Tea Party, Hypocritical Parasites?

[cemper93]

There exists about $6000 per person in the world. Considering that globalization is doing nothing to get rid of an upper wealth class, the money for the common man is going to be even less. So the options are:
1) Return China and India to destitution
2) Return everyone to destitution
3) Increase the size of the world economy by several orders of magnitude
4) Slaughter several orders of magnitude worth's of the world's population.

#1 is probably the easiest, although the required protectionism might lead to war. And therefore #4. #2 seems to be what path we are currently on. #3 is our best bet, but doing so will probably destroy the environment, also leading to war and #4.

I guess, what I'm saying is, we need a mass exodus to the cosmos or we are all pretty fucked. A sterility causing plague will also be acceptable.

Actually, 1) is a viable solution. The main reason why most "developing" countries are destitute in the first place is that global economy hinders their economic growth. The main effect that comes to play here (and that has been described by economists as early as in the 19th century) is the following:

If there are two countries, one strong industrial nation A and one weak developing country B, things may look like this before these countries start trading:
A: Is producing large amounts of finished goods at low labor input per good, the production only being limited by a lack of resources.
B: Is producing small amounts of finished goods at high labor input per good, the production being limited by low technology and therefore slow and ineffective production of not only finished goods, but also raw materials.

Now, A and B open their borders for international trade. Given both of them are free market economies, what happens? Well, the first and very immediate effect is that the small amount of businesses B has that are producing finished goods almost immediately go bankrupt. This makes sense when you consider that the costs to produce a single good are significantly lower with higher technology, which means that A's goods are cheaper than B's goods and B's companies are therefore pricing themselves out involuntarily. So B's production is down now and its capital will therefore soon be depleted. Yet the people in country B have to survive somehow, and because they have nothing else to sell, they sell their natural resources which still make an acceptable price given that A has a lack of them. However, the amount of money they make that way is just as much as they need to buy the most basic soft goods (clothes etc.) from A. So essentially, they are selling resources to A so that A can turn a small cut of them into clothes, keeping all the rest! This gets even worse when A starts to build factories in country B, because as the capital these factories are built with comes from A, A rakes in all the profits.

So, that's essentially what's going on in the world right now, much impelled by organizations like the WTO or the IMF. The reason the Chinese are growing so rapidly is that have kept their borders closed for a long time and even today are still regulating their economy and especially their external trade heavily. The others mostly stand no chance because the principles in play re pretty much a doom loop: more external trade makes the country poorer, making it rely on external help more, making it open itself more for external trade.

tl;dr: Letting China and India fall to destitution would in the long run actually help them because money is always falling upwards.

[Dark567]

more external trade makes the country poorer, making it rely on external help more, making it open itself more for external trade.

tl;dr: Letting China and India fall to destitution would in the long run actually help them because money is always falling upwards.

Dude..... Because India and China were doing so well in the long run before they liberalized trade? India and China are doing much better then they were 50 years ago and millions of lives are better off. Their economies were going nowhere before they liberalized trade. Every country that has gotten itself out of extreme poverty in basically the last century has done so via export oriented trade. We need the poor countries of the world to do more of that. Not less.

The results speak for themselves.

Spoiler:

[Bharrata]

Cemper93 does appear to be arguing directly against everything I know about economics...granted I've only taken one course, but it was with one of the best profs. at my school and I paid attention.

I was under the impression that international trade is mutually beneficial because the market lowers the marginal cost for products in both countries, with the footnote that there may be transition costs....and the groups experiencing those transition costs think that protectionist policies of their sectors are the only solution, rather than developing new skills to meet the new market. Sure it sucks for that group that they need to overhaul their skills, but for the vast majority of economic actors in both countries it is beneficial.

I'm curious if allowing India and China to revert to the Third World would destroy any chance their rising classes have at better education, which I would assume having better educated workers would make it easier for those countries to develop their internal markets in a generation's time.

Brazil will be the one to grow leaps and bounds I think, but that's my barely educated position

[Vaniver]

tl;dr: Letting China and India fall to destitution would in the long run actually help them because money is always falling upwards.

The sad tale of the Eunuchs and Confucians suggests to me that closing off Chinese trade is not a good plan long-term.

[jareds]

more external trade makes the country poorer, making it rely on external help more, making it open itself more for external trade.

tl;dr: Letting China and India fall to destitution would in the long run actually help them because money is always falling upwards.

Dude..... Because India and China were doing so well in the long run before they liberalized trade? India and China are doing much better then they were 50 years ago and millions of lives are better off. Their economies were going nowhere before they liberalized trade. Every country that has gotten itself out of extreme poverty in basically the last century has done so via export oriented trade. We need the poor countries of the world to do more of that. Not less.

The results speak for themselves.

Spoiler:

Why give decades-long graphs that are neither inflation nor population adjusted? Better versions are available at the same source and are still consistent with what you're saying.
GDP per capita, constant 2000 US$ or
GDP per capita, PPP, constant 2005 international $

[IcedT]

I was under the impression that international trade is mutually beneficial because the market lowers the marginal cost for products in both countries, with the footnote that there may be transition costs....and the groups experiencing those transition costs think that protectionist policies of their sectors are the only solution, rather than developing new skills to meet the new market. Sure it sucks for that group that they need to overhaul their skills, but for the vast majority of economic actors in both countries it is beneficial.

International trade is always mutually beneficial in an abstract sense, but because not all trade is liberalized in practice some countries that liberalize eagerly (like Jamaica or Haiti) suffer for it. The Asian Tiger economies tended to remove trade barriers more strategically and their success is self-evident.

[Vaniver]

International trade is always mutually beneficial in an abstract sense, but because not all trade is liberalized in practice some countries that liberalize eagerly (like Jamaica or Haiti) suffer for it.

