Four More Years of Economics #7
On Mobility
May 20, 2007
Dear Abhay,
Last February, while writing about the philosopher Henri Bergson’s theories of movement, I found myself, in the following passage, posing a problem in economic terms.
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I recently traveled to Antwerp. I wrote an email to my host. “I am leaving Chicago, and will arrive in Antwerp tomorrow.” The next day, I emailed her again. “I am in Antwerp now.” She replied.
How wonderful that you can reach me as easily from nearby as from far away!
Yet it was only information that traveled so easily; a series of digitized encoded thoughts, and as such, certainly, a part of me, but only a part, shall we say, not an element. My physical body had to move through a series of segments of intermodal transportation, the financial cost of which had increased in recent years, as well as a series of security checkpoints, the psychic cost of which had also escalated. Nabil El-Aid El-Othmani of Morocco summed up my point when he wrote:
What is the future of globalization when there is an increasingly greater disproportion between the movements of capital and goods and that of people?
He submitted this question to Nobel economist Joseph Stiglitz in an online discussion, a conversation that instances the disparity, at least if one tries to imagine the difficulties of a face to face conversation, and considers information technology in the category of capital and goods. Stiglitz replied.
This disparity in the liberalization of capital and labor is a major problem. Enormous energy has been focused on facilitating the flows of investment and capital, while movements of labor remain highly restricted. This is so even though the gains to global economic efficiency from liberalizing labor flows are an order of magnitude greater than the gains from liberalizing capital flows.
We can understand this response by way of Chicago’s recent big-box ordinance, through which the city government attempted to force an increase in the wages of workers at Wal-Mart and similar stores. The effort failed because of the Mayor’s aggressive efforts to defeat it, heeding Wal-Mart’s threat to leave the city if it passed. Clearly it is easier for Wal-Mart than for a person who works at Wal-Mart to move to the suburbs. The disparity in mobility allowed the store to leverage the government into keeping wages low. Had the mayor called the bluff of Wal-Mart with the argument that an increase in wages increases labor mobility, and contributes more to community economic growth than an increase in profits, which will further increase the mobility of capital and goods, which, Stiglitz goes on to argue, increases economic instability, we can expect that Wal-Mart would have lost the fight and begun to transform from its current state as a cavernous dungeon into that of a store one can shop at with a relatively clear conscience.
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Since we gave our collaborative lecture on Gandhi in London last June, Mohammad Yunus has won the Nobel Peace Prize for his micro-lending work at the Grameen Bank, which makes your comments on him at that time all the more prescient. The award and some of the public dialogue that has followed, as well as local Chicago developments, have prompted me to revisit the passage above from my Bergson lecture, and, on reaching the limits of my understanding, to pose a question to you.
Since I wrote the passage, we have had an election here in Chicago, the results of which demonstrated that organized labor made good on its threats. The Mayor now has to contend with several new aldermanic public servants who ran almost solely on the issue of passing legislation to force a living wage at big box stores. The union efforts, as I see them, seek not only to redress Wal-Mart’s pressure to lower wages, but also to address this disparity in mobility. It seems to me that Stiglitz’s formulation of the question is primary, and dissatisfaction with wages and benefits results from the instabilities and tensions produced by labor immobility, or the radical discrepancy between capabilities of labor and capital flow. Recent tensions around immigration laws and the policing of borders strikes me as a product of these same tensions, since immigration is foremost a question of labor mobility. Chicago’s big box ordinance addresses the instability incrementally on a local level. Perhaps we can liken this approach to Yunus’s Grameen Bank work – addressing a large problem in a small way, not only to improve local conditions, but also to provide an example, a direction.
On Wednesday, October 18th 2006, one week after Yunus won the Nobel, John Tierney wrote a column in the New York Times arguing that Wal-Mart founder Sam Walton deserved the same prize for doing even more to combat poverty than Yunus. Tierney, who has since left the Times as a columnist, argued that poor laborers make more in a sweatshop job than through Grameen microlending, and that furthermore, Wal-Mart saves Americans money through purchasing goods produced by low-wage labor and selling them at very low prices, passing savings on to the consumer.
Let’s leave aside the self-serving nature of this argument for the Wal-Mart corporation, which in today’s NY Times is described as practicing “vehement anti-unionism.” The argument seems strange to me in purely economic terms, because of its emphasis on the benefits of low-cost goods and its de-emphasis of the negative effects of wage reduction. Tierney suggests that wage reduction in the United States is a necessary price to pay for wage increases in Asia. This appears to negate his previous point about US consumer savings. In respect to the US economy, the only person who saves money buying low-cost goods at Wal-Mart is the person whose wages remain unchanged in relation to the cost of those goods. If I have access to low-cost goods only because I have taken a reduced wage, I am not saving anything. So consumers whose wages Wal-Mart has driven down don’t benefit, while those in management positions, or with wages uninfluenced by Wal-Mart pressure, could benefit a great deal. Maybe that’s a simplification, but I have repeatedly heard this argument for the value of cheap goods as if prices exist independent of other economic factors.
