Have labour will travel

We cannot say we were not warned. Many commentators about globalisation said that it would create an imbalance between labour and capital, for the simple reason that capital is free to move wherever it wants, and labour, except at the very top end, is not. And so it is turning out, with the middle classes of much of the developed world under extreme pressure, and shrinking.

There has been some rise of a middle class in the emerging economies, but it is nowhere near enough to compensate for the loss of demand in developed markets. In many respects, the US housing and debt crisis was the last gasp for a significant slice of the middle class in America after decades of declining real wages. They borrowed to keep themselves at that level, and of course it could not last. Europe’s middle class is under extreme pressure and so is Japan’s.

That much is well known. What I think is less examined is the way that economic measurements influences the formulating of government policies to deal with the economic and social implications. One of the effects of globalisation is that labour is the government’s responsibility. Capital has no responsibility except to itself, and can for the most part push governments around. Put another way, labour remains a problem of the nation state whilst capital has transcended the nation state. Maintaining employment, looking after labour, is not just a key to political survival of any democratic government, it is key to attracting the blessing of the capital markets. Strong employment (and tax collection) is key to keeping government deficits under control, without which the punishment of the capital markets is usually brutal.

So governments in developed economies are caught in a vice. To keep the work force in employment, the workers have to be able to compete with much cheaper labour forces in the emerging world. If they try to compete on price, it leads to a Catch 22 — to keep the nation’s standard of living up you have to cut workers’ standard of living. Doesn’t quite work, really.

There is always the possibility of investing heavily in areas like infrastructure or education — but this, if done aggressively, will blow out government expenditure and create unsustainable deficits that lead to the punishment of the capital markets. Another Catch 22.

There are some exceptions. The US gets a free pass on deficits because the US dollar is the reserve currency of the world; no other country with open capital markets could get away with racking up so much debt. Although it cannot be indefinite, of course. And Japan is hermetically sealed, it has blocked out the international capital markets for the most part. That, too, will eventually have a big economic cost, indeed it already has.

But for most countries, including Australia, that is the conundrum they are presented with. The most attractive durable solution is to become like Germany, whose industrial habits and structures give it an exceptional ability to maintain competitiveness. Trouble is, it is very German — not easily replicated by anyone else. Or they can pursue a mercantile route like Korea, but this is deemed to be against the economic orthodoxy; sullying the purity of price signals.

This leads me to my complaint about how economic analyses work. One problem is that economics only records a score, it is not suitable for developing strategy. And the scoring tends to be always pretty much the same — labour is too expensive and must be driven down; any form of government assistance is harmful to consumers. Policy makers must, essentially, have no policy other than to let the markets work. That is, let capital find its most profitable destination. Which for the most part inexorably leads to lower wages for much of the middle class.

Another problem with economic analyses is the persistent use of circular arguments. The key badge of honour of economists, to use Paul Krugman’s phrase, is David Ricardo’s doctrine of comparative advantage. This argument for specialisation — high wage countries specialise in high wage tasks and low wage countries do the low wage tasks and both sides benefit — is a circular argument. It says that if countries transact more, then there will be more transactions per head. Hard to argue with, as most tautologies are. But it assumes that there is a neat transfer and it is far from automatic.

Labour in high wage countries will obviously come under pressure from labour in low wage countries if there is only a finite amount of employment. In an environment of global over supply (over supply that is a function of the lack of a big enough middle class in emerging economies and also of huge technological advances), there is obviously going to be pressure on the number of jobs. The result is obvious to see in the auto industry, where car makers shop around the world to get the best subsidies from governments confident that there is an excess of labour.

Economics, in other words, is heavily biased towards the interests of capital, hardly surprising given that it is basically a record of transactions and capital flows. If capital is looked after then consumers will be fine and labour is, well, somewhere in the rear. The problem with the bias is that economic systems are whole systems. As Philip Coggan points out in this excellent talk, there is a long history of the inter-relationship between debtors and creditors, a swinging balance.

There is also a long history of the relationship between capital and labour. When capital markets were largely national, there was an obvious interrelationship between wages and the consumer demand on which decent returns for capital investment depended. Pay the workers well and they would buy the stuff you made. But now, capital is global and the investment is global. That relationship has been destroyed, leaving governments to pick up the peieces.

It is not just the case that the finance sector has privatised the profits and socialised the losses. The finance sector has profoundly altered the interdependency of the system on which they, and everyone in developed economies, ultimately depend.

