Unequal Exchange: A Study of the Imperialism of Trade (Arghiri Emmanuel)

Unequal Exchange: A Study of the Imperialism of Trade
Author	Arghiri Emmanuel
Publisher	Monthly Review Press
First published	1962
Type	Book
Source	https://annas-archive.org/md5/761304b4c308f50821088c435f73865b

Foreword

A Man of the Twentieth Century

by Torkil Lauesen

BORN IN 1911, AND PASSING AWAY IN 2001, THE COURSE of the life and work of Arghiri Emmanuel reflects the twentieth century. However, it also sheds light on the political economy of the twenty-first century.

Emmanuel was born in Patras, a provincial city in Greece, in the semi-periphery, if not the periphery, of the capitalist world system. He was a child during the time of inter-imperialist European rivalry. Greece took part in the Balkan Wars and was drawn into the First World War, and subsequently into yet another Greco-Turkish war from 1919 to 1922.

The world economic crisis of 1929 hit Greece hard, leading to mass emigration. Emmanuel studied at the High School of Economics and Commerce in Athens from 1927 to 1932, and then at the Faculty of Law until 1934, when he got a job in a trading firm in Athens. In Greece, as in the rest of Europe, fascism was on the rise. In 1936, Greek prime minister Metaxas staged a coup d’état and established a fascist and anticommunist regime. In the midst of these events, Emmanuel’s father died in 1937, and as the eldest son Arghiri became responsible for supporting his family. To raise money, Emmanuel, then twenty-five, emigrated to the Belgian Congo to work in a textile trading firm in Stanleyville. The extreme differences in living conditions between Africans and European settlers, and the brutal Belgian colonial regime, made a striking impression on him.

The German occupation of Greece ended in May 1941, when Greek king George II, along with many Metaxists, fled to Egypt and established a government-in-exile. The German occupation killed half a million Greeks and drove many to join the resistance—including Emmanuel. In 1942 he returned to volunteer for the Greek Liberation Forces, situated in Alexandria in Egypt, as a naval officer. However, in April 1944 Emmanuel joined the mutiny of Communist resistance forces against the right-wing Greek government installed by the Allies in Cairo.1 The uprising was defeated by British troops and Emmanuel was taken prisoner and sentenced to death in a Greek court-martial in Alexandria. By the end of 1945, Emmanuel was granted amnesty and transferred to a British prison camp in Sudan.2 While in prison, he wrote a textbook on dialectical materialism, an indication of his classical Marxist political outlook.3 Released in March 1946, with few prospects for earning a living in Greece because of his prison record and the defeat of the Communists in the Greek Civil War, Emmanuel decided to return to the Congo, where he found work in different commercial and building enterprises.

In the 1950s, the anti-colonial liberation movement was on the rise in Africa. In the Congo it was represented by the Congolese National Movement (MNC), the party of Patrice Lumumba. Living in Stanleyville, which became a stronghold for Lumumba in the late 1950s, Emmanuel became involved in Congolese politics, reflected in his articles in the newspaper Le Stanleyvillois. The articles deal with specific political and economic questions in the country at the time, but they also hint at themes developed later in his books L’Échange inégal (1969) and Le Profit et les crises (1974). Emmanuel became an economic adviser to Lumumba in the development of a program for a post-colonial Congo. However, in 1960, Emmanuel was kidnapped by Belgian settlers and deported to Nairobi. He maintained contact with Lumumba during his short period as prime minister from June 24, 1960, until he was killed on January 17, 1961. In a personal letter to Emmanuel Lumumba wrote that he was always welcome to return to the Congo.4 The Belgian Ministry of Justice on their side declared Emmanuel a threat to national security on November 4, 1960.5 After the CIA-backed assassination of Lumumba in January 1961, Emmanuel continued to advise the independence movement on economic matters. An unpublished paper dated June 27, 1961, on Congo’s economy in the transition from a colony to an independent state represented the first formulations of unequal exchange:

It will be necessary little by little to reconvert the Congo’s economy to adapt it to its new condition as a sovereign country. Colonialism maintains the colonized countries in the system of monoculture of some export crops and the extraction of raw materials. This is the clearest part of colonialist exploitation, an exploitation which is carried out not only for the benefit of the colonizer but on behalf of all the industrial countries.… When an industrialized country exchanges its products with an underdeveloped country, it actually exchanges one hour of national labor for 5, 10 or 15 hours of labor in the other. This exchange rate in turn prohibits the underdeveloped country from carrying out its own capitalization and emerging from underdevelopment. This cycle must be broken.6

Deported from the Congo to Nairobi, Emmanuel left for Paris, and at the age of fifty enrolled in the École Pratique des Hautes Études to study socialist planning. Political economist Charles Bettelheim was his advisor. Maybe he had plans to acquire a knowledge of planning and return to an independent Congo. Maybe he had developed some ideas on international trade through his experience in the Congo that he wanted to elaborate on. The first option became less attractive, as Congo under the U.S.-supported president Mobutu Sese Seko soon became a neo-colony of Belgian and U.S. mining interests. But Emmanuel continued to visit and observe the economic and political development in Congo in the 1970s.7

UNEQUAL EXCHANGE

Emmanuel’s experiences over fifty years living in the periphery of the world-system contributed to his understanding of the political economy of imperialism in the twentieth century. After less than two years of studies, in 1962 Emmanuel formally introduced the notion of unequal exchange in an article written with Charles Bettelheim.8 He wrote a second publication on unequal exchange in 1964, “El Intercambio Desigual,” which appeared in the February edition of Revue Economica, a Cuban journal.9 Emmanuel received a doctorate based on his 1968 thesis, “L’échange inégal,” from the École Pratique des Hautes Études. The thesis was published by Maspero in 1969. In the following years “L’échange inégal” was translated into Spanish, Portuguese, Italian, Serbian, and into English by Monthly Review Press in 1972.10

Emmanuel’s groundbreaking critique of David Ricardo’s classic theory of international trade and its modern versions was an extension of Marx’s theory of value. Marx had plans to investigate foreign trade more closely in a fourth volume of Capital but died before writing it.11 Emmanuel picked up this loose end and in the most lucid way put forward his thesis in the book Unequal Exchange: A Study of the Imperialism of Trade. Upon publication, the book was often criticized for focusing on circulation—international trade—rather than the sphere of production, where the exploitation of labor is assumed to take place. However, while the book addresses international trade, the Marxist concept of value is at the core of the theory of unequal exchange.

At the heart of Emmanuel’s work is the fundamental contradiction in capitalism between the imperative of expanded accumulation—the need to produce more commodities—on one hand, and the inability of the market to absorb the production and realize profit for continued accumulation, on the other hand, The historical solution to this problem was the development of unequal exchange. Capitalism polarized the world system into a center-periphery structure with correspondingly high-and low-wage levels. This difference in the price of labor caused a value transfer, one that is hidden in the price structure when commodities are exchanged between the center and periphery of the world system.

Through the imperialism of trade, value is transferred from the super-exploited proletariat in the periphery of the world system to the center, expanding the power of consumption and thus balancing the expanded accumulation. This historical solution to the contradiction was not a cunning plan by capital but was generated by the class struggle of the proletariat in Western Europe and North America.

If unequal exchange occurs in the sphere of circulation, then the basis of unequal exchange is the existence of both a globalized value of labor and a different price of labor (wages) in the center and periphery respectively. The concept of value unifies the spheres of production and circulation as both are necessary in the capitalist accumulation process.

Emmanuel’s Unequal Exchange: A Study of the Imperialism of Trade is a sophisticated analysis of political economy and a demanding book. However, like Capital, it is also rewarding. In addition to its systematic and rigorous argument, Emmanuel dares to break with established left-wing orthodoxies. By June 1970, Emmanuel wrote in Monthly Review:

The most bitter fruits of my work on “L’échange inégale” was the negative conclusion arrived at regarding the international solidarity of the working class.… Loyalty to the nation transcends internal conflict of interest, on the one hand, while on the other, it grows stronger in the consequence of international antagonism. National integration has been made possible in the big industrial countries at the cost of international disintegration of the proletariat.… As I said in my book, when the relative importance of the exploitation which the working class suffers through belonging to the “proletariat” continually decreases as compared with that from which it benefits through belonging to a privileged nation, a moment comes when the aim of increasing the national income in absolute terms takes precedence over that of improving each section’s share relative to that of the others. This is what the workers of the advanced countries have well understood, becoming, over the last half-century, increasingly “social democratized”—either by supporting the social democratic parties already in being or by “social-democratizing” the Communist parties themselves.12

In the 1970s literally hundreds of articles in academic journals and left-wing magazines discussed the concepts in unequal exchange and its political implications. Emmanuel became a prominent academic within the dependency school, along with Samir Amin, Andre Gunder Frank, and Immanuel Wallerstein. However, the “scandalous” idea that workers of the rich countries benefited from the transfer of surplus value from the workers of the poor countries did not make him many political friends in the First World. And yet, because of Emmanuel’s commitment to the political and economic emancipation of the Third World, the Indian Marxist historian Jairus Banaji writes that “Emmanuel’s work is the closest Marxist counterpart I can think of to Frantz Fanon’s Wretched of the Earth or to the films of Glauber Rocha and Fernando Solanas.”13

A BOOK FOR THE TWENTY-FIRST CENTURY

Why republish a book about the political economy of imperialism in the 1970s? The answer is simple: because the past fifty years have made Emmanuel’s work more relevant than ever.

The political economy of the world system changed profoundly in the last quarter of the twentieth century with the transformative power of neoliberal imperialist globalization. The development of the productive forces—computers, mobile phones, the internet, container shipping, and logistics—have made possible the control and management of global production. The time and distance between place of production and market has shortened as industrial production has been outsourced on a massive scale from the Global North to low-wage countries in the Global South in search of higher profits. A new international division of labor was created that extended beyond the export of raw materials and tropical agricultural products from the Third World and importation of industrial products from the North. In the 1950s, industrial goods made up only 15 percent of exports of all Third World countries. By 2009, industrial goods comprised 70 percent of all Third World exports.14 This constituted almost all industrial production, from high-tech electronics and cars to appliances and designer clothes, organized in global production chains stretching from the Global North to the South and back again. Financing and control of manufacturing and research and development remains in the North, while production is out-sourced to the South. Most consumption is in the rich countries of the Global North, where branding, sales, and service take place. Often the subcomponents of an electronic device or a car are produced in different countries in the Global South, where the conditions were optimal for capitalism, before assembly. Hence, the value transfer does not only take place in the international trade between countries but also through the value/price formation of the product within the company’s various departments.15

Neoliberal imperialist globalization accelerated the mobility of capital, both in volume and speed. The growth of global trade increased rapidly, while the mobility of labor remained low. These factors increased the volume of unequal exchange significantly.16

The global labor force engaged in capitalist production increased by 61 percent between 1980 and 2011, with 75 percent living in the Global South. China and India alone accounted for 40 percent of the world’s labor force, an unprecedented expansion of capitalism from North to South.17 In 1980, the share of industrial workers in the Global South and Global North was about equal. By 2010, the center of gravity had shifted, with 541 million industrial workers in the Global South and 145 million in the North.18 Yet, despite this change, wage levels remained low in the South. The consumption power to absorb the production, to realize profit and continued accumulation, remained in the North.

In the 1970s, dependency theory showed how the absence of development in the periphery created a structural dependency on the core countries. Today, the core countries rely on production in the periphery and the periphery remains dependent on consumption in the core. “Producer economies” and “consumer economies” are now connected via global chains of production.

NEOLIBERAL LESSONS FOR DEPENDENCY THEORY

Studying the theory of unequal exchange in the 1970s, I wondered why capital did not move much more industrial production to the Global South to take advantage of low wages. I had the chance to discuss this with Emmanuel in 1982, and he cited several practical, technical, cultural, and political reasons. Transport and communication barriers posed much bigger obstacles for control and management from a distance than they do today. The trade unions in the North still had the strength to resist outsourcing, and the social democratic–led states still had the ambition to regulate multinational companies.

The polarizing dynamic in global capitalism in over-and underdeveloped countries, from the second half of the nineteenth century up through the twentieth century, led the “dependency” theorists of the 1970s to conclude that the industrialization of the Third World was impossible within the imperialist system. They assumed that a substantial domestic market for consumer products had to be developed before industrialization could occur. The Third World countries had to de-link to unblock the development of the productive forces, as Russia in 1917 and China in 1949 had tried to do. However, this was only an option for very large and diverse economies. Most Third World countries would continue to supply raw materials, tropical agricultural products, and simple, labor-intensive industrial commodities to the North, at world market prices. Their economies would remain dependent, and they would still constitute the periphery of a world system dominated by the imperialist center.

However, these barriers for industrialization of the Global South were knocked down, and this analysis fell apart with the breakthrough of neoliberal globalization. Capitalism was still a dynamic system developing the productive forces. Its need to expand and its hunger for profit led it to outsource industrial production on a massive scale from the North to the Global South. The management of globalized production chains became possible by new forms of communication and transport, which solved the problem of the geographic distance between the sites of production and consumption. The domestic market for consumer goods became less relevant for the industrialization of the South, as it could be substituted by export to the Global North. It seemed unthinkable for most dependency theorists in the 1970s that only a few decades later 80 percent of the world’s industrial proletariat would live and work in the Global South, and that the Global North would be partly deindustrialized. However, Emmanuel somehow anticipated this development in 1976:

Another specific feature of the multinational company (MNC) which is vaguely considered to generate prejudice but which, if it really exists, is eminently advantageous, is its independence of the domestic market of the receiving country. Since the main problem of capitalism is not to produce but to sell, less traditional capital was attracted by the low wage rates of certain countries than was discouraged by the narrowness of the local market associated with such wages. This lack of capital in turn prevented growth and hence wage increases. The result was deadlock. In theory the solution was production for exports alone. But except for standardized primary products, such an operation appeared to transcend the fief of the traditional capitalist. In any case, it has never occurred.

The MNC, with its own sales network abroad and, even more, its own consumption in the case of a conglomerate, would not be put off by the lack of “pre-existing” local outlets. It would take advantage of both the low wages of the periphery and the high wages of the center. I have no idea of the relative importance of the phenomenon. Here, as elsewhere, statistical information is lacking. Albert Michalet [Charles-Albert Michalet, French economist] considers that it is very extensive in quantity and very important from the point of view of quality. All I can say is that, if this is so, this gives us for the first time the possibility of breaking the most pernicious, vicious circle which was holding up the development of the Third World. It is rather a matter for rejoicing.19

Emmanuel was aware of the role that the transnational companies had in the Third World, both in terms of value transfer, but also in terms of developing the productive forces and the transfer of technology. He shared Marx’s dialectical approach concerning capitalist modernization. Marx, on the one hand, affirms the positive, progressive features of capitalism: new technology and development of science, industrialization, urbanization, mass literacy, and so on. On the other hand, he denounces the exploitation, human alienation, the commodification of social relations, the false ideology, colonialism—with its connected mass extermination—all of which are inherent in the modernization process. In the first pages of the Communist Manifesto Marx describes “modern industry,” “modern bourgeois society,” “modern workers,” “modern state power,” “modern productive forces,” and “modern relations of production” as part of a progressive stage of historical development.20 Marx defended modernity because it prepared the way to a more fully developed modernity, namely socialism.21

In a similar way, analyzing the role of transnational companies, Emmanuel distinguishes between their role in development inside the framework of the capitalist mode of production and the possibility of the appropriation of the productive forces by the people—the transition to a new mode of production. At the end of the twentieth century, the capitalist mode of production was still vital and dominated the world system. A global transformation of the mode of production was not on the agenda. Looking at the negative side, capitalism in the Global North was bad, but underdeveloped capitalism in the South was worse. Like Lenin in the NEP policy in the Soviet Union in the 1920s and China in the policy of “opening up,” Emmanuel thought it was necessary for the transitional state, in the periphery, to develop the productive forces by capitalist means, on the road toward socialism, as long as the capitalist mode of production still dominated the world system.

ECOLOGICAL UNEQUAL EXCHANGE

The amount of individual consumption in the center is not only an expression of economic inequality, but “the imperial mode of living” poses a threat to the world ecosystem.22 In other words, unequal exchange is not only an economic problem but also an environmental one. Ecological sustainability was more or less absent from theories of imperialism in the 1970s. Arghiri Emmanuel, however, was aware of it. The periphery was underdeveloped, but the center was overdeveloped. In 1975, he wrote:

If the present developed countries can still dispose of their waste products by dumping them in the sea or expelling them into the air, it is because they are the only ones doing it. Just as their inhabitants can still travel by air and fill the world´s skies only because the rest of the world does not have the means to fly and leaves the world’s air routes to them alone and so on.23

Based on Emmanuel’s economic model of unequal exchange, an entire school of theorists have related the notion of unequal exchange to ecological devastation. Sociologist Stephen G. Bunker in 1984 linked what he called “modes of extraction” to the concept of unequal exchange. He proposed a study of ecologically unequal exchange within the relations of domination of the capitalist world system, but he also attempted to transcend certain positions within Marxism regarding the emphasis on labor as the major source of wealth and value production. Bunker compares a “mode of extraction” to a mode of production and reached the conclusion:

The unbalanced flows of energy and matter from extractive peripheries to the productive core provide better measures of unequal exchange in a world economic system than do flows of commodities measured in labor or prices.… The fundamental values in lumber, in minerals, oil, fish, and so forth, are predominantly in the good itself rather than in the labor incorporated in it.24

Bunker believed that the extraction of natural resources—whether by mining, drilling, fishing, harvesting, or cutting trees—is a crucial factor for understanding unequal exchange, since energy and matter are contained in all goods. However, while the difference in the consumption of biomass is a material expression of the difference between rich and poor, it does not explain the mechanisms that create the difference. There exists a global value of labor, but there are also differences in wage levels. The latter are the generators of unequal exchange.

The ecological aspects of unequal exchange are better understood as a complement to the economic ones. Unequal exchange creates patterns of consumption that have ecological consequences. The Global North not only consumes cheap goods from low-wage countries but its consumption patterns are also the main factor in the destruction of the global environment. I live in Copenhagen, where the city council boasts about being carbon-neutral by the year 2025.25 But that is only because it does not take our consumption into account. If the carbon emissions from the production of the goods consumed by Copenhagen’s residents were counted in the city’s carbon emissions, it would be utterly impossible for us to become carbon neutral. As researchers and planned degrowth advocates Pedregal and Lukic write:

The extension of the analysis of unequal exchange to the ecological field has incorporated the role of consumption and externalization in the environmental burden of the ecological footprint and other global and local ecosocial imbalances into the study of trade and labor. This has served to enrich research on the impact of these imbalances between the valorization of natural goods and manufacturing on all types of ecosystems and societies.26

Sociologists John Bellamy Foster and Brett Clark emphasize that the

transfers of economic values are accompanied in complex ways by real “material-ecological” flows that transform relations between city and country, and between global metropolis and periphery.27

The effects of ecological unequal exchange are unequal energy consumption between the Global North and a South with billions of people without access to the minimum energy needed for the production and reproduction of social life. Another aspect of the externalization of the ecological burden is the inequality in emissions. In 2016, the Global North (United States, Canada, Europe, Japan, and Australia) was calculated to have contributed 61 percent to the cumulative historical total of carbon dioxide emissions. China and India together accounted for 13 percent, Russia for 7 percent, and the rest of the world combined accounted for 15 percent, with the remaining 4 percent coming from transport and aviation. Emissions were calculated on the basis of production site rather than consumption site, which would have made the difference even more pronounced.28

As Pedregal and Lukić conclude:

In short, the ecopolitical critique of imperialism opened up by the study of ecologically unequal exchange helps to identify in a more complex way how the relationship of systemic inequality between core and periphery favors material flows between the two spheres to adopt uneven characteristics in terms of resource extraction, production, consumption, and disposal. Due to the international structure of trade, the richest and most powerful countries have perpetuated their historical dominance over both access to natural goods and their availability in the poorest and most dependent countries. This power manifests itself at every stage of the commodity supply chains, which condition the unbalanced distribution of benefits and harms, both natural and social. As a central part of the imperialism of global capital, ecologically unequal exchange is also supported by all the other forms of coercion and consensus that favor the existence of this domination.29

Unequal exchange, combined with political and military power, allows the Global North to import and consume natural capital far beyond our own. The capitalist market obliges the poor countries to surrender their natural capital and pursue non-sustainable economic development. The consequence is that we are not only confronted with an increasing divide between rich and poor but also with a dying planet.

What makes the ecological dimension of unequal exchange different from the economic ones is that the borders between the countries that benefit and those that suffer can’t be drawn as clearly. Most environmental problems are global problems; they aren’t confined to individual countries, and they cannot be solved by them. Pollution in China can already be detected on the West Coast of the United States. Neither the pollution of our air and oceans, nor climate change, respects national borders.

Sustainability is impossible within a capitalist framework. Competition between countries hoping to attract foreign investment means ecological concerns are pushed to the side. Capital externalizes the costs of pollution; paying for them would threaten profits and accumulation. In the coming decades, the consequences of climate change on living conditions, and the lack of raw materials, clean water, and other ecological shortages, will have enormous consequences for our societies. The notion of resilience has replaced that of sustainability. In this context, resilience simply means being able to make it through catastrophes, not avert them. Our survival depends on entirely new approaches to growth, consumption, and the relationship between humankind and nature.

Ecologist Alf Hornborg stressed the need to build “bridges between world-system theory and ecological economics as well as between dependency theory and political ecology.”30 Professors Pedregal and Lukić write:

Combined, they can offer a totalizing ecological view on the integration of our economies within global capitalism, providing us with a systemic perspective on the hierarchization of the distribution of ecosocial burdens across the planet, as well as the tools to overcome those hierarchies.31

MIGRATION AS UNEQUAL EXCHANGE

In recent years, the migration of labor has been included as a form of unequal exchange, such as by historian Immanuel Ness in his book, Migration as Economic Imperialism, which

grasps the stark reality of neoliberal migration and imperialism and its continuity rooted in unequal exchange between the Global North and the Global South which originated in the European colonial project of resource extraction over the last three centuries.32

It might seem a contradiction in terms to add migration of labor as a form of unequal exchange, because the prerequisite for unequal exchange is the relative free mobility of capital and trade of goods, but the immobility of labor restricted by national borders, in order to uphold the difference in wage levels.

However historically—and today—there are forms of labor migration that, so to speak, take the difference in wage-level with them in the migration process.

Historically, the European settlers took their relatively high wage levels with them, as they settled in the periphery of the world system, turning North America, Australia, and New Zealand into part of the center, by more or less eliminating the original population. European settlers also turned South Africa, Namibia, Rhodesia, the Belgian Congo, Algeria, and Palestine into small versions of the polarized world system by creating a sharply divided labor force in terms of wages, and an apartheid-structured society, both based on brutal racist segregation.

Similarly, in migration from the periphery to the center, the labor force perpetuates low remuneration. For African enslaved labor, there was no wage at all. For the Chinese and Indian contract labor in the United States, the remuneration was far below that of the European settlers. We see the same pattern today. The legal and undocumented migrant labor from Latin America, Africa, and Asia in the center receives a much lower wage than the homegrown labor force, a difference upheld by racist attitudes and structures in the center.

As the gap between the global value of labor and the different price (wage) of labor in North and South is the central thesis in the theory of unequal exchange, it is accurate to relate it to labor migration, which is a geographic transfer of labor power—hence, the creation of value. This value can be transferred through the price structure, when countries with relatively lower wages exchange goods with countries with relatively higher wages, but value can also be transferred through the migration of labor power from the periphery to the center, in order to produce goods and perform services at a lower wage than earned by the resident working class. Even if migrant labor received the same wages as the homegrown labor force, as in the case of the “brain drain” of specialists from the Global South, it implies a value transfer, as the country of origin has paid the generation cost of the labor power.

THE CRISES OF IMPERIALISM

Neoliberalism conferred forty golden years to capitalism, but beneath the surface resistance has been brewing. With the crises of global neoliberalism from 2007 to 2008, the decline of U.S. hegemony, the rise of China, and the development of a multipolar world system, the world is undergoing a profound change not seen in the past hundred years.

The dynamics of the polarized world system on the basis of wage levels and over-and underdevelopment, which had solved the contradiction in the capitalist mode of production between the imperative to increase production and the corresponding ability of the market to consume the production, have reached a turning point in the 2020s. Neoliberal globalization accelerated the transfer of value through unequal exchange to the North from the late 1970s until 2010. However, the rise of China as the world’s leading industrial producer represented the first break in two hundred years with the polarizing dynamic of imperialism. Maintaining its socialist project, China transformed from a source of value transfer to a competitor to the capitalist North on the world market.

The global pattern of trade is under transformation as North-South trade is in decline, while South-South trade is growing. This new trade pattern is made possible by the development of the productive forces in the Global South both in quantitative terms and in terms of technology. In addition, we have seen an extensive development of transport and infrastructure in the Global South to facilitate this trade. The value transfer of unequal exchange from South to North has begun to decline for the first time in the past 150 years, from 2.9 trillion dollars in 2011 to 2.3 trillion dollars in 2017.33 Rising wage levels in China are a main factor contributing to this decline:

Between 1978 and 2018, on average, one hour of work in the United States was exchanged for almost forty hours of Chinese work. However, from the middle of the 1990s … we observed a very marked decrease in unequal exchange, without it completely disappearing. In 2018, 6.4 hours of Chinese labour were still exchanged for 1 hour of U.S. labour.34

The capitalist mode of production approaches the limit of exploitation of the proletariat in the periphery, and it is on a collision course with the global ecosystem. Capitalism no longer appears as a positive form of developing the productive forces; it is irrational, destructive, and prevents human progress.

The core no longer has a monopoly of high-tech industrial production and is losing its grip on global finance and trade. To uphold its hegemony the United States seeks to split and erode the waning neoliberal world market, by trade wars, sanctions, and blockades. In addition, it has turned to political pressure and military means in a geostrategic struggle to uphold its dominance.

The division of labor created by neoliberal globalization and the growth of Asia as the “factory of the world” and the West as consumer societies translated into the significance of geopolitical importance of controlling trading routes. Hence the importance of the gateway to Asia in the North—Ukraine—and in the South—Palestine, the Persian Gulf, Red Sea, and Suez Canal. In a geopolitical struggle, NATO, led by the United States, is trying to secure military dominance of the Euro-Asian corridor.

THE ENDGAME

Like Wallerstein, I believe that the decline of U.S. hegemony forebodes the end of capitalism.35 This will not take place within a decade, but it seems likely that the twenty-first century is the autumn of the capitalist system. With the rise of China, the system is losing the balancing force of the center-periphery dichotomy that solved the inherent contradiction between production and consumption in capitalism. In its desperate effort to retain hegemony, the United States is disrupting the value transfer pipeline system of globalized production and trade that has served it so well for decades through protectionism. China has succeeded in diminishing the imperial rent of unequal exchange, while simultaneously breaking the technological monopoly of Western corporations and financial institutions and providing an alternative for the Global South in their economic development. Global capitalism will be haunted by economic crises generated by the inherent contradiction between the need to expand production and the lack of corresponding consumption. Profits will decline and accumulation will come to a halt.

The endgame of capitalism takes place within the framework of its structural, economic, political, and ecological crises. We have reached the stage in the history of humanity where capitalism is the primary driver of systemic changes, disrupting ecological balances and expediting incremental changes occurring over millennia to decades. A revolutionary break with capitalism is not just a question of removing capitalism’s fetters on human development; it is necessary to stop the destruction of the Earth for humans and other life forms.

The growing ecological and climatic crises and the scramble for natural resources trigger revolutions as living conditions are permanently altered, causing natural disasters and climate refugees. We are under time pressure to make the transition toward socialism due to capitalism’s continued impact on climate change. In the second half of this century, a form of “lifeboat socialism” may be the only solution to climate change and destruction of the Earth’s ecosystem.

Anti-imperialism today cannot be the same as it was in “the long 1960s.” History does not repeat itself—it moves ahead. The high revolutionary spirit and the success of the anti-colonial struggle, from the late 1940s until the mid-1970s, were due to specific contradictions in the world system, namely the contradiction between the socialist bloc and the United States, and that between the emerging Third World states on one side and U.S. neocolonialism on the other side. This set of interlinked global contradictions opened up a wave of anti-imperialist socialist national liberation struggles across Asia, Africa, and Latin America.

All this changed with the counteroffensive of neoliberal globalization from the mid-1970s to the present, complicating efforts to further national liberation into socialist transformation. However, neoliberalism was not “the end of history.” The development of the productive forces in the Global South signals not only a shift in the dynamics of capitalism but also enhances the material conditions for the development of socialism. In the 1970s, the Third World demanded a “New World Order,” which came to nothing. Today, the Global South is creating a new world order.

The anti-imperialist struggle in the Third World from the end of the Second World War to the long 1960s was waged by popular movements struggling for national liberation. These national states have become the economic, political, and military actors of continued anti-imperialism in the twenty-first century.

One example is BRICS. The cooperation between Brazil, Russia, India, China, and South Africa was enlarged in September 2023 and now comprises 46 percent of the world’s population and 36 percent of the world economy, counterbalancing the G7 (United States, Canada, the UK, France, Italy, Germany, and Japan) with only 10 percent of world population and 30 percent of the world economy. In the future, BRICS+ will further outweigh the G7.

BRICS+ is not an anti-capitalist organization, but it consists of states that are economically exploited and/or politically opposed to the U.S.-led imperialist center. The emerging multipolar world system consists of a complex of contradictory currents—between hegemonism and counter-hegemonism, conservative and progressive, capitalist and socialist forces. We must keep in mind Marx’s words:

No social order ever disappears before all the productive forces for which there is room in it have been developed, and new, higher relations of production never appear before the material conditions of their existence have matured in the womb of the old society.

We are reaching this point. Then, as Marx continues, “comes the period of social revolution.”36 What we are seeing today is the new relations of production maturing in the womb of the old world system. The challenge is to navigate in this sea of interconnected contradictions.

As in the 1960s, the contradiction between the North, trying to uphold its hegemony, and the Global South can create space for movements and nations struggling to advance toward socialism. The United States is still a forceful power, but the South is on the offensive. Whereas the transformative power of the Third World in the 1960s was based on “revolutionary spirit”—the attempted ideological dominance over economic development—the current transformative power in most of the Global South is based on economic strength.

In creating this new world order of an advanced socialist mode of production, we must move from the national to the global perspective. As Emmanuel mentions in a letter to the Egyptian pan-Arabist and Marxist Anouar Abdel-Malek, who underlined the national aspect of socialism:

The national framework constitutes a historical constraint that we unfortunately underestimated.… But that we must not only take it into account as a necessity but also make it a virtue; that we ourselves come to establish as a finality the manufacture of as many ad hoc socialisms as the existing nation-states, that is beyond me.37

China can and must continue the first part of its way toward socialism on the national road, as “Socialism with Chinese Characteristics,” but the development of an advanced socialist mode of production can only be realized on the global level.

Realizing an advanced socialist mode of production requires that not only China continues to move toward socialism, but also that the majority of states in the world system join the effort. A multipolar world system will open space for movements and nations to move along this path. In the coming decades, we might see the development of different socialisms with national characteristics based on different histories and cultures. However, it is essential to move on from the nationalist version toward global socialism if ecological crises and global inequality are to be addressed. The fact that humanity has transitioned from scattered local places, then from states and empires, toward an increasingly globalized world system equipped with advanced productive forces implies that capitalist countries have developed a way of living that has damaged the planet and have acquired weapons with the ability to destroy human life. But the development of the productive forces under capitalism has also contributed to the knowledge and ability to organize and manage the world system as a whole, a necessity for an advanced socialist mode of production.38 The transformation of the relations of production toward socialism does not imply regressing to productive forces organized within the national framework but instead, as Emmanuel states: “The world’s unification has ceased to be an option. It has become a condition of its existence.”39

—TORKIL LAUESEN, JUNE 2024

Introduction to the Updated Edition

ARGHIRI EMMANUEL’S UNEQUAL EXCHANGE: A STUDY of the Imperialism of Trade was an explosive work when it was first published in French in 1969, not simply due the depth of its critique of neoclassical economics, but even more because of the enormous challenge that it presented for Marxist economic theory itself.1 This incendiary reception was immediately evident in that the book incorporated an extensive debate between Emmanuel, a Greek economist, who became director of economic studies at the University of Paris-VII, and the French Marxist economist Charles Bettelheim, under whom Emmanuel had written his doctoral thesis on unequal exchange, and whose views departed sharply from those of Emmanuel. Thus, Emmanuel’s Unequal Exchange erupted on the public scene in a storm of controversy, which was already embedded in the book and quickly extended to a wider debate that continued for years, raising the issue of the relation of the working class in the advanced capitalist economies to imperialism. The impact of Unequal Exchange was startling at the time, but it then declined as interest in imperialist theory ebbed in the Western left and as the reality that Emmanuel had pointed to was frequently denied. Meanwhile, the inquiry that he had initiated was taken up by others, such as the Egyptian-French economist Samir Amin, and transformed in other directions. In the twenty-first century, however, the reality of both unequal economic and unequal ecological exchange has come to be regarded as the very crux of the anti-imperialist world struggle, and interest in Emmanuel’s classic work has once again skyrocketed.

The issue of unequal international exchange goes back to Karl Marx’s critique of classical political economy and indeed was an important question within classical-liberal political economy.2 In his seminal work On the Principles of Political Economy and Taxation (1817), David Ricardo assumed that capital was immobile globally, while the Malthusian iron law of wages meant that labor costs were determined by the requirements of physical subsistence. Hence, the law of value did not apply to international transactions. Although it could be assumed that the wages of workers were equalized since determined more or less by absolute subsistence, profits, due to the immobility of capital across nations, were not. Consequently, Ricardo introduced his famous theory of comparative advantage to explain international trade, as a departure from and inversion of the law of value, relying on supply and demand as the main determinant.3

Ricardo’s analysis demonstrated that it was always beneficial for countries to engage in trade, by exporting the products for which they had the greatest comparative advantage, relative to other goods they might choose to exchange. Nevertheless, he also acknowledged that due to differing productivities (and labor intensities) some countries would receive more labor for less labor in international exchange, while other countries would receive less labor for more.4 “Even according to Ricardo’s theory,” Marx observed, “three days of labour of one country can be exchanged against one of another country.… In this case, the richer country exploits the poorer one, even where the latter gains by trade, as John Stuart Mill explains in his Some Unsettled Questions.”5 As Amin summed up the Ricardian theory of comparative advantage in international trade, “All that this theory enables us to state is that, at a given moment, the distribution of levels of productivity being what it is, it is to the interest of the two countries to effect an exchange, even if it is unequal.”6

“Two nations,” Marx explained in the Grundrisse, “may exchange according to the law of profit in such a way that both gain, but one is always defrauded.… One of the nations may constantly appropriate for itself a part of the surplus labour of the other, giving nothing back for it in exchange.”7 In the third volume of Capital, he went on to note that “the privileged country receives more labour in exchange for less,” thereby obtaining “surplus profit,” while, inversely, the poorer country “gives more objective labour than it receives.”8 Related to this was the fact that “the profit rate is generally higher [in underdeveloped countries] on account of the lower degree of development, and so too is the exploitation of labour through the use of slaves and coolies, etc.”9 It was thus possible to see “how one nation can grow rich at the expense of another.”10 Although Marx never managed to write his planned volume on the world economy and crises, it is clear that—building on the reality of unequal exchange already depicted by theorists like Ricardo and Mill—he saw the problem as ultimately lying in inequalities of labor, with poor nations giving more labor for less in the exchange process.11

Austrian Marxist Otto Bauer is credited with being the first to put unequal exchange on a firmer footing. Writing in 1924, Bauer dispensed with Ricardo’s assumption that profit rates between countries were unequal, replacing the notion of the immobility of capital with one of the mobility of capital and with a tendency for profits to equalize at the international level. Nevertheless, unequal exchange continued to exist, in Bauer’s terms, because of the differing organic compositions of capital and thus differing rates of productivity between the more advanced and less advanced economies, which meant that in the process of equalizing profit rates between countries there was a transfer of value from poorer to richer countries. In Marx’s modified value theory, incorporating prices of production, equalization of profit rates required a transfer of value from industries with a lower organic composition of capital (or invested capital/labor ratio) to those with higher organic composition. The same essential process, Bauer argued, occurred between countries. In the equalization of profit rates internationally, those countries with higher organic composition gained value at the expense of those with lower organic composition. In Bauer’s words, “The capitalists of the more highly developed areas not only exploit their own workers, but [they] also appropriate some of the surplus value produced in less highly developed areas. If we consider the prices of commodities, each area receives in exchange as much as it has given. But if we look at the values involved, we see that the things exchanged are not equivalent.”12

German Marxist economist Henryk Grossman, writing in the 1930s, carried forward Bauer’s analysis. As he put it, “International trade is not based on an exchange of equivalents because, as on the national market, there is a tendency for the rate of profit to be equalised. The commodities of the advanced capitalist country with the higher organic composition will therefore be sold at prices of production higher than their value; those of the backward country at prices of production lower than value.”13

The whole approach to unequal exchange focusing on the organic composition of capital and the related higher productivity in developed capitalist countries was designated by Emmanuel as “unequal exchange in the broad sense.”14 Here countries with higher productivity due to a higher organic composition of capital and thus higher rates of productivity drew on surplus value in poorer regions, merely as a product of the equalization of profit rates internationally. In this case, it was true that the richer countries gained at the expense of the poorer countries, but this was a mechanical function of the equalization of profit rates, and did not in itself constitute actual imperialist exploitation.15

What Emmanuel brought to the concept of unequal exchange, and what gave it lasting importance, was a theory that focused on the international mobility of capital coupled with the international immobility of labor. His analysis did not deny the significance of the “broad basis” of unequal exchange as articulated by Bauer, Grossman, and others. But for Emmanuel, there was a second, and ultimately more significant, form of unequal exchange associated with imperialist exploitation. Namely, core economies in the center of the global capitalist system with high wages in global terms extracted surplus labor from economies in the periphery with persistently low wages, enhancing accumulation at the core at the cost of the periphery.

Although Ricardo had recognized the existence of unequal exchange, for Emmanuel the causes were reversed. For Ricardo’s unequal rates of profit and standardized subsistence wages internationally, Emmanuel substituted “unequal wages between countries” with profits “tending toward equalization.”16 Emmanuel did not primarily construct his analysis in terms of imperialism theory in V. I. Lenin’s sense. Rather, he assumed in this abstract model not monopoly capital but free competition. Nor did he start his examination with class-based production and accumulation, though both were part of his analysis. Instead, he treated wages as an independent variable, based on Marx’s analysis of their historically determined character.

Surplus value arises in capitalist production because the value generated by the exercise of a worker’s labor power exceeds the value of labor power or the wages paid to the worker. In core capitalist countries—including not only the old colonial powers but also, according to Emmanuel, the “white settler states” (the United States, Canada, Australia, and New Zealand) that had effectively exterminated or removed the original Indigenous inhabitants from the land—wages were comparatively high globally. This promoted internal, autocentric economic development. A “super-wage,” as in the United States, according to Emmanuel, generated a positive “dialectical interaction between the movement of wages and economic development.”17 In contrast, all countries in the periphery had much lower wages, associated with higher rates of exploitation, generating a dialectic of underdevelopment. It was this that constituted the structural basis for unequal exchange. In trade relations between what is now called the Global North and the Global South, the former was able to obtain more labor for less, or a net transfer of value, due to the structural inequality in wages built into the international system (and enforced by immigration laws)—a fact that was concealed by the supposed equality of trade when expressed in terms of price rather than labor value.

The reason that Emmanuel’s theory of unequal exchange stirred so much controversy within Western Marxism was due less to a departure from Marx, resulting from Emmanuel’s emphasis on wages as opposed to the accumulation of capital as the determining element in capitalist development, than from the direct political implications of his analysis. Frederick Engels and Lenin, in proposing the notion of a labor aristocracy, had argued that an upper stratum of the workers had knowingly been bought off by capital from the largesse of imperialism.18 In contrast, Nikolai Bukharin had seen this less in terms of a labor aristocracy within the advanced capitalist states than an embourgeoisement of the entire working class in the developed economies. Thus, he referred to “the additional pennies” offered to workers in the rich countries from the proceeds of imperialism, leading to their cooperation with capital. Following Bukharin, much more than Engels and Lenin, Emmanuel expanded his critique beyond a mere labor aristocracy to a Western working class as a whole that was seen as gaining from imperialism.19 This pointed to what Oskar Lange had called a “people’s imperialism” dividing the workers in the Global North from the Global South. In Emmanuel’s words, “Lange’s ‘people’s imperialism’ has today become a reality in the big capitalist countries.”20 Emmanuel thus presented this startling view: “Once a country has got ahead, through some historical accident, even if this be merely that a harsher climate has given men additional needs, this country begins to make other countries pay for its high-wage level through unequal exchange. From this point onward, the impoverishment of one country becomes an increasing function of the enrichment of another, and vice versa.”21

Although not denying that the workers in the core countries were exploited, Emmanuel argued that there was a point where the sense of gains from imperialism could altogether check national struggles, creating a capitalist-worker imperialist bloc, and that this point had been reached. He asked: “Could it be that revolutionary Marxism based on … solidarity has been inhibited by the dreadful implications of such a proposition [unequal exchange leading to a people’s imperialism] in relation to the international solidarity of working people?”22 Writing during the Vietnam War, he pointed to examples of U.S. workers supporting U.S. imperialism against Vietnam (as well as their support of U.S. attacks on Cuba) rather than exhibiting international solidarity. Similar developments had arisen in France (and among the white settlers in Algeria) in the French-Algerian War.23

Emmanuel went so far as to suggest, against historical reason, that if one could imagine the United States reduced to an underdeveloped country, this would be disastrous for U.S. workers, who would be “hurled into an abyss,” but that such a development would hardly affect the long-term prospects of U.S. capitalists themselves. “Leaving out of account the material losses suffered during and as a result of the event itself, the American capitalist would not find himself any worse off” in such a situation.24 This was a view that denied the larger structure of U.S. monopoly capitalism, including the many ways, apart from unequal exchange, in which surplus was extracted from the Global South by multinational corporations. More significantly, Emmanuel’s argument suggested that it was the working class, not the capitalist class, in the Global North who benefited most from unequal exchange/imperialism.

Behind Bettelheim’s sharp criticisms of Emmanuel and the volatile debate that ensued, therefore, lay the question of a people’s imperialism, issues that challenged much of post-Second World War Marxist political economy in Europe and North America. Emmanuel’s analysis was directly confronted by Bettelheim and then modified and extended by Amin. In the half-century that has followed the publication of Emmanuel’s book, his analysis has become more, not less, relevant. With all the limitations of his analysis in Unequal Exchange, Emmanuel’s contention that Marx’s value theory was superior to all other approaches in its ability to uncover the realities of the “imperialism of trade” has been strongly confirmed in the context of the global-value chain economy of the twenty-first century.25

BETTELHEIM AND EMMANUEL

The theoretical and political complexities and divergence of views within Marxism unleashed by Emmanuel’s Unequal Exchange are best seen through the lens of the debate with Bettelheim in the five appendices to the book. Emmanuel’s book appeared in a series edited by his mentor, Bettelheim. Although Bettelheim was strongly supportive of Emmanuel’s critique of the theory of comparative advantage, and their views coincided with respect to their understanding of the “basic theory” of unequal exchange as in Bauer and Grossman, they disagreed on what was the heart of the matter for Emmanuel: unequal exchange arising from the inequality in wages between rich and poorer nations or the “imperialism of trade.” Among the criticisms that Bettelheim raised were that (1) one nation cannot exploit another (a view in which he departed from Marx and Lenin), (2) exploitation could not occur via exchange but could only arise in production, (3) no analysis of unequal exchange could disregard productivity, (4) Emmanuel’s argument reversed Marx’s causality by seeing wage levels as the independent variable determining accumulation, and (5) Emmanuel’s analysis was based on free competition rather than monopoly capitalism.26

All these criticisms were meant to reinforce Bettelheim’s rejection of Emmanuel’s fundamental argument that not only did the rich nations extract surplus via unequal exchange from poor nations, but also that the workers in the developed capitalist countries, in effect, exploited workers in the underdeveloped countries. In response to Emmanuel, Bettelheim argued that even though workers in the Global South were frequently “superexploited,” in the sense that they were paid less than the value of their labor power (or the cost of its reproduction), these “workers in the underdeveloped countries were [nevertheless] even less exploited than those of the advanced, and so dominant, countries.” Emmanuel referred to this as “Bettelheim’s Paradox.”27

Bettelheim’s reasoning, which was not accompanied by any empirical analysis, was that since the organic composition of capital in the rich nations was much higher, labor productivity, or output per labor hour, was also much higher, which translated into a higher rate of exploitation (the ratio of surplus labor to necessary labor) in economically advanced countries, as opposed to underdeveloped countries. Since the labor time necessary to produce a good was reduced, while surplus labor was increased proportionately, this represented a higher rate of surplus value. Emmanuel had made the mistake, Bettelheim argued, of failing to account properly for labor productivity.

Arguing based on the existence of monopoly capital, as opposed to Emmanuel’s reliance in his model on free competition, Bettelheim insisted that there was such a thing as “imperialist exploitation” via multinational corporation investment in the Third World. However, he insisted, this dynamic was enabled by the greater technology, higher productivity, and larger rate of exploitation in the center capitalist economies. Moreover, such monopolistic surplus extraction, he claimed, could not occur through exchange but was the result of international production relations. In contrast, he suggested that Emmanuel had fallen for the fantasy of mere “commercial exploitation” divorced from production.28 Other Marxist political economists in Europe and the United States adopted the same argument as Bettelheim with respect to the higher rate of productivity and higher rate of exploitation in developed capitalist countries, as in the case of figures like Ernest Mandel, Michael Kidron, Geoffrey Kay, and others down to the present day.29

What was critical in Bettelheim’s view was that Emmanuel’s analysis denied the exploitation and class struggle at the center of the capitalist system, “making the proletarians of the rich countries appear to be the ‘exploiters’ of the poor ones. These proletarians must therefore have ceased to be exploited themselves, which means their labor is no longer a source of surplus value.”30 From this, Bettelheim concluded:

Emmanuel’s position seems to me to be clearly incompatible with Marxism, since in denying the existence of the class struggle in the industrialized countries (except in the economic form of that struggle, which conforms to the classic trade-unionist position, that is to say, an “economist,” and so non-Marxist, position). It amounts indeed to denying the existence of the political class struggle, and of classes themselves, when one treats the bourgeoisie and the proletariat of the industrial countries as identical, by alleging that the proletariat has “become bourgeois” and so has been integrated into the bourgeoisie.31

Emmanuel’s thesis, if true, Bettelheim insisted, would point to a break in the “objective solidarity of the workers of the industrialized countries and the dominated countries, while, in truth, that objective solidarity, representing a common class struggle, was as strong as ever.”32 However, capitalists both in the imperialist bourgeoisie and in the national bourgeoisies in the Third World could, Bettelheim argued, use Emmanuel’s notion of a split among workers internationally due to unequal exchange to distract workers from the class struggles in their own countries. The big bourgeoisie in the underdeveloped countries could falsely use the struggle against imperialism to consolidate their own power.33

Emmanuel’s responses in the debate with Bettelheim further complicated without decisively ending the debate. He argued that, for Marx, wage levels determined productivity (through technological innovation in response to high wages) and that Bettelheim and his other critics had simply reversed Marx’s logic: “To set up the productivity of labor as the determining element in the value of labor power, and also of wages, is an idea that is diametrically opposed to the Marxist, or even to any objectivist, conception of value.”34 There was no contradiction involved in the capitalists of one country obtaining surplus value from the production of workers in other countries via exchange since production and exchange were interconnected. Appropriation of surplus value, if ultimately rooted in production, did not occur solely within the production process.35 Ultimately, Emmanuel pointed to the need for a world value theory that transcended merely national conditions that concealed global value relations.36

AMIN AND EMMANUEL

As Amin indicated in “End of a Debate” in his Imperialism and Unequal Development (1977), Emmanuel’s approach was vulnerable to criticism since the restrictive assumptions built into his economic model made it impossible to address the most essential questions with respect to unequal exchange relations. Among the limitations of Emmanuel’s analysis were (1) his treatment of the wage as an independent variable, rather than dialectically related to the historical development of production and accumulation; (2) his resulting inability to deal adequately with the question of productivity; (3) the wider historical limitations of his analysis, which, since rooted in the assumption of free competition, was therefore not applicable either to noncapitalist economies or, more significantly, to the conditions of monopoly capitalism; (4) the related lack of a developed historical explanation for the immobility of labor; and (5) the tendency in Emmanuel’s theory to point to the direct exploitation of workers in the periphery by the workers in the core via trade relations, as if such economic transactions were not all mediated by and dominated by capital in its own interest.37 Nevertheless, the genius of Emmanuel’s analysis, in Amin’s view, was that it raised for the very first time the issue of world value, correctly indicating that labor, since it was engaged in producing international commodities, was itself international, subject to a world system of value.38

The fundamental theoretical problem in Emmanuel’s analysis was how to deal with the differences in the development of productive forces and of productivity in different parts of the world. Here Amin introduced a historically more general and theoretically irrefutable definition of unequal exchange, no longer relying simply on wage differentials, or seeing productivity as dependent on the level of wages. As Amin put it, “The essential theory of unequal exchange” points to the reality that “the products exported by the periphery are important,” in purely economic as opposed to natural resource terms, “to the extent that the difference between the returns to labor is greater than the difference between the productivities.”39 This was particularly evident when the production processes and particular use values were the same. But the fact that in the international system of production a labor hour in any part of the system was comparable with a labor hour somewhere else in the system gave the analysis a universal character.40

Amin departed sharply from Emmanuel’s notion that wage levels were determinant of productive forces, labor productivity, and accumulation. In Emmanuel’s framework there was a tendency to view high wages as directly related to unequal exchange. In contrast, Amin argued that the higher wages in the developed capitalist economies had arisen historically as a counterpart of economic development. Thus, they could not be assigned in the main to unequal exchange but had multiple causes.41 While insisting that workers in the Global North benefited from the imperialist exploitation in unequal exchange, Amin indicated that this was invariably mediated by the reigning monopoly capital, which took by far the lion’s share of the appropriated surplus, worsening its own problems of surplus absorption as a result.42

Bettelheim had stressed in his criticism of Emmanuel that the comprador elements in the underdeveloped countries could take advantage of the theory of unequal exchange and the struggle against imperialism, focusing on national rather than class conflict, to consolidate their own rule. However, for Amin, this simply pointed, in line with the whole Marxist analysis of imperialism, to the dual struggle of class and nation and the need to develop a strong working-class revolutionary consciousness.43

Adopting a somewhat more philosophical stance, Eurocentric Marxists sought to combat Emmanuel and other imperialism theorists with what Amin called an “epistemological argument,” charging that focusing on the extraction of surplus value from countries in the periphery via unequal exchange relied on circulation rather than production as the basis of the analysis and thus fetishized the former. In responding to such views, Amin not only emphasized the interrelationship between production and exchange, he also went on to declare forthrightly that “‘unequal’ exchange is nothing more than the mechanism of surplus-value circulation in the imperialist stage of capitalism.” Far from ignoring the importance of circulation, Marx himself, Amin pointed out, had devoted the whole third volume of Capital to it, hardly according to it a minor “epistemological” importance.44

Where Amin broke most decisively with Emmanuel was in relation to historical analysis. Emmanuel’s model was entirely based on the artificial assumption of free trade, insofar as it assumed the absence of monopoly capital, even though many of the historical factors he considered, such as the international immobility of labor and the international mobility of capital, were less characteristic of the era of free trade (where Ricardo’s assumptions were more realistic) than they were of monopoly capitalism. Hence, Amin took monopoly capitalism/imperialism in the terms laid out by Lenin and subsequent theorists of imperialism as the basis of his approach. Unequal exchange in international trade and the rise of a system of world value had to be viewed through the lens of “generalized monopoly capitalism.”45

It was in twentieth-century monopoly capitalism that more restrictive immigration laws, designed to control labor internationally, were instituted, enforcing the global immobility of labor and the superexploitation of peripheral labor, while also allowing for the overexploitation of migrant labor within the metropolitan countries.46 Likewise, it was only with the growth of the multinational corporation that the international mobility of capital—prior to that mostly confined to portfolio investment—became an established fact. Moreover, it was monopoly capitalism, Amin argued, in fundamental agreement with Ruy Marini, that made the “super-exploitation” of labor in the periphery a more systematic reality.47

In an attempt to take full advantage of the fact that the difference between wages was greater than the difference in productivities between the Global North and the Global South, multinational corporations increasingly—once improved communication and transportation technology made this feasible—introduced the same technology and production processes in the export zones of the Third World as existed in the center of the world economy.48 Thus, the transfer of value through the unequal exchange process was greatly enhanced in the age of neoliberal globalization from the 1980s on, leading to the development of global value chains as a dominant reality of global production.

