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High Wages and Economic Prosperity, Part I

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In my writing, I typically focus upon exposing the current economic myths and deceptive propaganda which continually emanate from the mainstream media. However, thanks to some recent questions and materials supplied by readers, I have found my gaze drawn back through time. In this look back, I have come across economic myths and propaganda which are nothing less than shocking.

For more than four hundred years, Western economies (and the deluded theorists who have been allowed to guide those economies) have focused upon two extremely simplistic and somewhat opposite “models” for our economies. In this respect, I am indebted to John Maynard Keynes. While Keynes may have been utterly inept as an “economist”, he is more than adequate as a “research assistant”.

Keynes tells us that the older of these too economic models (by far) is “mercantilism”, while the more recent theoretical model is that of “free trade”. For those readers who become phobic whenever exposed to economic jargon, relax. I have no intention of bombarding you with complex jargon. Indeed, as I alluded to earlier, these economic models are shocking for their simplicity (among other things).

Both of these models centered on the need to have a “balance of payments” surplus for one’s economy. There is nothing controversial here. A nation having a balance of payments surplus is like a corporation which makes a profit. No nation (or corporation) can survive over the long term as a money-losing enterprise. However this aspect of economic theory has obviously been totally (and conveniently) forgotten by all of our politicians and all of our modern “theorists” (i.e. banker apologists).

For the benefit of the precious metals enthusiasts out there, the “surpluses” that these nations and economists coveted above all else were not surpluses accumulated in banker-paper, but rather surpluses of gold and silver. For more than four centuries, those who accumulated the gold and silver were considered history’s winners, while those whose gold and silver was taken from them were the losers. We can see the obvious result of such thinking through the rampant corruption of modern, Western precious metals markets.

Mercantilism is by far the older of these two economic models, and can be thought of as an “adversarial” system of economic management. In this law-of-the-jungle philosophy, nations aggressively sought to out-maneuver competing nations in creating their balance of payments surplus – in the simplistic belief that there could only be “winners” and “losers” in any economic system. If you didn’t try to “screw the other guy” then they would certainly try to “screw” you.

Conversely, free trade is a much more cooperative economic system, in that thanks to the wonders of “comparative advantage” it was theoretically possible that most (or even all) economies could simultaneously be “winners”.  To reiterate, this is all simple stuff. The doctrine of comparative advantage stipulates that if all nations focus on producing the goods/services which they can produce the best, then through the mechanisms of “free markets” and global commerce an optimal equilibrium can be achieved where (in theory) everyone is a winner.

While free trade can immediately be seen as a more enlightened approach to global commerce, it should not be seen as some “theoretical breakthrough”. Rather, all it did was to mirror the general change in attitude in Western cultures, which (for the first time in history) sought to use diplomacy and negotiation as the principal tools of “foreign policy” rather than war, and more war. Mercantilism was an economic model of “constant war”, while free trade was a model (supposedly) based upon cooperation and mutual advantage (i.e. enlightened self-interest).

Keynes characterizes mercantilism and free trade as being in many respects opposite to each other, yet notes that both schools of thought have some shared beliefs. Here is where this previous theoretical work becomes interesting. Any time more-or-less opposing views share a common belief, this is highly suggestive that such a belief is flawed (with respect to at least one of the competing theories). While it is possible for opposing systems to share valid, common beliefs/goals, such scenarios clearly represent the “exception” rather than the “rule”.

With respect to my own analysis, the shared belief in which I am most interested is the belief of both schools of theorists that minimizing wages (for the average worker) was a critical component of economic prosperity. Some will accuse me of twisting the meaning of the work of Keynes and others here, in that these renowned theorists typically talk about the virtues of a “stable wage-unit”.

I would argue that such double-talk is very transparent. Look into the work of these theorists in detail, and we will observe a remarkable ‘coincidence’. All of these theorists warn of the “great danger” of rising wages (i.e. wages being too high), but none of these theorists have ever been able to see any harm in falling wages (i.e. wages being too low). Indeed, all that low wages have ever represented to these titans of economics are high profits for corporations (i.e. the very wealthy who own those corporations).

Clearly, an economic system which possesses a large, permanent, extreme bias against “high wages” while having demonstrated a multi-century “love affair” with low wages is not a system which believes in keeping wages “stable”, but rather in keeping them as low as possible.

