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Originally published December 26, 1983

A DELUSION appears from time to time in philosophy whereby appearance and reality are so separated that, as Charles Peirce observed, their connection is like that of a freight train held together only by a feeling of good will between the engineer and the brakeman in the caboose. A corresponding delusion suffered by many economists is that there is a real economic world underlying the actual one in which we live and have our being.

Classical economists are especially prone to talking about the real world rather than the actual one. They investigate the “real” GNP, not the “nominal” GNP (the quoted terms aren’t the same as those of medieval philosophy, but they give rise to similar difficulties); real interest rates, not nominal ones; real wages, not money wages: These investigations seem sensible and down to earth. Money, after all, is only good for what it can buy.

It was one of the marks of John Maynard Keynes‘ genius that he saw through at least some of the confusion this causes. At the very start of The General Theory, he showed why labor is concerned with money wages, not with real wages, to the bewilderment of classical economists. “Since there is imperfect mobility of labor,” he explained, “and wages do not tend to an exact equality of net advantage in different occupations, any individual or group of individuals who consent to a reduction of money wages relatively to others will suffer a relative reduction in real wages, which is sufficient justification for them to resist it.” He noted further that no specific wage negotiation can have a great enough effect on the general price level to make the latter worth considering by either party. High wages in Detroit have a slight and remote effect on the prices of the food and clothing automobile workers (and automobile magnates) buy.

Conservative businessmen nevertheless argue for “reality,” and not only in labor negotiations. Thus we hear much talk about the real interest rate, and how – regardless of what you thought when you talked with your friendly banker about a loan – until recently it was very low, or even negative. The nominal interest rate is what the banker was going to charge you; the real rate is generally determined by subtracting the rate of inflation from it (Keynes reasonably thought the deduction should be for future inflation, but that is obviously a guessing game and so not properly scientific).

If in 1980 you screamed when your banker reluctantly offered you a 16.5 per cent mortgage, he could sweetly point out to you that, what with inflation then running at 13.5 per cent, he was really asking you for only 3 per cent (plus, naturally, several mysterious fees and “points”). Moreover, if your tax bracket was, say, 30 per cent, he probably noted that your tax deduction for interest paid would amount to almost 5 per cent, putting you ahead of the game. You may have wondered who was keeping score.

The competing architects of the mishmash that is Reaganomics are agreed that your banker was correct in his reasoning. Messrs. Martin Feldstein and Donald Regan, Paul Volcker and Jack Kemp, all chant in unison that the economy suffers because rich people don’t have enough incentive to save. In particular, they don’t make long-term investments because they fear that when they get their money back it won’t buy as much as it does today. (The few I know seem to fancy buying extra condos here and there, and that seems like a long-term investment to me, but let that pass.) At this writing, when the real interest rate as calculated by your banker is at an all-time high, those with money to lend are (they would be shocked to learn) following Keynes in allowing not for present, but for future, inflation, which they evidently guess will increase.

Here Reaganomics has a stock answer: Make the rich richer. Considering what has been done so far, it’s hard to imagine what remains to be done, yet we need not doubt that pressure will be steady to reduce taxes in the higher brackets and to reduce income in the lower.

The anonymous White House and the palpable Representative Kemp (R-N.Y.) say in addition that the Federal Reserve Board should reduce the interest rate. Chairman Volcker replies that he could do so for a short while by increasing the money supply, but that resulting fears of inflation would send the long-term rate through the roof and would soon drag along the short-term rate, too. In brief, it is argued that the lenders’ search for real interest would make the nominal interest rate too high for anyone to borrow. Even though we may not like what is being done to us, it is for our own good.

T O CHECK on this argument, we must look a little more closely at the meaning of “realism” in economics. Does it in fact make sense to disregard money values and concentrate on real values? I will say that it does not.

In the actual world, where we do our actual buying and selling, it is money values that we do – and should – pay attention to. Keynes satisfied his tastes for old books and new paintings by speculating, mainly in commodities and currencies. He used his winnings for (among other purposes) buying paintings at the Degas auction in 1918. The real value of the paintings he bought for himself and urged others to buy was not about to change and, by definition, could not change. But the money value, as he anticipated, changed dramatically. He needed money to pay the money price for the paintings before it went up; the real values of either commodities or paintings had nothing to do with the case.

And of course it is impossible to say what the real value of those paintings was or is. Some of them I’d not give house room to, except for their sentimental association with the great man who once owned them. As far as the Consumer Price Index (CPI) or the GNP Deflator is concerned, the value of the paintings is nil. They don’t count; and to value them in terms of Smith’s or Ricardo’s or Marx’s labor theory would be ridiculous, as it would be ridiculous to attempt to apply Keynes’ wage unit to them. Since there is no way of saying what their real value is, it seems quixotic to insist that they have any in economic terms.

Nor are the paintings unique. The market basket of the CPI includes many items I would not give house room to and many others – entertainment, for example – that can be connected with a labor theory of value, or with any other “reality,” only by dint of the most laborious of gyrations. A theater ticket can be counted in the CPI because it is bought, that is, because it has money value. What its real value may be is beyond calculation.

The mere fact that the CPI is not the all-purpose market basket for all seasons, and that other indices (including many of the same items) have to be devised, indicates that the alleged reality shifts as the sands. In any event, like Keynes with his paintings, I need money to buy the things I want out of the baskets; and the more money I have, the more things I can buy. Regardless of the rise or fall of real values (whatever they might be thought to be, and however they might be determined), I’ll be able to buy more if I have more money. Why then should I not join other workers in resisting a reduction in my money wage?