Which period of Haitian history are you thinking of?

[IcedT]

International trade is always mutually beneficial in an abstract sense, but because not all trade is liberalized in practice some countries that liberalize eagerly (like Jamaica or Haiti) suffer for it.

Which period of Haitian history are you thinking of?

The period in which they went from being the richest colony in the Caribbean to one of the poorest countries in the world, roughly. Their economy relied on agricultural exports from the beginning, and without the protection of a metropole their trade became both more liberal and less profitable (their huge debts to France did their fair share of damage as well). Liberalization efforts within the last few decades haven't done much to improve their situation. They're not a perfect example because there are so many social and environmental problems that compound their economic ones, but basically I'm trying to make the point that liberalization is always for the benefit of the world economy but does not affect all parts of the world equally. There are times when less-liberal (basically mercantilist) policies, while bad and imbalancing for the global economy, can be very beneficial for a national or regional economy, and liberalization sacrifices those benefits for ones that their citizens may never directly see.

[lutzj]

International trade is always mutually beneficial in an abstract sense, but because not all trade is liberalized in practice some countries that liberalize eagerly (like Jamaica or Haiti) suffer for it.

Which period of Haitian history are you thinking of?

The period in which they went from being the richest colony in the Caribbean to one of the poorest countries in the world, roughly.

I think that had more to do with the unique condition of being liberated through a slave revolt. The plantations that had represented all of exports and most of the economy were ruined and the wealthy planters fled or were killed. Haiti found itself with no educated people, no capital, and no natural resources to speak of except for the sugar-growing land that had only even been so profitable under slavery.

[KnightExemplar]

I'd disagree that (A) is the default. The investor is going to keep investing that $x (or similar to) per year, and pocket the difference between y and x as their profits. If we change this to a worker scenario*, I think it'd be absurd to assume that (A) is the default, and I don't really see much of a difference between the two groups- for one their principle investment into the company is money, and for the other, it's time. The default, essentially, is to keep doing what you've already been doing: working N hours per week, investing $x per year, etc.

I'd also say that my argument is based around the fact that where most of the productivity improvements in the past several decades are concerned, that they're happening in situations similar to the B/C divide. Incremental technological progress making the machinery need 3% less power this year, operate 8% faster another year, take up 5% less space at another point, fail 12% less often... In most cases, it isn't happening because an investor offered to invest $100,000 in a company so they could switch to a mechanized factory; it's happened because when the company wanted to replace some of the machinery in its mechanized factory, that machinery had been made better (for the same or similar cost) in the intervening years. The investor did nothing to make that happen, such as in your B/C scenarios. In the case where they did invest that money to mechanize a factory, yes, they deserve quite a bit of credit, and a corresponding portion of the rewards (and I've admitted as such before). Even in many cases where that equipment does cost more and they still pay it, you can expect that there wasn't an actual increase in investment. Instead, that money would have come from other areas they were investing the money, such as more employees, advertising, additional factories, etc.

* Worker spends x hours a week working at a factory, making $y in wages, and at the end of the week has the options:
(A) Quit while the quitting is good. Here they don't work any more hours, and take their $y paycheck and leave.
(B) Keep working, wherein the company has the same equipment as before, giving their productivity as the same.
(C) Keep working, wherein the company has replaced their equipment with better, and the worker's productivity is now doubled.
(Similarity to your scenarios intentional). Here, the default is going to be "Keep working, regardless of if it's scenario (B) or scenario (C)".

Wait wait wait a second. Even in the most idealized hypothetical situation, I just can't help but feel that your example is pure imagination at the moment. Lets take a modern example: Mainframes -> Servers -> "Private Cloud". Sure, it may seem like an easy upgrade path, but Mainframes were built with Cobol, Servers were built with Java, and now the modern stuff can be anything from autoscaling LAMP stacks off of redundant servers to .NET to whatever the hell else anyone else is building right now.

The CHEAPEST portion of upgrading your old cray to a modern Dell PowerEdge C6100 is the $10,000 for hardware. The expensive part is hiring the programmers to convert your code and upgrade your business logic and database logic to the new system. Hell, thats the easy part. The hard part is firing your loyal employees who have worked for you in the last 30 years because their skills are outdated and replacing them with youngsters 5 to 10 years out of college, with a modern skillset.

Throw all the hardware you want at your workers. An old "Unix guy" ain't gonna know how to configure a Xen Hypervisor or Vmware ESXI. Yes, those Unix guys are bloody smart, but its a matter of training and keeping up with the times. And increasing productivity while lowering costs also is completely at odds with the expectation of modern workers. The Old Unix guy's skills are now outdated, and you have to spend money to train him. Or, you can hire a younger guy in his 20s or early 30s who is already certified for that technology and put him in charge of the system. You'll pay the young guy much much less than your old Unix Guru and he'll be more productive to boot. The old guy expects to be paid more cause he's been there longer. But the younger ones are more productive with the new equipment. Again, upgrading equipment is the easy / cheap part. Its all about training and human resources in today's economy.

I mean, yes, workers are smart, they're skilled and they've been loyal. But lets not forget about the way reality works. Its pretty insane IMO to assume productivity bonuses in your workforce based on equipment upgrades alone. You are going to have to talk about either training your workforce or replacing them... and one option is often cheaper. And this doesn't even get into high demand fields where investors can pour tons of money into training their workers, and they are "rewarded" as those workers simply leave the company and move on to their competitors. (Yo, thanks for those skills! I'm off to get paid more over there by those headhunters)

Things just ain't as simple as "invest money == make money".