The obvious parallel in our modern world is the gold market. Many prominent banking officials, most notably those of the Bank for International Settlements have openly talked about the need to keep the price of gold “stable”. However, decades of empirical evidence is clear in this respect: keeping the price of gold “stable” has always meant taking steps to suppress it when it was deemed “too high”, but never doing anything at all to “stabilize” the price (i.e. push it higher) when it was too low.

The proof is unequivocal. During the 1990’s, the price of gold was pushed below the costs of production for roughly 90% of all gold mines. You don’t have to be a “great economic theorist”(or a banker) to know that when 90% of the companies producing a good go out of business that the price of that good is “too low”. And yet at the time that banker-manipulation of this sector was bankrupting gold miners all over the world, gold price-suppression was at its peak.

Similarly, I have written on many occasions about how our governments have deliberately allowed structural unemployment to rise to the highest level in modern history (roughly 50 million people not allowed to work in Western economies), because by permanently keeping massive numbers of workers unemployed this permanently depresses wages – because those who have jobs are too terrified of losing those jobs to push for fair wages.

Thus, for more than 400 years, those on top (i.e. the very wealthy), and those who serve as their mouthpieces (the “great economic theorists”) have concluded that the best path to “prosperity” is to minimize the wages of “workers” (i.e. over 80% of the population). Here we arrive at the utter idiocy of these four centuries of economic theory: the idea that you can “maximize prosperity” for an economy as a whole while simultaneously minimizing prosperity for more than 80% of the people who live in that economy.

The complete failure of four centuries of theorists to see through such an obvious defect should not be seen as simply servitude by these economists toward the very wealthy. Instead, it is a classic illustration of “ivory-tower syndrome”. Is it any great wonder that a group of individuals who have never actually performed “a day’s labour” in their entire lives would be totally incapable of relating to the needs of the common worker (or even to acknowledge that these people have “needs”)?

To these “great theorists”, the common worker has never been anything but an “input of production”. Indeed, there is no recognition by these theorists that the common worker even belongs to the same species as these theorists, since the lack of regard (and even disdain) which these academics have for the common worker is very similar to how we treat our cattle.

We can boil down the enormous failure of comprehension of these theorists to a simple premise. Our great economists believe that people were invented for the benefit of corporations, rather than corporations being invented for the benefit of people. And since corporations are owned by the very wealthy, this premise is transformed into the following “Golden Rule” of 400 years of capitalist theory: workers exist for the sole purpose of maximizing the prosperity of the wealthy (i.e. economic slavery).

To attach numbers to this premise, in the United States, the richest 1% of Americans own 56% of all shares in U.S. corporations, or (put another way) 1% of the people hold majority ownership of all corporations. More broadly, the top-20% hold an obscene 87% of all equity in these corporations – making the other 80% literally nothing more than their slaves.

The simplistic (and hopelessly “top-down”) view of our economies represented by history’s greatest theorists has resulted in a hopelessly flawed economic system – where the inevitable consequences of that system have been clear to see. Despite allowing these “great minds” to steer our economies for more than four centuries, all that they have ever been able to achieve are cycles of ever more spectacular-and-devastating “booms” and “busts”.

They have never been able to achieve anything remotely approaching “lasting prosperity” or even “lasting stability” – for obvious reasons. An economic system which focuses on permanently impoverishing over 80% of the population is doomed to simply hollow itself out and implode – again and again and again. This is precisely what we see today: economies hollowed-out to an extent never before seen in our modern era, and about to implode in the most devastating economic collapse in human history.

This should not come as a surprise to any student of history. Regular readers know my deep admiration for a quote from Plutarch, a Greek philosopher who lived in Ancient Rome. Nearly 2,000 years ago Plutarch told us that “an imbalance between rich and poor is the oldest and most fatal ailment of all Republics”. To put these words in my own terms, if you hollow-out your economy by allowing all or most of the wealth to flow to the very wealthy, you guarantee the collapse of that economy.

Indeed, when freed of their bias against the common worker, the “great theorists” echo that point. As Keynes points out, both the mercantilists and free traders were greatly concerned with balance of payments surpluses – as being the key to economic health and prosperity.