In this I am no different from the investor (or speculator) who resists a reduction in money interest. Regardless of the so-called real rate, his choice is between the money rate and nothing at all. Like the unfaithful servant in the parable, he can bury his money, but that won’t help him. Or he can spend it, and that will help the economy. But if he wants to invest, he’ll have to follow the money rate of interest. In the end, he will compare the results of various investment strategies in accordance with the amounts of money they earn. Realism has nothing to do with it.

The New Leader

Originally published November 14, 1983

 

 

 

 

 

 

A FRIEND has taken exception to my proposal to limit or forbid the importation of foreign manufactures that threaten to destroy important domestic industries because of low prices based on the exploitation of local labor (“The Way to Protect,”November 14, 1983 NL, September 19). He says his freedom would be unacceptably abridged if he couldn’t buy a Japanese automobile, because he thinks they are better made than ours. He doesn’t deny that Americans are thrown out of work when our industries are shipped abroad, but he is confident that their distress is only temporary and perhaps not altogether undeserved. Besides, he objects to the word “exploitation” as old-fashioned rabble-rousing.

Two questions are mixed together here. The first I find difficult to take seriously. It is nowhere writ – not in the Bill of Rights, not in the Magna Carta, not in the Sermon on the Mount, not in the Code of Hammurabi – that my friend has a right to buy a Subaru, no matter how well it may be made. For various pragmatic or prudential reasons, the government will not interfere with his use of money except reluctantly and after due reflection; yet many uses are now routinely denied him, and there is no use that cannot, in principle, be denied. Money is, after all, a social, not an individual, creation. The issue is not whether denial is legitimate, but whether denial in this particular case is reasonable.

The other question is one of fact. In setting forth my proposal, I specified two steps that would have to be taken before barring a given import: “First, we decide that certain of our important industries are threatened in our home market by severe competition from foreign industries. Second, we determine whether that threat is made possible by wages or conditions that we would consider “exploitative.”

Now, whether these conditions apply to Subaru or not can readily be determined. I repeat: It is a question of fact, not of theory. For the purposes of our argument, my friend conceded that the conditions do apply, and that thousands of Americans in Detroit are thrown out of work because of Japanese labor policies. He nevertheless maintained that in the long run not too much suffering would be caused by the collapse of the American automobile industry; and that if suffering is caused the way to alleviate it is directly through the dole, not by forbidding the importation of Subarus.

I’m afraid that no doubt exists about the suffering, and it is by no means confined to the automobile industry. As I have previously said, as long as the American standard of living is higher than the Oriental standard of living, there is nothing whatsoever that cannot be manufactured more cheaply there than here. This goes for high-tech industries even more than for smokestack industries, because the technology of the former is in fact simpler and the capital requirements less extensive.

Nor is there any doubt that very little of the suffering we have so far seen will be alleviated by the so-called recovery. What’s going on now does not fit into the late Joseph A. Schumpeter‘s theory of new industries – ” railroad construction in its earlier stages, electrical power production before the First World War, steam and steel, the motor car, colonial ventures” – Ieading the upswing of fresh business cycles. The only new industry now on the horizon is high-tech, which, as noted, is high-tailing it for the Orient, and is not a big employer anyhow. For this reason, all the vague talk of retraining the millions of our unemployed fellow citizens is cruel nonsense. Retraining for what?

My friend is a compassionate man and is willing to consider the problem. Like Mr. Micawber, he expects something to turn up, but in the meantime he is willing to institute the dole (he is not a Reaganite) and to pay for it with a progressive income tax.

I am not one to say that it could not be done. Indeed, I say that it should be done. It is little enough. A dole at the poverty level might seem a bonanza for a part-time textile worker; it is a disaster for a veteran automobile worker who has saved a little money, started a family, bought a house, and nurtured the American dream. If, as some tell us, he was overpaid, then the dream was a fraud.

That is one side of the problem: the unconscionable cost to American workers of my friend’s assumed right to buy a Subaru or a Hong Kong sports shirt. The other side is the cost to my friend in taxes. Being in thrall to classical economics, he wants to balance the budget. At present rates, the Federal income tax raises about $285 billion, leaving a deficit of about $200 billion. A poverty-level dole would cost another $100 billion; a halfway decent dole would be double that. Thus to do what my friend wants to do would require income taxes one and a half times (if he doesn’t balance the budget) to two and a half times (if he does balance) those now in force. A flat tax at that rate of increase, let alone a truly progressive tax, would be a lot to pay for a Subaru. And millions of our fellow citizens would be condemned to aimless, hopeless lives.

Against this dreary scenario, my friend raises the specter of the Smoot-Hawley Tariff, sponsored by reactionary Republicans in 1930 and ever after blamed by junior high school civics texts for the Great Depression, the rise of fascism, World War II, the Cold War, and innumerable minor irritations. The analysis doesn’t rise even to the level of post hoc ergo propter hoc[1], for the Great Depression was already well under way when Smoot-Hawley was passed, while fascism had been in power in Italy for eight years, and was rapidly growing in Germany.