[Ghostbear]

I mean, yes, workers are smart, they're skilled and they've been loyal. But lets not forget about the way reality works. Its pretty insane IMO to assume productivity bonuses in your workforce based on equipment upgrades alone. You are going to have to talk about either training your workforce or replacing them... and one option is often cheaper. And this doesn't even get into high demand fields where investors can pour tons of money into training their workers, and they are "rewarded" as those workers simply leave the company and move on to their competitors. (Yo, thanks for those skills! I'm off to get paid more over there by those headhunters)

Things just ain't as simple as "invest money == make money".

I don't see any of what you said as relevant, for one, it's a different situation that what I focused on:

I'd also say that my argument is based around the fact that where most of the productivity improvements in the past several decades are concerned, that they're happening in situations similar to the B/C divide. Incremental technological progress making the machinery need 3% less power this year, operate 8% faster another year, take up 5% less space at another point, fail 12% less often... In most cases, it isn't happening because an investor offered to invest $100,000 in a company so they could switch to a mechanized factory; it's happened because when the company wanted to replace some of the machinery in its mechanized factory, that machinery had been made better (for the same or similar cost) in the intervening years.

And for another, what you're describing is just the fact that the total costs are not the same as the direct cost, which is irrelevant. The equipment costs $x, then the other costs (training, time lost during the switchover, business adaptation) to switch over to it are $0.2*x, giving a total cost of $1.2*x.. how does that change the situation in the least? That $1.2*x is just going to be taken out of the general pool of $y invested in the company in general.

[BlueLabel]

I'll take a crack at resolving the price/productivity of capital/labor debate.

First, there's a critical difference between the investor/laborer scenarios presented:

Rob the investor spends X dollars running a business for a year. During this year, he makes Y dollars in profit. After the original X dollar investment has been used up, Rob has several options.

Option A: Get out while the getting's good. Here Rob doesn't invest any more money, he takes his Y dollars and closes the factory.
Option B: Put out a call to other businesses for buying supplies. In this option the only company to respond is Joe's B2B corp. Joe offers Rob the same deals as last year.
Option C: Put out a call to other businesses for buying supplies. In this option Joe's B2B corp and Mark discount supplies both offer quotes. Mark's quote is for the same X dollars, but for twice the supplies. This would let Rob's company earn 2Y dollars next year.

In the first scenario, the investor has a choice between several options: take the profit and run, reinvest in equally productive capital, or invest in more productive (but equally expensive) capital. It's important to note that the investor has the power to choose not only whether or not to invest at all, but in fact the productivity of the capital he invests in should he choose to do so. In effect, if he commits to reinvesting, is presented with option C, and if worker skill remains constant, he then sets the level of productivity of the firm.

By contrast, the worker scenario:

* Worker spends x hours a week working at a factory, making $y in wages, and at the end of the week has the options:
(A) Quit while the quitting is good. Here they don't work any more hours, and take their $y paycheck and leave.
(B) Keep working, wherein the company has the same equipment as before, giving their productivity as the same.
(C) Keep working, wherein the company has replaced their equipment with better, and the worker's productivity is now doubled.
(Similarity to your scenarios intentional). Here, the default is going to be "Keep working, regardless of if it's scenario (B) or scenario (C)".

seems a flawed and imperfect analogy, as the worker is unable to choose what kind of equipment is made available to him in the workplace. He of course is free to cash in and quit work if he wishes, but in the scenario as presented, should he choose to work, the productivity level of the firm is out of his control, and the labor he provides is of equal value in either case. Maybe this will help explain why:

Both investors and laborers contribute to the operation of a firm: each party makes a contribution (money or time) that has a certain productive value associated with it (relative to other outlays of money or time, with other factors held constant). The nature of business is that the compensation each party receives for its expenditures corresponds to the productive value of its contribution. It is true that the workers in scenario 2 firm are more productive in option C. However, this increase in productivity would disappear if they returned to work using the original machines. If the firm then wished to restore the same doubled level of production, but with the original machines, the workers would have to work twice as many hours, for which they would presumably receive double the compensation. And they would be entitled to this, as the total (but not per hour) value of their contribution has doubled. Since the capital investment and their skill level is held constant, their hours worked (what Ghostbear refers to as effort - and it is), and therefore their total pay, must increase by the same factor as total production. Thus, it follows that the increase in production experienced initially in C depended only on the capital supplied by the investor, while the hourly value of the workers' labor remained constant (entitling them to a constant wage), with the extra profits generated by the productivity increase belonging to the investor who was solely responsible for it.

And here's where I think the fundamental disconnect has occurred in this discussion: when comparing the contribution of each party, the effort workers expend (in terms of hours worked) is analogous to the capital investment made by the owners (in terms of dollars spent), rather than to any perceived "toil or hardship" endured by the owner. New technology allows owners to make more productive use of, say a $100 investment in the same way that a better trained or more highly skilled worker can make more productive use of one hour of effort. It quite frankly doesn't matter that the investor didn't have to shed blood, sweat, and tears to contribute more production at the same cost to himself. Naturally, the benefit of increased productivity is enjoyed by the party that contributed it - for workers, this means higher wages; for investors, higher profits.

I think the reason why this equality, though perfectly logical, leaves some of us with a rotten feeling about the system, is that oftentimes, investors get to benefit from technological advances they themselves expended few or no resources to generate (and sometimes, can even take advantage of technology that obviates the need for labor - mechanization). On the other hand, for individual workers, increasing their skillfulness in a significant way can be incredibly expensive and time-consuming. It's much harder, and more personal and emotional, to go back to school for that masters than it is for a firm to invest in some hot new tech. Meanwhile, a significant percentage of the higher profit margins firms earn after investing in more productive capital is doled out in large bonuses to executives - individuals whose personal contribution seems undeserving of such lavish compensation. Still, with all that being said, workers ideally (though the real world is far from ideal) increase their compensation not by performing equally skilled labor with more productive capital, but by augmenting their personal skill sets/training/education level.