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  1. Worth pointing out that Riccardo actually understood the two conditions under which gains from trade via comparative advantage are predicated: 1) no or minimal labour flow across borders; 2) no or minimal capital flows across borders. Without both of those conditions Riccardo conceded that there were no gains from trade. You can read this bloke at econlib.org.

    Those two conditions held until the freeing up of capital flows. These days condition 2) doesn’t hold. The idea that we can gain from trade in 2011 via comparative advantage is a fairy tale. Riccardo knew it. Not sure why economists now don’t know it.

    • Not a surprise Hugo, many Keynesians don’t actually understand Keynes – and many Austrians are criticising this version of Keynes, not his original work…

      • Back when the FTA with the USA was being touted I contacted the institute of public affairs and put it to them that the conditions for gains from trade via comparative advantage no longer exist. The response was comical: I’m paraphrasing but along the lines of it (my claim) sounds like some sort of left/green nonsense. I would need to dig out my email archives but I recall emailing back to alert them to David Riccardo being the leftie/greenie promoting that “nonsense.”

      • Keynes didn’t understand Keynes, which is not surprising since a good deal of what he wrote contradicts other things he wrote.

  2. Just wait till the revolution.
    Then those capitalist scoundrels will pay for their crimes, eh comrade?

  3. I have been banging on about this for a long time – there are alternatives however they are deeply antipathetic to the inner workings of most capitalists (in the true sense of the word, and neo-liberal/classical economists).

    However trade has been balanced throughout the world with a several IMPORTANT regulations, one of which has been anti-dumping laws. Which were put into place to prevent countries with massive comparative advantages dumping there produce on the world market in order to capture it. This needs to be applied to labor as well as corn etc.

    Continuing we have innumerable international obligations governing trade and resources starting I think with the seal trade back in the 19th century. There are many more stringent laws which are in place – and quite frankly western nations have really dropped the ball vis-a-vis their relationship with capital – nations should use their power to exercise legislation governing labor conditions on imported products – international laws need to start governing labor at the UN – we have a WTO we need a WLO which would allow western nations to control the influx of goods manufactured with unethical labor standards – with tariffs being levied for lack of health benefits, holidays, weekly working hours etc.

    As I was saying, sovereign legislators have were convinced by capital that trickle down economics was all that mattered, take care of big business and the rest will take care of itself, so now government is entirely beholden to looking after big business and has abandoned its TRUE obligations which are of course the interests of the people.

    The Bruha which will erupt over labor tariffs deserves scant attention – entirely irrelevant self interest. I think companies will see very quickly that they are now merely surviving on artificial life support in the form of corporate welfare through sovereign protection – and that nation states could simply pull this rug and they are gone – the reality is that the corporations who get on board and realise that their TRUEST obligation is to GROW the spending capacity of their market (their employees), walling off each nation and actually allowing them to all to thrive at their own comparative level would be the best thing they can do – in other words – go back tow here we were from the 1950-1980’s and allow economies to enter the world market as capable self sustaining economies through developmentalism – and forever remove the Freidman-omics of the past 30 years.

    This issue was forecast be Raulston Saul in the collapse of globalization, and well documented in How Rich Countries Got Rich … and Why Poor Countries Stay Poorby Erik Reinert.

    A fantastic post – so incredibly on target and clearly the most important economic / political issue facing us today.

    • I’ve been banging on about this as well. It’s simply the world’s biggest pyramid game.

      China and Russia, as long as they have any influence over any kind of international organisations, will keep vetoing and ignoring international rules.

      Just look at what they do with the UN security council which is a joke with China never ever agreeing to anything. We are in fact letting them do as they please and I doubt it will stop (unless perhaps a republian wins the next US presidential election). Not that I would vote for the republicans.

      The world is full of currency manipulators (that includes USA) and corruption and I just can’t see it change

  4. I have always said globalisation is a dual-edged sword. Western developed economies reaped the benefits (trinkets) of globalisation and feasted on the credit/finance boom, a boom entirely necessary to feed the growth in consumption and subsequent growth in emerging economies We gladly moved production processes offshore, outsourced a range of services. We moved to strongly service based economic structure, largely quite pleased to watch the ‘dirty work’ move to distant climes. However, once debt saturation mired us, the credit bubble burst – the paucity of the new economy became apparent. National and household ‘wealth’ illusionary, time for the party to end.

