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Sandpit

October 7th, 2011

Another sandpit. You know the drill.

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  1. Chris Warren
    October 8th, 2011 at 09:54 | #1

    Is this a Zombie concept?

    Keynesians argued that, without adequate regulation, financial instability was inevitable. ["Zombie Economics"]

    There is a bit of Keynesian dogma here. Naturally using “adequate” introduces a truism. Given adequate cause anything MAY happen. Given adequate force the earth may flip over.

    Socialists could argue that with no regulation, socialist financial instability will not necessarily occur. Also feudal economic relations are not economically unstable. Most feudal regulation was to protect private ownership and rights. Feudalism was socially unstable and was overthrown by more productive forms. It did not collapse due to inherent structural tendencies.

    It would seem there are no adequate regulations that can abolish economic instability within capitalism. This can only be delayed at the cost of worse outcomes for later generations.

  2. Rob
    October 8th, 2011 at 11:10 | #2
  3. Ikonoclast
    October 8th, 2011 at 11:32 | #3

    It seems to me that capitalism is at the peak of its development. In the West, most economies are essentially run by and for the oligarchs and corporate capital with worker and welfare gains being wound back. Russia and China never achieved anything more than State Capitalism which has now devolved into crony capitalism with central planning overtones. The US also is essentially a crony capitalist state. History suggest to me that Russia, China and the US are converging in their political economy models (oligarchic and crony capitalism) despite the fact the their window dressing is different.

    Public debate in the West is controlled by the mass media in the hands of the oligarchs. All major political parties (at least in the Anglophone world) are very right wing and espouse neoliberal ideology and neoclassical economics. In effective and operational terms, the countries of the Anglophone world are one-party, one-ideology states. As little as 10% of the constituency understands even the fundamentals of the broad subjects of political economy or social history and thus have no idea that they live in effectively one-party, one-ideology states.

    I say that capitalism is at the peak of its development because;
    1. It has conquered the whole world as a system (including its recognisable variants);
    2. It has globalised capital;
    3. It has been significantly reversing democratic gains for forty years.
    4. It has been significantly reversing public ownership and the welfarist position for forty years.
    5. Its imperial apparatus is more powerful and more active than at any time in history.
    6. Its propaganda apparatus is more powerful and effective than at any time in history.
    7. The apparatus is in place to completely repress each nation’s home population.

    In relation to point three, it has to be noted that capitalism is inherently undemocratic. This is obscured by the (entirely false) propaganda which insists that free markets create democracy.

    Capitalism (as a growth system) is also at peak development due to the limits of growth which have now been reached. The material will determine the political. Current and future political developments will be conditioned by resource scarcity and the consequent national conflict and class conflict. The ruling oligarchies of all the major powers will wage total war against weak external enemies and any internal class enemies foolish enough to raise their heads. This will not save them as eventually the whole system will break down. Not only will global capitalism collapse (due to resource depletion) but global civilization itself will collapse, probably into regional and local remnants.

  4. Chris Warren
    October 8th, 2011 at 16:28 | #4

    One would hope that free markets do not contradict democracy, but even under socialism, some individuals will ‘game-the system’ if there is scarcity. The resulting outcomes will then introduce a feeling of injustice. Those who are badly-done-by will seek to use democracy to obtain remedies, and those who have benefited will try to reform or suborn the institutions of democracy to protect their wealth.

    Some of the games played under free markets can be seen in R A Radford’s famous paper

    “The Economic Organisation of a P.O.W. Camp”, Economica, 12, 1945.

    The end result of such free markets is:

    By April, 1945, chaos had replaced order in the economic sphere: sales were difficult, prices lacked stability. Economics has been defined as the science of distributing limited means among unlimited and competing ends.

    A short-term apparent functioning but then complete failure of standard, free-market economics.

  5. Tristan
    October 10th, 2011 at 06:54 | #5

    Capitalism as inherently undemocratic? Far from a neo-liberal, but to me a capitalism, which allows individual freedom to make decisions involving the FOP, is inherently democratic. Yes, it requires a strong framework to operate at its optimal level (or closer to it), to guard against the instability that is a major component, but I don’t see the argument that it is ‘inherently’ undemocratic (obvious aside being the development of crony capitalism as in Russia – but that is more an outlier than a true representation).

    Anyone catch this article? Makes for a good read.

    http://inside.org.au/how-fair-is-australia%E2%80%99s-welfare-state/

  6. Chris Warren
    October 10th, 2011 at 09:41 | #6

    Of course capitalism is inherently undemocratic. Welfare state capitalism will camouflage this for as long as it lasts. “Australia Reconstructed” was an exercise in parading supposed “good capitalism” in front of the ACTU noses – and most fell for it.

    I expect that Australia will be exceptional in that it will tend to feed more of capitalist wealth back to those in need – but this is due to our voting system. Right-wing capitalist representatives – eg Minchin – are opposed to our voting system.

    The inherent instability in the POW Camp example [above] is not clear, as most of the market disruption can be put down to exogenous factors.

    The inherent undemocratic nature of capitalism can only be seen once you assume each factor of production receives remuneration equivalent to what it produces in the long-run.

    Capitalists demand more than is socially necessary and, in the final analysis, they have to extract it from the rest of society. They then create whatever level of democracy or undemocracy suits this purpose – as evidenced by Minchin.

    As the world is closed – the real tendencies of capitalism are best viewed with a closed model – ie no exogenous excuses.

  7. John Nightingale
    October 10th, 2011 at 11:33 | #7

    The POW camp example is one in which the procession of increasing concentration was not as possible as in an open capitalist world. The world in which we live has an inevitable procession to higher concentration of wealth and incomes due simply to the evolution of success – the successful outcompete the less successful. Even if the ensuing entities become sclerotic, the size to which they have grown allows them to gobble up any upstarts (News International is an example). At that stage, marginal productivity theory loses its explanatory power (see the remuneration of CEOs in Australia outrunning their worth to shareholders, nothing new about it and nothing to stop it continuing).

