Chapter 1. The Secret of Free Enterprise Capital Accumulation

Section A; Part I: External Trade

Security for Powerful Nations Entails Insecurity for Weak Nations



Chapter 1. The Secret of Free Enterprise Capital Accumulation

Capitalism’s capital accumulation has some studiously ignored secrets. That capital is properly owned and employed by labor is recognized by no less an authority than Adam Smith: “Produce is the natural wages of labor. Originally the whole belonged to the labourer. If this had continued all things would have become cheaper, though in appearance many things might have become dearer.”1 Of course, the production once claimed by labor and now lost is the ever-increasing share that is going to profits of subtle-monopoly landrent, subtle-monopoly patents, a subtly-monopolized banking system, and the enormous costs of running those monopolies.

What Smith means by all things being cheaper, though they appear dearer, is that if workers had been fully paid they would have retained full title to the value of what they produced. Things would be cheaper because fully-paid workers would be able to buy more from other well-paid workers, who in turn would both produce more and purchase more. Not only would purchasing power be advancing in step with productive capacity, those who lived off the labors of others would now have to find productive work.

Instead of workers being paid full value for their labor, much of history has been capital—through control of the law-making process—transferring a part of labor’s rights to itself. As Adam Smith goes on to explain, this is a centuries-long process of the wealth produced by labor becoming a right of capital through subtly-monopolized title to land, technology, and finance capital.2 The rights of labor have historically been ignored and an excessive share of the wealth produced by the increased efficiencies of labor has, under exclusive property rights of residual feudalism, accrued to capital.

Wealth Accumulation Expands or Contracts Exponentially with the Differential in Pay

Technology and skill gaps, if initially large, tend to grow under free trade. This is an old Mercantilist insight that the modern economic analysis of innovation has reaffirmed and renamed the “learning-by-doing” requirement—that is, experience with the productive process is a sine qua non for building up productive skills and innovative prowess. —-David Felix, “Latin America’s Debt Crisis,” World Policy Journal

The secret to siphoning away others’ wealth is the low-paid labor in the poor nations and high profits and high wages in the rich societies that have dominated global trade for centuries. Arjun Makhijani calculates that, through an imbalance of currency values, equally-productive labor in the world’s defeated, dependent nations were paid 20% that of the developed world, a 5-to-1 differential.3 Later currency collapses in the developing world may have doubled that differential to 10-to-1.

Wealth accumulation advantage from unequally-paid but equally-productive labor is not a linear progression, it is exponential. Consider how long the underpaid nation must work to buy one unit of wealth from the high-paid nation and then consider how many units of wealth the high-paid nation can purchase from the underpaid nation with the wages of their equally-productive labor working that same number of hours.

Capital accumulation advantage increases or decreases exponentially with the differential in pay for equally-productive labor. The equally-productive worker in the poorly-paid nation produces a unique widget, is paid $1 an hour, and is producing one widget an hour. The equally-productive worker in the well-paid nation produces another unique widget, is paid $10 an hour, and also produces one widget per hour. Each equally-productive nation likes, and purchases, the other’s widgets. All true costs are labor costs so we ignore monopoly capital costs, which go to the developed world and only increases the advantage anyway, and calculate the cost of those widgets at the labor cost of production, $1 an hour and $10 an hour. The $1 an hour country must work 10 hours to buy one of the widgets of the $10 an hour country but, with the money earned in the same 10 hours, the $10 an hour country can buy 100 of the widgets of the $1 an hour nation. In a homogenized market (a mixture of high-paid and underpaid equally-productive labor) there is a 10-times differential in wealth gained. At that 10-times wage differential in a non-homogenized market (this example) there is an exponential 100-times differential in capital accumulation or buying power.

