Henry Liu and the labour global cartel - Politics Forum.org | PoFo

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#816295
STARTING FRIDAY, FEB 24

The global economy does not operate as a free market by any stretch of imagination. To level the playing field between capital and labor, Henry C K Liu proposes a global cartel for labor.

On Asia Times. The text isn´t published yet, but the idea seems to be very interesting to me, let us see what happens.
User avatar
By Eddier1
#816350
STARTING FRIDAY, FEB 24

The global economy does not operate as a free market by any stretch of imagination. To level the playing field between capital and labor, Henry C K Liu proposes a global cartel for labor.


Aside from the fact that a "free market" has never operated really in
the global economy, and the fact that globalism has been leaderless,
on auto pilot, so to speak, I remain optimistic that the global cartel
of labor will have the good leadership of a vanguard of the proletarian
majority in the world. Any thing less, will be stuff and nonsense and
result in a mere gesture without any labor power to pilot or guide the
workers of the world, who have only their chains to lose.
By Leopard
#817001
global labor union would be just as bad as global government or a global business cartel - what a farce on the workers...

[How? Why? Please elaborate...]
User avatar
By Eddier1
#817159
global labor union would be just as bad as global government or a global business cartel - what a farce on the workers...


Writes you!, you don't get it. It is not a trade union on a world basis
that I referred to (that can't break the chains of capitalism)
instead -- proles armed as necessary who are practical men not to be
trifled with by the "likes" of you with your comical retrograde and
ludicrous notions.

A vanguard of the proletarians is genuine leadership, not the sniveling
leaderless machinations of globalism on auto pilot that is driving the
world into vampire imperialism, and the clear and present danger of
extinction for the human race in the very near future.
By futuristic
#817669
Contrary to popular belief, no cartel is sustainable. It can only work for a short time until a member decides he would gain a competitive advantage if he leaves the cartel.

I personally would never join the cartel and would state in the 1st line of my resume that I am not a member of it. And job web sites would have a separate field for job applicants to state if they are a member of the cartel, and recruiters would have a possibility to never see members of the cartel in resume search results.
By Gothmog
#817823
And here is the article....

http://www.atimes.com/atimes/Global_Eco ... 5Dj01.html

PART 1: The need for a labor cartel

The global economy as currently constituted does not operate with a free market by any stretch of imagination, the propaganda of neo-liberal free-traders notwithstanding. For this reason, there is a need for a global cartel for labor.

Three related facts combine to make the global market not free. The first fact is that global trade is carried out under an



international finance architecture based on dollar hegemony, which is a peculiar arrangement in which the US dollar, a fiat paper currency backed by nothing of intrinsic value, can be printed at will by the United States, and only the United States, thus making export for dollars a game of shipping real wealth overseas for paper that is only usable in the dollar economy and useless domestically in all other non-dollar countries.

Key commodities, such as oil, are denominated in dollars primarily because of US geopolitical prowess. Most economies need dollars to buy imported oil, but the exporting economies buy much more oil than they otherwise need domestically merely to satisfy the energy needs of their export sectors. The net monetized trade surplus from exports in the form of dollars, after paying for dollar-denominated oil and other imports, remains useless in the domestic markets of the exporting economies. Thus dollar hegemony reduces the non-dollar exporting economies to an absurd position: the more dollars from trade surplus they accumulate, the poorer they become domestically. This situation is exacerbated if domestic wages are kept low by export policy in order to compete for more global market share to earn dollars. It is a case of starving one's own children to provide free child labor to serve ice cream to outsiders. It is bad enough to exchange valuable goods for fiat paper; it is outright foolhardiness to keep domestic wages low merely to earn fiat paper that cannot even be spent in one's own economy.

The second fact that makes the global market not free comes from neo-classical economics' flawed definition of labor productivity as the amount of market value a worker can produce with a given unit of capital investment.

Since according to monetary economics, market value, which is expressed as price, needs to remain stable to prevent inflation, labor productivity in financial terms can only be increased with declining wages per unit of capital. Further, price competition for market share directly depresses wages. Even if wages can at times rise in monetary terms, the ratio of wages to the market value of production must constantly fall in order for increased labor productivity to be monetized as profit. Thus profits from trade under this flawed definition of productivity ultimately can only be derived from falling wages.

The concept of surplus value within the context of the labor theory of value as explained by Karl Marx embodies this structural compulsion. Yet Marx was speaking of the structural effect of fair profits, not the obscene profits that are now the norm from sweatshops in the deregulated global market. Neo-classical economics replaces the labor theory of value with the theory of marginal utility, in which price is defined as the intersection of supply and demand in a free market. William Stanley Jevon (Theory of Political Economy, 1817), Carl Menger (Principles of Economics, 1871), and Leon Walrus (Elements of Pure Economics, 1877) promulgated the marginal-utility, neo-classical revolution.

Yet today's allegedly free market in effect deprives labor of any pricing power over its market value. Since capitalism does not recognize any ceiling for fair profit, always celebrating the tenet of "the more the merrier", it must by implication oppose any floor for fair wages, to validate the opposite tenet of "the lower the merrier". The terms of global trade, then, are based on seeking the lowest wages for the highest profit, rather than fair wages for fair profit. This is the linkage between neo-liberal capitalistic globalization and wage arbitrage, both in the domestic labor market and across national borders. Yet in a consumer-based global market economy, low wages lead directly to overcapacity, because consumer demand depends on high wages. The adverse effect on consumer demand from the quest for maximum profit is the critical internal contradiction of the deregulated capitalistic market economy.

The third fact that makes the global market not free is that while financial globalization facilitates unrestricted cross-border mobility of capital around the globe, obdurate immobility of workers across national borders continues to be maintained through government restrictions on immigration.

Free-trade advocates, from Adam Smith (1723-90) to David Ricardo (1772-1823), in considering the relationship between capital and labor, treat the mobility disparity between capital and labor as a natural state, never entertaining that it is a mere political idiosyncrasy. This "natural" immobility of labor might have been reality in the 18th century, but it is no longer natural in the jet-age global economy of the 21st century in which mobility has become a natural characteristic. Labor immobility deprives labor of pricing power in a global market by preventing workers from going where they are needed most and where market wages are highest, while capital is free to go where it is needed most and where return on investment is highest. This econo-political regime against labor mobility, coupled with unrestrained cross-border mobility of capital, maintains a location-bound wage disparity that has created profit opportunities for cross-border wage arbitrage, in a downward spiral for all wages everywhere.

Greenspan supports more immigration
In January 2000, when the US unemployment rate reached 4.1% (4.7% in January 2006), the low end of structural unemployment without wage-pushed inflation, employers found it difficult to fill low-paid agricultural, meat- and poultry-packing, and health-services jobs, as well as high-paid high-tech information-technology and software-design jobs. The problem led the Federal Reserve to become concerned about possible wage-pushed inflation. It forced lawmakers to sponsor legislation that would make it easier for farmers, meat processors, and high-tech industries to import temporary workers through exemptions in immigration restrictions.

Fed chairman Alan Greenspan told Congress that increasing immigrant numbers in areas where workers are difficult to find could relieve stress in the job market and therefore wage-pushed inflation. Consistent with the Fed's warped mission of maintaining structural unemployment to contain inflation, Greenspan said: "Aggregate demand is putting very significant pressures on an ever-decreasing available supply of unemployed labor. The one obvious means that one can use to offset that is expanding the number of people we allow in. Reviewing our immigration laws in the context of the type of economy which we will be enjoying in the decade ahead is clearly on the table, in my judgment." Congress showed no enthusiasm for Greenspan's suggestion of permanent immigration liberalization along with global finance liberalization.

Agricultural growers in the US had hoped to increase the number of immigrant farm workers by attaching a provision in their interest to the highly favored high-technology industry's legislation to increase the number of high-tech immigrant workers. In 2000, high-tech-immigration legislation seemed likely to pass Congress until the administration of president Bill Clinton began attaching legislative riders that would give Latin American refugees legal permanent residency. In addition, the Clinton administration wanted to grant amnesty to a large number of illegal immigrants, most of whom were Hispanics. This political maneuvering stopped the pending high-tech legislation dead in its tracks because Republicans feared that the Democrats were attaching such legislative riders to gain support from the large number of Hispanic voters.

The shortage of high-tech workers forced the industry to move operations overseas, at first not to save money on wages, but to find available workers. The labor unions reacted to immigration with traditional phobia, viewing it as a development that would keep wages low, rather than as a new source for reversing the steady decline in membership. Yet employment data showed that high-tech immigrant workers did not lower wages during the high-tech boom in the US. What eventually did lower high-tech wages in the US was overcapacity resulting from overinvestment caused by excessive debt and inadequate consumer demand resulting from stagnant wages. After its collapse, the US high-tech sector recovered by outsourcing manufacturing jobs to low-wage countries, leaving consumer demand to be sustained by an expanding debt-driven asset bubble.

Three years later, Greenspan took up another argument on behalf of immigration: this time in response to the actuary dilemma facing social security. On February 27, 2003, Greenspan, testifying before the Senate Special Committee on Aging, chaired by Republican Senator Larry Craig, described the economic impact of an aging US population, which would lead to slow natural population growth that would result in slow economic growth, diminishing growth in the labor force, and an increase in the ratio of the retired elderly to the working-age population.