An interesting thing about Smoot-Hawley is that its original impetus came from distress on the farms. Although by the time the bill was passed, duties were raised on almost everything under the sun, the presenting complaint in President Hoovers call for a special session of Congress was largely agricultural. Today there is again distress on the farms, but its cause is different. This time no one is underselling us in our domestic market, or in our international market. The trouble, instead, is that the Poles and others who want our wheat haven’t anything to pay us with. (Except, my friend says, golf carts: Would you have believed that almost all carts on American golf courses were made in Poland?) The Poles have coal for sale, but so have we-and so do the Germans, the French, the Belgians, the British; (One of the “reindustrializing” schemes that has been advocated and, for all I know, implemented involves rebuilding the port of Norfolk to facilitate the export of coal to God knows whom.)

Since the Poles can’t pay us for our wheat, we had to fall back on our ingenuity. The solution was simplicity itself: We lent them the money. Partly we lent it as a nation through the Export-Import Bank, and partly we had it lent for us by our friendly bankers. Of course,

Chase and Citibank and the rest didn’t exactly use our money; they used the Arabs’ money, deposited with them because of the high interest rates the Federal Reserve Board encouraged, allegedly to fight inflation. Just as bankers become unwitting partners of debtors to whom they lend too much money, however, we as a nation have become the unwitting partners of the banks that now have shaky foreign loans far in excess of their assets[2].

THE UPSHOT of all this is that we the people of the United States will in effect pay our farmers for the wheat that is in effect given to the Poles. I have nothing against the Poles, but it occurs to me to wonder why it is better to give our wheat to them than to poor fellow citizens, whom we expect to feed themselves on a supplement of less than a dollar a day. Charity should no doubt be world-wide, yet it should certainly begin at home.

The result of the banks’ loans to Brazil et al. in many ways is worse. The Brazilians invested the money (which, you will remember, couldn’t be lent to New York City because it was a “bad risk”) in building up their industry, particularly steel. Thanks to their low wages, they are now driving American steel out of the world market and to a considerable extent out of the domestic American market. To repay the loans, though, Brazil has to export still more steel and import less of whatever it imports. It must adopt what the bankers and the International Monetary Fund (IMF) aseptically refer to as austerity measures. This means reducing Brazil’s standard of living, and consequently paying its steel workers even less than at present.

If the bankers’ scheme succeeds, by no means a certainty, additional American steel workers will lose their jobs. Should the scheme fail, the banks will come crying to Uncle Sam to bail them out (they’re already lobbying for an increase in our contribution to the IMF), and we will in reality have given Brazil the steel mills that are destroying our industry and putting our fellow citizens out of work.

A very high percentage of foreign trade follows the patterns I have outlined, distorting economies everywhere to the principal benefit of bankers. There are, naturally, many things we want or need to import; oil (because we are too witless to cope with our energy requirements), tungsten, chrome, bauxite, coffee, and there are many things we can, without special government assistance, export to pay for them. But the necessity, or even the desirability, of foreign trade has been grossly oversold.

Trade is one of the modes of civilization (that is what makes economics a humanistic-and ethical-discipline). Trade also adds to wealth – the wealth of individuals, of nations, of the world. It does this by increasing and rationalizing employment, for wealth is the product of work. When trade expands employment for both partners, the prosperity of both is advanced, and David Ricardo’s Law of Comparative Advantage (see “How Our Sun May Rise Again,” NL, July 12-26, 1982) can be said to apply. Conversely, when trade brings about unemployment for one of the partners, its advantage disappears. Trade will always result in some unemployment in a competitive situation, and the unemployment will be compounded where the competition is based on gross wage differentials. If Japanese citizens were to buy up the output of Korea’s nascent automobile industry in preference to Subarus and Toyotas, Japanese wealth would be decreased, and you may be sure that the Japanese government has imposed effective restrictions.

Microeconomically – that is, company by company-foreign trade can be very attractive. Once a company is successful in its home market – factories built and paid for, experience gained – it takes little extra effort to open an export business, and economies of scale will make that business extraordinarily profitable at the margin, especially when stimulated by tax incentives. The profitability of multinational conglomerates is enhanced by their ability to manufacture where wage scales are the lowest (and declare their profits where taxes are the lowest).

When we shift from microeconomics to macroeconomics – from firm to nation – we find (as we frequently do in such shifts) that we have committed the fallacy of composition. What is good for each firm individually is not necessarily good for the nation. In the circumstances we have been discussing, some (not all) American exports are being paid for by us in the shape of high interest rates that inordinately benefit a few, and we will doubtless bear the further cost of rescuing banks in danger of failing. On the other side, some (not all) American imports are being paid for by individual citizens in the shape of shattered prospects and grinding poverty.

These outcomes are not divinely ordained. They are the result of policies deliberately, albeit perhaps blindly, adopted. If this be rabble-rousing, as I told my friend, make the most of it.


[1] A logical mistake which assumes that when things happen in a sequence that means that the second event was dependent on or caused by the first.

[2] Reading this in 2012, post the late 2000’s mortgage fiasco, I can change this sentence by replacing “shaky foreign loans” to “shaky mortgages” and not have missed a beat.

Originally published October 17, 1983

CONSTANT readers of this column have foreseen since THE NEW LEADER issue of March 8, 1982, what last month burst like a paper bag full of cold water over the heads of the self-assured enthusiasts for Reaganomics. The New York Times, evidently relying on Federal Reserve Board figures, announced that our national rate of saving has steadily declined in spite of the massive supply-side tax cuts that were supposed to stimulate it.