The wealth accumulation advantage of the higher-paid nation over the lower-paid nation is equal to the high pay divided by the low pay squared: (Wr/Wp)2 = A (Wr is the wages paid to equally-productive labor in the rich country [$10 earned for every 1-hour time-unit of production]. Wp is the wages paid to equally-productive labor in the poor country [$1 earned for every 1-hour time-unit of production]. A is the capital accumulation advantage of the well-paid nation [100-to-1 in this example]). All wealth is processed from natural resources by labor utilizing industrial capital, most of those resources are in the weak, impoverished world, and that natural wealth is transferred to the powerful imperial-centers-of-capital through low commodity prices and unequal pay for equal work, as per this formula.

The scenario above is expressed ã’ priôri’ (assuming the labor cost to build industries in each country and the resources harvested in each country, and thus the value of those industries and resources and the profits produced, at the same differential). This math is only in trade between nations with a wage differential for equally-productive labor. It does not represent trade within homogenized multiple markets of many high-paid and low-paid equally-productive workers. It does, however, point the way towards complex formulas that will accurately describe those complex markets. (The Legal Structure for Corporate Imperialism & Thinking in Terms of Units of Production, pp 207-13, are crucial to fully understanding this chapter.)

In reality, only a part of the workers in world trade are equally-productive but all could be relatively so if they had equal access to technology, training, and markets. Even now, grape pickers, strawberry pickers, janitors, et al.—any work which is not mechanized anywhere else in the world—and a share of the industrial labor of the developing world are just as productive as other workers anywhere.

It has been proven that labor everywhere can be trained to run industries just as efficiently and at times more efficiently, than developed world labor. Whenever the difference in pay is greater than the difference in productivity, a part of the production of the underpaid nation is transferred to the high-paid country. To maintain control of that wealth-producing-process, it has been the Grand Strategy of imperial nations for centuries to monopolize the production processes through denying other nations the use of technology and access to markets. Thus it has been imperial policies that have kept poor countries from learning industrial skills and building productive, affluent, economies—not their incapacity to learn.

Equal Pay for Equal Work is the Answer to World Poverty

As we have learned, in direct trades between countries, wealth accumulation advantage compounds in step with the pay differential for equally-productive labor. If the pay differential is 5, the difference in wealth accumulation advantage is 25-to-1. If the pay differential is 10, the wealth accumulation advantage is 100-to-1. If the pay differential is 20, the wealth accumulation advantage is 400-to-1. If the pay differential is 40, the wealth accumulation advantage is 1,600-to-1. If the pay differential is 60 (the pay differential between Russia and the victorious America [23-cents an hour against $14 an hour]), the wealth accumulation advantage is 3,600-to-1. And if the pay differential is 100, the pay differential between the collapsed Russia and the victorious Germany (23 cents an hour against $23 and hour), the wealth accumulation advantage is 10,000-to-1.a Place a trader between those two unequally-paid nations to claim all surplus value both through outright underpaying in hard currency or through paying in soft currency and selling in hard currency, capitalize those profits by 10-to-20 times, and you have accumulated capital through capitalized value.4

Inequality in pay creates invisible borders that guide the world’s wealth to imperial-centers-of-capital. Equal pay for equally-productive labor instantly eliminates those borders and quickly alleviates world poverty. If unequal pay for equally-productive work were reduced to a 50% pay differential (an equally-productive $5-an-hour nation trading with a $10-an-hour nation), the wealth accumulation advantage of the high-paid nation in direct trades with low-paid nations would be reduced to a 4-times advantage. A $3-an-hour labor nation trading with a $4-an-hour labor nation incurs a doubling (1.77 times) of wealth potentially accumulated (or consumed) for the better-paid nation. When all have access to technology and markets and pay is equal for equally-productive work, the wealth retained (and available for accumulation or consumption) by each nation is equal.

