It is a welcome sight to see a discussion about the theory of imperialism that is able to follow rigorous and academic research instead of quote-mongering or citing political differences as arguments against a theory. Cosmopod’s interview with John Smith, writer of Imperialism in the 21st Century and the subsequent letter commenting on John Smith’s interview by an anonymous comrade, has produced, despite some issues, a high level of scientific discussion that is worth paying attention to. Taking this opportunity, I would like to also make some comments on the “third worldist” theory of imperialism that the anonymous comrade clearly follows.
First, I would like to comment on the usual argument against the third worldist theory of imperialism. That is, that this theory proposes that the workers of the “first world” are exploiters of “third world” workers and thus they cannot be the subject of revolutionary change. This argument is also made by John Smith, and our anonymous comrade objects to it by claiming that the theory of imperialism (at least the theory that they accept as correct) supports this and so whether this is a politically desirable theory is irrelevant. This answer shows the correct approach to theory. We cannot settle scientific debates on whether we like or dislike the consequences of a theory. Besides, this “political” argument against third worldism could easily be extended to argue that actually their theory cannot sustain the Marxist argument for the necessity of socialist revolution, for the Marxist theory of history, etc. But again, this is irrelevant. One must settle theoretical issues not based on preferences but on logical and empirical grounds. Scientific realism is an essential element of marxism and backtracking on this is a more serious offense than any third worldist claim.
But let us now move on to the theoretical argument at hand. John Smith and Argiris Emanouil1 both share a particular emphasis on the role of wage differentials. John Smith calls this phenomenon “global labor arbitrage” and boils it down to the lower wages of the so-called “global south” compared to so-called “global North”. This occasionally is interpreted in contradictory ways (either as a difference in the value2 of labor-power or as a fall of the wage of workers in the “global south” below the value of their labor-power). Despite this contradiction, the consequences of John Smith’s elaboration stay the same: the wage differentials affect the transformation of values to prices of productions in specific ways which leads to value transfers from the “global south” to the “global north”. However, and in my opinion to John Smith’s credit, he has avoided using the term unequal exchange for this phenomenon and occasionally, due to his emphasis on the empirical side of the global value chains (here the term value does not refer to the marxist notion of value), the term value transfers refer in the structural relationships between the various stages of production of commodities. This is sometimes “enriched” by claims about unproductive activities or other such badly defined notions. On the whole, John Smith’s argument is that capitalists in the “global north” take advantage of wage differentials (alongside the unequal relationship in global value chains) to make “super profits”3 against the capitalists of the “global south”. The workers of the “global south” face the two sets of capitalists in their struggle for higher standard of living.
Our anonymous comrade has, of course, every right to disagree with Smith’s portrayal of Emmanouil. But, as we demonstrated above, he also portrays Smith in an undeserving way. We are willing to let this go, however, as Emmanouil is perhaps the most misrepresented researcher on unequal exchange. This term, unequal exchange, has come to be identified with the value transfers that occur when labor values are transformed into prices of production. This value transfer is claimed to represent some unequal exchange between the various industries, sectors or countries. But Emmanouil would, or at least a coherent development of Emannouil’s work, disagree with this definition of unequal exchange. In order to be fair both to Smith and to Emmanouil we also have to briefly develop his side of the debate.
Emmanouil’s approach on imperialism was mainly about terms of trade. He started his research by adopting the same transformation process of values to prices of production that John Smith adopts. However, he used this transformation in a completely different manner from Smith. Instead of focusing on differences between values and prices, he claimed that wage differentials affect the prices of production. In particular, he claimed that increased wages lead to increased prices that, in their turn, affect the specialisation of the various countries that enter into trade relationships. This, claims Emmanouil, leads to increased investments to the high wage nation due to higher effective demand (due to the increased wages of this nation’s workers) and locks the lower wage nation into a subordinate position in the global trade. This is all caused by the higher wage of the workers, who also have a better standard of living, and therefore it is in the interest of these workers to maintain this unequal relationship. Later, when Emmanouil was confronted with the logical problems of Marx’s transformation, he adopted the Sraffian way of solving the Marxian equations that define the prices of production, thus moving his approach to more solid ground. But the idea stayed the same, focusing on how wage differentials (an inherently comparative statics approach) can affect the prices of production and the terms of trade.
One can talk a lot about the various results developed by Emmanouil that have been shown in even more rigorous ground (Brewer for example showed how the variations over the free or restricted flow of movement of “capital” and labor leads to exactly the same type of advantage, absolute or comparative, that Emmanouil claimed it did).4 And it is a shame that his first, bad, formulation has kept his later formulation from influencing the marxist debate on international trade and imperialism.5 Far more shameful is the state of economic theory in Marxist circles, having stayed faithful to the wrong side of the debate in the 70’s and 80’s (and sometimes regressing even more backward). And even Emmanouil, with his strict emphasis on single production systems instead of joint production, draws all his political consequences on a model that fails to represent the most general production processes that occur in the economic reality. It is a fact that most of the results of Emmanouil do not hold in the case of joint production. This, unfortunately, has also been ignored by his friends and detractors alike.
