VANCOUVER ( BullionBullsCanada ) -- In Part 1, I briefly reviewed the approximately 400-year history of our current low-wage/high profit economic model. At the conclusion, I boldly predicted I could show the "great evils" of this economic model, while simultaneously claiming I could demonstrate -- empirically and theoretically -- that a high-wage economy leads to "maximum innovation, maximum efficiency, and maximum prosperity." Time to deliver.
The most obvious "evil" of a low-wage economy is an artificially low standard of living for the vast majority, so that a small minority can enjoy a much higher standard of living -- and build-up ever larger hoards of wealth, which damage the economy still further. The wealth which circulates in our economies is like the blood which circulates through our bodies. As these very wealthy parasites suck all the wealth out of our economies, the economies sicken and die, much like a person sickens and dies through losing too much blood. This is the primary dynamic which has doomed not just nations but even the greatest empires, throughout history. They did not succumb to external threats, but rather they disintegrated from within via the collapse of their economies, as the wealthy minority hollowed-out these empires, leading to their inevitable implosion. The other "great evil" of the low-wage/high profit economy is less obvious, but equally destructive, since it is the principal vehicle for extracting what little wealth is held by the little people -- i.e. the "common worker." A low-wage/high profit economy must lead to the evolution toward an economy filled with nothing but oligopolies and monopolies, based upon the basic principles of wealth allocation, risk assessment, and profit maximization. To begin with, a low-wage economy not only directly implies high profits but easy profits. It's a lot easier to make a profit off the back of a worker's labor if you pay that worker "minimum wage" than if you pay him enough to support a family. It also directly implies high profit margins. In a capitalist economy, where "free markets" and "competition" supposedly exist, such high margins should cause new entrants to enter the sector -- producing competition and thus leading to more moderate profit margins. However, high profits allow for the accumulation of large hoards of capital, while high profit margins give those companies already in a sector the ability to slash prices, choking off new entrants into the sector who lack both the reserves of capital and the "economies of scale" of their larger, established competitors.
Alternately, the accumulation of large hoards of capital allow these companies to buy-out new entrants into the sector, which also eliminates the competition. There is nothing controversial here, as this is precisely what has been preached by capitalist theory for 400 years. A low-wage economy stifles competition in each and every sector, through creating unacceptable risk for new entrants. Their possibility of survival is low (either through being bought-out or driven out of business), while the risk of failure is unacceptably high. Conversely, in a low-wage/high profit economy the incentives to use the hoards of capital accumulated to buy-out more and more existing competitors (leading to oligopoly/monopoly) are overwhelming. Unlike a new business seeking to get established within a sector, buying an existing entity presents virtually zero risk of failure, and near-100% certainty of increasing overall profitability, through three mechanisms. First and most obvious, buying-up another company increases revenues for these high-profit enterprises, which must raise overall profitability. In addition, this also increases the "economies of scale" for the business, which should result in higher overall profit margins, on top of higher revenues. Lastly, reducing competition gives surviving business more "pricing power" allowing them to increase profit margins still further. In a low-wage/high-profit economy, buying-out the competition is "win, win, win." Did I also mention it is an entirely brainless way for senior management to earn fat "M&A" commissions for themselves? Of course that would never influence or motivate the management of these companies. The empirical evidence which demonstrates this principle in unequivocal terms is the last 40 years of our own economic history. Regular readers are familiar with the fact that if we use real numbers for "inflation" (i.e. those faithfully produced at Shadowstats.com) we see that "real wages" (i.e. wages adjusted for inflation) have been falling steadily over that entire 40-year period in the U.S., with every reason to believe the data is similar if not identical in every other Western economy. The reason why it is reasonable to assume that this trend is valid in these other economies is because of the principal cause of this relentless plunge in wages: ever-growing "structural unemployment" (i.e. permanent unemployment). This massive, structural unemployment exists in every Western economy - for reasons which I have spelled-out in several previous commentaries.
