[SAVE TO WORD] Test.
There is an interesting quote in today’s Star Tribune. A resident of Ranier, Minnesota — a town of 150 people on the Canadian border — expressing frustration with the increased rail traffic that flows through his small town due to the increase in global trade says, “I’m not against people making a buck, but I’d rather pay two more cents for a ping pong paddle than put up with this.”
He’s hit on something and it involves more than being inconvenienced at an international rail crossing. One might ask the same question in the context of jobs, product safety, worker rights, the environment, and so on.
Global trade isn’t all bad. In fact, global trade has helped lift millions — perhaps billions — of people from poverty. It has also given consumers in advanced economies like the United States more buying power as the cost of consumer goods decreases.
However we are forgetting some very basic economic insights that go back to the dawn of economics. In America we are fond of quoting Adam Smith, doing our best to invest his work with moral authority that justifies free markets, an overly simplified reading of Smith, of course.
Let’s not forget about David Ricardo and his theory of comparative advantage — Smith, too — and maybe more importantly here the Iron Law of Wages. Not to get too deep into the weeds here, we can guess that Americans — especially American capitalists — don’t quote Ricardo as much because his thinking is a bit more stark, if not pessimistic, about the shared rewards of open economies.
Of course Ricardo hasn’t been entirely forgotten in the history of economic thought. Marx, Keynes, and Galbraith worked with Ricardo’s ideas, but not surprisingly, those economists are mostly ignored, if not vilified, in political and economic discourse today.
Ricardo essentially made a supply and demand argument for wages which most of us would regard as common sense. Any premium on wages would come at a cost, specifically a cost to the property owners. Thus, one might conclude that wages, like the economy as a whole, should be free and government should not interfere.
What’s the problem? Well, it is what we are seeing today. Wealth will have a natural propensity to concentrate into the vaults of those who possess economic power. The most recent and most read account of this trend is Thomas Piketty‘s “Capital in the Twenty-First Century.” The stats Piketty follows seem to bear out this concentration of wealth phenomenon.
As fortunes grow there are some ramifications for competition. In short, competition becomes imperfect. Firms enjoy more discretion in pricing, for example, which might also involve the price they pay for labor. In Ricardo’s view, labor rises and falls with the productive value added by their work. It is sustained at a subsistence level; quite literally the amount needed at a supply/demand equilibrium to sustain and maintain an appropriate population of workers.
In a state of imperfect competition — one created by the concentration of industry and wealth — these natural wage controls may not exist. Indeed, we see that today. Productivity is at record levels, as are corporate profits, and yet wages — both real and nominal — are flat or even in decline in older, advanced economies. On the other side of the equation they are on the rise in younger, less advanced economies. There isn’t a natural supply/demand equilibrium when it comes to wages, however. The rewards of increased productivity concentrate in the fortunes of those who possess economic power.
When the Ranier resident says he is willing to pay two cents more for a ping pong paddle, he is touching on that economic power which is increasingly realized in consolidated wealth and multinational corporations.
Ricardo also talks about the nature of comparative advantage among nations, but has been applied to the theory of competitive advantage of a firm. (Ricardo’s example pits two countries against each other where one has a comparative advantage over another. Frequently this gets confused with the idea of the competitive advantage of the firm and so-called “free markets ” or “free trade”. I’ll try to keep them straight!)
A competitive advantage for a business — or a nation — is a good thing. It sets up success based on merit, effort, and innovation. Or perhaps one nation has an advantageous access to a commodity like oil that others do not have. In the case of oil, as an example, until recently many foreign producers of oil enjoyed a cost advantage over the United States for oil production. Following Ricardo’s simple argument, those countries became exporters and we became importers.
When we confuse Comparative Advantage with “free trade” we run into problems, especially when that confusion becomes key to justifying free trade agreements. Moreover, the real focus on these trade agreements are not so much on the benefit of national economies per se, but on the business interests of private enterprise. The idea for the last 30 years has been to promise less government interference in private enterprise so that business can thrive and all will do better. But again, this is based on a basic confusion between the interests of a nation and those of a firm. In some sense, I think, the comparative advantage of nations has been pushed aside to benefit the competitive advantage of the firm.
The competitive advantage enjoyed by large multinational firms includes its enormous economies of scale. If once upon a time a dozen firms made ping pong paddles and sold them throughout the economy, firms might compete on quality and innovation as much as price. If we reduce the number of ping pong paddle makers to one or two, competition on those measures becomes less important and you potentially have an state of imperfect competition. The ping pong manufacturer might compete solely on price and push out competitors who cannot. (Think Wal-Mart versus Main Street.)
So when the Rainer resident comments on price and says he would rather pay the extra 2 cents than wait for a train to pass, he is expressing a willingness to adopt a less free market for the benefit he expects (less waiting for import trains). That two cents means little to him, but it is interesting, isn’t it? Built into these markets is something more than the cost and flow of goods. Waiting for trains is one thing…what about securing well-paying jobs? This will not happen in a free economy. Ricardos’ wage laws seem to apply. in the global economy, when you multiple all those small price margins — margins that favor the manufacturer by undercutting competition — the benefit is clear. Consider a hypothetical situation. If imperfect competition enables a firm to cut prices by 2 cents per unit and wages by 10 cents per unit, they control more of the market at lower costs while increasing profits and wealth. If you are selling millions of units a day, these pennies add up. They don’t go to the worker, however, because there is no economic pressure to do so. That is the trap set by imperfect competition.
It works because a large part of the labor supply (e.g., the American worker) is overpriced on the global market. Theoretically — although not very probably — eventually we would all end up living in huts eating radishes and stale bread in order to reproduce just enough labor and offspring to keep the system running! No more, no less. (Is that Malthus rumbling?) [KEEP IT SORT OF SERIOUS.]
Marx thought this sort of wealth concentration would spell the end of capitalism. He didn’t foresee the power of consumerism financed by credit. Global wealth is willing to take a chance on consumers — at 20% APR — that they can finance spending and maintain demand even on depressed wages. But that’s another story.
We should consider whether it makes sense to pay a little more to support stronger local economies versus global ones. There are indeed advantages to a more open global economy, but it is important to keep an eye on where the benefits go. In the United States, for example, the most glaring result of trade agreements has been a tendency to move low wages in third world countries and the high wages in industrial countries toward each other, even if very slowly. In Ricardo’s model, wages will continue to fall in developed economies as production is spread to low income economies.
So do we want these trade agreements or do we want to pay two cents more for a ping pong paddle? Until the myth of supply side economics becomes a reality and wealth trickles down from the concentrated fortunes that grow today, we might want to be skeptical of trade agreements that have largely served corporate interests at great costs to our national labor markets.
The implications of this is enormous. Millions of people across the globe live better lives because of global trade. Millions of people in developed countries are a little worse off. So there are some decisions to be made here. But there is one significant part of the economy we don’t want to touch and that is the growing inequality of wealth. Ricardo concluded that this was unsustainable. We should consider as much, too.
But forget about wealth for a moment. What we trade today is labor.
What good are cheap ping pong paddles — or televisions, cars, or anything else — if your factories are closed and your wages flat? The most glaring flaw in the trade debate is confusing the free flow of goods with the flow of the factors of production. A stronger flow of goods does not necessarily relate to stronger labor markets. It just means more cheap stuff as the cost of sustaining an adequate labor force drops. Meanwhile the owners of production still pocket a profit from increased productivity on an enormous economies of scale advantage they enjoy in a economy sustaining imperfect competition. [REWRITE — B]