In the end I think all discourse on this subject leads us back to Stiglitz’s observations about mobility. I tried to make the point in my Bergson talk that Wal-Mart’s pressure to reduce wages in America contributes to the discrepancy between labor mobility and capital mobility, which in turn contributes to economic instability. Now I will go a bit further and say that even Wal-Mart’s purchasing products produced by cheap labor abroad increases labor immobility on a global scale. In response to Tierney’s argument that sweatshop jobs lift workers above the poverty level, I would simply introduce the complicating factor of mobility, and perhaps in a broader sense of agency. Is it not true that part of Grameen’s radical approach is how it allows self-defined labor? How it proposes that poverty results from more factors than income? If workforces sacrifice mobility, agency, and self-defined labor, in exchange for a stable wage, then on a global level we begin to see the stresses that Stiglitz brings to our attention.
Is not the very idea of credit a method for taking advantage of capital mobility on an individual level? The Grameen approach shares this benefit with the lower economic strata of the population. The denial of credit to the poor seems an artificial construction designed to deny class mobility, or to keep poverty entrenched, since as Yunus says, the poor have an even greater incentive to pay off their loans than the wealthy.
Tierney’s column suggests to me that we in America continue to think that economic discourse concerns only wages and the costs. Otherwise, how could he make such an absurd argument that a radically retrograde institution like Wal-Mart somehow parallels a radically progressive one like Grameen? Is it so simple to distract people from the underlying issues? Even with the examples of Stiglitz, Yunus, and Amartya Sen, we so easily regress to reductive notions of economics.
All of this is a preamble for my question to you. If I were a real economist, I would be able to back up my thoughts with formulas, statistics, charts, and diagrams. However, since you tolerate my imaginative approach, I will ask you a question where my imagination fails. Stiglitz says “the gains to global economic efficiency from liberalizing labor flows are an order of magnitude greater than the gains from liberalizing capital flows.” My question to you is, what forms do those gains to efficiency take? Why are they an order of magnitude greater? And most important perhaps, what would a social structure look like that has attained a balance between the mobility of labor and that of capital and goods? What model do we have for the cessation of the disparity?
As always, I look forward to your response,
Matthew
Four More Years #8
Berkeley
June 3, 2007
My dear Matthew,
1.
We don’t eat mangoes in India. We suckle on them.
Every summer millions of Indians carefully remove mango from stem and using a quick squeezing action of the fingers suckle their mangoes as they did their mothers’ breasts, mangoes placed tightly between the lips.
The recent mangoes for Harleys trade deal will bring thousands of Indian mangoes into the United States for the first time in eighteen years but without a corresponding allowance for people to immigrate, mangoes will be eaten, not suckled on. That, my dear Matthew, breaks my heart.
2.
Karl Marx predicted that while in the early stages of capitalism labor would be mobile, in the later stages capital would be mobile with labor mobility turning into an epiphenomenon.
3.
In 1982 I started my studies in economics at Bombay University. I would often walk down to the American library to read the Sunday comics in the unfamiliar thick newspapers.
One day in the American library I found a book by John Kenneth Galbraith that changed my life. In The Nature of Mass Poverty Galbraith argued that the cause of poverty was what he termed accommodation. People get used to their circumstances and tend to settle into a poverty equilibrium. His solution, which came as a surprise to me then, was emigration.
Galbraith completely changed my view of my own options. I had been brought up to believe that you could travel abroad for an education but you had to go back home. That’s what my father had done after three years in England. It was the right thing to do for oneself and the country.
I was thrown from my comfortable equilibrium. Galbraith was, after all a former Ambassador to India, an economics professor at Harvard, and the first economist in the world to teach a class on development economics. His theoretical construct was followed by historical case studies showing how emigration from poor regions had helped not only the emigrants but also the people left behind. As people left the immobility of the poverty equilibrium the changing ratio of people to resources and new linkages with prosperous regions created wealth in what was once a poor land.
That was when I decided I’d leave home one day. Six years later I did.
4.
Much of the disparity between the mobility of goods and people can be explained with the concepts of average and marginal costs. Gandhian economist Fritz Schumacher liked to tell the story of driving on the motorway from London to Glasgow and noticing a large lorry carrying biscuits from London to Glasgow for sale. Later, on the same motorway but on the other side he noticed another large lorry carrying biscuits from Glasgow to London for sale. Schumacher would end his story by remarking that an alien from outer space would be forgiven for assuming that on earth biscuits needed to be transported 600 miles before they could be eaten.