By 2030, the growth of the US workforce will slow from 1% to 0.5%, according to census projections cited by Greenspan. At the same time, the percentage of the population over 65 years old will rise from 13% to 20%. Greenspan described how the aging population would have significant adverse fiscal effects.

"In particular, it makes our Social Security and Medicare programs unsustainable in the long run, short of a major increase in immigration rates, a dramatic acceleration in productivity growth well beyond historic experience, a significant increase in the age of eligibility for benefits, or the use of general revenues to fund benefits," Greenspan warned.

According to Greenspan, immigration could prove a most potent antidote for slowing growth in the working-age population. As the influx of foreign workers in response to the tight labor markets of the 1990s showed, immigration does respond to labor shortages. An expansion of labor-force participation by immigrants and the healthy elderly offers some offset to an aging population.

"Fortunately, the US economy is uniquely well suited to make those adjustments," said Greenspan. "Our open labor markets can adapt to the differing needs and abilities of our older population. Our capital markets can allow for the creation and rapid adoption of new labor-saving technologies, and our open society has been receptive to immigrants. All these factors put us in a good position to adjust to the [impacts] of an aging population."

Short of a major increase in immigration, economic growth cannot be safely counted upon to eliminate deficits and the difficult choices that will be required to restore fiscal discipline, said Greenspan's semi-annual report to Congress on monetary policy, submitted on February 11, 2003. Also, immigrants tend to have higher birth rates than native-born citizens. This would moderate the aging population trend.

Still, anti-immigration phobia continued to rise in the US, as reflected by CNN personality Lou Dobbs, recipient of the 2004 Man of the Year Award from the Organization for the Rights of American Workers for his tilted coverage of the national debate on jobs, global trade and outsourcing. Dobbs was also a recipient of the Eugene Katz Award for Excellence in the Coverage of Immigration from the Center for Immigration Studies for his ongoing series Broken Borders, which criticized US policy on illegal immigration and the Bush administration's "guest worker" program and proposals for immigration amnesty, notwithstanding that if his crusade should bear fruit, there would be no one to clean his broadcast studio every night.

Time is ripe for a global cartel for labor
In a world operating under the rules of political economy, the idea of a global cartel for labor, to be known as the Organization of Labor-intensive Exporting Countries (OLEC), can help to level the playing field between capital and labor. It is a timely political concept with important positive economic implications in this age of deregulated finance globalization.

In finance capitalism, both capital and labor are viewed as mere commodities, not unlike other basic commodities, most notably oil. All commodities command a price in the market by their sellers exercising fair pricing power. They do this by withholding supply from the market until the price is right and fair. If OPEC (Organization of Petroleum Exporting Countries) members can form a global cartel for oil to control and raise oil prices in the global market for their collective benefit, at the same time claiming benefits for the global economy, low-wage manufacture-exporting countries can also form a similar cartel for global labor to control and raise wages worldwide with a long-range strategy that would be good for the global economy.

The objectives of OLEC would be to coordinate and unify labor policies among member countries to secure fair, uniform and stable prices for labor in the global market and an efficient, economic and regular supply of labor to provide a fair return on capital to maximize growth in the global economy. The ultimate aim would be to implement a trade regime in which profitability is tied to rising wages. Toward these objectives, the successful experience of OPEC can be a useful guide. Just as OPEC allows different grades of oil to command different prices tied to a benchmark, OLEC would aim to set a price benchmark for labor around which flexible price ranges would reflect factors that affect productivity. The aim is to stop the downward spiral of wages caused by predatory wage policies.

OPEC is a permanent intergovernmental organization created at the Baghdad Conference on September 10-14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five founding members were later joined by eight other members: Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973-92) and Gabon (1975-94). Headquartered in Geneva in the first five years of its existence, OPEC moved to Vienna on September 1, 1965.

Each member country selects representatives who choose a governor for their country. These governors attend two regular OPEC meetings every year and they also choose the organization's chairman. All decisions are to be unanimous. The OPEC Statutes identify the main objective as setting prices of oil and oil products and keeping the price and supply stable with fair returns to the investors by adjusting production rates according to market conditions. OPEC operates as a market-sharing cartel within a framework of non-collusive cooperation with imperfect information.

For the first decade of OPEC history, the transnational oil companies, the so-called "seven sisters" (Esso, BP, Shell, Gulf, Standard Oil of California, Texaco and Mobil), managed to use their overwhelming financial power to ignore it, continuing their decade-old strategy of keeping oil prices low, with low royalties to the producer governments, to subsidize the advanced consumer economies while maintaining high corporate profit. In 1947, the price of oil was about US$2.20 a barrel, while exporter-government taxes were less than 50 cents a barrel and production costs were between 10 and 20 cents a barrel. These figures remained relatively constant until the cartel effects of OPEC took form in the 1970s. Up to 1973, oil was selling for less than $3 per barrel just before the OPEC oil embargo, a rise of less than 80 cents in 26 years, way behind inflation.

In 1967, during the Six Day War, OPEC member nations, namely Saudi Arabia, Kuwait and Libya, provided financial support to Jordan, Egypt and Syria. OPEC also successfully embargoed oil to Israel and the countries that supported Israel. In 1970, Libyan leader Muammar Gaddafi used OPEC's influence to put pressure on the other independent Middle Eastern states to increase oil prices and raise taxes on oil-company incomes, and in some cases to nationalize the oil companies dominated by foreign joint-venture partners. But it was not until 1973 that OPEC began to gain real market power. By that year, US oil production was falling because of rising dependence on low-priced oil from the Middle East. The oil crisis of the 1970s was a pricing problem rather than a shortage problem. In 1973, a barrel of Arabian crude sold for $3, and in 1980, the price peaked at $37 a barrel. In 1978, the "second oil crisis" was triggered by the Iranian revolution, causing its production to drop from 6 million barrels per day in September 1978 to 2.4mmb/d by December 1978.

In the 1980s, OPEC learned from experience that the higher oil prices of the 1970s decreased demand, stimulated conservation, and encouraged new exploration and production as well as quests for alternative energy sources, expanding the life span of the oil age. In May 1990, the first Gulf War caused a temporary oil shortage. In response to the crisis, OPEC increased supplies from fields not affected by the Iraq-Kuwait crisis, stabilizing prices. After the 1997 Asian financial crisis, oil fell to below $10. The second Gulf War caused oil prices to increase more than sixfold to exceed $70 per barrel, despite US pressure on OPEC to increase production. Few if any market analysts currently expect oil to fall below $50 in the foreseeable future. The impact of high oil prices, while stimulating conservation, has not been fatal to the global economy (see The real problems with $50 oil, May 26, 2005).

OPEC came into existence in 1960, but emerged as an effective cartel only after the Arab oil embargo that began on October 19-20, 1973, and ended on March 18, 1974. During that period the price for benchmark Saudi Light increased from $2.59 a barrel in September 1973 to $11.65 in March. OPEC has since been setting bottom benchmark prices for its various crudes. Yet oil prices immediately before the current crisis dipped below $10 after the Asian financial crisis of 1997 and eventually stabilized around $20.

Today, OPEC is the source of slightly more than a third of the world's oil supply. The margin for turning three barrels of crude oil into two barrels of gasoline and one of heating oil fell to $3.086 a barrel on February 9, 2006, based on futures prices in New York, the lowest since June 2003. The profit for turning a barrel of crude into gasoline fell below $1 a barrel for the first time since September 1994; the margin plunged from $31.708 on September 1, 2005. Oil reached a record $70.85 on August 30, the day after Hurricane Katrina made landfall on the US Gulf Coast, wrecking oil platforms, pipelines and refineries, and cutting production in the world's largest energy market. Oil may rise to a record $96 a barrel this August, a month when hurricanes typically cut US output, Mitsui & Co, Japan's second-largest trading company, said on February 6. China kicked off the trading of fuel oil futures on the Shanghai Futures Exchange last August 25 for the first time in a decade.

There is a fundamental relationship between wages and prices. Pricing policies of firms as they are actually practiced in the real world, whether by cartels such as OPEC, by other commodity producers, or by market leaders in pharmaceuticals, software, communication and in fact money (interest rates), have one thing in common. Pricing policies across all these different economic sectors are predicated on the proposition that price is seldom, if ever, set by the intersection of supply and demand, as neo-classical economics textbooks teach. The bottom line is that price is determined not by supply and demand but by strategies that aim at optimizing the long-term value of assets and political considerations.

OPEC pricing is a good example. Because of OPEC, oil prices have become a key factor in the global economy. Throughout the history of oil, price has been set by highly complex considerations and supply has always been adjusted to maintain the set price.

With pharmaceuticals, price is set neither by cost nor demand. The pricing model of any new drug aims at achieving a maximum lifetime value of the drug that has very little to do with current supply and demand. Microsoft's pricing model for Windows has nothing to do with supply and demand, or marginal costs, which are close to zero. Telephone charges are similarly disconnected from supply and demand, or marginal costs. Even in the auto industry, the dinosaur of the old economy, where cost input is high and discounted return on capital low, pricing is based more on complex considerations than demand. With 80% of autos financed or leased, subsidization of financing costs is the name of the game, not sticker price. Farm-commodity prices are definitely not set by the intersection of supply and demand. They are set artificially high by political considerations of practically all producer governments, and both supply and demand are artificially distorted to maintain the politically set price. The general consensus of mainstream economists on the global steel-overcapacity problem is to reduce capacity, not to let prices fall.