This development has caused some bewilderment. Norman B. Ture, former undersecretary of the Treasury for tax and economic affairs, who was the “architect” of the 1981 tax cut, said the news was disturbing and surprising. “It’s very difficult to understand,” he added. Other worthies were tempted to dispute the figures, for the mind-boggling reason that “they cannot show tax-evasion income” (the inference being, I suppose, that the so-called recovery has been fueled by illegal savings).

As you know, I am like Adam Smith in that I hold no brief for statistics. (One of the most successful books I ever edited was entitled How to Lie with Statistics.) It does, nevertheless, seem to me fitting that those who live by statistics should die by statistics. In the present instance, I think it as likely that the rate of saving has been overstated as the other way around; but whatever the precise figures may be, they certainly show that the tax cuts didn’t do what President Reagan promised they would do.

Nineteen months ago I told you why they wouldn’t. I wrote that unless the government is running a surplus, there is no way for tax cuts to be a direct stimulus to productive investment.“ To emphasize the point, I said it in italics, a typographical device I don’t resort to lightly.

My reasoning was as follows: “Try as he will, the supply-sider can’t get money into the hands of producers. This is not because of the conspicuous consumption of the rich or the notorious perversity of Wall Street. Even when everyone is doing his best to cooperate, the scheme can’t work. The supply-sider’s tax cuts go to the rich, all right; but the recipients have to lend the money right back to the government to cover the [increased] deficits. No more money becomes available for productive investment than there was before the game started.” I continued: “You will note that I say ‘available,’ because I don’t for a minute believe that much of that tax windfall would go into productive investment even if it could. Almost all of it is earmarked for speculation. No goods will be produced as a result of it, nor any services rendered. But the rich will be richer.”

Two months after my column appeared, the Times had a roundup of opinion on the economy, in which Professor Arthur Laffer was quoted. He was a big man in those days, with a curve named after him. The Laffer Curve, you will remember, was the principal intellectual underpinning of the Reaganomic tax cuts. Though it first appeared on a cocktail napkin and never was able to find empirical support, it was used to justify giving major tax cuts to the rich (whose incentive would otherwise be sapped). But on May 2, 1982, Laffer was quoted to the effect that the cuts would have “no economic effect” because the government would “give a dollar back and then borrow it right away from you.”

Yes, that is what I had said, and it amuses me to think Laffer might have gotten the idea from my column. That would have been sufficiently astounding. Sensationally astounding was the fact that here was one of the original supply-side gurus confessing that the scheme wouldn’t work. Laffer’s recantation was on a par with David Stockman’s confession that Reaganomics was a Trojan Horse for the rich.

Unfortunately, the Times business reporters are so used to stitching stories together out of mindless handouts, and Times readers are so used to skipping such stories that not even the Times editors noticed the recantation. In an editorial some weeks ago they still didn’t understand what had happened, attributing the fall in savings to the failure of the tax cuts to give individuals any “particular incentive” to save.

Now, in discussions like this, one can easily lose track of what the real issue is. The real issue here is not why savings have fallen but whether it makes any difference, and whether any “particular incentive” should be legislated to change the situation.

Classical economics noted that steam driven looms produced more cloth than hand looms, and were bought by men who had saved some money or could borrow the savings of others. Thus it seemed obvious that savings increased production (and so were virtuous and should be rewarded). That analysis, however, was inside out, as any moderately reflective businessman has known these past two centuries. For regardless of the savings one has accumulated, one is not well advised to buy a power loom if there is no effective demand for cloth or if the demand is already oversupplied. Of course, if there are no investment possibilities in textiles, there may be some elsewhere. But when you have 12 per cent of your labor force and 30 per cent of your industrial plant standing idle, the odds are against finding suitable places to put your savings, no matter how much you have laid by.

In this situation – which is the situation we have been in and are still in –  you can do two things with your savings: you can live it up, or you can speculate. Speculation, I’m ready to admit, is my King Charles’ head; I will therefore confine my remarks on the point to asking where you think all the billions came from that have gone into the stock market in the past 15 months.

Putting speculation aside, let’s look at living it up, otherwise known as consumption or demand. Here again, classical economics has something to say that seems plausible enough until you stop to think about it. The gimmick is Say’s Law. Jean Baptiste Say, a French contemporary of Adam Smith’s, had it figured out that production creates its own demand. He reasoned this way: If you set up a textile mill, you have to pay the people who build the factory and those who make the looms and those who raise and shear the sheep and those who run your looms. All these payments are used by these people to buy things they want or need, and the people who sell them these things use the money they are paid to buy what they want or need, and so on and on. Sooner or later, someone will buy your cloth. Or if no one does, it still happens that a lot of other goods are sold, so that, in the aggregate, production creates demand, and a universal glut is impossible.

MALTHUS, among a handful of others, saw that this is nonsense (because of the time lapses involved, if for no other reason), but he couldn’t convince his friend Ricardo or the followers of Ricardo. It took the Great Depression, when an unsalable glut existed for all to see, to exorcise the ghost of Say. And yet, only a half century later, the ghost of Say is again seen nightly on the battlements and occasionally stalking abroad in full daylight, driving Atari Democrats and self-advertised liberal businessmen mad with schemes to reduce consumption in the hope of increasing production.

