With the recent article by Pepe Gómez Merchán reopening the debates around unequal exchange in Cosmonaut, I figured now would be a good time to spit out what I had been meaning to say about the matter for some time, but which I never got around to. The first article in Cosmonaut that sparked this debate was Rob Ashlar’s in 2023, and I’ll begin with my criticisms there, and then move on to criticize Merchán, as both make certain subtle errors in their economic reasoning.

Unequal Exchange and the Lack of Profit Rate Equalization

First, let’s begin with this section from Ashlar’s original article.

We must now show the relationship between high wages in one country and low wages in another–that is, unequal exchange. Cockshott denounces the ‘notion that low wages are explained by unequal exchange’ (10:10 in ‘The so-called unequal exchange’), suggesting a weak grasp of the subject. It is not unequal exchange which leads to low wages, but the other way around. As Amal Samaha put it:

"If there are two or more trading partners that are competing for the same mobile pool of capital [i.e. under conditions of globally equalized rate of profit], a general wage rise in one country without a corresponding increase in the surplus value contributed by labor to its commodities will result in that country having a higher price of production (which we must remember does not necessarily correspond to unit prices, but to the sum of prices for a given quantity of invested capital) for its total production relative to total commodity values, regardless of the initial value composition of its industry. In contrast, all other countries which did not see such a rise in wages will see lower prices of production relative to initial commodity values. […] The capitalist of the richer country gets access to cheap elements of constant capital from the poorer country, while the poorer country must pay even more for high-value-added goods from the core."

This is a dynamic, historical model with several implications. First, it is not certain commodity types as such, but commodities made by expensive labor, which command high prices. Second, low- and high-wage commodities, by extension industries, must be inter-sectoral. Once a low-wage country effectively competes in a sector dominated by a high-wage country, the latter switches to another. The original sector’s prices fall, the new sector’s prices rise, and the structure is reproduced anew.

There is a grain of truth to this story, but only a grain. It is true that in many cases, when an industry goes from a highly developed economy to a developing one, its value-add decreases, but as in the case of the South Korean steel industry which gets brought up in Merchán’s article, this is often due to scientific-technical progress making it so the process itself becomes easier and more accessible, therefore allowing workers with less specialized training, and facilities with less specialized machinery, to make it. The problem with the unequal exchange theory as presented here is the assumption of globally equalized profit rates, which essentially forbids any excess profits in low-wage countries resulting from using a similar production process to the high-wage countries but with lower wages (and therefore higher rates of exploitation). This simply isn’t how things work. For one, there is no empirical evidence for profit rate equalization in the real world.^[1] Secondly, commodities with global prices do have a global cost curve, often one where producers in developing countries are lower and where producers in developed countries are higher. According to Ricardian rent logic, the profits of the lower cost producers will be directly determined by the costs of the least profitable producers on the market.

See below the global cost curve for Hot Rolled Steel Coil^[2], edited by me to illustrate the issue:

Countries like Venezuela, Iran, India, Japan and Egypt are near the lower end, whereas the top is dominated by the United States and Europe. For countries fully integrated into global markets, like India and Egypt and China, these lower production costs guarantee higher profits because, with some allowances for costs of transportation and arbitrage, there is a single global price for this product. Therefore we cannot speak of a situation where general wage rises in one country lead to its industries being higher value-added, so long as those industries exist in low-wage countries as well; this necessarily entails higher surplus for those low-wage countries. To the extent that low-wage countries cannot participate in such industries, whether because of intellectual property restrictions, lack of scientific-technical institutional knowledge, lack of sufficiently skilled workers, or lack of infrastructure to utilize the required production techniques, then we must again go to productivity as the driver of differences.

Merchán’s Chicken vs Egg Problem

Merchán provides several criticisms of unequal exchange and Ashlar’s position. His principal point is that higher wages in developed countries represent a lot more labor going to reproduce the specific worker subjectivity required to work in specialized ways, including education and such. But under scrutiny, I don’t think this quite holds up. The problem is that these reproductive costs of producing skilled labor can occur whether or not this skilled labor is actually used to produce high value-added commodities or not. In China and Vietnam, for example, these costs were much higher than in surrounding countries for many years before they actually saw industrial and international trade success because the communist parties put a lot of effort into things like education and healthcare, but it was only once this workforce was put to work in competitive global industries that they became export powerhouses. And college-educated workforces can be large in many developing countries; India is an excellent example, without generating much higher wages. In part, this is due to higher rates of exploitation in industries that actually do compete globally, and in part this is due to an even larger pool of uneducated people without the infrastructure and support to produce such goods.

When it comes to international exchange, the game is about selling to another country so they exchange their currency for yours, giving you the ability to command labor in the other country. This is only possible if you can produce goods in sufficient quantity and quality to make exchanges; hence, we return once again to the issue of productivity. Costs of social reproduction can increase quite independently of creating the industries which can actually get you access to foreign currency.

1. There have been a few pieces of empirical research which shows that there is no equalization of profit rates as was expected by Marx in volume 3 and classical economists more generally. See: Fröhlich, Nils. “Labour Values, Prices of Production and the Missing Equalisation Tendency of Profit Rates: Evidence from the German Economy.” Cambridge Journal of Economics 37, no. 5 (2013): 1107–26. http://www.jstor.org/stable/23601783.

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2. “World Cost Curve | Hot Rolled Coil HRC | Benchmarking.” 2019. SteelOnTheNet. June 2019. https://www.steelonthenet.com/resources/economics/world-cost-curve-hr,,,,c.html.

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