[Silknor]

It is true that streamlining or improving the economy helps everyone in it. But it helps everyone in it equally, and wealth is relative. So its a wash, isn't it? The only real benefits accrue to owners of capital.

Well I guess that gets down to a fundamental question: are we concerned about income inequality because we believe it to be inherently unfair, or because there's something troubling about a situation in which some people live in destitution, period, and the income inequality indicates that is in part due to the distribution of income and not an underlying cause like not producing enough overall to ensure everyone has enough food or shelter. Assume for a second that we face the same (post-tax, post-transfer) inequality in wealth and income that we did a century ago. Yet overall wealth and standards of living are much higher. I wouldn't consider that a wash.

[cemper93]

Dude..... Because India and China were doing so well in the long run before they liberalized trade? India and China are doing much better then they were 50 years ago and millions of lives are better off. Their economies were going nowhere before they liberalized trade. Every country that has gotten itself out of extreme poverty in basically the last century has done so via export oriented trade. We need the poor countries of the world to do more of that. Not less.

The results speak for themselves.

Spoiler:

Yes, they are better off. No, this is not (only) related to liberalization. No, the chart you showed doesn't prove anything.
I'll stay with China for this post, because I admittedly have not at all any knowledge of Indian economy.

There are two major problems with you giving GDP (per capita or per something else) as a measure of wealth induced by economic policies.
The first one is that GDP doesn't at all measure wealth; it measures the amount of traded goods. A country with a high GDP can still have a very low median income, or even a low average income if things are going badly (especially when foreign companies are making all the money - but I'm not saying that this is happening in China).
The second problem is that GDP in a "sane" economy is growing exponentially anyway. Exponential growth is fast; if I look at a chart that goes back as far as 1960, I could get the impression that economic growth back then was significantly slower than today, even though this entirely wrong. Look at this chart, which displays growth, not absolute values, to see what I mean.

Then about your argument that only liberalization has gotten countries out of extreme poverty during the last century. Well, that's kind of correct; however, this is also because almost no country at all did not liberalize its trade. I already mentioned China. For an example that makes a somewhat better point, consider Brazil. Its trade ratio is still pretty low (29% in 2008, 18% in 2009 - I have no newer data) despite its liberalized foreign trade policies, which doesn't hinder its economy from growing.

Cemper93 does appear to be arguing directly against everything I know about economics...granted I've only taken one course, but it was with one of the best profs. at my school and I paid attention.

I have to admit that I don't really know what is taught in an introductory course to economics (because I have not studied this subject myself), so I will resort to wild guessing. What you probably learned was Ricardo's theory of comparative advantage, according to which (grossly oversimplified) countries usually have certain goods that they can produce more easily than other goods (for reasons such as natural resources, skill level of workers etc.), and if they need to produce other goods less because they can import them, they can focus more on these and therefore increase their productivity.

There are, however, problems with this. If the good a country focuses on most doesn't require any education to produce, the country has no motivation to pay for education. Furthermore, if a country has higher opportunity costs (~work effort) for the production of all goods (because the countries with better machinery can produce even simple things like clothes cheaper despite the higher wages), all of its goods get undersold (by the process I outlined above).
See also e.g. the world-systems theory by Frank and Wallerstein.

...and the groups experiencing those transition costs think that protectionist policies of their sectors are the only solution, rather than developing new skills to meet the new market. Sure it sucks for that group that they need to overhaul their skills, but for the vast majority of economic actors in both countries it is beneficial.

I don't really see where you find that "vast majority" in a developing country where half the population can't even read nor write.

I'm curious if allowing India and China to revert to the Third World would destroy any chance their rising classes have at better education, which I would assume having better educated workers would make it easier for those countries to develop their internal markets in a generation's time.

I think you're underestimating the Chinese. According to many western observers, the Chinese are trying to cut their exports right now to be able to develop a better domestic market.

[KnightExemplar]

I mean, yes, workers are smart, they're skilled and they've been loyal. But lets not forget about the way reality works. Its pretty insane IMO to assume productivity bonuses in your workforce based on equipment upgrades alone. You are going to have to talk about either training your workforce or replacing them... and one option is often cheaper. And this doesn't even get into high demand fields where investors can pour tons of money into training their workers, and they are "rewarded" as those workers simply leave the company and move on to their competitors. (Yo, thanks for those skills! I'm off to get paid more over there by those headhunters)

Things just ain't as simple as "invest money == make money".

I don't see any of what you said as relevant, for one, it's a different situation that what I focused on:

I'd also say that my argument is based around the fact that where most of the productivity improvements in the past several decades are concerned, that they're happening in situations similar to the B/C divide. Incremental technological progress making the machinery need 3% less power this year, operate 8% faster another year, take up 5% less space at another point, fail 12% less often... In most cases, it isn't happening because an investor offered to invest $100,000 in a company so they could switch to a mechanized factory; it's happened because when the company wanted to replace some of the machinery in its mechanized factory, that machinery had been made better (for the same or similar cost) in the intervening years.

And for another, what you're describing is just the fact that the total costs are not the same as the direct cost, which is irrelevant. The equipment costs $x, then the other costs (training, time lost during the switchover, business adaptation) to switch over to it are $0.2*x, giving a total cost of $1.2*x.. how does that change the situation in the least? That $1.2*x is just going to be taken out of the general pool of $y invested in the company in general.

Because its not a machinery problem. Its a people problem.

Considering that buying new hardware is ~$10,000 for a pretty nice piece of equipment, and a few thousand also for the software you're gonna use. While taking your $100k / year worker out for 2 weeks for training alone is going to be $4000 in wages, another $4000 in lost productivity (they're training instead of working) and then maybe $2000+ for the actual cost of training. (books, teacher, examination...). If it was some conference across the country, throw down a few thousand more on hotels and air tickets. Throw down a modest multiplier of 4 or 5 because you've probably gotta train the whole team to use the new equipment and we're easily looking at the "real" cost of upgrading to that new $10,000 modern machine is really closer to $60,000 hit on wages, productivity and so forth ($10,000+ per worker on the team).