    Like petulant children we now don’t want to play the game as outcomes no longer suit us. God forbid, others nations economies are ‘growing’ and ours not. We are quite happy to reintroduce a range of measures to ‘protect’ what remains of our domestic economies. Stuff the emerging markets, ‘pull the rug from under them’ thought gaining increasing traction. This may or may not be the right course of action – always there the danger of throwing out the baby with the bathwater.

    Could it be that globalisation overall is successful but cyclical; either the current cycle moving away from somewhat from developed economies to emerging economies – to major population groupings yet to shift of the more (allegedly) sophisticated economies of the developed world. Or, the simply a period of transition to what has been coined the new normal – that may not necessarily be a bad thing. Trouble is we have been at the head of the table and do not relish being cast to the side or, worse, the waitstaff! I recall reading somewhere that it would never be possible to endlessly import cheap product without also at some point importing lower wages and lower living standards. We may be approaching that point.

    • The movement to emerging economies is simple when you realize comparative advantage died decades ago. With free flow of capital across borders corporations are free to chase global absolute advantage. Corporate bosses don’t sit around with central planners and figure out which nations have a comparative advantage in which product and mutually decide where to manufacture. They move capital to the cheapest centre — all other things being equal — so we have manufacturing moving from the first world to the third.

      As soon as free flow of capital was possible comparative advantage died (not withstanding there were other dubious things about it that are glossed offer in the fairy tale) and all that mattered was absolute advantage.

    • darklydrawlMEMBER

      Good Point. Actually I can see this close to home. My Mum is a great example of this sort of blindess. She is what a marketing person would call a ‘value shopper’ and price is nearly always the factor that drives her purchasing decision.

      Yet she is the one of the first and most vocal who publicly fires up about “Aussie jobs going offshore” and how you cannot purchase Aussie made shoes / clothes et al anymore.

      Of course the irony is, that she (and her ilk, which probably includes most of us) are exactly the reason for this.

      I can tell you now, even if my Mum could purchase Aussie made shoes, she wouldn’t – ‘too damn expensive! I’m not paying $300 for a pair of shoes when I can get them for $20 from K-mart’.

      The really weird thing for me is she cannot seem to put the two together at all. I am sure there are others just like that. Folks who are wearing Chinese made clothes from top to bottom, including underwear and shoes, who protest at Bonds moving production offshore. Weird.

      • +100

        That Kmart ad makes me chuckle all the time. Go ahead ladies, party over the prices. I’m sure there’ll be no hangover.

        Speaking of made in Australia, has that campaign officially died? Used to be everywhere!

  5. Finance is largely about maximising an outcome, hence money will always come before people.

    That’s what selfish people with small hearts do well.

    Not sure how to fix this, but I’d be happy to pay more and employ a few more local businesses and people.

    Government needs a wake up call here also.

    • > Not sure how to fix this….

      They’re called tarifs and trade protection. Not very trendy at the moment, but expect to see them come back in a big way.

  6. Given the vast majority of voters are low to middle class, I see it as inevitable that voters will awaken to the flaws of globalisation and vote to regulate it.

    • It would be nice to think so however just like communism is a great idea…in principal, so too would this hypothesis fall down.

      Given that both major parties in this country are more or less carbon copies of each other and both beholden to lobbies and vested interests its unlikely that this would ever change. The great unwashed public will probably believe whatever the squawky box tells them to believe.

  7. so possible solutions are:

    1. go back to the old (old) days where anyone was free to travel anywhere – no passports, no customs in effect no borders

    2. prevent the free flow of capital across borders or heavily tax it

    3. compromise: for every average annual wage that crosses a border one person can freely go the other way – one worker that is, one who earns that average wage, or two that earn half of it

    Australia – it’s all about being a lifeboat in a rising tide that sinks all other boats because they are tethered

    So many are flocking here – poms, yanks, Chinese, you name it they are coming to live where the last vestige of the great middle class dream is still afloat

    Gillard’s people seem to be swaying to represent those here who want to keep what we have for ourselves for as long as possible.

    Rudd’s lot seem to want to go with the flow and try to make the most of it

    one way appears to aid the working class and the other appears to aid the landed middle class

    and all the while the savvy people flog off everything and anything they can before it all turns to the stuff that comes out the end of a politician (doubly foul whichever end is up)

    it’s like being swept along by a river