THE REALITY OF UNEQUAL EXCHANGE

Amin’s critical elaboration, with greater historical consideration of Emmanuel’s analysis, allowed for the empirical investigation of international trade, while considering differences in wages and productivity. Recent scholarship has clearly revealed how the difference in wages between workers in the Global North and the Global South are much greater than the differences in their productivity. Importantly, this work illuminates how imperialist exploitation plays a central role in the creation and transfer of world value, whereby the surplus is appropriated by monopoly capital in the Global North. Given the limitations of price-based categories, unequal exchange reflects the transfer of value associated with the embodied labor in production that is concealed in standard trade accounts. It thus reveals the often invisible reality of value transfers from poor to rich nations through unequal exchange, in addition to the more visible ways that surplus is transferred through direct monopolistic power relations, as captured in current accounts.

Emmanuel’s and Amin’s insights regarding unequal exchange greatly enrich global commodity chain research, which studies the economic transfer of value within the numerous extraction, production, distribution, consumption, and financial linkages dominated by multinational corporations. By the twenty-first century, multinational corporations in the center of the world economy had shifted most industrial employment of workers to the Global South, practicing “arm’s length” contracting, whereby production was outsourced to independent suppliers. Here, giant corporations were able to take advantage of the low wages paid to workers, while externalizing some of their direct production costs and reducing their culpability for running sweatshops and for pollution. These conditions kept wages very low in the Global South and helped repress wages in the North. Foreign direct investment, from core nations to periphery economies, accelerated the offshoring process and arm’s length contracting, dramatically reorganizing the latter’s economies while expanding their industrial workforce.

As a result, developing country exports as a percentage of U.S. imports quadrupled in the last half of the twentieth century. By 2008, 73 percent of all industrial employment globally was located in the Global South, while, by 2013, the majority of total foreign direct investment went to the Global South.49 The South’s global share of manufacturing trade skyrocketed, with the primary export destination as the Global North. Industrialized manufacturing, intensive production practices, and global integration did not alleviate poverty in the South or lead to its convergence with the North. Instead, the relative health and environmental conditions of workers in developing countries worsened.50 Furthermore, value added, within global commodity chains, ended up being attributed primarily to economic activities within the Global North where the goods were marketed and consumed, rather than the Global South where the bulk of labor in production occurred.51

In “Global Commodity Chains and the New Imperialism,” Intan Suwandi, R. Jamil Jonna, and John Bellamy Foster developed an empirical approach for studying the invisible transfer of value, whereby unequal exchange allows monopoly capital to capture the value produced by labor in the periphery.52 To create the basis for cross-national comparisons from 1995 to 2014, they examined unit labor costs, or the ratio of wages to labor productivity, for the eight countries with the highest participation in the global commodity chains. The Global North countries were represented in this study by the United States, United Kingdom, Germany, and Japan, and the Global South countries by China, India, Indonesia, and Mexico. The authors found that the difference in wages between the North and South were far greater than differences in productivity. Thus, the former were getting much more labor for less in the international exchange, allowing the surplus to be captured by multinational corporations. The average unit labor costs in manufacturing in China, India, Indonesia, and Mexico ranged between 37 percent to 62 percent of unit labor costs in the United States, indicating that higher profit margins could be obtained by producing in the periphery. This trend is only amplified when considering all the other productive linkages of the global commodity chain that include the rest of the Global South.53 Thus, the differential rates of exploitation between nations leads to a massive transfer of surplus within the global capitalist system.

The extent of the ongoing unequal exchange was further captured in an important 2024 study published in Nature Communications by Jason Hickel, Morena Hanbury Lemos, and Felix Barbour. They explained that following the imposition of structural adjustment programs in the 1980s and ’90s on the Global South, which included devaluing currencies, cutting public funding for social welfare and environmental protection, encouraging lower wages to attract investment for manufacturing, and creating export-oriented facilities, the dynamics of unequal exchange intensified. To assess these relationships and conditions, they sought to “track flows of embodied labour between North and South, for the first time accounting directly for sectors, wages and skill levels,” which enabled them “to define the scale of labour appropriation through unequal exchange in terms of physical labour time, while also representing it in terms of wage value, in a manner that accounts for the skill level composition of labour embodied in North-South trade.” They found that 90 to 91 percent of “the labour of production in the world economy, across all skill levels and all sectors,” took place within the Global South. However, the value produced was “disproportionately captured” by the North.54

In 2021 alone, the Global North had a net-appropriation of “826 billion hours of embodied labour from the Global South,” which took place across all skill categories, from low to high, via the “invisible ‘ghost workers’” within this system of generalized commodity production. This represented $18.4 trillion in wages in the Global North, more than doubling the amount appropriated in 1995. The wage gaps across skill categories significantly increased between 1995 and 2021, resulting in Global South wages being 87 to 95 percent lower than their counterparts of equal skill in the North. Wages in the North over this time period increased eleven times those of workers in the South. Nevertheless, workers’ share of GDP declined by 1.3 percent in the Global North and 1.6 percent in the South, demonstrating the weakening position of labor worldwide.55

The imbalance was even more dramatic when considering the difference in labor hours contributions to the global economy. In 2021, the Global South contributed 90 percent of the 9.6 trillion hours of labor. This pattern was evident at all skill levels, as the Global South represented 76 percent of high-skilled labor, 91 percent of medium-skilled labor, and 96 percent of low-skilled labor, as far as total labor hours in global production. As a result, from 1995 to 2021, the Global South steadily increased its contribution to total global production in all areas. Hickel, Lemos, and Barbour found that “the South now contributes more high-skilled labour to the world economy [in total labor hours] … than all the high-, medium-, and low-skilled labour contributions of the Global North combined.” Global South workers were as productive as their counterparts in the North, plus they confronted extreme controls to maximize output. Despite these conditions, the Global South received only 44 percent of global income, withworkers in these countries receiving “only 21 percent of global income” in 2021.56

Between 1995 and 2021, the Global North imported over fifteen times more embodied labor than it exported to the South. As far as embodied agricultural labor is concerned, the North imported 120 times more than it exported. “There is no sector,” Hickel, Lemos, and Barbour explained, “in which the North net-exports labour to the South.” The only thing that briefly tempered the exchange ratio during this period was China, given improvements there in wages. This invisible transfer of value increased over the period and was accompanied by the transfer of “embodied land, energy, [and] materials” as part of overall production. There is no evidence of the Global South catching up with the North; in fact, the divergence within the global capitalist economy is deepening, with a larger share of surplus being captured by monopoly capital.57 This point, and the trends highlighted above, are all the more important considering recent arguments that China and other BRIC countries, such as Brazil, Russia, and India, are draining wealth from the United States, reversing the overall direction of imperialism.58

As Minqi Li demonstrated, in 2017 China experienced a net labor loss in foreign trade of 47 million worker years, while the United States had a net labor gain of 63 million worker years (measured in terms of total labor embodied in exported goods minus total labor embodied in imported goods), due to the production of commodities in China and other countries in the Global South, which were then consumed within the United States. The low unit labor costs in China and in other developing countries exacerbated this difference in net labor loss and gain. Additionally, as Marxist economists Guglielmo Carchedi and Michael Roberts have demonstrated, the BRIC countries are not draining surplus from other countries in the Global South or capital from the North. Instead, the imperialist bloc at the center of the global economy continues to extract surplus from BRIC countries.59

To gain a better understanding of the overall drain from the Global South, it is necessary to consider not simply the invisible transfers of embodied labor in unequal exchange proper, but also the visible transfers of wealth that accompany colonial and imperialist relations associated with the net flow of capital as part of international trade, recorded in national accounts. These accounts include the balance of trade regarding imports and exports, net payments to foreign investors and banks, insurance and freight payments, and payments for royalties and patents. The United Nations Conference on Trade and Development (UNCTAD), in a 2020 policy brief, indicated that from 2000 to 2017, for 134 developing countries, there was a net financial transfer “from developing to developed countries.” In 2012 alone, the net resource transfers, due to a “recovery of exports,” hit $977 billion. This has generated a “debt treadmill” in which developing countries in general find themselves “financially exhausted.”60 The system of international debt peonage resulting from the “difference between net capital inflows and net income payments to foreign capital, including net changes to international reserves,” reproduces itself, in part, because “external resources are deemed necessary to fund development, but this in turn generates return flows of interest payments and profit remittances that have to be funded by the developing country and can outweigh any earnings flows.”61

The underlying reality is one in which there is “a clear and persistent” situation, visible in the international system of accounts, where the Global South persistently experiences a net loss of capital to the Global North. According to UNCTAD, “The returns on external assets received are generally lower than the payments made on external liabilities, resulting in an ongoing net transfer of financial resources from developing to developed countries.”62 This constitutes a reverse flow of capital, from the periphery to the core, quite apart from unequal exchange as such, here arising simply from the monopolistic power relations of multinational capital located in the Global North.63

The transfer of economic value between nations is intertwined in complex ways with material-ecological flows.64 As Amin pointed out, following Emmanuel in this respect, there are many “other forms of unequal exchange,” which include an array of ecological considerations, especially when associated with the extraction and control of natural resources.65 Within the capitalist system, this gives rise to unequal ecological exchange (the exchange of more natural-physical use values for less), whereby there is a vertical flow of value embodied in energy and matter, which is beyond the value associated with the exploitation of labor from the Global South to the Global North. Additionally, unequal ecological exchange is associated with the North externalizing many of the environmental consequences, such as pollution, of this international production to the South, exacerbating inequalities and the disproportionate using up of the ecological commons, such as the atmosphere and oceans, by the North.66

Marx noted that real wealth included the contributions of both nature and labor, whereas, under capitalist accounting, value was only associated with the labor. Nature was deemed a “free gift” for capital.67 Thus, nature was part of the “hidden abode” of capital, as its contributions were outside the normal economic categories, constituting “profit upon expropriation.”68 Here, expropriation involved robbery, theft, and plunder. This appropriation without reciprocity undermined the processes that support the regeneration of ecosystems and the conditions of life itself.69 So-called primary accumulation involved the dissolution of previous property forms, the enclosure movement, the alienation of the human population from nature, colonialism, settler colonialism, imperialism, the plundering of resources abroad, enslavement, and genocide, all of which helped establish the polarized capitalist system, as wealth was concentrated in the core countries.70

This system of robbery is integral to the everyday operations of capital. The second agricultural revolution, between the mid-seventeenth century and the late nineteenth century, involved the despoliation of soil nutrients, as intensive agricultural practices were employed to produce food and fiber for distant urban populations. The nutrients were not returned to the countryside as part of a reciprocal process to restore the land. Agricultural operations became dependent on external inputs to try to maintain production. From 1840 to 1880, guano from Peru was the most prized fertilizer in the world. The Peruvian guano islands were plundered, under de facto slavery conditions, to enrich the soils of Europe and the United States.71

Colonial and imperial relations have played a central role in establishing and maintaining unequal ecological exchange. In Open Veins of Latin America, Eduardo Galeano provided an extensive account of how for centuries the Global North had robbed this region of the Global South of its natural resources, which included gold, silver, rubber, and a broad array of agricultural goods. “The plantation” system, in particular, he explained, “was structured as to make it, in effect, a sieve for the draining-off of natural wealth.”72 Within this global system, “the more a product is desired by the world market, the greater the misery it brings to the Latin American peoples whose sacrifice creates it.”73 Under the imperial conditions of unequal economic and unequal ecological exchange, Latin America was poor because it was a rich land. As Galeano described, “It continues to exist at the service of others’ needs, as a source and reserve of oil and iron, of copper and meat, of fruit and coffee, the raw materials and foods destined for rich countries which profit more from consuming them than Latin America does from producing them.”74 Amin argued that this process contributed to the “systematic destruction of soils,” “degradation of the environment,” and “impoverishment” of dependent countries.75

Through unequal ecological exchange, the Global North was overshooting its own resource base, as it utilized “ghost acreage” abroad to supply foods and other natural resources.76 Additionally, the Global North disproportionately utilized the ecological commons, greatly amplifying the ecological crisis. Emmanuel indicated that the developed countries were actively using up the ecological commons by “dispos[ing] of their waste products by dumping them in the sea or expelling them into the air.”77 As global capitalism progressively transgresses the planetary boundaries, threatening ecological destruction of life on Earth, the importance of Emmanuel’s investigation of unequal exchange increases, as does the international movement to confront the death drive of capital.

THE IMPERIALISM OF TRADE

Imperialism is a complex phenomenon, which has been imposed differentially, depending on how imperialism originally penetrated the domains of peripheral nations, and by numerous other factors having to do with innumerable other features, such as forms of colonization and semicolonization, the nature of anticolonial struggles, control of natural resources, strategic position as conceived by geopolitics, the exercise of monopoly power, and the role of comprador classes. In all cases, however, imperialism under capitalism has ultimately taken an economic form, in which the drain of the surplus of developing countries is achieved by multifarious means, involving more visible and less visible forms of exploitation and expropriation. Moreover, the robbing of the Global South has extended beyond mere economic transfers to ecological ones, involving the seizure of land and resources. It is a system of open veins, demanding revolutions and de-linking.

Emmanuel’s unequal exchange analysis has played an indispensable role in demonstrating that a value analysis that focuses on the role of labor in production and the exchange of labor reveals the full depth of economic imperialism, inhibiting underdeveloped countries, and holding them back. It thus represents the deepest roots of economic imperialism, traceable to the fact that while labor is relatively immobile internationally (and while migration of workers from the Global South is so structured that they carry their low wages with them), capital is mobile internationally. Any attempts by peripheral countries to de-link from international capital and to place limits on capital’s mobility inevitably lead to economic sanctions and military interventions emanating from the imperial core of the system.

Referring to his analysis in Unequal Exchange, Emmanuel wrote: “If I succeed, I shall have shown that not only is international trade not, as is thought, the Achilles’ heel of the labor theory of value but that it is, on the contrary, [only] on the basis of this theory’s premises that we can understand certain features of international trade that have hitherto remained unexplained.” At bottom, this required “integrating international value in the general theory of value.”78 Emmanuel succeeded to such an extent that his theory of unequal exchange, though modified by later thinkers such as Amin to accord with the reality of monopoly capitalism, has become indispensable to the analysis of the transfer of value within today’s global commodity economy. This uncovered the reality of the global labor arbitrage, revealing the world value system that constitutes its basis. Hic Rhodus, Hic Salta! (Here is Rhodes, leap here!)

Acknowledgments

Besides Professor Charles Bettelheim, director of studies at the École Pratique des Hautes Études of the Sorbonne, who has followed the making of this book stage by stage, from when it was a mere idea right through to its completion, giving generously from his store of knowledge and wisdom, I must also mention here Professor Henri Denis, of the Paris Faculty of Law and Economic Sciences, who read the manuscript and let me have the benefit of his valuable advice and judicious criticism. I am, however, alone responsible for the book, and all the more so because the two economists named are far from sharing all the opinions expressed in it.

Introduction

If the free traders cannot understand how one nation can grow rich at the expense of another, we need not wonder, since these same gentlemen also refuse to understand how within one country one class can enrich itself at the expense of another. [Karl Marx, “Address on the Question of Free Trade, 1848,” The Poverty of Philosophy (New York, 1963), p. 223.]

THE CAREER OF A “LAW”

When we look back over the history of economic doctrines during the last 150 years or so, we are struck by the brilliant race that has been run by the theory of comparative costs. In a branch of learning in which hardly anyone agrees with anyone else, either in space or in time; in which practically nothing is generally accepted and each generation of scholars changes academic truths into paradoxes and paradoxes into classical rules; in which everything is various and contradictory, up to and including the categories and concepts employed, so that even discussion itself becomes impossible for lack of a common language—David Ricardo’s famous proposition emerges from the fray as a truth that is unshakable, if not in its applicability and scope, then at least in its foundations.

The sternest of detractors, the Austrians, the marginalists, have called everything in question in Ricardo’s work and demolished it—with the exception of the chapter on foreign trade.1

To get Ricardo and Walras, John Stuart Mill and Pareto, Cairnes and Jevons, Marshall and Viner, all to agree in this way is an achievement that is quite out of the ordinary.

What is remarkable is not so much the survival of the proposition so far as its internal cohesion is concerned. As a rule any purely logical flaw in a theory is discovered during the first few months, if not the first few days, following its publication. Once this probation period is past, it is useless to attack the theory in this way. Any refutation must thenceforth relate to the validity of the theory’s assumptions. Since the latter are very often merely implicit or are badly stated, discussion of them may be kept up indefinitely. It is therefore not surprising that the theory of comparative costs could not be and has not been refuted within the framework of its explicit assumptions.

The few attempts that have been made in this direction, especially by Continental economists, have failed, and rightly so. These refutations have been inspired by a mistaken interpretation of the data or even of the very terms of the theory. Thus, Maurice Block wrote:

In this theory the costs of production of a commodity in two different localities are placed in the two scales of a balance, and the difference between the two costs is compared with the amount of expenditure that would be involved in transporting the commodity from one locality to the other. The highest form of the game consists in comparing two different products, such as linen in England and wine in Spain, and engaging in sterile hair-splitting on the matter. Continental economists have done well to leave “the theory of international value” on the other side of the Channel.2

Here we have a classical example of the error in this type of refutation. The theory of comparative costs does not weigh, one against the other, the costs of production of a commodity in two different places, but the differences between the costs of production of two commodities in each of the two countries concerned.

Vilfredo Pareto made the same mistake in interpretation in his “Course,” but in his “Manual” he acknowledged that Ricardo’s comparison did not relate to the same commodity in two countries but to two commodities in the same country, and this led him to recognize the merits of the theory, even though he disputed its implications regarding optima on the world scale.

Bertrand Nogaro, who devoted his doctoral thesis to the subject, likewise imagined that he had refuted the theory of comparative costs by showing the weaknesses of the quantity theory of money.3 His arguments in this connection are not without some value, though they are far from being original, the essence of them having been formulated as long ago as the 1840’s in England during the discussions about the Bank Act between the Currency School and the Banking School. But it did not occur to him that the theory of comparative costs could be true without the quantity theory, with a different regulator—for instance, price movements caused not by the ebbs and flows of money but by those of incomes. Here is another example of a mistaken interpretation. The classical economists had identified the amount of income with the amount of money on the assumption, overlooked by Nogaro, that the only incomes are money incomes.4

When he discusses the theory of comparative costs itself, he often misses the point, as, for instance, when he says that in internal trade costs set a limit to prices, whereas in foreign trade they have no such influence. James Angell is justified in saying that Nogaro does not seem to have understood the theory he is opposing.

Though conducted at a higher level, Maurice Byé’s analysis is not, it seems to me, free from this same sort of misunderstanding. For it is by stating that the idea of barter is inseparable from the theory of comparative costs that he arrives—rather too easily—at similar negative conclusions regarding the validity of this theory in a money economy.5

Finally, it is also by ascribing to the theory of comparative costs assumptions and conclusions that are alien to it that Bertil Ohlin calls its validity into question. However, the Heckscher-Ohlin factor proportion theory has rightly been seen not as a substitute for but as complementary to the theory of comparative costs. Its novelty is open to dispute, moreover, since such 100 percent supporters of the theory of comparative costs as Cairnes, Taussig, and Marshall, and even a preclassical economist like David Hume, had already, long before Ohlin, sketched the main outlines of the latter’s doctrine.6

It is thus not the invulnerability of the theory in the context of its own assumptions that is surprising. What is remarkable is that the realism of these assumptions, and especially that of the fundamental and explicit assumption, namely, the immobility of the factors, has never until now been seriously challenged.

For after all the subordinate assumptions—constant costs, equality in potential of production and consumption in the two countries concerned, wages everywhere equal to the subsistence minimum, identical techniques, identity in respect of money and incomes, identity in balance of payments and trade balance, full employment of the factors—have been questioned and rejected, that is, after Senior, Cairnes, Bastable, Angell, Nicholson, Mangoldt, Fawcett, Edgeworth, Graham, Taussig and Viner have done their work, the fact remains that the value of commodities is not formed on the international market in the same way as on the national market if, and only if, the factors are not so mobile and competitive in the former as in the latter, that is, if Ricardo’s fundamental assumption is maintained.

The essence of the matter remains unchanged, namely, that it is no longer the amounts of the two factors, capital and labor, expended in production that determine the exchange values of the commodities, but the reciprocal demands of the exchanging parties that determine prices, and thereby the rewarding of the factors.

AGREEMENT ON THE EXCEPTION

Insofar as the assumption of the immobility of the factors was not affected, a complete reversal of function took place: it was no longer the conditions of production that determined exchange, but exchange that determined production. This reversal, this “disavowal” of labor value, is what, to some extent, accounts for the unanimity mentioned above.

The opponents of labor value, both the marginalists and the supporters of equilibrium prices of interdependence, seemed to have found what they wanted here. Thus, F. Y. Edgeworth was able to say that if the labor theory of value were abandoned in favor of W. S. Jevons’s theory, the need to make an exception of international trade would vanish since for marginalism the coincidence between costs and value was only a special case, occurring when the factors were in competition.

In a subject in which doctrines are usually defined on the basis of each writer’s position with regard to the value of commodities, all the opponents of the labor theory of value naturally saw in the inapplicability of that law to the field of international trade a sort of admission of insolvency signed by the founder himself, and one that brought them great benefit.

The classical economists recognized, implicitly in Ricardo’s writings and explicitly in those of John Stuart Mill, that in order to understand how international value is formed it is necessary to go back to “a prior law, that of supply and demand.” All the postclassical innovators, from Walras, Menger and Jevons to the modern marginalists, and including the British neoclassical school of general equilibrium of interdependence, have themselves only gone back to this law belonging to the archaic age of political economy, deepening it and reformulating it in highly sophisticated and original ways.

Nevertheless, there is an aspect of the matter that seems to have escaped Edgeworth’s notice: what divides the economists is not the coincidence between costs and value but the question whether it is costs that determine value or value that determines costs.

For there to be no coincidence at all it is not enough for the factors to be noncompetitive; the commodities themselves must be noncompetitive, or, in other words, they must be nonreproducible.

Apart from this case (works of art, collectors’ pieces, etc.), which the classical writers did not overlook, though they considered that it was outside the domain of the law of value, everyone agrees, Walras included, that the prices of commodities coincide with their costs, whether the factors are in competition or not. The disagreement begins where the Walras school turns the causality of the classical doctrine upside down by letting costs be determined by prices instead of prices being determined by costs.7

Under the theory of comparative costs values continue to coincide with costs, but as the factors are no longer competitive as between countries, costs no longer coincide with the quantities of the factors expended in production, because since no equalization process takes place, the rewarding of the factors is no longer the same. It follows that the general conclusion of the labor theory of value, namely, that commodities are exchanged in terms of the quantities of the factors incorporated in them, does not apply in international trade.

There is another point to be made, too. Under Ricardo’s theory of foreign trade, costs are not such a passive element as in Walras’s general theory of value. Already in the oversimplified examples given by Ricardo and Mill of two countries of the same size and two articles of the same consumption, the relationships between the costs, if not the costs themselves, determine two limits, upper and lower, which prices can in no case cross, whatever the reciprocal demands may be.8

And, as we shall see later, as soon as we add a third article, or we vary the sizes of the two countries, prices become completely predetermined by the relations between costs, and the state of demand has no bearing on the matter, except in an intermediate fashion, that is, through fixing quantities in the case of branches with disproportionate costs.9

Apart from these two points, the working of Mill’s reciprocal demands, subsequently elaborated and given diagrammatic form by Edgeworth and Marshall, is perfectly adapted to the marginalist and neoclassical theories of the equilibrium price of general interdependence, along with all the other exceptions allowed for by the labor theory of value, which relate either to nonreproducible commodities or to some monopoly or other such as that of land. This circumstance explains, partly at least, why the little chapter on comparative costs has survived so splendidly all the revisions that Ricardo’s whole work has undergone since 1817 down to our own time.

PROTECTIONISM AND FREE TRADE

However, the bearing of Ricardo’s proposition is not restricted to this kick that it seems to administer to the accursed doctrine of labor value. That is only one of its two aspects: the formation of international value. The second concerns the advantages that the world as a whole, and each country separately, can derive from an international division of labor brought about by free trade. Ricardo, indeed, was interested only in this second aspect, it was Mill who concerned himself with the other one.

In his well-known example, in which Portugal can produce a unit of wine in 80 hours and a unit of cloth in 90, while England produces the former in 120 hours and the latter in 100, what interests Ricardo is that, after adopting their respective specializations, Portugal and England together produce the wine and the cloth in 360 hours instead of 390.

	Before Specialization			After Specialization
	Wine	Cloth	Total	Wine	Cloth	Total
Portugal	80	90	170	160	—	160
England	120	100	220	—	200	200
			390			360

In what proportion these two countries are going to share this gain of 30 hours Ricardo does not tell us. In the course of his argument, which is, moreover, extremely concise, he supposes that a unit of Portuguese wine is exchanged on an equal basis for a unit of English cloth, which amounts to saying that Portugal gains 10 hours by the opening of trade with England, while England gains 20 hours, transport costs being taken as nil. It is not necessary, however, that this should be so. What is necessary and what follows directly from the statement of the proposition is that the exchange can take place only within these limits: 1 of wine = 8/9 of cloth, and 1 of wine = 12/10 of cloth. This being so, neither of the two countries can ever lose by free trade between them. If a unit of wine is equivalent to 8/9 of cloth, England gets all the profit from the exchange but Portugal retains its status quo ante. If a unit of wine is equivalent to 12/10 of cloth, it is Portugal that gets all the advantage, but England loses nothing in comparison with its previous state of isolation. At all the rates of exchange that lie in between, the profit is shared.

Is this not a wonderful game, in which each partner has every chance of winning without the slightest risk of losing?

It is clear that this specialization constitutes only a relative optimum. The absolute optimum would be, not for Portugal to specialize in wine and England in cloth, but for the English to move to Portugal with their capital in order to produce both wine and cloth. In this case the saving of labor would be still greater since 340 hours would be enough for the entire production, instead of 360 in the case of specialization and 390 in that of isolation.10

But such an absolute condition would be neither possible nor desirable. The world is already structured in nations, whose frontiers constitute thresholds of discontinuity for the ebb and flow of the factors of production. Of all kinds of freight, said Adam Smith, man is the hardest to transport. If we add to that the assumption that capital is immobile, we are forced to content ourselves with the makeshift optimum provided by free trade, which is not at all a bad one, anyway.

It seems that it is this optimistic estimate of the benefits of international trade, even more, perhaps, than its implications regarding the theory of value, that made the theory of comparative costs so attractive to the economists of the nineteenth century and the beginning of the twentieth. For the career enjoyed by the idea of free trade has been at least as amazing as that of the theory of comparative costs.

Year after year and decade after decade, the governments of every country in the world have practiced without interruption a policy of protection. This has gone on for centuries. (Saint Louis, as far back as the thirteenth century, forbade the export of wool in order to weaken the textile industry in countries neighboring France.) The only break was the brief parenthesis of free trade that began for England in 1846 and ended completely in 1932, the first twists having been given to it at the Ottawa Conference in 1894, on the one hand, and, on the other by the various measures for regulating foreign trade that were taken during World War I.

England, however, is the only country where this free-trade parenthesis lasted even that long. The United States had already turned away from free trade with the ultraprotectionist Morrill tariff in 1861.11 In the other large countries in which the “gospel” of 1846 was accepted—with many hesitations and reservations, moreover—the free-trade arrangement was only ephemeral. France repudiated it in 1871, Italy in 1877, Austria and Argentina in 1878, Germany and Canada in 1879, Australia in 1902, Chile in 1916.

Apart then from England (where, owing to exceptional circumstances connected particularly with the crushing superiority and de facto monopoly enjoyed by its industry all through the nineteenth century, free trade lasted for a half-century in its pure form and another quarter-century in a much modified form), in the other countries, taken as a whole, this interruption to the age-old practice of protectionism did not last, generally speaking, more than about 30 years.12

Leaving aside this brief and insignificant interlude, the normal practice of the world, since the early Middle Ages and even since the Greco-Roman period, to go no further back, has been and still remains protectionism.13

And yet, year after year, decade after decade, imperturbably and tirelessly, the postmercantilist economists, from François Quesnay and Adam Smith onward, went on demonstrating the errors of protectionism and the advantages of free trade. The “irrefutable” proposition of comparative costs eventually convinced the most hesitant that there are two worlds, the rational world of political economy and the crazy world of economic policy.

This complete divorce between thought and praxis is a very unusual phenomenon. The mercantilists were integrated in their real worlds, their cities, and sometimes even dictated the laws of these cities. They were the men who knew, in the same sense as the veterinary surgeon or the blacksmith knows. Even if their arguments did not satisfy the intellect, their recipes were directly usable and it was possible to measure their results. From Quesnay onward economists have worked on models constructed according to a noble logic and carried on as though the real world did not exist. They have reasoned as much as the mind could possibly wish, but they can no longer claim to know,in the sense that the veterinary or the electronics expert knows. From this time onward the laity have no longer been obliged to stay quiet and listen in the way they do with those who know. Political economy has ceased to be a respectable science.

Nevertheless, when about 1860 the vogue of protectionism revived strongly, especially in the United States, and when during the 1870’s, the whole of Continental Europe followed this movement, it gave a shock to the economists, who thought they had done away with the mercantilist “illusion” by means of the law of comparative costs, despite the concession made by Friedrich List to “infant industry.” A section of the economists remained loyal to their principles (Loria, Bastable) and chose to believe that it was merely the reappearance of an illusion. Others such as Pareto, Sidgwick, Edgeworth, Nicholson, Marshall, Walker, and Carver sought without success to find the flaw in the law.

In attacking the assumption of constant costs these economists maintained that a country might suffer a loss through going over from protectionism to free trade, even if the possible friction involved in readjusting its production were left out of account. This could happen when the country concerned had to specialize in a branch of production in which costs were increasing. Loria, Bastable, and Taussig opposed this view, objecting that in such a case trade would become impossible, since the increase in some costs would cancel out the difference between comparative costs.

Edgeworth replied that it is by no means necessary to get so far as that point for a country to be harmed by specialization. Before that point is reached, there are other points at which the difference between comparative costs still prevails and continues to dictate specialization, but where specialization nevertheless means an absolute disadvantage for the country concerned.

The discussion proceeded with an exchange of examples in numerical terms, and Frank D. Graham took the matter up later on, showing that there are certain combinations of increasing and diminishing costs under which the situation of the countries as a group, and that of each one taken separately, is less good when there is trade than when there is none, whereas all the intermediate situations would induce each of the partners, so far as comparative costs are concerned, to engage in trade and specialization.

But that was all. The controversy broke off and its subject matter survived in the collective memory of the economists as “Graham’s paradox”—“paradox” being the label under which economic science classifies, with interest, amusement, and distant politeness, all those things that are too solid to be purely and simply rejected but are too baffling to be adopted.

Jacob Viner’s position is typical in this connection. After acting as devil’s advocate and loyally providing a numerical example in support of Graham’s proposition that is more coherent and convincing than all those given by Graham himself, he exclaims: But come now, are we to admit that everything we have been teaching hitherto and everything we have written in the textbooks is wrong, and that the law of comparative costs is a mistake? (God preserve us from such a disaster!) Graham’s proposition is right, but its field of application is practically nonexistent.

This is because it presupposes a branch with diminishing costs. Now, diminishing costs can only be the effect of internal or external economies. In the case of internal economies, Graham’s proposition does not fit because the alteration in costs takes place at the level of the enterprise, and the latter, foreseeing it, will not allow itself to be drawn into reducing production beyond the point where the change in its own costs cancels the comparative advantage. There remains the case of external economies, which constitutes the only grain of truth in the proposition, because in this case the alteration in costs takes place at the level of the branch of production, and the individual entrepreneur who abandons this branch is not interested in the increased cost burden that his departure imposes on those who remain in it. However, Viner declares, without explaining why this should be so, that the case of external economies is so unusual in reality that the practical interest of Graham’s proposition is negligible.14

Whatever the value of Graham’s proposition, which incidentally sums up and completes all the similar propositions of the writers previously referred to, and even if Viner goes too far in striving to minimize its effects, it is true that Graham considers only a minor aspect of the problem. To come to grips with protectionism it would have been necessary to go further than he does. States do not restrict imports and encourage exports in order to engage in a gamble on disproportionate costs, but for two different reasons: on the one hand, to protect national production, and, on the other, to maintain an active trade balance.

On the first point some concessions might be envisaged: friction caused by readjustment, protection for “fostering” purposes, the occasional need to take reprisals, etc. On the second, however, no discussion was possible. To admit that a lasting surplus of exports over imports, that is, in fact, a gift by the nation in question to other nations, could be beneficial to the national economy was to admit, in the last analysis, that the system under which they lived was utterly absurd, and the economists of free enterprise could not take that step.

The mercantilists had not had to reckon with this danger, since in their day the competitive system was not challenged. They took things as they were, and, without being able to explain the phenomenon, they nevertheless observed that an active trade balance had a stimulating effect on a country’s internal economy and raised the level of employment.

It was this last point that specially interested them, and not the illusion about the desirability of amassing gold for which their detractors unjustly reproached them. How could they have been victims of such an illusion when it was they who first perfected the quantity theory, according to which it is pointless to accumulate money, since the increase in its quantity is accompanied by a strictly proportionate fall in its value?

The great majority of the mercantilists adopted the quantity theory, which one of them, Jean Bodin, was the first to formulate. Their successors saw a contradiction in this attitude of theirs; but the contradiction lies not in the conceptions held by the mercantilists but in the ideas formed by their successors regarding these conceptions. For the mercantilists, or at least for the most representative of them, the influx of precious metals was not at all a good thing in itself; it could even be a loss; but a loss that was more than made up for by the gain arising from the increased employment and production that this influx brought in its train.15

What did it matter to Portugal that she gained, or failed to gain, ten hours of labor through specialization if this specialization was to lead to a situation in which not only these ten hours but some of the others, previously employed, would be left without employment? And this not because of some temporary friction in the transfer of factors but through the general and prolonged depression that a passive (or even an exactly poised) trade balance might bring about?

This is what the mercantilists perceived, obsessed as they were by the frightful underemployment of the age they lived in—far worse than all that the world of the nineteenth and twentieth centuries has known, even in periods of crisis—and it is their precepts that the nations have applied and go on applying, despite a century and a half of ceaseless preaching of the doctrine of free trade.

In the absence, however, of a rational explanation of the mechanism by which the fluctuations in the internal level of employment were linked with those of the external balance of payments, a general theory of protectionism still remained to be worked out, and without such a theory the most obvious observations remained unusable from the time when, with Quesnay, political economy became a science.

Friedrich List did not work out a general theory of protectionism. His instance, a very special one, of “fostering” protection of an infant industry, in the course of an exposition that from every other point of view was in accordance with the doctrine of comparative costs, did not in the least encroach upon the positions of the free traders. The most uncompromising of the latter would willingly subscribe to this passage in his book:

Solely in nations of the latter kind, namely, those which possess all the necessary mental and material conditions and means for establishing a manufacturing power of their own … but which are retarded in their progress by the competition of a foreign manufacturing power which is already farther advanced than their own—only in such nations are commercial restrictions justifiable for the purpose of establishing and protecting their own manufacturing power; and even in them it is justifiable only until that manufacturing power is strong enough no longer to have any reason to fear foreign competition, and thenceforth only so far as may be necessary for protecting the inland manufacturing power in its very roots.16

What difference is there between these statements and the following passage from John Stuart Mill?

The only case in which, on mere principles of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country.17

If we leave aside the difference in style, more literary and diluted in the case of List, more scientific and dense in the case of Mill, all that remains when we compare these two passages is their complete identity of content.

However, what was at issue was not the question whether an industry that was valid in itself, according to the calculation of comparative costs, should or should not be protected while it passed through the difficult period of infancy, but the question whether an industry that was not valid according to the “pure principles” of political economy ought, even so, to be established and protected on a permanent basis by means of tariff barriers.

List’s shamefaced “protectionism” did not alter by one jot the “non possumus,” categorical and unshakable, with which economic science answered the second question—any more than did all the charming “paradoxes” that from time to time gave expression to little crises de conscience felt by certain economists who were otherwise very orthodox, such as the one at the end of last century that led to the investigation of disproportionate costs.

As soon as these ripples had been smoothed away, the economists went back to that state of supreme indifference and disillusionment, the keynote of which had been sounded, once and for all, by Adam Smith: “To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it.”18 In other words, the economists resolved to believe that the world is not only mad but incurably so, so that the only sensible thing to do is to abandon it to its sad fate.

This extraordinary attitude, this systematic refusal to tackle the causes of the irreconcilable contrast between praxis and pure principles, resulted less from monstrous arrogance than from unconscious fear: fear of having to put one’s finger on the basic inner contradiction of the regime of private enterprise that they had undertaken to defend, that contradiction which consists in gaining by losing and losing by gaining. Rather than have to admit that the system itself was at fault, they found it more comfortable to claim that its ministers were congenitally doomed to everlasting error.

Michaïl Manoilesco alone tried to undertake the defense of long-term protectionism. Owing to its weaknesses, however, his work found little response as a general theory of protectionism, the first to be attempted.19 It nevertheless remains as an uncompromising apologia for protectionism. And it is no small paradox that in a world as relativistic as ours, in which nothing is too extraordinary to find an advocate at some time or other, a phenomenon so widespread as protectionism has found one only in the person of an economist of secondary importance, 110 years after Ricardo and 150 years after Adam Smith.

In order to explain protectionism it was necessary to challenge not merely the assumption of full employment, as Keynes did (without, however, going very far into the matter), and not merely the assumption of the identity between purchasing power and willingness to purchase, which Marx and Keynes challenged, but also that much more fundamental assumption of equivalence between the total amount of incomes and the value of production, which Keynes did not seek to question any more than did the other economists.20

Nevertheless, after World War II the advance of the Third World to the forefront of the world’s preoccupations has brought about a new crise de conscience in political economy, similar to that which occurred toward the end of the last century. Then it was necessary to explain the unexpected revival of protectionism among industrialized nations; now it is necessary to explain the difference in levels of development, and even the widening of this gap, between rich and poor nations, despite the many centuries of exchange and free trade.

This second wave of revisionism in relation to the free-trade doctrine is based on two points. The first is the level of employment. Official political economy having been since Keynes more or less liberated from the fetish of full employment, this aspect could be tackled without inhibitions.

It then emerged that the choice before the Portuguese worker is not always between producing cloth or producing wine, in which case there would clearly be no doubt about it, but sometimes between producing cloth or nothing, the advantage then being wholly in favor of industrialization, whatever the comparative disadvantages of producing cloth. It was then found that by industrializing, despite all the alleged comparative disadvantages, a country that is being developed can in certain circumstances make use of a labor force the “social cost” of which is nil, or, to employ more literary terms, it can “export its unemployment.”

The second point to which this modern revisionism relates is the terms of trade. It is the interest shown by economists in very recent times in the mechanisms whereby income is distributed internationally, given fresh life by new awareness of the differences in standard of living in different parts of the world, that has brought this point into the foreground of interest.21

THE TERMS OF TRADE

On the basis of Ricardo’s proposition variation in the terms of trade can occur only within the limits of comparative costs. This being so, all that a state can possibly risk by launching into trade is that it may enrich itself to a lesser extent than its partners enrich themselves—but never that it may become poorer than it was before.

Within these limits economists have not failed to point out several factors of deviation in the terms of trade in favor of or to the detriment of one or the other of the countries participating in exchange. Chief among these factors are customs duties and the balance of payments.

The possibility that customs duties may affect the foreign partner in trade through a movement of the terms of trade has been recognized in principle, though to different degrees, by a large number of writers. From the clear-cut position of Charles Gide, recognizing a 100 percent effect, to the much more qualified position of Bertil Ohlin, with, in between, the positions taken up by F. W. Taussig and A. Marshall, economic science as a whole accepts at least the possibility of such an effect, under certain conditions, especially connected with the elasticity of the demand for the product that is subject to the tariff.22

A condensed version of the argument is provided by Tibor de Scitovsky’s formulation: a well-calculated protective tariff will certainly benefit the nation if the reciprocal foreign demand has an elasticity equal to or less than unity; it will probably benefit the nation if this elasticity is higher than unity; and this probability will diminish in proportion as the elasticity of demand increases.

Ricardo had already given China tea as an example of a product with a low elasticity of demand, where a tax on exports would be borne entirely by the foreign consumer, and C. F. Bastable pointed to the United States tariff of 1890 on tinplate, Sumatra tobacco, and the agricultural produce of Canada.23

John Stuart Mill went still further. Taxes on imports may be partly or wholly paid by the foreigner, but taxes on exports may in some cases—if the elasticity of the partner’s demand is low and if the branch under consideration has very high and increasing costs—bring to the country that imposes them a benefit that exceeds the amount of the tax. Edgeworth emphasized this distinction and even offered a mathematical proof of it.

In Chapter 5 I shall examine the impact of customs duties on the terms of trade in relation to different combinations of elasticity of demand and disproportionality of costs.

Taxes are not the only factor that can affect the terms of trade. The state of the balance of payments is another. Thus, in the case of an export surplus arising from a payment by a debtor country, Mill says that the terms of trade will be unfavorable to this country.

Nearly all the classical writers were concerned with the consequences of extracommercial payments, such as those they called “remittances to absentees,” which constituted a twofold burden for the country, first by their actual amount and second by the depreciation of the national currency, with the subsequent deterioration in the terms of trade that any deficit in the balance of payments could cause.24

The great discussion in the 1920’s on the possible consequences of the payment of war reparations by Germany revived this controversy. Almost all the economists agreed that if such payments were made by Germany this would inevitably cause a deterioration in that country’s terms of trade. It was about the extent of this deterioration—necessary so that the subsequent increase in exports should ensure the surplus required to cover the unilateral transfer of funds—that the economists were divided. The more pessimistic of them, like Keynes, concluded that it was materially impossible for reparations to be paid, since any payment made without an equivalent must start a cumulative process, the deterioration in the terms of trade leading to an increase in the amount of exports needed to reconstitute the funds transferred, and every increase in the supply of German goods leading to a still bigger fall in prices.

Others, like Ohlin, observed that demand is affected not only by prices but also by incomes, that increased purchasing power in the countries receiving reparations would contribute to strengthening the price level and counterbalancing the effects of the increased supply of German goods.25

These autonomous movements of capital could even cause the terms of trade to deviate beyond the limits of comparative costs. In this sense they were the only disturbing element in the system. Nothing in the world could compel Portugal to sell her wine at less than 8/9 of cloth, except one thing: if this wine were to be exported not in order to be exchanged for cloth but in order to pay some tribute—if, in other words, this wine, instead of being exchanged for other goods, had to be exchanged for securities, whether these were Portuguese claims on England or British claims on Portugal. These securities being expressed, not in terms of wine or cloth, but in gold, their equivalent in wine could increase freely, with the only limit the possible cost of producing gold, should this be undertaken inside Portugal.26

Apart from this case, the terms of trade were always situated within the bounds of a narrow zone of indeterminacy, and when Mill, Marshall, or J. R. Hicks speak of the terms of trade, it is always within these limits that they conceive them to lie.

From this point of view, if unequal exchange did take place, the inequality could relate only to the sharing of the advantages of international trade. Not only quantitatively but also qualitatively, what was involved was unequal exchange of a different kind from that which I am going to discuss in this book, since in no case could it mean more than a failure to gain, never an actual loss.

Only after the last war was a new dimension given to this category of unequal exchange. Following the publication in 1949 of the United Nations study of the relative prices of the exports and imports of the developed and underdeveloped countries, some economists—if not academic ones, at any rate established and well-known figures—began to talk about the deterioration during a whole century of the terms of trade of a certain category of products. This put in question all the accepted ideas. It was no longer a matter of an accidental disadvantage that merely reduced the advantages of the international division of labor, but of a structural disadvantage that outweighed these advantages.

The series published by the United Nations showed a deterioration of the order of 40 percent in the terms of trade enjoyed by the countries producing primary products between the end of the nineteenth century and the eve of World War II.27 They confirmed the studies by Schloete, Silverman, Imlah, and the Board of Trade, covering a shorter period, 1880–1913, in which a deterioration of about 20 percent was already apparent.

All these studies especially concerned the foreign trade of Great Britain, it being accepted that this trade was the most significant as regards exchange of manufactured products for primary products, and that this country’s terms of trade expressed not merely the main trend of the terms enjoyed by all the industrialized countries in general, but also, by inversion, the general trend of the terms that fell to the lot of the backward countries.

Orthodox free traders like M. Ellsworth, G. Haberler, J. Viner, and F. V. Meyer have challenged in vain even the reliability of the statistical data on which these observations were based, while others of more independent outlook, such as C. Kindleberger, G. M. Meier, or even E. Gannage, have expressed an agnostic attitude to what has been revealed. The fact remains that economic science is now passing through a crise de conscience similar to that which occurred at the end of the nineteenth century.

While that was caused by the revival of protectionism in the industrialized countries, this is the result of the demands being put forward by a new world, what is called the Third World. Risen suddenly from the periphery of the nations, from those faraway lands that political economy used to call exotic, so as not to have to pay attention to them, this Third World has, by becoming aware of itself, set new problems and brought about the appearance of a specific branch of economics, development economics, which represents, in a way, the “negative” of established economic science.

What is good for a developed country is bad for a country undergoing development, and vice versa. The rich countries used to complain about foreign dumping, the poor countries complain today about the high prices asked by their suppliers. The rich countries used to worry about finding employment for plentiful factors of production, if necessary exporting them, if they could not export their products. For the poor countries today the problem is to make up for their shortage of these factors, if necessary importing them, if they cannot create them by internal accumulation. It used to be acknowledged that a particular branch of production should be established somewhere only if there was a market for its products already in existence; bizarre doctrines like that of “balanced growth” teach us nowadays that when there is balanced growth the simultaneous establishment of a variety of branches of production creates its own markets.

