Global Policy Forum

The Price of Globalization

By William Pfaff

The jobless recovery in the American economy, weakly echoed in Europe, reinforces complaints in all the Western industrial countries that employers and stockholders enrich themselves while workers' wages fall or remain static. Defenders of free trade irritably reply that outsourced jobs will be replaced by those demanding higher skills, and that workers should go out and retrain themselves.

The contrary argument is summarized in a recent article by Senator Charles Schumer and a former Treasury official, Paul Craig Roberts ("Exporting jobs is not free trade," Views, Jan. 7).

The argument is that capital, technology, ideas and jobs now all enjoy unprecedented mobility. It's workers that lack mobility. Nearly all the work performed in modern industry can be outsourced globally.

Actually, this is free trade. It is free trade as theoretically envisaged by the 18th century economist David Ricardo, stripped of the economic, social and political constraints that for two centuries kept trade from functioning the way Ricardo expected.

He said that states should exploit their comparative advantages in resources or manufacturing. Trading in those complementary advantages would produce reciprocal gain. It's win-win -- as Ricardo would not have said.

This is a relatively simple-minded theory, but in practice it has generally worked out, if not to the advantage of all concerned.

Ricardo, however, had a second theory, which he called the "iron law of wages." You do not hear much about the iron law, in part because you wouldn't want to hear about it, and also because experience has seemed to prove it untrue. But times are changing.

The iron law of wages is also simple and logical. It says that wages will tend to stabilize at or about subsistence level. That seemed inevitable to Ricardo, since while workers are necessary, and so have to be kept alive, they have no hope of any better treatment since they are infinitely available, replaceable, and generally interchangeable.

Ricardo's wage theory has seemed untrue. The supply of competent workers in a given place is not unlimited; neither workers nor industry are perfectly mobile, and labor demonstrated in the 19th and 20th centuries that it could mobilize and defend itself. The iron law of wages would seem to function only if the supply of labor is infinite and totally mobile.

Unfortunately that day, for practical purposes, has now arrived, thanks to globalization.

Globalization is removing the constraints imposed in the past by societies possessing institutions, legislation, and the political will to protect workers. Free trade doctrine is hostile to unions, social legislation, and legal restriction on industry's labor practices, all of which deprive poor countries of their comparative advantage, which is poverty.

Labor today has almost entirely lost power in the places where it once possessed it. Western Europe provides limited and unrepresentative exceptions: Germany with its national unions, and the civil service unions in France. In both countries unions survive because of political rather than economic factors.

Until recently, the complaint that industry benefited from free trade but workers did not was conventionally treated as special pleading by unions and the left. At best, this was said to be a problem of lagging interaction between the unmistakably positive results of trade for business and industry, and the advantages for workers that -- according to the abstract model -- must ineluctably follow.

Many arguments have been offered by economists as to why the comparative advantages of poverty and non-regulated industry would eventually and automatically do away with themselves, so that in the end we will all be high-wage societies -- if not with advanced social protections.

This, I fear, is utopianism. David Ricardo, in propounding his iron law of wages, was just as right as when he was in putting forward his rule of comparative national advantage. In the case of wages, he was merely ahead of his time.

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