While Western wages have been plummeting for 40 years, corporate profit-margins have (naturally) enjoyed their most robust growth in history. Parallel to that, we have seen the explosion of monopolies and oligopolies in literally every corner of our economies - where in many sectors there are now only two "competitors" or less, while with the largest sectors of our economies (retail, oil production, and food production) these gigantic markets are totally dominated by a mere handful of companies (i.e. oligopolies). While capitalist theorists have pushed us toward the low-wage/high profit economic model for four centuries, they have simultaneously preached that there is no evil in capitalism worse than the oligopoly/monopoly. Thus, the blind self-interest of these theorists and their total indifference to the economic oppression of the common worker has also blinded them to the fact that their entire economic paradigm for the last 400 years has been inherently self-destructive and thus inherently unsustainable -- with the evidence being four centuries of relentless "booms" and "busts." It does not have to be this way. Let us take a look at a hypothetical economy where most, if not all workers are paid "high wages" -- "high" relative to our current wages, and also high relative to the wages of workers in other economies in our hypothetical world. Imagine the position adopted by management and labor in wage-negotiations: Manager: We can't afford to pay you these high wages. The only way we could compete with other countries with these wages is if we were more innovative and efficient -- leading to a much higher level of productivity (real "productivity, not the phony "productivity increases" produced by 40 years of cutting real wages). Workers: If you pay us these high wages, you will motivate us to work harder. We'll be able to afford to better educate ourselves, making us more innovative and more productive. Further, with all of us workers receiving high wages, we will have plenty of buying-power to purchase your goods and services (without piling-up unsustainable levels of personal debt). Manager: But even if you do become more productive and innovative, with wages this high, our profit-margins will be so low that we won't be able to prevent new companies from entering the sector -- and there will be lots and lots of competition. Someone might even try to drive us out of business by paying their workers lower wages.
Workers: We're willing to take that risk. First of all, with you (and other established companies) paying much higher wages, their best workers will all look to get jobs with you or someone else, while the low-wage workers who remain will be demoralized, poorly educated, and produce inferior-quality goods and services. And if our business does fail, we have money in the bank to hold us over while we look for new employment, or a bunch of us might pool our resources and start our own business. Manager: But then management will never achieve our life-long ambition of becoming an oligopoly or a monopoly... Does the "high-wage economy" sound like some absurd utopia, which could never exist in the real world? In fact, my hypothetical economy isn't "hypothetical" at all, it's know as the "United States of America", from early in the 20th century until 1970, when wages began their 40-year plunge to what they are today, and the U.S. economy made its 40-year plunge to what it is today: a debt-bloated, hollowed-out shell. In this respect, I'm indebted to the work of author and economist Michael Hudson, who pointed out that a "high-wage policy" was the deliberate objective of U.S. governments (and both political parties) in the early decades of the 20th century -- backed-up by solid economic research which demonstrated that a high-wage economy could out-compete low-wage "pauper economies." A wonderful clip where Hudson is interviewed illustrates the era and the economics behind the era in more detail. In slightly more than half a century, the U.S. economy rose to become the wealthiest, most prosperous economy the world has ever seen. In just a 40-year transition a low-wage ( banker-serving ) economy, not only has the U.S. squandered all that wealth, and watched the vast majority of its citizens become impoverished (or nearly so), but as a nation it has turned into the biggest deadbeat debtor in the history of the world. A low-wage economy leads to a low standard of living, the inevitable rise of oligopolies and monopolies, and the equally inevitable cycle of implosions in such an economy -- as it hollows itself out again and again.
A high-wage economy maximizes innovation, maximizes efficiency, maximizes (real) productivity, maximizes competition, and thus maximizes prosperity. Simultaneously, it seriously hinders the creation/development of oligopolies and monopolies -- since there is far more risk and far less profit-incentive to buy-up other low-margin enterprises. As a society, we have been fed a 400-year "diet" of economic mythology -- which has only intensified in recent years. This mythology preaches that high wages are the "great evil" that must be avoided, that high wages destabilize economies, and over the long-term reduce overall prosperity. Conversely, a low-wage economy supposedly provides us with stability and "prosperity" (defined as the fat cats on top getting fatter and fatter and fatter...). It's all lies. In a low-wage economy, there are only a handful of winners in an ocean of losers. In a high-wage economy, there are only "winners" (unless you want to include the wealthy "capitalists" lusting for their very own oligopoly/monopoly). The moral and intellectual bankruptcy of history's "great economic theorists" (and the greedy bankers for whom they provide their theoretical "front") have led us to an inevitable outcome -- one predicted by Plutarch nearly 2,000 years earlier. Our hollowed-out economies no longer produce enough revenues to maintain a level of services which our previous high-wage economies could fully finance. The result is a row of insolvent dominoes. It is long past time to totally reject the economic charlatans who have brainwashed us, and to depose the bankers who have economically enslaved us. For those on top, releasing their economic choke-hold over our societies and ceasing to plunder our wealth any further is far less messy than a "solution" imposed via a guillotine.