(I haven't crunched the numbers, but a company spending $100K/year per worker probably only gives those workers something like $70k/year. The rest evaporates in payroll taxes, social security, medicare and so forth).

Since this is a people problem, based on the skillset of your people, it fundamentally changes the question of "workers vs investor". At least in the field I work in, people are expensive, not equipment. Those workers weren't going to get those skills to be more productive without the investor giving them the money, and putting up the capital to fund their training, wages and health insurance. And then the question comes back around: are those people more productive because the investor gave them the money for training? And now who deserves to benefit from the productivity gains? The investor who funded the training, or the workers because they're "working"?

[lutzj]

$4000 in wages, another $4000 in lost productivity (they're training instead of working)

This doesn't really disprove your point, but you probably can't count that value twice since you pay the wages anyway.

Normal Operation: Pay $4000, get $4000 of productivity, net $0

Training: Pay $4000, get no productivity, net -$4000

[KnightExemplar]

$4000 in wages, another $4000 in lost productivity (they're training instead of working)

This doesn't really disprove your point, but you probably can't count that value twice since you pay the wages anyway.

Normal Operation: Pay $4000, get $4000 of productivity, net $0

Training: Pay $4000, get no productivity, net -$4000

Perhaps is all about my field. I don't really know the real numbers, but I work as a contractor. In a realistic example, we get $8000 per person on a contract. The company keeps $4000 as profit and hands out $4000 to the workers.

This is because we're working not only for us, but for all of the contractors on the "bench". Since contracting is such a volatile business model (get a 6 month job here, a 3 year job there... etc. etc.), the wages my company demands from the client is far greater than our wages. I don't know if its double or triple, but its way up there.

So really, normal operation: Pay $4000 from workers, get $8000 in productivity. Profit $4000.
Training: Pay $4000, get $0 in productivity.

And we can't just train the people who aren't productive, cause those are the guys who are about to get laid off.

[Ghostbear]

Since this is a people problem, based on the skillset of your people, it fundamentally changes the question of "workers vs investor". At least in the field I work in, people are expensive, not equipment.

Missing my point, and this whole part still falls under my last bit- it just means that the total costs are not the same as the equipment costs. It doesn't matter if the equipment is $1 and the people costs are $1 billion. You're getting caught up on the use of the word machinery, and missing the point I'm making, I feel.

In fact, the costs don't factor into this situation at all, merely how they're being paid for, and why. I am saying that when much of that productivity comes from the slow march of incremental progress in technology (evolutionary instead of revolutionary), that the investors deserve only as much of the credit for it happening as the workers do (which is to say, they don't really "deserve" any, because it happened despite them), so heaping all of that reward on the investors and saying "but they totally earned it" is foolish.

[Dark567]

Exponential growth is fast; if I look at a chart that goes back as far as 1960, I could get the impression that economic growth back then was significantly slower than today, even though this entirely wrong. Look at this chart, which displays growth, not absolute values, to see what I mean.

^In today's edition of lying with graphs. Zoom out all the way and tell me the 60's was as good as today. It wasn't. It averages in the low single digits of growth a year. It's also worth noting that its easier to have large growth when you are poor. It would be very hard for any developed nation to consistently put up the growth numbers China has over the last couple decades. It's impressive that it has been able continue so consistently after it had already achieved growth in fact.

[cemper93]

^In today's edition of lying with graphs. Zoom out all the way and tell me the 60's was as good as today. It wasn't. It averages in the low single digits of growth a year. It's also worth noting that its easier to have large growth when you are poor. It would be very hard for any developed nation to consistently put up the growth numbers China has over the last couple decades. It's impressive that it has been able continue so consistently after it had already achieved growth in fact.

The Maoist sixties? Certainly not, which is also why the graph I linked to starts in 1970. Also, yeah, it's true that large growth is easier when you are poor, but there are also several other effects that make it easier to have a larger GDP growth:
1) A larger growth of population. Yes, China's population is still growing, they only have less children than before (at a significantly higher life expectancy), which means that the working population is growing even faster.
2) A free market. Note: I'm talking about a free domestic market, not free trade.
3) The "take-off" effect, especially the societal changes that make economic growth a goal in first place.

[Vaniver]

The period in which they went from being the richest colony in the Caribbean to one of the poorest countries in the world, roughly.

My impression of Haitian history goes like so:

1492-1517: Spanish arrive on Hispaniola, Taino die.
1517-1625: Spanish import African slaves.
1625-1697: French (and other) pirates and settlers colonize Tortuga and the western part of Hispaniola.
1697-1790: Hispaniola divided; French continue settling Saint-Domingue.
1790: Saint-Domingue is far wealthier than the rest of Hispaniola, mostly because of the brutal oppression of slaves to grow sugar.
1791-1804: The French revolution, as well as local slave revolutions, disrupt Haiti. The economy begins to decline.
1804: Dessalines declares Haiti independent, is crowned emperor for life by his soldiers. Black-on-white and slave-on-slaveholder genocide drives out the whites and free people of color. He's assassinated in 1806, and things are bad for quite some time.
1825: Under the threat of a French invasion, Boyer agrees to pay France for profits lost due to the end of Haitian slavery.

It seems to me that the best explanation for why Haiti's economy was much worse than Saint-Domingue's was because measurements of Saint-Domingue's economy don't include the horrific human cost of slavery, and because when you drive out all of the capitalists and turn sugar fields to subsistence agriculture, production takes a nosedive.

(That is, what lutzj said, but with more detail.)

[Garm]

Don't forget about those reparations that they've been paying to France. Paying a bunch of money to another country isn't exactly a recipe for economic success.

