The Mexican Pizza Riddle

Discussions on the Economics of Poverty
Part 4. Conclusions (continuation)
Eyler Coates
    It is contrary to common sense and to past experience in this country to think that an increase in capital investment and in the productivity of labor will automatically result in an increase in wages. It would be like telling all those people who fought and died in the labor movement that their efforts were pointless: what they fought for would have happened anyway.
Don Dale
    People fought and died for tyranny in the American Revolution. People fought and died for slavery in the American Civil War. People fought and died for Lenin, Stalin, Hitler, Mussolini and a thousand other forms of tyranny. Are we to tell them that their efforts were pointless? I certainly hope so! A cause with martyrs is not automatically just.
John B. O'Donnell
    Who's to say what could have been. But, I doubt very much that many managements would have surrendered their power over costs without the labor unions supplying sufficient force. At the same time, some labor leaders like John L. Lewis created the highest paid unemployed labor force of his time. There are limits, and sometimes obtuse labor negotiators are as destructive of progress as are greedy managements.
Eyler Coates
    Of course, in a few isolated instances, it did happen anyway. Henry Ford's instituting the $5 per day minimum wage in his plants was one example of such an event. But that was surely an isolated event, he was ridiculed for doing so, and the ridicule alone suggests that it would not have been a policy that would have been widely adopted. Other workers had to struggle, and struggle hard. Whatever his other faults, Henry Ford could be viewed as a visionary in this one regard.
John B. O'Donnell
    Too bad it is largely folklore.
Eyler Coates
    But this also suggests another possibility: Perhaps what a nation needs is one or two wildly successful visionaries (which Ford apparently was) who would be willing to promote an enterprise that would be a significant player in the economy and that would "start the ball rolling," so to speak. In other words, although Ford was ridiculed for paying his workers so much, at least his doing it set a kind of standard. It made people think that maybe this was the way to go. After all, he justified it by saying he wanted to pay his workers enough so that they would be able to buy his cars.
Paul Zrimsek
    If that story is true (I don't know), then Ford was ridiculed because his idea was risible. If he could have gotten labor of the same quality by paying less than $5 a day, but chose to pay that amount "so that they would be able to buy his cars", then his visionary insight consisted of discovering a roundabout method of giving away cars for free-- and that's assuming that the workers actually did spend all of the additional money on his cars.
Eyler Coates
    I think you are being unnecessarily rigid in your analysis. Most employers want the best workers they can get within reason and what they are able to pay, and focus on that rather than trying to pay the least they can to get by with. Moreover, good wages generally make for happy employees. It is not simply a matter of "the same quality by paying less." There are always a multiplicity of motives. For Ford, it could easily have also been a way of ostentatiously displaying his wealth. Ridicule? He was probably smirking.

    The story is true to the best of my recollection. I can still envision the cartoon in which the floor sweeper is stepping out of a limousine in, I believe, a fur coat and with a broom! If someone has better information, please let's hear it.

    This, simply stated, is the seemingly undeniable fact of economic life. People can't buy goods if they don't have money.
Don Dale
    Here's another fact: You can't create money by taking money from one person and giving it to another.
Eyler Coates
    Also, the real clincher was, Ford was outstandingly successful. Had he failed, it might have been a great setback for this nation and its economic development.

    Surely, labor productivity depends on the amount of capital investment per worker, just as Mohammad said. But this is not merely because of the presence of money, but because of the plant and equipment that capital will purchase.
Don Dale
    The capital investment is the plant and equipment, not the money.
Eyler Coates
    As the very existence of the Maquiladora industries prove, capital investment and the labor productivity it produces will not automatically generate higher wages. The Mexicans who work in those industries work for the same low wages that other Mexicans make. That is why the industries are there: to exploit cheap labor.
Don Dale
    The industries hire additional labor because it's cheap. They continue to hire until the marginal product of labor is equal to the going wage.
Eyler Coates
    Thus it looks like an increase in investment must be accompanied at the same time with higher wages for labor, whether obtained by struggle or by the foresight and generosity of the investment capitalist, who realizes that workers must have decent wages if industry is to flourish. Consider this scenario: Couldn't the Maquiladora workers theoretically demand the same wages that a comparable worker in the U.S. would get? Obviously, the plant would have never moved there but for the cheap wages. But equally as obvious is the possibility that the company could there. It was paying those wages. It moved there simply to lower its costs. Which suggests that it is not just capital investment, not just the higher productivity that investment makes possible, not just higher wages for workers, but all three coming together at the same time that would give those people a higher standard of living.
Don Dale
    If the workers did demand (and, for whatever reason, get) these higher wages, the factories would fire some of the workers to raise the marginal product of labor to the new wage.