    So who can be surprised if mature capitalism demonstrates high concentration of economic power? And that cannot be good for political democracy. Radical change in capitalist economies has only happened with radical exogenous events, notably wars that drain even the coffers of the most powerful, or internal revolution.

    Who knows what will bring the end of the present regime? Climate chaos? Bloody revolutions? Wars over access to oil and water? Pestilence? It will, of course, come to an end, they all do, but probably not in my lifetime.

  8. Ikonoclast
    October 10th, 2011 at 20:21 | #8

    @Tristan

    A lifetime of work in Australia, under both private enterprise and government bosses, plus my general observation of our society, plus my wide and life-long reading in literature, history and political economy have fully convinced me that capitalism is inherently undemocratic. The essence of democracy, in my opinion is that each citizen has an equal say in the running of her/his society. This equal say must be based on an equality of power which requires equality of citizenship, equality before the law, equality of opportunity and equality of material means. Equality of material means is important as the material sphere conditions the social and political spheres.

    Of the list (equality of citizenship, equality before the law, equality of opportunity and equality of material means), the first three must be guaranteed substantially and extensively by constitution, law and custom. “Equality of material means” does not mean anything so absurd as exactly similar wealth or income down to the last cent, particularly as needs can differ in any case. What it does mean is that each person should have sufficient to guarantee equality of opportunity and equality before the law (justice is expensive under our system). More than this it means that wide disparities in wealth and ownership (particularly of the productive apparatus) should not be permitted as these disparities amount to a power disparity. It is clear that the rich and the owners of productive apparatus have far more power than the poor.* This extends (in the absence of effective countervailing forces) to distorting the overall political-economy further and further in their favour. As laissez faire capitalism tends to monopoly it tends to ever greater concentrations of wealth and thus ever greater distortions and differences in power. Democracy by nature puts limits on laissez faire capitalism as the two are in fact diametrically opposed.

    * Think of the power disparity between Rupert Murdoch and a cleaner in his building. Each of them votes once in 4 years, on average, for the Federal Government of his choice but for the rest of the time Kerry’s power over the cleaner and his decent survival prospects is very substantial and their power disaparity and freedom of action personally, politically, socially and financially is just immense.

  9. Chris Warren
    October 10th, 2011 at 23:03 | #9

    @Ikonoclast

    Many on the Left seem to think you can live in a rich Western capitalism without understanding the structure of that wealth – the source of power disparity. They therefore expect that any glich in social justice, the climate, or economy can be fixed by regulation or compensation and society to be guided towards a state of permanent democracy.

  10. Ikonoclast
    October 11th, 2011 at 07:09 | #10

    @Chris Warren

    Maybe, but what do you think Chris?

    In my thinking it is crystal clear to me that (pure) capitalism is undemocratic (in fact it is totally autocratic) and that capitalism and democracy are inherently antagonistic. Marx diagnosed capitalism comprehensively. As a diagnostician he is hard to fault. As a prognostician, Marx may have made some significant errors. I’ve tended to follow Popper in that regard but I now think Popper may have been making a straw man argument about Marx’s historicism.*

    Although I am a strident critic of laissez faire capitalism and viscerally hate capitalist bosses, I also have a deep suspicion of revolutionary change and revolutionaries per se. Communist revolutionaries (like Stalin and Mao) seem no better than fascists to me and also no better than the capitalist oligarchs. So whilst I see that laissez faire capitalism must be defeated and fully reformed for humanity to have any hope, I do not see left ideological party dictatorship (for example) as any kind of answer. I see democracy as the answer but this must be a thorough-going democracy which democratises not only the overtly political but also the entire economic system.

    I would prefer to see a system I call “distributed capitalism” which would entail (among other things) all large enterprises being worker cooperatives. Workers in such cooperatives would work, own, manage and gain all income from such an enterprise. Management would work on an “Athenian Democracy” principle (without the slave element of course). Workers seconded to actual management positions would rotate after a year or two (back to the shop floor). Nobody could remain permanently in management. Management would also bring no extra privileges and no extra pay. Indeed, the healthiest arrangement would mean that those in management (while seconded there) would be subjected to regular good-natured rubbishing from the real workers for being “management bludgers”. For certain personalities, management would seem more interesting and easier so there would be no shortage of volunteers for administrative management duty. Large decisons would be taken by enterprise vote of the whole workforce of the cooperative.

    Beyond the cooperatives, the entire economy would look like a current capitalist mixed economy. The key difference would be that privately owned corporations and share owning in enterprises you did not work in would not be legally possible. There would still be a welfare system for the aged, ill, infirm etc. A progessive tax system plus the welfare system would provide some equalisation for the phenomenon that some collectives (and thus some workers) would be still be more successful and wealthier than others. I call it distributed capitalism because all capital ownership is distributed amongst the actual workers via the collective system.

    * Note:

    “The Austrian-English philosopher Karl Popper attacked a peculiar version of historicism along with the (hard) determinism and holism which he argued were at its root. However, Popper’s determinist definition of historicism tends to conflict with the contingency that others view as central to the concept, as expressed earlier in the article regarding the definition of Historicism. In his Poverty of Historicism, he warns against the “inexorable laws of historical destiny”, which implies that historicism is indeed a theory that can be reduced to universal, immutable truths. But, this is in sharp contrast with the contextually relative interpretation of historicism that its proponents argue for. – Wikipedia.

  11. Chris Warren
    October 11th, 2011 at 09:42 | #11

    @Ikonoclast

    It is very difficult because I am more interested in what society should think, or understand and do and control. Regulating capitalism is the best theoretical option provided it does not create worse problems for future generations or offshore societies.