[Crius]

@GhostBear: I would challenge the assumption that only the owner would benefit from increased productivity in your scenario. The immediate benefit would go to the owner, of course, but increasing productivity would change both the owner's supply curve (for produced goods) and demand curve (for labor), allowing part of the gains to be bargained away by consumers or the workers.

Exactly how much would be bargained away would depend on the bargaining positions of all parties. Consumers generally have a strong bargaining position, barring a monopoly producer with strong barriers to entry in the industry, so they would likely benefit by way of falling prices*. Worker bargaining position will vary greatly, though; highly skilled labor would likely get a large gain, while unskilled labor would have close to no bargaining power**. Truely unskilled labor is pretty rare, though, as most workers develop a specialized skillset as they work, so it's likely that they would likely be able to bargain some of the productivity gains away as well.

* In fact, this is already included in your example, as the owner is the beneficiary of the productivity gains experienced by the producer of the capital goods.
** Arguably due to minimum wage; productivity gains may increase "true" clearing price of unskilled labor while still remaining under the price floor set by minimum wage.

[Vaniver]

Don't forget about those reparations that they've been paying to France. Paying a bunch of money to another country isn't exactly a recipe for economic success.

The reparations are there- but they started 35 years after the economy started to decline. It's pretty clear the abolition of slavery crippled the sugar trade, and the slave revolts wiped out most of the other social and economic capital they had. (It's worth noting that many of the free people of color owned slaves, because that was one of the main ways to make money in Saint-Dominigue.)

It should go without saying, but I prefer free labor markets to a higher GDP, and the Caribbean sugar trade is a good example of why it's better to focus on voluntary transactions than it is to try and maximize GDP directly.

[KnightExemplar]

Since this is a people problem, based on the skillset of your people, it fundamentally changes the question of "workers vs investor". At least in the field I work in, people are expensive, not equipment.

Missing my point, and this whole part still falls under my last bit- it just means that the total costs are not the same as the equipment costs. It doesn't matter if the equipment is $1 and the people costs are $1 billion. You're getting caught up on the use of the word machinery, and missing the point I'm making, I feel.

In fact, the costs don't factor into this situation at all, merely how they're being paid for, and why. I am saying that when much of that productivity comes from the slow march of incremental progress in technology (evolutionary instead of revolutionary), that the investors deserve only as much of the credit for it happening as the workers do (which is to say, they don't really "deserve" any, because it happened despite them), so heaping all of that reward on the investors and saying "but they totally earned it" is foolish.

Do you really not see any difference between investing in people and investing in machines?

If you invest in machines, your workers owe you nothing. In this hypothetical case, I agree with your earlier post.

If you invest in people, your workers now owe you for their education. They wouldn't have been trained if it weren't for the investment dollars you pumped into them, and thus the investor is directly responsible for their increased productivity. For the rest of their lives, they will be more productive because of your investment dollars. True, the workers could have quit their job and went to college / professional school / got certifications on their own. But they didn't. The investor was willing to front the money for wages, training, lost productivity, and risk to improve the workers skills. Under normal circumstances, those workers wouldn't have acquired those skills without the aid of the investor.

So yes, it makes a huge difference. Especially when again, when you consider the high-demand jobs... increasing the skillset of your workers can potentially make them move out of your company and into other companies. Ex: Google and Facebook headhunt for the best engineers in the field.

EDIT: And btw: the risk is non-negligible. Consider all of those Intel Itanium engineers who were trained up for the new Intel architecture, only for the IA64 platform to crash and burn as the market converged on 64-bit X86 platforms. Wasted training money, wasted investment on all sides. It may suck for the workers when these skills turn out to be useless, but at least the workers got paid while learning the material. The investor doesn't recoup much of the costs at all. So it is clear to see who gets most of the risk as well.

[Ghostbear]

@GhostBear: I would challenge the assumption that only the owner would benefit from increased productivity in your scenario.

Doesn't this go against the history that we already have available to us, which is what sparked this topic initially? The workers benefit in round-about ways from the increased quality of life (which I have never denied), but the specific increased productivity at their place of work isn't going to them. Inflation adjusted wages have stagnated for workers, even though corporate profits have gone up:

I'm not sure you can say the workers are really seeing any significantly increased compensation, which is what this is about.

Do you really not see any difference between investing in people and investing in machines?

If you invest in machines, your workers owe you nothing. In this hypothetical case, I agree with your earlier post.

Are you assuming that the majority of productivity improvements are happening because of investment in people and that a significant share of it is not from technological progress? I've been mentioning the technological progress part repeatedly on purpose, because I think we can attribute a significant, likely majority, share of that increased productivity to this. As well, your argument assumes that most productivity increases that can be attributed to workers was paid for by the company. What share of people do you know who go to college and had a company for it? I didn't know anyone who wasn't doing one of: paying for it themselves, paying for it with scholarships, had their family paying for it, took out a loan, or some combination of the above. Including the people I knew working on their masters or Ph.D. Purely anecdotal, and I do know that many industries will pay for some of their workers to go back to school and get more training: but do you think that company investment covers the majority of those situations?

If you invest in people, your workers now owe you for their education. They wouldn't have been trained if it weren't for the investment dollars you pumped into them, and thus the investor is directly responsible for their increased productivity.

And the time the worker had to spend at that training or education? Both parties are investing here. The worker could have spent that time working, they aren't getting a free ride; there's a non negligible opportunity cost to them. Time is a very valuable thing to a person (because you can't really get more of it), and they invested that into this situation. Money isn't the only investment that exists.

And btw: the risk is non-negligible. Consider all of those Intel Itanium engineers who were trained up for the new Intel architecture, only for the IA64 platform to crash and burn as the market converged on 64-bit X86 platforms.