Price in fact is the most manipulated component in trade. That is the fundamental flaw of market fundamentalism. Friedrich Hayek's rejection of socialist thinking is based on his view that prices are an instrument of communication and guidance, which embodies more information than each market participant individually processes. Hayek uses the aggregate effect of individual misjudgments as the correct judgment. To Hayek, it is impossible to bring about the same price-based order based on the division of labor by any other means. Similarly, the distribution of incomes based on a vague concept of merit or need is impossible. Prices, including the price of labor, are needed to direct people to go where they can do the most good. The only effective distribution is one derived from market principles. On that basis, Hayek intellectually rejects government regulation of market.

The only trouble with this view is that Hayek's notion of price is a romantic illusion and nowhere practiced. That was how the native Americans sold Manhattan to the Dutch for a handful of beads, which under modern commercial law would be categorized as a fraudulent transaction. The Bank of Sweden Prize in Economic Sciences (Nobel Prize) was awarded to Joseph Stiglitz, George Akerlof and A Michael Spence for "their analyses of markets with asymmetric information". In his acceptance press conference, Stiglitz said, "Market economies are characterized by a high degree of imperfections." Further, and most significant, Hayek's argument is predicated on labor being able to go where it can do the most good, a precondition that is denied by immigration constraints.

The nature of cartels
A global cartel can take on many variant forms with different characteristics and impacts on the global market. Although every cartel is unique, from oil to diamonds, the common attribute of any effective cartel is agreement among members for deliberate restraint on supply to the market to achieve a consistently higher price than that from predatory competition among sellers with no market pricing power.

Theoretically, an ideal cartel can act as a monopoly operated by a number of separate but related yet independent entities. The multi-entity monopoly cartel assumes that it is a cartel authority rather than individual cartel members who make price and supply decisions, such that the cartel as a whole obtains the maximum possible monopoly revenue and profits from the market, and cartel members do not compete with one another but share the total profits in a pre-agreed manner. Under these terms, the cartel authority actually acts as a monopolist, but not necessarily a total monopolist. OPEC controls only one-third of the world's oil supply.

The marginal cost curve is determined by using up the lowest cost area first, regardless of which member country the supply area belongs to. Given the market demand curve for the cartel's supply, the cartel authority calculates the marginal revenue pattern and equates it to the jointly decided marginal cost curve. The equilibrium will set the cartel's profit-maximizing supply level and the corresponding monopoly price. The central determination of price and supply by the cartel authority can guarantee maximum profit to the organization as a whole. Under this framework, the producers with high marginal cost might not produce at all if their marginal cost is higher than the cartel's marginal revenue. Therefore, a unanimously accepted profit-share arrangement must be pre-agreed and post-enforced. However, such a perfect cartel cannot be sustained in reality by OPEC, which is composed of constituent sovereign nations. The large producer (Saudi Arabia) would have to act as the "swing producer", absorbing the demand and supply fluctuations in order to maintain the monopoly price.

A cartel for labor would have to operate under rules responsive to the unique problems of labor markets, the details of which will have to be worked out depending on the membership make-up and the negotiated outcome among the members. But the prospect of common benefit will ensure that the appropriate operational mechanics can be worked out. For OLEC, China and India can be swing suppliers to absorb labor supply and demand fluctuations to maintain stable and rising global wages for the common benefit of all OLEC members.

A market-sharing cartel is one in which the members decide on the share of the market that each is allotted as a cartel member to achieve fair sharing of benefits and costs. To achieve this objective, the members may then meet regularly to reach consensual measures in light of changing market conditions monitored by a staff of specialists. Since each member country in OPEC retains sovereign power over its own production rate and no individual one (except, possibly, Saudi Arabia as a swing producer) has the power to fix the price favorable to the cartel, it is predictable that member countries would adopt the market-sharing strategy as the way to achieve the cartel objective. The members join together to restrain their production for higher prices to gain optimum profit. Violating the cartel quota would serve no purpose, as an individual member may sell more oil but total revenue would fall because of lower prices. Theoretically, if cartel members have similar marginal cost curves, the ideal market-sharing strategy can achieve the same goals as the joint profit-maximizing ideal cartel model, outcomes of which are equivalent to those of a monopolist operating a number of plants.

Third World economies with surplus labor operate separately from a collective disadvantaged position in global trade because global capital obeys the Law of One Price while global labor is exempt from this law. As dollar hegemony forces all foreign investments into the export sectors of non-dollar economies to earn dollars from trade, it produces a structural shortage of capital for non-export domestic development in all developing countries. These non-dollar economies then suffer from an imbalance between excess labor and a shortage of capital that prevents them from achieving full employment and improving overall labor productivity. This imbalance translates into low wages that depress domestic consumer demand, which in turn discourages investment, in a downward vicious cycle of perpetual domestic underdevelopment. This widespread local underdevelopment in turn prevents the global economy from developing its full growth potential from rising consumer demand. This hurts not only the developing economies, but the advanced economies as well.

On the one hand, cross-border wage disparity has given rise to predatory outsourcing that threatens employment and wage levels in the advanced economies. On the other hand, low wages around the world prevent needed growth of exports from the advanced economies to balance trade. Thus raising wages around the world to reduce or even eliminate cross-border wage disparity would be good for all economies. It would be the win-win proposition that neo-liberal free-traders promised but never delivered. The current regressive terms of global trade need to be altered by a progressive global labor cartel.

A positive and progressive undertaking
Since competition for global capital in a deregulated global financial market tends to depress wages worldwide to the detriment of all, it follows that a cartel to give labor fair pricing power in international trade would be a positive and progressive undertaking.

Dollar hegemony has deprived Third World economies of the option of using sovereign credit for domestic development, leaving export trade as the only available alternative. Yet economic and monetary policy sovereignty of all Third World nations has been under relentless attack from neo-liberal terms of trade. But creating a cartel for labor along the lines of OPEC, a political organization with an economic agenda, ie a cartel for oil, is something that Third World leaders can do while they are still in command of political sovereignty.

The OPEC leaders achieved pricing power in the global oil market with two preconditions: ownership of oil in the ground (not movable) they occupy and political sovereignty. With that they managed to raise the price of oil, albeit with occasional failures, and at the same time reduce the abusive waste of energy in the consuming countries, especial the advanced economies. Now the labor-intensive exporting countries have two similar preconditions: 1) workers who cannot leave because of the immigration regimes of all advanced countries and 2) political sovereignty. They can do the same in pricing labor as OPEC did in pricing oil, to provide a benchmark global wage platform and to raise wages steadily to alter the current destructive terms of trade in the globalized market. The idea should also get support from the US corporations and labor movement, and from the likes of Lou Dobbs.

The way to do this is to make it impossible for global capital to exploit cross-border wage arbitrage for profit without raising wages to close the wage gap and, if necessary, with countervailing charges or taxes. Conversely, tax preference can be tied to a rising-wage policy.

Globalization itself is not a bad development. What is destructive are the current terms of trade behind globalization, which operate as a "beggar thy neighbor process" while trumpeting a win-win fallacy.

The idea of economic development is not to redistribute wealth by making the rich poor, but to create new wealth by making the poor rich at an accelerated pace to reverse the widening gap between rich and poor. Current terms of globalized trade widen the income and wealth gap by driving wages down and making low wages the main factor in measuring competitiveness. The neo-liberal financial system provides credit only to firms that profit from driving wages down and withholds credit from firms that raise wages. What the world needs is a credit-allocation regime and a profit-measuring system to link corporate profitability with raising wage levels rather than lowering them.

Lest we should forget, this is a very American idea. Henry Ford did it in the US by voluntarily paying higher wages than the market norm so that his workers could afford to buy the cars they produced. The US experience has proved that the poor can be made richer without the rich getting poorer. This can be done by enlarging the pie while benignly re-dividing it so that no one gets less than before while the poor get more faster, rather than just re-dividing a shrinking pie. The US itself provided very good lessons on how it could be done. The US has a superior Gini coefficient, which measures net income equality, to many underdeveloped economies. And the US is a richer nation by far. This shows that if the global Gini coefficient improves with more income equality, the global economy can also be richer. Many of the problems currently faced by the US economy have to do with the use of debt to mask a declining Gini coefficient.

US prosperity built on high wages
The US economy emerged after World War II as the strongest, the most productive and the most dynamic in the world, not only because Europe, Britain, Japan and the USSR and were all in war ruins, and the rest of the world was left barren from a century of plundering by Western imperialism, but because the US model was operatively superior. This superiority was based on three factors: 1) high socio-economic mobility, 2) high wages with relatively equality of income and 3) heavy public investment in physical and social infrastructure such as transportation, education and research and public health.

Socio-economic mobility manifested itself in a flowering of creative entrepreneurship and innovation. It was easy to turn new ideas and innovations into new small businesses because of pent-up demand from the war years and a friendly posture of banks that provided easy credit for returning veterans who aspired to be small-business owners. Big business applied its wartime management techniques to concentrate on heavy industry, benefiting from technological and management breakthroughs made in war research and systems analysis, leaving small and medium business opportunities to young new entrepreneurs to exploit innovations to fill the needs of a market economy in transition from war production to peace production.