    Having a Western capitalism, where all the exploitation is shifted into the Third World, is prima facie the best of all possible worlds, for Australians and our journalists, churches, politicians, economists, political parties, right-wing trade unions, and community activists become fixated with this. They seek to prettify capitalism with social movements and welfare state redistribution. If something goes seriously wrong: unemployment rises, people cannot afford houses, banks crash, or water runs out, most people expect the government will “fix it”.

    So as long as international wage rates are not equalised (relative to productivity – ie real unit labour costs), then OECD economies can theoretically get household goods, cars, and various gizmos, but from cheap labour. The main claim that low wages represent low productivity (based on work by Stephen Golub) was false. Offshore wages are determined more by politics than productivity. Golub simply chose a few countries that fitted his ideology. None-the-less our policy makers are fixated on pumping the Australian economy by sucking whatever it can from the Third World – including skilled labour.

    Why would anyone challenge capitalism if they grew up in the 1960′s before Australia had many modern conveniences and have experienced a vast improvement in quality of life, public services, medicine, post-secondary education, entertainment and consumer goods.

    Marx is extraordinarily difficult to understand, and people often say he made mistakes, or invent some other problem in his theory. These people have not come to grips with Marx’s true message. However Marx himself, noted that his analysis excluded the effects of Credit and Foreign Trade. These are now the two most important drivers of the GFC.

    Various options such as “workers cooperatives” have been mooted, but where is there a proposal accompanied with any requirement to control prices from a cooperative into society, or limit borrowings. Race Matthews is pushing this.

    Once people see the real problem is capitalism, irrespective of reforms, then we may or may not need cooperatives. Under socialism, individual and private enterprise will not cause any problem. However I do not oppose cooperatives as they empower workers.

    People often call for a mixed economy, but they don’t admit that in effect they are calling for a mix of regulated capitalism and socialism. This bodgey system will not work.

    I suppose theoretically, you can tax capitalism so it is stable – but how do you get society to agree to this? If people do not understand the problems in Marxist terms then there is no possible solution. All we can do is look for some new source of subsidising our wealth even if this means destroying future generations, or increasing poverty somewhere else.

    There is no reason to expect that society will find the means to solve its ecological, population and capitalist problems. It doesn’t have to – if a million people can starve in Africa, and kill each other, it can happen elsewhere.

    If someone can come up with a form of regulated capitalism, that does not carry contradictions that ratchet-up over time, then by all means lets see it. So far I have only seen poetic concepts of vague mixed economy, cooperatives, and “Greenery”.

    Frank Fenner probably had it right – before he died, he said it was now too late. And listening to the commercial psychopaths who think we need more growth and population to fix the problems of past growth and population, I tend to agree.

  12. Tom
    October 11th, 2011 at 09:55 | #12

    @Ikonoclast

    I’ve been on the JQ blog for a while but this is my first post. I do agree with you that pure capitalism/free market does not work. My believe is that because equilibrium can never be reached without government regulations and controls.

    Think of it this way, in a society where government does not regulate the labour market. Whenever there is a recessionary expectation and aggregate demand decreases (hence sales and profits for firms decrease) the high management level would never hesitate to lay off low level workers because they wouldn’t want to lower their million dollar worth bonuses (which are measured in different ways but mostly will consist of increases in profits), this increase in profits or I should call it increase in profits because of reduction in labour cost would be the simplist way out for high level mangements, because there is only so limited ways to cut material and overhead costs.

    Now why would this happen? This happens because of the endless greed theory of humankind, and bosses exploits human ignorance and cuts the firms labour cost by using the method of not increase wage even thou inflation exist instead of cutting wages which most workers will show strong resistance even if both methods shows the same result. Now how can you expect bosses to take less in the bonus just to not lay off workers to stablise the reduction in income in the economy? It would not be possible without government regulations to protect workers; without such measures, the firms will keep reducing labour cost to meet their bonus criteria and the income level of the economy will just keep dropping, and so does aggregate demand. “Market will come to fix itself to the new point of equilibrium eventually without any government action?” think again.

    This is what is actually happening in the US and Eurozone, firms are reluctant to give pay increases to the workers for such as long period of time and are exploiting the government fiscal deficits to give income increases to low and middle class population which makes up the largest percentage of population. But this can only last so long that the government would have to stop running budget deficit to meet their debt requirement. Then what would happen? There will be a huge drop of aggregate demand because the majority of the population can not afford to buy “luxury goods”, what is luxury good now is the most important matter; they are everything other than food and shelter which is what most of the business in the world are producing. If the government does nothing to increase what I call the “mode income” which means the income level that is earned by the largest percentage of the population in the economy; the economy will just end up in a cycle of layoff worker, lower in aggregate demand, layoff worker – to be endless. Capitalism is hiding behind the “average income” to measure living standard where a large percentage of the population don’t actually get any improvement or actually getting worser than decades ago while a small percentage gets an extraodinary increases in their income in the recent decades.

    However I don’t agree with your theory of “distributed capitalism” because it will give huge disincentive for people to improve their quality of work (by that I don’t mean working harder, but simply the work quality) which is the main factor for economy improvement; it is also why communism didn’t work in the first place. I think that Australia have a good system because the minimum wage ensures that “mode income” actually increases, and most wage and salary of workers in Australia are above average wage. My suggestion is that to not become America, not only that minimum wage will have to increase over time but also there should be policy in place that ensures workers will get their pay increase when their productivity increases. This will not only give incentives for workers to improve their quality of work (you know that people can only work harder to a limited extent) but also prevents firms for exploiting on workers for keep pressuring them for productivity increases but in the same time not giving them a pay rise for their effort of improvement. If there is a policy like this exist in Australia, we will never be in a situation like the US where two fulltime workers in a family can’t even afford health care.

    There is one problem in my theory is that if firms can’t exploit on their workers they will put their price up which will put pressure on inflation. Is there anyone that can think of a solution to that other than government controlled pricing?

