The Mexican Pizza Riddle

Discussions on the Economics of Poverty
Part 4. Conclusions
Eyler Coates
    It is said that there is no concern by wealthy Mexicans for the vast majority of Mexicans living in poverty. But it is worse than that. I have attempted to demonstrate that the wealthy are keeping the poor down, but with a fairer division of the pie, not only would the vast majority of workers live more prosperously, but THE RICH THEMSELVES WOULD BE EVEN RICHER BEYOND THEIR WILDEST DREAMS!!!! Their greed denies their people, their nation, and EVEN THEMSELVES a greater prosperity. All of this because that blind greed compels them to exploit their fellow countrymen, and they are convinced that the only way to riches for themselves is to exploit others. But that spirit exists here in America, too, and is straining at the bonds to practice the same kind of exploitation in here. Given these facts, the benefits of any economic activity in Mexico encouraged by this country will do little to benefit the poorer Mexicans and only go into the pockets of their oppressors.

    I present the Mexican situation as an example of what is a "natural" tendency of an economy and what it can do to a nation's prosperity. Unassisted, the Mexican economy is where things would naturally tend to be. It, I contend, is the "natural" state of free enterprise. Mexico has never been anything else. Free enterprise will rest at that minimal level forever if no intervening force jolts it to life by narrowing the gap between wages and prices. I'm not sure if there has ever been in the history of the world a nation that has gone BACKWARD from prosperity to what Mexico is, but I think that if we remove the mechanisms that drove us up from that and that keep us where we are, we just might establish an historical example.
Al VanZee
    You've hit upon the reason sophisticated industrial and service economies cannot sustain themselves without democracy. Elitist systems of all kinds, whether they be communist, fascist, authoritarian capitalist or whatever, are always hostile to their working classes by definition. In elitist systems, the policy of government is invariably to drive down wages. In so doing, they also destroy their consumer sectors and, in turn, the incentive for production.
Bruce Salem
    I wonder if the U.S. has strong tendencies toward elitism of this type in its foreign policy and that real scarcity in world resources forces it as a "have" country to deny these resources to "have-not" countries. This elitism is starting to be practiced on domestic workers as well.
Al VanZee
    Absolutely. The real situation however is no longer one of the U.S. versus the world, but one of transnationals in Europe and the U.S. in collusion with repressive governments in the third world, working against the interests of their own people.
Bruce Salem
    The reason would be to protect the "greed" of the elites. It is playing both sides against the middle, promoting some new markets for consumers of its goods, but keeping prices up on the backs of most of the world population under the control of local elites.

    What I am getting at is that the world may not be able to afford to give all nations access to diminishing resources at the level that they are consumed in the first world, so the U.S. has a foreign policy that covertly keeps the ability of Mexicans and other peoples dominated by elites from actually realizing the benefits of participating in the nominally capitalistic economies.
Al VanZee
    I'm a committed capitalist. I believe that a free enterprise system has the ability to produce whatever wealth the participating people need. What I see now, however, is a distortion of the free enterprise system that is eroding the buying power of consumers in the democratic nations, and at the same time inhibiting the democratic development of the third world.
Bruce Salem
    The poverty of these nations, and the lopsided distribution of wealth helps to maintain profits in first world companies. That is why the government and corporations go out and deal mostly with the ruling oligopolies in places like Mexico.
Al VanZee
    The suppression of wages also has the effect of suppressing democracy, since low economic power on the part of consumers translates into reduced political power as well, so the cycle of failure perpetuates itself.
Bruce Salem
    Maybe worldwide democracy is too expensive, and at least it is not in the "best" interest of multinational corporations whose margins depend on prices in the First World.
Al VanZee
    Democracy is certainly not "too expensive." But it certainly runs counter to the short term interests of the transnational corporations.
Bruce Salem
    These corporations, the ones who are buying off the Congress and the President, have no interest in distributing the wealth if it means that profits have to drop either during a transition or as a final result. If one argues that world-wide democracy is too expensive, it is now, then sadly, nations like the U.S., which looks like a champion of democratic institutions, have to behave in the opposite way in its foreign policy. With worldwide communications, there is nothing to stop the message that a consumer economy is attractive from getting to every human on the planet, so that sooner or later the demands for its fruits will be heard in places that are in direct conflict with the interests in the First World. This will be a greater source of conflict in the future.