    Allow me to illustrate this point by analogy. You go to the grocery store. Oranges are on sale this week, for $0.10 each. You stand in front of the oranges and think, "Hmm, which do I value more: an orange, or a dime?" Your answer is "An orange," so you pick up a nice-looking one and put it in your cart. Now, you think to yourself, "Which do I value more: another orange, or another dime?" We'll assume that the second orange isn't worth as much to you as the first one was. But let's say it's worth more than a dime to you, so you pick another one out. This process continues until you reach a particular point. That point is the one at which *the next* orange you would put in your cart is worth less than a dime to you. That's when you stop, because it's foolish to pay a dime for something that's not worth a dime to you, and you're no fool.

    Now, imagine that just as you're done picking out your oranges, a store clerk arrives and changes the price of oranges to $0.25. You protest, but to no avail -- you will now have to pay $0.25 each for your oranges. You rethink your purchase. "That last orange I was going to buy was worth more than a dime to me, so I put it in the cart when the price was a dime. But now the price is a quarter; is that last orange worth a quarter to me?" You decide that it's not, so you take that orange out of your cart and put it back in the display. Now you think about the second-to-last orange you had in your cart, and decide whether that orange is worth a quarter to you. If not, you take it out of the cart. This process continues until the last orange you still have in your cart is worth more than a quarter to you.

    Please note that the first orange is worth the same amount to you regardless of the price -- an orange that costs less doesn't taste any better. It's just that you'll likely buy more when the price is low. Your decision rule is to buy oranges until the next orange is worth less to you than the price.

    I think you can see my point--the firm will hire workers until the next worker is worth less to the firm than the wage.
John B. O'Donnell
    Many questions, and that is how one goes about finding answers. But, searching for answers with the wrong underlying assumptions of cause and effect is not the way to progress. Before raising these suggestions it is necessary to visit the roots of all analyses -- the assumptions -- and get rid of the false ones that have for so long hampered economic thought.
Jim Blair
    The next question might be, Why don't these differences "equalize"? The answer is basically "barriers between countries," and time. If a truly "Global Economy" happens, then there will be equalization, in time.

    You might read the review of "Pop Internationalism," or "The Future of Capitalism," on my Web Page.
Matthew B. Kennel
    Does this mean, for instance, that the high standard of living engineered by an educated population, working infrastructure, and perhaps most importantly, comparatively honest and fair and transparent government ought to be 'equilibrated' with societies which do not respect these conditions?
Jim Blair
    Good point, but I am talking about a "long term" equilibration. The sort of process that transformed Japan from a poor 3rd world country to a modern industrial liberal democracy.

    To understand why I think this can happen (and IS happening!), see the book "The End of History and the Last Man". There is a review on my web page. If this thesis is correct, it may be decades before it is obvious to everyone.
Mohammad Gani
    Very interesting article, E.C., but perhaps too long for a websurfer.

