy , submitted Feb. 11, 2003.  Also, immigrants tend to have higher birth rate than native-born citizens. This would moderate the aging population trend.

Still, anti-immigration phobia continue 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 criticizes US policy on illegal immigration and the Bush Administration’s “guest worker” program and proposals for immigration amnesty, not withstanding 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 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 in order 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 profitability is tied to rising wages. Towards 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 bench mark, OLEC will aim to set a price bench mark for labor around which flexible price ranges will 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); Socialist Peoples Libyan Arab Jamahiriya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973–1992) and Gabon (1975–1994). 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 OPEC chairman. All decisions are to be unanimous. The OPEC Statutes identify the main objective as setting prices of oil and oil products and keep 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, by continuing their decade-old strategy of keeping oil prices low, with low royalty to the producer governments to subsidize the advance consumer economies while maintaining high corporate profit. In 1947, the price of oil was around $2.20/barrel, while exporter government taxes were less than 50 cents/barrel and production costs were between 10 to 20 cents/barrel.  These figures remain 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, 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 Muhammar Quadaffi used OPEC’s influence to put pressure on the other independent Middle Eastern states to increase oil prices and raised 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 the 1973 that OPEC began to gain real market power. By 1973, US oil production was falling due to rising dependence on low-price oil from the Middle East. The oil crisis of the 1970’s 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 MMB/D in September 1978 to 2.4 MMB/D by December 1978.

In the 1980’s, OPEC learned from experience that the higher oil prices of the 1970s decreased demand, stimulated conservation, encouraged new exploration and production and quest 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 increased more than six folds to reach above $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 (http://www.atimes.com/atimes/Global_Economy/GE26Dj02.html)

OPEC came into existence in 1960, but emerged as an effective cartel only following Arab Oil embargo which 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 in September 1973 to $11.65 in March. OPEC has since been setting bottom benchmark prices for its various crudes. Yet oil price 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 $3.17 on Sept. 1, 2005.  Oil reached a record $70.85 on Aug. 30, the day after Hurricane Katrina made landfall on the U.S. 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 in August 2006 when hurricanes typically cut U.S. output, said Mitsui & Co., Japan's second-largest trading company on February 6.  China kicked off the trading of fuel oil futures on the Shanghai Futures Exchange on August 25 2005 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, both by cartels such as OPEC in oil, by other commodity producers, market leaders in pharmaceuticals, software, communication, and in fact the price of 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. In fact, a case can be built that price determines supply and demand, not the other way around.

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. In pharmaceuticals, price is set neither by cost nor demand. The pricing model of any new drug aims at achieving 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 percent of autos financed or leased, subsidy of financing costs is the name of the game, not sticker price. Farm commodities 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. Thus Hayek uses the aggregate defect 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 significantly, 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 Cartel

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 diamond, the common attributes of any effective cartel are 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 makes 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 each other 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 be workout depending of the membership make-up and the negotiated outcome among the members.  But the prospect of common benefit will insure 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. In order 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 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 form the Law of One Price. 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 to improve overall labor productivity.  This imbalance translates into low wages that depress domestic consumer demand that 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 prevents 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 is 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.

An International Labor Cartel is 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 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, i.e. a cartel for oil, is something that Third World leaders can do while they are still in command of political sovereignty. OPEC of course got its inspiration from the De Beer diamond cartel.  The Zaibatsu was a finance cartel in pre-war Japan. When the US occupation broke up the Zaibatsu, the dispersed companies quickly reformed in Keiretsu of horizontally-integrated alliances across industries around a major bank.  The Keiretsu has been instrumental to Japan’s post-war economic recovery.

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 that cannot leave because of 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 bench mark global wage platform and to steadily raise wages 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 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 to 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 is the current terms of trade behind globalization which operates 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 widens the income and wealth gap by driving wages down and making low wages as 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, than many underdeveloped economies. And the US is a richer nation by far. This shows that if global Gini coefficient improves with more income equality, the global economy can also be richer. Much 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 WWII 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 war-time 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 transportation 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 nimbleness 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 post-war 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 need to realize the American dream was a job, the income from which was closely calibrated to pay for a home, a car, a good life, 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, lawyer, doctors, etc.) were narrow.  Many hourly-paid union tradesmen such as plumbers, carpenters, metal workers, electricians, etc. actually enjoyed higher income 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 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 post-war 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 riches 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 USSR 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 US did not last forever, but the decay came imperceptibly slowly. Cold War paranoia in the US reversed the populist policies and arrested the economic ascendance of the middle class in the US while it turned the young socialist economies around the world into victims of garrison state politics. The Korea War set the US on a path against all national liberation movements in all former colonies which constituted two thirds of the world’s population that had risen from the post-war 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 importantly, its vast market by self-negating embargos imposed by US foreign policy. In Europe, 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 US, 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 importantly defense industries. Japan and South Korea were later given steel-making 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 embargos put all such markets off limit 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 German and Japan 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 MIT 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 IMB 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 resistant 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 firm whose main aim 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. 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 petroldollars 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 (NIC). This was the beginning of globalization which at first was called interdependence, as half of the world was still under communist rule.  The US 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 that US transnational corporations could not level with the US public due to US self-image. The same thing happened to the controversy over Corn Laws during the early days of the British Empire. Silly talks of Japan and Germany overtaking the US were widely circulated in clueless segments of the US, lamenting the disappearance of the good old days from the rearview mirror, unable to see when the rest of the nation was heading without them.  Paul Volcker administered a blood-letting cure on US inflation and restored health to the US financial sector by sacrificing US industry which was increasingly forced to go global, leaving the US worker jobless on the roadside.