A convenient example is at hand in an Op Ed page piece in the very issue of the Times that carried the story about the fall in savings. The author is one Fletcher Byrom, chairman of the Committee for Economic Development, described as “an organization of chief executive officers and university presidents.” Awesome. Byrom proclaims: “The United States needs to move away from a patchwork tax system that penalizes saving and investment toward one with more systematic emphasis on taxing consumption.” Someone should take Byrom aside and tell him about the Economic Recovery Tax Act of 1981.

He might also glance at another story in the same issue of the Times revealing that millionaires have multiplied like fruit flies even as savings have been languishing. There were about 180,000 millionaires in 1976 and 500,000 in 1981. It is not irrelevant that the great leap forward coincides with the introduction of the maxi tax on “earned” income. Goodness knows how many millionaires there are today, but I’ll bet the number has redoubled since the maxitax on unearned income went into effect two years ago. (I’ll bet the number of those below the poverty level has redoubled, too.)

If Byrom and his committee have their way, there will be still more people with millions to throw around. Their fortune-good for them but bad for the country – will be made possible by lowering the personal income tax and the corporation tax, while raising Social Security taxes and sales taxes, and maybe introducing a value-added tax, which is a semi-hidden kind of sales tax.

I am sorry, but I find it difficult to have proper respect for chief executive officers and college presidents who talk this way. The empirical evidence is plain that their policies have not done what they promised, yet they persist in them. The empirical evidence is plain as well that their policies have caused appalling suffering, not only in this country but throughout the world. Nonetheless, they persist. Although I find it hard to have proper respect for these people, I’m scared that they will continue to have their way.

The New Leader

Originally published September 19, 1983

LAST MONTH (NL, August 8-22) I suggested that the world’s Less Developed Countries might be better off if we denied their manufactures (mostly produced by multinationals) unlimited access to our markets. Here I propose to look at the problem from our point of view, starting with the reiteration of some observations I made a year ago about the Atari Democrats’ notion of inventing “sunrise” industries to replace “sunset” industries lost to foreign competition.

One of my points was that whatever we devise can also be devised or copied or, it is occasionally claimed, stolen elsewhere, particularly in the Orient. I must confess my astonishment at some people’s reluctance to accept this point, which seems to me as obvious as a sore thumb-now rendered somewhat sorer by the decision of Atari itself to start moving to Hong Kong. For again and again we have lost our domestic markets to multinational competition, with the results that millions of us are out of work and that our industrial plant is operating at 70 per cent of capacity.

The New York Times ran a story recently about the Sinchu Science-Based Industrial Park, currently being developed in Taiwan. “Sinchu has all the ingredients of Silicon Valley 20 years ago,” says Irving Ho, the park’s director. That may be commercial puffery, but why not? And how could anyone fancy it might be different with the as yet uninvented sunrise industries?

In the famous peroration of The General Theory of Employment, Interest, and Money, Keynes wrote: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” The almost universal obeisance to the doctrine of free trade confirms this observation. Adam Smith lives, defunct though he has been these two centuries.

Adam Smith indeed lives – that is, has a place in history – and we will better understand our own place if we understand his. The first eight chapters of his Book IV [of The Wealth of Nations], where his thoughts on foreign trade are laid out, are not written in a vacuum. They are an explicit, devastating attack on the mercantile system and especially on Thomas Mun‘s England’s Treasure by Forraign Trade, the leading exposition of that system.

Foreign trade, as Smith saw it, served two purposes: it enabled countries to exchange surpluses, and it facilitated the division of labor by expanding the market. In furtherance of these ends he opposed the monopolies and bounties and other restraints on, or inducements to, trade that were root and branch of the mercantile system. And he advocated independence for the colonies, largely because he judged trade with the nearby Continent more profitable.

But a lot has happened in the past 200 years, especially in America, and this makes The Wealth of Nations a historical document, not a present help in trouble. Our domestic market is now far larger than any world market Smith could imagine, and the division of labor has gone far beyond the 18 operations in the manufacture of pins that he immortalized. More important, his merchant adventurers have been succeeded by our multinational conglomerates.

Today’s problem with foreign trade is that our industries are losing out to foreign competition or are being shipped abroad by the multinationals. This happens because foreign labor is cheaper than ours. We are told by the three Harvard Business School authors of Industrial Renaissance: Producing a Competitive Future for America that the members of the United Automobile Workers had better shape up because they are paid 80 per cent more per hour than their Japanese counterparts, who are, in addition, more productive. The American man in the street reads this and says, “Just what I always suspected. American automobile workers are way overpaid. No wonder we’re having this depression.” The American man in the board room reacts a bit differently. “It’s a healthy thing we’re having this depression,” he says. “Now we’ll be able to get those wage scales back down where they belong.”

I venture to suggest that there is another way of looking at these figures (whose accuracy I will not question at the moment, though I may do so another time). One might as logically conclude that Japanese auto workers are underpaid as that our fellow citizens in Detroit are overpaid. Indeed, on the basis of the history of industrial relations, I’d lay even money that a better case could be made this way than that. When you stop to think of it, the idea that a working stiff anywhere is overpaid is not, on the record, over plausible.