    E.C.'s posting reminds of the Marxian theory of the self-contradiction of the capitalistic system. The self-contradiction consisted of the tendency of the capitalist to keep high profits and low wages, thereby starving the buyers of the purchasing power, ultimately undoing the very source of demand for the product.
Eyler Coates
    Yes, there is some semblance to Marxian theory. Although I do not consider myself a Marxist, and I believe that Marx was tragically wrong on many things, nevertheless I think he had some very good points also. What he failed to realize is, Capitalism is a dynamic force and has many natural mechanisms that no "man-made" system could hope to duplicate (a la Hayek). Also, he did not understand that in a free society, the regulation of capitalism could produce a controlled "animal" that will produce the best, most beneficial society possible. But as you point out, the "contradiction" of Capitalism, if not met by a counterbalancing force, would tend to destroy the whole nation.
Mohammad Gani
    It would be interesting to find a self-correction of this tendency. Namely, is there someone who can benefit from changing the relationship between wages and profits?
Eyler Coates
    The correction will never be by laissez-faire Capitalism, I don't think. But it is the duty of a free society to insure that ALL its citizens are protected, and this kind of threat to order is as dangerous as any other. It is imperative that this "beast" be controlled and saved from itself.

    I believe everyone would benefit from a change in this relationship. The question naturally arises, If everyone would benefit, why doesn't it happen? I cannot help thinking that it is all based on the attitude of the participants. We have a natural tendency, it seems, to think that we gain more by taking, not by giving, and this causes us to respond as we do. But the opposite tendency is not totally absent. Henry Ford was one of the first to recognize that he had to pay his workers a good wage if they were going to be able to afford to buy his cars. Oddly enough, he was widely ridiculed for taking such a position. Everyone in his plant made $5 per day minimum, and cartoonists of the time drew pictures of the floor-sweepers arriving for work in a limousine!
Don Dale
    Funny how your post owes more to Marx than to Jefferson.
Eyler Coates
    In no way did I intend to suggest that the ideas presented here are derived from Jefferson. At the same time, I am not a follower of Marx or of Rand or of any other ideological icon distributing artificial ideas. I am a searcher for truth, and I will accept it from whatever source it may be derived, although I must add that I have found Jefferson to be the most insightful of them all. But it is the ideas, not the man, that is important. As Jefferson wrote,
      "I never submitted the whole system of my opinions to the creed of any party of men whatever, in religion, in philosophy, in politics, or in anything else, where I was capable of thinking for myself. Such an addiction is the last degradation of a free and moral agent. If I could not go to heaven but with a party, I would not go there at all." --Thomas Jefferson to Francis Hopkinson, 1789.
Al VanZee
    Marx hated unions for the same reason you do. Because they interfere with the attempt by elites (the Party in the case of communism) to establish and maintain power.
Donald J. Dale
    How in the world can you possibly know whether I "hate unions", and if so, for what reason? I am simply pointing out that their practices are anticompetitive and can easily be shown to be welfare decreasing.
Eyler Coates
    Quite the contrary. The union struggle (now largely replaced by the minimum wage) is one of the things that has been responsible for the remarkable growth of the American economy. Does anyone seriously think we would have gotten to where we are without that struggle?
John B. O'Donnell
    Change that "practices are" to "practices can be" and the above is true, otherwise it is too general and does indeed appear to be anti-labor.
Don Dale
    Of course we wouldn't be where we are; we'd be much better off. You refer to the "remarkable growth of the American economy." In fact, the American economy, and the wages of American workers, grew most rapidly in the second half of the 19th century. This was not the age of unions; on the contrary, unions were illegal. This was the age of the "robber baron", the "selfish, evil, greedy capitalist" who "exploited the workers" in search of "the almighty dollar". And yet, the standard of living of those "exploited" workers rose during this time as never before or since.
Eyler Coates
    I am sure that through a careful manipulation of statistics, one could probably substantiate such propaganda. After all, the Libertarians will tell you they are the fastest growing political party in America. But we only need look at how close they came to winning the last Presidential election to realize how meaningless that statistic is. For anyone familiar with labor history, to suggest that the working people of this country were better off in the 19th century than they are today, or that they would be better off today if they had simply submitted to their exploitation, is laughably absurd.

    The Maquiladora industries are just as advanced as any in America, but with one difference: the workers make Mexican wages and have a Mexican, not an American, standard of living.
Don Dale
    Those workers who earn Mexican wages happen to be Mexican workers, with a Mexican education and a next best alternative in Mexico.
Eyler Coates
    Yes, and as soon as they step over the border, they are suddenly qualified to earn a decent wage.

Continuation of This Part

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