In a certain sense this is a return to classical political economy, that of Ricardo and of J. B. Say, so far as that part of it is concerned which is contrary to the views of Thomas Malthus and Sismonde de Sismondi. Going back to mercantilism and Bernard Mandeville, Keynes taught that squandering by individuals and by states brought about intensified activity, and so enrichment. It seems today that under conditions of underdevelopment it is saving that makes takeoff possible.

However, if Adam Smith and J. B. Say thus seem to have been rehabilitated. this is, it should be said, only in a certain sense, since in order to do without the market balanced growth implies a kind of direction of the economy by the state such as the classical economists never tired of denouncing as harmful.28

However that may be, in the context of the division of our planet into North and South (something that is in process of replacing the East-West division), in which Disraeli’s “two nations” are supplanted by two mankinds, and the international consciousness of the proletarians of all nations by that, no less international, of the “proletarian nations”; in which the belief prevails that poverty and wealth are no longer independent of each other and merely juxtaposed, but are structural and interconnected situations, so that one maintains the other; in which the classical centrifugal forces of diffusion have yielded place to the centripetal forces of suction and attraction toward the “poles of growth”; in which the postulate of a stable equilibrium, with a rebalancing mechanism that canceled out deviations by means of their own secondary effects, has been replaced by a postulate of cumulative imbalance and of a “vicious circle”—the terms of trade, which were dealt with by the classical economists merely in the margin of their discussion of comparative costs, and were then forgotten in the confusion of neomercantilism, in which the quantity of goods sold mattered more than the price obtained for them, are now again taking up space in economic writings, endowed with an entirely new dimension.29

It is above all since the Korean War that the increase in the pace at which the prices of certain primary products have been falling has made this problem unprecedentedly acute and dramatic.

Speaking of external aid, the Observer of January 20, 1963, concluded: “Even more significant is the fact that in the last ten years, developing countries have lost far more in the fall of prices of raw materials … than they have received in aid from all the contributing countries.”

The United Nations report on international aid to the underdeveloped countries points out in its introduction that “by its steady growth” official aid compensated, in the period between 1953–1955 and 1957–1959, for “more than half” of the loss suffered by the underdeveloped countries in their trade dealings during the same period. “This is irony with a vengeance!” writes Idris Cox, who quotes this passage in International Affairs (Moscow), February 1963.30

According to an estimate made by André Piatier, the decline in the prices of raw materials, occurring simultaneously with a rise in the prices of industrial products, has reduced the importing capacity of the underdeveloped countries by an amount equal to six times the total of all the loans received by these countries in the same period from the International Bank for Reconstruction and Development.

If we ignore those economists, ever fewer in number, who evince doubts as to the very reality of a long-term deterioration in terms of trade, or who reject it purely and simply by treating it as a statistical delusion, the others, we find, endeavor as best they can to reconcile it with the doctrine of comparative costs, or, more frequently, put forward specific explanations without troubling about how well these explanations may or may not fit any general theory.

To be sure, to take an extreme case, an infinite worsening of the terms of trade of a certain category of countries would not contradict the theory of comparative costs, provided that, given immobility of the factors, the cost of producing the imported commodity in the country itself was to be considered as itself infinite.

If, say, for one reason or other, it was out of the question to produce cloth in Portugal, the value of wine could fluctuate freely between 12/10 and 8/∞ of cloth. Once the barriers of cost relationships are lifted there is no limit to the influence that reciprocal demand can have. However, the mere absence of limits to fluctuation, while it makes the phenomenon of a steady decline in certain prices possible, does not make it necessary or even likely, given that, in the last resort, it is still harder for England to produce wine, coffee or bananas than for Portugal or the backward countries generally to produce cloth or machinery.

The limits to fluctuation will at that moment be: wine =∞/10 cloth and wine =8/∞ cloth. The price of wine can fall infinitely, but so can the price of cloth. The question thus remains open as to why it is the price of wine that falls, and not that of cloth.

It would seem to be necessary to suppose that certain products are subject by their very nature to particularly unfavorable conditions as regards the elasticity of demand for them, elasticity of price, and elasticity of income. Most of the economists who have admitted the fact without wishing to abandon the established theories have directed their efforts to trying to discover what these conditions are.

Gunnar Myrdal and Ragnar Nurkse were the first to draw attention (or the first to do this in a systematic way) to a price elasticity inferior to unity in the demand for primary products. They were followed with greater or lesser variations by H. W. Singer, Raul Prebisch, W. A. Lewis, etc.

However, while a weak price elasticity of demand is disastrous when there is a decline, it is beneficial to an equal extent when there is a rise. A demand that is inelastic in relation to prices means in everyday terms that it is possible to go on selling the same quantity, or thereabouts, whatever the price may be. To study this elasticity, therefore, however useful it may be in finding an explanation for stagnancy of sales despite the fall in prices, does not help in any way in trying to account for the actual fall itself. So long as one leaves out of account the elasticity of supply, that is, costs (and anyone is obliged to do this who considers the factors as noncompetitive), the argument proceeds in a circle.

Some have summoned to the rescue the weak income elasticity of demand for primary products, as defined in Engel’s old law—forgetting that the bulk of the agricultural products of the Third World are luxury products, in relation to which the income elasticity of demand is especially high.

To a lesser extent, substitute products are mentioned and also those economies in raw material that have been made possible by advances in the processing industry. However, as S. B. Linder remarks very appositely: “It is insufficient to argue that there has been a declining rate of increase in demand for goods from the ‘outlying’ countries. As long as there has been any increase at all in absolute terms, the present pattern of trade should transmit even more gains than the nineteenth-century pattern. Only absolute falls in demand could have worsened the situation.”31

Perhaps Linder goes too far, not taking account of the increase in the population of the countries that produce primary products, but it is undoubtedly beside the point to base oneself on the movement of demand in relation to the increase in income and production in the purchasing countries. This relationship has no influence on prices and is of no interest to the producers. Only the relationship of demand to their own production can be of interest to them. And so we come back to the same point: as long as the assumption of the immobility of the factors excludes from our analysis the aspect of supply and costs, there is no way of escaping from the enclosing circle.

This is not all, however. When Nurkse and his school explain the deterioration in the terms of trade of the producers of primary products by a decline in demand in the twentieth century as compared with the nineteenth, they are compelled to admit the presence of an endless series of exceptions. The price of timber has risen despite the substitute products now available and the relative fall in demand; that of coal has not fallen, or only very little; the consumption of petroleum has leapt upward to a striking extent, but its price has fallen no less strikingly; the terms of trade—at least in factoral terms—of agricultural countries such as Australia and New Zealand have not worsened, but quite the contrary; textile products, though manufactured, have fallen in price; and so on.

Come, now, A. K. Cairncross objects: “If we leave [India and the Argentine] out for one reason and Africa for another and the petroleum producers for a third we are bound to ask ourselves what significance can be attached to the rump. Are we talking about Indonesia or Australia, Guatemala or Venezuela, Ethiopia or the Belgian Congo? … [Moreover] it is just not true that ‘in the years before 1914 exports of primary produce were expanding more rapidly than exports of manufactured goods.’”32

It can also be pointed out that statistical inquiries into the elasticities of demand, begun only recently, are still in the tentative stage and are being sharply challenged. A number of writers steadfastly refuse to accord them any confidence, considering that these statistical studies are vitiated by the inadequacy of the data and the defects in the calculations.33

A more essential objection comes to mind, though. Explaining the terms of trade by the fluctuations of demand would have some value if it were done a priori, that is, if it were integrated in a general theory of foreign trade, so that it could be said that the same causes will always produce the same effects, and that in the event of this not happening one can look for the factors that have prevented the law from applying.

Now it is disturbing to notice that all economists from the dawn of their science down to modern times, whenever they have sought to deal with the matter theoretically, that is, a priori, starting from the same causes, which they were well aware of, have arrived at forecasts that were absolutely contrary to what has happened—unreservedly pessimistic as regards the prices of manufactured goods and unhesitatingly optimistic as regards the prices of primary products.

The classical economists were probably the most categorical in making this universal forecast of a steady rise in the prices of primary products. They made it the basis of their law of perpetual increase in rents and of the tendency of the rate of profit to fall as a result of the increase in the cost of living and of wages.

Thus, John Stuart Mill declared: “The exchange values of manufactured articles, compared with the products of agriculture and of mines, have, as population and industry advance, a certain and decided tendency to fall.”34 Malthus subscribed to this view in Section VII of the second chapter and Section VI of the third chapter of his Principles. Ricardo says the same thing: “From manufactured commodities always falling and raw produce always rising, with the progress of society, such a disproportion in their relative value is at length created, that in rich countries a labourer, by the sacrifice of a very small quantity only of his food, is able to provide liberally for all his other wants.”35 Robert Torrens repeats the same idea in almost the same words: “the value of raw produce is, in the progress of society, perpetually increasing with respect to manufactured goods; or, to express the same thing in a different form, the value of manufactured goods is perpetually diminishing with respect to raw produce.”36

Though using considerably more qualified expressions, and not indulging much in the game of historical forecasting, Marx seems to have shared in essentials the pessimism of Ricardo’s school regarding the evolution of the prices of manufactured goods.37 Marshall foresaw a day when the backward countries with their primary products would possess, in the field of international bargaining, “an unassailable monopoly,”38 and Bukharin in 1917 found that one of the essential factors in imperialism was the general and universal rise in the cost of primary products, which draws the industrial countries into a fierce struggle to get control of their sources.39 At about the same time Keynes came to the same conclusion.40

Projections in numerical terms were not lacking. Colin Clark in 1942 forecast for 1960 an improvement in the terms of trade for primary products of 90 percent, compared with the level of 1925–1934. In the case of sugar, for instance, taking as basis the 1925–1934 price of 2–94 cents a pound for a world production of 27·4 million tons, and forecasting a production of 61·3 million tons for 1960, he estimated that the price at the latter date would be 4·62 cents. If we allow for the difference in the value of the dollar between 1925–1934 and 1960, we see that Clark’s forecast has been cruelly refuted, even though the expected increase in production has been approximately achieved.41

Michel Moret reformulates Colin Clark’s argument and forecasts a steady improvement in the terms of trade for primary products, down to 1970 at least.42 Henry G. Aubrey, too, taking up the projections contained in the report of the Paley Commission, in order to forecast the future dollar holdings of the various countries of the world, says that a unit of the primary products as a group can be expected to buy, on an average, about 60 percent more American goods in 1975 than in the base period 1937–1940 and about 37 percent more than in 1948.43

In face of such unanimity on the part of several generations of economists, brought up in the cult of comparative costs, how can one avoid thinking that the efforts being made today to explain a posteriori the opposite tendency shown by reality, without breaking out of the framework of this doctrine, are merely so many rationalizations constructed for the needs of the cause by writers who are in confusion before a phenomenon that they had not foreseen and that is inconvenient for them?

Everything happens as if it was not the elasticities of demand that were determining the decline of certain prices, but the decline in certain prices that was causing the economists to reveal, from instance to instance, the elasticities adequate to each.

The classical postulate of the immobility of the factors, and the subsequent deviation from the objective determination of exchange value by the relative quantities of the factors consumed in production, seem to deprive us of the possibility of understanding certain major economic phenomena. The comparative study of elasticities of demand, which in the last analysis is merely a study of the specific nature of the products concerned, a comparison of their use values, fails to provide us with a key to the explanation of century-long tendencies in the terms of trade.

All other considerations apart, there is a very simple reason for this failure, namely, that there is no such tendency characteristic of certain products or certain categories of products. The “worsening of the terms of trade for primary products” is an optical illusion. It results from a mistaken identification of the exports of the rich countries with the export of manufactured goods and of the exports of the poor countries with the export of primary products.

The copper of Zambia or the Congo and the gold of South Africa are no more primary than coal, which was only yesterday one of the chief exports of Great Britain; sugar is about as much “manufactured” as soap or margarine and certainly more “manufactured” than Scotch whisky or the great wines of France; before they are exported, coffee, cocoa, and cotton (especially cotton) have to undergo a machine processing no less considerable, if not more so, than in the case of Swedish or Canadian timber; petroleum necessitates installations just as expensive as steel; bananas and spices are no more primary than meat or dairy products. And yet the prices of the former decline while those of the latter rise, and the only common characteristic in each case is that they are, respectively, the products of poor countries and the products of rich countries.

Textiles were formerly among the pillars of the wealth of the industrialized countries, and Britain’s warhorse; since they have become the specialty of poor countries, their prices hardly suffice to provide a starvation wage for the workers who produce them and an average profit for the capital invested in their production, even where the technique employed is the most up-to-date. Must we suppose that by an amazing coincidence at the same moment when the change of location took place there occurred a reversal in the elasticities of demand?

Are there really certain products that are under a curse, so to speak; or is there, for certain reasons that the dogma of immobility of factors prevents us from seeing, a certain category of countries that, whatever they undertake and whatever the produce, always exchange a larger amount of their national labor for a smaller amount of foreign labor? This is the most fundamental of the questions I shall have to answer in this study.

IMMOBILITY OF FACTORS

The only equalization process that interested the classical economists was that affecting profits, wages being always and everywhere the same, because irreducible. Accordingly, the necessary and sufficient condition of comparative costs was the immobility of capital, and not, as is widely supposed, the simultaneous immobility of both capital and labor.

“If capital,” says Ricardo, “freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labor price of commodities, than the additional quantity of labor required to convey them to the various markets where they were to be sold.” And elsewhere in the same chapter, on foreign trade, he says, “The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.” And again: “The same rule which regulates the relative value of commodities in one country does not regulate the relative value of the commodities exchanged between two or more countries.… In one and the same country, profits are, generally speaking, always on the same level.… It is not so between different countries.”44

Marx modified Ricardo’s conception of wages by bringing into the conception of the value of labor power an historical and social element. Thenceforth the “cost of living” ceased to be an invariable datum, and in the absence of mobility of the labor factor wages can vary both in space and in time.

After this modification, however, as before, the behavior of labor remains a matter of indifference for the application of the law of comparative costs, the sole condition, both necessary and sufficient, for this proposition being the immobility of capital.

In this context we must distinguish between the simple labor theory of value, corresponding to the conditions of precapitalist commodity production, and its developed form, corresponding to capitalist conditions of production. Allowing for the difference between Ricardo and Marx, we find the former set out in the third chapter of Ricardo’s Principles and the first volume of Marx’s Capital, and the latter in the fourth chapter of Ricardo and the third volume of Capital.

Under the simple theory of value it would be the mobility (internal competition) of the labor factor that would constitute the necessary and sufficient condition of the law of comparative costs. In contrast to this, under the developed form of the theory, to which Marx gave the name of the theory of prices of production, it is the mobility of capital that is its sole condition. This is because of the residual nature of profit, both for Ricardo and for Marx.

If capital is mobile and if the rate of profit is equalized throughout the world, then under Ricardo’s system there is no difference between international value and national value, whether labor is mobile or immobile, since the cost of this factor is self-equalizing without any international competition.

As costs of transport are left out of account, and the argument assumes complete freedom of trade, the prices of all commodities, and so those of consumer goods, are the same in all countries. Hence the physiological cost of reproducing labor is equal everywhere and wages identify themselves with this cost through the working of the internal demographic regulator alone.

In this case it is absolute costs and not comparative costs that determine specialization. A given country will be able to survive only insofar as there exists a branch in which it possesses an absolute advantage over all the others, or, if transport be taken into account, a branch in which its cost is equal to or less than the best international cost plus transport costs. The population will be regulated by the absorption capacity of this branch, excess population being either eliminated by starvation if it remains immobile, or got rid of by emigration if it is mobile.

Things are not like this under Marx’s system. The historical and social factor renders possible, provided labor remains immobile, a variation in rates of wages between one country and another. It is possible, then, to distinguish four different cases:

1. Both factors mobile: rates of profit and rates of wages are equalized. Then this case does not differ in Marx’s system from the corresponding case in Ricardo’s. Absolute costs determine the form of specialization, and the numbers of the population adjust themselves through emigration and immigration.

2. Both factors immobile: comparative costs determine the form of specialization, just as in Ricardo’s system. But whereas in the latter it is the variation in the rate of profit that absorbs the difference between absolute costs, in Marx’s system it is the variation in both profits and wages that shares it between them; to the extent, of course, that both are higher than the minimum vital—profit being higher than the level at which any investment is discouraged, and wages higher than the physiological minimum.

3. The capital factor immobile but the labor factor mobile. The comparative costs law is fully applicable, and there is no difference between the two systems.

4. The capital factor mobile, but the labor factor immobile. In this case the two systems necessarily diverge. In Ricardo’s there is then no difference between national value and international value. Demand no longer plays any part—any immediate part, that is; it still plays an intermediate part in the case of disproportionate costs by determining quantities—and the exchange value of the commodity is determined by its cost, in the sense of the amount of the factors that are expended in producing it.

In Marx’s system the situation is different. Here, too, demand plays no immediate part in this case; but the “prices of production,” which are Marx’s counterpart to the modified value of Ricardo’s fourth chapter, cannot apply, at any rate without some modification.

Both Ricardo’s modified value and Marx’s prices of production result from two equalization processes, the equalization of profits and the equalization of wages. Whereas, however, for Ricardo the latter takes place from below and through the working of a kind of biological law, the same for every country and therefore independent of international competition between the workers (which becomes pointless, since wages are incapable either of exceeding the physiological minimum or of being reduced below that level), in Marx’s system the social and historical factor can, in the absence of such competition, bring about considerable differences in wage levels and make impossible the equalization of wages on a world scale. In this case the differences between wages, not being able to affect profits—these being equalized by the assumed mobility of capital—will affect prices, and the latter can no longer be, as in Ricardo’s system, the same in both settings, the national and the international.

It is this fourth case that seems to me to fit present-day reality the best, and for this reason it will furnish the basic condition of the following thesis. Mobility of the capital factor—immobility of the labor factor, with rejection of Ricardo’s assumption about the physiological cost of labor power. Sufficient mobility of capital to ensure that in essentials international equalization of profits takes place, so the proposition regarding prices of production remains valid; sufficient immobility of labor to ensure that local differences in wages, due to the socio-historical element, cannot be eliminated, so that a modification of the proposition regarding prices of production is made necessary.

In short, I have undertaken to attempt the task that Ohlin reproached the supporters of the labor theory of value for neglecting: the task of integrating international value in the general theory of value.45

Equilibrium Prices in Internal Exchanges

I. FACTORS OF PRODUCTION AND EXCHANGE VALUE

Apart from any normative dispute there may be regarding the category called “factor of production,” we recognize as such, under the conditions of the production relations of commodity economy, whether capitalist or precapitalist, every established claim to a primary share in society’s economic product.1

These claims, which have been called primary incomes, are indeed essentially different from secondary incomes in that they are directly connected with the realization of the product, which is effected through the exchange of different commodities, so that (whatever may be the determinant and whatever the determined) there is precise correspondence between the relative size of these incomes and the rate of exchange, or exchange value, of the commodities concerned. Secondary incomes are not linked with the exchange values of commodities, except accidentally and indirectly, and to the extent only that they are functions of primary incomes which depend on these values.

In this sense a direct tax is a secondary income, and consequently it is not a factor, because it neither has any influence on the exchange value of commodities nor is influenced by this, except in a few special cases and in an intermediate way, through changes in the primary income to which this tax is applied.

An indirect tax, however, is always, in accordance with the definition given above, a primary income and a factor because, all other things being equal, there is undeniably a direct relationship between its level and the exchange value of the commodity to which it is applied. Here there is no room at all for argument about the direction in which this relationship is exerted. It is obviously not the exchange value that determines the tax, but vice versa, since a legislative decision arbitrarily lays down in advance, independently of and apart from the market, the rate at which this tax is to be levied.

If a legislative decision were to fix in the same way all the other claims, such as wages and profits, there would be no room either for argument about the determinative power of these factors. If, however, we assume a pure competitive economy, the reward of labor and the profit on capital are fixed not by any voluntary act but by the market. Hence the division among the economists, as regards the formation of value, into two camps: those who treat these factors as dependent variables, and those who treat them as independent variables of the system.

If now, instead of taking the exchange value of each commodity on the same footing along with all the rest, we take this exchange value in relation to a particular commodity, which serves as a universal equivalent, or if we lay down a scale for the reduction of all exchange values to some conventional unit, then we arrive at the idea of price.

Thus, in the series of exchange values: A = 2B = 5C = 10D = 10 grams of gold, the prices may be, either:

A = 10 grams of gold

B =5 grams of gold

C =2 grams of gold

D =1 gram of gold

or, if 1 gram of gold = 10:

A = 100

B =50

C =20

D =10

The second series being made up of simple coefficients to which any denomination may be added—franc, pound, dollar, etc.

In order, therefore, to avoid any question-begging, we can talk not of factors of production but of factors of price, provided, of course, we accept that it is the quantities of and rewards for these factors that determine prices, and not the other way round.

It is then appropriate to advocate one or other of these two determinations and to justify the choice made.

II. SIMPLE COMMODITY ECONOMY: ONE FACTOR ONLY

I. Exchange Value and Reward of the Factor

If there were no other claimants in society apart from a certain number of independent workers, owning their tools as their own inalienable property and freely exchanging their products among themselves, it would be hard to conceive of any theory of value other than the classical labor theory. To ask in these circumstances at what rate a commodity should be exchanged for another would quite simply mean asking the rate at which the labor of one producer should be rewarded, as compared with another.

By treating value as a real substance, economists have somewhat lost sight of the fact that, behind the commodities being exchanged, there are men who are expecting to receive their share of the social product.2 There are, after all, only two ways of deciding this share—either directly, through an imposed division of labor, or else indirectly, through exchange of the workers’ products and a division of labor based on each person’s free choice.3

In the first case there is no commodity production and the very concept of value is deprived of significance and becomes pointless.4 In the second, behind the comparison between commodities lies hidden a comparison between the different labors needed to produce them.

If man ever troubled to compare things so unlike each other as a canoe and a cow, it was solely in order to be able to pay as correctly as possible for the labor of those who had produced each of them, when these producers had become independent of each other. Where that is not the situation, then, even today, those in Black Africa who are still integrated in the tribal way of life look upon any such comparison as a white men’s fad that either astonishes them or makes them smile.5

2. Homogeneity of the Factor

Since the different labors that men perform can be compared only by reducing them to a common unit, it would be necessary and sufficient to reduce the particular forms of labor to a single quality to have the relation between them, and consequently the exchange value of the commodities produced by them, become reducible as well to a simple ratio between periods of abstract and homogeneous labor time. Hence, in a society of this sort, with simple commodity production, equilibrium will be maintained only if commodities are exchanged in proportion to the length of time needed to produce them, multiplied by a coefficient expressing, in accordance with the subjectiveevaluation made by the interested parties, the relative advantages and disadvantages of each occupation.

I have stressed the word “subjective” because this is where we meet the first objection that is raised by those who decry the labor theory of value, namely, that even in the case of simple commodity production, since labor is not homogeneous, there is not just one factor but as many factors as there are kinds of labor, for which, moreover, no objective reduction scale exists.6

Adam Smith, Ricardo, and Marx all had to have recourse to the scale of wages established on the market over a long period in order to be able to reduce, ex post, concrete labor to abstract labor. This dependence on the market, which was admitted by writers who declared that it is the conditions of production that determine exchange, and not exchange that determines the conditions of production, has been seen as an inconsistency on their part.

However, the impossibility in practice of establishing, ex ante, a scale for reducing complex forms of labor to simple labor, and the reference to the market made by Smith and Ricardo, and later by Marx, do not mean that the market determines this reduction, only that it provides confirmation of it. “Experience shows that this reduction is constantly being made,” says Marx in the first chapter of Capital.7 And he adds in Chapter 7: “From another aspect, when it is a question of producing value, the higher form of labor must always be reduced to average social labor—one day of complex labor, for example, to two days of simple labor. If respectable economists have protested against this arbitrary assertion … what they allege to be a trick of analysis is quite simply a procedure which is practiced every day in all parts of the world.”8 And in Chapter 1 of his Critique of Political Economy he adds further: “This reduction appears to be an abstraction; but it is an abstraction which takes place daily in the social process of production.”9

What matters, in fact, is not whether one has an objective reduction scale, independent of men’s will and, so to speak, metaphysical, but the simple fact that under the particular conditions of any moment the workers themselves succeed in agreeing on the respective qualities of their labors.

Reducing complex to simple labor is not an effect of the market; it results from production carried on with the market in view. It is obvious that without the market there would be neither abstract labor nor value, but that does not mean that these are determined by the market.

If one says that under these conditions the equilibrium price of a hat, which it takes ten hours of labor to produce, is two chairs, the production of which requires 20 hours, this amounts to saying that, in the opinion of the interested parties, and taking account of the period of apprenticeship needed, the special difficulties of each craft, etc., the labor power of a hatter is worth twice as much as an equal quantity of the labor power of a joiner, so that at this price neither of the two workers has any cause to change his occupation.

These coefficients (1, 2) are obviously established outside the sphere of exchange since they are determined exclusively by the conditions of labor peculiar to each craft. Once established, they determine and correct the market. Indeed, at the rate of one hat > two chairs the joiner would be better off making his hats for himself instead of buying them with chairs, and at one hat < two chairs the hatter would be better off making his chairs for himself instead of getting them in exchange for hats. Equilibrium is achieved at the rate of one hat = two chairs.

3. The Bearing of Equilibrium

Clearly, the relevance of this argument depends on how we define equilibrium. When perusing the enormous literature devoted to the dispute about value, the reader often gets the impression that a serious misunderstanding has occurred where this idea is concerned.

What the classical economists call the equilibrium price—the cost of production according to Quesnay, the necessary price according to other physiocrats, Turgot’s fundamental price, the natural price or cost price of Smith and Ricardo, MacCulloch’s real value, Sismondi’s intrinsic price, Marx’s price of production—is not the price at which at a certain moment demand is equal to supply. Such a sterile triviality was regarded by the classical writers as belonging to the prehistory of political economy, not worthy of their attention. The equilibrium price of a product is that at which the branch producing this product is in equilibrium: the price, in other words, at which movements of the factors toward or away from this branch cease completely.

The result is that it is not possible for any particular price to be in equilibrium unless all other prices are in equilibrium as well. Equilibrium is thus an ideal situation, and under the conditions we are supposing, where only a single factor exists, and this factor is homogeneous, it is the point where payment for a unit of this factor is equal in every instance where it is applied.

The marginalists’ position on this point is an ambiguous one, and very frequently we observe them gliding from the macroeconomic to the micro-economic standpoint. When Walras and Pareto say that the point of equilibrium is reached when all profits fall to zero, they do not diverge essentially from the classical position, according to which at the moment of equilibrium all the rates of profit become equal; allowing, that is, for the fiction, so dear to Continental economists, of the entrepreneur without capital, whose profit, according to Pareto, can only be a profit of alienation at the expense of another entrepreneur, the true profit on capital and the payment for the entrepreneur’s services being included in his costs in the form of interest and wages. The fiction mentioned is even to be welcomed in this particular instance, since it brings out the difference between the current price, at which some entrepreneurs gain and others lose, so that transfers from one branch to another are encouraged, and the equilibrium price, at which no entrepreneur either gains or loses anything at all over and above the payment for his services, and at which transfers come to a standstill.10

A moment arrives, however, amid the flood of marginalist propositions, when it is no longer clear whether what is being talked about is the fluctuations in prices or the prices themselves, their contingency or their nature, their movement or the level at which this movement occurs. Eventually it becomes clear that for many marginalists value and abstract price, as the axes around which concrete price varies, simply do not exist, and everything boils down to the sum total of actual prices, determined by the law of supply and demand.

In the extreme form of marginalism it is not even supply and demand that determine prices, this role being reserved to demand alone, if the view is taken that the true elasticity of supply is not one of quantities already produced but one of costs of production and reproduction.11

This is where the British neoclassicists differ from Jevons and the Austrian school. Walras’s work already foreshadowed this transcendence of the old dispute about whether prices are determined by demand or by costs of production:

Equilibrium in production, which implies equilibrium in exchange, can now be easily defined. First, it is a state in which the effective demand and offer of productive services are equal and there is a stationary current price in the market for these services. Secondly, it is a state in which the effective demand and supply of products are also equal and there is a stationary current price in the products market. Finally, it is a state in which the selling prices of products equal the costs of the productive services that enter into them.12

Pareto and Cassel joined Walras in considering that the relative amount of costs (and consequently of prices) does not depend only upon the market, but that it is also determined by the conditions of production. Marshall, however, was the economist who gave this view its most clear-cut form, when he declared that the question whether it is demand or cost that determines value is as empty of meaning as the question whether it is the upper or the lower blade of a pair of scissors that cuts a piece of paper. He went even further, declaring that the shorter the period under consideration, the greater is the influence of demand, and the longer this period is, the greater the influence of cost, thus recognizing that in the long run it is the cost of production that is the sole determinant.

In contrast it was by restricting himself to the amounts “physically given” that Jevons was able to declare that “labour once spent has no influence on the future value of any article”13—though nobody ever said that it was the labor already spent that determines value, this being done by the necessary labor, something that in itself implies the idea of reproduction.

Well, then, if it is not a question of a mere accident or of the end of the world, what does determine the amounts “physically given?” Jevons thought he could get out of the difficulty by means of the following proposition: “Cost of production determines supply. Supply determines final degree of utility. Final degree of utility determines value.” But in that case, Marshall replies, it would be possible to eliminate the middle term without much trouble and say that cost of production determines value.

It is E. von Böhm-Bawerk and Carl Menger, however, who are the spokesmen for the subjectivist theory properly so called: they are concerned only to analyze how sellers and buyers argue over a given quantity of commodities. By leaving out any possibility of reproduction they build a model that is appropriate only to the stock exchange, where a certain number of shares do indeed pass from hand to hand without any reproduction or multiplication being possible, or else to the conditions prevailing in the world on the eve of the Last Judgment, when mankind, their end having been announced, will doubtless stop producing and will consume their accumulated stocks of goods by exchanging them.

4. Internal Competition or Mobility of the Factor

If we adopt the macroeconomic meaning of the term, then as soon as this equilibrium price is upset by the everyday reality of the market, the factors start moving in the direction needed in order that the real price may still tend to conform to the abstract price. It is thus by disturbing the equilibrium of the economy that supply and demand are able to affect the distribution of the factors, and it is to this extent that market prices are active prices. What follows from this is that it is the mobility or competition of the factors, or the possibility for every worker freely to choose his occupation (still within the conditions laid down at the beginning of this chapter, in particular the existence of one factor only), that constantly restores the equilibrium of the economy and constitutes in the last analysis the essential condition for the functioning of the law of labor value.14 Moreover, market prices establish equilibrium in the commodities market and not in the factors market, and in order to ensure this momentary equilibrium they must, on the contrary, diverge, sometimes to a substantial extent, from “equilibrium prices.”

It would be useless to object, as several critics of the classical theory have done, that this competition does not in fact exist, because the existing hatters cannot transform themselves, at will and at any moment, into joiners, or vice versa: the classical writers always said that the competition of the factors is to be understood as a long-term affair, and the equilibrium price as only a tendency, an axis around which effective prices revolve, and from which they can deviate considerably and in either direction, depending on the law of supply and demand. This law, however, is itself meaningless unless account is taken of the basis of equilibrium, in relation to which we measure the deviations of disequilibrium that it determines. Supply and demand may at a given moment fix the price of iron at two francs the kilo and that of gold at 4,000. What decides, though, that iron is too dear at two francs, whereas gold is too cheap at 4,000, is their respective cost of production. The law of value is not a law of magnitudes but a law of motion.

The existing hatters cannot, of course, change into joiners overnight. On the other hand, however, nobody is born a hatter or a joiner, and at any moment a host of other people are on the point of choosing the trade they will follow. If the price of the products of a certain branch is too high in relation to the reward that these people regard as fair, given the particular and comparative difficulties of this occupation, then they will flock into this branch and by contributing their additional production will ipso facto bring the effective price down to the level of the equilibrium price.

Clearly, the limits within which the classical law of value is applicable are identical with the limits of the competition or mobility of the factors. As soon as these limits are exceeded, the law is no longer operative, and it is the “prior” law of supply and demand that becomes applicable. The classical writers were aware of the fact and continually acknowledged it.

While it is broadly possible for anyone to become a hatter or a joiner, not everyone can at will become a great painter or an inventor, nor can everyone repeat at will the lucky strike of the collector who comes one day upon a very rare stamp, or that of the prospector who finds a remarkable nugget of gold or a many-carat diamond. In such cases the ancient law of supply and demand, with all the refinements that the nineteenth-century economists gave it—marginal utility, indifference curves, elasticities of demand, etc.—becomes applicable.

5. Nonre producible Commodities

The classical writers often said that nonreproducible commodities, such as works of art, collectors’ pieces, etc., were outside the scope of their law.15 The opponents of the classical school have tried to create a universal theory, applicable to everything, whether reproducible or not, material or nonmaterial, commodity or income, productive service or service tout court, applicable equally to a real society in which reproduction follows consumption and to an island of shipwrecked people where only luggage and windfalls are exchanged: they have ended by creating a theory that explains nothing and leads nowhere. Only tautologies are truly universal.16 So as to be able to include Robinson Crusoe in the law of value they have emptied the latter of all its substance.

Nevertheless, the “case” of marginalism is not so “universal” as it seems since there is at least one value that it cannot take account of. And this is something important—the value of gold. Pareto had the intellectual honesty to admit this.

If the rate of exchange between two commodities, he observed, is determined by the relation between their respective ophelimities,* then in the event that a general increase takes place in the prices of all commodities, as expressed in gold, the increase in the quantity of gold must be such as not merely to cover the increased circulation of money but also to cover the increase in the consumption of gold itself, an increase that is needed in order to diminish its elementary ophelimity in relation to other commodities, on which alone its value depends.

However, Pareto admits, this conclusion is perhaps too dogmatic. It would be hard to attack it if the consumption of the money commodity itself were nearly as great as the total amount of all other consumption. But will it still stand up if, as in our societies, the money commodity is gold, consumption of which is very slight in comparison with other kinds of consumption? It is hard to see how all prices are to be regulated in an exact and strict way by the consumption of gold in watchcases, jewelry, etc.17

“We conclude,” he declares further on, “that, in the case of gold money, identical equilibrium positions are possible, within certain limits, with different prices. Within these limits they would seem, therefore, not to be completely and exclusively determined by the formulae of pure economics.”18

In their day the classical writers had declared that their theory did not apply to things that are not reproducible at will. They did this just as honestly as Pareto but much more categorically, without his caution (“they would seem, therefore, not to be completely and exclusively determined …”). If it is a question of “universality,” therefore, I do not see why Pareto’s theory, which leaves out of account such an important value as the money commodity, should be preferable to another theory, which leaves out of account Robinson Crusoe’s island.

Besides, the classical writers explained the reasons why their theory did not apply to the case of nonreproducible commodities. Being aware of their own assumptions, or at least of the most essential of these, they took account, by the same chain of cause and effect, both of the rule and of the

*“Ophelimity” is a term invented by Pareto to take the place of the more familiar “utility,” as used by the marginal utility theorists.—Trans. exception. Pareto, however, baldly records the exception without considering himself obliged to explain it.

Yet the “breakdown” of “pure economics” in the case of gold is no mystery, nor even a paradox. The subjective theories of value inevitably have to come to a standstill where ophelimity itself becomes an increasing function of the cost of production. All prestige consumption comes under this heading. A large number of things are not expensive because their ophelimity is large; their ophelimity is large because they are expensive. The flowers we present have to be not only beautiful, they have to be expensive as well. Otherwise, in certain circumstances they will not fulfill their role, and their use value suffers thereby.

Moreover, all the theories of general equilibrium of interdependence break down where the elasticity of demand is equal or inferior to unity.

Gold is subject to both conditions—to the former in part, because, after all, gold has certain intrinsic qualities and its consumption is not a mere matter of prestige, and to the latter entirely, because, according to the quantity theory, the elasticity of the demand for monetary gold is strictly equal to unity.19

If a supranational authority were to impose a tax on the extraction of gold from all the world’s mines, the prices of all commodities, expressed in gold, would fall in proportion to the amount of this tax, though the physical quantity of gold would not change and the ophelimities alleged to depend on this would change only to an absolutely negligible extent.20

6. Disproportionate Costs

If, however, we leave aside this extension that the postclassical economists tried to make in order to take account of the value of nonreproducible commodities, within the assumption and the limits of internal competition (mobility) of the labor factor and within the setting of a simple precapitalist commodity economy where there is only one category of claimants, namely, workers owning their own tools, inalienable in principle and of insignificant value—then it can be said that there is no possible way of refuting the law of labor value.

For I do not regard as a refutation, in the true sense of the word, the argument about disproportionate costs, as I have already stated in my introduction. When we say that value depends on the labor necessary for the production of a commodity, we accept implicitly that several factors may in turn determine the amount of this “necessary labor.” By saying “socially necessary labor” we even give explicit recognition to the existence of these factors. As Henri Denis writes, “value … is the amount of labor socially necessary for production with a given state of technique and of industrial structure, but also with a given state of the market.”21

It is clear that to each level of production potential there corresponds a different distribution of demand among the various commodities. The consumption of clothing does not increase in the same proportion as the consumption of food. If, then, costs are not proportionate, to each level there also corresponds a different series of exchange values of the products. Whoever thought of denying this? How does this observation discredit a theory that teaches that costs determine exchange value?

According to Garnier, demand determines only the quantity of things that are produced, and their value is determined by labor. Proudhon wrote that it is for the buyer to indicate the amount to be produced but for the manufacturer to fix the value of the things produced, through the amount of labor. Marshall himself agreed with this view of the question when he declared that utility determines the quantity to be supplied, the quantity to be supplied determines the cost of production, and the cost of production determines value.

If this is so, then demand is neither a determinant, as Jevons and Walras believed, nor a codeterminant, as Marshall, with a certain inconsistency, sometimes seemed to believe. It is, so to speak, a determinant of the determinant. It is one datum along with several others: climate, natural resources, state of technique, etc. On the basis of all these data taken together, a certain amount of labor is at any moment necessary in order to produce a given commodity. Whatever these data may be, and whatever the laws that govern them, at any moment the equilibrium price of one commodity in terms of another is equal, under the conditions we have supposed, to the relationship between the two amounts of labor socially necessary to produce them.22

III. CAPITALIST ECONOMY: SEVERAL FACTORS

I. Mobility of the Second Factor: Equalization of Profits

Up to now we have assumed the existence of one factor only, competitive and homogeneous. Under such conditions it is a matter of complete indifference whether exchange value is measured by the amount of the factor or by its reward. The factor’s internal competition (mobility) implying, as it does, equalization of its rewards, it is obvious that both methods produce exactly the same results. Once all the specific forms of labor have been converted into simple and universal labor, the relationship between the amounts of labor expended in the production of two different commodities is equal to the relationship between the rewards of their respective producers. This is why in such a case the labor theory of value and the cost-of-production theory amount to the same thing, and I have made no distinction between them in the preceding section.

At the same time, given the assumption of a single factor or of a single category of claims to a share in the social product, the direction in which determination takes place is beyond dispute. It follows directly from the definition of this factor. If the latter is homogeneous and competitive, its reward must, indeed, tend to be equal in every sector of production. And it cannot be equal unless commodities are exchanged in proportion to the amount of this factor that is socially necessary for their production.

Things change radically when we pass from simple commodity production to capitalist production, under which the tool and the producer are separated and a second category of claimants appears, that of the owners of capital.

According to my definition, and leaving rent and taxes aside for the moment, we now have two factors, labor and capital.23 If the first becomes homogeneous only through the reduction of complex labor to simple labor and concrete labor to abstract labor, the second is directly and completely homogeneous since by its very nature it is always abstract.24

Capital as such is, in the absence of external obstacles, perfectly homogeneous and competitive. Inside a given nation, such obstacles are, in principle, nonexistent, and economists usually agree on this point, even if they disagree about recognizing the same mobility on the international plane.25

As with the labor factor, this mobility implies that the reward for a unit of capital is equal whatever its application may be. This means that the equilibrium rate of profit, which constitutes the axis around which the real rate of profit varies, must be the same in all branches. Every difference, whether above or below the real rate of profit, brings about movements of capital in search of higher profits, and these movements tend to restore equilibrium.26

2. Unequal Proportionality of the Two Factors

If in every branch the intervention of this claim by capital were proportionate to the amount of labor expended for each kind of production, then the fact that this claim is rewarded at a uniform rate would have no influence on the exchange values of commodities as established in accordance with the respective amounts of labor embodied in them.27

This observation is independent of the nature of this claim and that of its reward. Whether profit is part of the value created by the worker or whether it is something added to this by the circulation of commodities; whether it represents a surplus value created by the worker over and above the value of his labor power or whether it is deducted from the actual value of labor power; whether it is the just reward of a productive service or whether it is a tribute paid by those who work to those who hold an exclusive claim upon the means and conditions of labor—these do not affect in any way the fact stated above that, if the proportionality of the two factors is equal, then the reward of capital, wherever this payment may come from, has no effect whatsoever upon the exchange value of the products.

Let us suppose that one unit of A contains ten hours of labor and one unit of B contains 20 hours. Under the conditions of precapitalist commodity economy they exchange at the rate of 2A for 1B. They will continue to exchange at the same rate after the coming of capitalist relations if, and only if, profit per unit of capital being the same in all branches, the amount of capital devoted to each of the branches is proportionate to the amount of labor.

Thus in my example if the general rate of profit is 10 percent, and capital participates at the rate of five units per hour of work, then in branch A it will be necessary to reckon with a profit equivalent to five hours of labor, and in branch B with a profit equivalent to ten hours. Whether this profit be deducted from the reward due to the worker or whether it be added to this, the ratio 2A equals 1B clearly does not alter.

But the proportionality of the two factors is not equal in all branches. Tools are not of equal importance in every form of production. Hence it is clear that if the products were to be exchanged on the basis of one hour of labor for one hour of labor, the two claimants could no longer be paid at a uniform rate valid for all branches.

In my example, if in branch A capital participates at the rate of ten units per hour of labor, and in branch B at the rate of five units per hour of labor, and 2A are exchanged for 1B, then the same value of 20 hours will have to be shared in each of the branches, but in branch A it will have to be shared between workers who have worked for 20 hours and capitalists who have contributed 200 units of capital, while in branch B the same value will have to be shared between the same amount of labor, on the one hand, and 100 units of capital, on the other. It will then be necessary either for the hour of labor, the unit of capital, or both to be rewarded at a different rate in A and in B, which goes against our assumption of the perfect mobility of the two factors. Thus, in the conditions we have assumed exchange can no longer take place on the basis of 2A equals 1B. With the coming of capitalist relations the labor theory of value in its primitive form found itself at a dead end, and a change in the original form of value became necessary.

3. Costs of Production

At this point calculation of exchange value on the basis of the respective amounts of the factors and calculation on the basis of the respective rewards of the factors, that is, the costs of production, diverge and separate from each other. In fact the first type of calculation becomes impossible, and no exchange value can be found apart from the rewarding of the factors, since the only common denominator between the two factors that makes the sum of their amounts commensurable is the rate at which they are rewarded.

As, on the other hand, we have assumed the existence of two factors only, or only two established claims to the social product, it is clear that, the social product being given, the rate at which one of these claims is rewarded must vary inversely with the rate at which the other is rewarded. This is why if we assume an equal proportionality of the two factors in all branches of production, the variation between these two rates would be irrelevant to the exchange value of the products, and we should be able to confine our attention, without any disadvantage, to the amount of whichever one of the two we chose, and so to the amount of labor alone. But as this assumption is absolutely unrealistic and has to be rejected out of hand, in order to take account of the fact that the quantities of the factors are combined in different proportions in different branches of production, we are compelled to weight them in terms of the respective rates at which the factors are rewarded.

Moreover, with the coming of capitalist production relations, labor power itself becomes a commodity, for the payment for which in advance a certain quantity of capital has to be employed. From this it follows that the reward of the labor factor does not come upon the scene merely as a primary constituent element of value but also as a part of the total capital invested, on the basis of which the reward of the capital factor has to be calculated. It thus has to be added to the multiplicand of profit. Accordingly, exchange value proves to be the sum of the workers’ wages, plus the profit on the means of labor, plus the profit on wages. Or, in Marxist terms, variable capital plus the profit on the two capitals, constant and variable.28

I am here leaving aside a value that is transferred just as it is into the value of the product, independently of the existence of one or more factors of production and of the rate of reward of these factors or the variations in this rate: the value of the products that are consumed in the course of production and the value of the wear and tear of equipment. This is, so to speak, an exogenous element that also existed under precapitalist commodity economy and that has no influence on the formation of exchange value in accordance with either of the two principles set forth. We must be on the alert straightaway against a possible confusion. The rewarding of the second factor, that is, profit, is not connected with the wear and tear of capital but with the use of capital.

4. The Transformation of Value as Seen by the Classical Economists

The idea of a modification of exchange value through the intervention of a second factor was frankly tackled by the classical economists and fully integrated into their theory.

In Adam Smith’s pragmatic approach this idea is somewhat confused and formulated in an intellectually unsatisfying way, in Chapter 6 of Book 1 of The Wealth of Nations.

Smith says that the value which the workers add to the material they work up is divided into two parts, the first going to pay their own wages, while the second provides their employer’s profit on the entire stock (both consumed and unconsumed) of material and on the wages that he has advanced.

Smith goes on to observe that the entrepreneur would have no interest in using more capital per worker if his profit were not proportionate to his capital. And he furthermore concludes that the natural price of a commodity is precisely what is needed in order to provide payment at their natural rates of ground rent, wages, and profit on capital.

He fails to explain, however, the nature and significance of the divergence between exchange value according to quantity of labor, in the case where there is only one factor, and exchange value according to the rewards of the factors, in the case where there is more than one of these. This deficiency was inevitable with a writer who, even in the case of the simple form of labor value, continually confuses the quantity of labor necessary to produce a commodity with the quantity of labor against which this commodity can be exchanged.

Actually, Smith was not able to point, as he should have done, to the transition from exchange value based on quantity of labor to exchange value based on costs of production because in its first form his labor theory of value already wavered between the two determinants. This wavering, moreover, was not unconnected with the intolerable contradiction that appears when he states that natural price is made up of ground rent, wages, and profit, whereas in other parts of his work he declares categorically that wages and profit are the cause of this price, while rent is only the consequence of it, or that natural ground rent is the amount by which price exceeds costs of production together with the customary profit.

Ricardo, with his abstract way of reasoning, is naturally more coherent than Smith. The transition from the simple to the developed form of exchange value takes place between Section 3 and Sections 4 and 5 of the first chapter of his Principles.

He approaches this modification of exchange value from the angle of fluctuations in wages, noting that, in contrast to what everybody had supposed up to then, an all-around rise in wages does not bring about an all-around rise in prices, but a fall in prices in the branches where the capital-labor ratio is higher than the social average and a rise in the branches where this ratio is lower than the average. Intoxicated by this discovery, he dwells especially on its most sensational aspect. He goes on at length, and with much detail, about what he himself calls this “novelty” and neglects the other aspects of the problem, particularly its link with the equalization of profits.

On the whole, however, Ricardo’s approach is sound. After having striven to show that the increase or decrease of wages has no effect on values, its only effect being to cause profits to vary in the opposite direction, he then explains that an increase in wages causes an increase in the “relative value” of those products into the production of which relatively little capital enters (the branches with a low organic composition, as Marxist terminology describes them, or those with weak capital intensity, to use the modern expression) and causes a decrease in the “relative value” of products with a high organic composition. A decrease in wages would have exactly the opposite effect.

This apparent contradiction is explained by the difference in the assumptions made. In his Section 3 Ricardo assumes that “in the early stages of society, the bows and arrows of the hunter were of equal value, and of equal durability with the canoe and the implements of the fisherman, both being the produce of the same quantity of labour. Under such circumstances the value of the deer … would be exactly equal to the value of the fish … however high or low general wages or profits might be.”

In his Section 4, however, he makes the opposite assumption:

In the former section we have supposed the implements and weapons necessary to kill the deer and salmon to be equally durable and to be the result of the same quantity of labour.… But in every state of society the tools, implements, buildings and machinery employed in different trades may be of various degrees of durability and may require different portions of labour to produce them. The proportions, too, in which the capital that is to support labour and the capital that is invested in tools, machinery and buildings may be variously combined. This difference in the degree of durability of fixed capital, and this variety in the proportions in which the two sorts of capital may be combined, introduce another cause, besides the greater or less quantity of labour necessary to produce commodities, for the variations in their relative value—this cause is the rise or fall in the value of labour [read: wages].… The degree of alteration in the relative value of goods, on account of a rise or fall of labour would depend on the proportion which the fixed capital bore to the whole capital employed.

And in Section 5 he writes: “Every rise of wages, therefore, or, which is the same thing, every fall of profits, would lower the relative value of those commodities which were produced with a capital of a durable nature, and would proportionally elevate those which were produced with capital more perishable. A fall of wages would have precisely the contrary effect.”

The last-quoted passage explains why Ricardo speaks, throughout all these parts of his work, only about wages, saying nothing about profits. As soon as the equalization of profits is assumed, variations in the general rate of profit can only follow (taking the opposite direction) those of wages, since profit is, from the classical standpoint, only a residue, or what remains of production after the physiological subsistence minimum has been ensured to the workers.