Everyone talks about automobiles, but they’re comparatively well off. Sol C. Chaikin, president of the International Ladies’ Garment Workers Union, points out that 25 years ago imports accounted for 5 per cent of the sales of ladies’ and childrens’ apparel, but it is estimated that this year they will account for over 50 per cent. In the Peoples’ Republic of China, garment workers are paid 16 cents an hour; in the Federal Republic of China, the rate is 57 cents; and in Hong Kong it’s a little over a dollar. Does anyone seriously propose to reduce American wages (which in the garment industry are already low) to these levels? If not, what does the incessant chatter about “productivity” mean?

Fashionable economics tells us we should be delighted to buy cheap textiles from the Orient and should concentrate on selling “information” in return. Information about what? one wonders. Books are not meant, because they happily pirate whatever they want right now. Nor is hi-tech (as we’re learning to call it) meant, because our multinationals are already manufacturing “hardware” there. That leaves “software,” but that’s easy to pirate, too. And if Orientals should perversely take an interest in the data we busily beam at each other, they can pick up all they want off a satellite, with a disk they can make cheaply.

We’d better face it: until the world standard of living is brought up to ours, there is nothing whatever that cannot be manufactured less expensively abroad than here. Nothing whatever. How long will it take for the world standard to approach ours? If you’re old enough to read this, you’re too old to live to see the day. The question is, what do we want to do about it now?

There’s no doubt what the National Association of Manufacturers wants to do about it, or the Business Roundtable, or the Reagan Administration. They want to lower labor costs every way they can think of: cut wages, cut fringe benefits, cut safety regulations; and to keep those who still have jobs in line, cut unemployment insurance and welfare generally.

Let’s assume, however, that you and I don’t find labor-baiting attractive. Let’s assume we think it a good thing that the American standard of living is higher than the Japanese or the Taiwanese. If we make these assumptions, how can we protect our standard?

Well, the way to protect is to protect. First, we decide that certain of our important industries are threatened in our home market by severe competition from foreign industries. Second, we determine whether that threat is made possible by wages or conditions that we would consider exploitative. Third, we refuse entry to goods produced in grossly exploitative conditions.

The proposal is not complicated. It does not cover all industry but only the industries we declare to be important and threatened in our home market. It does not require elaborate cost accounting (as do the reciprocal trade provisions against “dumping”) but simply straightforward questions of fact: What are the wage scales? What are the working conditions? Is child labor employed? It does not interfere with foreigners’ or multinationals’ trade anywhere else in the world. In every respect the proposal is analogous to our present laws refusing entry to contaminated foods or dangerous drugs or unsafe automobiles. Those laws protect Americans as consumers; the proposed law would protect us as workers and, incidentally, as entrepreneurs.

IT WILL be objected that the proposal can’t work because it is impossible to compare foreign wage scales and working conditions with ours. In reply, I would enquire how, if the comparisons can’t be made, the noisy critics of the American workingman know he is overpaid. What is proposed is merely the reverse of the critics’ coin. The fact of the discrepancy in wages is accepted; but instead of saying that our fellow citizen Americans are overpaid, we say that our fellow-human Orientals are underpaid. Mathematically, there is no difference in what is said; morally, there is an astronomical difference.

Of course the comparisons can be made, and they will be invidious. The real question is, as the lawyers say, who should have the burden of proof? I am reminded of Thaddeus Stevens‘ reaction to proposals that the North tell the South eliminating slavery was not its war aim. “Ask those who made the war what is its object,” Thad growled. In the present case, I think we could reasonably ask those who want access to our markets to prove that their workers are fairly paid and fairly treated by our standards. American unions and American companies would have the right to challenge the proof. No need to make a big fuss about it, any more than a big fuss is now made about determining that certain foreign automobiles don’t meet our emissions standards or that certain drugs are impermissible.

No doubt many will argue against protecting the American standard of living. Two arguments stand out. The first purports to be consumer oriented. Cheap imports, it says, benefit everybody. But they don’t benefit those millions whose jobs are taken by the imports, and those other millions who are being forced back to the poverty level.

The second argument purports to be producer oriented. Restrictions on international trade, it says, threaten all our industries, because exports now represent our margin of profit. To this argument there are three answers: (1) Our really threatened industries-automobiles,

steel, textiles, etc.-have already lost their export markets; (2) our biggest export business-agriculture will continue because the world needs it; and (3) we have at home an unexplored market larger than any we might lose.

Our 14 million unemployed, plus the millions of working poor, plus their dependents, comprise a “nation” of up to 50 million people-bigger than all but a handful of the 157 members of the UN. In spite of our failures, these people are better educated than the rest of the world, have a better understanding of the work ethic, and are closer to the rest of us in needs and wants. If our national and industrial policies were directed to helping these our fellow citizens, there would be plenty of domestic business to keep U.S. industry fully occupied and highly profitable.

 

The New Leader

Originally published September 5, 1983

Dear Editor

Brockway

The Great Communicator had the right words for George P. Brockway’s Rereading Galbraith” (NL, June 13): “There you go again.” Yes, “much of what passes for economics” is a waste of time; the timewasting proportion of the total may be exceeded only in magazine nonfiction. What’s wrong with economics, however, is not what Brockway in this column (or in any other) says is the problem. Brockway claims that, “If there is no way of judging relative wants,” there is no way of making things either better or worse. Not so: We don’t have to weigh individuals’ preferences to assert that, if more of some wants can be satisfied without reducing the resources devoted to other wants, things are better. A good many of us economists (usually microeconornists) devote ourselves to just this kind of positive-sum game, the quest for policies and institutional changes that involve few and inconsequential losers and losses and substantial gains to the rest of us. We don’t have to sneer about advertising-induced tastes (like packaged holiday tours that may crowd Gstaad) to do something worthwhile.