The London biscuit-maker being a large scale producer finds his overheads to be extremely high but the price of producing a marginal or one more biscuit to be absurdly low. Even though average costs are fairly high, marginal costs are a few pennies per extra biscuit produced. So the London biscuit-maker upon saturating the London market finds it cheap to exploit the Glasgow market. As long as biscuits sold in Glasgow can fetch a price that covers transportation costs and the negligible marginal costs, it is profitable for biscuits to be shipped to Glasgow.
It follows from the same kind of reasoning that the Glasgow biscuit-maker finds it profitable to make and ship biscuits to London. We may summarize this common situation as:
MC < AC where MC is marginal cost and AC is average cost.
5.
Opponents of minimum wage laws and living wage ordinances generally warn that jobs will be lost if such laws are put into place. Proponents of these measures respond by attempting to minimize the job losses. The simple truth of the matter is that jobs will be lost as a result of these laws but this is a matter to rejoice not mourn.
We must go back to the institution of the minimum wage law in 1938 to understand this issue better. The framers of this law intended to throw out of business those employers who were blatantly exploiting workers including children. Low paying, low-worth jobs that degraded humans needed to be eradicated.
No residents of a wealthy country such as ours must be subjected to the humiliation of working a full-time job and still not having enough to eat for themselves and their children. Walmart is exactly the kind of unsavory business that the framers of the minimum-wage laws were wanting to put out of business. At present, a significant number of full-time Walmart employees are unable to earn a living wage and are below the poverty-line, living on subsidies by the state.
Matthew, the reason I think most classical economists are obtuse on this point is that they see labor as simply a numeraire that allows for the computation of production costs. For Marx, on the other hand, labor is value. While exploiting labor is seen as a means of increasing value by the classical economist, it is seen as a loss of aggregate value for society by the Marxist economist.
6.
Krista and I enjoy living in Berkeley where most people support local organic farming, are in favor of living-wage ordinances and rent-control. However, even in Berkeley, most people are against free and open immigration, something I strongly support since my Galbraithian awakening. Having been schooled in elementary classical economics, they reach the incorrect, but common fear-based conclusion that open immigration means lower wages.
What most people, even in a radical enclave such as Berkeley, don’t know is that their fear of immigration is based on an economic model that assumes that each country produces just one product! When that assumption is relaxed the simplistic conclusion that equates open immigration with lower wages falls apart.
7.
What exactly is efficiency? In economics we define efficiency as the absence of waste. But there are two different kinds of waste: private and social. The businessman in London sending biscuits to Glasgow is acting efficiently. After all, he has excess capacity due to his high overheads. By exploiting new markets for his products he is utilizing his capacity to the full extent, avoiding waste. The businessman in Glasgow is doing the same.
The extreme mobility of biscuits as well as all other goods is an efficient decision on an individual level but a social inefficiency bordering on absurdity.
8.
Gandhi presented an alternative economic vision of small-scale producers selling in local markets. Small enterprises require only small overheads ensuring that marginal costs are close to average costs. There are no incentives for producers to ship their products far away. This is the only internally consistent and sustainable economic system. We may summarize such a system as:
MC = AC where MC is marginal cost and AC is average cost.
9.
The obscure but important Rybczynski Theorem states that when each country produces two or more products, an increase in a factor of production will not cause the price of the factor to decrease but will instead change the composition of the output. What that means in practical terms is that an increase in the mobility of labor caused by higher living wages and open immigration will not cause wages to drop but will instead change the kinds of things we produce and how we produce them.
We will produce fewer machine-produced, capital- and overhead-heavy products such as the typical product sold at Walmart, and produce more hand-crafted products that people really need and want. We will move from the perpetual imbalance and disharmony of MC < AC to the harmony of MC=AC.
10.
People, even when mobile, do not behave like biscuits being shuttled between London and Glasgow or like mangoes and Harleys being traded back and forth from India to America for the simple reason that they can not be mass produced. Birthing is to this day a cottage industry with marginal and average costs being very close together. In fact when it comes to migrating, the marginal cost (MC) of emigrating is always higher than the average cost (AC). The community of immigrants in America where I arrived in 1988 was on average much better off, settled, and adapted than I, the marginal immigrant, was. In my first few months of Chicago winter I got deathly ill. Having grown up in the hot, humid, coastal climate of Bombay it had simply not occurred to me to close the windows of my dorm room.
Looking forward, as always, to your next letter,
Abhay
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