This had nothing to do with a mere phobia toward one’s neighbour becoming wealthier and everything to do with their (correct) fear that allowing an economy’s wealth to be hollowed-out was the surest path to ruin. We know this to be the case because these same theorists were opposed to even their own governments accumulating “large Treasuries” – explicitly because if too much (idle) wealth flowed into government coffers this would sicken and eventually kill these economies.

Thus we have a group of theorists who are in complete agreement that we don’t want most of our economy’s wealth to flow into the possession of another country, and are in complete agreement that we don’t even want to see our own governments accumulate large pools of wealth – because just like draining us of our blood makes us anemic (and eventually kills us), draining the wealth out of an economy (and allowing it to accumulate in huge hoards) must always sicken and kill an economy.

It is only blind self-interest and elitism which makes these theorists incapable of seeing that allowing vast hoards of wealth to be accumulated by a tiny group of individuals is just as destructive (if not more so) than through allowing our economies to become hollowed-out by other means. It is nothing but elementary arithmetic to point out the obvious: low wages lead to high profits, which in turn leads to the accumulation of large pools of (idle) wealth, which in turn dooms an economy to implode. However, this principle implies much more.

In Part II, I will expand further on the great “evils” of the low-wage/high-profit economy, along with demonstrating (both theoretically and empirically) how a high-wage economy must ultimately lead to maximum innovation, maximum efficiency, and maximum prosperity.

Comments (17)Add Comment
written by James, January 25, 2011
Jeff wrote:
DayStar, I think you underestimate the deficiencies of greed and arrogance. Greed ALWAYS causes individuals to be overly focused on SHORT-TERM outcomes. This fixation with short-term profiteering (i.e. stealing) undermines their own long-term planning.

The history of countless kings proves you wrong. They risked wealth, kingdom, and life to obtain more. They often prepared for years, sometimes generations to achieve their objectives. There are numerous examples of corporations doing the same thing. Though at the time they might be flush with wealth and power, they risk the whole company to take out competition and gain a better market share. These elitists are no different. They are part of an organization that is larger than any one of them. They plan together and work together, and the plan and culture survives the death of any one of them, even as corporate culture and objectives survive the departure of a CEO. Since what they are doing is inimical to the masses, they must all hang together, or they will surely hang together.
Jeff Nielson
written by Jeff Nielson, January 25, 2011
Interesting comments.

Dylan, in fact capitalist dogma preaches that monopolies are supposed to lead to high wages - because with the monopolist parasitically sucking excessive profits out of an economy (also capitalist theory), the employees of the monopolist are deemed to be able to get 'a piece of the action'.

Thus my dynamic is the correct one. While external, extreme "control measures" (i.e. massive structural unemployment) may allow monopolies to MAINTAIN low wages, it is not a mechanism for CREATING low wages.

DayStar, I think you underestimate the deficiencies of greed and arrogance. Greed ALWAYS causes individuals to be overly focused on SHORT-TERM outcomes. This fixation with short-term profiteering (i.e. stealing) undermines their own long-term planning.

The proof of their failures are the countless "revolutions" scattered throughout history, over most corners of the world. In each revolution, many of the wealthy-and-powerful PERMANENTLY lose said wealth and power (usually via the guillotine).

RATIONAL actors would not endanger their own survival merely for an incremental increase in their already obscene levels of wealth and power.

Understand that "competition" and the law of the jungle are principles which these 'elites" believe should ONLY apply to the little people. They certainly never intend for there to be any "weeding out" taking place among their own ranks.

It is their arrogance which gives these people a false sense of their own infallibility and invulnerability, which in turn makes them believe that they are ABOVE basic principles of economics and (by extension) arithmetic.

written by James, January 25, 2011
Jeff wrote:
"It is only blind self-interest and elitism which makes these theorists incapable of seeing that allowing vast hoards of wealth to be accumulated by a tiny group of individuals is just as destructive (if not more so) than through allowing our economies to become hollowed-out by other means."

The theorists were products of and tools of the elites. The Keynesian theory was put out there to justify the plan to accumulate all the gold, silver and land for the elites. What you do not admit is that they do understand the economy is being hollowed out and they know the system will implode. But through this process they become owners of the world and the survivors become their perpetual slaves.

written by Dylan Jones, January 25, 2011
I would turn that question on its head.