  13. Tom
    October 11th, 2011 at 10:01 | #13

    Corrections, “and most wage and salary of workers in Australia are above average wage” i mean above minimum. “There is one problem in my theory is that if firms can’t exploit on their workers they will put their price up which will put pressure on inflation” I shouldn’t say its my theory; I haven’t check if any economist have suggested it before, but I don’t want to get sued over plagrism. so it would be “my belief”. Sorry for the post for corrections.

  14. Jarrah
    October 11th, 2011 at 10:02 | #14

    “The main claim that low wages represent low productivity (based on work by Stephen Golub) was false. … Golub simply chose a few countries that fitted his ideology.”

    Wanting to see what the specific criticisms are, I’ve been trying to find an explanation of this claim, without much success. Do you have any links I can use?

    “I suppose theoretically, you can tax capitalism so it is stable”

    The core mechanisms of capitalism cannot be fully stabilised, because their inherent instability is part of their function. There are countervailing forces that act to suppress the instability, but what that means in effect is a constant process of overshoot and resultant overcorrection.

  15. Ikonoclast
    October 11th, 2011 at 10:37 | #15

    On second thoughts, the term “distributed capitalism” is not good as it has already been appropriated to have a very different meaning from mine.

    It might be better to call it “cooperative capitalism”, “democratic cooperativism” or even simply “cooperativism”. Someone may know a better term.

    I do not see the state withering away under this system. In fact, I still see a large role for the democratic state to guarantee rights, equity, progressive taxation, welfare, education, communication, public health and medicine etc. As I said, a mixed economy would remain with government workers, self-employed persons, private one-person and family cooperative businesses plus larger (“public”) worker cooperative businesses. “Share” ownership would be restricted to workers in a cooperative enterprise. A business’s income (after maintenance, investment and expansion of the business) would be fully distributed as income to the workers on the bases determined by full enterprise votes.

    Capital for business expansion (say from a one person business to a family or to a worker cooperative business) would not come from “share” investment as we understand it today. The share market, as we understand it today, would not exist nor would it need to exist in any way. Capital would come from cooperative commerical banks only. These would be strictly regulated by government and would loan in the usual money-multiplier manner from deposits. Federal economic policy would closely resemble MMT (Modern Monetary Theory) and would be designed to ensure full employment, ecocomic stablity and monetary stability.

    Thus people with spare capital would have just two avenues for investment, government bonds (which are often necessary to manage interest rates policy but are not needed to finance a fiat currency) and commercial cooperative bank deposits where they earn interest. Commercial cooperative banks would clearly compete against each other for deposits and loans.

    The key aspect of cooperative capitalism would be that share income is not possible and autocratic, oligarchic or plutocratic ownership and management of large enterprises are not possible. Income from work and income from savings would be the only possible commercial incomes. The private landlord/rentier class would be not so much abolished as restricted and heavily regulated. Negative gearing would not exist. Private individuals would be limited to ownership of 1 rental property of not more than twice the market value of the average property. Punitive taxes and in extreme cases confiscation of assets would apply if limits were exceeded. Family collectives would be limited to one property per collective member. Larger, “public” landlord collectives would be treated like any other collective business. Renting would continue to be seen as a valid cooperative activity just as selling is.

    The issue would be how to transition to such a society. A full “Alpha Plan” (in contra-distinction to the Omega Plan of the Adam Smith Institue London) would need to be developed with a series of steps and stages to slowly transition from corporate capitalism to fully democratic cooperative capitalism. Each step would need to be carefully graduated. Each (relatively small) step would need to be a policy put to the democratic polity by a party avowedly committed to the entire Alpha Plan with the caveat that the full transition may take twenty years or more and be fully subject at all stages to democratic oversight and decision.

    Such a party would make no concessions and no apologies to the “1%” of plutocrats, oligarchs and the very rich. Such a party would be avowedly working for the “99%” who would benefit and who will understand that they would benefit once freed from the false consciousness of corporate capitalism and once they see real benefits flowing. Existing plutocrats, oligarchs and the very rich would be progressively divested of their wealth and ownership by state action and such action would be designed to be rapid and irreversible. The guiding principle would be that no individual needs more than ten times the average wealth at the time of substantial transition. “Hangover” wealth up to this ten times limit could only be placed in coopertive commercial banks to earn interest or used to buy government bonds. The entire system would be set up over time to ensure that personal wealth accumlation for any individual hit an absolute limt at five times average wealth and was punitively taxed at 100% wherever the limit is exceeded. Proven breaches of this wealth limit (for example by using extra-national tax havens) would result in humane, well-appointed imprisonment (costs fully charged to the individual) until such time as the breaches were fully rectified. Such a party (enacting these policies) would also be green, environmentally conscious, limits-to-growth conscious and sustainability conscious.

    Where worker collectives work successfully today, even in an otherwise corporate capital systems (eg. in California), they deliver to workers wages that are approximately double to treble standard wages under capitalist onwer management. This gives an idea of how much proper wage income is stolen by capitalists. Workers also report being happier, much more fulfilled and with a greater sense of personal and collective power and autonomy within such cooperative collective set-ups.

    Ahead of full enactment of such policies, capital flight would be limited by transfer laws on capital. Discussion of this goes beyond this post but there are ways in which capital flight (as opposed to real material assets flight where possible) can be rendered meaningless and of zero impact to the “losing” nation.

  16. Tom
    October 11th, 2011 at 10:53 | #16

    @Jarrah

    Sorry can’t help you there with links of critisms of Golub’s theory; but I strongly disagree with that statement. Low wage represents that there is no/little government regulation on the labour markets so that the firms exploits on the workers.