At the same time (1821) as the third edition of Ricardo’s Principles appeared, the first edition of James Mill’s Elements of Political Economy was published, containing this statement:

Of these two species of labour [immediate and hoarded] two things are to be observed: First, that they are not always paid according to the same rate; that is, the payment of the one does not rise when that of the other rises or fall when that of the other falls; and, secondly, that they do not always contribute to the production of all commodities in equal proportions. If there were any two species of labour, the wages of which did not rise and fall in the same proportion, and which contributed to the production of all commodities, this circumstance, of their not contributing in equal degrees, would create a difference in exchangeable values, as often as any fluctuation took place in the rate of wages.

If all commodities were produced by a portion of skilled and a portion of unskilled labour, but the ratio which these portions bore to one another were different in the case of different commodities; and if, as often as the wages of skilled labour rose, the wages of unskilled labour rose twice as much, it is very obvious that, upon a rise in wages, those commodities to the production of which a greater proportion of unskilled labour was applied would rise in value as compared with those to which a less proportion was applied.

It is curious that James Mill here brings in another factor of divergence that no other classical writer seems to have noticed: the differential fluctuations not of the respective rewards of the two factors, but of the rewards of the same factor (labor) during the course of time. In this he was wrong, for fluctuations in wages for immediate labor do affect the value of accumulated labor, since it is not the cost of production of fixed (constant) capital that matters but its cost of reproduction.

Later, however, Mill steadies himself, by bringing in the rate of profit, and his conclusion is a sound one:

When wages rise, and profits fall, it is evident that all commodities made with a less proportion of labour to capital, will fall in value, as compared with those which are made with a greater.… Those commodities which … admit a greater proportion of labour than capital in their formation rise in price: those which … have a greater portion of capital than labour, fall: and upon the aggregate of commodities, or all taken together, there is neither fall nor rise.29

Ultimately, James Mill goes further than Ricardo. He introduces in the passage just quoted the idea that the rises and falls compensate each other, which implies that the total of all the equilibrium prices, as determined by the addition of a second factor, is strictly equal to the total of all values, as they would be reckoned in quantities of labor if this second factor were not present. This idea is not to be found—not at any rate so directly and clearly formulated—in any of the other classical writers. Here James Mill links up, over the heads of Ricardo and John Stuart Mill, with Marx’s formula of prices of production.

This equivalence between the sum of values and the sum of equilibrium prices constitutes, indeed, the strongest argument against those who see the classical economists’ theory of equilibrium prices, or Marx’s theory of prices of production, as repudiating the original labor theory of value.

5. The Transformation of Value According to Marx

Price of production = equilibrium price: The step that Ricardo took between the third and the fourth sections of the first chapter of the Principles was taken by Marx between the first and the third volumes of Capital. In Volume 1, especially in the first three chapters and part of Chapter 6, so far as value is concerned, and in Chapters 7 to 12 and 16 to 18, so far as surplus value is concerned, Marx leaves out of account the difference between the organic compositions of capitals in different branches.30 Consequently, this first part of his theory can cover only three cases:

1. The case of simple (noncapitalist) commodity production, in which every producer owns his own means of production and these are inalienable

2. The case of capitalist production at a low level of development, at which items of equipment (“capital goods”) are nonexistent or negligible, or at which the difference between occupations is negligible, so that what the entrepreneur actually advances is merely wages, or wages plus equipment that is practically proportionate to wages

3. Within developed capitalist production, the special case of a branch whose organic composition is equal to the social average.

In these three cases, not only is the total of market prices equal at any moment to the total of values, but the price of the article varies around its value, so that in the long run its average price tends to coincide with its value. Here it is clear that the rate of wages has no influence on prices, since it has none on values. Value being the sum of two variables inversely related to each other, paid labor and unpaid labor, it naturally remains constant whatever the ratio of these two magnitudes.31

In Volume 3 of Capital Marx introduces for the first time the difference between organic compositions as a real fact of the capitalist system. The basis of the problem is discussed in Chapters 8 and 9. Chapter 8 is entitled: “Different Compositions of Capitals in Different Branches of Production and Resulting Differences in Rates of Profit.” Chapter 9 is entitled: “Formation of a General Rate of Profit (Average Rate of Profit) and Transformation of the Values of Commodities into Prices of Production.” The juxtaposition of these two titles sums up the entire transformation of simple labor value into equilibrium price. Marx’s thinking proceeds like this: if market prices coincided with values, viz. with the amount of living labor, the rates of profit in the different branches would be unequal, given the inequality of the capitals invested per unit of living labor and of their turnover rate. This inequality would prevent capitalism from functioning, since the capitalist who increased the organic composition of his enterprise so as to economize on living labor would obtain less profit than before and would thus be penalized to the advantage of those who had not mechanized their enterprises. In order that capitalist production may develop, profits must be proportional not to the number of workers employed but to the total capital invested by each capitalist. And Marx puts the finishing touch to his theory of value by giving, in Chapter 9, his famous formula of “prices of production”:32

Branches	c Constant capital	ν Variable capital	m Surplus value	V Value c+v+m	T Rate of profit	p Profit T(c+ν)	L Price of production c+ν+p
I	80	20	20	120		20	120
II	90	10	10	110	20%	20	120
III	70	30	30	130		20	120
	240	60	60	360		60	360

In this group of three branches the value added is 120 (Σv + Σm), of which wages absorb one-half and profits the other. Thus, the rate of surplus value is 100 percent, and it is, as it should be, the same in all the branches. But the total capital invested (Σc +Σv) being 300, and the total amount of surplus value being 60, the general rate of profit can only be 20 percent. This profit, added to the cost of production (c + v) of each branch, gives us the prices of production, which differ from the value of each article, if this value is the sum of the labor, living and past, expended in producing the article.33

It is undeniable that, according to the definition of equilibrium that I adopted in the second section of this chapter, Marx’s prices of production are equilibrium prices, since it is only at these prices that the two factors are rewarded at an equal rate in all the branches, and that transfers cease. Any deviation from these prices caused by the market would entail movements of factors from one branch to another, and if we take account of the fact that current prices do not affect wages, which are paid before goods are sold and independently of the results of such sale, that is, if we consider the equalization of wages as already given, and that it is profit that varies with short-term fluctuations in prices, then we must conclude that any deviation in effective prices, above or below prices of production, will bring about a movement of capital toward the favored branches, which will in turn tend to increase production in these branches and so bring the market price back to the price of production. Prices of production are equilibrium prices because they are the only mechanism capable of ensuring the equalization of profits.

6. Cause and Effect

While it is easy to show that at the moment of equilibrium the prices of commodities and the respective rates of reward of the two factors correspond, we must admit that there does not, at first glance, seem to be any purely rational proof as to which of the two is the determinant and which the determined.

Where only one factor was present, this proof followed from the premises. To show that equalization of the rewards of the single factor was necessary in order to achieve equilibrium was enough to show, by the same reasoning, that it is the conditions of production and not the market that determine equilibrium prices, since, equalization being given, only one point of equilibrium was possible. Immediately after a second factor comes into play, however, the direction in which determination takes place is no longer so clear. For prices of production or equilibrium prices no longer depend exclusively on the mere fact of the equalization of wages and profits. They depend to an equal degree upon the level of both. With wages and profits respectively equal in all branches, an infinite number of equilibrium prices is theoretically possible, corresponding to an infinite number of combinations between rates of wages and rates of profit. To each increase or decrease in the general rate of wages, and so to each increase or decrease in the general rate of profit, there will correspond a different group of equilibrium prices (prices of production).

If, indeed, we apply an increase of 50 percent in the general rate of wages to Marx’s diagram, the prices of production will be changed as follows:

Branches	c Constant capital	v Variable capital	m Surplus value	V Value c+v+m	T Rate of profit	p Profit T(c+v)	L Price of production c+v+p
I	80	30	10	120		10	120
II	90	15	5	110
III	70	45	15	130
	240	90	30	360		30	360

As was to be expected, the values have not changed, but all the prices of production (equilibrium prices), except in branch I, which has the average organic composition, have changed. How then can we say whether it is the alteration in wages that has determined the alteration in equilibrium prices or whether it is the latter, due to supply and demand, that has determined the alteration in wages?34

In the framework of the classical pre-Marxian assumptions, a choice in favor of the former alternative is clearly obligatory. There was then, it was supposed, a real basic wage, predetermined and unchangeable. It was a certain basket of goods that corresponded to the physiological subsistence-minimum of the worker and his family. No market movement could have any long-term effect on what this basket held. Any reduction would cause a section of the workers to die of starvation, and the subsequent shortage of labor would then cause wages to rise. The basket could not be made any smaller. Any increase above the minimum vital would cause the workers to become more prolific, and this, by increasing the supply of labor, would bring wages back to their starting level. A biological law independent of the market and of men’s economic relations determined the level of real wages. Since this wage level was predetermined, so likewise was the level of profit, and, the organic compositions being given, all the equilibrium prices were determined.

As for the nominal wage, this could certainly vary, but only if the conditions of production of the means of subsistence were to be changed. If, through less fertile soils being brought under cultivation, the same basket of foodstuffs could henceforth be produced only by six hours of labor instead of a previous four, the total working day being ten hours long, then profit would obviously be reduced from 60 to 40 percent of the total, which would entail a change in all the equilibrium prices upward or downward, depending on the ratio between the organic composition in each branch and the social average. But it was also just as obvious that it was not the market that had caused this change, but the conditions of production.

Things are no longer the same as soon as, with Marx, we recognize that wages are not exclusively determined by biological factors, but also by sociological and historical ones. With this expansion of the limits of wages we open up the theoretical possibility that wages, and thereby profits, may be determined by market forces. From that point onward it seems that we cannot make that choice of the direction of determination which we need to make if we are to go forward in this analysis, otherwise than on the basis of empirical considerations.

In a superpure economy of free competition, in which wages and profits could fluctuate freely between o and 100 percent, there would seem to be nothing, theoretically at least, against accepting that prices determine costs of production and not the other way around. However, this model has never existed, nor could it exist. This being so, the following considerations argue in favor of the opposite direction of determination:

1. Though surpassed by the socio-historical minimum, the physiological minimum wage nevertheless does still exist, and so there is an absolute lower limit that the market is powerless to shift.

2. The very notion of the physiological minimum is an elastic one. A need that has been created by technical progress and the power of demonstration becomes a biological need if it has been satisfied over a very long period of time. Sudden deprivation of the corresponding articles or service, if it hits one class of society alone and is not the result of a general state of emergency (war, blockade, etc.), causes moral suffering of such intensity that the biological mechanisms start working just as they would if it were a matter of lack of food or of adequate protection from cold. Moreover, a stage is reached at which certain needs created by civilization become so habitual and urgent that a worker will rather cut down on his food or his clothing than do without the corresponding article or service. When that stage is reached, a wage that is too low to enable both groups of needs to be satisfied becomes equivalent to a wage that is lower than the physiological minimum, and so becomes impossible. A similar case is provided by forms of consumption that are by nature inflexible, such as, for instance, housing. It is not possible to change one’s dwelling with every change in wages, even if one’s present accommodation is above the physiological minimum and if the food that can be bought with one’s present wage, after paying rent for this dwelling, is below that minimum.

Hence, wages can vary enormously in space but very little in time. The experience of history shows this.

3. Upward fluctuations are also limited because labor power is not a commodity like others. It is a commodity that is, so to speak, instantly perishable. The worker cannot save it up so as to take advantage of a favorable market conjuncture. Every hour that passes is an hour lost.35

4. There are considerable moral constraints upon the labor market. In spite of everything capitalism retains certain vestiges of personal relationships inherited from the feudal regime. One does not change one’s employee as one changes the shop where one buys things. People are proud of buying their raw materials cheaper than others can, but not of paying their workers less than their competitors pay. The first exploit is ascribed to the excellent organization of the firm and the ability of those who manage it; it enhances their prestige. The second, however, is ascribed to financial weakness and has an adverse effect on the firm’s credit.

In the other direction the extraeconomic constraints are not so strong, but they do exist.

5. The trade-union struggle of the working class and the reactions of the employers’ organizations prevent the free play of the market in this field.

What results from this is that the margin of elasticity of the general rate of wages, left to the possible influence of the market, is not very great in time. Now the previous diagram, in which the figures were not at all unrealistic, shows us that to very slight fluctuations in equilibrium prices (of the order of 4 percent in branches II and III), there corresponds a very large variation (50 percent) in the general rate of wages. If equilibrium prices were determined by the market, such fluctuations could occur every day. It would be ridiculous to suppose that wages should then follow with variations of 50 percent upward and downward.

There are other reasons of an even more fundamental sort, however, for rejecting the idea of determination on the basis of the prices of commodities. Were this determination to be admitted, it would be enough for the equilibrium prices of two articles, however unimportant these might be, to undergo change, for all wages in all other branches of production, and thereby the general rate of profit, to undergo corresponding changes, equal throughout all branches. It would be sufficient for consumers’ taste to move away from cabbage toward carrots for all wages and all profits, and also all the equilibrium prices of all commodities, to change! There is no mechanism that can achieve such an effect. To recognize its existence would be as absurd as to agree that it is possible to change the wavelength of a radio transmitting station by turning the knobs of one’s receiving set.

It is a priori conceivable that wages are linked with the general development of production or with the economic conjuncture and the level of employment, and so by some consequent link with the general level of prices. It is quite inconceivable that they should be linked with relative prices. In view of the present disparity in wages between the poor and the rich parts of the world, this would lead us, for example, to assume that the indifference curves of all the poor consumers in the world are so constructed as in every instance to favor products with a high capital intensity and disfavor the others. Given that, as a result of the uneven development of technique, products are continually passing from one category to the other, the respective tastes of poor and rich consumers would have to be continually changing in corresponding fashion, which is the height of absurdity.

This is why those who believe that this is the solution to the problem of determination are compelled, in the last analysis, to assume that there are as many factors as branches of production. In that case, of course, if the relative prices of cabbages and carrots change, only the payments made to the producers of cabbages and carrots will change, which is intellectually acceptable. They are therefore obliged to reject any equalization process, whether of wages or of profits.

If these equalizations are accepted, however, then one necessarily has to recognize that the payments made for the factors are the determinant, and the equilibrium prices are what is determined, since equilibrium is defined by the moment at which these equilizations are realized.

I have said above that pure reason seemed to be inadequate as justification for my choice, so that empirical arguments had to be resorted to. Nevertheless, here we have something that is almost a purely rational proof, or a conclusion that follows inevitably from our own definitions and assumptions.

Under conditions where there are two homogeneous and competitive factors, prices cannot be the cause and the rewards of the factors the effect, for the very simple reason, at least, that only certain combinations of prices are compatible with the two equalizations. If we divide the branches of production into two groups, those whose organic composition is higher than average and those whose organic composition is lower than average, then, regardless of the tastes and needs of consumers, the prices of articles belonging to the same group can in no case vary in opposite directions, and the prices of articles belonging to different groups can in no case vary in the same direction, or they will not be equilibrium prices. It is to be observed, besides, that within each group the rate of variation of prices is an increasing function of the divergence between the respective organic compositions and the average organic composition. Whatever the sign or the measure of a variation in the prices, an article will vary the more, in either direction, in proportion as its organic composition is further away from the average.

There is thus a law existing previous to the market that links the articles together in groups, and these groups are defined without any reference to the needs of the consumers. There is, moreover, no reason why variations in needs should follow the same law.

But there is another supposition that might rescue the marginalist thesis. Throughout my argument I have supposed that the organic compositions were already given. What, though, if they were actually conditioned by the prices? What if there exists an infinite number of quantitative combinations of factors—as, for example, Léon Walras and Bertil Ohlin supposed—all equally possible and dependent on prices? It would then be possible, at each variation of the equilibrium price, to choose a combination satisfying the condition of equivalence between cost of production and selling price (the latter being established independently and being thereby the determinant) without any need to make changes in all wages and all profits.36

Arguing like this means willfully forgetting the whole process and all the motivations in the choice of techniques, as this occurs under a regime of free competition. When an entrepreneur chooses his technique he is not concerned with equalizing cost of production and selling price, but with minimizing the former. Whatever the selling price may be, however high or however low, and whatever may be the size or the direction of its variations, the enterprise will seek the optimum combination of factors, and this optimization does not depend on the prices of the productions but on the prices of the factors.37

There may be grounds, perhaps, on the basis of this consideration, for modifying the classical proposition and saying that a change in the general rate of wages would not only have the effect of changing the prices of products in each of the two groups, but also, depending on circumstances, of changing the organic composition of the branches belonging to them, sometimes causing a branch to pass from one group to the other. Afterward, however, as before, wages and profits are no more directly dependent on prices than indirectly, through the mediation of the organic compositions.

We can thus conclude that, despite the reservation laid down at the start of this discussion, even in a model of perfect competition, it is not relative prices that determine the rewards of the factors, but the relative rewards of the factors that determine prices, if we assume that the two factors present are homogeneous and competitive.

The correspondences shown in Marx’s diagram of prices of production are not reversible. Wages and profits are indeed the independent variables in the system, and prices the dependent variables.38

Equilibrium Prices in External Exchanges

I. THE SPECIFICITY OF INTERNATIONAL VALUE

I. Equalization of Rewards of Factors

By keeping to the assumption that only two factors, capital and labor, are present, that is, by continuing to leave rent and taxes out of account, we provoke the question whether the process whereby equilibrium prices are formed within the framework of a given nation, as we have examined this in the previous chapter, still remains the same when we go beyond this framework.1 To find the answer we must obviously try to ascertain whether certain conditions are altered when the transition is made from exchange within a given nation to exchange between nations. If we assume a perfect system of free trade, and if we leave transport out of account (as we did when discussing exchange within a nation), there is nothing discoverable in the geographical situation of the exchanging parties that could alter the way exchange is determined, apart from the influence that the political fact of the division of the world into states may have upon the mobility of the factors.2

If the two factors were as mobile outside the nation as they are inside it, the specificity of international value would vanish, and the proposition about prices of production that I have set forth in Chapter 1 would be adequate to account for any and every exchange, wherever it occurred.

Economists have in the main rejected this assumption, which is contradicted by the most commonplace experience. The exceptions are very few and also far from clear. It is doubtful, for instance, whether Henry Sidgwick really believed in the absolute mobility of the two factors. Despite his statement that it is not the immobility of the factors that differentiates international value, but transport, and that the fundamental laws governing the formation of value are identical within and outside the frontiers of the nation, one can deduce only indirectly his belief in an equal degree of mobility rather than an equal degree of immobility in the two cases.3

The same doubt, or something very like it, remains after one has read the arguments of Maurice Byé. According to this writer, there no longer exists, since the progress made during the nineteenth century, any such immobility of the factors as would justify making a radical difference between internal and external exchange. Yet he writes in the course of his analysis:

Relative immobility of the factors … exists also, though, of course, to a lesser degree, in the relations between regions.… For a very long time it was a longer and harder task to transport men and goods from the South of France to the North, and from the East of the country to the West, than it is now to transport men and goods from one country to another, even when the countries are separated by seas.

Further on he writes:

We raised earlier the question whether the theory of international value set forth at the beginning of the nineteenth century was not deprived of its foundations, or at least of one of these, during the course of that century. It would be possible to reverse the terms of the question and ask whether, before the technical progress that made it possible to unite, to a very large extent, the different parts of each national economy, there was not good reason to regard the theory of international values as applying to trade between regions that were somewhat remote from each other within one and the same nation.4

In the end Maurice Byé neglects to tell us whether he sees the factors as being almost equally mobile internally as externally, or whether he sees them as being almost equally immobile on these two planes. Here too, we are able only indirectly to deduce a writer’s tendency to favor the former assumption.

It may be that for Byé, as perhaps also for Sidgwick and others, the two assumptions are seen as identical and the distinction I am making is nothing but an idle quibble, a certain degree of mobility being equivalent to a certain degree of immobility. The question, however, is not one of knowing what the degree of mobility or immobility is, but of knowing whether or not equalization of the rewards of factors occurs. In this context believing that the differentiation of international value is useless because equalization takes place both internally and externally or believing that this differentiation is useless because no equalization takes place anywhere at all are certainly not one and the same thing. Between the two lies the entire difference that stretches between the objective and subjective conceptions of value.

So far as I know, there is no one who formally takes up a position in favor of a universal equalization of wages and profits on the world scale. There are two main groups of economists, those who do not believe that such equalization takes place within the nation and who recognize a fortiori and with satisfaction the absence of such equalization externally, and those who, on the contrary, believe that such equalization does take place within the boundaries of the nation, but reject its occurrence outside those boundaries. The first group do not as a rule acknowledge the need for a special theory of international value, their theory of value being sufficiently “general” to embrace external as well as internal exchanges. If they recognize comparative costs, they do so because they consider that this special case put forward by their opponents confirms, in a way, their own general theory.5 The second group construct two distinct theories: one for national value and the other for international value. In the first theory it is costs that determine prices, but in the second it is prices that determine costs, prices being in their turn determined, as John Stuart Mill says, according to a law that is prior to the law of labor value, namely, that of supply and demand. In a certain sense international value then constitutes an exception, along with all the other exceptions that occur within the national framework itself, precisely where mobility of the factors is unable to operate—works of art, collectors’ pieces, etc.6

According to James Angell, it was Wheatley who first, in 1803, drew attention to the internal mobility and international immobility of the factors, particularly labor, but it needs a certain amount of imagination to discover such a view in a mere phrase of Wheatley’s stating that wages tend to equalize except where there are obstacles to movement by the labor force.

Adam Smith not only did not think of this, but in the opinion of some writers believed rather in the international mobility of capital. Thus, J. Shield Nicholson in his A Project of Empire refers to this alleged position of Smith’s as one of his “lost ideas”: “In what is called the pure theory of foreign trade it is assumed that between different ‘economic nations’ there is no mobility of capital.… Adam Smith, on the other hand, held the view confirmed by experience … that foreign trade can only be carried on by sending a certain amount of capital out of the country.”7 John H. Williams takes up this same idea in his article, quoted above, “The Theory of International Trade Reconsidered.”

It is not at all clear that Adam Smith’s idea, to which these writers refer, actually relates to the export of capital rather than to its transfer into the export trade. Now, mobility of capital as between branches of production installed in different countries is not at all the same thing as that mobility of capital which ensures the financing of external trade itself. Whatever the truth of this matter may be, what is certain is that Smith nowhere formulated the slightest hint of any differentiation of international value due to immobility of the factors outside the boundaries of the nation.

2. Comparative Costs

Ricardo was undoubtedly the first to put forward in a systematic way the need for a special theory of international value, based on immobility of the factors, and it was he who formulated the well-known theory of comparative costs. I have already discussed this law in my Introduction. As I mentioned, Ricardo was above all interested in the international division of labor and in the advantage that the world as a whole can secure from free trade. As regards the formation of exchange value in external trade, he seems to have thought that, since it depends on an element so imponderable as demand, this is of no interest to pure theory. After indicating the upper and lower limits, determined by cost ratios, he leaves this zone of indeterminacy to the exploits of his epigones, who proceeded for a century thereafter to describe their learned curves across it. Ricardo stops where determination by the objective conditions of production comes to an end, and the limits of this determination are enough for him to show that, whatever the effective price may be, the international division of labor will prove advantageous both to the exchanging parties as a whole and to each one separately. The proportion in which the exchanging parties will share this advantage does not concern him. For Ricardo this distribution is as undetermined as price itself, both of them being dependent on a subjective factor, and so on something that is beyond the reach of scientific investigation.

As regards mobility of the factors, Ricardo is interested only in its effect, namely, the equalization of their rewards. This is why he speaks only of the equalization of profits, the only equalization that can be affected by immobility of the factors, particularly that of capital, since the equalization of wages is always ensured from below, through the working of the demographic regulator, whether or not there is mobility of the labor force. The nonequalization of profits is for Ricardo a necessary and sufficient condition for the working of the law of comparative costs, and this is an important point that does not appear to have been remarked upon until now. Nowhere in his Chapter 7 devoted to international trade does Ricardo speak of wages. The only thing that interests him is immobility of capital, the impossibility of having a universal rate of profit on the world scale.

The assumption of immobility of capital was adopted later on by all who concerned themselves with comparative costs: John Stuart Mill, Cairnes, Bastable, Edgeworth, Marshall. As the nineteenth century advanced, however, experience increasingly contradicted this abstraction. If one’s gauge of the mobility of the factors was the actual level of wages and rates of profit in the different countries at each moment, it was still possible in Ricardo’s time to talk of a general immobility of the factors on the international plane. On the one hand the differences in wage levels were much less than they are today, while on the other the differences in rates of profit were much greater. About the middle of the century, John Stuart Mill had to acknowledge that the theory was showing signs of losing its validity. And from that time onward, down to the end of the century, export of capital progressed by leaps and bounds.

Faced with this historical difficulty, Cairnes took the bull by the horns. The assumption of complete mobility of capital and of labor within the nation and of their complete immobility outside it is false in both its parts, he acknowledged. Labor is not entirely mobile inside the nation, and capital is becoming more and more mobile outside it. It is becoming “less national and more cosmopolitan.” Nevertheless, he concluded, theory can be satisfied with relative immobility if the latter is sufficient to restrict the competition of the factors.8

This is the argument that was to be typically used thenceforth by all the supporters of comparative costs, in order to face up to the contradiction between reality and the classical assumptions. Bastable quotes Cairnes approvingly:

It is by no means necessary to the truth of the doctrine, as it has been laid down, for example, by Ricardo and Mill, that there should be an absolute impossibility of moving labour and capital from country to country. What the doctrine requires is not this, but such a degree of difficulty in effecting their transference as shall interfere substantially and generally—that is to say, over the whole range of the commodities exchanged—with the action of industrial competition.9

Marshall likewise makes the assumption of relative immobility of the factors as between different countries, and this enables him to adopt and carry further the theory of comparative costs, without having to deny so obvious a phenomenon as the export of capital.

Jean Weiller declares his support for the same view. Referring to the migratory movements during the nineteenth century, both of labor and of capital, he writes: “Thus, it was no longer possible to speak of absolute immobility of the factors of production. The essential feature of the theory has survived, however: these migrations do not prevent a very big gap in conditions of production and standards of living between one country and another. And it is the existence of this gap that matters.”10

3. How Marxists Treat the Assumption of Absence of International Competition between Capitals

Marxist economists have in general taken up an attitude of benevolent neutrality toward Ricardo’s theory of comparative costs. Marx, we know, did not have time to work out the theory of international trade that he planned to include at the end of his book, but a sort of vague tacit approval that transpires from certain (very few) passages relating to this question seems to have sufficed for some economists in the socialist countries to have indicated recently their respect for Ricardo’s theory. Hence the paradox that the school of economists who have given so much attention to the phenomenon of the migration of capital in search of higher profits, and who have shown so much interest in the phenomenon of economic imperialism, accept that international value is formed as though the capital factor were completely immobile and no tendency to equalization of the rate of profit could exist on the world plane.

Thus, Joseph Mervart could write: “The main difference between the domestic and the international exchange is in the greater difficulty of capital movements from one country to another compared with its movements between different branches of industry in one country. This makes the leveling out of extra profits much more difficult.”11

In general, Marxist works on external trade, from the theoretical standpoint at least, are scarce and slight. Paul Sweezy comes out unreservedly for the immobility of the factors, but does this in such a way as completely to miss the point: “When we speak of the tendency of rates of surplus value to an equality under capitalist production, we imply free mobility of labor which … is lacking in international economic relations.”

In the first place nobody has ever talked about equalization of rates of surplus value on the world scale, but of equalization of rates of profit. And further, mobility of labor is, on the one hand, not the relevant condition and, on the other, superfluous to the argument. As I have already shown, for the law of the formation of prices of production to be replaced by that of comparative costs, it is necessary and sufficient for capital alone to be immobile.

When Sweezy challenges Otto Bauer on a point that I shall discuss in Chapter 4, he writes: “The situation changes, of course” (that is, Bauer’s thesis becomes well-founded), “as soon as we drop the assumption excluding capital exports.”12

And what is it that prevents us then from dropping the assumption excluding capital exports? Sweezy does not tell us. Apparently he does not feel obliged to justify his choice of an assumption that is consecrated by a century of teaching in the most respectable schools and that was accepted incidentally by Marx, writing in the nineteenth century, in a little phrase not relating to foreign trade and without any special significance being intended by it, where he speaks of possible difficulties to be encountered in the transfer of capital, which would cause “the various spheres of production” to be “related to one another, within certain limits, as foreign countries.…”13

4. Equalization of Profits as an Empirical and Statistical Category

As soon as the matter under discussion ceases to be international value and international trade, economists usually see clearly, and all empirical and quantitative analyses (without exception, so far as I am aware) agree in bringing out a tendency to international equalization of profits, or at any rate to such slight differences that it is not possible to talk of non-competition of the capital factor.

R. P. Dutt compares the respective rates of profit in Britain and in the British colonies.14 He finds, for the year 1951, differences in gross profit ranging from 34 to 47 percent.15 If, says John Strachey, he had taken 1950 instead of 1951, he would have found, instead, the figures 25 and 29 percent.16

Andrew Shonfield, using a more general mode of calculation, finds for 1955 an average net profit on all overseas investments by British companies of a little under ten percent, while in the same year internal investments brought in about eight percent.

S. H. Frankel, who has studied in detail investments of foreign capital in backward countries, and especially in Africa, also seems to give credence to “allegations” according to which, taken as a whole, overseas investment does not give a bigger return than could be obtained by the same capitals inside the home country.17 According to R. A. Lehnfeldt’s figures, the average return in 1898–1910 on colonial securities was only 0·2 percent higher, and the return on foreign securities other than colonial ones hardly 1 percent higher, than that on national securities of the same type.18 This observation made in 1914 corroborated one made at the same time by C. K. Hobson, who found that the obstacles to foreign investment had diminished to such an extent that the return, at current prices, on the best class of foreign securities held by British investors was only a little higher than that on the best national investments.

If we consider that, given absence of competition of the capital factor, the biggest differences in rates of profit ought nowadays to be found between the great industrialized countries and the developing countries, with the rates in the latter group of countries normally a good deal higher than those in the former group, we have in the recent and current phenomenon of the migration of capital “in the wrong direction,” that is, from the backward countries to the advanced ones, an additional argument against the assumption that equalization of profits does not occur. As a Cuban study (a collective and anonymous work) observes:

the best proof that the rate of profit in the underdeveloped countries is not particularly high is provided by the investment in the developed countries of a large part of the capital held by the national bourgeoisies of the backward countries. It must be supposed, under these conditions, that the rates of dividend of the big foreign corporations are not much lower than those of the national companies. We can then agree that imperfect mobility of capital internationally is not incompatible with rates of profit which are more or less equal in the developed countries and the backward ones.

This last point is worth attention. As I said earlier, what matters is not whether mobility is perfect or imperfect in itself, but whether it is sufficient to bring about equalization of profits. If we observe ex post that there is actually a tendency for rates of profit to equalize, then discussion about the degree of mobility becomes pointless.

This mobility of capital “in the wrong direction” has been noted by several economists. Thus, Arthur Lewis expresses surprise that very often, even if there is a surplus of labor power within a country, available at subsistence-level wages, opportunities for investment abroad may be found more profitable. “Many capitalists residing in surplus labour countries invest their capital in England or the United States.”19

The United Nations study of Instability in the Export Markets of the Underdeveloped Countries in 1952–1953 notes that, in a large number of insufficiently developed countries, the net contributions of capital between 1946 and 1950 were negative. The rapporteur attributes this to payments assignable to the service of the public debt. However, the statistical series published in this study show that, for several of these countries, payments of interest on the national debt came, for the period under consideration, to less than the net outflow of capital, which proves that there was actual export of capital from the underdeveloped countries for the purpose of investment in the developed ones:

Long-term capital (in millions)	1946	1947	1948	1949	1950
Argentine—pesos	–1,102	–511	–2,052	+31
Egypt—£E	–8	–25	–13	–4	–4
India—rupees	–338	–2,294	–2,361	–123	–49
Service of the debt:
Argentine	–451	–276	–35	–37
Egypt	–9	–5	–3	–9	–11
India	+13	+54	–178	–179	–228

Furthermore, according to a report drawn up by the International Monetary Fund in March 1964 for the World Trade Conference, the developing countries, especially those in Latin America and in the franc area, were suffering from a persistent drain of private capital. These departures of capital were estimated in the two regions mentioned for the period between 1952 and 1961 at nearly $800 million.

While in the case of the franc area political insecurity played a certain part in a phenomenon that sometimes resembled a flight of capital, as regards Latin America it cannot be denied that what was happening was the making of a choice between opportunities for and returns from investment at home and abroad. And for this region alone, between 1952 and 1961, the amount of private capital publicly registered as having been sent abroad was $576 million. By adding the capital transferred clandestinely, the International Monetary Fund estimates that the actual export of capital in this period came to nearly $3 billion.

As long as this “perverse” movement had not yet been recorded, it was possible to delude oneself about the classical assumption of nonequalization by supposing that despite the presence of a very much higher rate of profit in the backward countries, the capital of the well-off countries was not mobile enough to restore the balance. Now, however, when it has been proved that capital is even fluid enough to migrate in certain circumstances in the opposite direction, namely, from poor countries to rich ones, and to do this in relatively substantial amounts, the thesis about the absence of competition becomes untenable.

5. Absence of Competition of the Labor Factor on the International Plane

Unlike what has happened with the rate of profit, there is not the slightest hint of a tendency toward equalization of the rate of wages internationally. In spite of the long periods—broadly extending from 1850 to 1914—during which workers were free to move about the world, wages today differ, as between rich and poor countries, considerably more than they did during the nineteenth century.

In 1874 Cairnes, quoting the inquiry made by Wells, and seeking to show that there is no equalization of wages, whereas there is at least a relative equalization of profits, and thus engaging in an argument that necessarily inclined him toward accentuating rather than attenuating the differences between national wage levels, emphasized that wages in the United States were 25 to 50 percent higher than in Britain, 48 to 70 percent higher than in Belgium, and about 100 percent higher than in France. Were the comparison to be made with certain Eastern countries, such as India and China, he added, the difference would probably be fourfold or fivefold.

There is no need to go as far as the Far East today to find divergences of the last-mentioned order. Already, as between the United States and certain European countries, such as Spain, Portugal, or Greece, wage ratios of one to four or one to five would no longer surprise anyone, and in the years 1950–1955 the average industrial wages per hour in the United States and in the five most highly industrialized countries in Europe, according to an ILO study were as follows:20

	$
United States	1·70
Great Britain	0·454
Belgium	0·378
France	0·335
German Federal Republic	0·331
Italy	0·265

If we take a date between Cairnes’s time and the period covered by the ILO figures, say 1900, a statistical series published by Fritz Sternberg in Le conflit du siècle, embracing a wide range of industrial branches, shows that wages in the United States were between two and three times those in Germany, which is about half way between the figure noted by Cairnes in 1874 and the ILO figures of 1955.

This shows that not only is there no equalization, but that the tendency is toward ever greater differentiation.

Despite a rise of 50 to 100 percent in European wages during the second half of the nineteenth century, the gap between the United States and Europe has increased instead of contracting, and, through this rise and those that have occurred during the twentieth century, European and American wages, while drawing further apart from each other, have at the same time become unprecedentedly higher than those in the underdeveloped countries. Were one to go today so far as Cairnes went, and compare wages in the United States with those in certain countries in Asia, in Africa, in the Middle East, or in Latin America, divergences of 20-fold to 40-fold would be found. Throughout Black Africa the wage of an unskilled urban worker varies between three and six cents an hour (that of a rural worker coming to nearly half as much as this), whereas in the United States the corresponding figure is between one and one-half and two dollars. This is, of course, an extreme case, but we should not be far from the truth if we estimated the average wage in the most highly developed capitalist countries at a figure about 20 times the average wage in the developing countries taken as a whole.

In all the countries of Black Africa, for example, when gross estimates are being drawn up for preliminary plans, the share of labor in the cost of construction work is put at 25 percent—12·5 percent for native labor and 12·5 percent for European labor. The average participation of European labor on the building sites amounts to one white foreman to 50 or 60 black workmen. In the factories and mines we find approximately the same proportion, while on the plantations it becomes still more unbalanced. It can be reckoned, broadly speaking, that one European foreman costs about as much as 100 African workers.

Even if we allow for the difference between the “African” wage of the white foreman and his usual wage in Europe, the fact remains that his reward is several dozen times as much as that received by the black worker. The differences we then observe among the various underdeveloped areas themselves, for instance, among Black Africa, North Africa, the Middle East, or Latin America, are so slight in comparison with the gulf that separates the average for all these areas together from all the industrialized countries together that it has no appreciable effect on the orders of magnitude concerned.

On the other hand, this difference is considerably increased if we add to the take-home wage the social benefits that are so important for the worker in the industrialized countries but are practically nonexistent for the worker in the backward countries. It would be greater still, moreover, if we were to take account not only of the deferred payments and direct social benefits financed by special funds but also of the indirect benefits that are financed out of the state budget, and this not only under the heading of social services but under others as well, that is, the whole of what some call “the social dividend.”

It is possible to estimate the intensity of labor—output of labor given the same equipment—of the average worker in the underdeveloped areas at 50 to 60 percent of that of the average worker in the industrialized areas. (There are no overall statistics on this subject, but all the calculations made by large-scale enterprises and by United Nations experts converge toward this estimate.)

Consequently, if we examine not what the worker earns but what an hour of his labor costs society, we can be sure that we are on this side of reality if we conclude that, allowing for direct and indirect social benefits, the average wage in the developed countries is about 30 times the average in the backward countries, or, allowing for the difference in intensity of labor, about 15 times that figure.

Such differences were unknown at the beginning of the nineteenth century and down to the third quarter of that century. What predominated in those days, all over the world, was the subsistence wage. If there were differences, these reflected the difference in subsistence level in different countries, depending on the level of civilization. Today there are two distinct categories of wages—subsistence wages and the rest. Broadly speaking, we can date the beginning of this differentiation from the beginning of large-scale trade-union struggle in the industrialized countries, that is, roughly, from the 1860’s.

Adam Smith, to be sure, said that English wages in his day were already higher than the physiological minimum. In support of his statement he put forward four considerations: (1) wages in summer were higher than wages in winter, despite the need for heating in the latter season; (2) fluctuations in wages were not strictly parallel to fluctuations in the prices of foodstuffs; (3) wages varied from place to place more than prices did; and (4) variations in wages not only did not correspond in time and space to variations in the prices of foodstuffs, but were often inverse to these.21 But this was clearly an exceptional case and also involved very slight differences. If the socio-historical element was already beginning, in Adam Smith’s time, to fill out the minimum vital of the English worker, it was still far from outweighing the physiological element, and this was even truer in Continental Europe than in England.22

On this point we have substantial evidence going as far back as the middle of the nineteenth century. The specific weight of bread in a working-class family budget is alone sufficient to show that the physiological minimum was what virtually determined wage levels. In 1832 the Baron de Morogues estimated, for a family of five, that out of a total expenditure on food of 570·15 francs per year, and total expenditure for all purposes of 860 francs, the amount needed for bread was 296·40 francs. That, however, applied to what the author called “the comfortably off workman.” For “the workman in straitened circumstances” the calculation was different. In the towns this workman, even if he added to his own wages those of his wife and children, could not dispose of more than 760 francs a year altogether, whereas the same amount as mentioned above, 296·40 francs, had to be devoted to buying bread. And in the countryside the unskilled workman, even if his entire family worked, could not command a total income exceeding 620 francs, which they consumed thus:

Homemade bread at 19 onces per person, i.e., for five persons for 365 days, 1,084 kilogrammes, estimated at 28 centimes per kg. only “because this bread contains other flour besides pure wheaten flour”	303.52 francs
Dairy produce, vegetables, meat, seasoning, including salt at 25 centimes per day for five persons	91·25
Fermented drinks, at 10 centimes per day	36·50
Total for food	431·27
Housing, fuel, light, direct taxes	70·00
Clothing	100·00
Utensils, tobacco, etc.	18·73
Total annual expenditure	620·00 francs

From the very detailed estimates made by the writers who around 1830-1840 studied the standard of living of the workers in France, such as Buret, Villermé, and Cherbuliez, it emerges that food accounted for 65 to 70 percent of the budget of a working-class family, and bread for 55 to 70 percent of all food and 30 to 50 percent of all expenditure.23

When expenditure on bread absorbs half the income of a working-class family, and when, after paying for his food—of which bread already makes up 70 percent—his housing, and his clothes, the worker has no more than 3 percent of his income available for other expenditure, only part of which can be regarded as unnecessary, since these last 1873 francs per year (according to the calculation above) have to cover domestic utensils, it is hard to speak of a wage that is anything but a subsistence wage.

From the beginnings of political economy until late in the nineteenth century, and for some European countries, such as Greece, right down to the eve of World War II, in all writings about wages and in the workers’ own demands, wages were always linked with the price of bread or of wheat. Most authors, when they wanted to convey a clear idea of what real wages were in different countries at different times, converted the nominal wage into kilos of wheat or bread.

L. R. Villermé tells us, for example, that “the daily wage of the laborer would be equivalent to the value of five or six kilos of wheat.” Thomas Brassey, in order to prove that real wages improved during the century between 1770 and 1878, shows first of all that the nominal wage almost doubled, rising from 7s. 3d. to 14s. a week. Then he gives the prices of bread, meat, butter, and the figure for rent between these two dates. The three last figures have trebled, thus clearly exceeding the increase in wages, rising respectively from 31/4d. to 9d. from 6d. to 1s. 8d., and from 8d. to 2s. Only bread has remained unchanged at 11/2d. a pound. This last circumstance enables Brassey to conclude: “Wages having risen, while the price of bread has remained stationary, the condition of the labourer has materially improved.”24 This shows that for the writer of these words items such as meat, butter, and rent were negligible quantities when compared with bread.

We know with what emphasis British writers refer to the increase in the price of corn after the Napoleonic wars and the serious decline in the British workers’ standard of living that then occurred, despite the considerable increase in the nominal wage.25

That wages did not practically diverge from the physiological minimum before the middle of the nineteenth century is also shown by the fact, which several researchers have revealed, that the worker’s real income has been remarkably stable all through the centuries. Jevons showed that real wages in classical Greece (328 B.C.) were not very different from those of unskilled workers in the nineteenth century. And Colin Clark, who quotes this evidence, himself finds that the average income of the working class in Justinian’s time was even higher than that in the Greece of the 1940’s or in many other countries of southeastern Europe, and equal to that in Great Britain in the 1850’s or in Germany and France in the 1870’s.26

So far as I know, it was Davenant who first set forth the law by which wages tend to coincide with the cost of subsistence.27 But it was Torrens who provided the most rigorous formulation of this law: “The reward of labour has a constant tendency to settle down to that quantity of subsistence which, from climate and custom, is necessary to enable the labourer to bring up such a family as will keep the supply of labour even with the demand.”28

Storch, with his usual pedantry, reduced the classical law to an equation: “The necessary wage amounts to the most indispensable maintenance … at least double the worker’s personal subsistence … the wife’s work sufficing only for her own expenditure … and the subsistence of four children (so that two survive) being approximately equal to that of one grown man.”29

Quesnay, noting that the daily wage was naturally regulated by the price of wheat, estimated it as equivalent to one-twentieth of a sétier, and Malthus, writing later, gave much the same estimate when he pointed out that for nearly 500 years the reward for a day’s work in England had varied closely around the price of a peck of wheat.30

Finally, E. Daire, when in 1847 he published Vauban’s La Dime royale, wrote in a note to page 87: “180 work-days at 12 sous the day bring the annual reward of a weaver to 108 livres, which represents 162 francs of our money. But if we measure these 108 livres by the amount of wheat they could purchase at that time, we find they are equivalent in today’s money to 194 francs 64 centimes.”31

It was only during the second half of the nineteenth century that in the industrialized countries the socio-historical factor really began to operate and the change to occur. Through force of habit people went on talking casually in terms of the price of bread, but wages had already taken off from the swamp of subsistence.32 At the same time thresholds of discontinuity arose between countries and groups of countries. Even among the industrialized countries differences in wage levels became more marked toward the end of the nineteenth century and the beginning of the twentieth.

What is remarkable is that this differentiation coincides with a period in which there was, in general, free movement of human beings about the world, and, in particular, when the great emigration to the United States took place. This shows that, in contrast to what happens with capital, more than merely marginal mobility of workers is needed if there is to be equalization of wages.

II. THE MODIFICATION OF PRICE OF PRODUCTION IN INTERNATIONAL EXCHANGES: UNEQUAL EXCHANGE

I. A Primary Form of Nonequivalence: Equal Rates of Surplus Value with Unequal Organic Compositions

The foregoing tends to show how realistic is the assumption that I intend eventually to adopt for the international framework, that is, noncompetition of the labor factor making possible different rates of surplus value, along with competition between capitals leading to a tendency to equalization of rates of profit.

Let us for a moment, however, leave this assumption aside and return to the national setting. By dividing the sum of the value-added produced within a system by the sum of the units of new (or living) labor devoted to production—this labor having first been reduced to simple, homogeneous, and average labor—we obtain the product per unit of simple labor. We then call “surplus value” what remains of this product after wages have been paid. The rate of surplus value is then the ratio between the amount of surplus value and the amount of wages, and the rate of profit is the ratio between the amount of surplus value and the total amount of capital invested.

By these definitions the total of surplus value is equal, taking society as a whole, to the total of profit—what the classical writers called the net income of society: but if we assume that equalization of profit takes place, the surplus value produced in each production unit is not equal to the profit that this unit makes. The reason is that, in order to bring about this equalization, transfers of surplus value are made from one group of enterprises to another, namely from those with an organic composition lower than average to those with an organic composition higher than average.

If we take again Marx’s numerical example:

System A

Branches	c Constant capital	v Variable capital	m Surplus value	V Value c+v+m	T Rate of profit	P Profit T(c+v)	L Price of production c+v+p
I	80	20	20	120		20	120
II	90	10	10	110	20%	20	120
III	70	30	30	130		20	120
	240	60	60	360		60	360

we note that a transfer of surplus value takes place from branch III to branch II, since the former, with surplus value produced to the amount of 30, realizes only a profit of 20, whereas the latter, with surplus value amounting only to 10, realizes the same profit of 20.

Let us suppose, however, that our system comes into contact with another one, also made up of three branches, and with the same rate of surplus value (same general rate of wages), but with different organic compositions (see Table over).

Within this second system the same transfers of surplus value take place as in the first, that is, 10 units from Branch III to Branch II. If, however, each system could maintain its specific rate of profit—20 percent for system A and  percent for system B—and if all the three articles produced participated in exchange in the proportions supposed, then despite the transformation of values into prices of production in both systems, prices would contain on the average and as a whole the same amount of value-added—40, on the average, and 120 for production as a whole—which implies that if exchange could be effected on that basis, one hour of living labor in one system would be exchanged, on the average, for one hour of living labor in the other.

System B

Branches	c Constant capital	v Variable capital	m Surplus value	V Value c+v+m	T Rate of profit	p Profit T(c+v)	L Price of production c+v+p
I	40	20	20	80		20	80
II	50	10	10	70		20	80
III	30	30	30	90		20	80
	120	60	60	240		60	240

The three articles of system B, taken together, are exchanged, to be sure, at the rate of 360 for 240, against the three articles of system A, taken together, but when this happens, B exchanges 120 units of its national living labor for 120 units of A’s labor, the difference between 360 and 240 arising from the fact that the three articles of system A, taken together, contain 240 units of past labor, in the form of raw materials, wear and tear of equipment, etc., as compared with 120 in system B.

Let us now suppose that free circulation of capital is introduced between these two systems, and, as a result, equalization of profits takes place. (See Table opposite for equalization in the two systems taken together.)

In this case the commodities produced in system B are no longer exchanged for those produced in A at the rate of 120 for 80, but at 125 for 75. Since in the average B article there are 40 hours of past labor, considered as being already valorized within the framework of these two systems, and therefore incapable of either increasing or decreasing, and 40 hours of living labor, it is the latter that will suffer the effect of the deterioration in the terms of exchange.33 Whereas before equalization one hour of B’s living labor was exchanged on the average for one hour of A’s living labor, it is now exchanged on the average for 21/27 hours of this labor.

A and B Together

Branches	c Constant capital	v Variable capital	m Surplus value	V Value c+v+m	T Rate of profit	p Profit T(c+v)	L Price of production c+v+p
IA	80	20	20	120		25	125
IIA	90	10	10	110		25	125
IIIA	70	30	30	130		25	125
IB	40	20	20	80	25%	15	75
IIB	50	10	10	70		15	75
IIIB	30	30	30	90		15	75
	360	120	120	600		120	600

We should have arrived at the same result if, instead of putting in the profits-equalization pool the three branches I have imagined for each of the two countries taken separately, I had used their totals in the diagram:

Country	c Constant capital	V Variable capital	m Surplus value	V Value c+v+m	T Rate of profit	p Profit T(c+v)	L Price of production c+v+p
A	240	60	60	360	25%	75	375
B	120	60	60	240		45	225
	360	120	120	600		120	600

The two countries, instead of exchanging their imagined composite articles at the rate of 360B = 240A, in accordance with their values, exchange them at the rate of 375B = 225A. As we have assumed that the nominal values of the past labors of A and B, respectively 240 and 120, already express prices of production and consequently exchange at par, the difference can affect only the added values, which, instead of exchanging at 120B = 120A, exchange at 1356= 105A, which gives the same result as before, that is, one hour of B’s living labor is equivalent to 21/27 of A’s.

The worsening in the terms of exchange will become clearer if we abandon Marx’s simplifying assumption of a turnover rate of constant capital equal to unity. Actually, it is assumed in the diagrams given above that the whole of the constant capital is consumed during a single cycle of production, which is not only unrealistic but also fails to achieve its purpose as a simplification; instead, this assumption makes the diagrams less readable and even liable to ambiguity, since it prevents us from distinguishing between intermediate consumption, which is a neutral factor, and the total amount of capital invested in production, which is an active factor.