The Affluent Society is an important book, one that changed our way of looking at things, as Brockway maintains. Yet Galbraith, like Brockway, can be wrong on critical points. There is no evidence whatever that advertising increases aggregate consumer spending (except for the trivial increases represented by the consumer spending of those employed in advertising). What advertising does is to increase spending for particular products or brands, at the expense of other products or brands. From this it follows, as Brockway would put it, that the existence of advertising does not tell us that American consumers as a whole spend too much, nor that their choices lack legitimacy. But rather conventional economics tells us that we can’t leave all choices to consumers because the economy left to its own devices will undersupply public goods. It may make unexciting copy; still, the fact is that the mainstream of the dismal science is not hostile to government per se.

New York City

                                                                       DICK NETZER
Director
Urban Research Center
New York University

Editor’s Note:  Dick Netzer’s first letter re: The Dismal Science can be found here:  http://wp.me/s2r2YP-291

Originally published August 8, 1983

LAST SUMMER I wrote a couple of columns questioning the Atari Democrats notion that we should write off our “sunset” industries (automobiles, steel, textiles, what have you), where we’re losing dominance in even our own market, and concentrate on some “sunrise” industries to be invented by a commission of unemployed economists. You will be astonished to hear that in spite of those pieces, the notion is still around. Now, the unstated premise of the Atari Democrats’ notion is the belief that protectionism is unthinkable in the modern world. We learned this in those high school courses on Problems of American Democracy we took instead of history. Even President Reagan learned it. In this year’s Economic Report he said, “I am committed … to preventing the enactment of protectionist policies in the United States.”

I am pained to suggest that President Reagan is wrong once again. In explanation, I am going to start with what the consequences of American protectionism might be for the rest of the world, particularly for what are euphemistically called Less Developed Countries, or LDCs. It is, make no mistake, the LDCs that would ultimately be most seriously affected by a rebirth of protectionism. Most of the talk now is about Japan, but that is merely because most businessmen and most business commentators don’t remember yesterday and can’t imagine that tomorrow may be different from today. It was only yesterday (let us remember) that the Germans were the Wundermenschen. The VW bug had bitten off a piece of the American market long before Toyota mastered the pronunciation of Corolla, Everyone had a Leica before Cheryl Tiegs taught us to prefer Olympus. The cognoscenti turned up their noses at Avery Fisher’s consoles and rushed to get the latest components from Telefunken. German productivity was proverbial.

But now all that is forgotten. The Germans are having a depression just like us, and the Japanese are selling cars and cameras all over Europe. VW is losing money hand over fist, and Telefunken is on the verge of bankruptcy.

A moderately reflective person might wonder whether what happened to the United States, and then to Germany, might not one day happen to Japan. As a matter of fact, it is already happening. The Japanese are writing off their textile industry and are manufacturing electronic components in Singapore and South Korea, just like the rest of us. Aha! says standard economics, this will benefit the Japanese. The benefit will come from lower consumer prices, and the Japanese who lose their jobs to Koreans will turn their hand to things the Koreans want but can’t make. That is the way standard economics thinks things work, and next month we’ll consider why they don’t work that way.

For the present, let’s step back a bit. The factors of production, we learned from standard economics, are land, capital, labor, and perhaps technology. Which of these factors do the multinationals seek in strange strands? Not technology, certainly, and not land, especially if they’re doing their seeking in Singapore. Not capital, either, though a sheik here or there may have more than he can think what to do with. No, the factor sought is labor.

Well, everybody knows that. Asian girls, especially young ones, have remarkably nimble fingers and are wiry and strong and able to work long hours, and they’re smart and eager to learn. Moreover, they’re fresh from the bush or the slums and never saw regular pay before and so are easily pleased. They don’t fuss about safety regulations or health insurance or sex discrimination or any of that stuff. Nor is this so bad as it may sound to us liberals, because these people are in for a tough life any way you look at it, and work in an electronics sweatshop is a lot better than their alternatives, and that is true even without mentioning prostitution.

Overworked and exploited though they may seem by our standards, these girls may have been chosen by destiny to use their nimble fingers to scratch out the first painful steps toward the establishment of a middle class in their underdeveloped lands. Such steps were not easy in the 19th-century Northern Hemisphere, and there is no reason to expect them to be easy in the 21st-century Southern Hemisphere. And unless the steps are taken, the LDCs will continue to be at the mercy of imperialist or neoirnperialist powers. This is the standard view of the situation-hard-nosed, perhaps a bit regretful, but above all forward looking.

Now, I will contend that neither standard economics nor Marxian economics understands what is wrong with imperialism. The thing about imperialism, I propose, is that it is extractive. It extracts the produce of mines and of agriculture, and it pays for these products whatever the market will bear[1]. Sometimes the market will bear a lot, mostly it won’t. Some American farmers are old enough to remember how it was in the days before price supports;  that’s the way it is now and always has been with LDC producers of copper and bauxite, cocoa and bananas and sisal. If you’re puzzled by this performance of the market, you will find it beautifully explained in the works of John Kenneth Galbraith, particularly Chapter VIII of Economics and the Public Purpose. Meanwhile you can rely on the avouchment of your own eyes that somehow prosperity has not come to Guatemala or Guinea or Bangladesh.

