eyler.coates@worldnet.att.net wrote: > It is true that this does nothing to raise productivity. But since > productivity is not the issue, that is totally irrelevant. We are not > talking about production efficiency, but the quantity of production. > Not output per worker, but more output with more workers. . Hi, Actually, productivity IS the key. Output per worker. To avoid all the complications of currency exchange and inflation, think in terms of hours of labor per item. A sort of Marxist "labor theory of value". The more labor that goes into a product, the more expensive it will be; the longer you will have to work to buy it. ( But this makes it harder to compare between countries and in a quantitative way). In Mexico, it takes more labor to make a pizza (and almost anything else) than in the US. So a Mexican can buy less for the same number of hours of work. >Your point would be significant except for this: the technology for >making pizza in both countries is not significantly different. >Certainly, the American pizza maker is apt to be more efficient by a >small factor. A reasonable estimate might be 25% at the high end. But >we are talking about a factor of 3! Think of the DOUGH! You are forgetting the First Principle of Economics: Think of the Dough. You say the pizza making process is similar, and it probably is. The US efficiency gain comes from the American farmer. The wheat grown in Kansas has much less "human labor" per pound than wheat grown anywhere. And transportation is cheaper here, etc. This all goes into that pizza. The example of Mexico is harder to explain in detail since NAFTA. They are getting access to the US market. In this problem, consider that the US and Mexico have been two distinct markets for a long time. Imagine two isolated countries, Mexico and USA. The wheat used in the US pizza is grown by a Kansas farmer who harvests hundreds of acres in a day using a combine. It is shipped the huge grain elevator in a train that is dozens of huge cars long and has a crew of three people, etc. The Mexican wheat is planted by hand in a field plowed with a donkey, harvested with a scythe and taken to a stone mill by a donkey cart, etc. Compare the amount of human labor in each pound of pizza dough in each country. From this comparison, the question becomes, why does the Mexican pizza cost ONLY three times the US one? Answer: wheat is only one part of the final product, and in other inputs, the productivity differential is less. For example, at the final delivery to your table, the waiters in the US and Mexico probably have equal productivity. This illustrates two points: The failure to even consider basic food staple price shows that Americans have so adjusted to the VERY high productivity of US farmers that they don't even notice it. But for most of history, most people have put most of their work time into growing food. This is still the case for most of the world today. This means that basic food staples have been very expensive, and still are for most of the world. And it shows the value of international trade. Clearly Mexicans can benefit by buying wheat grown in the US. But how to pay for it? Well by selling us things we can't (or can't easily) make/grow. Like coffee or strawberries in the winter. And of course, this is what is happening; given time, things will equalize. It is All Relative! The relative cost of different items is different in different countries. For example a decade ago, basic grocery store food in the US Virgin Islands was about 3 times the price in Wisconsin, but rum there was only about 1/5 the price. Milk was much more there, but emeralds cost much less.(those differences exist but are less now). In Israel (before some changes in economic policy several years ago) food was much cheaper than in the US, but cars cost MUCH more (and still do). These kinds of differences are due to tax policy as much (or more) than to productivity differences. Productivity Sets the Limit. But the OVERALL standard of living is determined by productivity. When the widget factory is modernized, and worker productivity increases 1000 times (that many MORE widgets from the same number of worker hours), the widget workers don't get a pay raise of 1000 times; the gain is spread out over the entire economy by some combination of higher pay for workers, lower prices to consumers, larger dividends for investors, etc. If this is not obvious, consider the two extreme cases. The very SMALL country. So small, it has only one citizen. He lives on an island alone. He has for consumption only that which he "produces" (grows, finds, catches, picks). He can form a union, or give himself a pay raise. But if he wants to raise his living standard, he should invest his time in raising his productivity; he can make tools to plow and catch fish and game. Traps, and a spear for example. Or, at the other extreme, the Global Economy: the planet earth. Collectively we can consume only what we produce. If by new technology, the average