Authors: Paul Craig Roberts
A conclusion drawn from this theory by Paul Samuelson is known as the factor-price equalization theorem. This theorem says that free trade will cause wages, rents, and profits to equalize in every country. We do not need to examine this theorem beyond its implication for First World labor. The excess supply of labor in China and India today exceed the total of the employed labor forces of the US and Europe. How far will US and European wages have to fall in order to become equalized with Chinese and Indian wages?
Heckscher-Ohlin theory locks poor countries into labor-intensive and agricultural/mineral production at the expense of capital investments that would raise the productivity of labor and wages in those countries. When the IMF imposes structural adjustment programs on indebted poor countries, the IMF follows Heckscher-Ohlin theory, which mandates labor-intensive and agricultural production as the path to progress for Third World countries. Part of the IMF’s structural adjustment menu consists of free trade and privatization. Free trade or “trade liberalization” prevents a country from protecting its “infant industries” in order that they can develop. Privatization generally transfers a country’s resources from its control to that of First World corporations. Thus, the country is blocked from the path of development and becomes a source of cheap labor and raw materials.
The theory’s predicted convergence of wages, rents, and profits across countries is not occurring. Moreover, the rapidly rising economies of China and India are not following the Heckscher-Ohlin prescriptions. Instead, China and India are investing in manufacturing and in tradable professional skills, and their development has received a large boost from jobs offshoring by US and European corporations.
Instead of equalizing as Heckscher-Ohlin theory predicts, income is concentrating in fewer hands. Those hands are mainly the hands of powerful Western financial institutions, especially American ones, that with deregulation and concentration have acquired the ability to manipulate prices in equity, bond, currency, and commodity markets.
The ability that large financial institutions have acquired to accumulate income and wealth is due in part to the simplifying assumption in economic theory that treats all participants in the economic process--consumers and corporations, large and small businesses, farmers and financiers--as having equal influence, with no participant able to influence the market. The assumption that “markets are self-regulating,” an assumption that was transformed into US economic policy, resulted in the financial crisis that begin in 2008 and is ongoing. This assumption is based on the belief that no corporation or economic sector has the political power to commit fraud or has the economic power to game, rig, or manipulate markets.
The failures of economic theory have resulted in the failure of capitalism. Capitalism no longer allocates resources efficiently or equitably. Profits are no longer a measure of social welfare. The claim made by economists that capitalism serves social welfare is no longer true.
Problematic economic doctrines, such as free trade, and the deteriorating information content of price and profit signals caused by rising external costs and shrinking natural capital indicate that empty world economics no longer suffices. We need a new economics for a full world.
Economists will resist such change, because of their investments of their human capital in empty world economics. Status, position, and income flow from one’s stake in the existing economics corpus. Economists will keep a blind eye turned as long as they can.
However, as subsequent sections of this book will illustrate, time is running out for economics as we have known it. Not only have the resurrection of laissez faire capitalism and the claim that markets are self-regulating failed, but also the two main justifications of market capitalism have been destroyed by the emergence of financial institutions that are “too big to fail” and by jobs offshoring. If markets do not eliminate failures, then capitalism’s claim to efficiently allocate resources is undermined. If profits are not a measure of a society’s welfare, the justification of profit maximization no longer exists. The theoretical edifice that associates capitalism with social welfare collapses. The purpose of this section is to make that clear.
The economic and financial mess in which the US and Europe find themselves and which has been exported to much of the rest of the world is the
direct consequence of too much economic freedom.
The excess freedom is the direct consequence of financial deregulation.
The definition of free markets is ambiguous. At times it means a market without any regulation. In other cases it means markets in which prices are free to reflect supply and demand. Sometimes it means competitive markets free of monopoly or concentration. Free market economists have made a mistake by elevating an economy that is free of regulation as the ideal. This ideological position overlooks that regulation can increase economic efficiency and that without regulation external costs can offset the value of production.
Before going further, let’s be clear about what is regulated. Economists reify markets: the market did this, the market did that. But the market is not an actor. The market is a social institution. People act, and it is the behavior of people that is regulated. When free market economists describe the ideal as the absence of any regulation of economic behavior, they are asserting that there are no dysfunctional consequences of unregulated economic behavior.
If this were in fact the case, why should this result be confined to economic behavior? Why should not all human behavior be unregulated? Why is it that economists recognize that robbery, rape, and murder are socially dysfunctional, but fail to see unlimited debt leverage and misrepresentation of financial instruments as socially dysfunctional? The claim, as expressed by former Federal Reserve chairman Alan Greenspan along with others, that “markets are self-regulating” is an assertion that unrestrained individuals are self-regulating. How did anyone ever believe that?
When Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, Deputy Treasury Secretary Larry Summers, and SEC Chairman Arthur Levitt browbeat Brooksley Born, head of the Commodities Future Trading Corporation, and prevented her from doing her duty to regulate over-the-counter derivatives, we witnessed either the four most stupid public officials in human history or four crooks setting up a new scam for Wall Street.
The financial crisis that resulted has spread its devastating effects everywhere. The explosions in public debt and money creation, which have resulted from efforts to bailout the financial system from its own stupidity and greed, have brought the US dollar and the euro, the two reserve currencies of the international financial system, under pressure, threatening the reserve currency status of the currencies and the international financial system with collapse.