Another disadvantage of Marx’s simplification is that it gives rise to the false presumption that organic composition varies more or less directly with variations in intermediate consumption, whereas nothing is further from the truth.

Apart from depreciation, which increases with the capital intensity (organic composition) of a branch, while forming part of the cost of production, the variations in the other elements not only do not proceed parallel with the organic composition but, generally speaking, proceed inversely to it. The branches with a high organic composition usually have a relatively low raw-material coefficient, and vice versa. This is true, in general, both for heavy and for light industry. To take extreme cases, a mine has an intermediate consumption (constant capital consumed) that is practically nil, but a very high organic composition (total capital invested), whereas an enterprise where food products are processed has a very high raw-material coefficient and a very low organic composition.34

The distinction made between constant capital invested and constant capital consumed during the production cycle offers the further advantage, from the methodological standpoint, of enabling us to neutralize the effect of the latter, by assuming it to be equal in all the branches, so as the better to bring out the effects of the former upon prices (see Table, p. 57).

In this example we see clearly that country B obtains for 170 hours of national labor (living and past) only the equivalent of 155 hours of international labor, while country A obtains 185 for the same amount of national labor. Though the two products have cost the same amount of past labor and new labor, namely, 170 units each, they do not exchange at par, but in the proportion 155A = 185B.

See text page opposite

Country	C Constant capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit T(c+v)	L Price of production R+p
A	240	50	60	60	170	110	25%	75	185
B	120	50	60	60	170	110		45	155
	360	100	120	120	340	220		120	340

Another simplification is also found, which may be closer to economic reality, especially the reality of modern capitalism. This consists in identifying the constant capital invested with the total amount of capital. Actually, Marx’s diagram is based not only on the assumption of a turnover rate of constant capital equal to unity, which is unrealistic, this rate being very much lower,35 but also on the assumption of a turnover rate of variable capital (wages) also equal to unity, which is unrealistic in the other direction, since this rate is in general much higher.

A modern industry does not in fact have to consider as capital necessary for its operation anything more than the value of its installations plus the value of a certain stock of raw materials, the turnover rate of the amount needed to pay wages being so fast that the capital tied up for this purpose becomes a negligible quantity in relation to the rest. This part of the industry’s capital is covered, moreover, by simple cash facilities accorded by the banks.

However, there are some exceptions to this rule. In shipyards, aircraft construction, the production of large-scale equipment, and even civil engineering work, to mention only a few examples, the turnover rate of variable capital is very slow, almost the same as that of intermediate products. Besides, the banks’ financing of variable capital in the industries where the turnover rate of the latter is rapid is not undertaken free of charge. It entails an interest payment at a rate that, even if lower than the rate of profit, is nevertheless not insignificant.

For all these reasons, while it is wrong to simply add constant and variable capital together, since there is no reason to suppose that their turnover rate is equal, it would be just as wrong to overlook variable capital and regard constant capital as constituting the whole of the capital invested.

This is why in the numerical examples that follow I have decided to include an additional column on the left, the figure in which is to represent the whole of the capital invested (K), that is, the sum of constant capital, both fixed and circulating, and variable capital, weighted by their respective turnover rates, whatever these may be in each particular case.

If I then insert a hypothetical K in my numerical example, we shall have the result shown opposite.

Just as in the previous example, the distinction between past labor and new labor, constant capital consumed and variable capital, here ceases to be significant, and the supplementary assumption of preliminary transformation of the values of the inputs into prices of production, which I made previously (note 33) and which I may have seemed to be making so as to suit the purposes of my argument, is no longer needed. If we take all the entries together—past labor and new labor consumed in production—country A obtains, for 170 units of its national labor, 190 units of international labor, while country B obtains 150 of these units for the same amount of its national labor. Or, what comes to the same thing, the products of A and B that embody the same amount of labor, past and new, do not exchange at par but in the proportion 190B = 150A.

See text page opposite

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	60	60	170	110		80	190
B	120	50	60	60	170	110		40	150
	360	100	120	120	340	220		120	340

In this form the above diagram could be interpreted as, and does in fact correspond to, what some Marxists consider a primary type, or the true type, of nonequivalent exchange. This nonequivalence would then be expressed thus: 170/170 > 150/190. In Chapter 4 I shall discuss this opinion and give the reasons why I do not regard this type of exchange as unequal. It is true, nevertheless, that already in this type of exchange a transfer of surplus value (of 20 units) takes place from country B to country A.

2. Nonequivalence in the Strict Sense. Unequal Rates of Surplus Value

The diagram in the previous section is subject to the assumptions of mobility of capital and an equal rate of wages as between countries A and B, the latter resulting either from mobility of labor or from a bioeconomic law, common to the two countries, which, even without such mobility, causes wages to equalize themselves at the physiological level.

If the first assumption—competition of capitals and equalization of profits—can be retained as realistic enough under the conditions of the modern world, the second, that of equality of wages, whether it be the effect of one or the other of the causes set out above, is absolutely unrealistic and frivolous. In the world of today the notion of the subsistence minimum is sufficiently elastic for no tendency to automatic equalization downward to be possible, and national frontiers are sufficiently tight for equalization through international competition among the workers to be quite out of the question. I do not think, either, that a theoretical proof of the disparity of wages in different parts of the world is called for, since this is an indisputable fact confirmed by observation and experience.

If we assume that wages in A are ten times as high as in B but that, allowing for an intensity of labor in A double that in B, the cost of labor power in A is five times what it is in B, which gives a very moderate parameter, my diagram will be changed as shown on page 62.36

Instead of A = B, according to values, or 150A = 190B, according to the previous diagram, we now have 110A = 230B. The inequality of exchange in passing from one of these conditions to the other is expressed thus:

Just as in the two previous examples, the distinction between past labor and living labor is pointless here, since both enter into the production of A and B in equal amounts (170).

Here, however, it is possible to go further. The capitals invested can themselves be equalized, yet the transfer of value from one country to another will take place nonetheless (see page 63).

Here, each of the products embodying 170 hours of labor is exchanged at the rate of 210B = 130A, though nothing is different in the two producing countries except wages. It thus becomes clear that inequality of wages as such, all other things being equal, is alone the cause of the inequality of exchange. Consequently, my decision to ignore Bortkiewicz’s objection, regarding the previous transformation of the values of the inputs (of past labor) into prices of production, was justified so far as my argument was concerned. Whatever the effect of this transformation, it will change nothing in the ratio between the two products, since all the inputs of past labor, in respect both of equipment and of intermediate consumption, are equal in both countries.

However, in order to define exactly the influence of wages in relation to that of organic compositions, we must go back to the previous inequality formula:

We can then say that it is the second part of this formula, i.e.,

that corresponds to my definition of unequal exchange.

Regardless of any alteration in prices resulting from imperfect competition on the commodity market, unequal exchange is the proportion between equilibrium prices that is established through the equalization of profits between regions in which the rate of surplus value is “institutionally” different—the term “institutionally” meaning that these rates are, for whatever reason, safeguarded from competitive equalization on the factors market and are independent of relative prices.

See text page 61

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production c+v+p
A	240	50	100	20	170	150		80	230
B	120	50	20	100	170	70		40	110
	360	100	120	120	340	220		120	340

See text page 61

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production c+v+p
A	240	50	100	20	170	150	25%	60	210
B	240	50	20	100	170	70		60	130
	480	100	120	120	340	220		120	340

I shall give the reasons for this limitation in Chapter 4. Before proceeding further in this analysis, however, I must explain my view on the direction in which determination is effected.

3. Wages, the Independent Variable of the System

I am aware that my definition is a question-begging one. It treats wages as the independent variable of the system, whereas the correspondences shown by my diagram do not prove that it is necessarily wages that determine relative prices, and not the other way round.

The equalization of profits assumed in the diagram can have two possible consequences: either the difference in prices, being unable to react upon profits, reacts upon wages, or else the difference in wages, being unable to react upon profits, reacts upon prices. Nothing in the diagram gives us reason to rule out either of these possibilities. It will therefore be outside the diagram and its theoretical analysis that we must look for the grounds on which we base our choice of the second determination rather than the first. These grounds can only be intuitive and empirical.

Most of the reasons I have invoked in Chapter 1 in favor of making the same choice within the national setting remain valid for international exchanges. But there is a difference between the two cases. Having recognized that in the national setting equalization of wages takes place, I have ipso facto ruled out any variation in relative wages. All that then remained of the case for wages being admitted to be a variable dependent on prices was a variation in their general and absolute level. It then became apparent that it was absurd to suppose that a relative increase in the price of a commodity such as artichokes might bring about an increase in the general level of wages, and even more so—if it so happened that the artichokes branch was one with an organic composition of capital higher than average—a decrease in this same level, and thereby a rise or fall in wages in a branch of production so remote from horticulture as, say, metallurgy. (For it had been established that a rise in certain relative prices corresponded not to a rise but to a fall in the general wage level, and to accept, after that, the determination of wages by prices seemed doubly absurd.)

The case is altered when we turn to the international setting. Since here I recognize noncompetition of the labor factor, and, consequently, elasticity of wages as between one country and another, I thereby leave open the theoretical possibility that wages may vary in a particular country in proportion to the variations in the prices of the products or product that it exports. At first glance this possibility does not seem absurd. In addition, in this case a rise or fall in prices always corresponds to a parallel rise or fall in wages, and never to the contrary phenomenon, which eliminates the other absurdity in the idea that wages are determined by prices, which is perceptible at once within the national setting.

A closer look, however, reveals that determination of wages by prices is equally ruled out in the international setting. It is not, indeed, a matter of saying that the wages of cocoa producers must follow the price of cocoa, which would be acceptable at the level of intuition, but that all wages in Ghana must follow the price of cocoa, since I admit that inside each country the equalization of wages continues to operate. And this must not happen only indirectly, that is, through the impact that an increase in the price of this product might have on the national income, the standard of life, and social development in Ghana, something that everyone will readily admit, but directly and proportionately. Quite apart from the case of a country like Ghana, where the export of cocoa has a considerable specific weight in the country’s economy, if we accept this principle we are obliged to agree that there is nothing to stop the general wage level in the United States from one day falling below that of India if, for instance, the elasticities of international demand for American automobiles and Indian cotton goods, respectively, should be reversed to the detriment of the United States, and if this situation lasts long enough to take effect!

All our experience, intuition, knowledge, statistical fact, and common sense itself fight against such a conjecture. The income of the Indian textile industry, at a moment of exceptionally favorable conjuncture and a sharp rise in prices, could perhaps be imagined adequate to provide the Indian textile workers with wages higher than American wages; but how can one imagine that it could ever make possible a rise in the general level of wages in India, not to the American level but even to one noticeably above the present Indian level?

Actually, what would happen in the event of such a sharp increase in demand and prices would be, in the short run, a sharp increase in the profits of textile firms in India. Also, perhaps (still in the short run), if certain political and social conditions were present, the textile workers would get a share of the cake. But these very effects would work to bring about their own cancellation. Capital and labor would rush into textiles, and in the long run—that is, in the period needed for new mills to be set up (assuming that the existing ones have not sufficient reserve potential) and for workers from other branches to move in and complete their training—supply would become equal to the new demand at a price that would be just enough to pay Indian wages and the international rate of profit. The only qualification to this would arise in a case of increasing costs or a case of monopoly of a natural factor. In these two cases, which usually go together, a rent would be established to the advantage of certain firms or of the owners of the noncompetitive factor, and this would absorb the excess price over and above the local wage level and the international profit rate, these two figures remaining unchanged. Experience shows that such cases of rent are very infrequent in reality and practically nonexistent on a long-term basis.

Wages are differentiated by geographical areas and independently of ups and downs in commodity prices. They are rigid and remarkably stable in time. During the last twenty years the price of coffee, copper, and sugar has fluctuated in a range of one to three and sometimes even more than that. No corresponding change or anything like it has been recorded in the wages paid in the countries producing these goods. All through these evolutions and even revolutions in prices, the worker in Guinea, Uganda, Brazil, or Katanga has gone on receiving his subsistence wage, which can be estimated, without much margin of error, at five cents an hour, whereas his American or European counterpart has in the same period been earning 20, 30, or 40 times as much, depending on the particular country and not at all on the movement of prices. During this same period the capitalist in Guinea, Uganda, Brazil, or Katanga had, of course, his ups and downs; yet, taking one year with another, he ended up with something not too far from the average international rate of profit.

4. Weaknesses and Contradictions in the Contrary Thesis

It is no accident that in this field the greatest confusion prevails among economists. This confusion is worse, it must be said, among the followers of Ricardo, the neoclassicists, and even the Marxists, than among the pure liberals. To Walras the problem presents no difficulty. From the moment when he introduces “n” categories and “n” prices of services in his equations, he is safeguarded from any contradiction. The singleness of the market prices of services affects only the service specific to each branch of production. Competition between occupations being ruled out, there is, in theory nothing to prevent Senegalese producers of groundnuts, if their product’s price goes up, from earning three dollars an hour, while Senegal as a whole goes on being a poor country in which all the other workers receive only five cents. Jevons too could say, with just as much consistency, that “wages are clearly the effect, not the cause, of the value of the produce.”37

Cairnes, Nicholson, and Taussig, however, cannot say this. Since they are obliged to cling to the classical doctrine of the homogeneity of the labor factor and its competition within national limits, together with general noncompetition of the factors on the international plane, they have to distinguish between internal exchanges where it is the quantities and rewards of the factors that determine prices, and the external exchanges where it is prices that determine the rewards of the factors. They are therefore either evasive and ambiguous, like Cairnes and Nicholson, or they follow the argument to its logical conclusion and acknowledge straight out, as Taussig does, that international prices determine wages not only in the exporting branches but also in those working for the internal market, without making any reservation regarding the relative importance of the two groups of branches. Here is a significant passage: “What causes high money wages? The answer is not hard to find. Those countries have high money wages whose labor is efficient in producing exported commodities, and whose exported commodities command a good price in the world’s markets. The general range of money incomes depends fundamentally on the conditions of international trade, and on those conditions only. The range of domestic prices then follows.…”38

The exaggeration in this statement, to put it mildly, leaps to the eye. According to this, it would be enough for a country, however poor and underdeveloped, to possess one little export commodity that commands a good price on the world market, for its general level of wages to be as high as in any other country.

Taussig does not, of course, mean real wages. He supposes that it is only money wages that will rise, while real wages remain low as a result of the general increase in all internal prices that makes it possible for the economy to pay the high money wages inaugurated by the export sector. It is just here, however, that the contradictions begin and the problem becomes inextricable. For under conditions of free trade, perfect competition, and convertibility of currency, and with transport costs left out of account, as in Taussig’s system, what is there to prevent consumers from getting their supplies from abroad instead of paying the higher prices for local products? If they do this, the prices of local products will fall and this must bring about one of two consequences: either real wages will rise, which is absurd, since there is no resource from which they can be met, apart from the tiny export sector; or—more probably—money wages throughout the economy, and therefore prices in the export sector itself, will fall, which goes against the assertion that it is external demand that determines prices and not the rewards of the factors inside the country.

Besides, the experience of a whole century shows us that money wages are high in the countries where real wages are equally high, even if there is not strict proportionality between the two, and the former run ahead of the latter. To accept Taussig’s thesis would lead us to agree that, under certain conditions of the world market, countries that are poor and that have low real wages would have a general price level and a general rate of money wages higher than those prevailing in countries that are rich and have high real wages.39 To my knowledge there has never been such a case since the world market came into being.

Ohlin challenges Taussig’s theory, but in order to do this he resorts to eclecticism: wages in the exporting branches do not precede causally the prices on the internal market—there is interdependence between wages and prices. The general conditions of supply and demand in all industries (that is, the entire price system) determine all prices and all wages. Further, the productivity of labor in the exporting branch depends on the capital intensity of this branch, and only the marginal productivity of labor can be considered. But this productivity is itself a variable in the price system, and furthermore it is not known statistically, etc., etc.

Arguing eclectically leads, nine times out of ten, to arguing in a circle. One begins by taking productivity as the determining factor. Then one remembers that in one’s system the productivity of labor—whether marginal or average—does not mean the physical output per unit of labor, but its economic yield, that is to say, something that depends on wages and prices. It cannot therefore determine the one without the other being given. And there one is, caught in a blind alley from which escape is sought through the fog of “interdependence” and statistical agnosticism.

Taussig’s thesis was not original. As far back as 1830, Senior had declared that the general level of money wages in a country was determined by the wages that labor could command in the exporting branches, and that the comparative wage levels in the exporting branches of the various countries were determined by the comparative prices of the exported products of these countries on the world market.40

This doctrine was followed up by P. J. Stirling and later developed by H. von Mangoldt. Consciously or unconsciously, it has been accepted by the majority of orthodox economists in the Western countries. As for the Marxist economists, a certain inhibition seems to hold them back from venturing into a territory that Marx did not have time to explore, namely, foreign trade. They stick to the ABC’s of Marxian and classical political economy, which rules out any influence by the general wage level upon values, forgetting that it is not a question of values but of prices of production, and that even inside the given nation Marx and the classical economists agreed that fluctuations in wages have an effect on equilibrium prices.41

What is remarkable is that when it is not a matter of terms of trade, but of the opposite, competition between countries, when the threat of internal depression impels states to sell as much as possible rather than as dear as possible, then those who are responsible for the economic policies of rich countries and even the practical economists, if not the “pure” ones, do not hesitate to talk about “social dumping” on the part of the low-wage countries and even to take protectionist measures against them. The protectionist policy of the United States is to a large extent inspired by this principle. All the tariff barriers erected before World War II in the industrialized countries of the West, and the bans imposed on Japanese goods (which, though modified, have still not entirely disappeared), were justified by this same consideration.42

When it is a question of importing coffee or bananas, which the rich countries do not themselves produce, and the low prices of which can consequently be only to the advantage of the purchasing countries, then any notion of artificially increasing prices is repudiated in the name of the sound principles of economic rationalism, and no allusion to the low wages of the producers is allowed, since, in accordance with these same sound principles, these wages are not the cause of prices but their effect. When, however, by chance the poor countries decide to export products such as Indian cotton goods or Japanese transistors, which are already included in the production of a traditional branch of industry in the rich countries, then all these principles are cheerfully forgotten, and it is discovered that it is only proper that the rich country should make up by means of artificial tariff barriers for the equally artificial difference in wages; thus brusquely and brazenly admitting that wages are not the effect of prices but their cause.

“Besides,” says Guy de Lacharrière, who until then had not questioned one tittle of the orthodox teaching about the authenticity of market prices and had placed nonequivalent exchange in the category of Marxist heresies, which, as everyone knows, are so disreputable that scholars may reject them without taking the trouble to study and refute them, “these low costs of production [of products that compete with those produced in the rich countries] are not due, or are not mainly due, to a higher degree of rationalization of production, but to the low wages paid to the workers, the employment of female and child labor, the absence or insignificance of social benefits, in short, to social dumping. It is therefore easy, when the interests of the producers in the rich countries are harmed, to appeal to the indignant reaction that these practices easily arouse. At best it is a case of the linking of a practically Western level of productivity with a wage level that is still exotic.”43

This last phrase is a godsend and I am grateful to its author for giving us it. Yes, indeed, this is the point: the conjunction of Western productivity with “exotic” wages. As I said so far back as 1962, “it is the capacity of the underdeveloped sections of mankind to wield the tools of our epoch while they are still a long way from possessing the needs of our epoch that in the last analysis gives rise to the superprofit of unequal exchange.”44

But if this conjunction causes the prices of Indian cotton goods and Japanese ships to be abnormally low, why are the prices of bananas and coffee not also abnormally low, since wages in these branches are just as exotic and productivity is undoubtedly higher than in the West?45

“Unfair competition by means of low wages,” “pauperized labor,” “social dumping,” etc., are expressions of which present-day writing on economic matters is full, while pure economics goes on imperturbably teaching that wages depend on prices, and not the other way round.46

In the days when wages varied from one country to another only as 1 to 2, or even 1 to 3 or 1 to 4, it was perhaps legitimate to suppose that fluctuations on the commodity market could be the underlying cause of these variations. When, however, wages vary at the rate of 1 to 20 or 1 to 30, and vary only in space, while possessing extreme rigidity in time (in which only a slow and linear trend is to be observed, with hardly any variation), we are indeed compelled to recognize that they probably vary in accordance with laws peculiar to themselves and that, consequently, they really are the independent variable of the system.

III. PARITY OF PROFITS WITH DISPARITY OF RATES OF PROFIT

I. General Observations

Equalization does not mean that the rate of profit is the same everywhere. Ricardo pointed out that what happens is “a strong tendency to equalize the rate of profit of all [employers of stock], or to fix them in such proportions as may in the estimation of the parties, compensate for any advantage which one may have or may appear to have over the other.”47

An external and supplementary element such as a risk premium added, for example, to profit on capital invested in developing countries does not hinder equalization. If the risk premium in Brazil is + 1/2, compared with the United States, and the general rate of profit in the latter country is 10 percent, then parity occurs when the rate of profit in Brazil reaches 15 percent. At 16 percent capital should move from the United States to Brazil, and at 14 percent from Brazil to the United States.

Sismondi noted this process of equalization at different levels, but Turgot had earlier provided the most vivid description of it: “The different uses to which capital may be put thus bring in very unequal returns; but this inequality does not prevent them from having a reciprocal influence upon each other, and a sort of balance being established between them, as between two liquids of unequal weight and communicating with each other through the base of an upturned siphon, the two branches of which they occupy; they would not be at the same level, but one would not be able to rise higher without the other one also rising, in the opposite branch of the siphon.”48

It is this kind of equalization on the basis of unequal rates of profit that emerges, for example, from the concise figures given by H. Feis to show the rates of yield on the Paris Stock Exchange between 1878 and 1911:49

Average Percentage of Yield
Year	French securities	Foreign securities
1878	4·12	5·50
1903	3·13	4·20
1911	3·40	4·62

As can be seen, the differential in favor of foreign securities remained remarkably stable over this period of one-third of a century: 100/298 in 1878, 100/292 in 1903, 100/278 in 1911.

The same parity is shown in Figure 1, which represents the evolution of returns on American investments inside and outside the United States.

Figure 1

Source: Survey of Current Business, September, 1966.

The graphs for direct investments abroad in all areas, on the one hand, and for investments inside the United States, on the other, reveal a remarkable parallelism and a negligible degree of divergence between 1955 and the beginning of 1965. The graph for direct investments in Europe diverges noticeably from the other two during the first period, but rejoins them in 1961 and follows them thereafter. The peaks and troughs of the three graphs coincide in time.

2. The Formula for Transforming Value into Price of Production is not Altered

Let us look again at our numerical example (see page 74).

Let us now suppose that B, an undeveloped country where wages are low, has, however, a rate of profit that is double that of A. This will not prevent us from calculating the international prices of production. In such a case, in order to find A’s rate of profit, we have to relate the total surplus value (120) to the sum of the capital invested in A and twice the capital invested in B (240 + [2 x 120] = 480). Thus, A’s rate of profit will be 25 percent and B’s 50 percent (see page 75).

The procedure here is similar to that which is followed when there is a difference in intensity of labor. Just as two hours of less intense labor are equivalent to one hour of more intense labor, so one unit of capital counts as two in the formula for the formation of prices of production, if this capital is invested in a country where the rate of profit is to be double the average rate.

Thus, instead of having:

we shall have:

See text page 73

With Wages Equal

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	60	60	170	110		80	190
B	120	50	60	60	170	110		40	150
	360	100	120	120	340	220		120	340
With Wages Unequal
A	240	50	100	20	I70	150		80	230
B	120	50	20	100	170	70		40	110
	360	100	120	120	340	220		120	340

See text page 73

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit*	p Profit TK	L Price of production R+p
A	240	50	100	20	170	150	25%	60	210
B	120	50	20	100	170	70	50%	60	130
	360	100	120	120	340	220		120	340

Consequently, any differences in rates of profit there may be between countries where capital is plentiful and underdeveloped countries does not in the least prevent a world price of production from being formed, so long as these differences have been predetermined by external factors and are not due to the internal factors that determine variations in the general rate of profit. A certain risk premium, or the expatriation premium that capital may require if it is to be invested in faraway places, is often an external factor of this sort. The quantitative effect of such a premium on the terms of trade is negligible. Insofar as it exists, it cannot absorb more than a tiny fraction of the inequality of exchange. Independently of its quantitative effect, however, the superprofit that capital may require in underdeveloped areas modifies only the parameters of the model but not at all the law by which it functions.50

3. Can the Difference in Rates of Profit Make Up for the Inverse Difference in Wages?

The general formula for the profit (p) of a branch (i) is:

m being the surplus value and K the capital invested in the branch. The formula for the price of production (L) in the same branch (i) is

or

c being the constant capital consumed and v the wages paid out in the branch.

If we have only two branches, A and B, and if we assume that the rate of wages is higher in A by a coefficient r, and the rate of profit higher in B by a coefficient q, then:

If, in order to exclude the influence of organic composition, we assume that the capitals invested are equal, we shall have:

from which we get

and, as q is assumed to be higher than unity,

On the other hand:

and so:

p_a + p_b = m_a + m_b. (5)

The sum of profits is equal to the sum of surplus value, which is the basis of Marx’s formula for the transformation of value into price of production.

Prices of production will be:

L_a = c_a + v_a + p

L_b = c_b+ v_b + qp.

If, in order to measure the respective influence of wages and profits, we assume that the constant capital consumed is equal in the two branches, then, in order that the difference in profits may make up for the inverse difference in wages, it is necessary—organic composition having already been assumed to be equal—that the prices of production for A and B shall be equal. Thus, we must have:

c_a + v_a + p = c_b + v_b + qp.

Since c_a = c_b, we can write:

v_a + p = v_b + qp

or

v_a – v_b = qp – p. (6)

It would also be possible to write:

v_a—qp = v_b—p = n.

Consequently, if

v_a + v_b > qp + p

then n > o,

whereas, if v_a + v_b < qp + p

then n < o.

In all cases, va – n = qp, and vb – n = p.

Consequently, it would be possible to write

We know, however, that if to a fraction in which the numerator is greater than the denominator—as in our case in (2) above—we add an equal sum to both numerator and denominator, then the value of the fraction is reduced, while if we subtract an equal sum, the value of the fraction is increased. Consequently, if n is positive, that is, if

v_a + v_b > qp + p

then

and, replacing the second member in accordance with (7) above

or

or, in accordance with (3) above,

r < q.

If n is negative, that is, if v_a + v_b < qp + p, then

and, replacing the second member in accordance with (7) above

or

or r > q.

Finally, if v_a + v_b = qp + p, that is, if n = 0, then

and, substituting in accordance with (7)

orr = q.

As, however, qp + p = m_a + m_b, in accordance with (4) and (5) above, by substituting on both sides we get:

If Σv = Σm, then r = q.

If Σv > Σm, then r < q.

If Σv < Σm, then r > q.

It can therefore be said that, all other things being equal, it is necessary, in order that the surplus profit may make up, in the terms of trade of the underdeveloped countries, for their deficiency in wages, that their rate of profit be the general rate multiplied by a coefficient higher than unity and inversely proportional to the average rate of surplus value Σm/Σv. If the average rate of surplus value is higher than one, the ratio between rates of profit can be lower than the ratio between rates of wages; if the average rate of surplus value is lower than one, the ratio between rates of profit must be higher than the ratio between rates of wages.

Since in practice the average rate of surplus value is not higher than one, it would be necessary, if compensation is to occur, for the rate of profit in the low-wage country to bear at least the same proportion to the rate of profit in the high-wage country as the high rate of wages bears to the low one.

When we think of the differences between rates of wages that exist in the world of today, we see at once that it is illusory to rely on compensation through a positive difference in the rate of profit in the underdeveloped countries, even supposing that such a difference exists.

In my example given in the previous paragraph, in which the wages in A are assumed to be five times as high as in B, for the prices of production to remain what they are, with wages and profits equal, it would have been necessary, given equality in organic composition, for the rate of profit in B to be five times the rate of profit in A, or as shown opposite.

And these are only very moderate parameters. Wages in A are only five times as high as in B. If they were, say, ten times as high, as often happens in reality, then it would be necessary, in order that compensation might be effected, for the rate of profit in B to reach even more unrealistic heights.

IV. SOME POSITIONS ON THE FRINGE OF UNEQUAL EXCHANGE

I. Singer-Prebisch Thesis

There are very few instances of economists taking up positions that contradict the official theory that wages are a dependent variable of prices. It is doubtful whether the well-known Singer-Prebisch thesis can be regarded as contradicting this theory.

Briefly, the thesis in question notes that the fruits of technical progress can be distributed either to the producers or to the consumers. In the developed countries the technical progress of the manufacturing branches leads to an increase in incomes; among the producers of foodstuffs and raw materials it leads to a fall in prices.

Depending, therefore, on whether primary or secondary products are involved, an increase in productivity is reflected in a fall in prices or in a rise in wages and profits. If it is the nature of the product that dictates this difference, that means that the independent variable of the system remains the state of demand, since, as use values, the products differ from the economic standpoint only in the kind of demand they arouse. The fact that primary products are put on one side of the barrier and manufacture on the other merely supports the impression that the Singer-Prebisch thesis is in the last analysis only a sophisticated reformulation of the fashionable doctrine that, for reasons left undefined, the former category of goods encounters always and everywhere a less satisfactory demand than the latter. This is what Guy de Lacharrière calls “the fundamental inferiority of the trade in basic produce as compared with the trade in manufactures.”51

See text page opposite

With Wages and Rates of Profit Equal
Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	60	60	170	110	25%	60	170
B	240	50	60	60	170	110		60	170
	480	100	120	120	340	220		120	340
With Wages and Rates of Profit Unequal
A	240	50	100	20	170	150		20	170
B	240	50	20	100	170	70		100	170
	480	100	120	120	340	220		120	340

The low income elasticity of primary products (Engel’s law), says Singer in effect, reinforced by the higher incomes of the industrialized nations and the reduction in the use of raw material per unit of product, brings about considerable price falls, which are not merely cyclical but also structural. “This perhaps is the legitimate germ of truth in the charge that foreign investment of the traditional type formed part of a system of ‘economic imperialism’ and of ‘exploitation.’”52

True, among the factors determining the contrasted effects of technical progress in advanced countries and underdeveloped ones respectively, Singer mentions the differential pressure of wages, arising from difference in the efficiency with which the factors are organized. As Kindleberger points out, however, this argument is supererogatory. “If it can be conclusively established that the elasticities facing the underdeveloped countries are lower than those facing the developed, there is no lack of forces to explain why the terms of trade work as they do.…”53 Indeed, it is hard to see what a more dynamic posture of the factors could do in face of a defective structure of external demand, if it is really demand that determines prices.54

It is also hard to see why the application of this “law” should be restricted merely to the case of technical advance and increased productivity. For many decades, perhaps for centuries, the technique of producing whisky has not progressed by a single step.55 Nor has that of the great wines of France. And yet these products are sold at a price that is high enough to pay the workers who produce them in accordance with the North-West-European wage level and the capitalists who own them according to the universally applicable rate of profit. This is not so with textiles, despite the ultramodern plant to be found in Egypt, India, or Hong Kong. Something that represents the highest degree of paradox, according to the Singer-Prebisch thesis, but which is quite normal according to mine, is the fact that the European countries with an old-established tradition in this branch are now—that is, since it has been taken over by the underdeveloped countries—turning toward the semi-craft production of artistic and luxury goods, in which they can continue to obtain prices sufficiently remunerative to pay a labor force that insists on wages 20 or 30 times as high as those the Egyptian or Indian workers get, in spite of the fact that the latter are equipped with the latest in automatic looms.56

Singer himself reveals the weakness of his thesis when he has occasion to speak of the special deterioration in terms of trade suffered by Britain in the first years after the war: “It is surely a remarkable fact that in a world hungry for capital goods, and with her two most important direct industrial competitors eliminated, England should have experienced adverse terms of trade in the years 1945 to 1948.”57

Singer can find only one explanation for this “paradox”—“Britain’s inability to take advantage of the post-war situation.” What sort of inability? What sudden paralysis had gripped the factors—the best organized in the world—in a country that had enjoyed centuries of economic domination in which it was able to work out at leisure the most subtle methods of commercial exploitation? By what aberration had this country thus been led to make a present to the foreigner of part of the “commodity value” of its exported capital goods in such an exceptional economic situation?

Singer offers no reply to these questions; in other words, he fails to explain his “paradox.” And yet it is enough to reverse the relationship of cause and effect, to admit that wages are not the effect but the cause of prices, whereas profits are determined by the general average rate of profit, for the paradox to vanish and everything to become clear.

Britain in 1945 had to choose between the terms of trade and expansion, these two being incompatible in a competitive economy, and she chose the path of expansion. A policy of austerity was introduced, the pound was overvalued on the internal market, and both indirectly, through the real difference in the rate of exchange, and directly, through measures taken in the name of this policy, prices and nominal wages were frozen inside Britain. Britain’s customers profited (relatively) by this freeze. Thus, at a moment when the world had the greatest need for capital goods and Britain was the only country in a position to supply them since her traditional competitors, especially Germany, were out of the running, among all industrial commodities only capital goods fell in price. As these capital goods made up the greater part of British exports in this period, the country’s terms of trade worsened at the same time as those of other industrial countries remained unaltered, or even, as in the case of France, slightly improved, despite the increased price of raw materials and agricultural produce.

Raul Prebisch, though he elaborates with greater precision the thesis he shares with Singer, does not add much to the essence of the matter:

If prices had been reduced in proportion to increasing productivity, the reduction should have been less in the case of primary products than in that of manufactures.… The benefits of technical progress would thus have been distributed alike throughout the world, in accordance with the implicit premise of the schema of the international division of labor.…

Had the rise in income in the industrial centers and the periphery been proportionate to the increase in their respective productivity, the price relation between primary and manufactured products would have been the same as if prices had fallen in strict proportion to productivity. Given the higher productivity of industry, the price relation would have moved in favor of the primary products.

Since … the ratio actually moved against primary products in the period between the 1870’s and the 1930’s it is evident that in the center the income of entrepreneurs and of productive factors increased relatively more than productivity. In other words, while the centers kept the whole benefit of the technical development of their industries, the peripheral countries transferred to them a share of the fruits of their own technical progress.

The reason for this difference is that

during the upswing, part of the profits are absorbed by an increase in wages, occasioned by competition between entrepreneurs and by the pressure of trade unions. When profits have to be reduced during the downswing, the part that had been absorbed by wage increases loses its fluidity, at the center, by reason of the well-known resistance to a lowering of wages. The pressure then moves toward the periphery, with greater force than would be the case if, by reason of the limitations of competition, wages and profits in the center were not rigid … The characteristic lack of organization among the workers employed in primary production prevents them from obtaining wage increases comparable to those of the industrial countries and from maintaining the increases to the same extent.58

Cause and effect thus alternate, according to Prebisch. What makes prices go up during the upswing is the market. The increase in wages and profits follows in accordance with the orthodox schema. But what stops them from falling during the downswing is the rigidity of wages and profits. Yet this is true only of the center. In the periphery wages and profits follow prices all the time, as they “should.”

Even with this limitation the thesis gives a serious twist to the prevailing doctrine according to which the factors passively submit to objective prices and, in the absence of an effective monopoly, nothing can be done against the omnipotence of demand on the world market. In this form, however, it is still only a working hypothesis, and no theoretical proof is attempted by its authors.

Furthermore, Prebisch ends by treating income elasticity of demand and nonuniformity of technical progress as ultimate factors in prices. In the last analysis Prebisch finds that what distinguishes primary products from manufactured products is income elasticity, which is merely aggravated if there is technological disparity.

With such a conclusion as this, the twist I mentioned above proves to be merely an inconsistency in argument. Kindleberger has not failed to point this out:

There can be no monopoly elements in factor markets in separate countries, which impinge on terms of trade, apart from the existence of monopoly elements in goods markets. If foreign demand and supply in international trade are elastic, national price-wage policy can have no effect on the terms of trade. A difference between the price and wage policies of two countries will affect their balances of payments, and through them possibly their exchange rates, but the terms of trade will be unchanged.… If foreign demand and supply are inelastic, differences in price and wage policy can bring about a change in the terms of trade.… But it is questionable whether it is the monopoly elements at the factor level, rather than those in goods markets, which are effectively responsible for the changes.59

It must be agreed that as long as the premises of the prevailing theory are not challenged, Kindleberger will be in the right as against Prebisch.

According to Prebisch, the benefits of a uniform increase in the productivity of all the branches of a nation’s economy are reflected in an increase in wages and are therefore kept within the country. Contrariwise, since wages are governed by marginal productivity, a big disparity in productivity causes the sectors where progress takes place to transfer the fruits of their differential productivity abroad, through the fall in the prices of their products.

What role has income elasticity of demand to play, then, in this system of causes and effects that seems quite complete and self-sufficient? Income elasticity of demand enables the center to devote itself, for preference, to industry, which enjoys technological homogeneity, whereas the periphery is obliged, if it wants to find employment for its excess labor power, to engage in both industry and agriculture, thus falling into technological disparity.

There was a time when economists felt obliged to justify their positions if these contradicted the established doctrines in any way. Today they are content to set forth their views and leave it at that. According to the classical writers and to the universal consciousness of mankind (what is called common sense), wages depend not on the productivity of the branch in which the worker works but on that of the branches that supply the goods he consumes. Thus, at every stage they are linked more or less closely with the price of one or more representative articles belonging to this body of consumer goods. Yesterday it was bread, today it is beefsteak, tomorrow perhaps it will be the automobile or the television set. This conception leaves out of account, of course, the effect of trade-union action, and it may be that the workers in an export industry, if they are well organized, can exploit a good economic situation to obtain an improvement in their wages, even though neither the price of bread, nor that of beefsteak, nor that of housing has changed, or even if these prices have fallen. To allege, however, that necessarily, through the mere working of the law of uniformity of technical progress, this improvement will be the greater by the extent to which productivity has risen in agriculture, stockbreeding, or building, and thus by the extent to which the prices of the goods consumed by the workers will have fallen, is too original not to require full explanation.

If it was the degree of uniformity in technical progress that mattered, and not the level of technique, then monoculture would constitute the ideal condition for high wages. In that case Venezuela, which devotes such a large proportion of its productive effort to the extraction of oil (in which, moreover, the technical progress achieved has been considerable), ought to have a wage level higher than that of the United States, where the greatest diversification is to be found and so (allowing especially for the specific weight of services) the greatest disparities in technique.

At the end of the eighteenth century and the beginning of the nineteenth century, Britain found herself in precisely this situation of uneven technological development. Export industry was advancing by leaps and bounds, while agriculture, though very good in absolute terms, was relatively stagnant. The effect of this disparity was the opposite of that indicated by Prebisch’s proposition. Wages rose, and they even rose so much as to provoke the liveliest reaction on the part of the industrialists, who demanded and eventually secured the abolition of the Corn Laws, so that imports of foodstuffs might lower the prices of the workers’ subsistence and thereby the pressure to raise wages might come to an end.

How does Prebisch get out of all these contradictions? By taking wages sometimes as cause and sometimes as effect. He assumes that it is the productivity in each branch taken separately that determines wages in the first place, and this apparently leads him—though he does not explain himself clearly on this point—to think that, in the event of a disparity in technique, the wages in the primary sector tend to fall. This prevents the prices in this sector from rising, despite its low productivity, and consequently enables the advanced industrial sector to freeze its own wages in spite of its high productivity. This wage freeze brings about in its turn a fall in prices in this exporting sector and a transfer of value abroad.

Here we have a perfect instance of reasoning in a circle. Prebisch is looking for a cause for a certain evolution of world prices. He thinks he has found this in a certain evolution of wages, which is in turn conditioned by a certain evolution of productivity. Now, productivity can in no case affect wages except through prices. I am a worker employed in making transistors. Owing to a technical improvement that has been introduced I now complete two sets a day instead of one, whereas a fellow worker of mine who makes shoes is still producing only one pair of them a day. For this development to have any significance that will allow me to see it as a favorable conjuncture and put forward demands, the rate of exchange of transistors against shoes must be such as to ensure that the firm that employs me is making bigger profits than before. In the absence of that circumstance there is no mechanism whereby the effect of a change in the productivity of a given branch can be transmitted to the wages in that same branch.60 But this assumes that prices are established prior to wages, whereas we have set out to show that prices are determined by wages.

2. Arthur Lewis

Among non-Marxist economists there is only one, to my knowledge, who has broken explicitly with the traditional conception: Arthur Lewis. You claim, he says in effect, that wages in the export sector follow the fluctuations in world prices. But how can these wages rise, in the event of increased productivity and high demand, if the country possesses a practically unlimited reserve of surplus labor power in its self-subsistent sector? As soon as the industrial wage reaches a level that enables the factory worker to get more goods than the peasant can produce by his own labor in his village setting, the peasant will leave the land and become a factory worker. Under these conditions the wages paid in the export sector, whatever the technological level of this sector and the state of world demand, must necessarily be governed by the amount of produce that a man can extract from the soil under the conditions of low productivity that are characteristic of subsistence agriculture.

Assume that [two countries, A and B] produce food but do not trade in it, country A also produces steel, and country B also produces rubber. If B can release unlimited supplies of labour from subsistence food production, wages in B will equal average (not marginal) product in food.… In A also the wage cannot fall below productivity in the food industry. We may simplify by assuming … that labour is the sole factor of production and that one day’s labour

in A produces 3 food or 3 steel

in B produces 1 food or 1 rubber

Earnings in A will then be three times earnings in B (the difference in food productivity). And the rate of exchange will be 1 food = 1 steel = 1 rubber. Suppose now that productivity increases in B’s rubber industry only, so that one day’s labour produces 3 rubber. This is excellent for the workers in A, since 1 steel will now buy 3 rubber. But it will do the workers in B no good whatsoever (except in so far as they purchase rubber), since their wage will continue to be 1 food.61

In this argument Lewis is following out a very old idea. We find it outlined by Malthus when he compares the fertility of the soil and the wage level in America and Europe respectively.62 We find it again in the writings of Chevalier and Brassey, also in connection with America: “Wages can never long remain at a low level in the United States, while the working man can transport himself and his family from the irksome employment of the factory to the free life of the Western plains.”63 “So long as the Americans possess this vast domain of the West, a common fund from which every man can draw by himself, in return for his labor, a fine inheritance, there will be no cause to fear any depreciation of labor power … “64 It is Silvio Gesell, though, who has provided the scientific formulation of this idea: “The income from labor on free soil determines the wages of those who work on the land and thereby the general wage level.”65

What is newly contributed by Lewis is the idea of using this law to solve the problem of the continual and structural worsening of the terms of trade of the underdeveloped countries:

We have here the key to the question why tropical produce is so cheap. Take for example the case of sugar. This is an industry in which productivity is extremely high by any biological standard. It is also an industry in which output per acre has about trebled over the course of the last 75 years, a rate of growth of productivity which is unparalleled by any other major industry in the world—certainly not the wheat industry. Nevertheless workers in the sugar industry continue to walk barefooted and live in shacks, while workers in wheat enjoy the highest living standards in the world. The reason is that wages in the sugar industry are related to the fact that the subsistence sectors of tropical economies are able to release however many workers the sugar industry may want, at wages which are low, because tropical food production per head is low. However vastly productive the sugar industry may become, the benefit accrues chiefly to industrial purchasers in the form of lower prices for sugar. (The capitalists who invest in sugar do not come into the argument because their earnings are determined not by productivity in sugar but by the general rate of profit on capital.…)66

It is this last phrase that is the most revolutionary. Lewis does not seem to realize it, though, since he puts it in parenthesis. This is a pity, for it would be by taking this step—recognizing the equalization of profits on the international plane—that Lewis’s thesis would become a coherent one. If, indeed, wages are stuck at a very low level, for reasons peculiar to themselves, somebody has to get the benefit of the difference. This somebody can only be either the capitalist or the consumer. If it is the capitalist, there may perhaps be exploitation or bad distribution within the nation, but there is no unequal exchange on the international plane. If it is the (foreign) consumer, we have the plundering of some nations by others.

If the capitalist cannot benefit by it (at least not in the long run), owing to the competition of capital and the equalization of profits, only the consumer is left, and for him to benefit it is necessary that prices fall.

Given this reservation, there is nothing to be said against Lewis’s thesis, except that it is too restrictive to serve as a general theory. It is limited to the case where a low-yield self-subsistence sector is present. This factor, though very often an attendant circumstance, is not the only one that brings about differentiation in wages between countries.

It is perhaps this confinement of Lewis’s thesis to the case of dualistic economies that has prevented it from causing much of a stir. I have already mentioned P. Moussa, some passages of whose work Les nations prolétaires are inspired by it. Gunnar Myrdal, too, refers to it explicitly: “As long as there is no scarcity of labour—at a price that exceeds only by a conventional margin the subsistence level—rises in labour productivity would tend to be transferred to the importing industrial countries, while any similar productivity rises in the developed ones would be entirely preserved for increases in the remunerations of their factors of production.”67

Linder also sometimes slides imperceptibly in the direction of Lewis’s thesis, as when he says that, even if the export sector develops as a result of the reduction or elimination of the sector that competes with imports, since it works with “an unlimited supply of labor,” the equilibrium income per head will remain unchanged in both sectors.68

This is practically everything that has appeared in response to Lewis’s proposition. Another limitation it suffers from is the condition he lays down of an increase in productivity in the export sector. This is the same limitation as in the Singer-Prebisch proposition of which I have already written at length.

3. Marxism and Unequal Exchange

Generally speaking and as a whole, Marxist economists have not proved able to solve the apparent contradiction between a prolonged worsening in the terms of trade and the law of labor value, which, within the framework of its basic assumptions, allows of only accidental inequalities.

Labor value was already modified by Marx with his proposition on prices of production, but, as we know, he did not have time to go further, as perhaps he might have done, and work out another modification, by the transformation of national prices of production into international prices of production. This perhaps accounts for the failure of Marxist economists to deal with the question.

Nevertheless, there are several fragmentary allusions in Capital to the influence that a possible differentiation in wages between countries could have upon international prices: “In the case of a partial, or local, rise of wages—that is, a rise only in some branches of production—a local rise in the prices of the products of these branches may follow.”69

The first element in this proposition being: “in the case of a partial, or local, rise of wages,” it would not affect the sense of the passage if we were to modify the second and third elements as follows: “that is, a rise only in some branches of production, or certain regions or countries—a local rise in the prices of the products of these branches, or of these regions or countries, may follow.”

“However, if the rise in wages is local, if it only takes place in particular spheres of production as a result of special circumstances, then a corresponding nominal [?] rise in the prices of these commodities may occur. This rise … is then … a means of equalizing the particular rates of profit into the general rate.”70 “The favored country recovers more labor in exchange for less labor.…”71 “… when the rates of profit of two different countries are compared … the same rate of profit is, in effect, based largely on different rates of surplus value.”72

The last-quoted passage is perhaps the most significant in relation to the line that would have been taken in the projected book on foreign trade that Marx did not have time to write. In his price-of-production formulas Marx had always up to then assumed a generally equal rate of surplus value. Here, speaking of two different countries, for the first time he introduces the assumption of different rates of surplus value. Different rates of surplus value combined with “the same rate of profit” means different wages together with equalization of profits, which leads directly to the conclusion that follows from the diagrams set out above, namely, that the difference in wages, being unable to react upon profits, reacts instead upon prices.73

Finally, in Volume 1 of Capital Marx formally acknowledges that the value of labor power varies not only in time but also between different countries, yet: “in a given country, at a given period, the average quantity of the means of subsistence necessary for the worker is also given.”74

Nevertheless, apart from a very few writers who have raised the question of difference in organic composition of capitals as the sole structural source of nonequivalence, and who will be discussed in Chapter 4, Marxist economists have in general either remained on the margin of the idea of nonequivalence, as already provided by Ricardo’s law of comparative costs, or else confined themselves to studying the “accidents,” in particular the fluctuations in prices and the effects of monopoly, some even going so far as formally to deny that a unilateral transfer of value from one country to another can ever occur through the mere working of economic laws.

Many Marxist economists, especially among those in socialist countries, when they talk of nonequivalent exchange, have particularly in mind an unequal sharing of the advantages resulting from Ricardo’s comparative costs. To illustrate this conception, let us taken any example of comparative costs—say, Graham’s example, which has the merit of simplicity: country A produces in 10 hours 40 wheat or 40 watches, and country B produces in 10 hours 40 wheat or 30 watches. The equitable rate of exchange according to this conception would be something like 40 wheat = 35 watches. More than 35 watches for 40 wheat could constitute unequal exchange to the detriment of A, while less than 35 watches for 40 wheat would constitute unequal exchange to the detriment of B. (The limits are 40 watches > 40 wheat > 30 watches.) It is clear that at the rate of exchange of 39 watches for 40 wheat, country A still gains something by specializing in watches, and at the rate of 31 watches for 40 wheat, country B still gains something by specializing in wheat, even though the exchange may be regarded as being unfavorable to A or to B. From this standpoint unequal exchange does not represent a real loss but merely a failure to gain.

Among the initiators of this rehabilitation of Ricardo in the economic teaching of the socialist countries we may cite M. Rakowski in Poland in 1950 and, above all, Günther Kohlmey in the German Democratic Republic in 1954.