    Try searching the graph for average productivity per capital per hour instead of per population; USA is in a similar working hour to Australia with about 15% more productivity yet the majority of their population have much lower spending power than the majority of Australians. That by itself proves the Goulb’s theory is false, however capitalism hides behinds that by saying GDP per capita in USA is higher than Australia when the middle class worker income virtually stagnated ever since 1970s, and more and more people in the USA can’t afford anything other than food and shelter and lives paycheck to paycheck. Yet America have high productivity per hour basis to Australia; huh? irony there?

  17. Jarrah
    October 11th, 2011 at 11:43 | #17

    “Low wage represents that there is no/little government regulation on the labour markets so that the firms exploits on the workers.”

    I’d have to strongly disagree with that statement. I think perhaps you are being led astray by Chris’s vague description – Golub’s work is more about how the comparative advantage of low wages is offset by low productivity. Unless Chris is referring to something else Golub has said, in which case – my apologies to both of you.

    Regarding the correlation between wages and productivity, it has been very strong at a national level (less so at industry level) for a very long time (of course it’s not a precise one-for-one linkage, and there are lagging and frictional factors). There does seem to be a deviation in recent years, so something else is going on. I suspect the combination of increasing globalisation, paradigm-changing technological advances, and preferential treatment for capital by complicit politicians.

    “yet the majority of their population have much lower spending power than the majority of Australians.”

    They do? Are you adjusting for PPP?

    “GDP per capita in USA is higher than Australia when the middle class worker income virtually stagnated ever since 1970s”

    Wages have stagnated but overall compensation hasn’t.

  18. Jarrah
    October 11th, 2011 at 11:46 | #18

    Sorry, wrong link. Try this one.

  19. Chris Warren
    October 11th, 2011 at 12:12 | #19

    @Jarrah

    You must not use PPP. When a export is purchased in another country, PPP dollars are not used. Anyone using PPP dollars are not understanding the impact of free trade.

    I can only provide the basis for this claim as at 2000 when Golub’s materials were being peddled through the Commonwealth Departments. No copies were then available in any Australian library.

    Golub’s papers were:

    Comparative and Absolute Advantage in the Asia-Pacific Region, Working Paper PB95-09, Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco, 1995

    International Labor Standards and International Trade, IMF Working Paper WP/97/37, International Monetary Fund Research Department, April 1997
    World Development Indicators 2001, The World Bank, 2001

    Golub provided data that showed low wages reflected low productivity in:

    Korea
    Mexico
    Brazil
    Thailand
    Malaysia
    Philippines
    India.

    But he did not show countries where the opposite trend applied, ie wages fell as productivity rose between:

    Ireland
    Belgium
    Australia
    Sweden
    Finland
    Austria
    Italy

    and again between

    Bolivia
    Venezuela
    Panama
    Portugal
    South Africa
    Slovenia.

    Nonetheless the claim that low wages are not a threat because they represent low productivity was picked up by pathetic labor politicians such as Lindsay Tanner [Open Australia, Pluto Press, Sydney, 1999 -pg 89]. It was also in the press eg: “Economist” (1995, pg 119), and in various think tanks.

    Golub’s work was also used in Irwin’s “Free Trade Under Fire”, Princeton UP, 2002.

    In general the claim that low wages represent low productivity is based on there being a linear relationship between these two.

    There is not. At any wage point – a company can access a wide range of productivites, at a ratio of one to 4.

    So at a low wage you may find productivites, or $10 to $40, in a choice of countries. At medium wages you will find productivities of between $1000 to $4000. At high wages you can find productivites between $10000 to $40000.

    So a capitalist can always reduce wages with no loss of productivity by switching country from high wage to low wage at the same level of productivity (within a range of 1 to 4).

    However the fact that this ratio stays relatively constant, means if you take logarithms, the graph becomes linear. But then the range of productivities becomes buried in the “thickness” of the linear trend.

    An exponential increase will always be graphed linearly if you take logs.

    This trick was used by:

    Gary Burgess et al, “Globalphobia: Confronting the fears about open trade”,Brookings, (1998) pg 67 (citing Rodrik), and by:

    Douglas Irwin, “Free Trade Under Fire”, Princeton UP, 2002, pg 211.

    Another trick is to claim that “wages follow productivity” in single countries by presenting data for South Korea and the Philippines, where indeed, this applies from the 1970′s to 1990′s. See Irwin page 213.

    But a fuller set of data, shows that there is a huge range of countries where wages increased faster than productivity;

    Italy, Singapore, Hong Kong, China, Hungary, Mexico, Norway, Syria, Israel, Greece,

    and a huge range of countries where wages fell compared to productivity (1980-99):

    Ireland
    Egypt
    Bolivia
    Thailand
    Belgium
    Zimbabwe
    India
    Australia

    In the middle, of course you will find countries where productivity and wages movements were parallel. But you cannot base your analysis on this cherry-picked data set.

    However you can base your politics on it.

    It is a bit difficult to attach the data.

  20. Tom
    October 11th, 2011 at 13:33 | #20

    @Jarrah

    “yet the majority of their population have much lower spending power than the majority of Australians.” with regarding to PPP Chris Warren explained it; but both of your arguments conflict to each other.

    “Wages have stagnated but overall compensation hasn’t.” compensation are not wages and are paid by the government, sooner of later the government would have to stop the compensation if it has been there for prolonged period of time because of public debt and this would just meant that the aggregate demand for goods are becoming more and more reliant on government transfers rather than wages paid by firms. What would happen when the government is forced to stop running budget deficits because of large public debt like the current situation in America? The government would either have to cut spending in transfer payments such as compensation or reduce their spending in investments in infrastructures which creates jobs and stimulates the economy. Both ways would be bad for the economy, if then the government decides to stop the transfer payment of compensation to the majority of American workers. They are left with wage level of 1970s to purchase price level of 2011, how then can they have higher spending power than Australian workers when Australian worker’s wage level had a significant level of increase since the 1970s and are much less reliant on government transfers? You should know that the Howard government ran a lot of budget surpluses compare to USA’s budget deficits and Kevin Rudd’s one off payments of the stimulus package are basically expired now and so is Obama’s. Why would the aggregate demand level of these two economies differ so much after their stimulus package expire?

