The Basis of the Wealth of Nations

What is the real basis of the wealth of a nation, and the societal well-being associated with it? One can define this well-being as the ability to produce more goods and services with equal or less input than previously and distributing these goods fairly across society, thus, offering the members of the community to make decisions in life that go beyond the immediate pecuniary or economic survival. Cultural theorists like David Landes would focus on cultural factors, such as an ethic of work, thrift, honesty, patience, and tenacity that set some nations apart from others.1 While these cultural values have some validity (non-work can not generate wealth), it completely ignores social structural constaints, such as the fact that wealthy countries hold poor countries in dependence. This is illustrated in Joseph Stiglitz’ description of how the World Bank and International Monetary Fund implement harsh, “structural readjustment” programs that cripple the domestic economy of poor economies, while serving the narrow interests of creditor banks in developed countries.2 There are people, who are enormously industrious, but their lack of ownership of resources make them dependent on those that have accumulated large amounts of resources.

But the cultural argument will not die away, especially not among the upper class that is so well-revered in America. According to a survey, 95% of America’s millionaires believe in hard work as being the curical factor for their wealth.3 One needs to question how these millionaires attempt to define ‘hard work’. Investing in stocks is harder than picking fruits under sweltering summer heat? Sounds absurd, but if one were to follow through on the logic of hard work=success and laziness=failure, this should be the outcome. The millionaires think of themselves as having been primarily responsible for having created the wealth and the legitimately laying claim on it.

But this logic of hard work does not square well with the evidence. A lot of the wealth is accrued in the hands of investors, who placed their bets in highly profitable Fortune 500 companies. These profits, in turn, are derived from high-volume sales of high priced consumer items relative to the costs of producing these items, mainly labor costs. In this scenario, both workers as well as consumers are shortchanged, because the worker is not paid the full value of the sales, nor do employment prospects increase for workers relative to the sales success (whereas, conversely, indications of an economic slowdown immediately confirm the rule that workers are laid off to salvage company profitability), and the consumers have to work more to be able to purchase those relatively high-cost (relative to production/labor costs) consumer items. The toil of the workers and consumers, through the complex arrangement of modern day division of labor, veiled by the everyday economic transactions (capitalist-consumer, capitalist-worker) and manifest in the financial fortunes of millionaires, can be the only reason for the wealth of the few. One illustration serves as a case in point. Timothy Cook, the CEO of Apple, made $378 million in 2011,4 whereas 30,000 Apple employees, who sell those iPads, make about $25,000 a year, or $11.25 an hour.5 Not to forget, the nine Apple executives received a compensation of $441 million, which is equivalent to the wages of 95,000 Chinese factory workers at Foxconn, the major Apple producer.6

But, right now, I want to go beyond the socio-economic argument of exploitation to explain the wealth of nations (even though I shall return to it later). One always needs to keep in mind, and most economists will agree, that the source of a potential, and eventually, real increase in the standard of living can only be found in the increase in labor productivity, i.e. how many goods and services the average worker produces every hour of labor. This rate varies among different sectors of the workforce, and with the division of labor one worker produces one aspect of work that is dependent on the labor of other workers, thus making the relative importance of an individual’s labor difficult to track down. From a productivity viewpoint, capitalism is an absolute miracle. Since 1949, labor productivity in the manufacturing sector has increased by 2.9% every year (long-term average).7 This means that every year the workers are producing more items with the same amount of input.

How can this best be illustrated? Let us take a small community that lives on subsistence farming. The members of the family, from young to old, all work on the field, and it is determined that the average farmer can produce two bushels a corn per day. That is just enough to feed himself, and perhaps another relative that does not work. The surplus created in this society is minimal, labor is arduous and just sufficient for survival. A drought or flooding means a famine, and the extinction of the community. The laziness of any of its members would similarly spell the disruption of the community’s material existence. Now comes a farmer, who in the late afternoons after a day of work decides to experiment swith tools, whereas the rest of the family prepares meals, sings songs and finds other means of the scanty little recreation. That inventive farmer invents the plow, and discovers that by exerting the same amount of labor, he has doubled his yield. Instead of two bushels a corn, he gets four bushels of corn. His initially skeptical fellow farmers discover the utility of the plow, and direct the inventor to create more plows for community use. The farmer agrees to it, and devotes more time to building plows, and soon enough, every farmer in the community is using the plow, thus, doubling the productivity of the whole community with the simple invention of a tool. Now that more corn is produced, every member of the community can be fed, surpluses can be generated, some of it can be traded with neighboring communities, some farmers can become kings, administrators, bureaucrats and soldiers, and do not have to perform the labor to sustain themselves. A smaller proportion of the population can work in agriculture, and yet, still be able to feed every person. This is the story of progress.