    Some of the same factors are working in our domestic economy to push down labor costs and to weaken democratic institutions here. Voter turnout may indicate this.
Al VanZee
    Such authoritarian and dictatorial economies as do exist in the world today, function only to the extent that they can use the buying power of consumer sectors in the democratic nations as an outlet for whatever production they may have.
Bruce Salem
    And the first world nations take advantage of that fact. That is why Pakistani child labor and Chinese prison labor is tolerated by some people.
Al VanZee
    Democracy is the key ingredient in explaining the explosive growth of technology and production in the last two centuries. Once democracy is gone, technology and production will cease as well, since there will be no incentive for either.
Bruce Salem
    That may be true, but the big question is the sustainability of the supporting economic system worldwide. I have no doubt that some future technologies will make it more likely that people the world over will be able to more easily meet their material needs, if not aspirations, but the road to there may be as rough as it has been in the past with powerful forces working to keep scarce resources in the hands of those that have them now. This is the stuff that makes history, the rise and fall of nations.
Al VanZee
    Absolutely. But, as I said, I am a committed capitalist and do believe that free enterprise is capable of feeding and sustaining the world. The key question is whether the components of the existing free enterprise system are, in fact, free.

    For all these reasons, the trend of the past twenty years, involving a flat rate of growth for middle class wages in the United States, is an extremely dangerous development.
Bruce Salem
    Yes, in the near term, the lopsided income distribution in the U.S. with most people losing a little is bad. The question becomes one of, Is this shift due to unfair advantages gained by a few through corruption that needs reform, or do we need to change our values to build a society more in line with the means we have? This may challenge economic thinking here to its core.

    It seems to be the sense of most people in this discussion that consumerism, with its creation of demand through advertizing, is the way that people's needs are met. The argument goes that the incentives for people to make material goods and to advance technology all come from an expectation of increasing demand and profits. I don't argue, but wonder how that works under increasing scarcity which at least causes prices to rise.
Al VanZee
    I don't take increasing scarcity as a given. People are completely capable of sustaining themselves if they are given opportunities for education and political freedom. Those opportunities can only arise through the democratic process. Any factor that inhibits the democratic process inhibits economic prospects as well.
Bruce Salem
    The problem is that the information flow is not really total, which would countervail some of the traditional sources of power in the world, and that is why a First World country like the U.S. may actually want the price and wage inequalities in a place like Mexico to persist. Either one has to restrict access to scarcity to elites, or decrease the demand.

    I recognize that my analysis hinges on whether scarcity is real and long lasting. It may not be. A worldwide revolution involving a safe inexhaustible energy source would go a long way to removing limits, but as earth is ecologically limited, some aspect of growth will limit access to resources, and all of the downside happens as a result.
Bruce Salem
    I don't think scarcity is real. There is more than enough food to feed everyone. An example is the fact that American farmers have been overproducing while third world populations are starving. The problem of the starving man in the third world is not one of scarcity. His problem is one of access.

    He won't be able to access the wealth of the world, or create more wealth, unless he lives under a political system that allows him to educate himself and participate in free enterprise. There is no such thing as a free enterprise system that exists independently of a free political system. A political system that artificially suppresses his wages will prevent his education, and prevent him from participating in the economy as fully as his ambitions would permit. The key factor is political. The third world must have democracy to produce on a self-sustaining basis.
Matthew B. Kennel
    Now, I find it quite worrisome that the US Federal Reserve chairman has in effect made evidence of rising worker's wages a prima facie trigger for raising interest rates.

    And few seem to be that worried.
Al VanZee
    I find that a great concern as well. The Fed's policy is another example of how government management of the economy is being used to hold down wages, and ultimately, consumer demand.