And just like the time investment, the risk goes both ways: those workers could have spent time training or educating or specializing themselves for something else, but they choose IA-64 at the behest of their employer. Just as they got paid while it was relevant, the company still got to use their skills while it was relevant. The workers weren't being paid for nothing, and they weren't working for nothing. The risk applies to both groups.

[Bubbles McCoy]

I'm not sure you can say the workers are really seeing any significantly increased compensation, which is what this is about.

I'm going to go ahead and guess "production worker" in that graph is limited to a certain form of manufacturing worker, in which case I'm not really sure what this is supposed to prove. It's true that steep improvements in factory efficiency will not be to the factory workers benefit. But, that in of itself isn't all too relevant - the question is does the average worker in the broader economy benefit from reduced cost/improved products coming off the factory line. Provided that's true, factory workers suffer in the short term*, but with time they move to other work and enjoy the benefit of the cheaper/better goods as well. I suppose it's arguable that managerial/owner types have captured more of the gains of efficiency increases than they ought to have, but that would require a bit deeper of an analysis.


* I use the term "short" loosely here, as that could very well mean a term of twenty years. What "short" really means is that there's a change to the economy that will leave everyone better off after a while once things have settled.

[Ghostbear]

I'm going to go ahead and guess "production worker" in that graph is limited to a certain form of manufacturing worker, in which case I'm not really sure what this is supposed to prove.

Fine, median wages vs. hours worked:

Spoiler:

Wage increases have happened, but it's due to overtime and not from increased compensation.

Of if you prefer, just median family income (you can ignore the data for the top 400 earners if you like, that falls mostly under a separate debate):

Spoiler:

Or perhaps some graphs perfectly relevant to this discussion:

Spoiler:

I included a bunch of different charts here in the hope to avoid nitpicking over this.

[...] the question is does the average worker in the broader economy benefit from reduced cost/improved products coming off the factory line. [...]

No, as I've said several times, I think that's completely irrelevant. Everybody, including people that have no involvement in the company, is going to see a benefit from that. This isn't about who benefits from technological advances, this is about who gets to pocket the proceeds from a business doing better thanks to those technological advances. To which I say: not just the owners, because the owners didn't cause that progress (and not just the workers, because they didn't cause that progress either- but we're not in a situation where they're pocketing much of any of it- see the graph above).

[KnightExemplar]

I think I see your point now Ghostbear.

I'll have to do a bit of graph searching myself however, because there are other facts I'd like to investigate. (And I don't have the charts off the top of my head). Ex: a corporation like Apple has made inroads due to its investment into foreign workers. So has say... China's wages increased at the expense of the American worker's? Or a corporation like Facebook simply hires fewer people in comparison to its revenue. (Facebook made ~$3.7 Billion in revenue, but only has ~3000 employees. Walmart employs over 2 million and only ~$300 Billion in revenue).

Generally speaking, that is how it is in the technology sector. Fewer and fewer people are needed to generate the revenue. By this measurement, Facebook employees on the average are 10x more productive than Walmart employees. I'm almost certain that the average wage at Facebook isn't 10x higher than the average Walmart Employee.

Anyway, since the 80s are right at the point where "things change" according to your graph, that really makes me wonder about the effect of the technology sector on wages. If indeed, its because technology engineers / workers are say 10x more productive but only demand 2x or 3x the wages, then the graph begins to make sense.

[Arrian]

...
Or perhaps some graphs perfectly relevant to this discussion:
... <took the first graph out because it's not showing up for me.>


I included a bunch of different charts here in the hope to avoid nitpicking over this.

[...] the question is does the average worker in the broader economy benefit from reduced cost/improved products coming off the factory line. [...]

No, as I've said several times, I think that's completely irrelevant. Everybody, including people that have no involvement in the company, is going to see a benefit from that. This isn't about who benefits from technological advances, this is about who gets to pocket the proceeds from a business doing better thanks to those technological advances. To which I say: not just the owners, because the owners didn't cause that progress (and not just the workers, because they didn't cause that progress either- but we're not in a situation where they're pocketing much of any of it- see the graph above).

The thing is that most of your graphs show wages, not total compensation, (except one whose numbers don't match up with the government numbers for total compensation) and the question is whether employers are keeping productivity gains to themselves or sharing them with workers. Wages don't capture this, they only show what workers take home, you need to look at the entirety of what employers are paying when they hire a worker to come to a conclusion. The reason looking at the changes in wages is misleading is that the compensation structure for the American worker has significantly changed since 1950: Do you think there is ANY WAY wages will be unaffected by a couple decades of often double digit health inflation in the cost of insurance?

If you look at the BLS's Employment Cost Index you'll get a better picture of what companies are paying for employees, a much more accurate view of compensation than simply looking at wages. Employment costs for all civilian workers are up 15.5% since 2005 and have about tripled sine 1981. Wage stagnation is not compensation stagnation.

[Dark567]

It's worth noting, that the US has one of the highest(top 10) median incomes per capita by most measures, including adjustments for costs of living. Saying that income growth hasn't been high enough, when we remain one of the best seems like its asking for a little much.

[Garm]

@Arrian: What's the point of comparing cost of employment? Health care costs are rising, so what? Ghostbear's point is that productivity is up (way up!) but compensation for the average worker has not risen in a commensurate fashion. I'm willing to believe that there's a valid reason behind you mentioning cost of employment, just not making the connection on my own.

[cemper93]

It's worth noting, that the US has one of the highest(top 10) median incomes per capita by most measures, including adjustments for costs of living. Saying that income growth hasn't been high enough, when we remain one of the best seems like its asking for a little much.

OTOH, 34% of world's billionaires live in the USA, which is a distant first place. If the median income is only "somewhere in the top 10", that's a huge contrast.