This illustration of productivity shows that such an improved productivity relies not so much on the muscle power, the physical labor input of the workers, for that has historically decreased, especially as we are in a postindustrial society. Hard work seems to become more and more of a trope used by people to confirm their biases rather than mirror economic reality. This does not mean that hard work under current socio-political configurations is not necessary. Any employee that works for a big corporation, facing deadlines and overtime, should know this better than anybody else. It simply means that the economic necessity for longer work is falling away provided that work is equitably shared across society (which, of course, it isn’t).

Changes in labor productivity are mostly driven by technological advances. Basu et al. argue that most of the productivity growth in the 1990s are directly related to changes in technology.8 What is the significance of saying this? If productivity increases, and the potential increase in the standard of living, are based on mechanical processes of industrial production, and not on specifically culturally and socially malleable factors (i.e. hard work, justifying if not actually then at least morally a proclaimed superiority of some who claim to work harder, or who claim to own most of the resources, to seize a greater share of the economic pie that is commonly produced), then there should be no reason to withhold these improvements in the standard of living to all members of society. Yet, we know that this takes place all the time.

Greater labor productivity is clearly desirable, because it can make lives easier (i.e. less work-equal results, same work- more results, or ideally less work- more results), and open up more beneficial ways how to run an economy (to further enhance productivity). Workers can be paid more, consumers can be charged less, social safety nets can be expanded. Secondly, it opens up more leisure time that can be used for non-work related activities. Robert Skidelsky impressively pointed out, quoting Keynes, a 15 hour work week could have well become the norm in the industrialized world, had the power of the rich not stood in the way.9 The rich have captured virtually all of the gains of productivity through the since Marx’ well-known divide-and-conquer strategy of the capitalist class, i.e. the escalation of the ranks of the reserve army of the unemployed, bidding abundant and overqualified labor against each other in the hunt for scarcer and scarcer positions, thus keeping wages down and the hours of existing employees up.10 As a result, productivity increases, but wages stayed flat, whereas profits increased. Can this be conceived of anything else, but a dialectical inversion, i.e. the unforseen negative social consequences of potentially positive economic circumstances? Another argument as far as work and leisure is concerned is described by John Kenneth Galbraith. He stated that greater productivity has not translated into more leisure time, but simply more consumption.11 The 40 hour work week is still the guiding model of full-time work, which is the only standard considered desirable (and the only one with which companies provide their employees with a reasonable standard of living, though even that idea is diminishing12).

This stands in striking contrast to the communist society that Marx only briefly described in his earlier writings. He writes that “in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.”13 While such thoughts, specifically the overcoming of the constraints of economic and social life, sound very desirable, they are far from realistic at this point. Labor- the proclaimed revolutionary class- is not at a revolutionary point, and is expected to be lulled into political passivity. Labor productivity, for the economic expert and the businessman mostly a tool toward accumulating capital, remains for the average workman an abstract construct. Why should the average worker care about labor productivity, when he knows that work has not become intolerably more complicated or hard, especially not for the vast majority of low-income service workers? We seem to have accustomed ourselves to the social norm that a 40 hour work week is the most desirable amount of work, even though the economic necessity for that has fallen by the wayside.

The opportunity to challenge political and economic configurations can only arise, when growing awareness exists about the relationship between productivity growth and income inequality, manifest in a generally growing pie, but a smaller slice for the workers. For all those that can understand this basic argument, any attempt to prove that it is the work ethic or the work mentality of the labor force that guides economic well-being should strike as fairly misleading and pointless. It simply denies the fruits of industry, that are based not on the dilligence of the industrial working class alone (which forms a shrinking number of the total labor force), but the intelligent creation of our engineers and scientists. The unemployed and service-related underemployed workforce should seize on the national wealth that stands available. The economic experts are threatening us with ever more doom and gloom about the continuing prospects of global capitalism, especially the vagaries of the old industrialized countries, US and Europe. The level of labor productivity is the important message that gets lost underneath the headlines of ever new Wall Street scandals that the world’s financial sector is cooking up.