In his course of lectures at the Academy of Economic Sciences in East Berlin on The Theory of International Value, Kohlmey, by calling Ricardo’s comparative advantages “relative” advantages, and the effects of their sharing “absolute” advantages and disadvantages, takes note that the international division of labor involves relative advantages for all the countries that participate in it, but absolute disadvantages and absolute advantages, respectively, for the weak countries and the advanced ones.

Viliam Černiansky is more explicit: “A saving of labor results for both parties even from an exchange taking place under unequal terms of trade when certain countries always pay less in terms of their own labor for the labor of others.”75 In another place he writes: “Nonequivalent exchange nevertheless enables all the parties to the exchange to effect a saving of labor.”76

The similarity in the terms is too great for us not to see in these passages direct inspiration by the following passage in Marx: “And even if we consider Ricardo’s theory … three days of one country’s labor may be exchanged for a single day of another country’s.… In this case the rich country exploits the poor one, even if the latter gains through the exchange.…”77

The way Marx puts it—“even if we consider Ricardo’s theory”—shows that in his mind there was, so far as unequal exchange was concerned, something more than can be got from Ricardo’s theory. What, in fact, that something more was, he did not have the time to tell us; and so, rather than venture outside Ricardo’s comparative costs, which would involve grave intellectual risks, Marxists confined themselves to reformulating under the cover of Marx’s authority what he had observed already regarding unequal exchange in Ricardo’s theory, which is only a minor aspect of the question, showing itself even in Ricardo’s theory.

Over and above this Ricardian inequality and the differentiation in organic composition that will be dealt with in Chapter 4, the Marxists in general do not accept any other structural nonequivalence in world prices; this is remarkable enough when one thinks of all those people who take nonequivalent exchange for a Marxist invention.

It is natural, though, that a supporter of the subjective theories of value should feel completely at ease in the presence of the terms of trade. The phenomenon I call unequal exchange ought not to embarrass someone who has never required that exchange be equal to anything at all. If equivalence is an ex post phenomenon of the market, there is no such thing as equivalence or nonequivalence in themselves.

It is not the same for a Marxist, who believes in the existence of an abstract equilibrium price and for whom the formation of value is a process of production and not a market process. If he acknowledges the existence of a century-long movement of prices that transcends the economic cycles, he ought to find a law for it and then reconcile this law with the labor theory of value, something that is no easy task. If, however, he thrusts unequal exchange away into the outer darkness of those “fluctuations” for which theory does not have to account, he may devote himself without danger to all the statistical and empirical analyses anyone could wish of the pernicious effect that the anarchy of capitalist world trade may have on the economic development of the backward countries.

The non-Marxist economists can then easily find the remedy for the “fluctuations” in a Joseph-like policy of compensation funds, in which the fat kine naturally make up for the lean ones.

As for the actions of the monopolies, of which the Marxist authors talk so much, this question is as remote from our subject as any other form of direct plunder of the underdeveloped countries by the rich and strong ones.

Besides, some Marxist writers find that the monopolies cannot figure as a factor in nonequivalence since they are rife on both sides of the barrier. “It may be,” says Kohlmey in his lecture course, “that young states are disadvantaged by capitalist world prices. But it is also conceivable, and it does actually happen, that the state enterprises in these countries which have taken over from the expropriated foreign monopolies have also inherited their superprices for exported goods. Let us recall once more in this connection the fact that, as a rule, in the capitalist world markets, the prices of raw materials and fuel are monopoly prices no less than the prices of manufactured products.”

“Even the monopoly price,” writes J. Mervart, a Czechoslovakian economist, “does not last longer than the duration of a cycle (five years): in the long run the world price is governed by the value of the commodity, and so constitutes the fairest price, and the only thing to be done is to secure oneself against the disturbances that may be caused by fluctuations in it.”78

Other Marxists categorically reject any idea of plundering through nonequivalent prices. Paul Baran considers that the terms of exchange can have only a negligible influence, since, he says, in any case when there is a rise in the price of a product exported by a country of the Third World, it is not the national economy but the big companies that profit by it, to increase the dividends they distribute elsewhere.79

In face of such an astonishing statement made by an economist who has undertaken to analyze all forms of exploitation one cannot but think that Baran was trying to get rid of an awkward subject as quickly as possible. Where does he find evidence that the difference in prices is equal to the increase in dividends? That a certain number of export companies are regular enclaves in the economic life of the underdeveloped countries is indeed a fact; but between that fact and bringing down merely to “dividends” the whole of the price differential in the foreign trade of the underdeveloped countries there is a definite gap which ought not to be crossed so lightheartedly. In Problèmes de planification, no. 2, I took as an example the Union Minière du Katanga, one of the most colonialist companies in existence. From the figures I quoted, it emerged that the rise in the price of copper in 1956 represented an income bonus of £25 million for the Congo. Yet the dividends of that company for 1956 were only £900,000 more than in 1955 and £7 million more than in 1957.

The same negative position is taken up by Paul Sweezy, when he declares that the trade between two countries may well affect the distribution of the value produced within one or both of the countries concerned but cannot transfer any value from one country to the other.80 As I have already had occasion to say, Sweezy’s position is governed by his unshakable fidelity to the postulate that there is no competition between capitals on the international plane.

Finally, and outside the ranks of those who have located unequal exchange in the difference between values and prices of production, and who will be discussed in Chapter 4, I know of only one Marxist who has taken up a position recognizing an alteration in world prices to the detriment of the poor countries, as a result of the low wages prevailing in these countries. This is Henri Denis.81 He agrees in essentials with my own thesis, but he treats labor as the only factor and examines prices without making any link with the equalization of profits and without any reference to Marx’s price of production. This circumstance considerably restricts the bearing of his interesting work.

Wages

I. WAGES AND THE LAW OF VALUE

I. The Classical Position

By examining in the previous two chapters the formation of equilibrium prices—first on the national and then on the international plane—I have shown that, in the correspondence that exists between wages and relative prices, it is not wages that vary in dependence upon prices, but prices that vary in dependence upon wages. But if wages are an independent variable of the system, what are the primary facts that determine them? What place do they occupy, not merely with regard to the relative prices of a certain place and a certain time, but also with regard to the totality of the economic factors of a closed system and in the evolution of this system? Hitherto I have dealt with this question in a fragmentary way, as called for by the various phases of my argument. It is now time to deal more systematically with this problem.

When he treated wages as the price of labor, Adam Smith confused the amount of labor contained in a commodity with that which this commodity can buy. Ricardo took him up sharply on this point. The confusion would be of no importance, he said, in effect, if the two magnitudes were the same—but they are not. And not only are they not equal but their variations are independent of each other. Suppose, says Ricardo, that for some reason (harvest failure, soil exhaustion, etc.), foodstuffs double in value. Can it be said that they will be exchanged for twice as much labor, that is, will real wages be reduced by half, although they are supposed to be irreducible? “Food and necessaries in this case will have risen 100 percent if estimated by the quantity of labor necessary to their production, while they will scarcely have increased in value, if measured by the quantity of labor for which they will exchange.”1

If, however, wages are the price of labor, if labor is a commodity like any other, and if, as Ricardo claims, the amount of labor contained in a commodity is not equal to the amount that this commodity will buy, then the principle of equivalent exchange is violated, and profit becomes merely the effect of this violation, that is, nothing but cheating.2 Adam Smith, by identifying the amount of labor contained in a commodity with that which this commodity can buy, preserved the principle of equivalence but conjured profit out of the picture. Ricardo correctly showed that the amount of labor that a commodity can buy is greater than the amount needed to produce it and drew the conclusion that it is precisely this difference that constitutes profit—but by this very reasoning he destroyed the rule about equivalence without providing any explanation of this exception.

This was the foundation upon which Robert Owen and Saint-Simon’s followers built their social criticism—a utopian kind of criticism insofar as it aimed at abolishing profit without altering the mode of production—which made things easy for their detractors, who were able to refute not only the Utopians but also Ricardo himself by showing the aberrations to which the labor theory of value could lead.

These detractors did not take long to find the flaw in Ricardo’s argument. If the value of labor is the natural wage, that is a certain quantity of commodities, and the value of any commodity is the amount of labor needed to produce it, then it must follow that labor is the measure of its own value, and so determinant and determined are one and the same.

2. The Marxian Position

Only Marx broke through this circular argument. The prices of all commodities tend, said Marx, to coincide with their values,3 and wages are no exception to this rule. But the commodity that wages purchase is not the worker’s labor but his labor power. Labor, the common denominator and measure of the value of all commodities, is not itself a commodity and therefore has no value. What under capitalist production relations becomes a commodity, what is bought and sold, is, in a sense, the man himself, his strength, the accumulated energy that enables him to work for a certain number of hours, his labor power.

In order to be kept up, this strength needs a certain supply of substances, some of which are freely given by nature while others are produced by human labor. It is therefore worth the amount of labor necessary to produce these substances. There is no circular argument. Labor does not measure its own value but that of labor power.

This is not a mere trick of analysis, for the two quantities involved are not equal. The labor time a man can put in is usually longer than the time needed to produce the substances he has to absorb in order to contribute this labor time. The difference constitutes the source of profit.

Thus, the capitalist does not, in normal circumstances, purchase labor power at less than its value, and profit is not mere theft. Nevertheless, by purchasing labor power at its right value, he makes a profit. For this commodity is the only one among all commodities that, by being consumed, produces a value greater than its own cost of production. It produces surplus value. The worker functions somewhat like an electric battery that is charged and discharged. Unlike an ordinary battery, however, which provides less current when it is discharged than has been put into it, the worker supplies, in the course of exhausting his labor power, more labor than it was necessary to expend in order to make him fit to work. However, just as when you have your battery recharged you pay the garage owner not for the current you will obtain from this battery but for the current he uses up in recharging it, so likewise when you hire a worker you do not pay him for the labor you are going to get out of him but for what has been expended in order to produce his strength: to regenerate, so to speak, his muscles, tissues, and nerves. Just as with other commodities, the value of labor power is independent of its use value. But the two things, value and use value, not being comparable, no other commodity can produce profit. Labor power being the only commodity the use value of which consists in producing value, its cost of production and the effect of its consumption become comparable, and the difference between them constitutes profit.

It would be pointless to ask why this is so. If it were not so, if a man needed, in order to live, as many commodities as he could produce when he worked, he could not be exploited, and there would be no profit, no wage labor, no capitalist relations—and, indeed, no accumulation or economic progress. The mere fact that one of these things does exist is sufficient proof that this is so.

3. Peculiarities of Labor Power as a Commodity

There is a trap here, however, which one has to beware of. Despite all these analogies, labor power is not really a commodity like others. All other commodities need, in order to be produced, either labor alone or labor plus raw materials. Labor power is the only commodity the production of which necessitates only raw materials, and when we speak of its value in terms of labor, it is the labor embodied in these raw materials that is meant. The result is that whereas the value of all other commodities depends on the productivity of their respective branches of production, that of labor power depends on the productivity of certain other branches, namely, those that supply it with its raw materials, and has nothing to do with the productivity of the branch in which it is itself consumed. The value of no other commodity can be linked structurally with a definite quantity of other commodities. It cannot be said a priori that an automobile is equivalent to a certain quantity of steel, and still less that it is equivalent to a certain quantity of textile goods or meat. Since labor is involved, as well as materials, in producing it, the equivalence varies with the variations in the respective productivities. Alone among all commodities, labor power is intimately and closely bound up with a certain quantity of use values, a certain basket of goods. This is due to the fact that labor power needs, in order to be produced, only use values, and not any direct labor.

In a world that, by eliminating use values, generally speaking, from its methods of reckoning, has made everything conventional and abstract; where an entrepreneur is considered less well off today with a stock of 1,000 T.V. sets than he was yesterday with a stock of 500, simply because productivity in this branch has more than doubled and the price has fallen to less than half, or even because a tax of equal amount has been abolished; where a few thousand stock-exchange operators, by passing bits of paper about among themselves, raise the value of IBM shares from $300 to $600 in a few months, though the firm in question is far from having doubled its capital during this period; and where, as a result of this activity on the stock exchange, hundreds of thousands of shareholders, without doing anything, without even exchanging their shares, are convinced and can even convince their bankers, their creditors, and their notaries that they have gained millions of dollars without anybody else losing a penny—in this world one thing alone retains its links with reality and is thus able to transmit the changes in reality and provide the ballast of a concrete element to this delusory system. This one thing is wages.4

II. WAGES AND WHAT DETERMINES THEM

I. The Physiological Wage or the Historical Wage

Labor power is only indirectly equivalent to a certain quantity of labor. It is directly and a priori equivalent to a certain quantity of goods. This equivalence is unchangeable insofar as it is independent of the differential development of technique and of the value or price of production of these goods themselves. For a change to take place, the man himself has to change. His standard of living has to change. And this is a very slow process, as slow as the evolution of the social and cultural milieu that conditions a man’s needs.

The classical writers, despite a few fragmentary and sporadic allusions to the historical factor, took into account, as a rule, only the biological aspect of the worker’s needs. From this standpoint, the value of labor power (and, therefore, wages) was a primary fact, on the basis of which the entire mechanism of production, distribution, and prices was determined.5

Marx, however, brought in explicitly the historical factor: “… the actual extent of what are called [the worker’s] necessary wants, as also the ways of satisfying them, are the product of historical development, and therefore depend chiefly on the degree of civilization attained in the country concerned. The origins of the wage-earning class in each country, the historical conditions under which it was formed, continue for a long time to exercise a very great influence on its habits and demands on life, that is to say, its needs. In contradistinction therefore to other commodities, there enters into the determination of the value of labor power an historical and moral element. Nevertheless, in a given country, at a given period, the average quantity of means of subsistence necessary for the worker is also given.”6

From the moment when “an historical and moral element” is introduced into the value of labor power, the coordinates of the economic model are no longer without any influence on wages since they form the basis of the moral and historical element itself. At first glance it is therefore possible to say that with Marx wages cease to be the primary fact that they were for the classical writers, and it is hard to see how they can thenceforth continue to be an independent variable of the system. The level of wages determines profit, but the latter, by accumulating, causes technique to progress and productivity to increase, which gradually creates the historical and social conditions for a transformation of man, a heightening of his needs, which results in an increase in the value of his labor power, and so of his wages.

Yet this is not the “interdependence” of the neoclassical school. Wages continue to determine relative prices, and relative prices have no effect on equilibrium wages, since “in a given country, at a given period, the average quantity of means of subsistence necessary for the worker is also given.”

This is why the argument used by some Marxists, who link wages with productivity, is contrary to Marx’s own thinking. The argument runs like this. In the world as a whole, the “necessary time” is x.7 The more productivity increases, the bigger is the basket of goods produced by x. Consequently, real wages, insofar as they coincide with “necessary time,” are a growing and proportionate function of productivity.

Nothing could be further from the truth. The value of labor power is not determined in the first place by a certain number of hours but by a certain basket of goods. Increased productivity does not directly increase this basket of goods; it reduces the time needed to produce them. Indirectly, in an intermediate way, the basket gets bigger in the long run even so. Trade-union struggles and the “demonstration effect” contribute to this. The immediate effect, however, of increased productivity is an increase in surplus value, not an increase in wages. Only when the quantitative changes in productivity have accumulated sufficiently to change into quality, in other words when this increase has become large enough and has lasted long enough to change the way of life of society, and thereby to change man himself in his biological elements, so to speak, does the value of labor power change. There is a dialectical interaction.

2. Market Wages and Equilibrium Wages. The Mechanisms of Determination

Marx’s position, which forms the basis of my thesis, differs essentially from that of the classical writers, but both are diametrically opposed to the marginalist view, according to which it is the prices of commodities that determine the prices of the factors, and to the neoclassical view, according to which the two are interdependent.

For the classical economists the matter was quite clear: in the short run the law of supply and demand determined the price of labor, like that of any other commodity. This was the market wage. In the long run this wage tended to coincide with the equilibrium wage, which was equal to the value of “labor,” that is, the value of the commodities needed by the worker in order to survive and reproduce himself. Whereas, however, for all other commodities equilibration occurred through transfers of economic factors from one branch to another, and the moment of equilibrium came when these transfers ceased, in the case of the commodity called labor, equilibration occurred through demographic changes, and the moment of equilibrium came when the working-class population stopped varying in size, since it had at its disposal neither more nor less than it needed in order to subsist and reproduce at the same level, which was also that at which the supply of labor was equal to the demand for it. While, therefore, the economic parameters had an effect on the market wage, the equilibrium wage was fixed, being based on a purely biological factor, and between this wage and the economic factors there could neither be dependence or interdependence in the immediate present, nor any interaction or connection in the course of time. As has already been said in Chapter 2, a long past in which there had been unvarying fixity of wages at the physiological subsistence level provided the classical thesis with its historical justification. Right down to the eighteenth century, indeed, if we leave aside short-term fluctuations, and the demographic imbalance that followed the Black Death in the fourteenth century, real wages had hardly varied either in space or in time, at least in the countries that the scientific investigation of the age could cover.

In space it could vary, according to this model, only as a result of climatic differences that caused the worker’s subsistence minimum to vary from one country to another in accordance with the rigors of his natural environment. In time it could vary only as a result of a biological mutation that shifted the threshold of man’s expectation of life, or of a change in world climatic conditions. The equilibrium wage was thus the effect of a natural law, and the economic parameters had no effect on its level, either directly or indirectly, through an “historical and moral element,” itself determined by the evolution of these parameters through time.

Direct determination was ruled out by the fact that, as has already been said, the employer does not pay for the output of labor power but for what it costs, just as the purchaser of any other commodity pays not for the enjoyment he is going to get from it but for its cost, in the sense of the intrinsic price, value, or equilibrium price of its production.

Indirect action by the economic factors was also ruled out since, even if it be accepted that certain psychological or historical needs may set working the same demographic mechanisms as are activated by physiological needs in the strict sense, or what comes to the same thing, that these psychological needs become in time physiological ones, man being a product of both nature and society, the very creation of these new needs presupposes that the working class has been consuming the relevant goods and services over a certain period. There would therefore have to be, to start with, a superwage (a market wage above the minimum), which, through being paid over a long period—long enough to change men’s subsistence minimum—became transformed into an equilibrium wage. However, under conditions of perfect competition and exclusion of any trade-union or political action and any monopoly, whether on the workers’ side or on that of the employers, no such superwage, as a market wage, could be sufficiently widespread and last sufficiently long to raise the subsistence minimum, and thereby the equilibrium wage to its level, instead of itself falling back, in the approved fashion, to the level of the subsistence minimum.

Under conditions of perfect competition it is impossible to imagine any economic fact determining such a long-standing superwage. Since a superwage cannot be brought about except by a temporary failure of equilibrium between supply and demand, what appears straightaway as the economic factor par excellence that can make wages take off from the subsistence level is technical progress and increased productivity. Yet not only cannot these factors have this effect, their actual effect is usually the opposite, since they reduce the demand for labor instead of increasing it. If a localized advance in technique—on the basis of an uneven development of capitalism—can ensure a differential productivity to certain enterprises during a fairly long period, their increased profitability resulting from this circumstance merely makes it possible for them to increase wages. If free competition among the workers is not disturbed by trade-union or political intervention, this possibility cannot, however, become reality, since, according to the law of value and the logic of the contract of employment, the superprofits being made belong to the employers, and wages are not subject to alteration. Once the employer has paid for the value of the labor power of the moment, he is under no further obligation, and the results of his exploitation of this labor power are nobody’s business but his. This is the significance of the distinction that classes wages with fixed incomes and profits with variable incomes.

Given the laws of commodity economy, it is indeed hard to see what could in the long run upset the working of supply and demand, so as to permit a market superwage, by accumulating habits and traditions, to result in the establishment of a new way of life, an increase in the value of labor power, such as alone might consolidate this superwage by transforming it into the equilibrium wage.

Going back into history, we find only once the phenomenon of a long-lasting disturbance like this in the entire working of a closed system. This was the period following the Black Death of 1349. It appears that a severe shortage of labor power then occurred, which caused the wages of the free workers to rise to unprecedented levels. This upset lasted in England until the end of the fifteenth century, having been aggravated by the Wars of the Roses and by the fact that during this period peasants who had fled from the feudal estates constituted practically the only source of labor power for a flourishing trade and nascent manufactures.

The state was therefore obliged to take draconic measures to check the rise in wages. In 1351 “the King, by the advice of the prelates, nobles and others … enacted the Statute of labourers, which ordained that all men and women under sixty years of age, whether of free or servile condition, having no occupation or property, should serve any person by whom they should be required, and should receive only the wages which were usual before the year 1346, or in the five or six preceding years, on pain of imprisonment, the employers being also punishable for giving greater wages.”8 In 1388 “the parliament enacted, that no servant should remove from one hundred to another, unless travelling upon his master’s business, and not even in pilgrimage, for the good of his soul.… Boys and girls, who were employed in husbandry till they were twelve years of age, were to be confined to it for life.”9

But these measures were judged to be insufficient, and the English government decided to attack the evil at its root. In 1363 a law was passed by which “domestic servants, whether of gentlemen or of tradesmen or artificers were … declared to be entitled to only one meal a day of flesh or fish, and were to content themselves at other meals with ‘milk, butter, cheese, and other such victuals.’”10

This prescription shows us both the amazingly high standard of living of the English workers in the fourteenth century and also the fact that the English lawmakers of that time, by striking directly at the way of life of the wage earner, proved that they understood better than certain economists of the nineteenth and twentieth centuries the mechanisms that determine wages and appreciated quite well the danger that a superwage due to special circumstances might become transformed in the long run into an equilibrium wage.

However, Thornton goes on, wages kept rising in spite of the struggle to stop this and enabled the working class to indulge in a degree of luxury that scandalized Parliament, which decided to put it down by means of sumptuary laws. A statute of 1463 ordained that agricultural laborers had no right to dress in materials the value of which exceeded two shillings a yard, or to wear hose that cost more than fourteen pence the pair, or wear girdles garnished with silver.11

At last, at the end of the fifteenth century, the situation was reversed, and the sumptuary laws were succeeded by the poor laws; which proves that an accidental superwage, even if it has lasted a long time, can hardly become an equilibrium wage, in the sense of a change in men’s vital needs, unless it is “safeguarded” by institutional factors.

Thus, in the classical model real wages were unchangeable in the long run, while money wages depended on the ratio between two productivities, that of the branch producing subsistence goods and that of the mines producing gold and silver. This was the ultraclassical model, so to speak, corresponding, for instance, to the extreme formulation by Jacques Necker that I have quoted earlier. In the course of their arguments, and at a lower level of abstraction, writers like Adam Smith, Sismondi, J. B. Say, and others recognized, as has been pointed out in Chapter 2, that the worker’s needs were less rigid than a mere ration of goods ensuring his survival and animal reproduction. Ricardo himself recognized that variations were possible in the general wage level, since it was in connection with these variations that he studied the transformation of labor value into equilibrium price in the fourth section of his Principles. This contradiction is explained by the fact that, historically, the stagnation of wages in the swamp of subsistence that had lasted for thousands of years, referred to in Chapter 2, had already for some time been outgrown, but owing to the time lag between objective reality and ideological superstructure, these writers were only just beginning to be aware of the fact.

Marx worked out his theory when the mutation was almost accomplished. Already among the European countries that formed the traditional subject matter of political economy, England was noticeably in advance of the rest, while wages in the United States had been observed for some time to be considerably higher than those in England, and the “exotic” countries were arousing the curiosity of science to an everincreasing extent. It was clear by that time that in England and the United States an “ethical” wage level had replaced the physiological one, and that this wage level, which obviously exceeded the strict subsistence minimum, was not the effect of a temporary disturbance but appeared as a normal wage level, which was accepted as such by all parties, and on the basis of which the economy went on functioning quite smoothly.

As there had been no change in the natural features of human life and no change in man himself apart from what resulted from his economic and social evolution, it had to be deduced that wages had ceased to be the primary fact assumed by the classical economists. This does not, of course, mean that wages had ceased to be the independent variable of the system. But it was henceforth still the independent variable only as regards the dependence of prices upon wages, and no longer the independent variable in the total socioeconomic function throughout all time.

3. Equilibrium Wages and Value of Labor Power

From this time onward things become more complicated, and many questions arise. Is the equilibrium price of labor power equal, always and everywhere, to the value of labor power, or does this price in some countries regularly exceed this value, and do wages actually include part of the surplus value? In other words, do the higher wages that prevail in certain countries represent higher values of labor power, or do they constitute permanent superwages?

Marx keeps strictly to the law of value, with labor power no exception to this law. In equilibrium it is bought and sold at its value. If then its equilibrium price differs among countries, this must be because its value is itself different. This value is equal to “the average quantity of means of subsistence necessary for the worker,” and, says Marx, “in a given country, at a given period,” this amount “is also given.” Consequently, the introduction of the “historical and moral element” into the conception of the means of subsistence does not repudiate the biological basis of wages, but enlarges it by adding a new dimension. It could not be otherwise, since for Marxism man is a social being, which implies that his biological condition cannot be conceived of in isolation from his social condition.

In Marx’s day the differences in wages between the various countries of the “known” world were still very limited, and within these limits an elasticity adequate to the subsistence minimum was still easily conceivable. Today is this elasticity sufficient to cover the range of wage levels that extends between the wage level of the Congo and that of the United States? In other words, is the equilibrium of American wages at present a demographic equilibrium in the same sense as that of Congolese wages? Is the American wage of today irreducible in the sense that any reduction would cause the working-class population to decline and an imbalance to occur between supply and demand such as to restore the present wage level?

Frankly, I do not feel very certain how to answer this question. I regard it, however, as a subject that lies to one side of my own argument. For if the American wage is a permanent superwage, this must mean that supply and demand on the labor market of the United States are equalized by factors other than the mere working of the law of value, and these factors can only be political or trade-union factors. Whatever the origin of this superwage may have been, the fact that it is an extraeconomic factor that ensures its perpetuation is enough to prove the essential element in my argument, namely, that the differentiation of wages is by nature an institutional matter.

I therefore prefer to examine and carry further the opposite thesis, that of Marx, despite the fact that it has probably been overtaken by history. For if the equilibrium wage still represents the value of labor power, and if this value is an increasing function of economic development, we may then doubt the pertinence of my use of the qualification “institutional,” if not of my treatment of wages as an independent variable.

4. The Moral Element in the Value of Labor Power

The problem is more complicated than it appeared at first sight. In the majority of the capitalist states of today, it is evidently out of the question for the law of value to operate without any limit, so far as labor power is concerned, since there is a minimum wage for all occupations, guaranteed by law. Can it operate, however, within this limit? One is inclined to say it cannot, since trade-union pressure and direct or indirect intervention by the state are now factors present in every capitalist society.

Yet this reply would go too far. It is certainly not these factors that can determine, e.g., the present superior wage rate in the United States as compared with Great Britain, since they operate in the latter country with at least the same (if not greater) intensity in favor of an increase in wages as in the United States. We must therefore admit that these factors operate on the basis of a certain predetermined point of equilibrium, and that if this is left out of account and they are treated as being equal everywhere, there will nevertheless remain such substantial differences in level as cannot ultimately be explained otherwise than by differences in the local values of labor power.

But how are these differences to be understood? Can this be done on a strictly physiological plane, even if we add an historical and psychological dimension to this conception? Can we say, in other words, that prolonged familiarity with a certain standard of living has altered the American worker’s needs to such a degree that he is henceforth incapable of living and reproducing unless he consumes three or four times as much as is sufficient to enable a British worker to live comfortably and reproduce himself as he likes?

I do not think it is as simple as that. There are, of course, huge individual differences in this field. People have been known who, on ceasing to be able to drink their morning coffee in bed, have died of this deprivation; but others have also been known who have quite suddenly given up the most elementary comforts and readapted themselves without difficulty to their new way of life. I do not think, though, that, by and large, the sum of the vital physiological needs of the American worker is larger than that of the British worker’s needs, to the extent that the former’s present wage exceeds the latter’s.

We must, however, keep in mind the fact that beyond a certain level of difference we have to change not the amounts consumed but the very form of consumption. There are thresholds of discontinuity in the economy of eating, clothing oneself, and taking shelter. If one wants to go farther in this direction or that, it is necessary to change completely the type of food, clothes, and housing. One has, for example, to go from the individual small house to the block of apartments or from the block of apartments to the shack. Now, production is geared to a certain model of consumption, and to change this arrangement would mean a thorough upheaval in the economy. I do not suppose that the American worker would lie down and die, or cease to beget children, if he were obliged one day to live in public housing or even a shack. The trouble is that in the United States there is neither enough public housing nor enough shacks to shelter everybody. The American workers are thus doomed either to live in elegant andcomfortable small houses or else to sleep under bridges. The cost of housing is for them, and as a whole, practically irreducible.12

Again, as already pointed out in Chapter 1, some forms of consumption are by their nature more or less rigid. The majority of durable goods belongs to this category. One cannot change houses, even were the entire range of type of housing available in unlimited quantity, nor even change one’s furniture (which is often being bought on the installment plan), every time one’s wages are raised or lowered. The only method left in such a case for adjusting expenditure to income is to save money by cutting down on food, a branch of consumption that is immediately reducible, but the elasticity of which has very narrow limits beyond which physical health is affected. This is how it can happen that an American may sometimes be undernourished—as the medical examination of young army recruits shows—although his income is substantially higher than that of a properly nourished European.

This entire analysis is still confined, however, to the field of material needs. Yet in addition to these needs there are men’s “demands on life,” and besides the historical evolution of the worker’s subsistence minimum, we have to take account of the moral element in the price of labor power, and it is not accidental that Marx uses both of these words in the phrase I have quoted above.

Though we have, in the foregoing discussion, sought to neutralize the trade-union factor by assuming it to be equal in effect on both sides of the Atlantic, we must not lose sight of the fact that this factor only seems equal when it operates on the basis of the established wage rates, which differ widely between, approximately, three dollars an hour in the United States and one dollar an hour in Britain. If the occasion were to present itself today, somewhere in the United States, to defend or improve a wage of one dollar an hour (for white workers), the negotiating power of the workers concerned would be greatly strengthened in this instance, even if the employers involved were in business difficulties, whereas if the best-organized trade union in Britain were to undertake today to demand the equivalent of three dollars an hour for the same category of workers in that country, its chances of success would be very slim, even if the firms concerned were quite prosperous enough to pay this wage.

The profitability of the firms concerned, that is, the immediate economic factor, enters into the matter only as an external circumstance, favorable in some cases and unfavorable in others, but in no way decisive. Let us suppose that the airline companies in France are enjoying exceptionally high profits: a strike of jet pilots with a view to raising their salary from 10,000 to 11,000 francs a month would be none the less unpopular with the public, and that would have a serious bearing on its effectiveness, even though the employers were in a position to pay the increase demanded. An opposite example is provided by what happened when, a few years ago, the French miners won their point against a government that had, in resisting them, gone so far as to put the mines under martial law; they won because the entire people of France supported them, though everybody knew that the coal industry was losing money.

The effectiveness of the trade-union factor itself, and the outcome of collective or individual negotiation in general between wage earners and their employers, depends to a large extent upon the relation between what the workers are demanding and what society regards, in a certain place and at a certain moment, as the standard of wages.It depends on a certain level of attainment, which is itself the result of past struggles and evolutions.

As already mentioned in Chapter 1, there are moral constraints and a certain personal element in relations between employer and employee (probably inherited from the feudal order), which cause the contract of employment to be something other than a mere resultant of supply and demand, even if we leave the trade-union and political factors out of account. For a given country at a given moment, and even for each race or ethnic group of workers in one and the same country, there exists, regardless of any trade-union or legislative intervention, a lower limit of wages below which the average employer would not dream of going, even at the risk of bankruptcy if he did not, and an upper limit above which this same employer would not dream of going, so that he would rather shut up shop, even though, owing to exceptional market circumstances, he risked missing thereby considerable opportunities for profit. For his part, the average French wage earner would not accept an abnormally low wage even though he ran the risk of unemployment without the prospect of benefit payments, and he would meet with the approval and support of his family and his friends for his refusal; whereas an Algerian working in France who saw fit to refuse this same wage would find himself treated as either a shirker or a madman and would be denied any material or moral aid. Regardless of market conditions, there are wage levels that are impossible, because unthinkable, in a particular country, at a particular period, for a particular racial or ethnic group of wage earners.13

The value of labor power is, so far as its determination is concerned, a magnitude that is, in the immediate sense, ethical: it is economic only in an indirect way, through the mediation of the moral and historical element, which is itself determined, in the last analysis, by economic causes.

5. The Trade-Union Factor as the Driving Force in the Raising of Wages

I have said already, when examining the position taken by the classical economists, that the vicissitudes of the commodity market can have no direct effect on the labor market, since the results of the sale of the product concern not the worker but the entrepreneur. If the sale of the product does produce a local disturbance in the relation between supply and demand on the labor market, this concerns the effective wage, or market wage, not the equilibrium wage, which itself is based on the value of labor power. Since the latter is, according to the classical writers, unchangeable, no problem arises within the context of their teaching. At the next market readjustment everything would come back to normal, with commodity prices restored to the level of equilibrium prices, and wages to the level of the value of labor power. If, however, we accept, along with Marx, that the value of labor power can evolve, then we accept, ipso facto, the possibility that a market wage in force over a long period may become an equilibrium wage, and so that economic factors may influence the equilibrium wage, if not directly then at least indirectly, through a change in “the average quantity of means of subsistence necessary for the worker,” and independently of any political or trade-union factor.

Even if that were true, I do not think that my definition would be undermined in essentials, since, for this result to be achieved, men’s needs would have to be changed, and that justifies us in saying that in the first instance wages are determined by an extraeconomic factor, namely, men’s psycho-physiological constitution as it exists and functions at any given moment.

However, I do not think that it is true. Change in man’s nature, in man’s subsistence minimum, is such a long process that no market disturbance can give rise to it and bring it to a conclusion unless its effects are at least consolidated by the success and continuity of some collective action by the workers, pressing for their demands. At all events we do not find any example in history of anything like this being accomplished in the absence of that factor. And yet favorable circumstances have not been lacking. From the middle of the eighteenth century to the second third of the nineteenth, Britain triumphantly carried through its industrial revolution. The productivity of labor advanced by dizzy leaps and bounds during that period, especially in the textile industry, which was the main export branch. Its precocious industrialization in an “underdeveloped” world guaranteed to Britain possession of an effective monopoly of foreign trade. Yet real wages changed very little between 1750 and 1834, when the old Poor Law was abolished, and the working day was considerably increased between the same date and the Ten Hours Act of 1847. The placing of a mechanical loom at the worker’s disposal, a very important technological advance, instead of resulting in an increase in the wages of weavers working in the mills, caused a headlong decline in the wages of the handweavers, who were plunged into unprecedented poverty. Marx refers in several places to this decline in real wages in the period mentioned. According to the figures he quotes in the Theories of Surplus Value, the weekly wage rose between 1742–1752 and 1800–1808 from 6 to 11 shillings, but the price of a quarter of wheat rose in the same period from 30s. to 86s. 8d., so that the purchasing power of the same wages fell from 102 pints of wheat to 60.14 Even if these figures need to be handled with caution, the impression that clearly emerges from our reading of the estimates made by contemporary writers is that even if real wages in Britain did not actually decline in this period, they nevertheless did not increase to any significant extent.

It was above all the end of the eighteenth century and the beginning of the nineteenth that was the most difficult period for the British working class, with a marked setback in its standard of living. The poor rate, which stood at about £1,700,000 in 1776 had risen to £4 million by 1801 and to £8 million by 1833. One-third of the population of Britain was obliged to seek public assistance, J. B. Say recorded. However, it seems that the first wave of mechanization in and after the 1750’s had caused wages to rise, so that around 1830 they again stood approximately at the level of 1750. This confirms what was said above, namely, that even should exceptional circumstances bring about, under a regime of free competition, a sudden increase in the demand for labor, this imbalance does not last long. In the absence of institutional factors (either political or trade-union), equilibrium is soon restored at the old level.

In contrast to this, in the second half of the nineteenth century and at the beginning of the twentieth, through the operation of political and trade-union factors, although technological progress was slowing down in Britain, and British world supremacy beginning to fade, wages rose rapidly and to a marked degree.

The example of Japan, which was industrialized and had attained, on the eve of World War II, technological levels very much higher than the Britain of the 1840’s, without wages taking off to any noticeable extent from their physiological subsistence level, and where wages began to evolve only after the war, precisely as a result of institutional changes in Japanese political life, forbids us, moreover, to assume that technological progress does perhaps remain the determining factor, merely requiring a certain absolute level of productivity of labor in order to achieve its effect.

6. Wages Zones within a Nation

The very fact, however, that in countries where several communities live side by side, with ways of life and needs that are very different from each other, as in South Africa, and in more or less all the former colonies, even if there is no legislative discrimination, a rate of wages appropriate to each of these communities is established, and free competition between employers does not bring about a unified labor market—this fact finally destroys the argument about interdependence between the prices of productive services and those of commodities and proves that the value of labor power and its price are conditioned in the first instance by an extra-economic factor, even though in the final instance they are based, like everything else, upon the economic foundations of society.

Here we have, at first sight, a contradiction between the existence of selective wage rates within a country and the historical fact of the inevitable spread of progress through all classes and social strata. However, this contradiction is only apparent, for there is less interpenetration between racial or even ethnic groupings with standards of living that are different to start with than there is between classes and social strata. The former colonies of Black Africa before World War II, provide us with a model of compartmentalization. Segregation was more thorough than that prevailing today in South Africa. Not only was there in all the urban centers a European town and an African one, clearly distinct and often a long way apart, with the blacks forbidden to enter the European town after certain hours (and also very often a similar restriction on Europeans’ hours of entry into the African town), not only were all public establishments—cafés, restaurants, cinemas—segregated, but also for every purpose there was a shop for Europeans and a shop for blacks. Apart from a few articles of common use, such as gasoline, matches, shoe polish, there was, so to speak, nothing in a shop for Europeans that could interest a black, and nothing in a shop for blacks that could interest a European. Under these conditions the diffusion of progress was impossible. The very extent of the difference between the two patterns of consumption created such a discontinuity of standard of life that any demonstration effect was ruled out in advance.

With some slight quantitative differences this situation exists today in South Africa, and with greater modifications it is found even in the United States—not only, and not so much, in relation to the blacks as to certain immigrant groups from the poorer parts of Europe, like the Balkans or southern Italy. These immigrants, living as they do in their closed communities, retain for an indefinite period their traditional pattern of consumption and their low level of needs. They usually receive wages calculated accordingly, and much lower than those of the Americans of Anglo-Saxon stock.

In a country like the United States, these immigrants feel the need for a automobile less than they would if they had remained in their country of origin. There, however poor the country might be, and despite the relative scarcity of cars, there would always have been some friend or some relative luckier than themselves, who would have owned a car and so aroused in them a feeling of envy or a tendency to imitation. In the country where cars are most plentiful, however, this does not happen to them, for the cars that pass them in the street are too anonymous, too unknown, too remote from them to provide them with either a stimulus or an example.

III. WAGES AND DEVELOPMENT

I. Increase in Wages as a Factor in Economic Development

As we see from the examples of Britain and Japan, which have been mentioned already, technological progress and industrialization, where they precede wage increases, do not seem to be the cause of these increases, or even the determining cause of the political and trade-union actions that bring them about, but merely a favorable condition. Are they, though, at least a necessary condition? Within the framework of each country taken separately, certainly not. There are many examples where technological progress and industrialization do not precede the increase in wages, but follow it. This was the case in the United States in the eighteenth century. Wages there were considerably higher than in Britain, though neither technical progress nor industrialization had so far occurred.15

More recently, Australia, New Zealand, Canada, and, to a certain extent, Denmark and Holland have confirmed the possibility of high wages prevailing in advance of technical progress and industrialization. Development then appears not as the cause but as the effect of high wages. And while in cases where favorable economic conditions have preceded high wages, it is not possible, as has already been pointed out, to see any direct connection of cause and effect between the two phenomena, in the opposite type of case the level of wages acts directly—that is, by the mere operation of the law of value—upon the economic factors, by determining the necessity for an intensification of the organic composition of capital and by encouraging investment through the expansion of the market.

The high-wage countries eventually equip themselves and become industrialized, if necessary protecting their high-wage levels by means of tariffs, as the United States did. Whereas there are many instances where the economic possibility of a rise in wages has not led to this actually occurring, at least before the institutional factor came into play (Britain, Japan), or before the disappearance of a specific institutional factor resisting it (the wages of blacks in South Africa, and even, to some extent, the wages of blacks in the United States), there is not a single example where high wages have not led to economic development, in other words, where institutionally established wages have proved to be too high in relation to the actual or possible level of economic development and have had to be brought down on the basis of inadequate development.16

Out of Britain’s five former colonies of settlement—the United States, Canada, Australia, New Zealand, and the Cape—the first four have become the richest countries in the world, with a national per capita income of $3,000 or $4,000 annually. The fifth, South Africa, has remained a semi-developed country, with a national income of about $500 per capita, about as poor as Greece or Argentina. Yet the natural resources of South Africa are not less considerable than those of North America and are certainly more so than those of Australia and New Zealand. All five were colonized by men of the same northern stock, tough and fearless. The climate of South Africa is no less healthy than those of the other four. Finally, all five were connected with the same source of capital, London, and belonged to the same commonwealth of nations and the same mercantile and financial networks. One factor alone was different, namely, what happened to the indigenous population. Whereas in the other four colonies the total extermination of the natives was undertaken, in South Africa the colonists confined themselves to relegating them to the ghettos of apartheid. The result is that in the first four countries wages have reached very high levels, while in South Africa, despite the selective wages enjoyed by the white workers, the average wage level has remained relatively very low, hardly any higher than that in the underdeveloped countries, and below that of the Balkans, Portugal, and Spain.

Let us suppose that tomorrow the South African whites were to exterminate the Bantus instead of employing them at low wages, and replace them with white settlers receiving high wages. There would certainly occur, insofar as this operation was carried out more or less brusquely, upheavals, bankruptcies, frictions of conversion and adjustment, a transition period of great difficulty; but the ultimate result would be a leap forward by South Africa, which would soon catch up with the more developed countries. This is a frightful thought, I know, but it fits the reality of the capitalist system. To take the case of gold alone, despite the regulated market for this metal, the improvement in the terms of exchange would bring South Africa a considerable extra income. With white miners the cost of production in the great majority of the mines would greatly exceed the present selling price of 35 dollars an ounce. If the Federal Reserve Bank were stubbornly to refuse to raise this price, most of the South African mines would shut down. Only a very few especially rich ones would go on working.17 Production, which is at present about 900 tons, or about 75 percent of world production, not including the U.S.S.R., and 60 percent, including sales by the U.S.S.R. (base year, 1962), would fall to a negligible figure, perhaps 50 or 100 tons.

If we consider that since 1965 the gold production of the capitalist world, together with sales by the U.S.S.R., has been insufficient to meet the needs of private hoarders and of industry; that the currency stock held by the United States has had to be drawn upon to make up the deficiency; and that this stock has already fallen to about 12,000 tons, we can easily see that such a decline in South African gold production would threaten to clear out the vaults of Fort Knox in a few years.18

Faced with such a threat, the United States would have to choose between increasing the price of gold and putting an embargo on it. If it chose the latter course, it would save its own stock but would lose all control over the free market, which would then be thrown completely off balance. The private demand for industry and hoarding is at present around 1,500 tons, and world production, including U.S.S.R. sales, would, in the event of such a defection by South Africa as I have envisaged, amount to only 500 or 600 tons. Furthermore, there is no certainty that the U.S.S.R. would go on selling gold on the free market, if the United States were to proclaim an embargo. Logically, these sales would cease. On the other hand, the mere fact of the embargo would entail intensified speculation on a rise in price and an increase in propensity to hoard. Finally, the embargo would release the issuing authorities in the other countries from all their obligations to cooperate with the Federal Reserve Bank and from their present cautious policy, and a large share of their dollar holdings, which they would no longer be able to convert at the Federal Reserve Bank, would be used to buy gold on the free market. All these factors would increase private demand still further, and eventually it would be compelled to pay the price needed if South Africa was to bring its gold back into production, paying white men’s wages to its white miners.19

2. Dialectical Interaction between the Movement of Wages and Economic Development

As soon as we accept that man’s needs undergo historical evolution, it becomes clear that the institutional factors that determine the equilibrium wage in the first instance are not accidental factors intruding from outside human society. They are certainly different in nature from the Black Death of 1349 or a world climatic upheaval: they belong to a group of conditions that, in the final instance, are based upon the economic foundations of society. We have, in fact, to set the problem in the context of world economy as a whole, and not in that of a particular country or region. If wages in the United States in the eighteenth century, or in Australia in the nineteenth, were so high, that appears as an historical accident so far as the United States and Australia are concerned. But it was no accident for all the countries of the world taken together in the context of world economic evolution. The men who settled in the United States and Australia in those periods came from certain parts of Europe that were already advanced and had a standard of living higher than the others; when they emigrated they naturally demanded even higher incomes. This was not the case with the Spaniards and Portuguese who settled in Central and South America, or even with the French who settled in Quebec. The consequence has been that Quebec has remained backward in comparison with the rest of Canada, and Latin America has remained underdeveloped as compared with the United States, although, except for a few regions, the conditions and natural resources were much the same throughout the New World.20

It could thus be said that though the different development of the United States has not determined the level of wages in that country, the uneven development of the world has certainly determined this wage level in the last analysis, since it has determined the different subsistence minimum and different “demands on life” of the men who peopled the United States.

I do not dream of denying this, and this is why I say that in the final instance the value of labor power, however ethical and institutional it may be, is based, like all other institutions, upon the economic foundations of society. But this is why I also say that it is not a question of interdependence in the neoclassical sense, but of dialectical interaction. What seems to me to distinguish the one from the other is that, in the former, which Marx encountered under another flag and which he used to describe as metaphysical, each thing is at once cause and effect while remaining the same, whereas in dialectical interaction the effect becomes the cause in its turn, while changing essentially and through the very fact of this change.

Thus, a market superwage is the effect of a certain economic combination. For it to become in its turn the cause of another economic combintion it must first change in its essence, even change into its opposite, namely, the equilibrium wage, or the value of labor power (that is, the thing by contrast with which it is itself defined). And, as I have already said, for this qualitative change to take place there must be first a certain accumulation of quantitative changes.

This, it seems to me, is the real dynamic of the process. Not a mere integration of the successive variations in the course of time of a function (whether linear or exponential), but the realization of the changes in this function itself as a result of time and of the accumulation of its effects. These reflexions may be seen as idle philosophical subtleties, and it may be that in persisting along this road one risks getting bogged down in disputes about words and meaningless controversy. The real problems, so far as this study is concerned, are different. It is above all the question whether, here and now, and all other things being equal, it is economic conditions that directly determine national equilibrium wages, or whether it is the inequality between these wages that influences prices and economic development. I believe the second proposition to be the correct one, and I think I have shown this to be so.

Here and now, the equilibrium wage is something given, an independent variable. Whatever may have been the initial cause of the differentiation; the direct and exclusive action of market forces, resulting in a superwage that lasted long enough to become changed into an equilibrium wage, something that seems improbable; or trade-union and political intervention giving rise to an artificial superwage, or at least consolidating a conjunctural superwage—possibly conditioned, in the last analysis, by a certain phase of economic evolution—and ensuring the necessary duration for it to become changed in character, something that seems closer to historical fact; we call this “something given” institutional because it is based upon man himself, as a physical and social being, upon men’s needs and “demands on life,” as they have been shaped by a very long and slow process, in which the principal immediate agent is the accumulated body of traditions and habits.

Another question arises, however, that needs to be answered. Whether development determines wages or wages determine development, it follows from my analysis that the two must correspond.

Now, in order to show that economic development does not necessarily entail an increase in wages, I have myself referred to the example of Britain in the eighteenth century and at the beginning of the nineteenth and to that of Japan before World War II. In both cases effective economic development ran ahead of the level of wages for several decades. The stagnation of wages does not seem in these two instances to have hindered accumulation, technical progress, and industrialization. Here, then, we have a degree of economic development somewhat ahead of the one corresponding to the wage level.

And yet there is no contradiction. In both cases (the distinctiveness of which enabled me to show that even when, for one reason or another, economic development precedes an increase in wages, this increase takes place only after an institutional factor has intervened), the conditions assumed, namely, absence of monopoly and equalization of the rate of profit, were not satisfied.

In the case of Britain, to which I shall have to come back again later, the monopoly of landownership, considerably reinforced, moreover, by state intervention in the form of the Corn Laws, prevented the excess surplus value arising from the increase in productivity from escaping overseas. This excess was intercepted on the wing and kept inside the country in the form of a superrent corresponding to the gap between nominal and real wages. In other words, real wages, as I have shown earlier, remained practically unchanged, but as a result of very high tariffs against imported corn, the prices of foodstuffs rose and forced nominal wages up, which prevented the increased productivity from going to benefit the foreign consumer, as it would have done given free competition and equalization of the rate of profit. The tax on imported corn had the same effect as a tax on the export of manufactured goods. In both cases it is a question of an intervention by the state that prevents the law of value from operating freely. As, on the other hand, under the special conditions of the bourgeois revolution in England, no real replacement of one class by another occurred, but instead a merging of the functions of the two classes, a large section of the old feudal class transforming itself into industrialists and financiers, this superrent was automatically directed into capitalist accumulation and had, from the standpoint of economic development, the same effect as that of a superprofit.