Underpay through unequal Currency Values

When the IMF/World Bank/GATT/NAFTA/WTO/MAI/GATS/ FTAA /military colossus forces other countries to devalue their currencies and reduce consumption to increase sales of their valuable natural resources to the developed world, this lowers the value of their labor and commodities, and raises the relative value of manufactured products from the developed world. The claim is made that this is due to the inefficiencies of developing world industry and labor, but this is hardly so:

The low level of wages is intimately linked not to low productivity of labor-time, as classical economic theory would suggest, but to the undervalued exchange rates and the workings of the international monetary system…. The world’s monetary system does not set values of the currencies on the basis of relative productivity of workers…. The present system is based on balance of payments considerations and on capital flows…. [T]he Mexican currency is valued much lower than the relative productivity of Mexican workers collectively…. [W]hile the average amount produced per unit of time by workers in Mexico, Brazil or Bangladesh is lower than in France, the United States or Japan, the difference in wages at present exchange rates is much bigger than the difference in productivity. This explains why the purchasing power of American dollars, French francs or Japanese yen is much bigger in Mexico, Bangladesh or Brazil than it is in their countries of origin.5

Arjun Makhijani explains further:

The product that export platform countries in the developing world are selling is not merely cheap labor, but highly productive labor. In Singapore … McGraw Hill produces in one year an encyclopedia that takes five years to produce in the U.S…. Mexican metal workers are 40 percent more productive than U.S. workers, electronics workers 10 to 15 percent more productive, and seamstresses produce 30 percent more sewing per hour than their U.S. counterparts.6

One study concluded developing world workers were paid as little as 8/10-of-1% of the product sales price in the industrial world and in all cases they were paid under 2% of the final sales price.7

Paying equally-productive developing world labor 20% the rate of developed world labor (since the currency collapses halved their wages, possibly 10%), and the former Eastern bloc only a fraction of that, is a wealth confiscation rate far greater than at the origin of the monopolization of the tools of production and proto-mercantilist control of trade (plunder-by-trade) in the city-states and coalescing nations of Europe centuries ago (see next chapter).

There is “a continuing South-to-North resource flow on a scale far outstripping any the colonial period could command.”8 During Kennedy’s presidency there were $3 flowing north for every $1 going south; in 1998 the ratio was 7-to-1 and, assuming the financial meltdown of the imperial centers is avoided, the rate of flow will increase. With their enormous reserves of wealth in the developed world, corporations and speculators were buying up properties in the financially collapsed world for 3-cents to 30-cents on the $1. Those titles to others’ industries and natural resources will demand profits and those profits will flow to the imperial centers. That will further increase the flow of wealth to the financial centers.

Purchasing Power Parity, a Strategy of Deception

The farther one goes east from the borders of Western Europe, the lower the value of local currencies and thus the higher the rate of wealth confiscation. In each case, if labor values were calculated by the Purchasing Power Parity (PPP) system, one would find greater wealth in those countries.

Simply stated, PPP calculates commodity values in countries with undervalued currencies at their values in the imperial-centers-of-capital. Those values may have been calculated in all sincerity. But the low wages and prices received by the already impoverished when calculated in “hard” currency gave substantial moral power to impoverished countries when negotiating with the IMF and World Bank which chose PPP to offset such embarrassment. What was not addressed was that these low currency values denied full value to the soft currency nations when purchasing from the imperial center while simultaneously they were required to sell to the already wealthy world below value.

If the IMF, World Bank, and traders used these PPP equal values in purchase of commodities and payment of debts, the world’s currently suppressed and oppressed people would be fully paid for their labors and would thus have gained their economic freedom. Of course, such calculations would immediately expose how powerful societies lay claim to others’ wealth through unequal wages and low-priced commodities by imposed “soft” currency values.

Periphery of Empire Finances the Imperial Centers

Poor countries are financing the rich through the wealthy world underpaying equally-productive developing world labor, paying far less than full value for natural resources, and through primarily investing in commodity production for the wealthy world. In this process, between 1980 and 1990—when measured against the dollar (not internal [PPP] relative values)—“wage levels in Mexico declined by 60% [another 40% in 1994-95] …, in Argentina by 50% and in Peru by 70%.”9 This appears as IMF/World Bank/GATT/NAFTA/WTO/MAI/GATS/FTAA failures. However, they are the successes of financial and economic warfare, not failures. The prices of developing world commodities are lowered while the prices of developed world products are retained, siphoning ever more wealth to corporate imperialists:

Capital that has extended its influence over these new territories knows its own interests, works together in its common interests even while individual capitals compete, [and] coordinates its goals and its strategies in its common interest…. There will always be social inequality, because that increases profits; winners win more because losers lose more. Keeping the Third World in dependence and poverty is not an accident or a failure of the world capitalist system, but part of its formula for success.10

Holland consumes 14-times the natural resources within its borders as calculated in monetary units, which far undervalues developing world labor. Other European countries are more or less comparable, and the United States, with fewer than 5% of the world’s population, consumes almost 30% of the world’s natural resources.11 That there is any intention of the developing world succeeding under a philosophy that siphons such enormous wealth from the impoverished to the wealthy is an oxymoron. For the world’s poor to gain control of their destiny the wealthy world must pay them equally for equal work, pay full value for their natural resources, and permit them equal access to finance capital, technology, and markets.

Though the IMF/World Bank/GATT/NAFTA/WTO/MAI/GATS/ FTAA purport to practice equal and honest trade, this is so only between developed imperial-centers-of-capital and then only partially so. Labor on the periphery of empire is being asked to take severe reductions in pay; the original advantages granted to Japan, South Korea and Taiwan (China and other Southeast Asian nations also slid under that umbrella) are being scaled back; and the needs of most impoverished nations for industrialization support (equal pay for equal work, access to technology, protection of home industry and markets, and access to world markets) are not even considered. Except for the currently emerging China and Southeast Asian countries (and their 1997-98 financial meltdown highlights that their success is not yet assured), the former colonial world is still the countryside providing cheap natural resources and cheap labor to imperial-centers-of-capital.

Trumpeting Partial Rights as Full Rights

The following scene is repeated over and over throughout history: Rights are taken away from the weak through violence and cunning. The excessive rights of power become excessive rights of capital formalized into law (primarily through the structure of residual-feudal property rights) and those excessive rights accumulate wealth. The greater share of that confiscated wealth is wasted (trade wars, cold wars, covert wars, hot wars, and high living) and a smaller share becomes accumulated capital. Historically those rights were regained through revolutions. Once the rights of the Napoleonic Codes had been experienced, aristocracy could not nullify those political gains. Likewise with the economic rights given developing nations to gain allies in the Cold War, rescinding those rights will be very difficult.

A society becomes accustomed to whatever structure of rights through which it obtains food, clothes, and shelter. A change in the structure of rights will feel abnormal. If a gain of rights for the politically weak—and thus a loss of rights for the powerful—is imminent, political power (supported by true believers in academia, the media, and among the masses) will immediately be deployed to suppress those gains to the weak and re-impose a pattern of beliefs which protects that power.

After the initial appropriation of rights through violence or cunning, the further claiming or suppressing of rights is done by good people (it could be you or me) maximizing the gains to themselves within the law and customs of society. That self-interest typically takes the form of supporting the imposition of a set of beliefs (a “framework of orientation”) and legal structures (inequality structured in law which is but a remnant of feudal law) to protect an interest group’s newly gained rights.

Each partial gain of rights as society comes out from under the feudal system from which our legal system evolved is trumpeted as full rights (a social-control-paradigm [“framework of orientation”]). That incomplete gain in rights becomes customary; technology continues to gain in efficiency, producing ever-more wealth; the masses receive the smaller share, or none, of that increased wealth; the powerful receive the larger share or even all the increase plus a part of what once went to labor; the rich get richer; the poor get poorer; and eventually another revolution is born.

After a gain in rights through a successful revolution, new power-brokers, or a coalition of old and new powerbrokers, continue the structuring of rights to lay claim to the greater share of the wealth produced by the ever-increasing efficiencies of technology (inequality structured in law). This cycle keeps repeating itself, normally giving more rights to more people each time. But full political rights cannot be won without full economic rights and full rights for all will never be attained so long as vestiges of residual-feudal exclusive property rights are structured into law.