It might be useful to reflect briefly on the relationship between the financial and economic crisis on the one hand, and higher productivity levels and the weaker position of labor on the other hand. Higher productivity levels do not inevitably lead to an economic crisis. Different pathways could have been adopted. But in a world where everyone knows what is best for him, but never attack the big picture of what is best for all, the ensuing mess becomes oftentimes unavoidable. This is especially evident for historians, who can look back with the wisdom of hindsight. As Phanit Laosirirat correctly describes, the productivity revolution would not have been a major problem for the world economy. It could very well have been a boon for the society at large, so long as productivity increases (which amounts to an increase in supply) are matched by increases in real wages among the greatest number of people (increase in demand).14

In reality, the gains only flowed to a small number of people, corporate executives and major shareholders, due to corporation’s ability to replace labor with labor-saving technology, thus increasing the unemployment rate, and the power of the employer to negotiate wages down, while weakening the power of labor unions to stand their ground against cutbacks in salaries and wages for labor (refer to footnote 10). Profits for corporations reach all time highs.15 The banks, who thankfully accumulate greater capital reserves demand the government to deregulate their industry, and flood the markets with the help of the Federal Reserve, that held interest rates low, with loans for working people, so they can take advantage of the productivity growth on credit rather than via their own wages. This situation satisfied employers and banks, whereas the indebted employees temporarily forgot their problems, while they were sustaining their consumption levels on stagnant wages. The ensuing rise of defaults led to a near-bankruptcy of the financial industry that got on the hooks of a government bailout, which itself pledges massive austerity on the working people, that are necessary to sustain the economy in the first place. The bailed out banks are politically stronger than before, even though they are financially bankrupt. Taxpayers and central banks are plugging the holes wherever they can, but simply encourage new speculation and new rate-rigging scandals.16 The credit crunch led to massive reductions in demand, which convinced companies to pare down their payrolls and increase the efficiency, i.e. labor productivity, of the remaining workers. This creates a huge social crisis, in which demand is depressed due to wage cuts and higher unemployment rates. Profits are back to normal, at the cost of overworked Americans on the one hand, and desperately unemployed Americans on the other hand.17 The capitalist knows how to capitalize on the crisis, and that because we were incapable of handling the productivity challenge differently!

“Absolute wealth corrupts absolutely.”18 Alas. When mankind consisted of hunter-gatherers, productivity was low, and survival in group life was fragile, whereas it was impossible alone (Robinson Crusoe can serve as nothing more than a metaphor), every one worked for the benefit of the group, collecting berries and fruits, hunting animals, living in caves. The slightest hint of selfishness of a person would not only have caused that person to be ostrasized and admonished by their clansmen, but also meant the threat to survival of the whole group. Concepts like the ‘individual’ or the ‘free market’ would have been absurd under these circumstances. An approved form of look out only for yourself would have been self-defeating. The interest of the individual was organically tied into the interest of the community. It was only the creation of surplus (correlated with the rise in productivity), first the surplus of food, and later the surplus of tools and goods, that changed the conception of the society, and the emergence of the individual.

Marvin Harris describes how surplus creation has given tremendous power to those that were responsible for storing or administering the surplus food.19 The first political leaders, the Headmen, were administering scant surpluses, worked the hardest in their community and ruled not by force but by persuasion. The successors were the Big Men, who had greater surpluses and redistributed the food to the community. The more food they distribute, the more popular. Power conferred duty and toil, not wealth and privilege. But the real evolution to formal political leadership occurred when the Big Men became Chiefs. This occurred when the surplus food could also be stored. The storage of food opened up great opportunities for the community, as their survival would not only depend on the generosity of the climate (i.e. the absence of floods and droughts). But it also created the challenge of how to store the surplus. The granaries that were built were administered by the chief, who initially had no reason to withhold the food to anybody. But over time, the realization occurred that simply the fact that the community members relied on him, the chief, to retrieve the food, made that chief very powerful. From a social perspective, the chief also gained in status and reputation. The chief was exempt from working in the fields, and started to build his own palace with subservient serfs. Later, a military would be raised to principally protect the community and its stored surplus, but later this ‘national security’ became almost exclusively synonymous with the protection of the chief. Social stratification has been created, the apparently fluid class relations are crystallized into solid social relations, transmitted from one generation to the next. The primary function of the administration of the surpluses has been supplemented by the forces of exploitation by the administrator of the community. Ever rising productivities, if they ever did occur, could primarily benefit the chief, who claims the ownership over the products of society, and counts on the benevolence and loyalty of that society.