An economy full of oligopolies and monopolies must lead to Low wages. Why?

The self-appointed masters of capital must maintain the wealth differential to remain in power otherwise their pyramid would come crashing down.
This means that they are not content with hoards of wealth, they go out of their way to ensure that the majority of the population is in poverty and in debt slavery to them. If everyone had enough to live comfortably, there would be no slaves to perform menial, unpleasant, even dangerous jobs. No one to pander to their egos. And they are terrified of the retribution that might be visited upon them once their power evaporated.
The Mercantilism versus Free trade echoes the left versus right paradigm that they use to distract and divide segments of the population against each other. They distort both ends of the spectrum in a way that serves them and disempowers the rest. On one hand they promote the darwinian dog eat dog, win lose mentality, using fear as a means to divide the population. They also distort the free trade philosophy, promoting co-operation amongst the global network of oligarch dominated countries working together to keep the wage slave on the hamster wheel. Of course they present this to the little man as global unity and economic stability.

written by robert berg, January 24, 2011
Jeff; A few more thoughts on the stock market & how it is an absolutely key element in wealth concentration.
The US market has climbed back to levels last seen in the days before Lehman.
It's as if none of this ever happened, yet the (visible) deficit has risen from $9.3 trillion in2008 to over $14 trillion today.
Unemployment is (officially) over 9% for the longest stretch since the 1930's.
There seems to be a huge disconnect between reality & the stock market, but there really isn't.
A lot of this money found it's way into corporate coffers as a result of their lower global wage base.
Corporate America has over $3 trillion IN CASH on their balance sheets.
The banks are in particularly good shape, as long as they can foist all their mortgages on FANNIE & FREDDIE, and as long as they remain invulnerable to failure.
With this money, they buy the competition, as we've discussed; Buy back outstanding shares, restructure debt (eg pay investors less because of Fed engineered zero interest rates), and bonus themselves up.
In addition, they invest in overseas joint ventures to continue the downward wage pressure.
The resultant rise in share prices benefits the top 1% because they own most of the appreciating stocks.
Any talk of the middle class benefiting because of their 401K's is nonsense. The vast majority of Americans have no net worth whatsoever. Even if they did, it has been long since scared out of the market, or used to avoid foreclosure.
The higher stock prices are, of course an illusion of prosperity that comes with a long overdue bill. The price collected will be grinding unemployment, national debt, and a dollar collapse.
Jeff Nielson
written by Jeff Nielson, January 24, 2011
Something which I will hopefully have room for in my conclusion is to point out how "globalization" was a MASSIVE boost for oligopolies and monopolies - because suddenly "too big" was no longer defined on a NATIONAL scale, but on a global scale.

Essentially, overnight all these mega-corporations were given "the green light" to ALL get ten times as large (except for those who ALREADY had their monopolies).

Those looking for an example of what these oligopolies are doing TO US should look at this post on our forum: http://www.bullionbullscanada....=4814#5334
written by robert berg, January 24, 2011
Barely a day goes by without seeing this.
Today, Rock Tenn announced the acquisition of Smurfit Stone Container for $3.5bb.
Of course the chuckleheads are at it again, telling the sheeple that this represents a vote of confidence in economic growth.
Not one Kudlow amongst them will ask what facilities will be closed & how many workers will be let go.
Keep watching as these things unfold before you every day.
Smile as they tell you how this is good for the economy.
Jeff Nielson
written by Jeff Nielson, January 22, 2011
Looks like I better shut my mouth before I give away EVERYTHING in the next commentary.

Nice job Bobbbny!
written by robert berg, January 22, 2011
I'll take a shot at it Jeff.
As wages are driven lower, corporations collect more profits & capital.
They use this capital to buy their competitors, close their production facilities & release workers, creating even more powerful corporations, and monopolies.
This is already evident in our markets, where the expectation of the media chuckleheads is that these corporations, flush with cash (an all time record amount) will begin hiring again.
They will do nothing of the sort. They will continue to buy the competition & shut them down.
Jeff Nielson
written by Jeff Nielson, January 22, 2011
Redpill, the REVERSE of that: that high wages DO allow the average person to accumulate capital is going to be an important ingredient in my argument about high wages "maximizing" efficiency/innovation/prosperity.