This last circumstance makes the British case resemble the Japanese, although in the latter case the excess surplus value was not “caught,” in the form of rent, but directly, in the form of monopoly superprofit. In fact, the Japanese economy was, with the inauguration of the Meiji era, the first centralized economy, the first state capitalism, in the modern world.21 This circumstance, this institutional factor, to some extent prevented the extra surplus value produced by increased productivity from being leaked abroad through the equalization of profits and, as with nineteenth-century Britain, this made possible accelerated accumulation and economic development despite the subsistence level of wages, and perhaps even owing to this wage level.

The Soviet Union and several other socialist states have also achieved exceptional growth rates while keeping wages down to a low level for a long period. This does not reveal a contradiction in the conclusions of my analysis, but rather the objective contradiction between a competitive economy and a planned one. As soon as competition and independent decision-making by individual entrepreneurs are abolished, all the functions go into reverse. Investment ceases to be an increasing function of consumption, but, since production is predetermined by material possibilities, accumulation becomes a decreasing function of consumption. The state being the dictator of specializations and of prices, there is no need for high wages in order to appropriate an increased share of the world economic product. On the contrary, since this share is given by the real potential of production, the state is all the better able to increase accumulation if wages, and consumption generally, are kept down at very low levels.

3. Cumulative Effect of Interaction

Clearly, the process of interaction between economic development and the movement of wages is accompanied by a cumulative effect. Once a country has got ahead, through some historical accident, even if this be merely that a harsher climate has given men additional needs, this country starts to make other countries pay for its high wage level through unequal exchange. From that point onward, the impoverishment of one country becomes an increasing function of the enrichment of another, and vice versa. The superprofit from unequal exchange ensures a faster rate of growth. This brings with it technological and cultural development. In order to deal with increasingly complicated production tasks, the ruling class is obliged to raise the people’s educational level. The conditions favoring trade-union organization are created. Besides, while the capitalist class as a whole is interested in restricting the workers’ needs, each capitalist on his own, driven by the pressure of competition and striving to popularize his own goods, acts so as to increase these needs. The law of diminishing costs, which, pace the marginalists, is much more widespread than that of increasing costs, urges the capitalists toward mass production and production for the mass market.

Whatever he may do, the capitalist cannot compartmentalize society. Little by little, new forms of consumption spread everywhere and create fresh needs. The progressive enlargement of the market attracts foreign capital, and the influx of this capital speeds up development. This influx, moreover, consitutes in itself a factor tending to increase wages. The existence of already available outlets stimulates investment, and increased investment causes an increase in the organic composition of capital, which forms the source of a second transfer of value from the poorer foreign country to the richer country.22

Every increase in wages, resulting from the conjunction of all these factors, increases the inequality in external exchange and thereby enriches the wealthier country still further. This enrichment in its turn sets all these factors in motion, which leads to the creation of new needs among the workers, an increase in the value of labor power, and, finally, a fresh increase in wages. Wealth begets wealth.

At the same time the poor country continues to be grounded at the level of elementary physiological subsistence. By transferring, through nonequivalent exports, a large part of its surplus to the rich countries, it deprives itself of the means of accumulation and growth. The narrowness and stagnancy of its market discourage capital, which flees from it, so that, despite the low organic composition and the low wages, a substantial proportion of its labor force is unable to find employment.23 Unemployment, open or concealed, exerts an additional downward pressure on wages and thwarts the trade-union struggle, which is already hindered by the low level of education. In proportion as wages increase in the other countries and the terms of exchange worsen, the value of labor power in the poor country decreases still further.

From the standpoint of capitalist profitability, which takes account only of the paid portion of labor, the low cost of labor power makes it unprofitable to carry out the relative increase in fixed capital that would result from the adoption of higher techniques and methods tending to economize human labor. Thus, the average organic composition of capital in the poor country is kept below the world average, and still further below the average in the industrialized countries, and this becomes an additional and independent mechanism for transferring value from the poor countries to the rich ones. Poverty begets poverty.

How is it possible to break out of this circle in the underdeveloped countries? Increased wages are a factor in development, and development makes possible increased wages. But is it conceivable that wages could be increased in order to start the process of development, when, except in the export branches, productivity is at its lowest level?

In the underdeveloped countries there are, in fact, three kinds of branches of production:

1. The export branches where comparative productivity (compared with that which the same branches would enjoy if they were established in the importing country) is exceptionally high. Here wages can easily be increased.24

2. The branches producing for internal consumption and not subject to foreign competition: services, building, transport, certain food products of current consumption, and so on. The importation of these products and services being physically impossible, an increase in wages is not limited in this case by any competition. Its only disagreeable effect would be to create a gap between the nominal wage and the real wage generally prevalent—a gap that exists already in all the high-wage countries.

3. The branches producing for internal consumption and subject to foreign competition. The difference in productivity is such that these branches would really not be able to survive this competition if wages in the underdeveloped countries were to be increased, under a free-trade system. However, in all the countries where the wage level has historically been in advance of economic development, this problem has been solved by repudiating free trade. It was the main purpose of protectionism in these countries, and especially in the United States, between independence and the end of the nineteenth century. Today the purpose of protectionism and of the regulation of agricultural prices in many of the developed European countries is to protect the high wages prevailing in the backward branches of the economy. When the United States broke away from the mother country, it was much less highly developed than she was—in fact, it was an underdeveloped country—but it had wages that were twice as high. It protected the branches that were subject to foreign competition by means of prohibitive tariffs. The conjunction of these tariffs with the market capacity determined by the high wages themselves led to an influx of capital that started off the process of development.

This obviously does not mean that it would be possible overnight to increase wages in the underdeveloped countries from five cents to three dollars an hour. But they could perhaps be raised from five cents to eight or ten cents. Subject to competition within the group, and to the extent that this increase was introduced in a fairly large number of countries exporting the same products, part of the increase would be recovered by the export branches from the foreign consumer, while another part would be only nominal, because it would correspond to the increase in local prices. This second part would be protected. But these very measures of protection, together with the expansion of the market resulting from the increase in wages, together with the fact that this increase would induce a certain amount of mechanization, would attract foreign capital in investments that would increase productivity in the branches whose production would replace imports, and thus absorb the difference between the real and the nominal wage. At that moment, tariff protection becomes pointless; but it may be maintained nevertheless, since at the same moment a fresh wage increase becomes possible, from 8 to 12 or from 10 to 15 cents, and a fresh gap between real and nominal wages may be created and may need to be protected. And so on and so on. This is the capitalist path of development. Foreign capital is attracted by an expanding market, and the lack of national accumulation funds due to the increase in consumption is made up for by financing from international sources. Development follows the curve of consumption. First comes light industry, responding to the increase in unproductive consumption that results from increased income. Later comes heavy industry, responding to the productive consumption of light industry, when this has reached a certain level.

The socialist path is the opposite of this one. Wages are more or less stabilized and unproductive consumption reduced. By the methods that a monopoly of foreign trade makes available, the excess surplus value is prevented, so far as possible, from going abroad to the benefit of the foreign consumer. For the rest, traditional exports are reduced but, on the basis of a certain degree of diversification, traditional imports are reduced to an even greater extent. The foreign exchange thus saved is used to import capital goods. The surplus in the national accumulation fund makes up for the lack of foreign capital. Development is determined by the ratio between consumption and accumulation. At first it is heavy industry that gives material form to accumulation, and then, later, light industry, when it is considered that the time has arrived to increase incomes.25

4. The Limits of the Equilibrium Wage

Another question arises, relating to the limits of the equilibrium wage. The lower limit is obviously a man’s strictly physiological subsistence minimum. The upper limit depends on the scale on which we visualize the problem.

On the world scale this limit depends on the global production potential and the lower limit of profit—that below which, under capitalist production relations, investment ceases: what could be called profit’s minimum vital.

For each country taken separately, however, under the conditions we are assuming, with competition by capital and no competition by labor, it is necessary to distinguish between an abstract limit and a real one. At the abstract limit, (1) in the rest of the world, outside the country in question, wages would everywhere have been reduced to the level of the strict physiological minimum; (2) throughout the world the general rate of profit would have fallen to the minimum determined by the propensity to invest; and (3) capitals would have flowed into the country in question, tending to equip the largest possible number of branches of production at the highest possible technological level. The sum of these capitals would tend to equalize and could not exceed the total world sum minus what would be needed to enable the workers in the rest of the world to work at the lowest technological level possible. (4) The entire excess of surplus value produced under these conditions in the rest of the world would be drained toward the country in question.

Very far short of this fanciful combination, the possibility of high wages being paid for by the rest of the world is restricted by the frictions and resistances of the real world, that is, by the resistance of the capitalists in the country in question, the trade-union struggle in the rest of the world, the viscosity of capital, the ratio between total possible exports and total national production, and the competition of the other countries that export the same products.

The last two factors are the most important and deserve closer attention:

1. My diagrams of unequal exchange show the effects of an increase in national wages in terms of improvement in the terms of trade and not in terms of national income. The two indices are not identical. The simple index of the terms of trade (I shall have occasion to come back to this point) is an index of unit prices and as such is independent of the quantities exchanged. Consequently, the incidence of its variations on the national income depends on the ratio between the volume of foreign trade and the volume of the national product. This is why it is in the interest of countries with high wages and advantageous terms of trade to intensify their specialization and expand their external exchanges, whereas it is in the interest of low-wage countries to diversify. My analysis merely goes to prove that it is the consumer who pays the difference between the wage levels. But the consumer may be foreign or local. It follows that, insofar as the production of high-wage countries is disposed of inside these countries, there is neither transfer of value from one country to another nor exploitation on the international scale.

The disturbances that an all-around increase in wages can cause in the sector producing for internal consumption constitute, if not a limit, then at least an important brake upon this increase. Contrariwise, if we are arguing in terms of two groups of countries, one with high and one with low wages, and on the basis of given international specializations, we do not have to consider in this context the danger of a reduction in external exchanges as a result of actually increasing wages. If the model of international specialization does not change, then in the worst possible case only the volume of use values exported by the group of rich countries will diminish as a result of an increase in their prices following an increase in wages. The value of the exports will remain unchanged to make up for the value of the reciprocal exports from the poor countries. And in the case that occurs most often, this value will even increase, the countries suffering from unfavorable terms of exchange being obliged to make an additional export effort in order to be able to pay, despite the rise in prices, for the same quantities of imported commodities that they need. As for the possibility of an alteration in the world specialization model and a general shrinkage of international trade brought about by the actual increase in wages, I will discuss this in Section 5 of the present chapter. If now, instead of considering each of these groups as a group, we look at the position of each particular country, we come face to face with the internal competition of other countries belonging to the same group and exporting products of the same branch.

2. In general, and except transiently, that is, during the period when a branch is moving from one group to the other, when the difference in productivity can for a certain time make up for the difference in wage levels, the two groups, that of the developed countries and that of the underdeveloped ones, do not export the same products, and the problem of competition between the groups on the commodity market does not arise. What does arise is competition within a group.

This is the most powerful check on an unlimited increase in wages in the advanced countries, but it is also the most powerful check preventing a takeoff of wages in the poor countries. On the one hand, national segregation stands in the way of simultaneous variation of wages on the scale of the entire group; on the other, despite the equalization of wage rates on the national scale, wages in an export branch can be negotiated (whether on the free-employment market or through collective action by the wage earners and their employers) only in relation to the international competitive capacity of the branch in question.

What prevents British machine-tool manufacturers from raising their workers’ wages is not the fear of seeing their Argentine clients start to produce their machine tools for themselves or cut down their consumption of them, in accordance with the high principles of the law of comparative costs, but the fear of seeing them turn for supplies to Germany or Sweden. Since the same fear, but the other way round, prevails at the same time in Germany and Sweden, an increase in wages is prevented from occurring throughout this group.

Contrariwise, any increase in wages, even one that goes beyond the limits of the competitiveness of individual costs, which results from circumstances favoring the trade-union struggle in a country belonging to the group tends to be contagious for the other countries in this group, since it widens the limits of their mutual competitiveness, so that the country where the wage increase first occurred ends by recovering the competitive position it had lost.

This is the only case in which productivity determines wages. When, in spite of their belonging to the same zone, there are differences in wages between countries that regularly export the same articles, these differences correspond, under conditions of perfect freedom of trade and competition, as well as of equalization of the rate of profit, to a proportionate difference in productivity.

Outside these limits, that is, where there is no possibility of passing on the cost to the foreign customer, a rise in money wages would result, in the case of a nonconvertible currency, in a rise in internal prices, with a depreciation of the national currency, and consequently there would be a rise in nominal wages without a rise in real wages; in the case of a convertible currency, the result would be that a certain number of branches of production would be brought to a standstill, capital would take flight, and unemployment would increase.

If we consider the present gaps between wage rates in different parts of the world (even in terms of real wages), we are compelled to acknowledge that in practice the forces that work against this phenomenon leave a very substantial margin for “independent” variations in wages.

I am not here talking about the short-term disturbances that occur at the moment of an increase of wages. These do not represent a “limit” but are merely readjustment tensions, lasting until the increase has had its effect.

At the same time, when we speak of convertibility of currency, we must distinguish between the different levels of abstraction at which we are conducting our analysis. At a very high level of abstraction, if a currency is convertible, then there can be no difference between nominal wages and real wages. However, a series of factors, namely, transport costs and the technical need to produce most services and some material goods on the actual spot where they are to be consumed, not to mention customs duties, make currency convertibility illusory, to a certain extent, and allow a considerable disparity in the internal prices of the various countries, which gives rise to gaps between nominal wages and real wages even where there is convertibility. (It may well be said that my francs are no longer convertible into dollars at par once France has imposed a tariff on American goods.)

Moreover, this elasticity of real wages in relation to nominal wages, in spite of convertibility, makes possible the absorption of the temporary disturbances to equilibrium that occur before the repercussion process is completed and enables this process to be completed with the minimum of shock.

On the other hand, it is nominal wages and not real wages that have an effect externally (I shall have to come back to this point later on), and the gap between them expresses the extent to which part of a nation’s production cannot be exchanged, at whatever price, but has to be consumed on the spot. To this extent the high-wage countries do not benefit from unequal exchange; and to the same extent the low-wage countries do not suffer from it.

5. The Organic Composition of Labor and Development

On the plane of national development: When, in my diagram of unequal exchange (in Chapter 2, page 62, above), the workers in country A receive 100 units for a quantity of labor counted as 120, and those of country B receive 20 units for the same quantity of labor, this quantity, whether it represents hours, days, or months, is assumed to represent simple, abstract, and universal labor. It is thus the result of a reduction process. If we assume that the unit of time is the production cycle, the 120 man-cycle units of labor do not necessarily represent 120 workers. The number of living workers represented by these 120 units of abstract labor does not figure in the diagram, and it depends, for each country, on the proportion of skilled labor and the degree of skill, in the branches of production in which the country in question specializes.

At a given world technological level, the various branches of production differ not only in the intensity of the organic composition of their capital but also in what might be called the organic composition of their labor, meaning the ratio between the number of living workers and the amount of social labor to which their specific labors can be reduced. With the same wage rates and the same number of personnel, the most modern building concern has a payroll amounting to much less than that of the most modern chemical works, because the latter’s personnel includes a very much higher percentage of skilled and specialized workers.

Now while, as I have shown, a country’s development depends on its wage level, we must nevertheless acknowledge that this development is not to be measured in absolute wealth but in wealth per capita. Even if unequal exchange arising from difference in wages did not exist, and even if we consider only the material income of the moment, it is not a matter of indifference for a country whether it is a community of laborers or a community of engineers.26 This is because equalization of wages does not mean equal pay for equal labor time, but equal pay for an equal unit of time given an equal level of skill.

If Greece were to specialize 100 percent in the business of tourism (for which, it may be said in passing, the country possesses an unquestionable comparative advantage), and turned its entire population into head waiters, elevator operators and porters, it would not thereby become as highly developed or as rich as the industrial countries, even if its hotels were the most modern and the best equipped with the newest techniques in the world, and even if unequal exchange were abolished, that is, even if these head waiters, elevator operators, and porters were paid at the same rates as their Belgian, Swedish and Swiss colleagues. The reason is that, with the same general wage scale, an elevator operator is paid less than a skilled worker and a waiter less than an engineer.

The effects of the organic composition of labor may perhaps be clarified if we take an extreme case, say, a socialist world with a single wage scale and without any exploitation, direct or indirect.27 All other things being equal, and with exchange taking place according to values or prices of production, the disparity between regions in income per capita would still be considerable. A rural area, where perhaps one agronomist was needed to a thousand laborers, would be much poorer than an area specializing in textiles, where the proportion would probably be one engineer to two hundred workers of medium skill, and this in turn would be much less rich than another area specializing in electronics, where perhaps there would have to be one engineer to ten highly specialized workers.28

This is the factor that can give meaning to what is called the “dynamism” of certain branches, and consistency to planned decision-making as to what kinds of production a developing country should endeavor to establish—and not the behavior of products on the market and the elasticities of the corresponding demands. Such decision-making must be based on study of the organic compositions of capital and labor characteristic of each branch and must strive to foresee the curves of their future evolution. Not all branches have the same power to absorb, now and in the future, fixed capital and highly skilled labor, and even though one were to attain the world technological level and the wage scale of the developed countries, if the branches chosen were branches that, at that level, had an organic composition of capital and an organic composition of labor that were relatively low, the country would still not be as rich as others.29

This does not mean that every country is in a position to choose the branches with the highest capital intensity and the greatest proportion of highly skilled labor. Both depend upon the investment possibilities; direct investment in capital goods, in the case of the former, and indirect investment in education and training of people, in the case of the latter. The second kind of investment is both the one that takes longest to produce results and the one that most urgently needs to be undertaken. So far as the first kind of investment is concerned, choosing a branch that can have a high organic composition of capital does not mean that one necessarily has to start off with this high organic composition. If capital is scarce and labor plentiful and underemployed in the self-subsistent sector, it may be, in certain circumstances, more to one’s interest to choose a technical combination in this same branch that is below the technological level of the moment, a combination entailing a relatively low organic composition: just as it may be, in other circumstances, to one’s interest to choose the highest available technical combination, despite the shortage of capital and abundance of labor.30

But the choice of a technical combination within a branch, at a certain moment and under certain conditions, is one thing, while the choice of the branch itself, rich in possibilities of absorption of fixed capital, so as to safeguard the future, is quite another. Another thing, too, is the choice of a branch that permits and even entails the employment of a higher proportion of skilled workers. In this case it is much more difficult than in the first one freely to choose combinations that are below the organic composition of labor characteristic of the branch. One is then dependent on the technical combination chosen, which determines not only the capital intensity but the proportion of skilled labor as well.

On the regional plane: This variation in the organic composition of labor between one branch and another, in my opinion, explains, broadly at least, the differences in development between different regions within a country. If, indeed, the difference in wages were the sole cause of the difference in development, how would it then be possible to account for the considerable differences in regional development inside the frontiers of one and the same country?

Here it must be said that mobility is never perfect even within a single nation. There is a certain viscosity of the labor force just as there is a certain viscosity of capital. The distances are sometimes great. A working-class family living in the Bordeaux area cannot decide overnight to move to Paris in search of higher wages. A thousand ties keep a man bound to his province or to his town.

Nevertheless, it might be thought that small movements of workers crossing the lines of demarcation between wage-level areas would suffice to spread their effect little by little over the whole territory, since, if there is difference at the extremities, there must obviously somewhere be difference between two points that adjoin each other. But the interoccupational employment space is not homogeneous but structured. The workman who wants to change his employer may thus face the choice of either remaining in his trade but moving to a distant part of the country, or of remaining near his home but changing his trade. As the possibilities of apprenticeship and training are likewise structured in dependence on the regional location of the branches of production, this circumstance adds a further degree of viscosity to the labor factor. On the other hand, economic reality, as I have already had occasion to remark, is discontinuous, and this discontinuity is reflected here in the fact that a certain “minimum” of differentiation is needed before the competition of the factor can be released, through the shifting of labor power from one area to another.

All this makes possible a certain disparity of wages, and thereby a certain disparity in regional development. Is this sufficient, however, to account for the present level of disparity? If we consider that basic wages are to an increasing extent negotiated collectively and on a nationwide scale, and if we leave aside certain special cases where geographical localization is linked with an ethnic or racial factor, as, for instance, in the southern United States, or in certain parts of France since the recent influx of Algerian, Spanish, and other foreign workers, or some other cases where semifeudal survivals completely distort the working of the law of value, as in southern Italy, we must answer this question in the negative. Regional differences in wages, especially real wages, where they exist, do not exceed an order of magnitude similar to that of the differences between countries usually regarded as being on the same level—e.g. France, Belgium, West Germany. They are not discoverable by simple observation. Yet regional disparities in levels of consumption are glaringly obvious.

If we agree that, under modern capitalism, in which the idle rentiers of former times have practically disappeared, the total amount of household consumption roughly corresponds to the total amount of wages, including the salaries paid or attributed to employers, or, at all events, that the lavish expenditure of a few individuals has little effect on the poverty or wealth of a region, differences such as those that exist today can only be explained if the per capita wage income differs considerably from one region to another.31 However, the per capita wage income can vary only as a result of three factors: (1) rate of wages, (2) level of employment, and (3) quality of employment.

If differences in wage rates are insufficient to bring about such a glaring disparity in levels of consumption, and if under conditions of relative full employment, such as have prevailed in France in recent years, regional differences in unemployment can be taken as negligible, then all that is left is the third factor, namely, the regional distribution of the higher categories of employment, what I have called the organic composition of labor, as the only explanation of the phenomenon, or at any rate of its main features. The incidence of this factor on the amount of consumable income is, in a country like France, considerably higher than the mere geographical difference in wage rates, if we leave aside the ethnic or racial factor mentioned above. It must also be kept in mind that it is not only the proportion of higher categories of technical personnel that varies a great deal from region to region, but also that of administrative personnel, in both the private and public sectors. And it is not only economic development that suffers as a result of this but also, and more so, social development as well, since the average intellectual level of the area is directly affected. We think it can be said that the reason why Languedoc is less developed than the Paris region is not because the wages of laborers and the salaries of technical and administrative staffs are lower in the former than in the latter (though this contributes to the result to a certain extent), but above all because in Languedoc there are more laborers and fewer technical and administrative employees than in the Paris region.32

IV. REAL AND NOMINAL WAGES

I. Transport Costs

What has been said so far may leave the impression that it is real wages that provide the foundation of my thesis. Whether the notion of subsistence be physiological or psychological, what determines the value of labor power, and thereby wages, is a certain amount of goods and services. Whether these goods and services are cheap or dear cannot, at first glance, affect either the worker’s real wage or the surplus value extracted by the capitalist, which is merely the surplus of goods and services that the wage earner can produce over and above what he receives, or, consequently, the part of this surplus that a country finds itself obliged to transfer abroad without getting any equivalent, through the mechanism of unequal exchange.

If this were so, the effects of unequal exchange would be considerably mitigated. Though money wages may vary from one country to another in a ratio of 1 to 20 and even more, it is clear that in terms of actual goods and services purchased the disparity is less. The bulk of working-class consumption involves local products, the prices of which in the underdeveloped countries are lower than those of the corresponding products in the rich countries, after all these prices, expressed in different national currencies, have been reduced to a common denominator on the basis of the parities of these currencies accepted in international trade transactions.

This disparity between real and money wages does not figure in my diagrams because these have been constructed without taking account of transport costs, and on the assumption of absolute free trade. These hypotheses imply uniformity of price for each commodity and each service in all countries and all regions. Under these conditions there can be no difference in real and nominal wages between one country and another, or in other words, the ratio between nominal wages is the same as that between real wages. This is the only point at which these hypotheses, and especially the assumption of the absence of transport costs, become inconvenient and have to be abandoned.

Working-class provisions are usually weighty or perishable substances, and most services are not exportable, since the act of production and the act of consumption are inseparable. Finally, free trade is not absolute, and agricultural products are often accorded special tariff protection. For all these reasons the prices of this category of goods and services may vary considerably between one country and another.

2. The Worker’s Wages and the Worker’s Cost

This disparity causes a divergence between what a worker really earns and what this same worker costs his employer. Now, while the capitalist’s profit is already given by the general rate of profit, what determines price is not what the worker really earns but what he costs in money terms.

Low prices of provisions correspond to a low value of labor power. If we assume that bread is the sole article of working-class consumption, ability to buy bread in country B at half the price it costs in country A has the same effect as if in country B there were a race of men who can provide the same amount of labor as in country A but with only half as much bread.

If we consider that in the underdeveloped countries the goods consumed by the workers in the capitalist sector are produced by an extensive noncapitalist agricultural sector, we note that unequal exchange hits not only the workers of the given country but also several other classes of its population—craftsmen, peasants, and so on—though not the capitalists. The prices of commodities exported from India are low not only because the Indian worker is content with a bowl of rice and rudimentary housing, but also because rice and local building materials are cheaper in India than elsewhere. If the prices of rice and building materials were to fall still further in India, the money wages of the textile workers would fall, and India would receive less from her external trade, although the real wages of her textile workers had not changed.

The opposite is also true. A developed country that protects its agriculture, and keeps the prices of its agricultural products artificially above the world level, gains in external trade, even if the real wages of its workers have not risen. This happened in Britain in the days of the Corn Laws, which caused Ricardo to say:

… when any particular country excels in manufactures, so as to occasion an influx of money towards it, the value of money will be lower, and the prices of corn and labour will be relatively higher in that country than in any other. This lower value of money will not be indicated by the exchange; bills may be negotiated at par, although the prices of corn and labour should be ten, twenty, or thirty per cent higher in one country than another. Under the circumstances supposed, such a difference of prices is the natural order of things; and the exchange can only be at par when a sufficient quantity of money is introduced into the country excelling in manufactures, so as to raise the price of its corn and labour.

And Malthus observes, when quoting this passage:

In reality, the quantity of money in each country is determined by the quantity wanted to maintain its general exchanges at par; and the greater are the advantages of any country in regard to its exportable commodities, the more money will it retain, and the higher will be the price of its corn and labor, when its exchanges are at par. If England should lose her advantages in this respect, her corn and labour would fall to the level of the rest of Europe, in spite of any corn laws that could be imagined.33

What was happening here? England had an industry that enjoyed a substantial advantage over the rest of the world. Normally, this advantage (in exchange) could not have been retained without an increase in some fixed income—say, wages or rents—for competition would have prevented the English manufacturers from enjoying their superprofit for very long. But this superprofit was cancelled out by the rise in the price of foodstuffs, and consequently of wages. The surplus of exports resulting from this advanced industry caused the rate of exchange to rise above par, which in turn caused an influx of gold and silver that raised the prices of foodstuffs. Money wages followed in the usual way. In the end the manufacturers received only the normal profit, the workers received only the natural real wage, and the whole of the superprofit from high prices that England drew from her overseas customers went into the pockets of the landlords. The question arises, of course: why did they not buy corn from abroad? Here the Corn Laws intervened, together with transport costs, which were extremely heavy for the goods consumed by the workers.

At a period when the British workers were not strong enough to seize the benefits of British trade for themselves, the landlords did. Later, the landlords were defeated and the Corn Laws repealed: but the workers’ organizations being stronger in resisting a cut in nominal wages than in defending or improving real wages, the superior level of British money wages was consolidated. It was even raised higher, if account be taken of the effect of the Ten Hours Act, passed soon after the repeal of the Corn Laws, thanks to the unexpected support given by the landlords’ representatives in Parliament, burning to get their revenge on the industrialists.

V. DIFFERENTIAL WAGES AND THE INTERNATIONAL DIVISION OF LABOUR

1. How to Reconcile the Working-Class Monopoly that Underlies Unequal Exchange with the Free Localization of Branches of Industry

I want to avoid a misunderstanding that may arise from my argument. I am not saying that a particular branch in a particular country can increase wages at will and transfer the burden ipso facto to its customers. But the range of possible kinds of production is so extensive, and the number of specializations in the different variants and qualities of the same article so large, that a high-wage country can never find itself in a position where it cannot discover a specialization that, in the international division of labor at that moment, is free from competition on the part of the low-wage countries.

True, it is not as a high-wage country that a country can discover specializations that are advantageous from the standpoint of international competition, but neither is it as a highly industrialized country. Every country, whatever its wage level and whatever its degree of industrialization, can discover these specializations on the sole condition that it selects them from among the branches established in countries that have a wage level equal to or higher than its own, or from among those for which its natural advantages outweigh the difference in wage levels. This is what actually happens, and there is no lack of such branches. By the mere fact that a country imports something, it obliges its suppliers to neglect some other branch of production, since, in order to sell to this country, the suppliers automatically have to devote more factors to their exporting branch than this branch would require on the basis of the proportions laid down by the model of their own consumption.

2. Unequal Exchange or Autarky

This is why, on the other hand, it is not possible for low-wage countries to cancel this advantage enjoyed by the rich countries by themselves specializing in the branches favored by the unequal exchange of the moment. As soon as such a branch is taken over by the low-wage countries, the rich ones drop it and turn to producing something else. This has already happened with textile production, taken over by the underdeveloped countries, and it will soon happen with shipbuilding, with which Japan is busying herself.

Textile production was for a long time the warhorse ridden by the first industrial country. Britain exchanged her cotton goods for Indian cotton and gained from this exchange the means of paying high wages to her workers. The day when India took up weaving—in which, by the way, she had formerly had much longer experience than Britain, until interrupted by the onset of colonial rule—Britain changed her approach. She began to exchange her cotton yarn for Indian cotton and Indian fabrics. Then India started to produce her own yarn. So now Britain exchanges her looms and spindles for Indian fabrics, still obtaining the wherewithal to pay her workers their high wages. If India were to begin tomorrow to make her own looms and spindles, Britain would change her branch of production yet again. She would send out machine tools for making these spindles and looms. After that would come special steels for making these machine tools, and so on. It is not even necessary for Britain to climb upstream in the production process every time. If need be she can go downstream. If India were to specialize one day in metallurgy and engineering, to the neglect of her textile production, Britain would find no difficulty in taking up the latter branch again. By exchanging fabrics and yarn for steel, looms, and spindles from India, Britain would achieve the same superprofit as she achieves today with the reverse pattern of trade. Whatever she makes and whatever she sells, she must realize the advantage that comes to her from unequal exchange and that corresponds to the difference between British and Indian wages. Unless we assume that one day India will produce everything she needs and no longer exchange anything at all with the developed countries, something that is practically unthinkable, the latter will always be able to find something to produce and exchange with India. So long as exchange takes place and so long as the wage levels are unequal, nothing can stop India from pouring out toward Britain or toward other developed countries part of the surplus value extracted from her own workers.34

The choice is thus between unequal exchange and autarky. In order to understand this dilemma properly, we must consider the problem on the scale of the two groups of countries, the high-wage group and the low-wage one, and not on that of any particular country taken separately. One low-wage country may be able to benefit for a certain period by establishing on its soil one of the traditional branches of the high-wage countries, favored by unequal exchange. Other low-wage countries will soon copy its example, and this branch will not take long to become “degraded” (not to mention that the mere internal competition of the capitalists of the country in question will often suffice to bring about the same result).

But suppose that the countries of the second group try to escape from unequal exchange by producing inside their zone and supplying to each other the products that are burdened with the high wages of the advanced countries. What will they do then with their coffee, their rubber, their palm nuts? If they continue to export them to the developed countries, what will they do with the money they get for them? Unless they return these funds in order to buy something from the developed countries, their situation will be worse than that resulting from unequal exchange: their exports will have been, in effect, given away. But if they import something with the money, they will be subjected to unequal exchange.

Could we perhaps imagine a general agreement, a sort of common market of the underdeveloped countries, who would plan their production and exchange and arrange among themselves to produce just enough coffee, rubber, and palm nuts to meet their own needs, directing the surplus of their factors into producing articles that otherwise they would have to import, on the scale of their zone as a whole? Though one may doubt whether, even taking the group as a whole, the underdeveloped countries could be entirely independent of the others, it is undeniable that if the low-wage countries did succeed in concluding such an agreement, they would escape from unequal exchange—in the main, at least. Such a possibility, however, lies outside the conditions assumed in this study, which are those of competition between the producers both on the national and on the international planes. It is certain that what causes the excess surplus value produced within the country to be drained away abroad is the competition between the capitalists, which constantly tends to reduce their profits to the level of the general rate. Without this competition this excess would be kept within the country, if not in the form of superwages then at least in that of superprofits. A monopoly of foreign trade even on a national scale, and still more, of course, one organized on an international scale, such as that which the agreement imagined above would bring about, would obviously put an end to this servitude. Though autarky is not practicable, the underdeveloped countries that had attained such a degree of integration would in any case have no need to resort to it. They would, instead, directly intercept and retain their own excess surplus value through a concerted price policy35

Despite this practical impossibility for the underdeveloped countries to live without external exchange, it follows from my analysis that the policy of diversification and autarky has more inherent logic than that which consists in choosing the branches that political economy has recently described as dynamic, for the sole reason that it has observed ex post that they lie on the right side of the barrier of unequal exchange—losing sight of the fact that they are only “dynamic” because they belong to the high-wage countries and would cease to be so the moment they crossed over to the underdeveloped countries, as happened with the textile industry.36

On another basis than mine, F. Perroux, G. Destanne de Bernis, Jean-Marie Martin, F. Rosenfeld, and others have analyzed, in a series of articles published in Economie appliquée, the dynamic of the “industrializing industries.”37 Considering it as self-evident that industrialization is an indispensable factor in raising the standard of living, these writers are able to justify their decision in favor of establishing first of all in the developing countries certain “industries situated at the highest stages of the production process” because of their training effects, and without referring to the impact of the terms of exchange. On this basis their arguments are to the point and it would be hard to dispute the conclusions they draw.

However, a free trader might reject the entire argument by challenging what looks like a question-begging assumption they make, namely, that industrialization is a good thing in itself. If freedom of trade is perfect and if all prices of all products are equally remunerative to their respective factors, it is hard to see why a country that specialized, in accordance with its comparative advantage, in the production of bananas should be less rich than one that specialized in machine tools. If machine tools are dynamic because they induce the mechanization of other branches of industry and agriculture, oil seeds, rubber, petroleum are no less indispensable to every industrial group, and there seems no clear reason why a developed country can without prejudice depend on foreigners for its supply of raw materials and yet not for iron and steel goods. G. Destanne de Bernis offers three reasons, all very weak. “The objection that these intermediate products might be imported,” he writes, “will not hold, for three reasons we have already encountered: the fact that the underdeveloped countries actually import only a very small quantity of them, their lack of available foreign exchange, the low value of these products in proportion to their weight, which prevents them from being objects of active international trade.”38

The first of these reasons is incomprehensible, if it is not a mere tautology: the underdeveloped countries cannot import these products because they “actually import only a very small quantity of them.” The second departs from the writer’s premises: the availability of foreign exchange depends on the amount of value produced, and so on the level of development, on the proportion of this value that is exchanged, and on the terms of exchange. To invoke the first of these factors is to take for granted what has to be proved, namely, that development will proceed faster if the proposed path be followed. The second works against the argument, since the proportion exchanged diminishes with the diversification and the “introverted” development that is being advocated. All that is left is the terms of exchange, which do indeed constitute a valid reason in themselves that can determine, in the last analysis, decisions to set up certain industries regardless of or in contradiction to comparative costs, but of which the writer takes no account whatever in his argument. Finally, the third reason is based on an untruth. It is simply not true that iron and steel goods in general, and machines in particular, are “heavier” than the palm nuts, the minerals, or the petroleum that the developed countries import, not to speak of certain other agricultural products the transport and preparation for transport of which in some cases costs several times the price f.o.b. It is this high price f.o.b. that makes the importing of some products worthwhile and that of others not; in other words, it is the terms of trade that make industrialization desirable for the underdeveloped countries of today.

But it is clear that as soon as the need for industrialization and diversification is acknowledged, the analysis of the “poles of growth” and the “industrializing industries” provided by the writers I have quoted becomes extremely interesting.

It is true, however, that between extreme specialization and complete autarky there are a whole range of situations corresponding to the different degrees of diversification. If the underdeveloped countries, whether each one moved by its own interest or the whole lot together, acting in concert, were to succeed, not in ceasing completely to export coffee, rubber, and palm nuts and to import manufactured goods from the industrialized countries, but just to reduce those exports and imports to a substantial extent by transferring part of their factors from the traditional export branches to certain branches whose production would replace imports, the result would constitute a twofold gain for these countries. In the first place, they would benefit from the mere fact of reducing the volume of their exchanges, since the loss arising from unequal exchange is, as I have already had occasion to say, the product of the terms of trade multiplied by the ratio of the volume of external exchange to the volume of the national product. Then, they would also gain through the reinforcement of their power to bargain over the prices of their traditional export products, resulting from the diminution in the quantities produced and exported. For we must not lose sight of the fact that the equilibrium of world trade dictates that the diversification of one of the two groups must be followed by an equal diversification of the other, without which this other group would have more commodities to offer than could be bought from it and would need more commodities than it could be supplied with. Thus whichever of the two groups took the initiative in diversification would hold right away an advantage over the other.

In addition, the concrete conditions are such that, geologically if not economically, diversification is easier for the underdeveloped countries than for the others. As already said, it is always easier for Portugal (read: for the underdeveloped countries) to produce cloth than for Britain (read: the developed countries) to produce wine (read: coffee, rubber, palm nuts).

Thus, under present-day conditions of huge disparity in wage levels between the “North” and the “South,” diversification, whether undertaken in the framework of each underdeveloped country separately, if the size of the country permits this, or on the basis of regional agreements, is undoubtedly beneficial for the “South,” and indeed it is to be observed that these countries are becoming more and more aware of this. However, we must not confuse diversification with choice of export branches or change of specialization in order to compete with the rich countries.

What must be kept in mind is that the rich countries pass on the cost of their high wages to the foreign consumer on the basis of an existing international division of labor and thereby enjoy the advantage of the status quo. These countries do not have to worry about finding specializations that make this repercussion possible. They already possess these specializations. They were acquired at the same time as the superiority of their wage levels came about, in the course of a long-term evolution. If the other countries want to take over these branches, it is they who will have to worry about the difficulties of transplantation. Besides the obstacles listed above, it must also be said that in any case a new branch of production is not to be established anywhere by merely pressing a button. Decades of effort are needed, during which the high-wage countries that hitherto exploited this branch have time to adjust their aim. This is just what happened with textiles. Above all, though, during this “acclimatization” period of the new branch, the ratio between the costs of the old producers and the new is not one that can be deduced from merely calculating the effect of the difference in wages. While the new industry is going through the period of infantile disorders, the difference in productivity usually makes up, in whole or in large part, for the difference in wages, and sometimes more than makes up for this. This period is usually too long for the relatively short view taken by private capital, which under a competitive system is the exclusive agent of the introduction and establishment of the new branch. Only the state, within the context of the long-term prospects of an overall economic plan, can undertake the effort and sacrifice called for by this often lengthy period of adaptation and organization.

If what is involved is a branch of production aimed at replacing imports, matters can be facilitated for private capital by an adequate degree of tariff protection, but if an exporting branch has been chosen, private capital would find it very risky to face a long period of working without profit, or even at a loss, due to inexperience and external “diseconomies.” Only export subsidies could provide the necessary incentive, but such subsidies presuppose a degree of interventionism going much further than mere tariff protection and coming close to the model of a planned economy—to which, as I have already observed, many things are possible that are out of the question so far as a free-enterprise economy is concerned.

What then becomes, in all this, of the international division of labor, seen by the best minds as the product of objective, inescapable factors, a sort of pre-established harmony? On this subject I think it is good to quote Marx’s splendid apostrophe: “You believe perhaps, gentlemen, that the production of coffee and sugar is the natural destiny of the West Indies. Two centuries ago, nature, which does not trouble herself about commerce, had planted neither sugar-cane nor coffee trees there.”39

Limits and Implications of Unequal Exchange

I. DIFFERENT ORGANIC COMPOSITIONS WITH THE SAME WAGE LEVEL

I. Unequal Exchange in the Broad Sense

In Chapter 2 I distinguished between two forms of nonequivalence. One (apparent) form arises from the mere transformation of values into prices of production, when wage rates are the same but the organic compositions of capital are different. The other, which I called nonequivalence in the strict sense, is characterized by differences in both wages and organic compositions. I refused to consider the first form as constituting unequal exchange and based my definition upon the second. Since, however, many Marxists regard the first form as constituting the very type of nonequivalent exchange, I must justify the position I take on this matter.

To do this I will first refer to a passage from the pen of Professor Charles Bettelheim in which this question is discussed.1 He concludes by agreeing that the unequal exchange that arises from differences in wages is much the more important, both from the standpoint of the immediate exploitation of one country by another and from that of the uneven development of different countries.2

However, the arguments he sets out at the beginning of this passage, apparently with a view to showing the scope of the problem, and without sticking too closely to them thereafter, tend to show that between the two forms of unequal exchange there is only a difference of degree. For this reason I shall discuss these arguments as they stand, while appreciating that the point of view for which they might constitute the elements is not the same as Professor Bettelheim’s own, as I have been able to learn it subsequently and as it is even expressed later on in the same passage.

According to these arguments, when we consider the two forms of nonequivalence we might think fit to speak of unequal exchange “in the broad sense” and unequal exchange “in the narrow sense.”

Let us take again the example we used in Chapter 2 (see over).

Here, according to the argument we are discussing, is a case of unequal exchange in the broad sense, since country B exchanges its production, which has cost it 120 hours of living labor and a certain quantity of past labor, for 150/190 of the production that has cost country A the same amount of living labor and an equivalent amount of past labor.3 In other words, and leaving aside the inputs in past labor that we assume to be the same in both countries, country B exchanges one hour of its national living labour for 15/19 hours of A’s living labor.

It is undeniable (and I have accepted this in Chapter 2) that already in this type of exchange there is a transfer of surplus value (20 units) from country B to country A. I cannot, however, put this transfer in the same category with the transfer caused by difference in wage levels, even if we distinguish between a “broad” sense and a “narrow” sense, because I see between the two a difference not of degree but of quality.

2. Nonequivalence in the Broad Sense is Not a Phenomenon Peculiar to Foreign Trade

The first reason that forbids us to make this identification is that this kind of nonequivalence exists in every exchange that occurs under the capitalist system, whether inside or outside a nation, and from the point of view of method there would be nothing to gain by creating a new category.

Our limit is the capitalist system itself. When we say that there is unequal exchange between France and Guinea, we are not concerned with what would happen if capitalist production relations did not exist, and commodities were exchanged in accordance with their values and not their prices of production, but with what would happen if Guinea were a part of France, like Brittany or the département of Alpes Maritimes, that is, if the exchange we are analyzing were intranational instead of international.

For a Guinea that was a part of France, with free circulation of capital and of people to and from other parts of France, with the same legislation and the same relationship between social forces as elsewhere in France, and a unified labor market embracing Guinea and the rest of France, unequal exchange “in the narrow sense” would vanish, but unequal exchange “in the broad sense” would continue. How then can one talk of an inequality peculiar to international trade if exactly the same phenomenon occurs between regions and between branches of production inside one country? How could France or Guinea complain about the mere transformation of values into prices of production when this same transformation takes place inside each country’s national economy?

See text page 161

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	60	60	170	110		80	190
B	120	50	60	60	170	110		40	150
	360	100	120	120	340	220		120	340

However, this argument, I agree, is not decisive. The reply could be made that inside a given country redistributive mechanisms wipe out the inequality of exchange that is due to differences in organic composition between different branches or regions. There is a unified capital market, which is not the same thing as international investment. The branches or regions with a higher organic composition pour back into the other branches and regions the extra surplus value they have drawn out of the common pool, either through social legislation and state expenditure or else through interbranch financing carried out via the banking network or the stock exchange. All this is missing from the international scene. The 20 units of surplus value transferred from B to A owing to the difference in organic compositions are irrecoverably lost by B.

3. Prices of Production as a Structural Necessity for Capitalism

There is, however, another fundamental difference between “inequality” of exchange due to difference in organic composition and inequality due to difference in wages. Differentiation in organic composition is inevitable even in a model of perfect competition; it is independent of the degree of this competition or the imperfections in it. It is due, among other things, to the specific technical features of the different branches. Differentiation in wages is due to imperfect competition by the labor factor, caused by distances and political frontiers, and is proportionate to the imperfection of this competition. Constant increase in organic composition is a structural necessity for the development of capitalism, whereas disparity of wage levels is an accidental feature.

Nobody, whether an individual firm or a country, would go on accumulating if profits were not proportionate to capital invested. Prices corresponding to values would put a premium on nonmechanization. Technological progress would be held up. This is even valid regardless of the internal regime of each country, if each country presents itself externally as an independent producer of commodities exchangeable on the international market.

Prices of production, which take account of the capital invested, are thus an element that is immanent in the competitive system. They are an instrument for maximizing society’s economic product. Even if we consider only the aim pursued by the capitalist class (since this class alone is in charge of the working of the system), namely, the maximizing of profit, we see that increase in organic composition is a factor favoring this. All other things being equal, and if wages remain the same, to maximize production means to maximize profit, since the latter is only what remains after paying wages.4

When, however, a low-wage country pours away abroad the extra surplus value that its enterprises have extracted from its own workers, this does not correspond to any sort of rationality or any sort of progress.

Difference in organic compositions is an objective condition of production. Disparity in wages, if my analysis in Chapter 3 is correct, is an institutional factor. An international division of labor conditioned by this factor is “suboptimal” insofar as there is no necessary correspondence between the natural and objective advantages of each country and a location of branches of production that is determined by differences in wages.5

Let us suppose that, for some reason or other (political changes, trade-union activity, or whatever), wages in the Third World were suddenly to increase fivefold or tenfold, or that wages in the advanced countries were to fall by that much: the greater part of today’s international division of labor would lose all justification, even though no objective factor of production had changed.

4. Organic Compositions and Terms of Trade

In conclusion, if we try to explain the long-term worsening of terms of trade by differences in organic composition and regardless of disparity in wages, we shall be on the wrong track. For the transfer of surplus value that is occasioned by difference between organic compositions, that is, by the transformation of values into prices of production, though it certainly corresponds to a disadvantage that exists in the factoral terms of trade, does not necessarily correspond to one in the barter terms of trade.6

We must indeed refrain from losing sight of the fact that the prices of production A = 190 and B = 150 are not unit prices but the countervalue of the total production of countries A and B.

What would the situation be if A had the same organic composition (120) as B and exchanged its products at par with those of B, the other elements in cost remaining the same? Would it be better or worse for B? This depends on the physical quantities produced by A in these two cases.

For B’s situation to be better, the increase in A’s organic composition, from 120 units of capital per 120 units of labor to 240 units of capital per 120 units of labor, would have to result in an increase of productivity of less than 190/150. In other words, it would be necessary that, all other things being equal, the price of production per unit product should not diminish with the increase in equipment and advance in technique, but instead should increase. This is something that, though theoretically possible, is improbable in practice, given that, under a regime of free competition, a higher technique is adopted only insofar as and to the extent that it will have the effect of reducing the unit price.

If we bring the physical quantities of the goods into our numerical example, the respective positions will be as shown on page 166.

Everything thus depends on the magnitude of x. if x < 126 2/3, B’s terms of trade are indeed worsened; if x=126 2/3 they remain the same; and if x > 126 2/3 they are even improved. It is therefore necessary, in this numerical example, that the marginal productivity of capital be less than 4/15 of its average productivity for this inequality “in the broad sense” to bring about a worsening in the terms of trade.

Since, as a general rule, in the system of free competition, a higher technique is useful only on condition that, with wages unchanged, the unit price of the product is less than that obtained with the lower technique; and that, despite this, the additional capital needed for this technique is rewarded at the prevailing rate, or that the unit price is equal to that obtained with the old technique, but the total capital (initial and additional) earns a rate of profit higher than the prevailing rate; and as this condition implies a corresponding growth in production per unit of living labor, we can conclude that, accidents excepted, the country that has not increased its organic composition will receive from the country that has done this, for the same value and the same use values, a lower value, to be sure, but a higher quantity of use values than before.7

We must distinguish the ex ante motives and calculations of each individual capitalist from the ex post result that ensues for all the capitalists. Individual calculation is necessarily linear. Each capitalist separately assumes that the elasticities of the market are infinite so far as he is concerned, and he cannot reckon either with the effect his own actions will have upon the commodity and capital markets or with what would happen if the other capitalists were to copy his example. Even if he realizes that the new technique will soon be introduced generally and that the end result will be a worsening of the situation of all the capitalists, himself included, he cannot refrain from using the new technique, if it is profitable in relation to the existing situation. Were he to hold back while others adopted the new technique, his individual position would be still worse than if he hastened to make use of it, along with the others and as soon as possible.

See text page 165

With Equal Organic Compositions
Country	K Total capital investment	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	T Rate of profit	p Profit TK	L Price of production R+p	Use values	Unit prices
A	120	50	60	60	170	50%	60	170	100	170
B	120	50	60	60	170		60	170	200	0·85
	240	100	120	120	340		120	340
B’s barter terms of trade are Px/Pm = 1/2.
With Unequal Organic Compositions
A	240	50	60	60	170		80	190	X	190/x
B	120	50	60	60	170		40	150	200	0·75
	360	100	120	120	340		120	340
B’s barter terms of trade are Px/Pm

Thus, faced with the new technique, the position of the individual capitalist in country A is a simple one. The general rate of profit is 50 percent. The price of the product is 1·70. Two reasons may persuade him to adopt the new technique that requires twice as much capital for the same number of workers. He can either reduce his price below 1·70 in order to undersell his competitors, while retaining the same rate of profit, or he can increase this rate of profit, while keeping his price at 1·70. In both cases it is clear that he will only adopt the new technique if he can produce with it more than 136 units of the product for the same total cost of production. Thus, it is necessary that x > 136. If this is so, then after this new technique has come into general use in country A, the international price of a unit product of A will fall below 1·39 or 190/136, having previously been 1·70, whereas a unit product of B will fall in price only from 0·85 to 0·75. Thus, the commodity terms of trade will improve for B instead of getting worse.