I am not saying that this evolution of political power in the hands of the few could by all means be avoided. Anarchistic tendencies if they had prevailed everywhere, would have held back social progress. The division of labor would have to include the position of full-time managers, who allocate society’s resources. The problem seems to lie in the fact that those societal resources can easily remain stuck in the hands of those whose only task is administration and not expropriation. This becomes ever more glaringly obvious when observing the excesses of capitalism, unfettered private power and a struggling middle class despite abounding productivity revolutions. The only remedy to that is the vigilance of the populace. As James Madison wrote in reference to the checks and balances of the US constitution, “Ambition must be made to counteract ambition.”20

References

1 Landes, David S. The Wealth and Poverty of Nations: Why Some Are so Rich and Some so Poor. New York: W.W. Norton, 1998. Print. http://www.amazon.com/The-Wealth-Poverty-Nations-Some/dp/0393318885
2 Stiglitz, Joseph E. Globalization and Its Discontents. New York: W.W. Norton, 2002. Print. http://www.amazon.com/Globalization-Its-Discontents-Joseph-Stiglitz/dp/0393324397
Consider also Wallerstein’s dependency theory. Wallerstein, Immanuel Maurice. World-systems Analysis: An Introduction. Durham: Duke UP, 2004. Print.
3 Reyneri, Adriana. “Millionaires Say Hard Work, Not Inheritance, Builds Wealth.” Millionaire Corner. N.p., 10 Mar. 2011. Web. http://www.millionairecorner.com/article/millionaires-say-hard-work-not-inheritance-builds-wealth.
4 Thurm, Scott. “Apple’s Cook Tops the List of Highest-Paid CEOs.” Wall Street Journal. N.p., 21 May 2012. Web. http://online.wsj.com/article/SB10001424052702304019404577416790548164260.html.
5 One should also notice how the employees have developed an “ennobling” cult around the Apple brand, which keeps them from asking a pay raise. Very likely this is also due to the high number of applicants, and the lack of physical proximity that reduces the chances of forming a union, as is the case in most of the retail and restaurant industry. Segal, David. “Workers Share Small Fraction of Apple’s Great Wealth.” Apple Info Center. International Herald Tribune, 27 June 2012. Web. http://www.appleinfocenter.com/article/Workers_Share_Small_Fraction_of_Apple_s_Great_Wealth/83888/index.html.
6 Shapiro, Isaac. “Comparing the Pay of Apple’s Top Executives to the Pay of the Workers Making Its Products.” Economic Policy Institute, 30 Apr. 2012. Web. http://www.epi.org/publication/apple-executives-pay-foxconn-workers/.
7 Fleck, Susan, John Glaser, and Shawn Sprague. “The Compensation-productivity Gap: A Visual Essay.” Monthly Labor Review. U.S. Bureau of Labor Statistics, Jan. 2011. Web. http://www.bls.gov/opub/mlr/2011/01/art3full.pdf.
8 Basu, Susanto, John G. Fernald, and Matthew D. Shapiro. “Productivity Growth in the 1990s: Technology, Utilization, or Adjustment?” National Bureau of Economic Research., July 2001. Web. http://www.nber.org/papers/w8359.pdf?new_window=1
9 Skidelsky, Robert. “Labor’s Paradise Lost.” Project Syndicate. N.p., 21 June 2012. Web. http://www.project-syndicate.org/commentary/labor-s-paradise-lost.
10 “But in fact it is the capitalist accumulation itself that constantly produces, and produces indeed in direct relation with its own energy and extent, a relatively redundant working population, i.e. a population which is superfluous to capital’s average requirements for its own valorization, and is therefore a surplus population.” (p782). Marx, Karl, and Ben Fowkes. Capital: A Critique of Political Economy. Vol. 1. London: Penguin Books, 1990 [1867]. 781-794. Print.
11 “With more pleasant work and expanded wants, a man is somewhat more likely to choose more work than more leisure.” (p371) A few pages later Galbraith argues for greater choices for employees to opt for leisure or overtime, rather than imposing a standard 40-hour work week. (p373) Galbraith, John Kenneth. The New Industrial State. New York: Signet Books, 1968 [1967]. Print. 369-376.
12 For 2010, 4.2% of all full-time workers were classified as working poor, compared to 15.1% of part-time workers. U.S. Bureau of Labor Statistics. “A Profile of the Working Poor, 2010, Report 1035.”., Mar. 2012. Web. http://www.bls.gov/cps/cpswp2010.pdf.
13 Marx, Karl, Friedrich Engels, and C. J. Arthur. The German Ideology. New York: International, 1972. Print. http://www.marxists.org/archive/marx/works/1845/german-ideology/ch01a.htm#a4
