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Can we resist the Iron Law?

by Colman Tue Mar 28th, 2006 at 08:35:13 AM EST

My attention was recently drawn to this article by William Pfaff.

It is free trade as theoretically envisaged by the 18th century economist David Ricardo, stripped of the economic, social and political constraints that for two centuries kept trade from functioning the way Ricardo expected.

He said that states should exploit their comparative advantages in resources or manufacturing. Trading in those complementary advantages would produce reciprocal gain. It's win-win - as Ricardo would not have said.

This is a relatively simple-minded theory, but in practice it has generally worked out, if not to the advantage of all concerned.

Ricardo, however, had a second theory, which he called the "iron law of wages." You do not hear much about the iron law, in part because you wouldn't want to hear about it, and also because experience has seemed to prove it untrue. But times are changing.

The iron law of wages is also simple and logical. It says that wages will tend to stabilize at or about subsistence level. That seemed inevitable to Ricardo, since while workers are necessary, and so have to be kept alive, they have no hope of any better treatment since they are infinitely available, replaceable, and generally interchangeable.

Ricardo's wage theory has seemed untrue. The supply of competent workers in a given place is not unlimited; neither workers nor industry are perfectly mobile, and labor demonstrated in the 19th and 20th centuries that it could mobilize and defend itself. The iron law of wages would seem to function only if the supply of labor is infinite and totally mobile.

Unfortunately that day, for practical purposes, has now arrived, thanks to globalization.

Now that the supply of labour massively outstrips demand is it inevitable that the Iron Law will apply? Are we doomed to a global serf class ruled by global merchant aristocracy or are we merely passing through a stormy part of the progression to a capitalist free-market utopia where everyone is prosperous, fat and happy?


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Don't know about you, but resistance is not futile...a fight is required here.

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Tue Mar 28th, 2006 at 08:44:50 AM EST
He said that states should exploit their comparative advantages in resources or manufacturing. Trading in those complementary advantages would produce reciprocal gain. It's win-win - as Ricardo would not have said.
Also, Ricardo did not envisage the ability of capital to move freely in pursuit of absolute advantage. His was a world of trade, not of foreign direct investment and offshore funds.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 28th, 2006 at 08:48:08 AM EST
The consequence of that is?
by Colman (colman at eurotrib.com) on Tue Mar 28th, 2006 at 08:51:42 AM EST
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That free trade is no longer win-win for the countries involved, since the least efficient country is decapitalized and its economy ruined.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 28th, 2006 at 08:57:26 AM EST
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Right. Thanks.
by Colman (colman at eurotrib.com) on Tue Mar 28th, 2006 at 09:08:36 AM EST
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Okay. You've read him recently? Recommend any particular edition?
by Colman (colman at eurotrib.com) on Tue Mar 28th, 2006 at 09:13:55 AM EST
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No, I haven't actually. My copy of Ricardo ended up in my (in)famous pile of 20 boxes of books in a friend's garage.

Now that I actually have nonnegative net worth (still zero when you round to the nearest million, of course) I can actually affor to have the boxes shipped.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 28th, 2006 at 09:21:55 AM EST
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I mean, it endded up in the boxes before I had a chance to read it, so I skipped to JS Mill.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 28th, 2006 at 09:22:31 AM EST
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So JS Mill = thinking outside the box?

(No slight on Ricardo meant here ;))

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Mar 28th, 2006 at 10:35:16 AM EST
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Perhaps this is slightly OT (and somewhat naive), but has anyone ever actually verified comparative advantage empirically?

As I understood it, comparative advantage was the reason why globalization was going to make us all so much more prosperous (or at least boost employment in those sectors that enjoy the comparative advantage). Given the actual outcome, I can't avoid wondering if this assumption is (still) warranted.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Tue Mar 28th, 2006 at 10:19:21 AM EST
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That is assuming that what globalization does is encourage us to divest from the sectors where we are at a comparative disadvantage and invest in the sectors where we have a comparative advantage.

What is actually happening is that capital is divested from our entire economy and invested in the other country to produce goods for our consumption. We don't produce jack shit for the Chinese market, and we don't buy the products that China used to produce before. Our capital is using Chinese resources to produce our products, sort of like a virus subverts a host cell for its own purposes. Supposedly Europe has a comparative advantage in high-quality, low-volume goods, made for the Western markets.

So, globalization with outsourcing is not Ricardian comparative advantage, it's something else.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 28th, 2006 at 10:30:53 AM EST
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Thanks for the clarification!