Communication and transport were relatively costly and cumbersome, keeping centralized management from being cost-effective in pervasive control of local markets, thus enabling small local entrepreneurs to compete effectively with big business through nearness to market and sheer ability to change. A new middle class of good and rising income came quickly into existence that was confident, dynamic and independent. This came to be recognized around the world as the American Spirit, the belief that the combination of good ideas and hard work will lead to success in a free and open market, even though only a very small part of the US market was really free and open. China is now at the beginning of this path of development, with spectacular success.

High wages and full employment in the postwar US led to strong consumer demand and a happy working class whose economic interests were effectively promoted by a strong labor movement that had developed productive symbiotic relationships with management from war production. Home ownership was promoted by government subsidies through credit guarantees and interest ceilings. All that was needed to realize the American dream was a job, the income from which was closely calibrated to pay for a home, a car, and a good life including free education, affordable health care and comfortable retirement, all accomplished with consumer financing.

The concept of "pay as you go" liberated Americans from the slavery of "save first, consume later", which would produce overcapacity while consumer needs remained unsatisfied. And jobs were plentiful because consumer demand was strong. There was living democracy in the workplace, with bosses forced to treat workers with equality and with the respect awarded to customers in order to retain them. The income gap between factory workers and professionals (engineers, lawyers, doctors, etc) were narrow. Many hourly paid union tradesmen such as plumbers, carpenters, metalworkers, electricians, etc, actually enjoyed higher incomes than professional engineers, at least in the early decades of their careers. Aside from old money, income disparity among the working population was small, giving society de facto socio-economic-cultural democracy. This happy outcome was because work was fairly and highly compensated.

The GI Bill obliterated the elitist tradition of higher education. Children of working-class, farming and immigrant background went to college, university and graduate school for the first time in US history and went on to be titans of industry and academia. This public-funded investment in human capital was the single largest contributor to US prosperity for the postwar decades until this generation reached retirement age in the mid-1970s.

Despite the anti-communist ideology behind the Cold War, the US economy benefited greatly from socialistic programs that began in the New Deal while the core of the US economy remained firmly rooted in capitalism. The combination of a capitalistic core and a socialist infrastructure produced one of the greatest prosperities in human history, relatively free of oppressive exploitation. Within limits, the US was undeniably the freest and richest society in the world. With such a wondrously successful system, it was a puzzle why Americans were told by their leaders to fear communism, since the whole world was trying to copy the US. Even the Soviet Union was copying the US model with the ideological modification of state capitalism at the core. Where the USSR erred was that it failed to allow a consumer market of small entrepreneurs, a mistake China is now avoiding.

Income disparity hurts the US economy
The good times in the United States did not last forever, but the decay came imperceptibly slowly. Cold War paranoia in the US reversed populist policies and arrested the economic ascendance of the middle class while it turned the young socialist economies around the world into victims of garrison-state politics.

The Korean War set the US on a path against all national-liberation movements in all former colonies, which constituted two-thirds of the population of a world that had risen from the postwar ashes of European imperialism. The Vietnam War was a continuation of that misguided geopolitical posture. These counterproductive wars not only did not achieve their misguided geopolitical objectives, they forced the US to rely on Japan as a convenient and docile ally both militarily and economically, shutting out the rest of Asia and, most important, its vast market by self-negating embargoes imposed by US foreign policy. In Europe meanwhile, confrontation with Soviet communism after the Berlin Crisis forced the US to build up defeated Germany as a key military and economic client state.

These policies set up the US in a new role of neo-imperialist in a global struggle of the rich against the poor. To support Germany and Japan and to incorporate them economically into a reactionary West led by the United States, the US decided to allocate the sunset industries to their economies, such as auto manufacturing, while the US kept the high-tech industries such as aircraft manufacturing, television and computers and, most important, defense industries. Japan and South Korea were later given steelmaking and shipbuilding to help support US logistics in Asian wars.

The original idea was that subsidized imports to the US from these new allies were to be tolerated only on a temporary basis, that they were expected to supply low-priced goods to the parts of the global market that were too poor to buy US goods produced at high wages. But the Cold War embargoes put all such markets off limits to US allies, forcing the US market to stay permanently open to Japan and Germany. In time, the US came to depend on relatively inexpensive imports from Japan and Germany to help contain inflation. Both Germany and Japan have failed to recover to this day as truly sovereign powers to fulfill their full potential as independent states.

Meanwhile, domestically the worst aspects of both capitalism and socialism were working hand-in-hand to weaken the US economy. The organization man emerged from US corporate bureaucratic culture, robbing the economy of creativity and initiative. The likes of IBM, General Motors and General Electric became ruthless predators that chewed up independent entrepreneurs for breakfast by their market monopoly. A Massachusetts Institute of Technology professor of electronics with a new technology would start a successful company by servicing IBM, which then would force a fire sale of the new company to IBM by threatening to stop buying from it. Within a year of its success, the new innovative company would become another IBM subsidiary managed by the huge bureaucracy of a gigantic enterprise. And the professor would retire from creative work with the sale proceeds. In this manner, IBM grew into a sluggish giant on a diet of other people's ingenuity.

Unionism turned into a drag on productivity and efficiency and the main resistance against change, rather than the driving force of innovation to protect labor's pricing power. Finance and banking evolved in ways that discriminated against small business and those with inadequate capital, and pushed innovative entrepreneurs to seek funding from venture-capitalist firms whose main aim was to sell the new companies to big business for a quick profit. Risk-taking eventually became too costly for entrepreneurs, but cheap for speculators.

The US trade deficit grew along with war-induced fiscal deficits threatening the gold-backed dollar. Keynesian deficit financing, instead of a formula to moderate the business cycle, became a permanent feature even in boom times to support ever higher levels of structural unemployment. President Richard Nixon was finally forced by recurring trade deficits and fiscal irresponsibility to take the dollar off gold in 1971; and by 1973, OPEC was allowed to raise oil prices on condition that petrodollars would be recycled backed to the US to limit damage to the US economy.

As the US economy continued to stagnate, offering low returns on investment, petrodollars went to so-called newly industrialized countries (NICs). This was the beginning of globalization, which at first was called interdependence, as half of the world was still under communist rule. The United States was compensating for the slowdown in domestic growth with overseas expansion, by arguing that the US economy was merely growing beyond its borders rather than shrinking domestically, which would only be true if the US accepted a restructuring of its economy: by shifting from domestic manufacturing to global finance.

Jimmy Carter presided over this restructuring transition of the US economy and saw a "national malaise" of spiritual despondency and economic stagflation that was inevitable when the population failed to understand the transition of the US from a strong nation to a hegemonic empire, a fact on which US transnational corporations could not level with the American public because of US self-image. The same thing happened to the controversy over Corn Laws during the early days of the British Empire. Silly talk of Japan and Germany overtaking the United States were widely circulated in clueless segments of the US, lamenting the disappearance of the good old days from the rear-view mirror, unable to see where the rest of the nation was heading without them. Paul Volcker administered a blood-letting cure on inflation and restored health to the US financial sector by sacrificing US industry, which was increasingly forced to go global, leaving the American worker jobless on the roadside.

Neo-liberal global trade with dollar hegemony depress wages worldwide
Bill Clinton was the first neo-liberal president of the United States. Just as life-long anti-communist Nixon could strike a deal with communist China without being accused domestically of being soft on communism, something that a populist John Kennedy could never have done during the Cold War, Clinton was more helpful to US transnational big business by undercutting organized labor than any Republican dared venture.

Clinton was able to silence US labor protestation against job outsourcing under globalization because the union vote had no other viable presidential candidate to vote for. Union wrath was deflected from US management to offshore labor, first in Japan, then Southeast Asia and then China, exploiting deep-rooted racial hostility in US labor movements.

But it was Robert Rubin, consummate bond trader from Goldman Sachs, who devised dollar hegemony as a way of financing a perpetual trade deficit by forcing US trade partners to recycle their trade surpluses denominated in dollars back into US capital accounts by buying US Treasuries that yield low returns. Thus dollar hegemony allows the US to enjoy a rising current-account deficit by way of a guaranteed capital-account surplus and the benefits of a strong dollar and low interest rate all at the same time.

The Clinton administration in effect resisted political pressure from US export manufacturers to devalue the dollar, arguing that devaluation, while helpful to US exports, is not good for the overall US national interest, which lies in the global dominance of finance. And US global financial dominance depends on a strong dollar made possible by dollar hegemony. Financial dominance is the caviar and the trade deficit is in fact the bait to capture sturgeon in the form of trade partners. By exporting more to the US for dollars than they import from the US payable in dollars, the United States' trading partners are fooled into thinking their trade surpluses with the US are a good deal, while they are shipping real wealth produced by underpaid labor to the US in exchange for paper money that can only be invested in the US and their own domestic sectors are starved for capital.

The economic transformation of the industrial base in New England was accomplished in the 1950s by shifting textile manufacturing to the low-wage southern United States. This was repeated by shifting manufacturing from the Midwest to overseas in the 1990s, but unlike New England in the 1950s, which transformed into a new economy of finance and high tech, the Midwest remained mostly a rust belt that never recovered. This is because the profit from the economic transition, instead of going to start new, more efficient plants, goes to finance debt that keeps US consumers spending.