Obviously, the lack of financial regulation was dysfunctional in the extreme, and the social costs of the policy error are enormous.
Thirty-three years ago in an article in the
Journal of Monetary Economics
(August 1978), “Idealism In Public Choice Theory,” I presented a model to assess the benefits and costs of regulation. I argued that well-thought-out regulation could be a factor of production that increases Gross National Product. For example, regulation that contributes to the quality and safety of food and medicines encourages specialization in production and lower costs, and regulations enforcing contracts and private property rights add to economic efficiency.
On the other hand bureaucracies build their empires and extend their regulations into the realm of negative returns. Moreover, as regulations increase, economic managers spend more time in red tape and less in productive activity. As rules proliferate, they become contradictory and result in paralysis.
I had hopes that my analysis would result in a more thoughtful approach to regulation, but to no avail. Partisans of larger government continued to argue that more regulation was better, and libertarians maintained than none was best.
The ongoing financial crisis has given us a taste of what the absence of regulation can produce. Despite the enormous cost, the financial system remains unregulated. As soon as Wall Street devises a new financial instrument and finds new suckers, debacle will again happen.
The ambiguous concept of freedom in economics has laid other minefields. Until the Clinton administration, economic concentration was seen as impinging on economic freedom. As late as the Reagan administration, AT&T was broken up. The Clinton administration permitted the concentration of the media. Formerly, this concentration would not only have been considered “in restraint of trade,” but also contrary to the American tradition of a diverse and independent press. Today mergers and concentration of economic power are no longer seen as encroachments on competitive markets but as necessary to maintain global competitiveness. In the George W. Bush and Obama administrations, we have witnessed enormous financial concentrations.
One consequence has been that financial corporations can no longer be held accountable as they “are too big to fail.” Thus, the economists’ story of how the market weeds out the failures can no longer be told. The failures accumulate and are subsidized with public money.
This is the antithesis of economic efficiency.
The dispersed power that made the market a socially functional institution is disappearing. For example, capital is free to concentrate, but labor unions, a “countervailing power” to capital, are being destroyed. Jobs offshoring has destroyed the manufacturing unions, and now politicians are using the state and local budget crises to destroy public sector unions. Unbridled capitalism, no longer restrained by regulation or by countervailing power, has reemerged. The Robber Barons have been resurrected.
Developments since the collapse of the Soviet Union 20 years ago have confused economists and produced results that threaten the edifice of economic theory. Economists have confused jobs offshoring with free trade. However, as we have seen, jobs offshoring is not trade at all. It is labor arbitrage. Free trade theory is based on comparative advantage. Labor arbitrage is the pursuit of absolute advantage.
Profits resulting from jobs offshoring raise questions about economic theory’s justification of profit maximization. Theoretically, profits are justified, because they are evidence that resources were efficiently used in producing consumer satisfaction and are a measure of the economic welfare of the society.
This conclusion no longer holds when profits are produced by rendering a country’s work force unemployed
. Offshoring separates consumers from the incomes and careers associated with the production of the goods and services that they consume. The profits from offshoring reflect the economic welfare of the foreign country. Therefore, the edifice that economists have built that justifies market capitalism as the deliverer of economic welfare to society no longer stands.
Class war is raging in the US and Europe. It is the political elites and the monied interests that control them against everyone else. In the US class war of the “one percent” against the “99 percent” has created the Occupy Wall Street (OWS) movement as a response from the “99 percent.” In Europe it has brought citizens into the streets in Greece, Spain, and Italy.
The dispossession of the people has gone beyond economic dispossession; citizens are being dispossessed socially and politically as well. The US is no longer a model of “freedom and democracy.” Citizens have been stripped of representative government and the Constitution’s guarantee of civil liberty. Citizens who still vote find that the ballot box is unable to bring change.
Americans have been dispossessed politically, because (1) they have lost representative government, (2) they have lost the accountability of government to law, and (3) they have lost their civil liberties that protected them from a police state and the use of law as a weapon by government.
Americans have been dispossessed economically, because (1) millions of middle class jobs have been moved offshore to China, India, and other low wage locations, (2) the burden of massive losses in the financial sector has been placed on taxpayers and on the US dollar’s credibility as world reserve currency, and (3) continued high immigration and work visas for foreigners further impair the ability of unemployed Americans to find a job.
Americans have been dispossessed socially, because (1) the ladders of upward mobility have been dismantled, (2) a university education is no longer a path to a middle class existence, (3) millions have lost their homes and careers, (4) median income has been falling for a number of years, and (5) the income and wealth distribution is now so skewed toward the top that a small number of people control the wealth, the income that wealth produces, and the political power that money buys.
I will discuss these elements of dispossession in the order in which they are listed.
Elected representatives are unresponsive to voters. Election outcomes are almost always determined by money. Therefore, representatives are responsive to those who provide their campaign funds. Seldom are these people the voters. Campaign funds are provided by interest groups, such as Wall Street, the military-security complex, agri-business, the American-Israeli Public Affairs Committee, and large corporations in general. In 2010 the US Supreme Court ruled that it is merely the exercise of free speech, a constitutionally protected right, when powerful corporations purchase the US government with campaign donations.