Allow us to backtrack to our main topic, the relationship between Smith and Emmanouil. Our comrade, in his letter, completely misses the fact that John Smith has based his whole argument on wage differentials and has many times, including in his book, has argued for the elimination of restrictions of labor movement. That, as Emmanouil would have argued, can only lead to the gradual equalisation of wage rates throughout the globe and thus this would have eliminated “unequal exchange” in the Emmanouilian sense. Shouldn’t that be a point of agreement between Smith and Emmanouil? In our opinion it obviously is and should be taken as such by any follower of Emmanouil. Of course, we would like to point out that their agreement on this topic does not mean they are correct. The fact that educated workers of poorer countries constantly leave to gain higher wages in the more developed countries has been a bane of the developing countries for decades. The restrictions of labor movement have stopped the equalisation of wage rates but have also protected developing countries from their most capable workers leaving and as result having to base themselves only in former peasants, that would take time to learn to adapt in their new industrial environment (before them leaving as well). Labor restrictions have very complex effects on the development of national economies and Emmanouil’s formal model is far from capable of portraying all the different effects.6
We do not wish to enter into the debates of labor productivity and the, frankly, wrong statements that “third worldists” occasionally make. Let us have only a single point. Productivity of labor can only be defined in money terms, as the ratio between the output measured in money terms and the total wages. To be defined in labor value terms, as has been shown, is far from simple.7 In any case, the productivity of labor does not directly affect the wage rate but only sets the possible range of wages. This means that higher productivity can only create the economic environment for gaining viable higher wages, but does not cause them. Looking at the productivity of labor measured correctly can only lead to specific results.
Let us move now to our final points, as we are not interested in fully developing our position just yet. That has to do with Emmanouil’s insistence of the wage rate being an exogenous variable. It is a fact that in the tradition of classical political economy the wage rate has been treated as a given variable when calculating the prices of production. But what this means has been misunderstood both by Emmanouil and his followers. First of all, the technique of production and the demand has also been taken as given. That means that one could as easily vary the technology and obtain similar comparative statics as when varying the wage rate. This, however, has not been understood as unequal exchange of any kind. Secondly, as Brewer showed, the countries with lower wages have an advantage in international trade in the model that Emmanouil develops. Lower wages leads, in the case of international mobility of “capital” and labor restrictions, to capital moving in the nations with lower wages and creating unemployment in other countries. To reiterate, this is a direct result from Emmanouil’s model. These firms then can export, in way more competitive prices, in the countries with higher wages. There is no single argument that can be made inside Emmanouil’s model against this. To bring effective demand into it is to forget that we are talking about international trade and not about non-tradable goods. If one wishes to talk about their effect on the economic growth they can do it. But it wouldn’t be about trade any more, or at least it would also be about the general structure of the economy and not just tradable goods.
The third point about the exogenously given wage rate is that, in the Sraffian model that Emmanouil adopts and in the mathematical, formal, sense the “exogenously given wage rate” does not mean what people want it to mean.8 It does not mean that the wage rate is actually independent of the economic conditions in the national and in the global economy. It does not even mean that you are allowed to just take them as a given and treat them as not needing any explanation. It simply means that we are treating them as if they were independent of the economy. We can then calculate the viable range of wages from the technology and then vary the wage rate inside this range to see its effect on relative prices, the rate of profit and the technical change. But that’s all. It’s a model that gives us comparative statics, no consequences can be extrapolated from this model that actually require a dynamic model, like the flow of investment or the rate of change of the wages. Another simple point is that the Sraffian model, i.e. the correct one, can only give us relative prices and not absolute prices. This means that the price level and the exchange rate are also not endogenous to the model. Finally, and perhaps most importantly, we have to deal with the argument about the setting of the wage rate. We argued above that to claim that the wage rate is independent of the economy is not supported by the assumption that the wages are exogenously given. But, for the sake of argument, let us accept this premise. The wage rate is determined politically. This means that the workers and the capitalists have to struggle with each other to determine the wages. Let us also assume, as Emmanouil does, that we live in a world with single production processes (with or without technical change). Then, as the mathematics can show, any increase in the wages (either of the high or the low wage country) leads to a decrease in the profit rate and in the total profits of the system. This means that an increase in the wages of the high wage country can only hurt the interests of the capitalists, independent of the country they are in. And this is independent also of the industries that these countries specialise, i.e. of whether the competition is intra- or inter-industrial.