However, regarding the rise of monopolies/oligopolies, then "no" the lack of capital for the poor is not directly connected.
written by Schuhmann, January 22, 2011
let me make a guess - the line of argument will begin with the fact, that the poor can not accumulate any capital smilies/cheesy.gif
Jeff Nielson
written by Jeff Nielson, January 22, 2011
Keep in mind that most economics is nothing but common sense. So here's a little "teaser" for all of the readers of Part I as you wait for Part II:

Low wages must lead to an economy full of oligopolies and monopolies. Why?

Let's see if any of our readers can connect-the-dots here...
Jeff Nielson
written by Jeff Nielson, January 22, 2011
Excellent comment Bobbbny, and I loved the quote (let's see if I can remember that one).

Whether it's "NAFTA" or "globalization" or "free trade", these have all been nothing more than euphemisms for the REAL goal: making the world a better place for LARGE corporations.

We have CENTURIES of business leaders, politicians, and economists who all love to call themselves "capitalists". Yet these "capitalists" can always manage to conveniently forget that at the very same time that capitalism was born and corporations came into existence that we were WARNED that there was no greater danger/worse evil than oligopolies and monopolies.

And yet for 400 years, the very wealthy have been able to get the weak, the stupid, and the greedy to ignore this fundamental principle, and allow these predators to get a stronger and stronger economic choke-hold on all of us.

Hollowed-out economies produce no revenues for governments. Without revenues, governments (and economies) collapse. And yet the ONLY thing we hear from idiots in the media, government, and business is "spending cuts".

The problem NEVER was spending. Adjusted for REAL INFLATION, spending growth has actually been minimal. It is the drop-off in revenues which has made all of our economies insolvent.

The solution for inadequate revenues is simple and obvious:

1) Implement a flat wealth tax - so that the VERY wealthy FINALLY pay their fair share of taxes

2) Implement a four-day work week to put 10's of millions of people back to work, and allow the subsequent "tightness" in labour markets (i.e. no more slaves) to push wages back toward a fair level.
written by robert berg, January 22, 2011
Great read Jeff. Spot on.
The system here has, as Eisenhower warned us, come to be controlled by the military-industrial complex.
Corporations are the best means of concentrating wealth in the hands of the few. They write the rules & make the laws, and our elected officials are there to serve them. This is evident in NAFTA, which ensures that goods can be manufactured wherever it is cheapest, and then imported duty free into the end markets. What this means is that the millions of jobs we have lost are NEVER coming back. The rich will get richer.
Remember this quote:

“Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power”
Benito Mussolini
Jeff Nielson
written by Jeff Nielson, January 22, 2011
Redpill, there has ALWAYS been a mechanism for FAIR trade: "managed trade". The "Auto Pact" between Canada and the U.S. brought nearly 4 decades of prosperity to this sector, where the INDUSTRY was divided fairly/evenly between Canada and the U.S., wages for everyone were high, and North American autos dominated the world for decades.

The MYTH from ivory-tower economists and thieving-bankers is that we ONLY have a "choice" between "free trade" (i.e. a race-to-the-bottom for wages) and "protectionism". The idea of negotiating FAIR and COMPREHENSIVE trade agreements NEVER OCCURRED to our rulers - for two reasons.

One, for DECADES, they have not cared in the slightest about the well-being of the average worker - and were content to "sell them out" with free trade. The OTHER reason is that such agreements are DIFFICULT, and require HARD WORK.

All that "leaders" (i.e. banker-servants) seem genetically capable of are "simple" and "easy" tasks - which they receive from their Masters.
Brian Boutilier
written by Brian Boutilier, January 22, 2011
After reading your article Jeff, this popped into my head. Somehow seemed appropriate.
written by Schuhmann, January 22, 2011
Yes Jeff, it's true but in globalized world economy we also have to compete with the chinese workers - they do not have trade unions. The Problem is even bigger. The competition in a globalized world is also about the taxation of the big companies - they do not pay taxes.
Did you know, that Daimler Benz for example is a belgium company - from the point of view of taxation.

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