Rubin, a Wall Street bond trader who became US Treasury secretary, is an internationalist whose idea of America does not extend west of the Hudson River. Politically, the Wall Street internationalists, not all of whom are Jewish, appeased the opposition by deregulation of the banking and finance sector so that non-New York financial firms could get in on the action. In reality, the New York banks ended up turning all banks across the nation into their local branches. Banks in the US, instead of being local financial pillars that prosper only with the local economy of their domicile, now can profit from destroying the local economies.

The battle between those who sold their labor and those who manipulated finances was won hands down by the financiers in the age of globalization. This is because cross-border wage arbitrage, unlike financial arbitrage that often eliminates market inefficiency by lifting the market value of the coupled instruments, works only to depress wages, never to lift them. Workers are not allowed to go to where wages are high, yet capital is encouraged to go where wages are low. Thus while the aim of financial arbitrage is to lift asset value to enhance profit, the aim of wage arbitrage is to lower wage value to enhance profit.

To defuse political backlash of falling wages in the advanced economies caused by outsourcing to low-waged economies, an asset bubble, including housing, was allowed to give the masses in the advanced economies capital-gains income to compensate for reduced income from work. The formula was to take jobs from high-paid US workers and give them to low-wage overseas workers, and to compensate US workers with rising prices on their homes, low-price imports and larger return for their pension-fund investments overseas. This formula worked for a while, but it requires an escalating expansion of the money supply to support a debt bubble. The Fed under Greenspan managed to accommodate debt-driven expansion for more than a decade, until the problem reached a point when further expansion of the money supply did not leave money in the US, but went only to the global dollar economy offshore. US corporations are lining up to shed their pension obligations in the name of maintaining global competitiveness. The US housing bubble will burst from insufficient and stagnant income even if mortgage rates should remain low.

Thus while it may still be in US imperial interests to expand the dollar economy globally, this expansion is facing domestic political opposition because an expanding global dollar economy leads to imbalances in the US economy with clear winners and losers that will soon translate into political expressions in future elections. In a democracy, when losers exceed winners in numbers, even if not in aggregate monetary value, the electoral impact can be immediate. The dollar economy, which benefits primarily the financial sectors in the US and other money-center locations, continues to expand while the non-financial sectors of the US economy collapse. With domestic political opposition building in the US, it is of critical importance how US policy will deal with the challenge of domestic imbalances created by globalization.

The need to reduce global wage disparity
US policies need be changed to stop the destructive impact of dollar hegemony on both the US economy as well as the global economy. The global dollar economy is shaping up to benefit unfairly only a small number of financial speculators and manipulators, not the world's population. The key is to eliminate as quickly as possible global income disparity that enable destructive cross-border wage arbitrage.

The United States should promote, even impose, terms of trade that reduce wage disparity both domestically and globally. This would allow both the US and the global economy to expand faster. Since it is economically painful and politically dangerous to lower wages in the advanced economies, the only option is to raise wages at a rapid rate in the currently low-wage regions to reduce global wage disparity. This can be done only if global wage parity is set as a policy objective, rather than letting market forces dictate a downward spiral of falling wages. As global wages reach parity, manufacturing will be redistributed to locations of true overall competitiveness, rather than being based on the single-dimensional factor of wages. Global trade and exports will be conducted to benefit domestic development rather than to deter domestic development. Global income will rise, creating more consumer demand to reduce or even eliminate current global overcapacity.

Without an OLEC cartel to protect the pricing power of labor in a global financial market, the Law of One Price will discriminate against labor by pushing wages down. The Law of One Prices echoes David Ricardo's Iron Law of Wages, which supplements Thomas Malthus' population theory by asserting that wages tend to stabilize at the lowest subsistence level as a result of unregulated market forces. Malthus observed that population growth would mathematically outstrip the means of subsistence, giving economics the label of the "dismal science".

The theory of marginal utility as espoused by William Stanley Jevons in England, Leon Walrus in France, Eugene Bohm-Bawerk in Austria, and Irving Fisher and Alfred Marshall in the US asserts that the market value of a commodity is determined by the demand for it and the relative scarcity at any given time and situation, and not by any intrinsic value. Marginal price is the price above which no buyer will buy. Marginal land is land that will not repay the cost of labor and capital applied to its cultivation or improvement. Marginal wage is the wage above which employment will cease. But while labor is a commodity, humans are not. There are basic human needs that every economy is required to satisfy before market rules can be applied. For this reason, all civilized societies forbid slavery, child labor and other inhumane labor practices.

The Law of One Price for labor decrees that the Iron Law of Wages will depress marginal wage to the lowest possible level if left to market forces. Yet the theory of marginal value of labor operating within a regime of neo-liberal terms of trade only applies impeccable logic to an artificial structure disguised as fundamental truth. The terms of trade in a labor market in which an anti-inflation monetary policy structurally disallows any scarcity of labor to emerge is inherently prejudicial to the fair pricing of labor. Similarly, the theory of marginal value in the flawed terms of trade in the auto market leads Detroit to produce unsafe cars at any speed by calculating that the cost of lawsuits from injury and death caused by unsafe cars is less costly than raising auto-safety standards when the monetary value of injury and death are set too low by the courts.

The current global overcapacity is a direct result of global wages being set too low by global wage arbitrage, depriving the world of the full potential of consumer demand. This overcapacity can be corrected by a global labor cartel.

Purchasing-power parity and the Law of One Price
Purchasing-power parity (PPP) between currencies measures the disconnection between exchange rates and local prices that defy the Law of One Price in a globalized economy. Purchasing-power parity is reached when exchange rates between two currencies are adjusted to enable both currencies to buy the same amount of goods and services at local prices. The PPP gap between the US dollar and the Chinese yuan is estimated to be 4, meaning that one Chinese yuan buys four times as much in China as its current exchange-rate equivalent in dollars buys in the United States. A PPP gap highlights the distortion exchange rates exert on the Law of One Price in cross-border trade.

Purchasing-power parity contrasts with interest-rate parity (IRP), which assumes that the behavior of investors, whose transactions are recorded on the capital account, induces changes in the exchange rate. For a dollar investor to earn the same interest rate on his investment in a foreign economy with a PPP gap of 4, such as the purchasing-power disparity between the US dollar and the Chinese yuan, the return would have to buy four times as much in China as it could in the US. Thus for every dollar of profit US investors require from investment in China, four dollars' equivalent in Chinese goods and services are needed to support the prevailing exchange rate. Accordingly Chinese wages would have to be at least four times lower than (one-quarter of) US wages unless inflation in China closes the PPP gap, or purchasing-power disparity, between the two currencies. But inflation in China will cause the yuan to fall against the dollar, keeping the PPP gap constant even as Chinese prices rise. This shows that pushing China to revalue its currency upward is futile, as Chinese wages would fall to compensate for a stronger yuan. What China needs to do is to raise Chinese wages within a stable exchange rate.

Applying the Law of One Price to global labor
The Law of One Price says that identical goods should sell for the same price in two separate markets when there are no transportation costs and no differential taxes or tariffs applied in the two markets. A global trade regime governed by the Law of One Price should have wages in two separate labor markets converging through arbitrage to close the disparity. Since it is economically regressive for the higher wages to fall, the only productive convergence would be for the lower wages to rise.

In finance, the Law of One Price is an economic rule stating that in an efficient market, a security must have a single price, no matter how that security is created. For example, if an option can be created using two different sets of underlying securities, then the total price for each would be the same; otherwise an arbitrage opportunity would exist. Because of the Law of One Price, put-call parity requires that the call option and the replicating portfolio must have the same price.

Interest-rate parity, which plays an important role in the foreign-exchange markets, is another example of the Law of One Price. For the Law of One Price to hold between two economies, purchasing-price parity, exchange-rate parity between the paired currencies and interest-rate parity must all exist simultaneously.

Any violation of the Law of One Price is an arbitrage opportunity. The same should apply to the disaggregated labor markets in the global economy. The issue of unified wages is not only a matter of morality or social justice, as liberals asserted during the Industrial Revolution and the age of imperialism, and as neo-liberals and market fundamentalists reject in the age of globalization and neo-imperialism. It is the law of a truly free global market. While finance arbitrage uses the Law of One Price to raise market value of securities, cross-border wage arbitrage thus far only obstructs the Law of One Price in separate labor markets to keep wages low everywhere.

A common mistake traders make is to forget the caveat that arbitrageable price discrepancy should be isolated from factors such as tax treatment, liquidity or credit risk. Otherwise, they will put on what they perceive to be an arbitrage when in fact there is no violation of the Law of One Price beyond government intervention. The Law of One Price underlies the important financial engineering definition of arbitrage-free pricing even for disparity of prices created by government policy.

To understand the positive potential for cross-border wage arbitrage, beyond the destructive impact of archaic outsourcing, lessons can be learned from how profit is generated by arbitrage plays in financial markets. If risks from oil, weather, environmental impact, credit and interest rates can be arbitraged profitably, there is good reason that risks associated with rising wages can also be arbitraged for profit.

Using wage arbitrage to stabilize rising wages
In finance theory, an arbitrage is a "free lunch", a transaction or portfolio that makes a profit without risk. Suppose a futures contract trades on two different exchanges. If, at one point in time, the contract is bid at $40.02 on one exchange and offered at $40.00 on the other, a trader could purchase the contract at one price and sell it at the other to make a risk-free profit of a $0.02. If the market for that security has sufficient broadness and depth, the arbitrageur can make millions. And if an arbitrage opportunity is created by a central bank on two currencies, as the Bank of England did in 1992 defending the pound sterling, an arbitrageur like George Soros could make billions in a couple of days at the expense of the British economy.