amount produced by each hour of work is doubled, the same amount of work results in twice as much to have. (or we could work half as long and have as much as now--see "the Shorter Work Week?" file on my web page). People seem to lose sight of this obvious fact since, because of division of labor and specialization, very few people consume the same products that THEY produce. Added comments: Other Explanations. Minimum Wage. It was suggested that the US is richer BECAUSE the minimum wage is higher. The absurdity of this idea is obvious if you imagine that some low productivity non-industrial country passes a $100 per hour minimum wage. (In the "equivalent" units of their currency--or maybe even in US dollars! Hey, why not?) They then expect that with all that money, their workers will be rich. No need for that factory to invest in more productive tools. It is more the case that the US minimum wage is higher BECAUSE the country is richer. So politicians think they can pass some of that wealth on to the "working poor" without it costing THEM (or the taxpayers) anything. Is this a good idea? See my web page files on "EITC" and "Minimum Wage". Distribution & Profits Other explanations have been in terms of distribution of wealth. This would make sense if Mexico HAD lots of wealth, and it was all kept by a few people, while the vast majority are poor, while in the US it is more evenly distributed. But the average income/wealth per person in Mexico is much less. Even if it were all equally distributed, they would still be poor by US standards. Or that all/most/more of the productivity gains in Mexico go to the investors/capitalists rather than to the workers (as in the US). If this were the case, investment in Mexican business would be much more profitable than investments in the US. But with the recent Peso crash, and the uncertain political situation, would YOU invest your retirement savings in a Mexican business? If returns ARE high (in the short run) it is because people won't invest in long term average return stocks or bonds. See my web page file "The Peso Crisis". And the letter below from "Grinch". And if investment returns WERE very high in Mexico compared to the US, the productivity gap (and thus wage gap) would close faster. But I agree that a stable political situation would improve the prospects for future wage growth in Mexico. Unions Can Raise Our Wages! The US pizza makers make more than the Mexican ones because they have a union. Well unions can get higher wages for SOME workers. But if they don't increase productivity, that increase is at the expense of other workers who either don't have a union, or have a weaker one. Some unions may have raised productivity in some skilled trades by establishing training programs and performance standards. But they have also resisted new technology. Sometimes when productivity was increased, the union ensured that some (or all) of the gain went to the workers. When workers making less than the national average wage strike, I am usually sympathetic. But the more common situation lately has been those who make MORE strike because they want MUCH MORE. It was the American Airline Pilots (who at $120,000 per year for a 20 hour average work week) strike for a 12% pay hike. Not the ticket clerks, (who will be harmed by a strike). My favorite is when professional athletes strike. See the "Baseball Players Syndrome" on my web page. Rising Productivity & Falling Wages? And finally, it was claimed that productivity can't be the cause of higher wages since productivity in the US has been rising since about 1970 but wages have been falling. The much discussed "fall in wages" is not real. It is partly an artifact of the error in the Consumer Price Index. Total compensation has been rising along with productivity; but "take home" pay has, or has not been rising (on average) depending on which correction to the CPI that you use. The rest of the "wage increase" has gone to an increase in taxes (mostly Social Security), and to increased benefits like health care and retirement. For more about the CPI see my web page files on "Inflation, Boskin, JKG and CPI". There are tables and graphs to illustrate the "CPI effect". Both productivity and "wages" have been growing, just at a slower rate than in the more distant past. See the review of "Peddling Prosperity" on my web page for some explanation of this. John B. O'Donnell: > >That's the "proper" answer by conventional economic analysis, but >it doesn't change the fact that Eyler's assessment is correct. >Productivity can change the amount labor can demand from capital >and still have capital stay in business, but the simple fact of >an increase in productivity has no value for labor unless it has >the clout to demand part of the increase in productivity as >wages. There is nothing automatic about it. In time, there _may_ >be sufficient competition for labor, but that is a very iffy >proposition at best and history has shown that without labor >unions to address the more significant abuses most of the benefit >of productivity remains with capital and, yes, it does so even to >the detriment of the overall benefit of capital.. I don't deny that unions play a role in the DISTRIBUTION of the gains from productivity. But 1- They can't distribute it if it dosen't exist. 