  21. Chris Warren
    October 11th, 2011 at 13:49 | #21

    this may not be such a big issue.

    Obviously you cannot pay your electricity bill or buy food in a supermarket with “compensation”, but this concept may be in the minds of businesses when they are selecting a location.

    Compensation may be just “wages, salaries and supplements”. Labour costs include superannuation, workers compensation, long service leave etc.

    It depends and there is no consistency.

  22. Chris Warren
    October 11th, 2011 at 15:06 | #22

    Golub’s key paper is here:

    http://www.imf.org/external/pubs/ft/wp/wp9737.pdf

    Well worth reading as an example of how most university economic units are the ideological factories for capitalism.

    Dogma on tap.

  23. Tom
    October 11th, 2011 at 15:27 | #23

    @Chris Warren

    Your exactly right, I strongly dislike university economic context at the moment because textbooks being biased and teaches capitalism economic theories that is falling apart. However I don’t think this problem will be fixed anytime soon, unless not until the future generation comes into power and realise the failure of capitalism theories.

    Also I dislike the behaviour of blaming J.M. Keynes for this because when he developed his theory the world’s economic system is very much different to today’s system and that no universities would like to be the soldier charging first with teaching different economic theories as they will be killed off very fast by the media and capitalism.

  24. Jarrah
    October 12th, 2011 at 09:27 | #24

    @Tom
    “compensation are not wages and are paid by the government”

    Actually, no. It refers to job benefits, and in the US that means healthcare too (they have a screwed-up halfway-house health system that is broken and needs fixing, but that’s another issue). So all your subsequent comments are moot.

    @Chris Warren
    “You must not use PPP. When a export is purchased in another country, PPP dollars are not used. Anyone using PPP dollars are not understanding the impact of free trade.”

    Tom and I were not talking about trade, but about domestic spending power.

    “At any wage point – a company can access a wide range of productivites, at a ratio of one to 4.”

    What is your source for this? And I’m not sure exactly what you mean.

    I’d also appreciate knowing where you got your wage and productivity data for the countries Golub didn’t look at.

  25. Jarrah
    October 12th, 2011 at 16:55 | #25

    From the Tobin tax thread:

    “Capitalism IS theft. A proportion of the value of the workers’ work is stolen, by the capitalist.”

    The proportion of the value of the worker’s work comes from capital. Workers are far more productive with access to capital goods than they are without them. The division of the output is highly variable, and doesn’t normally equal the relative input from worker and capitalist, because the division is dependent on other factors – usually scarcity of either element. So you can certainly make a case for different ways of dividing the output, depending on what you feel is fair, but it is arrant nonsense to claim that both parties don’t contribute.

    Of course you anticipated that response, and pre-emptively wrote with the following:

    “The capitalist does nothing to earn this new capital other than invest previous capital which was also stolen.”

    That’s essentially a circular argument that implies the cycle of theft->investment->theft goes back infinitely, since previous capital is always “stolen”. To put it in plain terms: returns on capital are theft because the capital invested is the result of a previous theft because returns on capital are theft. Do you see why that is ridiculous?

    The illogic is plain, but let’s puncture it with concrete examples of how capital might not be the result of theft: a worker gets a loan to provide herself with capital goods; the capital is the savings of a former worker who went into business for herself, and hired others; superannuation in Australia is a multi-billion dollar investment pool, lots of which provides capital to businesses, and super belongs to workers – according to you, that would make workers thieves as well.

  26. Jarrah
    October 12th, 2011 at 16:59 | #26

    ‘The proportion…’ should be ‘A proportion…’

  27. Chris Warren
    October 12th, 2011 at 19:43 | #27

    @Jarrah

    Productivity is not relevant. Workers will produce more with tools under feudalism, or market socialism, and will still provide funds for new capital development and to cover depreciation of old capital.

    Capitalism is more than this. It extracts additional value which can only be maintained by increasing the take from workers, or by collecting the market share from other capitalists.

    In the long-run, assuming competitive free markets, all of the supposed extra productivity which capitalists claim, is competed away, until only the wage of the entrepreneur is left. As Marshall said – the greater part of the apparent profit is real wages disguised in the garb of profit [Principles of Economics, ch VIII]. Only politics creates and maintains the flow of extra value to capital (beyond the necessary wage of the entrepreneur). It only exists if wages are relatively fixed by some different process.

    There is profit during a period of adjustment when a new innovation or competitive advantage is introduced, and there is no equilibrium. This comes from the previous market share of old producers. Apparent capitalist profit can be just a transfer from these now-ruined others, if politics allows this to be kept away from workers wages.

    Scarcity is not relevant because this is matched by the necessary amount of labour to obtain it and is priced accordingly. In market terms, a scarce item needing 10 hours will cost 10 hours and will sell for 10 hr equivalent. A common item needing 1 hour will cost 1 hour and will sell for 1 hour equivalent. Unless politics intervenes.

    Scarcity also exists in all forms of political economy – including market socialism. So this does not produce specifically capitalist profit. It may produce a normal profit during adjustment if a new producer finds a cheaper way of producing a scarce item than current producers. But this is competed away at equilibrium. However politics can be used to maintain artificial profits – eg copyright, licencing, etc.

    When it comes to capitalism, circular arguments are not ridiculous, they are bedrock. All capitalists prattle-on about the circular flow, in which the scenario you lampoon is worshiped. Any textbook will bring you up to speed on this.

    You concrete example does not address capitalism specifically.