It is obvious enough that imperialism extracts the minerals of the earth and the fertility of the fields and ships them abroad. What it does to the factor of land, it also does to the factor of labor. The only reason for employing LDC labor is that it’s cheap. It’s far away and not always very efficient, and usually in need of an embarrassingly brutal dictator to keep it in line. But it is cheap.

Its cheapness is revealed by what it is exchanged for. When the labor of an LDC is used to manufacture products for export to the developed countries, the LDC earns foreign exchange that it spends in the developed countries on what it wants or needs – often on food it once produced itself – until seduced into maximizing exports. To understand what such an exchange means, we can compare the average hourly wage in the LDCs with that in the industrialized world. The precise numbers of course vary from place to place, but a ratio of one to five won’t overstate the differential and will do for purposes of illustration. This requires the LDCs to exchange five hours of their labor for one hour of our labor. The produce of the four-hour labor difference is in effect extracted, no less than the produce of their land was (and still is) extracted.

It is important to understand that this is not a situation of temporary unfairness, or of an imbalance that will be righted even in Keynes’ famous long run. What is extracted is gone forever. The situation, furthermore, has grown steadily worse in our time, much to the bewilderment of everyone who had great hopes for the results of liberation.

WHY HAVEN’T the newly liberated colonies been able to duplicate the success of the U.S. following its freedom? Wasn’t our position right up to World War I just like that of the LDCs? Didn’t we need and use British and European capital, just as the other former colonies need and use the multinationals’ capital today?

No, and again no. We used British and European capital, all right, and for the most part they were handsomely rewarded, but we used it first to build our infrastructure – canals, then railroads, eventually even street railroads. And we were inevitably the ones to employ that infrastructure; there was no way that benefit could be extracted. When foreign capital went into steel and soap and thread and chemicals, those products were for our own market; their benefits were not extracted, either. An interesting short book with a long title published last year, European Direct Investment in the USA before World War I by Peter J. Buckley and Brian R. Roberts, is able to discuss all the details of its subject without once considering the possibility that Europeans invested in the U.S. to manufacture for their own consumption. A sign that our development was not extractive is the fact that throughout the period in question – and indeed until very recently-our wage scales were the highest in the world. (That used to be a proud boast.)

In contrast, when GE manufactures plastic-frame irons in Singapore or Atari makes mind-boggling games in Taiwan, the irons and games do not stay in the underdeveloped world. They are shipped out, and with them is effectively extracted the wage differential between the underdeveloped world and the developed world.

The United States was able to escape similar domination by Britain and Europe in the 19th century mainly because of the sheer size of the country. A chronic shortage of labor kept wage scales relatively high, and a large internal market encouraged the use of foreign capital to produce goods for our domestic demand rather than for export. To duplicate the U.S. performance, the LDCs must duplicate the conditions. This won’t come naturally; they will have to be driven to it. Nevertheless, their objective should be to use their labor to produce what they themselves need. They should be manufacturing equipment for an equivalent of the Rural Electrification Administration. They should be developing trade within the LDC world and reducing their trade with the industrial world. The LDCs will always lose in trading with the industrial world (though a few of their citizens may become filthy rich); by trading among themselves they can pull themselves up by their bootstraps, just as we did a century ago.

Such quasi- internal trade would require cooperation on a scale that appears implausible. But the industrialized world-particularly, as I’ve said, the United States – could enforce such cooperation on the LDCs by the simple expedient of denying their manufactures unlimited access to our market. If GE could not sell its Singapore-produced irons in the U.S., it would find it necessary either to produce something else in Singapore, or to pass up the opportunity to employ its capital there in a highly profitable way. Even if it opted for the latter solution and pulled out, the Singapore economy would be, literally and figuratively, healthier.

The proposal to deny unlimited access to our market goes against everything we used to be taught. It also goes against what the publicists for big business continue to teach us. It is, however, merely an extension of the anthropologists’ commonplace that subsistence farming is better for peasants than is a one-crop plantation system. In my next column, I will take up more fully how a change might be implemented, as well as what its effect would be on us.


[1] Editor’s note:  Those who knew the author, and his wife Lucile H. Brockway, my parents, know that these ideas were discussed between them and that she published a ground breaking book, “Science and Colonial Expansion” in 1979, four years before this article appeared, that makes these points, and others, at length from an anthropological perspective.  The two of them were quite a pair….

Dear Editor

‘Dismal’ Pleasures

George P. Brockway has been one of the most enjoyable writers in THE NEW LEADER lately. The installments of “The Dismal Science” demonstrate wit, erudition – not that I always agree with him – and a refreshing willingness to question the assumptions that lie behind the experts’ arguments.

Brockway’s appreciative comments on John Kenneth Galbraith, for example, were excellent. (“Rereading Galbraith,” NL, June 13). They reminded me of the wrangling that greeted the publication of The Affluent Society. Much of the controversy centered on Galbraith’s observations about advertising, about “the contriving of wants” in order to increase production.

Galbraith’s case is convincing, and yet even the people who agree with his conception of the role Madison Avenue plays in our economy continue to wrongly believe that consumer choices guide production. This myopia simply shows the need for more of the kind of illumination that is shed by Brockway’s columns.

Dayton, Ohio                                                                                                                  RONALD LAMBRETH

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