2- In recent times, the unions have had the effect of making the already "well paid" better off at the expense of the lower paid workers. Think of the really big gains; airline pilots, baseball players, etc. 3- Name an example of a country that has high productivity but low wages. ---jeb To avoid all the complications of currency exchange and inflation, think in terms of hours of labor per item. A sort of Marxist "labor theory of value". The more labor that goes into a product, the more expensive it will be; the longer you will have to work to buy it. ( But this makes it harder to compare between countries and in a quantitative way). In Mexico, it takes more labor to make a pizza (and almost anything else) than in the US. So a Mexican can buy less for the same number of hours of work.--jeb > >Really now, do you propose it takes two mexicans to lift a pizza >where one American can do the job? This is such utter nonsense >that even economists may see the errors.--JBO'D As I said, the biggest productivity difference is not in the waiter or the baker. It is the farmer. Food in most of the rest of the world is much more expensive than in the US. Even in Europe it is notably more expensive. Americans have become so adjusted to this that they don't notice it until they travel abroad. Much out our high standard of living is a result of the huge gains in agricultural productivity. The percent of the population living on farms has dropped from 90%+ to 5% or less. 1- Yes the waiters and bakers in Mexico are probably as productive as those in the US. But the farmers and aircraft makers are not. The result is not that Mexican and US waiters and bakers then have similar wages. The waiters and bakers in the US benefit from the high productivity of the US farmers and aircraft makers, the ones in Mexico don't (yet)--well even THEY benefit, just not as much! And I should have included the dairy (not just the wheat) farmers. I am from Wisconsin, and cheese is an important factor in pizza. I bet that Wisconsin dairy farmers are at least three times as productive as those in Mexico. The weather/rainfall is better, and they get a lot of advice from the experts at the UW (Cow College or Moo U.) :-). A quote from Eyler Coats: The Mexicans do not live in the Stone Ages. They have modern appearing ovens, and other modern appliances. I must remind you that I lived in Mexico and ate pizza perhaps once per week for a year. To suggest that every other pizza came out an inedible charred mass is utterly absurd. Their pizzas were, BTW, every bit as good as the best in America. Anyone who has been to the interior of Mexico knows that the quality of their foods is excellent. Their beers are far better than anything you can buy in the U.S. And don't judge their beers there by imported Mexican beer in this country. I think they change the formula to suit American tastes (or the lack thereof). Mexican workers *in Mexico* are, to my observation, as good and competent as those anywhere.--Eyler C. Are you suggesting that productivity in Mexico is, overall, as high as in the USA? Or even close? I don't know how they farm now, and lately there are some modern farms that grow crops largely for export. But I recently read some essays by Oscar Lewis on a Mexican village he considered to be typical. One essay was on the factor of three gain in production to be gained by the Mexican farmers who used a plow rather than the hoe that most have still use. He claims that most of then still grow crops the way their ancestors did when Colombus came here. (now this was in the 1950's, but if they had not changed in 450 years, how much have they changed in 40?) 2-- In case I was not clear, trade and NAFTA is rapidly changing the picture, and much of the confusion is due to these changes. To understand the situation, first picture a USA and a Mexico each isolated, with no flow of goods or people between them. And think in terms of "labor put into each item", not the price in dollars or pesos. Once that is firmly in place, THEN consider the "nonequilibrium" current situation under way until a new model of a single economy of USAMexico is formed. (actually USAMexicoCanada). The only place I have ever been with cheaper food was Israel (before a change in tax/social policy about a decade ago). Food was cheap then mostly (I think) because of the way the government favored the kubbutzniks. People were encouraged to live on farms and grow food in excess of the normal supply/demand level, and they didn't mind that prices were low. Most countries (France for example) try to help the local farmers by keeping food prices high. (I know the French will claim that their food is more expensive BECAUSE it is BETTER!) Yes, my analysis is quite conventional. But when the conventional theory fully explains the situation, why seek out the bizarre? And one more point: pizza is not a traditional Mexican food. Most Mexican food is based on corn rather than wheat. This reflects the fact that the climate and terrain there favors growing corn rather than wheat. Sometimes people lose track of the most basic and obvious factors.