14 Laosirirat, Phanit. “Productivity’s Role in the Financial Crisis.” APO: Asian Productivity Organization. N.p., n.d. Web. http://www.apo-tokyo.org/productivity/102_prod.htm.
I do have to disagree with Laosirirat on one important count. “In normal situations, the market mechanism ensures that demand increases in proportion to greater supply to maintain an economic balance. This implies that real wages must also increase with productivity growth.” The “market” mechanism itself guarantees no redistribution of wealth. This abstract analysis fails to take into consideration the power relations among the various economic actors, namely the capitalist and the worker. Productivity increases have not always, but regularly been hijacked by those entities that concentrate the most power (and subsequently wealth) in their hands. As a mainstream economist, Laosirirat simply assumes the government, or central bank, to be the outside meddling influence, that if it had kept its nose out, no unfair distribution of wealth could have occurred. Politics should not mess with economics. This assumes that economic entities through their actions and interactions are not themselves political. I simply disagree with this point.
15 This is true even now that unemployment rate remains stubbornly high, and wages are downward tilting. To quote the Wall Street Journal, “Deep cost cutting during the downturn and caution during the recovery put the companies on firmer financial footing, helping them to outperform the rest of the economy and gather a greater share of the nation’s income. The rebound is reflected in the stock market, with the Dow Jones Industrial Average at a four-year high.” Only at the end of the article, caution or healthy skepticism is voiced about the company labor cost cutbacks to increase ‘efficiency’ in light of a global demand slowdown. “Such efficiency moves are essential for companies. But economists warn that improved efficiency and continued executive caution are slowing the recovery. “What’s best for an individual firm may not be best for the overall economy,” says Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego.” Thurm, Scott. “For Big Companies, Life Is Good.” Wall Street Journal., 9 Apr. 2012. Web. http://online.wsj.com/article/SB10001424052702303815404577331660464739018.html.
16 The best analysis of the bank LIBOR rate-rigging comes from Matt Taibbi. Taibbi, Matt. “The Scam Wall Street Learned From the Mafia.” Rolling Stone., 21 June 2012. Web. http://www.rollingstone.com/politics/news/the-scam-wall-street-learned-from-the-mafia-20120620.
17 A great illustration of this outrageous social crisis under capitalism can be inferred from Dean Baker’s excellent proposal of reducing the number of hours of the existing employees, and replacing them with the 10% that is unemployed but looking for work. “If we lack enough useful ways to employ our workforce, we could simply work less. Instead of having 10 percent of the workforce unemployed, we could have the whole workforce employed, but working 10 percent fewer hours. If everyone got paid the same as when they worked 10 percent more hours (a situation that we can bring about using government money, because of a shortfall in demand), everyone should be better off and we will have eliminated unemployment.” Baker, Dean. “Between Overworked and Out of Work.” YES! Magazine. N.p., 15 Jan. 2010. Web. http://www.yesmagazine.org/new-economy/between-overworked-and-out-of-work.
Also consider this article on the seemingly conflictual nature of overwork and underemployment, and how both co-exist in the American economy of the 21st century. We saw the increase of women’s work, and greater economic stress for families. Bluestone, Barry. “Overworked and Underemployed.” The American Prospect. N.p., 19 Dec. 2001. Web. http://prospect.org/article/overworked-and-underemployed.
18 Phillips, Kevin. “Absolute Wealth Corrupts Absolutely.” Time. 02 July 2002. Web. http://www.time.com/time/business/article/0,8599,269373,00.html.
19 Harris, Marvin. “Life Without Chiefs.” New Age Journal, November/December 1989, 42–45, 205–209. Web. http://windward.hawaii.edu/facstaff/dagrossa-p/articles/LifeWithoutChiefs.pdf. Excerpted from Harris, Marvin. Our Kind: Who We Are, Where We Came From, Where We Are Going. New York: Harper & Row, 1989. Print.
20 Madison, James. “The Federalist No. 51.” Constitution Society. N.p., 6 Feb. 1788. Web. http://www.constitution.org/fed/federa51.htm.

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