Martin Wolf Echoes the 19th Century Socialists

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Last May, a milestone of sorts was reached in Mexico, an actual positive marker in favor of advancement rather than the usual drug-war decay that has become so ubiquitous in our attention for our neighbor. The automaker Audi announced that it was building a $1.3 billion plant in Puebla. Once completed, it would mean that for the first time in the country's history Mexican labor would produce a luxury automobile in Mexico.

Up to this point, automakers have used Mexico as a cost-efficient resource to build smaller, lower revenue-producing vehicles. They are, or were, the backbench of auto production, and production growth until recently was due in large part to the environmentalist impulse of CAFE standards. Fuel standards force car companies to "over manage" costs, particularly with the small cars vital to "fleet fuel efficiency ratings." But Audi's investment was just the latest in changes that are coming to the Mexican end of NAFTA.

GM had already started making Silverados in Guanajuato, while Cadillac has been producing big revenue, and big profit, SUV's at its facilities near Monterrey. This pickup in production of GM autos and trucks in Mexico has become somewhat contentious, particularly given the US government's "investment" in the firm. All the way back in 2010, Michigan Congressman John Dingell (D) complained,

"I understand the economic argument for the off-shoring of production, but I think the practice is reprehensible. U.S. automakers have benefitted greatly from federal largesse and should feel morally compelled to retain and create as many domestic jobs as possible."

That was an interesting, though no doubt intentional, way to phrase his objection, "morally compelled." Depending on the auto company and the location of the facility, the typical Mexican worker makes between $3.20 and $4 per hour. The average American compensation is somewhere between $45 and $60 per hour. This disparity is well known for obvious reasons, which is why Dingell's appeal seems to make some cursory sense.

But on the south side of the border, that $4 per hour wage represents more than just an ill-suited comparison. The Washington Post in early July 2013 quoted Alberto Rabago, a Mexican union official, who rightly noticed that, "When I came here 20 years ago, people didn't even have indoor plumbing. Now they have pickup trucks, satellite TV and send their kids to universities." Maybe that is just nationalistic bluster on his part, but that comports very well with what we know of international trade - it benefits (mostly) both sides of the free exchange agreement.

In that context, Congressman Dingell's reprehension is somewhat softened, but that is not necessarily the job of the US government. Given that, it is not at all straightforward how that should proceed. After all, had GM simply produced all its marginal production inside the US it would have rapidly needed another bailout as either the costs would have been too high to absorb, or the price it would have had to charge to pass on those costs to consumers would have been a godsend to its competitors. That does create a problem over what to do with the "surplus" of US autoworkers, now unable to come close to matching the profit efficiency of Mexico and other nations like it.

The "solution" of the "recovery" after the Great Recession appears in the form of golden arches. Where ostensibly "middle class" workers once toiled for a decent income, those "unlucky" to have been displaced by the ongoing economic catastrophe are left with the unappealing choice of fast food or extended idleness.

Into that breach has returned an ages-old idea, as history is so very cyclical. Caught up in the political rhetoric and hysteria over extended economic malfunction, we have been beset by the phoenix-like return of the "wage slaves." Writing in the Financial Times this week, Martin Wolf summarized this "threat" to the workforce due to automation, though it is just as well a "threat" from Mexicans. Wolf writes, "I noted that the rise of information technology coincides with increasing income inequality," though only two sentences later he quotes a recent study that "showed" two-thirds of such income equality is directly attributed to better pay in the financial sector (where else).

As inequality of pay and earned income captures the attention of economic participants in the worst recovery ever seen in this country, the elite opinion constantly narrows its focus on what commands can be sent to rectify the situation.

"Fourth, we will need to redistribute income and wealth. Such redistribution could take the form of a basic income for every adult, together with funding of education and training at any stage in a person's life. In this way, the potential for a more enjoyable life might become a reality. The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. It would be possible, for example, for the state to obtain an automatic share in the income from the intellectual property it protects."

How that doesn't sound like outright extortion, of the Hollywood mafia kind, is beyond me. The logical extreme of that proposal is that non-payment "to the state" will lead to removal of even rudimentary levels of law. A basic, and likely guaranteed, minimum income for every adult, payable through taxation and redistribution is something that has become more prevalent, even in the recent "battle" over the minimum wage in the US, and the newly sounded "job-lock" of those freed by Obamacare's own version of redistribution.

Martin Wolf's socialist exhortation, along with all these other schemes, is so very (and eerily) reminiscent of exactly that made about a century and a half ago.

"Wealthy men, who are patterns of virtue in the discharge of their domestic duties, value themselves on never intermeddling in public matters. They forget that property is a mere creature of law and society, and are willing to make no return for that property to the public, which by its laws gave it to them, and which guard and protect them in its possession."

The predecessor argument, echoed so robustly in the Financial Times, was made in 1856 by George Fitzhugh in his book Cannibals All! A Virginian born in the early 19th century, you can guess about where his civilities took his intellectual direction. He was one of the most well-known defenders of American slavery in the South, and the moral foundation he laid in defense of the institution was the same as that upon which Martin Wolf's modern update lays.

"The free laborer must work or starve. He is more of a slave than the negro, because he works longer and harder for less allowance than the slave, and has no holiday, because the cares of life with him begin when its labors end. He has no liberty, and not a single right. We know, 'tis often said, air and water are common property, which all have equal right to participate and enjoy; but this is utterly false. The appropriation of the lands carries with it the appropriation of all on or above the lands, usque ad coelum, aut ad inferos. (Even to heaven or hell.)"