In 1998, an article Soros wrote in the Financial Times on the inevitability of a Russian devaluation of its currency precipitated the fall of the Russian government, a massive default on its debts, and widespread financial panic that brought down Long Term Capital Management (LTCM), another high-flying hedge fund, requiring involvement of the US Federal Reserve in a $3.5 billion bailout. The International Monetary Fund (IMF) plan for Russia assumed that the maturing treasury bills (GKOs) could be rolled over, albeit at an astronomically high interest rate. But the holders of the GKOs were banks that borrowed dollars to buy the same GKOs and which could not repay the dollars without the foreign banks agreeing to lend them more money, which the foreign banks would not. So the Russian banks could not roll over the GKOs at any price, leaving a missing link in the financial chain. As the Russian public started withdrawing their savings from the national savings banks, the missing link widened. What started out as a fixable hole of $7 billion, within a week or two became a unfixable abyss. Soros and his partners lost their investment in a Russian telephone company, along with countless others.

Most arbitrage opportunities only reflect minor pricing discrepancies between markets or correlated instruments. Per-transaction profits tend to be small, and they can be negated entirely by retail transaction costs. Accordingly, most arbitrage is performed by institutions that have very low wholesale transaction costs and can make up for small profit margins by doing a large volume of transactions. Formally, theoreticians define an arbitrage as a trading strategy that requires the investment of no net capital, cannot lose money, and has a positive probability of making money. Arbitrage is the quintessential virtual-capital play in capitalism.

Wages in different labor markets change for complex reasons. The gap in wages as measured by standard productivity units changes, which produces arbitrage opportunities. Any company whose revenue is affected by weather has a potential need for weather-risk management products that hedge the company's exposure to weather deviating from historical norms. This is true for companies that consume oil, or are impacted by changes in interest rates or any kind of uncertainty. In 2003, the US Defense Department considered launching a market for terrorism futures to improve the prediction and prevention of terrorist outrages.

All companies are affected in their profits by wage:productivity ratios. A labor cartel, like an oil cartel, cannot be expected to keep prices at a fixed level for long periods, nor would it be necessary. Thus a wage-risk management derivative could be structured to mitigate wage risks and reduce resistance to wage rises caused by fear of unexpected temporary wage declines in competing markets. Like weather and environmental derivatives, hedging can be a defensive use of wage-index derivatives. Strategic planning linked to wage uncertainties can also be financially backed by wage-index derivatives for proactive use to sustain wage targets set by the labor cartel.

While a market is said to be arbitrage-free if prices in that market offer no arbitrage opportunities, there is a second use of the term, shunned by theoretical purists but in wide use for several decades so as to become standard in all markets. According to this usage, an arbitrage is a leveraged speculative transaction or portfolio. During the 1980s, junk-bond financing funded an overheated mergers-and-acquisitions market that produced new corporations such as CNN, Microsoft and many other firms that are now respected industrial giants. Arbitrageurs of this period were speculators who took leveraged equity positions either in anticipation of a possible takeover or to put a firm in play. They also engaged in greenmail. Ivan Boesky was a famous arbitrageur from this period who was ultimately convicted of insider trading. Michael Milken, the junk-bond king, also was sent to prison on finance-related charges. But the role of junk bonds in financing new companies was undeniable.

The presence of a labor cartel to sustain rising wages that stimulate consumer demand could also be financed by speculative arbitrage. If the conditions should come into existence, the almost inexhaustible creativity of the financial markets will response to the challenge.

Unequal pricing powers between capital and labor
David Ricardo's interest in economics was sparked by Adam Smith's Wealth of Nations (1776), whose thesis is that the division of labor (specialization) enhances economic growth. Ricardo's law of rent was seminally influenced by Malthusian concepts. He propounded his "Iron Law of Wages" and a labor theory of value. To Ricardo, rent is a result and not a cause of price.

The Iron Law of Wages asserts that wages cannot rise above subsistence levels. The theory of value maintains that in exchange, the value, not the price, of goods is measured by the amount of labor expended in their production. Smith also saw advancements in mechanization and international trade as engines of growth through the facilitation of further specialization. Because savings by the rich were seen as what provide investment and hence economic growth, Ricardo saw unequal income distribution as being one of the most important determinants of national economic growth.

This is a critical shortcoming in Ricardo's proposition, as in the modern economy, capital comes increasingly from the pension funds of workers, not exclusively from the rich. However, Ricardo po
User avatar
By Eddier1
#818149
Yes the economists are at it again...swimming in abstractions that know no material landmass to dock at. Profit maximumization, how convenient to
make it sound so enscounced in a "sound economic" theory, when what
it is in reality is the bottom line of a whore.

Wait for these masters of deceit and deception on political economy that
is geared to vested special interests -- best left arcane so the working
people can't see what is being done to them, and from whom it is coming.
But there will come a time when the whores of profit maximunization will be revealed, against their will, and that shalll be when the wages of the
workers are at the lowest possible level, and there is no BREAD to buy at the local bakery, since everything will be from foreign countries, shipped in by containers or flown in by cargo jets.Then in some way or
others ships will sink or be blown up with hidden nuclear bombs in
containers from Dubai, and cargo jets will crash by hijackers who are
terrorists.

Wait for that, and fail to support a radical change now that only the
workers are capable of doing, only they can change the corruptions
of greedy business as usual and foul gov'ts that serve them and not
the People, and the consequences will be really apocalyptic.
By futuristic
#818470
Articles like this are actually very dangerous because they perpetuate the illusion that one day governments will get together and implement a program to make the World better. They divert our attention from a sorrow fact that this will never happen. The government is simply not designed to do anything like that. As Bill Gates says when Windows crashes: “this behavior is by design”. :) The gov’t is designed to serve bribers and not the nation as a whole. Individual incomes of politicians don’t depend on how happy and wealthy the nation is but rather on bribes. The gov’t is inherently corrupt because every few years they desperately need support with money and propaganda to get elected. Additionally, the gov’t is deliberately weakened by the separation of powers and cumbersome decision making process that is among other flaws suffers from the influence by incompetent voters who are in turn influenced by propaganda, first of all in gov’t controlled public schools. And the gov’t is inherently a monopoly, which eliminates the need for it to improve and innovate.

If this fucked up world is ever to be made better this will be done through private effort driven by profit motive. This is the only hope we have. The only! Period. Any other ideas is utopia.

Besides, no consensus will ever be accomplished on what is “better”. Some people want absolute wealth, others want equality, others want freedom, and yet others want to impose their morals on everyone else. No compromise can reconcile those interests, so the only solution is segregation.

The debate (and articles) of what should be done is senseless because of 2 reasons: (1) it will anyway never be done by these governments; (2) even if something is done it will not satisfy anyone because interests of every person are unique.

This is where the idea about competing private for-profit city-states comes from. I argued for it here. I understand that for an average Joe it sounds like a joke and it would do so to me too just a short while ago but I really don’t see any other option to satisfy interests of every individual on this planet to maximum extent limited only by technological advance and capital accumulation, whatever those interests are.

The dinosaur of the government/state has reached its evolution potential and is now set to be replaced with smarter and smaller species.
By Gothmog
#820811
The dinosaur of the government/state has reached its evolution potential and is now set to be replaced with smarter and smaller species.


-Well, hopefully you´re not advocating the Somalian development model :D . Anyway, if the state is dying, as you says (and it´s actually possible that the national state is suffering a more or less serious crisis, I didn´t reach a conclusion about this), then it will be the end of capitalism, as the system needs state intervention to work properly (and also to be tolerated by the masses, a fact that is commonly forgotten). The most likely result of a mass collapse of the national state would be a world of chaos, not prosperity.
By futuristic
#821907
Well, hopefully you´re not advocating the Somalian development model

Well, with all its flaws it has a huge advantage over the state development model – it does not create slaves, which may be beneficial in the long run. Besides, we know that actual implementation of the state model resulted in arguably more deaths than all warlords together have bullets. A state is only needed if without it the “progress” will not start but this is not the case in Somalia as they already have an airport, an airline, a lot of factories, and even a few phone companies and ISPs. So they are all set for state-less development.

Anyway, if the state is dying, as you says (and it´s actually possible that the national state is suffering a more or less serious crisis, I didn´t reach a conclusion about this),

It does in fact suffer a big crisis because it has reached a limit of its capabilities. It can’t jump higher because of the flawed “design”. It goes the same classical way as socialism did. It’s unable to reform drastically because if, for example, it’s made more powerful by copying the corporate governance model (there is unlikely a better option as this one has been selected by long competition) it would immediately begin abusing its power. And it would still stay a monopoly, which is why there would be no “invisible hand” to direct it the right way. The flaws of the state that I mentioned in my previous post can only be fixed all at once, an attempt to fix only some of them would not result in a working solution. The state can’t be gradually improved; it can only be an all-or-nothing improvement.

then it will be the end of capitalism, as the system needs state intervention to work properly

I am far from denying the importance of state intervention. But it doesn’t have to come from a “state”. It may come from for-profit incorporation jurisdictions or private cities.