Former Colonies do not have Economic Freedom

The former colonial societies furnishing most the world’s natural resources were defeated centuries ago. We are taught that they are now free but that is not so, rhetoric that they are notwithstanding. Labor is too poorly paid in defeated, weak, and dependent nations to create buying power and those cheap resources are processed into useful products that become the wealth of the industrialized and militarily powerful imperial centers. A small share of those manufactured products is returned to the weak defeated nations to pay for the raw material from which those manufactured products (created wealth) were made.

To purchase a small share of manufactured products from the industrialized countries produced with developing world resources, defeated societies must sell even more of their resources. Manufactured product sales above the needs of payment for resources and money wasted on arms and corruption continually increase the debts of the dependent nations and servicing that continually increasing debt requires the sale of even more resources.

Heavy investment in extraction of the natural wealth of weak resource-wealthy nations while paying local labor subsistence wages assures a surplus of production and low prices for those natural resources while simultaneously denying both the accumulation of capital and buying power in the dependent nation. Of course, those debts cannot be paid off and that is the much spoken of, but little understood, debt trap.

Summary

Control of trade, and thus control of who becomes wealthy, has for centuries been through monopolization of technology and unequal currency values. The cooperative approach to Germany, Japan, and Southeast Asia we witnessed for 40 years as technology was shared and currency values equalized with allies was only to gain supporters for the battle to suppress the breaks for freedom worldwide that we will be addressing in depth. But those battles have been temporarily won by the imperial-centers-of-capital and the rules are changing.

If developing centers of capital were permitted to mature and true free trade developed this would be a crisis of the first order for the imperial-centers-of-capital. The high price of technology is a function of patent monopolies copied right off of feudal monopolies (Chapter 25). Honest capital is but stored labor and the proper cost of virtually every manufactured product, including industrial capital, is the price of labor to produce it. This includes a fair wage (not monopoly wage) for management and reasonable interest on capital (stored labor) for owners.

The fact that almost every region of the world has more natural resources than Japan attests that—once it has industrial capital, an efficient internal transportation system, and access to markets—the developing world can, on the average, produce more cheaply than Japan. Where are Hong Kong’s resources? Where are South Korea’s resources? Where are Taiwan’s resources? Where are the resources of most of Europe? The answer, of course, is that those resources are primarily in the impoverished world and that natural wealth has been confiscated through inequalities of trade to become the wealth of the imperial-centers-of-capital.

The centuries-long process of embedding excessive rights in property (those residues of feudal exclusive property rights) and taking rights away from labor and those on the periphery of empire has created an economic monster. We grow up within that monstrosity, no other system for comparison is permitted to evolve, everything looks normal to us, and people are instinctively threatened by thoughts of major changes. After all, their livelihoods are tied to those same horrendously wasteful arteries of commerce.

But consider this: The greater share of low-paid labor we have been describing is essential work while over half the labor in the high-paid services in the industrialized world is, except as a method of distribution, totally unnecessary. The rights of property are so excessive and the rights of labor so inadequate that throughout the Industrial Revolution distribution by unnecessary labor has evolved to pull some of the unearned wealth back from property. It is the buying power of the masses from the wages of that unnecessary labor that created more demand, that created more industry, and that created today’s developed world economy of income (wealth) distribution through unnecessary labor.12

When one realizes how distribution by unnecessary labor works within highly inefficient monopolies one can look up at the glass skyscrapers in the heart of any city, look at the plaques on the doors, and realize that the entire building is unnecessary as well as the businesses providing the fixtures and maintenance.

Chapter 27 addresses how, with modern communications, possibly 60% of retail infrastructure is unnecessary. Restructure the residual-feudal exclusive property rights under which those subtle monopolies are created into conditional property rights and those monopolies disappear even as use rights, competition, and efficiency increase (superefficient capitalism). Instead of distribution through a residual-feudal monopoly structure there is efficient distribution through equal rights to nature’s bounty, equal rights to a productive job (two to three days per week) and equal rights to leisure time (four to five days per week). There is no need for money to work its way through a monopoly for roughly half to be distributed to non-producers and those doing unnecessary work and half paid to those actually productively employed.