--jeb PS. As a PS, in the lab where I work a few chemists analyze thousands of air samples collected from all over the country each week. We can do so because of the "robot" instruments that work 24 hrs a day, and the computers that process the data much faster than we could do it just a few years ago. (I can remember the days when it would have taken 10 times as much time for a chemist to a similar kind of sample analysis). When there were predicted to be electric power blackouts of a few hours a week last summer, I realized that even such a few temporary blackouts would cripple our operation to such an extent that the samples could probably be done as well in Mexico. And the UPS strike harmed our efficienccy some; if not for competing ways to ship, we would have stopped completely. Reliable power and transportation are essential to US high wages. -- ,,,,,,, _______________ooo___( O O )___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 And This From "Grinch". Subject: The Mexican Supermarket (was: Mexican Pizza) Date: Sat, 15 Mar 1997 07:43:00 GMT From: Ol'Nasty@Seus.com (Grinch) Newsgroups: sci.econ References: 1 The Mexican Pizza Riddle puts forth a number of misconceptions that perhaps may be illustrated by referring to some real numbers from the economy. After all, for a theory to be viable the numbers have to add up right. Here are five propositions put forth in the Mexican Pizza Riddle, as I understand them: I. *** Profits unfairly extracted from the poor account for the poverty of the masses. Thus, if the rich took fewer profits, the poor would be richer. *** >the Mexican worker/consumer has one third the >buying power of the American worker/consumer... >There are wealthy Mexicans, of course, >but they maintain their wealth by extracting high profits.... >If the worker/consumer is paid only enough to buy beans and >rice to live on, there will be great demand for bean and rice production, >but for little else Let's look at the numbers. I'll start with US numbers (for 1995) to illustrate the point, because anyone can look them up in an almanac, then move on to Mexico. In the US, total corporate profits in all industries, from all businesses public and private, large and small, amount to about 9% of personal income -- that's before profits are taxed. Here's myth #1: Profits are a lot larger than they are. People who imagine huge amounts of profits being extracted from workers often confuse high rates of return on capital with high total amounts of return on capital. If you take away, say, 1/3 of total US profits from business owners and give them to the earning classes, you'll increase the spending power of personal income by no more than 3%. But you don't want to take away 1/3 of *all* profits because... * Corporate profits already are taxed about 30% on average (up to 35% by the federal government, plus more at the state and local level) before being distributed. * About 50% of after-tax corporate profits pass to the non-rich through earnings from mom-and-pop businesses, stock shares held in college savings accounts, IRAs, pension accounts, and so on. Presumably the goal is to help, not hurt, the working non-rich. However, the wealthiest 5% of the population do receive about 50% of all profits through their investments. Let's say that you want to take 1/3 of the profits going to *these* people and transfer them to wage earners. You'll transfer 33% of 50% (wealthy people's) of 70% (distributed post-tax) of 9% (total profits) of national income -- or an amount equal to about 1% national personal income. So consumers will get a 1% increase in spending power. Wow. Now apply the same process to Mexico. Immediately you realize that the Mexican economy generates only about 10% of the profits of the US economy, but has 35% as many people -- so proportionately, your profits are being spread over 3.5 times as many people, which reduces everyone's increase in income accordingly. If you take the trouble to look up the numbers and do the computation, you'll see that even if you transfer pre-tax profits and adjust for Mexico's lower average personal income (1/3rd of the US's), transferring 1/3 of the profits earned by Mexican investors increases the buying power of the earning classes by only 1%. In short, the massive profits that are supposed to be transferred to increase the buying power of wage earners simply do not exist. The fact that high rates of return are earned on Mexican capital does *not* mean there is a huge total amount of return on such capital. Just the opposite is true -- high rates of return exist because there is a *shortage* of capital and high returns are needed to attract more capital to develop the economy. II. *** There's a "free lunch" to be found in moving income from profits to wages. *** The idea that everyone would be better off if business owners "just took less" in profit and passed out the difference in wages assumes that business owners do nothing useful with their profits -- as if they just stuffed profits into their mattresses. Let's look at the impact of shifting an amount from profit to wages that is sufficient to increase personal income by just 1% -- this would be about $60 billion in the US, and $6 billion in Mexico. Assume the economy obtains a benefit of a 1% increase in consumer demand as a result. Capital assets are valued at a multiple of the amount of income they produce. Treasury bonds today are worth about 14 times the annual interest they pay, stocks are valued at 20+ times earnings, etc. If you assume capital assets are valued on average at 17 times the annual income they produce, then removing $60 billion from capital income will reduce the value of capital assets by over $1 *trillion* -- with a "T" -- in an economy whose total GDP is $7 trillion. One suspects that this would offset a 1% increase in consumer demand. The same reality applies in Mexico. Shifting from capital income to wage income an amount sufficient to increase consumer demand by 1% would reduce the value of capital assets by perhaps $100 billion, in an economy with a GDP of $700 billion. Of course, these are "order of magnitude" calculations. You can change the multiplier used to value capital assets to any number you want. But any reasonable number will give you a collapse in value that *far* outweighs any corresponding gain in consumer demand. As Milton Freidman famously pointed out, there's no free lunch. III. *** In Mexico, high profits for owners result from their extracting high prices relative to wages *** The idea that high returns to capital result from high, "greedy" prices being charged by business owners may seen obvious -- but it's only obvious in the way that it's obvious that the Earth is flat and the Sun moves around it. Instead of the fictional pizzeria, lets look at a real place were Mexican's buy food, the supermarket. Supermarkets operate with a typical 1% profit margin on sales, and this is as true in Mexico City as it is in Chicago. (If you doubt it, go to the library and read a few issues of a trade publication such as Marketing News). The store owner puts up, say, $1 million pesos to buy inventory (a retailer's major capital cost) and if he can sell it 15 times over during the year he gets a 15% return on his money and has a viable business. But the "Mexican Pizza Riddle" says that store prices should be lower relative to wages, and that they are not so due to the owner's "greed." Well, by how much can a store owner operating with a profit margin of 1% on sales reduce his prices and stay in business? Or, if you think he should pay more wages, how much can he raise wages without wiping out a 1% profit margin? The point is that *all* businesses are financed in this manner. High returns to capital come not from high profit margins on sales, but from profit margins on sales *multiplied* by turnover. Some businesses have higher profit margins on sales than supermarkets, with more expensive and less-frequently sold items generally having higher margins -- up to 10% to 15% for autos. But consumer businesses in general have *nothing like* the kind of 40%+ on sales profit margin that the author of the MPR seems to assume exists out of owners' "greed", which would enable owners to greatly cut prices (by 1/3 perhaps? ) relative to wages without putting themselves out of business immediately. It should be clear now that "high profits from capital" and "high profit margins on sales" are not at all the same thing. IV. *** Productivity doesn't matter. *** Several posts in this thread have accurately noted that productivity is the key to national living standards, while the author of the MPR keeps rejecting the idea: >> Look at it this way, you haven't done ANYTHING to raise >> productivity, so there aren't going to be any more goods in the economy >> after your proposed round of massive pay increases then there were before >> it. >It is true that this does nothing to raise productivity. But since >productivity is not the issue, that is totally irrelevant. We are not >talking about production efficiency, but the quantity of production…. But productivity is everything! Again, look at the real-life example of the supermarket. Say the market owner increases his productivity by adopting "just-in-time" inventory practices with his suppliers, so that he receives supplies just as he makes sales, and thus can reduce the amount of inventory he must carry from 1 million peso's worth to a half-million peso's worth. As a result... (1) He can lower his prices while keeping the same profit margin on sales that he had before, by reducing from his costs the