EDIT:

@Arrian: What's the point of comparing cost of employment? Health care costs are rising, so what? Ghostbear's point is that productivity is up (way up!) but compensation for the average worker has not risen in a commensurate fashion. I'm willing to believe that there's a valid reason behind you mentioning cost of employment, just not making the connection on my own.

I guess what Arrian meant was that the workers don't get more compensation in money, but that they do get more compensation by other measures (like social security or medicare). Which is of course true, but nowhere near justifies the huge income equality in the USA.

[marky66]

The business owner should absolutely reap all the surplus rewards of his investment, for the simple reason that he is taking all the risk.

For one thing, the employee can up and leave when he wants, but closing down a factory is not a simple process. Property leases and capital equipment inventory are but two major hurdles to the closure.

Also, back to the example of typewriters and computers: three months before computers are introduced, the owner decided to upgrade his entire typewriter inventory with the newest typewriters on the market. His competition spent the same amount on the fledgling computers a few months later, and within a year the first owner was out of business. Granted the workers also lost their jobs; the business owner, meanwhile, has no job and is bankrupt.

[Vaniver]

OTOH, 34% of world's billionaires live in the USA, which is a distant first place. If the median income is only "somewhere in the top 10", that's a huge contrast.

The US has 25% of the OECD population. 34% of the world's billionaires is higher than average, but not shockingly so.

[Dark567]

It's worth noting, that the US has one of the highest(top 10) median incomes per capita by most measures, including adjustments for costs of living. Saying that income growth hasn't been high enough, when we remain one of the best seems like its asking for a little much.

OTOH, 34% of world's billionaires live in the USA, which is a distant first place. If the median income is only "somewhere in the top 10", that's a huge contrast.

You act as if this was a bad thing?

[Arrian]

@Arrian: What's the point of comparing cost of employment? Health care costs are rising, so what? Ghostbear's point is that productivity is up (way up!) but compensation for the average worker has not risen in a commensurate fashion. I'm willing to believe that there's a valid reason behind you mentioning cost of employment, just not making the connection on my own.

You actually have the reason I bring up cost of employment right in your statement.

Ghostbear is arguing that all the gains from increased productivity are going to (owners of) capital and uses wage stagnation for his proof. The problem is, wages aren't the only way workers are compensated. You have to look at the question from the firm's perspective: They have to pay for both labor and capital. Part of what they pay for labor shows up as wages, but not all it does, some goes to taxes, some goes to medical insurance, some goes to other benefits like vacation time. Wages are only part of the picture, just like profits are only part of the picture on the return to capital (think of profits as the wages paid to capital,) there are also maintenance costs, depreciation, etc. The firm mostly cares about the total cost of labor and the total cost of capital, the sub components are much less important.

So, when productivity increases, the firm pays more to both labor and capital, but that doesn't necessarily translate to higher wages for workers. In our case, health insurance costs have skyrocketed, so that means the cost to companies for labor has increased a lot, even though wages have changed. It's the same for any other input: If the cost of plastic increases because oil prices has risen, a toy company has to pay more for their supply, even though profit for the plastic manufacturer hasn't risen.

That's why I look at the cost of employment rather than at wages. The return to labor can be seen there much more cleanly than trying to aggregate all the components on the employee's side. It illustrates that companies have indeed been paying more for workers, just as they've been making higher profits. The fact that this isn't showing up in wages means that something else is going on, not that labor isn't gaining returns to productivity.

None of this is to say that the ratio of pay to labor and capital hasn't changed. The gains from increased productivity aren't necessarily being evenly distributed between labor and capital, but Ghostbear is arguing that all the gains from productivity increases are going to capital, and that's not the case. One of the ways to answer that question is to compare the share of labor's income to the share of capital's income as a fraction of GDP and see if that is.

The allocation of national income between workers and the owners of capital is considered one of the more remarkably stable relationships in the U.S. economy.
...
This measure clearly shows a declining trend in recent decades. Having reached a peak of 58 percent in 1970, wages and salaries have declined to only 52 percent of national income in 2003. However, if we consider total compensation—including employer social insurance contributions and benefits—labor’s share has shown very little variation.1 By this measure, labor’s share of national income has averaged 70.5 percent over the past 50 years and has remained within a narrow range of that average.

[Dauric]

In the discussion of a wage gap, isn't comparing the cost of labor to capital measuring the wrong things? The "owner" of capital in most large companies isn't the CEO or the company president, but the company itself as an incorporated entity. As I understand it if you're taking a system-wide "cost-of-labor" metric you're measuring both the high and low ends of the spectrum, the janitor and the CEO in the same measurement. To say that cost-of-labor and capital growth are in step would mean that the CEOs aren't getting their pay by taking it disproportionately from the incorporation, but it doesn't address whether or not the range of highest and lowest remunerations (of all types) is widening.

[cemper93]

OTOH, 34% of world's billionaires live in the USA, which is a distant first place. If the median income is only "somewhere in the top 10", that's a huge contrast.

The US has 25% of the OECD population. 34% of the world's billionaires is higher than average, but not shockingly so.

Wrong, because a good portion of the rest of the billionaires is living in Russia and China, and neither are members of the OECD.

OTOH, 34% of world's billionaires live in the USA, which is a distant first place. If the median income is only "somewhere in the top 10", that's a huge contrast.

You act as if this was a bad thing?

I can't see how one can believe it's not. If most of the world's richest people are living in a country, but this country's general standard of living is only average, that's a sure sign of social inequity.

[Dark567]

I can't see how one can believe it's not. If most of the world's richest people are living in a country, but this country's general standard of living is only average, that's a sure sign of social inequity.

Dude its not average. It's not anywhere close to average. It's one of the highest, by some measurements the highest. Actually by average(mean), it is pretty much the highest by any adjustment. By median, it is always very high and often the highest.