A Mendacious Triangular Trade (Part IX)
The notion came to me that trade in the modern world could be likened to a triangle by what is essentially a poor memory. The great economist David Ricardo had proven what others had suspected, that a law of comparative advantage would ineluctably favor free trade among countries. I recalled that Ricardo had used three countries in his model -- hence, a triangle. Actually he used only two. So, what we have here is a "mendacious triangular trade" in the purest sense of mendacity: our triangle has only two sides.
But there was, in my original intent, a mendacity of a different sort, one not quite so obvious. As envisioned by Ricardo (and many others) it would not matter that, say, Chinese labor was so cheap that the Chinese could produce more of every exportable commodity than, say, we could here in America. In a world based on absolute free trade, the flow of American gold into China would in the long run cause the price of labor in China to increase to the point where American labor could compete. This would be brought about by a double effect. As the cost of Chinese labor increased, the price of American labor would decrease.
In a freely trading world, both effects would occur. As more money flowed into China, the purchasing power of the Chinese worker would increase, which in turn would drive up the price of goods in China, which in turn would lead Chinese entrepreneurs to bid up the price of labor so as to take advantage of the robust local market. As dollars left America, and as the price of goods decreased, the price of labor would tend to fall. All in good time, the international market would find "equilibrium" and the laws of economics would, once again, have been proven out.
In actual practice we see, indeed, that the price of labor in America is tending toward a lower level, as more workers leave higher paying manufacturing jobs to take jobs in the service industry (i.e., at Wal-Mart or MacDonald’s). If the price of labor in China were, in fact, moving in the opposite direction we could expect the free trade policy (to which America is committed) to bring China into the "the family of nations," and international pressures of the warlike sort to relax between the east and the west.
On the other hand, if the structure of the Chinese economy is such that the inflow of gold to China is not passed on to its workers, but is rather put to other uses, China's wages will increase so slowly (if at all) that the desired equilibrium will never materialize. Instead, China as a nation -- but not China as a people -- would become wealthier and wealthier, and America, both as a nation and a people would become poorer and poorer. And I suggest that the Chinese economy is indeed so structured, and that in the long run, the short run, and in between, the Chinese nation, and its people, will rule the economic world.
So, what is China's secret? How have they structured their economy so as to permit such a dramatic shift in its economic fortune? The answer is relatively simple. They have not permitted the money earned by foreign trade to flow freely to its work force. Instead, they have invested their money in two distinct enterprises, both of which have the same ultimate effect. They have, as a first priority, invested in the development of their manufacturing infrastructure, and secondly, they have invested in foreign debt. By increasing the productivity of that segment of its workforce engaged in international trade it will assure that the favorable differential between Chinese and American wages will be maintained, perhaps even increased. By lending money (at interest) to its foreign customers, China will assure that, at least for the immediate future, the markets for its goods will not collapse. In time, after the manufacturing base in America (and elsewhere) has been sufficiently disabled, the Chinese will essentially have ascended to the apex of economic power. They can then, if they choose, permit the wages of their work force to rise to a level quite sufficient to sustain the Chinese people's desires.
While this is going on, the Chinese have permitted small free enterprise to develop, but only insofar as those enterprises cater to and supply what we Americans call the local trade. Chinese free enterprise can thus be disregarded as a force in the Chinese economy. Free enterprise in China will never be permitted to play a role in the "mendacious triangular trade." It will, moreover be taxed sufficiently high enough to assure that the Chinese entrepreneur's success will never become so pronounced that the work force involved in "the trade" will be overly envious, but even if they were, the Chinese government -- the state -- will never permit the workers' demands to exceed the level at which Chinese superiority (as measured in labor costs) will be threatened.
Ricardo's law presupposed that the commodity called "money" would be permitted to flow freely within the borders of the free trading countries. But the Chinese economy -- and indeed any true socialist economy -- does not permit such flows to occur.