expense of storing, & handling half of his former inventory -- which are serious operating costs incurred in addition to the capital cost of financing the inventory. (2) With same profit margin on sales that he had before -- that is, with *lower* prices than before -- he now *doubles* his return on capital (rate of profit) because he's now turning over his smaller inventory 30 times a year instead of 15, on the same volume of sales. But he still has only the same amount of profit as before (on a smaller investment) if he keeps just one store. (3) With the same amount of capital he had before, he can now run *two* stores -- doubling employment (which increases national wage income, upward pressure on wages ) and doubling the amount of goods he sells (good for consumers: more available, downward pressure on prices). And if he is indeed "greedy" he will be driven to do so to double his profits -- otherwise he won't have any more cash profits than before, in spite of his higher rate of profit. Now, just what were the objectives of the proposals in the MPR? >We are not >talking about production efficiency, but the quantity of production. Not >output per worker, but more output with more workers. Not more >*efficient business,* but MORE BUSINESS. There will be more goods in the >economy because the economy will have expanded. Instead of one pizza >parlor, you will have two. Their productivity will be the same. There >will be higher employment. It seems that HIGHER PRODUCTIVITY exactly attains them! It allows the store owner to *double* both employment and production (sales), while lowering prices. And his doubled 30% rate of return will encourage his own greedy self to open even *more* stores, hire more people, pay more wages, and sell more goods as fast as he can, as long as opportunities exist. What if he's so greedy that he doesn't return any of his gains from productivity through lower prices? Then his rate of return on capital will be even higher, so he'll be able to open more stores even *faster*, and if he is truly greedy he will strive to do so -- because it is the number of stores he has that puts cash in his pocket. Now, in contrast, let's say the same store owner instead follows the suggestion of being "less greedy", and doesn't increase productivity. Instead of adopting just-in-time inventory practices, he decides to refund half of his original "ample" 15% return on capital to his customers... -- He gives up half his profit. -- His customers get a 1/2 of 1% lowering of prices, which is too small for them to notice. -- Increased quantity of production that results: zero. V. *** Increasing consumer spending power increases quantity of production *** So, the "cures" offered in the MPR encounter certain practical difficulties: - There aren't anywhere near enough profits to transfer as much as desired. - Profit margins on sales aren't anywhere near big enough to cut prices as much as desired. - There's no "free lunch" ... any attempt to do either of the above on a serious scale would have disastrous consequences. Yet the author of the MPR maintains the optimistic belief that somehow putting more money in the hands of consumers, *without* increasing productivity, will increase the amount of production and employment in a magical way that overcomes all these problems. Alas, 40 years of economic theory and experience prove otherwise. Increasing consumer spending power without increasing productivity buys inflation, not production. When consumers get more money they spend it much more quickly than producers can open new factories or new businesses. So the current level of prices for existing goods gets bid up, and any profits that producers might expect from higher prices disappear to inflation. So producers have no incentive to increase production. See any Macroeconomics text book on the subject. >I'm not sure if >there has ever been in the history of the world a nation that has gone >BACKWARD from prosperity to what Mexico is, but I think that if we remove >the mechanisms that drove us up from that and that keep us where we are, >we just might establish an historical example. There are examples of MANY countries that have gone backward by following the very same ideas proposed in the MPR. In 1946 Argentina was the fourth wealthiest country in the world. 30 years later it was on the list of "developing" nations. In the meantime its Peronist government had mandated high returns to workers at the expense of capital. Foreign investors stayed away, and when domestic investors tried to move capital abroad to earn higher returns than permitted at home, exchange controls were imposed to stop them. Consumer demand surged ahead of productivity and the economy collapsed in inflationary ruin, which is only now being straightened out. Other examples available upon request. Increasing consumer demand without increasing productivity achieves nothing, at best. All the textbooks agree. As Casey Stengle used to say, "You can look it up." --- Regards, Grinch