This is the same sentiment expressed in numerous formulations throughout the Progressive canon, including the idea of rent theory advanced by John Hobson into the People's Budget in Britain in 1908. The capitalist is a thief, and must render unto the public that which he has stolen. There is no skill or, in the parlance of modern economics, value added in the production of goods and services from the business owner, only the hoarding of the means of production. Labor, therefore, must rightfully claim its lost "wage", even through the compulsion of government threat and action.

Fitzhugh called Northern laborers "wage slaves", pitiful creatures that were below even the Southern black slaves. He saw that any defense of slavery must shed its ties to racism, and in so doing he "realized" that concepts of economic justice should be equally applied throughout all races. Appalling some of his Southern supporters, he argued that there should be white as well as black slaves. For Fitzhugh, the flaw was not in racial distribution of attributes, but in humanity itself. He calculated that nineteen out of twenty humans were fit for nothing but slavery.

This was not a negative condition in the Fitzhugh formulation, not at all. For this was a "positive freedom" as the laborer would be totally free from hunger and thirst, provided with all the necessities of life by the "master." Again, that is a sentiment that is timeless, with a variation stretching all the way back to Plato's Socrates arguing for much the same of Kallipolis in The Republic. There are those in the elite that add "value" to the management and extraction of labor for production, and the vast majority that simply provide the labor. Fitzhugh saw it as more than a "fair" compromise and arrangement; most unattached and unbiased see it as the restoration of feudalism cloaked by modern concepts and rationalizations.

But where does Alberto Rabago fit into this new and just re-arrangement? While those that were previously "job-locked" in the US and Europe are now freed under the "master" of the government, surrendered to its guaranteed income, how does the Mexican worker fare? For a great deal of the logical extension in arguing in favor of this highly redistributive system, Martin Wolf acknowledges the idea that modern life in the developed world has the potential to be leisurely, particularly by historical comparisons. He writes,

"For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today's triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily."

Given that government is supposed to be enforcing and redistributing a minimum income, assuming it could ever come about without inflationary consequences redistributing all that justice "backward" again, the expectation is certainly that living standards will be unaltered, if not advanced. But doesn't that require Alberto Rabago to make our cars for us? For if those in Michigan, for example, that are afforded an opportunity to move out of the "prison" of work by government means, we still need someone to work. Somebody, somewhere has to do it, and likely more of it as the government breeds less where it exists now; someone has to at least grow and harvest all the food.

You can imagine the case where minimum guaranteed income produces such a disincentive to work that productivity declines precipitously. And into that breach, the entrepreneurs will take up the mantle and begin to re-orient "wealth" again on the means of production. Those that are willing to work will "redistribute" all that government income into their hands, sowing the seeds of "inequality" all over again.

For an extreme example, we can use the Mexican case extended under these conditions. If Americans no longer wish to work enough to produce cars, and Mexicans fall outside the redistribution scheme, it would likely follow that Mexico would then become the primary center for car production. As the proportion of production moves in that direction, suddenly the power shifts. At some critical point, given that production no longer lies domestically, the Mexicans can begin to dictate terms of exchange in what is now their own production. Who would benefit the most then, the nation that is more proportionally idle, or the one that has gained (earned) the true wealth of actual production capabilities?

As a rhetorical exercise, it is somewhat useful to think about such conditions in less extreme, more realistic situations even as they exist now. The incentive to work is not just about pay or leisure, but about the economic creation of wealth. The free exchange of labor in production is wealth; it is the genesis and basis of the economic system that gave Mexicans pickup trucks and satellite dishes in just the past 20 years. Taking "positive freedom" from the government is admission that nothing better is possible, that wealth is worthless.

And that is the heart of all this discontent, the resurrection of old Marxist and aristocratic tendencies from ages long gone and discredited. The lack of real economic expansion and even basic function in the past six years has become an albatross on the capitalist ideal; largely because those that claim to embrace capitalism also embrace the statism and central planning that has marked the past few decades. To the public, they are intertwined and one in the same. If the "free market" is only going to produce "wage slaves", why not become a government slave and at least enjoy a more leisurely life?

In a true free market, those autoworkers displaced by Mexicans should find new employment in new "high value" industries. As automobiles have become a commodity, and thus low skill in nature, other non-commodity productive opportunities should have taken their place. And that has been true to some extent, though not due to free markets or capitalism. As noted above, pay inequality due to the heavy intrusion of finance shows the misallocation of resources that are not capitalistic, but rather artifacts of central state intrusions.

Where once the agriculture worker became the industrial worker, now the industrial worker becomes the finance functionary, lawyer or educator in the business of student distraction. To believe that those occupations were "meant" to be the next wave of employment evolution is to be blind to the rise of finance and government interference.

The use of Mexican workers is a net positive for the global economy, not only to those in Mexico but the least of which is that cars and trucks are cheaper in the US and thus more attainable to Americans. A cheaper car means a consumer can buy "other" goods and services. When that "other" is limited by the intrusion of finance and government, we should not wonder why the idea of "wage slaves" has returned from its own grave. Slavery itself was a form of socialist redistribution, as Fitzhugh put it:

"A Southern farm is the beau ideal of communism. There is no rivalry, no competition to get employment among slaves, as among free laborers... Wealth is more equally distributed than at the North, where a few millionaires own most of the property of the country."

It's exceedingly easy to have equality when everyone is exceedingly poor, or a slave. Mexican pickup trucks, iPhones, and modern life require redistribution under conditions of merit, skill and truly free exchange. Only the politics of envy decry such an advance, unseen by any other epoch in human history. And, sadly given the current state of monetary and fiscal affairs, it will not be duplicated under the stresses and strain of "positive freedom" doled out by centralized dispensaries under extortion of government and all its agencies.


Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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