    Under socialism, workers can get loans to obtain capital goods which exist because another workers has saved or diverted from consumption. Provided the final goods are sold at economic prices, there is no theft and no capitalist profit. Any profits during adjustment belong to the enterprise as a whole and all participants in the enterprise can vote on what they do with the proceeds. This abolishes theft.

  28. Ikonoclast
    October 12th, 2011 at 19:52 | #28

    @Jarrah

    The general principle is that all accrued capital represents current or previous theft of the surplus value of workers’ efforts. This general principle is correct. There are grey and even white areas of exception at the edges as you note. Also, as you note (in your attempted refutation) the “theft theory” could mean theft going back over generations. This is precisely what it does mean. Sir Frank Packer stole the surplus value of workers’ production and passed on a fortune plus capital equipment to Kerry Packer who continued to steal further surplus value from workers’ production.

    You say yourself, “Workers are far more productive with access to capital goods than they are without them.” Why then should not the workers own the capital goods, the means of production? Why should a small parasitic group of non-workers own a vast amount of capital goods and the rest of society be wage slaves? Morally there is no justification for it. Economically, there is an explanation and it is found in the works of Karl Marx. I won’t repeat Marx’s arguments here. I suggest you read Das Kapital Vol 1 at least.

  29. Jarrah
    October 13th, 2011 at 14:28 | #29

    “This general principle is correct.”

    No, it is not. It’s petitio principii, plain as day.

    “There are grey and even white areas of exception at the edges as you note.”

    Nothing grey about specific, incontrovertible refutations of your thesis. Dialectically, it has met its antithesis, and there needs to be a new synthesis. Feel free to formulate one.

    “the “theft theory” could mean theft going back over generations”

    Not ‘could’. By your logic, ‘must’. And not ‘generations’. By your logic, ‘forever’.

    “Why then should not the workers own the capital goods, the means of production?”

    Nothing stopping them. Of course, at that point your artificial binary classification of worker=/=capitalist breaks down, as it does in real life.

    “Why should a small parasitic group”

    Contributors cannot, by definition, be parasitic.

    “wage slaves”

    Wage slavery is an oxymoron, and one that does violence to the English language, and one that denigrates true slavery.

    “I won’t repeat Marx’s arguments here.”

    You’ve been doing nothing but. I’ve read Marx, and his failure to comprehend the collaborative nature of work is perhaps his most fundamental error. He needed an explanatory framework because of his concept of surplus value. He needed surplus value because of the labour theory of value. His theoretical edifice is an upside-down pyramid balancing precariously on the philosophically and economically bankrupt LTV. That’s why his extrapolations are wrong.

  30. Jarrah
    October 13th, 2011 at 14:35 | #30

    “Productivity is not relevant.”

    Chris, it is central. Ikonoclast points out, correctly, that a proportion of value is taken by the capitalist. But the capitalist’s involvement produces more value than would otherwise exist, so it’s only right that they take a cut of the final output.

    “In the long-run, assuming competitive free markets, all of the supposed extra productivity which capitalists claim, is competed away, until only the wage of the entrepreneur is left.”

    Given certain assumptions and constraints, very true. This is part of the reason why I support competitive markets – economic rents are driven down. Of course, in real life there are all sorts of frictional factors that prevent perfect competition, starting with government involvement, as you rightly point out.

    “Scarcity is not relevant because this is matched by the necessary amount of labour to obtain it and is priced accordingly. ”

    Perhaps I wasn’t clear – I was talking about the scarcity of labour or capital, not commodities.

    “You concrete example does not address capitalism specifically.”

    They address the hollowness of Ikonoclast’s characterisation of capitalism as theft.

  31. Chris Warren
    October 13th, 2011 at 15:43 | #31

    @Jarrah

    A manager, organiser, or collective can ensure that more product exists than otherwise. This is normal economic theory. Capitalism is more than producing more growth. Obviously an individual manager, organiser, or whatever, gets a cut out of the final product but this is not a capitalist profit. Capitalist profit only exists after all socially necessary costs have been paid.

    The argument against capitalism is not based on growth, but that capitalist growth is based on either declining incomes for others or countervailing tendencies (increased debt, population increase, exports). These countervailing tendencies are unsustainable.

    A capitalist produces two sets of so-called “more value”, some by the skill and labour of the capitalist, but a second – a political demand that Capital be remunerated more than wear and tear.

    But more than this, remunerating a skilled organiser a premium income, causes no economic imbalance. However, allowing them to use politics to get more, disrupts the circular flow and we end up with a long-run tendency to ratcheting macroeconomic instability all the way to a global financial crisis. To then add on further payment for Capital destroys the whole economy.

    Ignoring the complication of credit – before Capital can be invested, it must be diverted from consumption ie saved from wages. Any additional wealth this process produces must be assigned to the savers (ie wages) or else they have no incentive to save. Also to realise the additional wealth, you need expanded final consumption funds. This must be in the hands of those who have saved from personal consumption.

    Capitalist profit certainly arises through exploiting frictional factors and capitalists have incentives to erect then around their activities. This also happens in all class-based economies and even merchantilism, in fact wherever surplus exists.

    A capitalist profit is always a fixed rate which, in theory, is not allowed to fall. Over time this rate can vary, but it exists as a rate which capital requires before it invests – irrespective of the social need for products and services. The fixed rate is demanded on the first capital circulated, but then again on the accumulated capital that arises. This, after repetition, leads to chaos and financial bailouts.

    Capitalist profit is not the windfall, entrepreneurs wages, fees for skill, or the surplus transfers generated as markets adjust. Capitalist profit is an impost on top of this, essentially funded by degrees of monopoly and other restrictions (particularly on workers wages).

    As people’s appetites are unlimited, a scarcity of labour or investment funds is the same under any economic system and does not change matters. A particular scarcity my give someone an advantage. This causes no problem if they just get a higher income. A problem only arises if they seek to capitalise on their scarce attribute. Scarcity is natural and diverting resources to produce scarce products is what wealth creation is all about. This occurs perfectly well and sustainably under market socialism, which is where the world is heading.