    This obviously cannot go on without serious destructive consequences.
John B. O'Donnell
    To E.C.'s conclusions I can only repeat my comment from above --

    The only exception I find with these statements is that I suspect that it is ignorance of economic consequences exacerbated by economists who refuse to acknowledge that P(macro) is not a causal factor in determining Q(macro) and not self-centered greed that reduces everyone's prosperity.
Jim in Boulder
    Observation of the real world seems to be against E.C.'s conclusions. By your own admission, we are the richest country on the face of the Earth. Germany, I think most would agree, has a very good standard of living, but not quite as nice as ours, and Russia has one substantially lower still. Yet, the ranking of how much the governments and unions of the respective nations interfered with their labor markets goes in exactly the opposite order! The old Soviet Union was deeply engaged in price and production quota-setting and the Germans have a MUCH more extensive union organization in their country (the same is true of most of the European nations). How does your thesis explain this?
Eyler Coates
    By drawing distinctions. Just as you can't equate the adjustment of the wage-price differential with inflating the money supply, so you can't equate the union struggle for a higher wage in a democratic society with the communist system. Mixing apples and oranges only produces fruit salad. Surely, you are not suggesting an equivalency between the German economic experience and the old Soviet? These are so disparate, I have a problem even expressing the disparity. Perhaps you would care to clarify your point.
Jim Blair
    After reading E.C.'s post, I was thinking of posting a serious analysis. But Elmore Daniel James (Jim in Boulder) beat me to it.

    The basic question is: Why are living standards different in different countries/places? The answer is that productivity is different. This is because of capital, education, infrastructure, etc., differences. No riddle there.
Eyler Coates
    Does that mean when a plant with a high level of productivity moves to a different country, the living standards jump right up to the level of the country they left behind? A plant operating out of the United States, but located in the Maquiladora, will have all the advantages of capital, education, infrastructure, etc. So why is it they pay wages similar to those in Mexico for the same work they would pay much higher wages in the U.S.? Is it maybe because productivity has nothing whatsoever to do with it?
Mike Wooding
    Or maybe that there are several factors involved. Just because my car won't start without a charged battery doesn't mean that it doesn't need gasoline in the tank, too.

    And no, it's not likely that a plant operating out of the USA will have the same advantages. Mexico does have different laws, infrastructure, etc.
John B. O'Donnell
    What it means is E.C. has stepped on some economists' toes by pointing out the failure of their analyses and has presented a clearly defined circumstance that lays their assumptions asunder. Congratulations! Now all we need do is get you away from jumping to false conclusions and we may even fix this "dismal science."
Mohammad Gani
    It will be useful to encourage E.C. and anyone who is serious about solving puzzles that affect human lives materially. However, fixing a dismal science is a not a simple job. I read perhaps all the postings on the Mexican Pizza Riddle I could see, but I could not get the issue.

    I suspect that the main issue is distribution of factor income and the secondary issue is its impact on growth. I wonder if anyone remembered the simple idea of factor proportions and their relevance to factor prices. If Mexico is relatively capital poor and labor abundant compared to the USA, then one would expect real wage rates to be relatively lower and the profit rate to be relatively higher in Mexico than in the USA. I fail to see how raising the share of wages and reducing that of profits will push the Mexican economy to the same kind of factor proportion in the USA, namely, how is Mexico going to accumulate capital faster than it increases the labor supply? It is important to remember that labor productivity depends on the amount of capital per worker. The real wage of labor can not increase if the labor productivity does not; and one thing that raises labor productivity is capital per worker.
John B. O'Donnell
    What you fail to see is the elegant fashion in which Eyler has brought forth the incompleteness of economists' assumptions concerning the factors that create value.
Eyler Coates
    Mohammad seems to have really pointed us in the right direction.
John B. O'Donnell
    I very much disagree. Mohammad presents the false allocation among only some of the contributors of value. This is not progress, this is retreat.
Eyler Coates
    Simply raising wages and forcing employers to accept a smaller profit margin would, if anything, only reduce investment funds and would more likely hurt the economy rather than help.
John B. O'Donnell
    You are jumping to conclusions again. Your final conclusion "would more likely hurt the economy rather than help" is true but it is not supported by the statements you present here. The reason it is likely to hurt is the arbitrariness of the redistribution of value implied by "raising wages and forcing employers to accept smaller profit margin." A different distribution of the value produced is probably called for, but the measures to determine what that new distribution should be must be determined first. And before there can be a search for the variables and parameters for a new distribution it is necessary to accept that a determination is desired.
Eyler Coates
    Which only proves that there is no single element that will solve the problem.
John B. O'Donnell
    It doesn't prove it, but no one has found such a single element.

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