Wasted labor within what appeared to be an efficient economy has been outlined in classics by Benjamin Franklin 200 years ago, Charles Fourier 180 years ago, and Thorstein Veblen, Bertrand Russell, Lewis Mumford, Stuart Chase, Upton Sinclair, and Ralph Borsodi in the first half of the 20th-Century. Late 20th-Century writers describing the same phenomenon are Juliet Schor, Seymour Melman, Samuel Bowles, David Gordon, Thomas Weiskopf, Jeremy Rifkin, Andre Gorz, numerous European authors, and this author in The World’s Wasted Wealth 2 and Cooperative Capitalism: A Blueprint for Global Peace and Prosperity.

Footnotes

1. Obviously the Russian worker’s factory was at that time essentially shut down, they were still being paid their 23-cents an hour, nothing was produced, and the formula appears inaccurate. But it is the basis that is inaccurate, not the formula. Before its collapse, the Soviet Union was calculated to be within 8 years of equaling the West in technology (Rich Thomas, “From Russia, With Chips,” Newsweek (Aug. 6, 1990). With its huge natural resources and its highly skilled workforce operating factories utilizing the latest technology, and assuming it had access to markets, Russia could theoretically produce just as efficiently as anyone else. The billions of dollars poured into Russia were not building any manufacturing industry at all, let alone modern industries. A massive inflow of funds used for anything except building a technologically modern industrial capacity becomes a debt trap that lays claim to more and more of a dependent nation’s wealth. Back to text

Endnotes

1. Adam Smith, The Wealth of Nations, Modern Library edition (New York: Random House, 1965), p. 64. Back to text
2. Ibid, pp. 64-67. Back to text
3. Arjun Makhijani, From Global Capitalism to Economic Justice (New York: Apex Press, 1992). Back to text
4. Doug Henwood, “Clinton and the Austerity Cops,” The Nation (November 23, 1992): p. 628. Colin Hines and Tim Lang (Jerry Mander and Edward Goldsmith eds.) in The Case Against the Global Economy and for A Turn Toward the Local (San Francisco: Sierra Club, 1996), p. 487 say $24.90 an hour for the Germany and $16.40 for the U.S. When benefits are included German manufacturing wages rise to $30 and hour, America to $20 and hour and Britain to $15 (Richard C. Longworth, Global Squeeze: The Coming Crisis of First-World Nations (Chicago: Contemporary Books, 1999), p. 177. Russian wages will increase even greater when benefits are factored in. Back to text
5. Makhijani, Economic Justice, pp. xv, 80-81, 121-22, 162-65; see also pp. 159, 167-70. Back to text
6. Ibid, p. 163. Back to text
7. Jack Epstein, “Dickens Revisited,” The Christian Science Monitor, August 24, 1995, pp. 1, 8; Amy Kaslow, “The Price of Low-Cost Clothes: U.S. Jobs,” The Christian Science Monitor, August 20, 1995, p. 4; Christopher Scheer, “Illegals Made Slaves to Fashion,” The Nation, September 11, 1995, pp. 237-38. Back to text
8. Susan George, The Debt Boomerang (San Francisco: Westview Press, 1992), p. xvii. Back to text
9. Susan George, Fabrizio Sabelli, Faith and Credit (San Francisco: Westview Press, 1994); Duncan Green, Silent Revolution (London: Cassel, 1995), especially pp. 95-96; Hancock, Graham, Lords of Poverty (New York: Atlantic Monthly Press, 1989); James Petras, “Latin America’s Free Market Paves the Road to Recession,” In These Times, February 13-19, 1991, p. 17. Back to text
10. Peter Marcuse, “Letter from the German Democratic Republic,” Monthly Review, July/August 1990, p. 61. Back to text
11. David C. Korten, When Corporations Rule the World (West Hartford, CT, Kumarian Press, 1995), p. 33. Back to text
12. J.W. Smith, World’s Wasted Wealth 2 & Cooperative Capitalism; A Blueprint for Global Peace and Prosperity (ied.info/: The Institute for Economic Democracy, 2003). Back to text

This is a chapter from the book, Economic Democracy; The Political Struggle for the 21st Century. Visit that link for more information about the book.