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Tue Mar 28th, 2006 at 10:48:21 AM EST
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Now you need a real economist to answer your question.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 28th, 2006 at 10:55:03 AM EST
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I wrote my MBA dissertation on employment modes in management consulting. Now management consulting is as far from the "commodity" labour market as you are likely to get. There are layers of horse manure protecting the industry and it's reasonably well perceived as knowledge work. And yet, lo and behold, the Iron Law is in the process of taking effect there too.
by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 28th, 2006 at 10:44:06 AM EST
I'd love to see more on that: maybe if the consultants think they're going to be affected they won't be so smug.
by Colman (colman at eurotrib.com) on Tue Mar 28th, 2006 at 10:50:16 AM EST
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Well, the dissertation itself is not so impressive, there were difficulties with NDAs and data collection and stuff.
by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 28th, 2006 at 11:01:06 AM EST
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A one paragraph summary would be fine!
by Colman (colman at eurotrib.com) on Tue Mar 28th, 2006 at 11:04:29 AM EST
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I'll dig it out and copy and paste something later on today if I get time.
by Metatone (metatone [a|t] gmail (dot) com) on Tue Mar 28th, 2006 at 11:15:41 AM EST
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Henry C. K. Liu, in his articles proposing a global cartel for labour has this to say
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 towards 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 too long been accepting the malignant effects of human construct as natural laws, rather than treating exploitation, greed and injustice as flaws in the human condition that needs to be contained by a rational structure that rewards good and penalizes evil.
Now, if i discover how to post a link... but the series of articles can be read in Asia Times Online, thats www.atimes.com.
by Torres on Tue Mar 28th, 2006 at 01:42:16 PM EST
Somewhere in between.  The "stormy" characterization certainly sounds about right, to me, though I think it's going to be quite a large and slow-moving storm.  Will it lead to some sort of capitalist utopia?  Doubtful.

As I said to Miguel a while back, Ricardian trade theory does take into account the massive differences in wealth between the average American/European and the average worker in China or India or one of many other countries.  Comparative might work in a world where countries were on equal ground.  But since the average person in China does not require a $40,000/yr. salary, he is inevitably, I think, provided with an advantage for the moment.

In short, we're just not able to exploit our advantages right now.  And, unfortunately, we still have a long way to go.  The Middle East and Africa haven't taken off yet.  China and India are still very far behind.  A two-trillion dollar economy sounds great, but China's got over a billion mouths to feed, too, whereas the UK -- also at around $2t -- has only sixty million.

That's why I keep telling people to stop worrying about the idea of China achieving a larger economy than America or Europe.  Too many people, mainly Americans, take it as a sign that we're falling behind our Asian neighbor.  We're not.  It would have to be about twenty-five times its current size to match us on per capita income.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 28th, 2006 at 02:27:07 PM EST
As I said to Miguel a while back, Ricardian trade theory does take into account the massive differences in wealth between the average American/European and the average worker in China or India or one of many other countries.

That should read,

As I said to Miguel a while back, Ricardian trade theory does not take into account the massive differences in wealth between the average American/European and the average worker in China or India or one of many other countries.


Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 28th, 2006 at 02:28:47 PM EST
[ Parent ]
The supply of competent workers in a given place is not unlimited; neither workers nor industry are perfectly mobile, and labor demonstrated in the 19th and 20th centuries that it could mobilize and defend itself. The iron law of wages would seem to function only if the supply of labor is infinite and totally mobile.

Unfortunately that day, for practical purposes, has now arrived, thanks to globalization.

Fortunately, mobility of labor as well as mobility of industry will be greatly reduced as oil gets more expensive... Think 1890s mobility: mid-price to expensive train travel, no planes (or very expensive ones), no cheap transport of raw materials or manufactured goods by ship...

_______________________________________________

"Those who fight might lose, those who don't fight have already lost." - Berthold Brecht

by RavenTS on Wed Mar 29th, 2006 at 06:14:22 AM EST
We are assuming that what needs to happen is that labour needs to move to where the capital is, and so that mobility of labour is the limiting factor. This is consistent with the (now obsolete) system where capital was tied to its home country.

Ricardian comparative advantage makes sense when goods are more mobile than both capital and labour. When capital is the most mobile (as it is today, and the margin seems only likely to increase with peak oil) you have a different mechanism at play.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 06:22:18 AM EST
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