Neo-liberal Global Trade with Dollar Hegemony Depress Wages Worldwide

Bill Clinton was the first neo-liberal president. 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 JFK 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 silent US labor protestation against job outsourcing in globalization because the union vote had no other candidate to vote for.  Union wrath was deflected from US management to off-shore 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 a guaranteed capital account surplus and the benefits of a strong dollar and low interest rate all at the same time.  The Clinton Administration effectively resisted political pressure from US export manufacturers to devalue the dollar, arguing that devaluation, while helpful to US export, is not good for 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 sturgeons in the form of trade partners.  By export more to the US for dollars than they import from the US payable in dollars, the trading partners of the US are fooled into thinking that 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 while their own domestic sectors are starved for capital.

The economic transformation of the industrial base in New England in the US was accomplished in the 1950s by shifting textile manufacturing to the low-wage south.  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, foes to finance debt that keeps US consumers spending. Robert Rubin, a Wall Street bond trader par excellence who became US Treasury Secretary, is an internationalist whose idea of America does not extend beyond 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 end up turning all banks across the nation as 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.   Early financial globalization was pioneered by super-WASP Citibank led by Walter Wriston who championed lending petro-dollars to Third World governments who were expected to be bankrupt proved when profitable investment with good returns were getting hard to come by in the US domestic market.

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 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 gain income to compensate of reduced income from work. The formula was to take jobs from high-pay US workers and give them to low-wage oversea 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 over a decade, until the problem reached a point when further expansion of the money supply does not leave money in the US, but goes only to the global dollar economy off shore. US corporations are lining up to shed their pension obligation 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 interest 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 US should promote, even impose, terms of trade that reduces wage disparity both domestically and globally.  This will allow both the US and the global economy to expand faster. Since it is economically painful and politically dangerous to lower wages in the advance 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 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 eliminated 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, 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 first satisfy before market rules can be applied.  For this reason, all civilized societies forbade 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 artificially 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 law suits from injury and death 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, the Law of One Price and Exchange Rates

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 than its current exchange rate equivalent in dollars buys in the US. A PPP gap highlights the distortion exchange rates exert on the “Law of One Price” in cross-border trade. Purchase 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 four times, such as the purchasing power disparity between the US dollar and the Chinese yuan, the return would have to buy four time more in China than it does in the US.  Thus for every dollars 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 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 upward revalue its currency is futile as Chinese wage 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 which states 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 arbitragable 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 currency, as the Bank of England did in 1992 defending the pound sterling, a 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 Federal Reserve in a $3,5 billion bailout.  The IMF plan for Russia assumed that the maturing treasury bills (GKOs) could be rolled over at albeit astronomically high interest rate. But the holders of the GKOs were banks that borrowed dollars to buy the same GKOs which could not repay the dollars without the foreign banks agreeing to lend them more money, which the foreign banks were not. So the Russian banks could not roll over the GKO at any price, leaving a missing link in the financial chain. As the Russian public started withdrawing its 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 normally 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 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 impacted by changes in interest rates or any kind of uncertainty. In 2003, 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 profit by wage/productivity ratios.  A labor cartel, like an oil cartel, cannot be expected to keep prices at fixed level for long periods, nor would it be necessary.  Thus a wage risk management derivative can be structured to mitigate wage risks and reduce resistance to wage rise caused by fear of unexpected temporary wage decline 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 pro-active 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 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 of the names that are now respected industrial giants. Arbitragers 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 arbitrager 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 bond in financing new companies which otherwise could be secure financing was undeniable.  The presence of a labor carter to sustain rising wages that stimulate consumer demand can 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.

Neoclassical Economics Arbitrarily Assigns 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 was seen as what provides 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 between 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 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 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.

February 20, 2006

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