Thursday, 1 December 2011


The debate about capital or labor as the catalysts of creating productivity are as old as classical economics and ideologically based. Some of the classical economists believed that capital creates wealth and is the catalyst to productivity, while others argued that labor does, and that capital creates nothing in the absence of labor.  
Even Joseph Schumpeter changed his early position advocating endogenous growth owing to R and D investment (theory based on mathematical economics and influenced by the Vienna School), versus the later Schumpeter as analyzed in Capitalism, Socialism and Democracy (1942). Going through the Great Depression and New Deal and experiencing American-style capitalism, Schumpeter concluded that politics of labor was a matter of state policy and workplace hierarchies were to be deplored. 

Keynes' General Theory of Employment, Interest and Money (1936) revolutionized macroeconomic theory by questioning classical economists' assumptions about labor's role in the economy that operates with under-utilization of labor and low values, thus undercutting the demand and resulting in disequilibrium. Given that capital accumulation is an obstacle to economic growth, the state must necessarily interfere as a catalyst of economic growth at avoid disasters that the system innately creates. 

The idea that labor and its value is determined by the laws of supply and demand date back to classical economic theory of the early 19th century, and it is one that many economists have challenged in the last two centuries. Orthodox economists of the market system insist that labor is indeed subject to the "invisible hand", a theory that Keynes challenged. Classical and neo-classical theories of labor are based on Enlightenment era rationalist assumptions about the individual that in turn entail rational behavior by the marketplace, while Keynesian economics assumes the irrationality of markets.

In a post-Keynesian world, most economists, politicians and social scientists know that the laissez-faire theory of labor is hardly applicable in the age when the state determines fiscal and monetary policy, it decides minimum wage, engages in labor-intensive development works to stimulate the consumer economy, and provides incentives to the private sector to hire workers. Schumpeter was among those who recognized that the invisible hand was imaginary, not fully functional, and that the role of the 'free market' economy was not nearly as 'free' as orthodox economists wanted to believe.

Finally, no matter which side on comes down on the degree to which the economy is 'free' or state-determined, the reality is that downward socioeconomic mobilization in the Western World is a reality and it is projected to remain so for the decade. Labor values for the broader middle class and blue-collar workers will remain under downward pressure as the state tries to strengthen the credit system that finance capitalism has devastated with its parasitic practices resulting in super-concentration.

Even the pillars of finance capitalism, IMF and World Bank, have expressed concern about how the current global economic contraction and its slow recovery later in the decade will entail a jobless economic recovery with relatively low compensation. I am guessing that no respectable economist or politician on this earth has publicly stated that the surplus work force in the (public or private sector) market and/or labor high values are to blame for the contracting cycle of the economy - 2008-2011.

What they argue is that workers must accept lower wages and benefits and that the surplus labor force in the public sector must be eliminated so that national economies can be competitive with those that currently have lower wage values. In short, they are asking labor to sacrifice consumption, effectively lowering demand and thus slowing world economic recovery, for the sake of higher corporate profits. 

To make this argument convincing, they argue that the goal is to expand the economic pie through efficiency mechanisms - an idea that is as old as Adam Smith and just as bogus and intentionally distracting from the issue of labor values and lack of shared benefits and costs between labor and owners of capital and management regarding productivity. To his credit, Schumpter, having lived in the shadow of Keynes and lived during the Great Depression realized the fallacies and myths regarding the catalysts of productivity and labor's role.  

The following excerpt from his 1942 work is applicable today.
"All those who are unemployed or unsatisfactorily employed or unemployable drift into the vocations in which standards are least definite. … They swell the host of intellectuals … whose numbers hence increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment … righteous indignation about the wrongs of capitalism … Capitalism inevitably … educates and subsidizes a vested interest in social unrest."

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