Imagine an “incorporation jurisdictions” agency. Its business is to register “artificial bodies”, regulate them, and resolve disputes between them. There is obviously a need in such a service and it doesn’t have to be provided by a gov’t.

(and also to be tolerated by the masses, a fact that is commonly forgotten)

It’s forgotten because it’s not the case any more (and probably never was). And BTW, private cities would be very interested in the prosperity of their residents as they would be able to sell their services for higher prices.

The most likely result of a mass collapse of the national state would be a world of chaos, not prosperity.

A sudden collapse in indeed undesirable. In the reality at some point private cities will begin emerging one-by-one and with time more and more people would live in them. I hope, the groups that control states would choose not to stop the history but rather take advantage of the new business opportunities. After all, chaos is not in their interest either. Maybe that’s too idealistic view and we are actually set to experience a temporary chaos and “liberations” of private cities by states but one way or another in the end we will all live in private cities.

The business opportunity is already there. Some areas in America experience influx of local migrants. New towns are being built. The development companies can add value to the homes they build by customizing/localizing town regulations. They may start with setting up good schools. This is already possible and is only not happening because of the threat of force from the state.
By Gothmog
#823978
Well, with all its flaws it has a huge advantage over the state development model – it does not create slaves, which may be beneficial in the long run. Besides, we know that actual implementation of the state model resulted in arguably more deaths than all warlords together have bullets. A state is only needed if without it the “progress” will not start but this is not the case in Somalia as they already have an airport, an airline, a lot of factories, and even a few phone companies and ISPs. So they are all set for state-less development.


-Well, I would rather live in a country with a functional state, maybe it´s just a question of preferences, but, if we must live in capitalism, better to have a state spending 30-60% of GDP to provide you with healthcare, education, and infrastructure than to struggle in the jungle of stateless countries like Somalia and Haiti (you know, public GDP spending in Haiti is only 11% of GDP, seems no to be a great deal)

Imagine an “incorporation jurisdictions” agency. Its business is to register “artificial bodies”, regulate them, and resolve disputes between them. There is obviously a need in such a service and it doesn’t have to be provided by a gov’t.


-Yeah, and how to enforce the decisions taken by these agencies? From where will come the legitmacy of these bodies?

It’s forgotten because it’s not the case any more (and probably never was).


-It´s forgotten because people are counting the social role of the state as a sure thing, if public healthcare, public education and public pensions are abolished overnight in the industrialized countries, the resulting social unrest would make the Russian revolution looks more like a minor disagreement between gentlemen.

BTW, private cities would be very interested in the prosperity of their residents as they would be able to sell their services for higher prices.


-Or alternatively they could enter in a self destructive competition to offer cheap labour to private (foreign) investment. Anyway, the idea cannot work because you need larger scale production to be efficient. This return to the Middle Age you suggest (because it´s more or less a modernized feudal system that you´re advocating) would actually result in more bureacracy (because each city would need to have a "complete" administrative structure, including customs and border police) and less productivity (because markets would be smaller). It´s possible for strategically located cities like Singapore (Hong Kong was never an independent country), to survive and even prosper (but it needs massive state intervention), but for cities situated far from sea trades this alternative isn´t feasible.

A sudden collapse in indeed undesirable. In the reality at some point private cities will begin emerging one-by-one and with time more and more people would live in them. I hope, the groups that control states would choose not to stop the history but rather take advantage of the new business opportunities. After all, chaos is not in their interest either. Maybe that’s too idealistic view and we are actually set to experience a temporary chaos and “liberations” of private cities by states but one way or another in the end we will all live in private cities.

The business opportunity is already there. Some areas in America experience influx of local migrants. New towns are being built. The development companies can add value to the homes they build by customizing/localizing town regulations. They may start with setting up good schools. This is already possible and is only not happening because of the threat of force from the state.


-I´m pretty sure the end of nation state isn´t in the agenda of the ruling elites, quite the opposite, they want to make the nation state stronger, not weaker. In such circumstances, the eventual collapse of the nation state would be completely involuntary, and so chaotic and unplanned.
By Gothmog
#823983
Part 2

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

OLEC
PART 2: Rising wages to right historic wrongs
By Henry C K Liu

According to the current terms of global trade under dollar hegemony, the penalty for a non-dollar economy that uses dollar foreign capital is a low domestic standard of living to support a high return denominated in US dollars on foreign capital. Since dollar profits for foreign capital cannot be used in the local non-dollar economy, such profits must leave the domestic economy in one form or another, either through direct repatriation or, in economies with currency control, through central-bank foreign-

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exchange reserves. Thus there are no recycling economic benefits to the non-dollar domestic economy from dollar profits earned by foreign investment.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tomorrow: Competing theories on the value of labor

Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com.
By futuristic
#824111
Well, I would rather live in a country with a functional state, maybe it´s just a question of preferences

I may agree with you on this. I would probably also choose Venezuela over Somalia if I had only those 2 choices. But if I had more info about Somalia, in particular what areas are safe and where property is protected (and such areas actually exist in Somalia) I might choose Somalia. What I am sure about is that Somalia is going to be much better off in the long run than Venezuela unless someone “liberates” them.

but, if we must live in capitalism, better to have a state spending 30-60% of GDP to provide you with healthcare, education, and infrastructure

That’s a pretty good idea unless 95% of that amount is simply stolen...

than to struggle in the jungle of stateless countries like Somalia

If they have ISPs out there it’s not jungle. And even if they have junglish areas wealth created in stable areas would quickly trickle down to the jungle.

and Haiti (you know, public GDP spending in Haiti is only 11% of GDP, seems no to be a great deal)

If in Haiti only people who control the gov’t can do business it’s much worse than it’s in Somalia.

Yeah, and how to enforce the decisions taken by these agencies?

The need in good reputation is the best enforcement. It really works unless corporations suppress competitors using government intervention and thereby become unaccountable monopolies. A good example is Russian forex brokerages. The industry is absolutely unregulated and unaccountable to the state. Scams are widespread, which scares away a lot of potential customers. So leading brokerages have created a commission which aim is to resolve disputes between traders and brokerages. Any trader can file a complain. The commission doesn’t have any enforcement power and yet brokerages do obey to its decisions because they can’t afford to spoil their reputation.

From where will come the legitmacy of these bodies?

And you believe the “legitimacy” can only derive from a feeling similar to what slaves have to their master? I.e. the master is “legitimate” by definition, especially if he doesn’t beat them too often and feeds them sometimes with shitty food... :D

In my case companies would want to register with reputable regulating jurisdictions because it would automatically boost their reputation and make them accountable to their partners. And this accountability doesn’t have to be based on force. All is needed is that contract adherence history, similar to modern credit history, is maintained for every individual. And this history should be bound to biometrical data of the person and not to paper documents that can be counterfeited. So if someone is discovered cheating that person would never be able to find job/partners and would die on street. IMO, that kind of enforcement is good enough.

It´s forgotten because people are counting the social role of the state as a sure thing, if public healthcare, public education and public pensions are abolished overnight in the industrialized countries, the resulting social unrest would make the Russian revolution looks more like a minor disagreement between gentlemen.

Actually if the abolishment of those services is accompanied by also the abolishment of taxes nearly everyone would become better off.

Or alternatively they could enter in a self destructive competition to offer cheap labour to private (foreign) investment.

So this would be an opportunity for competing cities to lure the “cheap labor” for still low but a bit higher wages... And besides, as you know, in knowledge based economy cheap labor, unlike labor of well paid skilled professionals, yields cheap profits. There are almost no jobs that can be trusted to slaves and 20 years from now such jobs will not exist at all.

Anyway, the idea cannot work because you need larger scale production to be efficient.

Did I say the cities would be isolated? :roll:

This return to the Middle Age you suggest (because it´s more or less a modernized feudal system that you´re advocating) would actually result in more bureacracy (because each city would need to have a "complete" administrative structure, including customs and border police)

Every city already has numerous bureaucracy that doesn’t have any motive to excel or keep itself small. And restrictions on trade would not be in any city owner’s interest. And I don’t see a significant role for border police. The only reason it’s needed is to keep terrorists out but they would not exist if the cities don’t try to “spread democracy”.

and less productivity (because markets would be smaller)

What sane investor/businessman/land developer would want to make markets smaller? :roll:

It´s possible for strategically located cities like Singapore (Hong Kong was never an independent country), to survive and even prosper (but it needs massive state intervention),

The cities may also micromanage their economies if it helps. It would be sort of “business incubator”. They would have all rights to do so on their private land. The only difference with modern state that they would be much more accountable to their residents and would only be able to make more money if residents are both happier and wealthier and no competing city manages to provide yet better standards of living for its residents.

but for cities situated far from sea trades this alternative isn´t feasible.

But if now cities prosper in remote areas why wouldn’t they keep prospering provided trade restrictions don’t exist? It would be in the best interest of land developers to maintain seamless worldwide economic space. Some cities may even allow 3rd party jurisdiction agencies to run the economy and also outsource other activities including land development if it lets them to increase profits. The same way real estate owners hire 3rd party management companies to manage their properties. Remember, their profit comes from renting out real estate. They would be very interested in avoiding any sort of isolation of their city or “poverty trap” of its residents.

I´m pretty sure the end of nation state isn´t in the agenda of the ruling elites, quite the opposite, they want to make the nation state stronger, not weaker.