To move into the world of prices, we can also see that any increase in the wages of the workers working in the industries that produce subsistence of goods9, that are produced in low wage countries according to third worldists, leads to a relative increase in their prices and that affects all consumers of these goods in all countries. But to take from this that these workers exploit the workers of the other countries would be to miss the institutional power of the capitalists and that due to the private ownership of the outputs of production the capitalists have superior power against the workers. The working class is not supposed to keep the struggle on the economic front. It can only posit a threat to the capitalist by taking the struggle toward the fight for the ownership of the means of production. If it doesn’t then the workers within a country don’t actually have a reason to form a class-for-itself. This can be extended from the international arena, that third worldists like to focus on, to any country, high of low waged. The effects of wage differentials are the same when some workers in some low wage country gain wage increases. Would that mean that these workers are members of the labor aristocracy in this country and we should only say that workers that are the least paid have revolutionary potential? Or, for that matter, should we say that when countries with low wages trade between themselves we also have a creation of labor aristocracy in the country with the relative higher wages? To make a long story short, Emmanouil has only provided further proof that in the economic struggle the capitalists will come out on top, even when workers win, and that the workers can only form common interests when they approach the issue of capitalist exploitation from the fundamental side of the private ownership of the means of production, and the subsequent private ownership of the outputs of production.
Of course, the third worldists are right in that, looking at it from a strictly rational approach, the workers in countries with higher wages are expected to be far more reluctant to attempt a revolutionary change. But this does not require the unsupported argument that the workers in these countries are somehow exploiting other workers. All one needs is to understand that revolutionary upheaval would probably require significant sacrifices and would result in, at least temporary, decrease of the living standards. As Roemer has also argued, these sacrifices are manifested in a far higher transition cost from capitalism to socialism. It is to be expected then that these workers would be more difficult to be commit themselves to revolution compared to workers with lower standards of living.10
To summarize, we are ready to accept the criticism that we have not refuted all the points of the third worldist position. We have not, for example, laid out a growth theory that would take into account the balance of accounts, the technology transfers and the major technology differences, the role of autonomous demand and so many other points that are relevant to the development of growth theory. But neither has the third worldist tradition. And contrary to the author of this letter, who has relevant literature to consult, the third worldist have, for decades, limited themselves to the supposed political consequences of their theory instead of creating an actual theoretical framework that can support their case. We would also like to return to the beginning of our letter, which we started by defending the third worldist transition from the “political criticism” they are commonly subjected to. It is now the time however to point out to their own, substantial, errors in the same vein. It is very common for third worldists to argue that to disagree with their basic model (that again does not show what they claim to show), means that you are also members of the labour aristocracy and that you are just protecting your privilege. This is again a demonstration of withdrawal from the scientific field into the welcoming arms of dogmatic self-defence against reality. Indignation and dismissal of arguments, even when they are essentially the same in many regards (like Smith and Emmanouil) can lead only to the insignificant joy obtained by self-isolation against an imagined all-powerful opponent.
by ΔΜ
- I am unable to write Emmanouil’s name as “Emmanuel”. He may have wanted it this way but I cannot do this, it doesn’t make sense. Please be understanding of my Greek weirdness.
- In the Marxist sense.
- This is not about different profit rates as our anonymous friend claims, as these “super profits” refer to the fact that the capitalists in the “global north” are mainly investing in “unproductive” activities that do not produce surplus value and thus their profits are only achievable by these value transfers.
- Brewer, Anthony, 1985. “Trade with fixed real wages and mobile capital,” Journal of International Economics, Elsevier, vol. 18(1-2), pages 177-186
- The so-called “Neo-Ricardians” have used the same framework as Emmanouil and have shown how international trade can lead to positive or negative gain. This research should be of interest to any follower of Emmanouil.
- Far from us from saying that labor restrictions are good or bad. We just point out that labor restrictions have contradictory effects and that workers and capitalists should not be treated like they have the same interests as the nation.
- For more information, you can read Flaschel P., Franke R., Veneziani R. (2013) “Labor Productivity and the Law of Decreasing Labor Content”, Cambridge Journal of Economics, vol. 37(2), 379-402. This approach however requires a more general definition in order to be able to extend for cases of joint production and heterogeneous labor.
- Emmanouil, and several of his followers, also insist that there is a significant difference in taking the wage rate instead of the profit rate as exogenously given. Unfortunately, this is not correct. There is no reason to argue for one instead of the other within the Sraffian model. No matter which one we take as given, we can then proceed to calculate the viable range that both distributive variables can take and the relationship between them. This does not change whether the one or the one is assumed as the independent variable. The distinction between dependent and independent variables in this model is purely formal and of no semantic consequence.
- A more general claim is that low wage nations are stuck exporting commodities with lower “capital” to labor ratio compared to other nations, mainly in industries of subsistence goods or in minerals and other raw materials. The literature around the Leontief paradox shows that this simple story about the “capital” to labor ratio of the exports of various nations requires substantial reconsideration.
- We would like however to make the point that from a marginal point of view the opposite may be the case. But this has to be just speculation at this point.