    A capitalist only gets the income as the personification of the political force of Capital. This divides society into those who have Capital and those who do not. As capital accumulates this division must be intensified due to the augmented amount of capital. This increases the division in society – there is no escape.

  32. Tom
    October 13th, 2011 at 15:58 | #32

    @Jarrah

    “Actually, no. It refers to job benefits, and in the US that means healthcare too (they have a screwed-up halfway-house health system that is broken and needs fixing, but that’s another issue). So all your subsequent comments are moot.”

    Please accept my apologies there for doing lack of research. The reason why I believe American workers have less spending power than Australian workers is because the continuous fall on house prices and the lack of inflation in contrast to GDP growth from seeing the statistics.

    Food and shelter are basic human needs, but theres three ways of housing, rent and mortgage and government housing (which exists in Australia, not sure about America thou). More and more rational human are now thinking “own home” is a need rather than want because of education and the media that leads to fear speculations about future, especially renting cost inflates over time. Also because of this housing is considered as one of the safest investment as theorically demand for house purchase don’t drop as long as population grows (one of the major reasons why housing securities have market demands in the first place).

    After GFC, house prices in America have failed to recover and is still on a dropping trend that is caused by people taking loans that they can hardly afford to repay (whether thats a borrower’s fault or a lender’s fault being put aside) and are forced to sell their homes after losing their income. Now after such a catastrophic fall in house prices, house (mortgage) demands still fails to recover; the reason that I speculate from this fact is because house prices are much much higher than the suppose equilibrium level driven by investment demands and speculations. Also there is a continuous upward trend on people unable to afford rent, forced to share with other people, and are living in cars. How then, can the majority American workers have higher spending power than the majority of Australian workers when they can’t afford basic “need” of rent and mortgage?. An example of this can be easily demonstrated by the demand of housing in Australia have recovered and house prices are actually rising compare to falling house prices in America; also that two fulltime woolworths or coles worker (similar to Walmart) can easily afford a mortgage, cars and other luxury goods.

    When there is GDP growth (capitalism statistic) it should most likely have inflation, take the case of Australia because when there is GDP growth demand increases and so does general price level. The statistics in America is showing contradicts to it’s current economic state, companys’ are making better profit comparing to previous year, share prices recovering when there is nearly no noticable inflation that represents increase demand and the interest rate is near 0% that is suppose to put improve demand AND cause inflation? All this shows that people’s spending power is falling in America and by looking at house prices and inflation their spending power is very low compare to Australia as general economic theory suggests that when there is an output gap (economy is growing), GDP growth and inflation both exist. If this theory is false then inflation doesn’t exist.

  33. Jarrah
    October 13th, 2011 at 18:27 | #33

    @Chris Warren
    You know, I think we are actually making progress in understanding each other on this matter. Rare for a blog thread!

    “Capitalist profit only exists after all socially necessary costs have been paid.”

    I think I get it. You are referring to what I know as economic or supernormal profit, as distinct from normal profit. Because you make that distinction – as opposed to Ikonoclast condemning all profit as theft – I can sort-of agree with many of your points.

    “it exists as a rate which capital requires before it invests – irrespective of the social need for products and services”

    The return rate needs only be perceived as higher than alternatives. So it’s not fixed in that sense. Also, the social need for products and services is reflected in the return rate. That’s the ‘invisible hand’ at work. If there is need, then there is demand. Markets respond to demand with supply.

    “A problem only arises if they seek to capitalise on their scarce attribute.”

    This relates to my previous point. If people are getting supernormal profits, that’s not ideal if we view it as a frozen snapshot. But those supernormal profits have a very important role – they tell others that there is great demand (social need) for something, and that if they move quickly, they can get a supernormal profit as well. But in the very act of doing so, they increase supply and serve the social need and – in a competitive market – reduce the supernormal profits to normal levels. I should note that determining social need is extremely difficult, and prices aren’t perfect*, but they do work pretty well, better than any other system tried so far.

    I heartily agree that policies that encourage supernormal profits (policies that prevent competitive markets working to their potential) should be avoided if at all possible. Some of these include: mandated monopolies, price floors and price ceilings, uneven taxation, subsidies and quotas. Arguments can be made that some of these will be necessary for such-and-such a purpose, or desirable for some reason, but it should be kept in mind that they all have the effect of privileging a few over the many when weighing up the costs and benefits of implementing them.

    * – Especially when so many important things are not priced, and when need is not expressed as market demand because the needy are not able to afford to participate in markets.

  34. Chris Warren
    October 13th, 2011 at 21:15 | #34

    @Jarrah

    When high prices exist attracting resources, some other sector of the economy contracts. So an increase in supply for one is a decrease for another. Any increase in wages, or profits, in the preferred sector only comes at the cost of unemployment and overcapacity in the redundant sector.

    Need does not produce demand as demand is determined by your income (ie budget constraint). In fact need is always greater than consumption – more is always better than less.

    If there is no demand because of poverty – the need can still be extreme.

    Capitalism tends to suffer from insufficient demand because, at capitalised prices, real wages cannot purchase all that is produced. This is a well known contradiction of capitalism.

    There is no problem with prices, it is how they are set that is the issue. Capitalist prices create crisis as all returns (includinf supposed return on capital) must be matched by final consumption expenditures. But final consumption is only made up from wages. The costs of any intermediate consumptions are passed into the final retail price.

    As I recall, it was Ricardo, who first noted that wages were not equivalent to the prices of products. This is the final contradiction of capitalism (although the structure of its mode of production is the real problem).

    Marx explained the specific nature of capitalism quite well in Ch. XXXIII of his work Capital.

    I tend to encourage people to start reading Marx’s Capital at Chapter 33 and skip all of chapters 1 to 3 until later.

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