Tomorrow I will attempt to explain America's immigration policy as a function of classical economic theory. Later on, I'll see if anything short of all-out war with China can change the flow of the world's fortune.
But there was, in my original intent, a mendacity of a different sort, one not quite so obvious. As envisioned by Ricardo (and many others) it would not matter that, say, Chinese labor was so cheap that the Chinese could produce more of every exportable commodity than, say, we could here in America. In a world based on absolute free trade, the flow of American gold into China would in the long run cause the price of labor in China to increase to the point where American labor could compete. This would be brought about by a double effect. As the cost of Chinese labor increased, the price of American labor would decrease.
In a freely trading world, both effects would occur. As more money flowed into China, the purchasing power of the Chinese worker would increase, which in turn would drive up the price of goods in China, which in turn would lead Chinese entrepreneurs to bid up the price of labor so as to take advantage of the robust local market. As dollars left America, and as the price of goods decreased, the price of labor would tend to fall. All in good time, the international market would find "equilibrium" and the laws of economics would, once again, have been proven out.
In actual practice we see, indeed, that the price of labor in America is tending toward a lower level, as more workers leave higher paying manufacturing jobs to take jobs in the service industry (i.e., at Wal-Mart or MacDonald’s). If the price of labor in China were, in fact, moving in the opposite direction we could expect the free trade policy (to which America is committed) to bring China into the "the family of nations," and international pressures of the warlike sort to relax between the east and the west.
On the other hand, if the structure of the Chinese economy is such that the inflow of gold to China is not passed on to its workers, but is rather put to other uses, China's wages will increase so slowly (if at all) that the desired equilibrium will never materialize. Instead, China as a nation -- but not China as a people -- would become wealthier and wealthier, and America, both as a nation and a people would become poorer and poorer. And I suggest that the Chinese economy is indeed so structured, and that in the long run, the short run, and in between, the Chinese nation, and its people, will rule the economic world.
So, what is China's secret? How have they structured their economy so as to permit such a dramatic shift in its economic fortune? The answer is relatively simple. They have not permitted the money earned by foreign trade to flow freely to its work force. Instead, they have invested their money in two distinct enterprises, both of which have the same ultimate effect. They have, as a first priority, invested in the development of their manufacturing infrastructure, and secondly, they have invested in foreign debt. By increasing the productivity of that segment of its workforce engaged in international trade it will assure that the favorable differential between Chinese and American wages will be maintained, perhaps even increased. By lending money (at interest) to its foreign customers, China will assure that, at least for the immediate future, the markets for its goods will not collapse. In time, after the manufacturing base in America (and elsewhere) has been sufficiently disabled, the Chinese will essentially have ascended to the apex of economic power. They can then, if they choose, permit the wages of their work force to rise to a level quite sufficient to sustain the Chinese people's desires.
While this is going on, the Chinese have permitted small free enterprise to develop, but only insofar as those enterprises cater to and supply what we Americans call the local trade. Chinese free enterprise can thus be disregarded as a force in the Chinese economy. Free enterprise in China will never be permitted to play a role in the "mendacious triangular trade." It will, moreover be taxed sufficiently high enough to assure that the Chinese entrepreneur's success will never become so pronounced that the work force involved in "the trade" will be overly envious, but even if they were, the Chinese government -- the state -- will never permit the workers' demands to exceed the level at which Chinese superiority (as measured in labor costs) will be threatened.
Ricardo's law presupposed that the commodity called "money" would be permitted to flow freely within the borders of the free trading countries. But the Chinese economy -- and indeed any true socialist economy -- does not permit such flows to occur.
Tomorrow I will attempt to explain America's immigration policy as a function of classical economic theory. Later on, I'll see if anything short of all-out war with China can change the flow of the world's fortune.
posted by Benedict S. at 4:01 PM
1 Comments:
Good work- I was thinking of "immigration policy" as another localized form of the problem you are identifying but since you intend to write about this tomorrow I will not step on your toes.
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