Some do and some don’t. There are many successful people who made their way from the bottom and they see that they would be more successful ousting the fat cats who control the state if the state is dissolved. Heck, even I personally strongly believe I would be much better off in a private city. Although the idea may sound quite odd for those who grew up under the state.

In such circumstances, the eventual collapse of the nation state would be completely involuntary, and so chaotic and unplanned.

Actually we don’t know. If the dissolution of states is really imminent elites would make sure the process goes on gradually. But anything may happen. The pressure from ever wealthier consumers to buy services from private agencies rather than from the state and the pressure from the private agencies to sell the services would be ever increasing and eventually the state would not be able to resist. And you remember, the state can’t improve the quality of the services because it has already reached limits of its “design” while for-profit organizations have no limits...
By Gothmog
#824346
That’s a pretty good idea unless 95% of that amount is simply stolen...


-No functional state has such levels of corruption

What sane investor/businessman/land developer would want to make markets smaller?


-You?? :D

The only difference with modern state that they would be much more accountable to their residents


-How??

Actually if the abolishment of those services is accompanied by also the abolishment of taxes nearly everyone would become better off.


-Wrong, for those in the bottom, what they receive from the welfare state is more than they pay, while the opposite happens in upper and middle class

And you believe the “legitimacy” can only derive from a feeling similar to what slaves have to their master? I.e. the master is “legitimate” by definition, especially if he doesn’t beat them too often and feeds them sometimes with shitty food...


-No I´m talking about the legitimacy of the modern state, which, despite its flaws, is better than the state of lawlesness you suggest. You libertarians are dead wrong when they see the state as a coercitive entity that prevents people from doing business. It´s a coercitive entity that is essential to ALLOW people to do business, no state, no capitalism, no business, just a war between mafias. And you´re also wrong when you claims that the state power is based only in the force (althought force is essential). Consent of the ruled is essential too, regardless of the country being or not a democracy. So you want a system where the state has no coercitive power and is based only in the consent of the ruled. Good, but it may be that what the masses want is not exactly the free market utopia you want so you´re left with two options (1) to use the state power to enforce the economic system you want or (2) to allow the masses choose what they want. Wonder what the ruling elites usually choose?? The failure to understand the nature of the beast (the state) is the main weakness of the libertarian ideology and explains why it won´t never be taken seriously.

In my case companies would want to register with reputable regulating jurisdictions because it would automatically boost their reputation and make them accountable to their partners. And this accountability doesn’t have to be based on force. All is needed is that contract adherence history, similar to modern credit history, is maintained for every individual. And this history should be bound to biometrical data of the person and not to paper documents that can be counterfeited. So if someone is discovered cheating that person would never be able to find job/partners and would die on street. IMO, that kind of enforcement is good enough.


-So the only punishment for fraud will be "the market"? It will be a paradise for fraud! In this unregulated environment I can cheat and steal people until I´m caught, and the only thing that will happen to me is that no one will want to make business with me....but then I will have US$100million dollars in my bank account, in that case the consequences you mentions are irrelevant. You largely underestimates how companies and individuals may gain advantage in the market by hiding information from the general public (and private investors). The market is actually too slow and inefficient to punish those frauds. State coercion is thus essential.
By futuristic
#826168
Gothmog, you really can’t grasp my main point. Forget about what you know about “the state” and “politics”. Try thinking from consumerist point of view. Imagine, you have a need in a good living environment. I may guess you want: good home or apartment, clean streets, beautiful buildings in the city, interesting job, safety, friendly people around you. Why do you believe a private city would not be able to provide these to you for a mutually acceptable price? It’s only the matter of innovation and capital accumulation for that to become possible, which applies to everything else the market gives us.

How??

The same way any business is accountable to their customers.

-Wrong, for those in the bottom, what they receive from the welfare state is more than they pay, while the opposite happens in upper and middle class

Notice that I said “nearly everyone” so my argument still stands. :D
And I would actually question the fact that they receive more from the welfare state than they would from the market. Middle class receives “free” education at the expense of the poor who receive no education. The rich wage wars worldwide at the expense of everyone else or have the state to eliminate competitors or protect their special interests, which in turn eliminates jobs and harms the poor first of all. The state deliberately keeps the poor in the poverty trap for generations; the market would have no interest in doing so. I bet you saw these topics that discuss how the market would help the poor:
The Fate Of The Disabled Under Libertarianism
Innovative churches or a great argument for the free market

-No I´m talking about the legitimacy of the modern state, which, despite its flaws, is better than the state of lawlesness you suggest.

Wait. You failed to show what exactly makes the state “legitimate”. Maybe only the fact that it claims it’s “legitimate” and slaves just believe it’s true without asking questions.

You libertarians

Any libertarian would say that I am not one of them.

are dead wrong when they see the state as a coercitive entity that prevents people from doing business. It´s a coercitive entity that is essential to ALLOW people to do business, no state, no capitalism, no business, just a war between mafias.

It’s essential only on early stages of capitalism when regulation of market participants is not yet profitable. The state can also satisfy other needs not yet backed by money.

And the “war between mafias” ends very quickly and then the mafias become nice because it’s more profitable and less risky for personal lives of the mobsters. War is not profitable, they can’t afford fighting for a long time.

And you´re also wrong when you claims that the state power is based only in the force (althought force is essential). Consent of the ruled is essential too, regardless of the country being or not a democracy.

That applies to customers even more. A supplier of a good is absolutely dependent on their customers.

So you want a system where the state has no coercitive power and is based only in the consent of the ruled.

Wrong. You forgot that the private cities will be absolute dictatorships on their private land with the right to coerce, kill, expel, or imprison anyone they want as long as residents view these actions as “legitimate”.

Good, but it may be that what the masses want is not exactly the free market utopia you want so you´re left with two options (1) to use the state power to enforce the economic system you want

Of course, some cities would target those who want something else but the free market. There are probably hundreds millions of such people in the world so such a huge niche will not be ignored. You may have a chance to live in a socialist utopia within your lifetime.

or (2) to allow the masses choose what they want.

That is what the market is very good at – providing choices.

Wonder what the ruling elites usually choose??

They choose to idolize the state via brainwashing. As long as people have slave’s feeling to the state elites can do anything they want. However with multiple competing states brainwashing will be problematic.

The failure to understand the nature of the beast (the state) is the main weakness of the libertarian ideology and explains why it won´t never be taken seriously.

I do in fact understand the nature of the state and I understand that its flawed design is a product of agrarian ages when capital was scarce, labor was unproductive, and war and coercion were the best way to get wealth. Things have changed since. Now war is not profitable unless funded at the expense of the poor while profits received privately by the rich. Employing slaves is a bad option too. Besides, numerous peaceful investment opportunities have been created by the market.

And I am not a libertarian. I don’t want a state at all, even a “limited” one. It’s not needed any more. The market has shown that it can satisfy needs way better than the state does so I want it to satisfy the need in living environment along with all others.

So the only punishment for fraud will be "the market"? It will be a paradise for fraud! In this unregulated environment I can cheat and steal people until I´m caught, and the only thing that will happen to me is that no one will want to make business with me....

Not that easy. Now whoever cheats only risks a “legitimate” punishment but with no “legitimate” force above he would be risking to get a bullet in his head.

Any why do you think cities and incorp jurisdictions would not be able to run an effective “Interpol” that would hunt down criminals?

but then I will have US$100million dollars in my bank account

The “US$100million dollars in my bank account” will actually mean 100 million of private currency units in a private bank. Why do you believe the practice of freezing fraudulent bank accounts would not exist any more?

Besides, an issuer of private currency can also void money even with no consent of the bank that keeps the money. It’s easy to implement technically.

It would cost a bank bad reputation to serve criminals. And you may say there will be banks that would not care and would actually target criminals. Of course, but “good” private cities and international incorporation jurisdictions would prohibit their residents/companies to deal with those banks.

in that case the consequences you mentions are irrelevant.

Irrelevant? Would you be happy having $100M and live in an underground bunker on Mars surrounded by bodyguards and anyway risking to die prematurely? Would you like to live like Osama Bin Laden?

You largely underestimates how companies and individuals may gain advantage in the market by hiding information from the general public (and private investors).

Actually I know that US SEC is doing a fairly good job regulating public companies. But those regulations can also be imposed by incorporation jurisdictions, cities, or exchanges. And be confident, cheating will be punished severely.

The market is actually too slow and inefficient to punish those frauds. State coercion is thus essential.

I see no reasons to believe that cities and incorporation jurisdictions are going to be “too slow” if their customers demand fast action.

Generally, this discussion is a bit pointless because we simply don’t know how the market would satisfy the need in good living environment. You don’t know, for example, what it takes to make the computer you now use. The market has delivered it to you somehow but it make take a few million pages to describe both technology and business process to do that. And you still have no problem using your computer. You are just a happy consumer. Modern “politics” are much simpler as they are intended to be understood by the masses. Understanding is in fact not required to consume. It’s job of market participants to deliver or if they can’t they would not be around for a long time. Opinions I expressed in this discussion may be no more correct than how scientists in 1954 imagined a computer would look like in 2004. Sounds like a disclaimer. :) But what I am sure about is that the state will soon be forced to surrender its functions to market participants. It will not be able to stand in the way of both buyers and sellers while providing shitty quality to the former and not letting the later to do business. I hope we will need to wait no longer than 20 years to find out where I was right and where I was wrong.

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