Consequently, neither the barter terms nor the simple factoral terms of trade can, as a rule, suffer from this nonequivalence “in the broad sense.” Only the double factoral terms can be affected by it, and then only provided it is accepted a priori that only the service of labor is productive and deserves reward. If we were to keep to Pigou’s formula of “a certain quantity of labor and of service of capital,” then q (or Z, according to Kindleberger) would be composite and indeterminate, and the inequality pointed out by Bettelheim would be no inequality at all, since, though B gives one hour of its labor for 15/19 of an hour of A’s, on the other hand, it gives the “service” of only 120 units of its capital for 240 of A’s. Between the two inequalities there is no common yardstick by which we could compare them, except for wages and the rate of profit, which cause one to compensate the other at the new prices of production, 190/150.

Only if we reject the “service” of capital, that is, if we exclude the time factor and assume that one hour of labor at t₁ is equal to one hour of labor at t_n; in other words, if we postulate that country A has no right to any special payment for the fact that it has had to wait the time needed to accumulate 240 units of capital before exporting its goods, whereas country B had to accumulate only 120; only then would unequal exchange “in the broad sense” correspond to a worsening in the double factoral terms of trade, and of them alone.

It is not the same with inequality of exchange caused by inequality of wages. There, the low-wage country receives in exchange not only less value but also fewer use values, and the inequality is reflected in all the terms of trade, barter as well as factoral.

5. The Criterion of Conformity with the Law of Value

It follows from what has been said that to describe as unequal the exchange that results from the transformation of values into prices of production would be to express a value judgment and take a stand in a controversy that is philosophical rather than economic. One would then have first to answer the question whether a present good is or is not worth more than a future good—whether the fruit of the sacrifices of the generation that built the railways and the blast furnaces in Europe belongs to that generation’s own descendants or to mankind as a whole (given that it was the existence of this mankind-as-a-whole, and in many cases the profit Europe drew from them, that made that construction work possible). If this were my theme I should not be very far away from Bettelheim’s formulation. But my theme is a different one: it is to analyze exchange from the standpoint of commodity economy itself.8

Bettelheim answers that, insofar as prices of production are respected and wages are fixed under conditions that conform to the law of value, it can be said that “from the standpoint of capitalist production,” no exchange is unequal.

That prices of production be respected is indeed in conformity with the law of value, and this is precisely why I do not accept difference in organic compositions as an element that in itself contributes to inequality of exchange. But I am doubtful whether the geographical differentiation of wages is equally in conformity with the law of value. One of the most essential conditions for the working of this law is that there should be a single market and a single price for every commodity (leaving aside, of course, transport costs). Since labor power is, under the capitalist regime, a commodity like any other, it ought, if competition is perfect, to command the same price everywhere. If in fact it commands different prices, then competition is not perfect, and the law of value has been distorted. And what prevents this competition from being perfect is, first and foremost and above all, the political fact that the world is divided into separate states.

Underpinning unequal exchange there is a monopoly, all right; not, however, a monopoly of goods—certain writers in the socialist countries, whom we have quoted in Chapter 3, are not wrong when they say that this monopoly is to be found on both sides of the barrier—but the monopoly position held by the workers in the advanced countries. And this is no structural necessity of the capitalist system.9

6. How Growth is Affected by the Transformation of Values into Prices of Production

What are the advantages possessed by the country with a high organic composition? In my numerical example country A obtains a national income of 140, country B one of 100. Yet the amount of wages paid out in the two countries is the same (60). Therefore, country A’s advantage depends on the use it makes of the surplus. If we assume that the surplus is wholly accumulated in both countries, new capital is formed to the extent of one-third of what was there before, and we find ourselves at the beginning of the second period at the same point as at the beginning of the first. (This obviously implies that the marginal return on capital is the same in both countries, but there is no reason to suppose that it is higher in the one with the higher organic composition. As a rule, the contrary happens.)

In this case the wealth of country A becomes something entirely fictitious, since in order to have an accumulation rate of 331/3 percent the two countries are obliged to capitalize the whole of their surplus. Should country A decide to enjoy its wealth by consuming part of its surplus, it thereby enables country B to catch up with it, and the organic compositions are equalized.

Everything changes if we consider that the two countries need, over and above the individual consumption that is reflected in wages (60:60), a collective consumption, what is called unproductive expenditure, on matters such as education, national defense, etc. Then the advantage held by country A at once becomes apparent. For if the surpluses are equal in terms of percentages on existing capital (331/3 percent), they are not equal in absolute terms (80:40). Now, while for growth it is percentage that counts, for consumption in all its forms what matters is amounts.10

Thus, if we assume that both countries must devote half of their surplus to unproductive expenditure, each of them will have 162/3 percent of their existing capital left for accumulation, and this will have a nil effect on the divergence between their respective organic compositions; but country A will have at its disposal, for unproductive expenditure, a value of 40, whereas country B will have only 20.

Is there a contradiction between this observation and my attributing inequality of exchange exclusively to a difference in the rate of surplus value? I do not think so. Let us look more closely at what is meant by unproductive expenditure. Both countries have, in an initial phase, distributed a value of 60 each in the form of wages. Then, in a second phase they proceed to a second distribution, through social services, by making deductions from profit, but this time the sum distributed amounts to 40 in country A and 20 in country B. It is a kind of social wage awarded in addition to the nominal wage. If we were to imagine a model of a super-pure capitalism in which all the public services, including justice and national defense, would be run by private enterprise and where there would therefore be neither budget nor taxes, the situation described above would be equivalent to the situation expressed by the diagram opposite showing exchange with differential rates of surplus value.

We note that nothing has been changed in the relative situation of the two countries as compared with the diagram given at the beginning of this chapter. Prices remain the same and both countries have a surplus that ensures the same rate of accumulation.

We may thus conclude that the advantage held by A, which we have already seen materialize through the difference in unproductive expenditure, is not an advantage that results, strictly speaking, from a difference in organic compositions but from a hidden difference in wages, the unproductive expenditure being in reality only an indirect wage.11

It is certain, however, that the difference in unproductive expenditure, whether in absolute terms or per worker, which is made possible by the difference in organic compositions, while it does not constitute an element in my definition of unequal exchange, does nevertheless constitute a factor in economic and social development. Although Marxist and classical terminology, which classifies as unproductive all expenditure that does not produce surplus value, has allowed us to identify expenditure on health, education, and justice, and even expenditure on infrastructure defrayed by the state, with a social wage that is “consumed,” in a broader sense and indirectly this expenditure is productive and ought, at least on the plane of development and growth, to be identified with investment rather than with consumption.

See text page opposite

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	100	20	170	150		40	190
B	120	50	80	40	170	130		20	150
	360	100	180	60	340	280		60	340

Like the differences in the organic composition of labor of which I spoke in the previous chapter, the differences in the organic composition of capital constitute, under conditions of concrete capitalist relations, a factor in development but not a factor in unequal exchange, except indirectly, insofar as development itself results in an increase in the equilibrium wage in accordance with the process analyzed in Chapter 3.

7. Consumption Determines Income

Whatever the organic composition, for a country in a competitive system to derive an advantage from its foreign trade, it must consume more than the others do, whether in the form of direct wages or in that of unproductive collective expenditure or other kinds of consumption.

I am aware that this proposition may seem somewhat outrageous. Elementary logic and the natural order of things tell us that we can only spend as much as we earn; this is why orthodox political economy tends to think that wages depend on prices. The object of this study is to prove that under capitalist production relations one earns as much as one spends, and that prices depend on wages. If this thesis is correct, it will follow that capitalist production relations are fundamentally contrary to elementary logic and the natural order of things. Confronted with such a dreadful consequence, many people will hope that it is not correct.12

If my thesis is correct, then we shall have to say, for example, that it is not because it exports timber that Sweden has the highest standard of living in Europe, but that timber is expensive because it is produced in a country (one of several high-wage countries) where the working class, owing to certain historico-political circumstances which need not be examined here, has secured remarkable social conquests.

It would be interesting to compare, for instance, timber and petroleum on the basis of Nurkse’s six points, which are used today to explain the decline in prices of raw materials, and which I mentioned in Chapter 2 (note 51).

1. Industrial production in the advanced economies is shifting away from light industry toward heavy industry, in which the relative consumption of raw materials is low. If this were so, petroleum should have a clear superiority over timber.

2. The share of services in the total output is rising in these advanced economies. On this point it can be said that there is either equality between timber and petroleum or a slight advantage to the latter.

3. The income elasticity of demand for many agricultural commodities tends to be low. Petroleum, which benefits from the very high income elasticity of the demand for automobiles, has from this standpoint an overwhelming superiority over timber.

4. The advanced countries especially have resorted to agricultural protectionism. The effect of this factor is nil for petroleum, since, even if we allow for North American protectionism (the only case), the increase in world consumption is so rapid that the other producing countries experience practically no difficulty in finding outlets for their increasing production. If we assume that it is nil for timber as well, which is not altogether true, the two products are equally placed in this respect.

5. Modern technique has achieved substantial economies in the use of natural materials. Undoubtedly, this factor affects timber more severely than it affects petroleum.

6. Synthetic substitutes are displacing and competing with natural products. There is no commercial synthetic substitute for petroleum, but there are many such substitutes for timber.

Thus, from whatever angle we look at the matter, so long as we remain at the orthodox point of view for which the market determines prices, petroleum indisputably holds a “fundamental superiority” over timber. Moreover, consumption of petroleum has made striking progress through several decades. Between 1913 and 1962, production and, as a result, consumption, on the world scale have risen from about 50 million tons to 1,215 million tons. But the consumption of timber has been steadily falling. Between 1913 and 1950 consumption per capita declined by about 10 percent in Europe and 25 percent in the United States.

And yet, despite this extraordinary market superiority enjoyed by petroleum, its price fell from index 100 in 1913 to index 43 in 1952 and index 27 in 1962, while that of timber rose from index 100 in 1913 to index 559 in 1952. The terms of trade between petroleum and timber have thus evolved from index 100 in 1913 to index 7·7 in 1952. At the latter date it was necessary to give 13 times as much petroleum as in 1913 in order to receive the same quantity of timber.

It may perhaps be objected that this is due to an increase in productivity, which is greater in the case of petroleum than in that of timber. But there is a practical and easy way of measuring the incidence of productivity: the factoral terms of trade. When we look at these we find that, despite this increase in productivity, the producers of petroleum receive only a subsistence wage (except in the United States and Canada, which are protected by preferential prices), whereas the producers of timber receive a wage of a quite different order of magnitude, 20, 30 or 40 times higher. The mere fact of the worsening of the double factoral terms of trade shows per se that the barter terms of trade have worsened to a greater extent than can be accounted for by the increase in productivity.

If it were the market that determined incomes, then timber, as such, would have no particular tendency to enrich Sweden, Finland, Canada, or Austria, any more than petroleum would have to impoverish the Middle East or Venezuela. If, however, it is incomes that determine the market, then everything is explained by the mere fact that timber happens to be a product of high-wage countries and petroleum one of low-wage countries.

Finally, there are certain kinds of timber that do not follow the general movement, either in barter or in factoral terms. These are the exotic species that are above all produced in Africa. Curiously enough, these are precisely those timbers of superior quality that ought, according to the prevailing theory, to be favored by the market, or at least to enjoy an income elasticity of demand higher than that enjoyed by the species that are exported by European and North American countries. In defiance of the prevailing theory, however, these high-quality species, which are practically the only ones produced and exported by low-wage countries, are also the only ones whose prices are falling.

8. The Idea of Unequal Exchange “in the Broad Sense” in the History of Political Economy

Quesnay (in whose work are to be found, if one looks carefully, the germs of all the major ideas in political economy) noted that a country that exported the produce of its soil and purchased manufactured goods from abroad would employ fewer men than would be the case without this trade—which was another way of saying that it would exchange a certain quantity of its national labor for a larger quantity of foreign labor. Despite the different formulation used, it emerges clearly from a reading of his argument that for Quesnay this “unequal exchange” was the effect of the difference in “organic composition” between agriculture and industry, the fixed capital of the latter being, in his day, insignificant as compared with that very substantial quantity constituted by the soil.

But it was naturally the Marxists who deepened this idea. Otto Bauer observed that the German-speaking areas of the Austrian realm, owing to the higher organic composition of their industry, pumped out part of the value produced in the Czech-speaking agricultural areas:13

If we wish to study the situation of two areas which are at different stages of capitalist development but which exchange their goods … the Marxist theory of prices provides us with the key. The mass of surplus value produced in the two areas is determined by the surplus labor provided by the workers of both areas. But what share of this surplus value goes to the capitalists of each of those areas?

The capital of the more highly developed area has a higher organic composition, which means that in this more advanced area a larger quantity of constant capital corresponds to the same size of wage fund (variable capital) than in the backward area. Now, Marx taught us that, owing to the tendency to equalization of the rate of profit, it is not the labor of each of the two areas respectively that produces the surplus value taken by each area’s capitalists: the totality of the surplus value produced by the workers of both areas will be shared between the capitalists of these two areas not in proportion to the amount of labor contributed in each but in proportion to the amount of capital invested in each. Since in the more highly developed area there is more capital to the same amount of labor, this area appropriates a larger share of the surplus value than would correspond to the amount of labor it has contributed. It all happens as though the surplus value produced in the two areas were first of all cast into a heap and then shared out among the capitalists according to each one’s holding of capital. Thus, the capitalists of the more highly developed areas not only exploit their own workers but also appropriate some of the surplus value produced in the less highly developed areas. If we consider the prices of commodities, each area receives in exchange as much as it has given. But if we look at the values involved we see that the things exchanged are not equivalent.…

Later, Otto Bauer notes that, besides the difference in the organic composition of capital, wages in the Czech provinces are lower than in the German-speaking ones, but the only conclusion he draws from this fact is that, since the gap between organic compositions is bigger than that between wage levels, the profit per worker in German-speaking Bohemia is nevertheless higher than the profit per worker in Czech-speaking Bohemia.

More or less the same position on the transfer of value from a country with a low organic composition to one with a high organic composition is adopted by Henryk Grossmann.14 Maurice Dobb seems to agree with this conception, though in a more carefully qualified and even rather oblique fashion.15

A Marxist who goes all the way along this line, which he discusses as though it were something quite original, is the Yugoslav Milentije Popovic̀. In a polemical pamphlet aimed at justifying certain demands and written with a virulence equal to his lack of precision, this writer refers to differences in organic composition in order to show the disadvantages suffered by Yugoslavia, as an underdeveloped country, in her exchanges with the Soviet Union.16 “… considering that countries which place their commodities on the world market possess different national organic composition of capital … it follows, then, that countries in which the economic [sic] composition of capital is above the average world organic composition, … extract, at the given moment, extra profits at the expense of those countries whose organic composition of capital is on a lower level.”

In the course of his argument Popovic̀ often mixes up the difference in organic compositions between the different branches in which exchanging countries specialize with the difference in productivity in the same branch in two countries: “For example, the labor of American workers engaged in the production of trucks, while it is qualitatively exactly the same as the labor of our own workers engaged in the production of trucks, nevertheless is being sold on the world market as labor of a greater specific weight, i.e., as labor of a higher quality.”

Popovic̀ does not seem to grasp that in this example what we have is not a transfer of surplus value caused by the transformation of values into prices of production but the simple difference between the individual (national) value and the social (international) value of a certain commodity. If Yugoslavia wants to sell her trucks to a third country, obviously she has to bring her prices into line with the American prices. As, however, the technological level of her truck-producing industry is below that of the American, the same price for the same goods procures higher wages in the United States than in Yugoslavia. This is similar to what happens to a firm inside a given country that suffers a loss, or fails to make a gain, because its individual costs are higher than the average social costs of the branch to which it belongs. This situation has nothing in common with that of Brazil, for example, which exchanges her coffee, in which she possesses the highest productivity in the world, for American trucks, which come from the source with the highest productivity of trucks in the world, and which nevertheless suffers a disadvantage in exchange due either to the difference in organic composition between coffee production and truck production or to the difference in wages between Brazil and the United States.17

Here and there, however, we find in Popović’s work some interesting remarks, such as this: “In the exploitation of a backward country (for example, Yugoslavia), all countries which are on the upper levels of this scale [of economic development] are taking part, whether they exchange commodities with it or not.”

II. THE POSITION OF THE WORKING CLASS ON THE INTERNATIONAL SCALE

1. International Workers’ Solidarity According to the Marxists

The idea that differences in organic composition are responsible for unequal exchange has been, since Otto Bauer wrote, widely accepted among Marxist economists.18 It is hard, all the same, to understand how a Marxist economist can draw the conclusion that differences in organic composition affect international prices without encountering on his way to this conclusion the determination of these prices by differences in wages.19 The condition necessary if organic compositions are to govern prices is the equalization of profits; and the equalization of profits constitutes, in the same context, a sufficient condition for wage levels to have an influence on prices. Could it be that on reaching this point, Marxist thought has been inhibited by the dreadful implications of such a proposition in relation to the international solidarity of working people?

And yet the hopes that revolutionary Marxism based upon this solidarity have been so cruelly disappointed in recent years that perhaps the time has come to emancipate ourselves from this taboo.

2. Is the “Labor Aristocracy” a Byproduct of Imperialism?

Marxism did not completely overlook the possibility of the class struggle becoming weakened through a certain margin of reforms that the advanced capitalist countries were able to provide by dipping into the superprofits of international exploitation. But it linked this phenomenon with the imperialist phase and restricted its bearing to the upper stratum of the proletariat, so that it appeared to be transitory in character. This was approximately Lenin’s position, and Bukharin could say at the Sixth Congress of the Comintern, in 1928: “… we see certain countries which are, so to speak, ‘aristocratic’, countries, which (to use an expression that needs to be made more precise) possess a ‘labor aristocracy,’ that is, a proletariat whose standard of living is higher than that of the average for the world proletariat.”20

Sometimes the narrow limits of the “labor aristocracy” were transcended, but never those, equally transitory, of imperialism and colonial profits. Thus, in some passages of Imperialism and World Economy (1917) Bukharin speaks, still with regard to the imperialist countries, of a relative and momentary solidarity of interest between capital and labor, coexisting with a deeper and more lasting antagonism between them, or of a momentary association of the interests of capital and labor on the basis of an increase in wages made possible by colonial superprofits, etc., without making any distinction between the privileged stratum of the “labor aristocracy” and the other strata of the proletariat. Sometimes he even uses terms that exclude this distinction: “The bill for this [colonial] policy is paid, not by the continental workers, and not by the workers of England.… The European workers, considered from the point of view of the moment are the winners [i.e., gainers—Trans.].”21

When we read this passage and other, similar ones in the writings of Marxist authors, we ask ourselves whether this solidarity of interests between the capitalists and workers of the imperialist countries, however temporary and transitory it may be, has an objective basis or is merely the effect of a monstrous deception of the working class. This last phrase of Bukharin’s gives one to suppose that objective conditions determine this situation. So far back as 1858, that is, in the midst of the free-trade epoch, Engels went further along this path: “The English proletariat is actually becoming more and more bourgeois, so that this most bourgeois of all nations is apparently aiming ultimately at the possession of a bourgeois aristocracy and a bourgeois proletariat as well as a bourgeoisie. For a nation which exploits the whole world this is of course to a certain extent justifiable.”22 But this was only one of those whimsical outbursts that were habitual with Engels, and, as such, need not be accorded any importance.

In the orthodox line of Marxism this “objective” basis has rather been regarded as illusory. Revolutionary Marxism chose to consider that what actually happened was an opportunist deception of the proletariat based on the increased employment that imperialist policies created in the metropolitan countries, together with what Bukharin called “the additional pennies received by the European workers from the colonial policy of imperialism.”23 Accordingly, over a long period revolutionary Marxism concentrated all its fire upon the instigators and beneficiaries of this deception, the Social Democratic leaders, in the vain hope of exposing them in the eyes of their supporters. After the bitter and repeated defeats suffered by this approach, after World War I, contrary to all expectations, had broken the unity of international organizations of the working class instead of drawing them closer together, and had opened a period of crisis in the socialist movement, and after the four Internationals had disappeared or declined (the second continuing its formal existence only at the price of abandoning any internationalist action, and the third being born only to be wound up after barely two decades), the experience and instinct of self-preservation of the first workers’ state was still needed before it was realized that little was to be expected for the defense of this state from the solidarity of the working classes in the capitalist countries. Then in 1934 there took place the turn toward Popular Front policies, with a radical change in the strategy of the communist parties in the industrialized countries.

Since that time a process of integration in the nation has been undertaken. It is in the name of the national interest and with reference to this interest that the communist parties defend the line they choose to adopt in foreign policy; yesterday and today, as between the United States and the U.S.S.R., today and tomorrow, as between the U.S.S.R. and China, the latter choice of position confirming already in deeds, if not so far in words, that the antagonism between rich and poor nations is likely to prevail over that between classes.24

To explain a historical fact that has endured for nearly a century by the corruption of the leaders and the deception of the masses is, to say the least, hardly in conformity with the method of historical materialism. Political parties are not churches possessing eternal truth and renouncing on principle any interest in the present moment and the men of the moment. Political parties are “opportunist” by nature, since their business is the conquest of the masses and the seizure of power at a given historical moment and under given historical conditions. A political party anxious to preserve its identity may consent to make temporary retreats, refusing to bow to transitory objective conditions. But it cannot ignore structural objective conditions persisting for several generations, on the excuse of service to a transcendental truth. Itself an objective condition, the party as such can and must “make” history; it cannot do violence to history. When a deep-seated change has occurred in objective conditions, a class party, though it can still go on, through inertia, living outside the realities of its epoch, must eventually reach a moment when it has either to transform itself or to disappear. Due to this time lag between base and superstructure, however, when the objective antagonisms are intensified the masses are more revolutionary than their parties, but when the antagonisms soften the parties remain for a long time more radical than the masses. This is what has happened between the end of the nineteenth century and our time. It is not the conservatism of the leaders that has held back the revolutionary élan of the masses, as has been believed in the Marxist-Leninist camp; it is the slow but steady growth in awareness by the masses that they belong to privileged exploiting nations that has obliged the leaders of their parties to revise their ideologies so as not to lose their clientele.25

This does not mean that antagonisms have disappeared within the developed capitalist nations. Whether wages be high or low, whether the social product be large or small, the two shares, that of the working class and that of the receivers of surplus value, continue to be magnitudes that are inversely proportional to each other, and so the antagonism continues. When, however, the relative importance of the national exploitation from which a working class suffers through belonging to the proletariat diminishes continually as compared with that from which it benefits through belonging to a privileged nation, a moment comes when the aim of increasing the national income in absolute terms prevails over that of improving the relative share of one part of the nation over the other. From that point onward the principle of national solidarity ceases to be challenged in principle, however violent and radical the struggle over the sharing of the cake may be. Thereafter a de facto united front of the workers and capitalists of the well-to-do countries, directed against the poor nations, coexists with an internal trade-union struggle over the sharing of the loot. Under these conditions this trade-union struggle necessarily becomes more and more a sort of settlement of accounts between partners, and it is no accident that in the richest countries, such as the United States—with similar tendencies already apparent in the other big capitalist countries—militant trade-union struggle is degenerating first into trade unionism of the classic British type, then into corporatism, and finally into racketeering.

The workers in the most advanced capitalist countries now hold frontline positions in the defense of the national interest. President Johnson had only to point out the harmful effects that it would have on the war in Vietnam to stop any strike by American dockers. He did not have the same success with some bourgeois elements, and still less with their sons and daughters in the universities. In former times dockers went on strike precisely in order to prevent imperialist interventions. Today they stop strikes they have begun for other reasons in order to avoid embarrassing these interventions in any way. They even go on strike rather than unload ships trading with Cuba, against the advice of their own government. (President Kennedy used to refer to the interviews he had with American trade-union leaders as “pressure from my Right.”)

The bloody struggle being waged by the blacks in the United States today shows, by its very violence and its style, that this is the revolt of a disappointed partner rather than a thoroughgoing challenge to America’s Great Society and its overseas adventures. The strongest of the arguments formulated during this crisis is at bottom an argument of petty blackmail, namely, that the American blacks cannot fight in Asia for principles that the whites deny to them at home; this implies that if these principles were to be accorded to them and if one day they were to become fully privileged citizens of their country—something that is not materially impossible—they would then have no further objection to fighting the Vietnamese people.

Oskar Lange’s “people’s imperialism” is today becoming a living reality in the big capitalist countries. Hardly thirty years ago the title of “social patriot” was regarded as a serious insult by any militant worker. Who would take offense at it today? “Popular movements,” writes Myrdal, “which fifty years ago were imbued with internationalism have now become narrowly nationalistic.” And speaking of Britain, the author adds: “Labour economists have usually carried out their practical studies under more narrow national premises than their colleagues to the right.”26 The same writer goes on: “There does not exist for mankind as a whole that psychological basis … of mutual human solidarity.”27

To an increasing extent the attitude of the working class in the advanced capitalist countries as a whole in relation to the Third World is becoming like that of the British working class toward the rest of the world all through the nineteenth century: struggles for wage-and-hour demands, sometimes very violent and very effective, inside the country; a united national front against the outside world, with the working class sometimes taking up vanguard positions. This is what Joseph Chamberlain expressed in his equation: democracy means imperialism plus social reforms. The socialist, Marxist, and Darwinist Karl Pearson did not shrink from writing in 1894: “No thoughtful socialist, so far as I am aware, would object to cultivate Uganda at the expense of its present occupiers if Lancashire were starving.”28

Marx and Engels cherished no illusions about the sentiments of the British workers at the time when they alone constituted the labor aristocracy of the whole world. Speaking of the underpaid Irish workers, they observed: “Every industrial and commercial center in England now possesses a working class divided into two hostile camps, English proletarians and Irish proletarians. The ordinary English worker hates the Irish worker as a competitor who lowers his standard of life.… He cherishes religious, social and national prejudices against the Irish worker. His attitude toward him is much the same as that of the ‘poor whites’ to the ‘niggers’ in the former slave states of the U.S.A.”29

As we see, Marx and Engels did not hesitate to speak of the deep feelings of “the ordinary English worker” in general and did not put the blame for them on the opportunism and treachery of their leaders. Today everything suggests that there is more socialism and internationalism in the brains of the intellectuals of the Labor party, and perhaps more still in those of some bourgeois liberals, than in the feelings and reactions of the British working class. At each of the recent British general elections [i.e., 1951, 1955, 1959—Trans.] it was enough for the Conservatives to claim that the Labor party was planning to carry out fresh nationalizations for that party’s chances to be gravely jeopardized. Naturally, the Laborites hasten each time to deny with vigor this frightful “slander.” A charge to which the British workers would have been even more sensitive would have been lack of loyalty to British imperial interests. On that point, however, the Labor party has given such guarantees in the past that nobody would have taken such a charge seriously.

In France, Cartierism, the supreme expression of national egoism, addressed itself neither to the capitalists nor to the intellectual elite but to the “little people” of town and country, whose language it spoke.

On their part the representatives of the Third World have not been deceived. Sometimes using in their analyses, more correctly than some Western Marxists, the method of historical materialism, they have arrived at conclusions that are extremely realistic and disillusioned. “In contrast to what for a long time I used to believe,” wrote Ferhat Abbas, “the existence of a revolutionary proletariat and of liberals in France made no difference to the fundamental facts of the Algerian problem.”30 The class is not a form of integration that takes precedence over the nation; this is proved by the fact that the Western working class appropriates to its own benefit part of the profits of exchange with the underdeveloped countries. This is essentially the view expressed by Mamadou Dia.31 Even the dispute between the two blocs, the one headed by the United States and the one headed by the U.S.S.R., is described as a dispute between rich countries by Abdoulaye Ly, and Sekou Touré declares that he knows of no difference between East and West but only between rich nations and poor ones.

All this may seem odd if one is used to regarding the bourgeois as the promoters and sole beneficiaries of “the nation.” It is undeniable that they were its promoters, but since the middle of the nineteenth century, in the industrialized countries, they have ceased to be its chief beneficiaries. If we recognize the equalization of profits, it must be a matter of indifference (on the economic plane, at least) to a capitalist whether he is American or Indian. And if we do not recognize the equalization of profits, he would be better off as an Indian than as an American.32 But it is not at all a matter of indifference to a docker whether he is an American or an Indian.

Let us imagine that a major defeat brings the United States down to the condition of an underdeveloped country. Leaving out of account the material losses suffered during and as a result of the event itself, the American capitalist will not find himself any worse off. The members of the liberal professions and the highly skilled workers will experience at worst an insignificant decrease in their incomes. (Despite the huge disparity in general wage levels, an engineer, a manager, or a lawyer in Egypt or in India earns nearly as much as his counterpart in one of the richest countries). The laborers and the ordinary skilled workers, however, will be hurled into an abyss. It is even hard to imagine how, in the event of such a catastrophe, an American worker who today earns three dollars an hour could survive on a wage of a few cents a day. And this is no arbitrary and fantastic speculation. Something of the kind has already happened in Algeria. When the threat of independence became immediately real, big financial capital as a whole adjusted itself to the idea of Algerian Algeria. Provided Algeria did not take the path of socialism, the capitalists had no privileges at risk. Their only privilege was their capital itself, and as long as national independence did not threaten this, they had no reason to oppose it, any more than had the real labor aristocracy, those who earned the wages or salaries of their trade or profession, not those of their nationality or race. Individually, these people made different decisions, conditioned by the ideological superstructure, but as a class they refrained from acting against the Algerian people. It was the European proletariat of Bab-el-Oued (previously a stronghold of the Algerian Communist party) that mobilized in defense of French Algeria and supplied the OAS killers. For them it was a question of life or death. Their privilege was their quality as Europeans or whites. Algeria as a French dependency guaranteed them European, or French, wages in an underdeveloped country. They earned in a few days what an Algerian earned in a month. Without this privilege they were materially, objectively, unable to live. “La valise ou le cercueil”—the suitcase (for an escape to France) or the coffin—was a saying that related to their problem alone.

3. Financial Colonialism and Mercantile Colonialism

As long as we see imperialist expansion as the cause and the “disengagement” of the working class as the effect, it is natural to consider the decline of internationalism and of the revolutionary spirit as a passing and transient phenomenon without any bearing on the fundamental position and conditioning of the proletariat, since imperialist expansion has its seamy side. From a certain point onward it can be effected only at the expense of an existing imperialist position. In the cycle of victory and defeat the balance sheet of the working class clearly shows a loss: the victim loses more than the despoiler gains, as Plato put it. “However, the war itself, which could be waged only because the proletariat gave its tacit consent or showed insufficient indignation, has proven to it that its share in the imperialist policy is nothing compared with the wounds inflicted by the war,” wrote Bukharin about World War I.33

The Italian working class was stirred up against the unfortunate Abyssinian war of 1896 but heartily collaborated in the victorious war against Turkey for the annexation of Libya in 1911.

Under these conditions the revolutionary parties could only strive to preserve the purity of their political line, despite temporary setbacks, and bide their time. Orthodox Marxism took its stand upon the hope that the world war to which the imperialist path would inevitably lead would rapidly bring about the destruction of capitalism.

This view followed indirectly from the idea of financial imperialism. Expansion previous to 1850 was seen as mercantile colonialism, whereas expansion subsequent to 1875 was regarded as investment imperialism. The argument ran like this: in proportion as capital accumulates, the rate of profit falls. At a certain stage of development, capitalism is faced with the dilemma of maintaining its rate of profit by keeping the standard of living of the masses at a very low level, which means depriving itself of scope for profitable investment inside the home country. The only way out, if the system is to be saved from freezing up, is to undertake investment abroad, which calls for imperialist protection. Alternatively, one could, of course, redistribute the national income so as to expand the home market and thus make possible increased internal investment, but this would mean a lower rate of profit. Seen like this, there was a fundamental antagonism between the long-term interests of the working class and imperialism.

This analysis took a few liberties with historical facts. During the period of this “financial imperialism” the expansion of the big industrial states assumed the form, principally, of the partition of Africa, the breakup of the Ottoman Empire, and the completion of the French conquests in Indochina. Yet investment in those areas was practically nil, apart from petroleum, gold, and copper. Even if we include these, the investments made were very much smaller than those made both in the previous period in other parts of the world and, in the period of “financial imperialism” itself, in the old-established markets of America, Australasia, India, the Balkans, and Russia.

On the other hand, the fact that 66 percent of the foreign capital invested in Africa was invested in a particular group of countries often called the mining areas—the Union of South Africa, South-West Africa, the Rhodesias, and Katanga—shows clearly that “financial imperialism”—ridding the home market of surplus capital and seeking higher dividends elsewhere—was never an end in itself.34

It is interesting to observe that the men who promoted the “second colonialism” always talked of trade, sources of raw material, outlets for industrial products—never of capital in search of places for investment. I do not claim that one can explain the whole of history by the conscious motives of its protagonists. Nevertheless, it does seem to me that if the imperialist states had been suffering at that time such severe constraint from their overaccumulated masses of capital and had felt such an overwhelming need for profitable investments abroad, this would not have failed to find expression, for instance, in the deliberations of that eminently aware race of men, British politicians in general and those of the Victorian period in particular. Not so, however. From Durham, Cobden, and Goldwin Smith to Salisbury, Granville, and Milner, and including Dilke, Disraeli, and Rosebery, all the British statesmen who debated in Parliament first the disengagement and easing off in the liberal period in the middle of the nineteenth century and then the revival of colonialism in the last quarter, whether they were for or against, talked always about trade, very occasionally about protection of British capital already invested abroad, but never about capital seeking outlets.

When we read their speeches, extending over nearly a century, we are struck by the stereotyped character of the arguments used and the naiveté or cynicism of the statements made. They defend imperialism or reject it in terms of raw materials for industry, customers for British products, and the balance of trade. Everything suggests that the state which, by virtue of its geographical position and its sea power, held the initiative for action, had recourse to colonialism for the first time when its economic power was not yet strong enough to ensure the same advantages through mere competition; had then repudiated colonialism around the 1840’s, when its industrial supremacy guaranteed it an effective monopoly position in world trade; and had returned to a colonialist policy when, around the 1870’s, this industrial supremacy began to be challenged.

The conversion of one of the biggest opportunists in modern history, Disraeli, to the imperialist idea in 1872 was a symptom of the last-mentioned turn. But this second imperialism does not seem to have differed at all from the first one, except that instead of sending one’s customers to settle in conquered countries one now tried to turn the existing population into customers. Joseph Chamberlain’s remark, at the end of the nineteenth century; “the Empire is commerce,” echoed Burke’s remark at the end of the eighteenth century, defining the colonial system as “purely commercial,” and Livingstone’s motto, “Christianity and commerce,” recalls that of Wilberforce a half-century earlier. The great idea of the Cape-to-Cairo railway that occupied the minds of Britain’s leaders for so long was never advocated except as a factor favorable to trade. And Cecil Rhodes, the champion of the second British imperialism, did not hesitate to say that the Union Jack was the biggest commercial asset in the world. All imperialisms are, in the last analysis, mercantile in character.

This is why, from the time when formal privileges for the home country and monopolistic systems like the Navigation Act ceased to be fashionable, colonialism ceased to be a paying proposition. The entire history of the partition of Africa shows that what moved each of the big European states was not so much desire to seize a certain territory for itself as fear that a rival power might seize it. This is what explains the remarkable ease with which quite small countries, such as Belgium and Portugal, were able, in the midst of this unscrupulous banditry, to retain or to acquire huge and wealthy regions without any special exertion and without any opposition from the Great Powers. The Berlin conference of 1885, which allocated to Leopold II, in his personal capacity, a country five times the size of France, is significant from this standpoint. Once the Great Powers were sure of an open door for their trade, they no longer had any desire to assume the expense of direct administration.

Some discriminatory measures, de facto and even de jure in favor of the respective metropolitan countries did indeed continue to exist in a number of cases, but the industrial countries that lacked colonies did not suffer from these. Either by direct trade in the margins left by these discriminatory measures or by the system of communicating vessels that the movement of capital and goods established between the colonialist countries and the other industrial countries, each of them got its share in the worldwide unequal exchange, and everything shows that this share did not depend on size of imperial possessions, but on industrial potential and wage level in each of these countries. We have only to compare the standard of living of Sweden, Denmark, and Canada, on the one hand, with that of Portugal, Italy, and even France before the last war, on the other.

History repeats itself. At the highest point of its colonial expansion under Charles V and Philip II, Spain was the poorest country in Europe. At a time when all the gold and silver mines of the New World were under Spain’s political control, and when attempts to export precious metals from Spanish territory incurred very heavy penalties, gold and silver were so scarce in Spain that the country was obliged to use copper currency. At the same time, as Locke observed, the bulk of the currency used in England came from Spain. It was the example of Spain and Portugal that Josiah Child had in view when he wrote: “… where there is little manufacturing and as little husbandry of lands, the profit of plantations, viz., the greatest part thereof, will not redound to the mother-kingdom, but to other countries, wherein there are more manufactures and more productions from the earth.…”35

On this basis the facility and rapidity with which the great colonial powers have recently agreed to dismantle their huge empires is easily explained. In the middle of the nineteenth century the de facto monopoly enjoyed by Britain made de jure colonial monopoly pointless; now, in the middle of the twentieth century the impracticability and anachronistic character of this de jure monopoly, under pressure from the United States for the freeing of trade, has made colonialism pointless once more. Direct plundering being more or less excluded, the former imperialist states resigned themselves without too much sorrow to letting the free play of economic laws perform the task of attributing to each of them what was due from the product of that indirect exploitation that is constituted by unequal exchange.36

4. The Respective Positions of the Social Classes in the Era of Colonialism

This misunderstanding about the real nature of colonialism entailed the conviction that the antagonism between capital and labor, even in the advanced countries, was so profound that no long-term loyalty to the nation on the workers’ part was possible. In the first place the unexploited territories in the world are not unlimited in number, and since the growth of the advanced countries proceeds unevenly, a moment must come when the expansion of one imperialist country can no longer be achieved except through redistribution of colonial possessions. This redistribution means war. In the second place the export of capital, insofar as it is profitable to the capitalists, is detrimental to the workers. The scarcity of capital in the home country exerts an upward pressure on profits and a downward pressure on wages. Whatever share of their superprofits the capitalists may concede in order to buy over part or all of their working class, the situation is fundamentally an antagonistic one. The eventual transformation of a large section of the active capitalists into idle rentiers, clippers of (overseas) coupons, and of their sons into officials to administer the colonies or officers to defend them or hold them down, cannot but lead in the end to the enrichment of the capitalists and the impoverishment of the workers.37

Things certainly change with the coming of commercial imperialism, but not very much. Whether it be financial or commercial, as long as external expansion is seen as the cause and the incomes of the different classes as the effect, the gain that the working class can draw from it remains subsidiary and subordinate. It is not at all the same, though, if, as I believe, it is wages that are the cause and external exploitation the effect. From that point the initiative is held, consciously or unconsciously, by the working class; it is their demands that become the driving force of the world economic antagonism, and international workers’ solidarity becomes an historical misconception.

The question may be asked: if, as I have declared, the trade-union action of the timber workers makes Sweden rich, that of the weavers and miners does the same for Britain, and that of the iron and steel workers likewise for the United States and Germany, why then do the capitalists of these countries oppose the demands of their workers so vigorously and yield to them only when they are forced to? For the simple reason that these wage increases make poorer not only the low-wage countries, through the terms of exchange, but also the capitalists themselves in the advanced countries. They make them poorer first, in the short run, through raising individual (national) value above social (international) value during the period needed for these increases to become general in the same branch in all the developed countries. Second, in the long run—that is, when these increases have become general in the group of countries in question—they make them poorer through the fall in the world rate of profit that they entail.

Let us take up again our numerical example with wage levels the same in different countries (see page 190).

Countries A and A′ are assumed to be specializing in the same branch, and country B in a different one. In an initial phase country A increases its wages by 50 percent. As it suffers from the competition of country A’, it cannot increase its prices and, leaving aside the case of increasing costs in A’, the capitalists of A must content themselves for the time being with a lower rate of profit (see page 191).

The capitalists of A have had to bear alone the difference in their national wage level, and prices and terms of exchange have not changed.

This situation is not a stable one. Either the increase in wages will spread to country A′, which specializes in the same branch, and we shall have two groups of countries, one with high wages and the other with low wages, (A, A′) and B; or country A will change its specialization in order to escape from competition by A′, and we shall also have two groups with different wage levels, but these will be A and (A′, B). In both cases capital, which we assume to be mobile and competitive, will by its movements bring about equalization of profits at a general rate lower than before. So as not to overburden this analysis I confine myself opposite to the first case only, but it is obvious that the second will differ only in its parameters.

See text page 189

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	60	60	170	110	30%	72	182
A′	240	50	60	60	170	110		72	182
B	120	50	60	60	170	110		36	146
	600	150	180	180	510	330		180	510

See text page 189

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	90	30	170	140		42	182
A′	240	50	60	60	170	110	30%	72	182
B	120	50	60	60	170	110	30%	36	146
	600	150	210	150	510	360		150	510

The capitalists of the developed countries emerge as losers from this operation since their rate of profit has fallen from 30 to 20 percent—those of country A, where the wage increase began, have lost even more than that since for a certain period they were getting only 171/2 percent—but their countries have gained, since, thanks to unequal exchange, the national income of each of these countries has risen, in value terms, from 132 to 138. In terms of use values the gain has been still greater. It has been equal to the differential in the barter terms of trade, that is: 188/134: 182/146. It is their workers who have gained the whole of the difference—the sum of the national gain and the capitalists’ loss.

On their part the countries of the second group have lost doubly, both by the fall in the rate of profit and by the worsening of their terms of trade.

The preceding analysis may give the impression that a basis is thus created for international workers’ solidarity in that an increase in wages, wherever it occurs, leads to a fall in the world rate of profit. But this would be to confuse diminution in profits due to a local fall in the rate of surplus value with diminution in profits due to a fall in the general rate of profit. If profits diminish owing to an increase in wages in a closed system—and in the short run every system is closed—it is obvious that this benefits the workers concerned. This is merely tautology. But if the profits of the Indian capitalists diminish because an increase in wages in the United States causes a fall in the world rate of profit, this not merely fails to make the Indian workers any better off, it makes their position worse. The Indian capitalists have indeed a solidarity of interest with the American capitalists against an increase in wages in Detroit, but the Indian workers have no solidarity of interest at all with the workers of Detroit. This is so because, under the conditions we have assumed, capital is competitive but labor is not. This is why, inside a nation where both factors are competitive, an increase in wages, wherever it may occur, arouses both solidarities, that of the workers on the one side and that of the capitalists on the other.

See text page opposite

Countries		K Total capital invested	c Total capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c + v	T Rate of profit	p Profit TK	L Price of production R+p
Developed		240	50	90	30	170	140		48	188
		240	50	90	30	170	140	20%	48	188
Under-developed:	B	120	50	60	60	170	110		24	134
		600	150	240	120	510	390		120	510

The International Equilibrium Price with More Than Two Factors

I. GENERAL OBSERVATIONS

I. The “Other” Factors in the Formula of Prices of Production

If we let ƒ represent the sum of the prices of the other possible factors in addition to wages and profits, the general formula for the international price of production of a branch that we will call i becomes:

The formula for the general rate of profit will be:

K being the capital invested.1

And the formula for the profits of branch i will be:

It is then possible to rewrite equation (1) like this:

Equations (2) and (3) show us that Σm must be greater than Σf:

because otherwise T and p_i would be negative, which would be absurd.

As I have already shown by implication in paragraph 2 of the first part of Chapter 3, “Σm” must itself be positive, that is, the actual labor time must always be greater than the “necessary time,” without which wage labor and the capitalist system itself would become a material impossibility. “Σf” is positive by definition.2

These observations show us the key position that is held by m (surplus value). It depends on wages, which have already been presented in the previous chapters as the independent variable of the system, and all the other factors depend on “Σm,” the sum of which they merely share among themselves. They depend on “Σm,” however, only in the sense that it sets the limit that they cannot exceed; within that limit they may very well behave as independent variables.

Furthermore, if we take the aggregate of the branches, 1, 2, 3 … n, we shall have

and so on to

from which we get

Σm = Σf +Σp. (5)

Thus the total of primary incomes, other than wages, is equal to the total amount of surplus value extracted in a closed capitalist system, with perfect competition.

On the other hand:

L₁ = c₁ + v₁ + f₁ +p₁

L₂ = c₂ + v₂ + f₂ + p₂

and so on, to

By substituting in accordance with equation (5), we have:

ΣL = Σc + Σv + Σm.

However, we know that value V is equal to c + v + m, from which we get:

ΣL = ΣV. (6)

Thus, whatever the number of factors, the sum of prices of production equals the sum of values.

If, however, we look more closely at the functions indicated by the above equations, we note that the second category of factors is subdivided into two: (1) profit (p), which is a competitive factor, subject to interbranch equalization, and (2) all the others (ƒ), which are noncompetitive factors, not subject to interbranch equalization. This differentiation confers a certain fixity on the “other” factors, despite their dependence on m, and gives pure profit a residual character. We thus have, strictly speaking, three categories of factors: wages, the “other” factors, and profit; and, from a static point of view, that is, within the limits of a single production cycle, the first two categories correspond to what in practice are called fixed incomes, while the third corresponds to what are called variable incomes:

This distinction is based on the fact that the ratio of “necessary time” to actual labor time, and so the amount of surplus value, is not known at the beginning of the production cycle but only at the end of it, whereas all the primary incomes, except profit, are already determined and allotted, if not paid out, to the owners of the respective factors before the end of the cycle.

Here we have a fundamental element that has a certain influence on the formation of prices of production, which is our present subject, and also an influence of cardinal importance on the general equilibrium of the capitalist system and on the interaction between this equilibrium and the trade balance, which will be dealt with in another work.

2. The Effect of the “Other Factors” on the Terms of Trade

Let me now apply all this to my numerical example (see pp. 203 and 204).

Although B’s terms of trade have been worsened by the addition of the “other” factors, they have not been worsened to the full extent of the excess of the “other” factors in A. The reason for this is that the diminution of the average rate of profit that followed naturally put at a disadvantage the country with the higher organic composition, and as this country is A, the one change has partly made up for the other. If we were to presume the opposite, that is, if it were in B, the country with the lower organic composition, that the “other” factors weighed the heavier, then this country’s terms of trade would be influenced doubly, but in the same direction, and would be improved over and above the excess of the “other” factors (see page 206).

See text page opposite

With Two Factors: Wages and Profits
Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	R Cost of production c+v	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	60	60	170	110		80	190
B	120	50	60	60	170	110		40	150
	360	100	120	120	340	220		120	340

See text page 202

With More Than Two Factors: Wages, Profit and “Others”
Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	f Other factors	R Cost of production c+v+f	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	60	60	170	38	148	20%	48	196
B	120	50	60	60	170	10	120		24	144
	360	100	120	120	340	48	268		72	340

It is obvious that even if the “other” factors were equal in the two countries, adding them would have improved the terms of trade of the country with a low organic composition (see page 207).

If the country with a low organic composition is at the same time, as is usually the case in reality, the low-wage country, the sign of the variations in the terms of trade resulting from the adding of the other factors is the same as in the case where wages are equal (see page 208).

We can thus conclude that, all other things being equal, it is fully in the interest of the underdeveloped countries, with low wages and sometimes with low organic composition, that the worldwide average rate of profit should fall, regardless of the cause of this fall, and in particular that it should fall through the addition of other factors, such as rent, indirect taxes, etc., even if the level of those other factors is the same in the two groups of countries—and all the more if this level is higher in the underdeveloped countries.2a If the level is lower in these countries, their terms of trade will continue to improve to the extent that the deficit of other factors is less than the effect of the fall in the general rate of profit; but as the deficit counteracts the effects of this fall, there is a limit beyond which the terms of trade of the countries with low wages and/or low organic composition will start to worsen despite the fall in the general rate of profit.

II. RENTS

I. Differential Rent, Determined by Prices

According to the classical view, rent is constituted by the difference between individual costs of production in a branch with diminishing returns. The classical economists saw land as the branch par excellence belonging to this category, and most of their writings on the theory of rent related to land. They were aware, however, that the same phenomenon could occur in any other branch, and they said so.

Thus, John Stuart Mill speaks of cases in industry that are “analogous” to ground rent, such as patents, special business abilities, business arrangements, superior forms of organization, etc. And Ricardo defines rent in a general way, as being always the difference between the products obtained by the employment of two equal quantities of capital and labor. It is true, nevertheless, that what the classical economists were preoccupied with was ground rent, and, essentially, ground rent in agriculture.

See text page 205

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	f Other factors	R Cost of production c + v+f	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	60	60	170	10	120	20%	48	168
B	120	50	60	60	170	38	148		24	172
	360	100	120	120	340	48	268		72	340

See text page 205

Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value c+v+m	f Other factors	R Cost of production c+v+f	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	60	60	170	24	134	20%	48	182
B	120	50	60	60	170	24	134		24	158
	360	100	120	120	340	48	268		72	340

See text page 205

With Two Factors: Wages and Profits
Country	K Total capital invested	c Constant capital consumed	v Variable capital	m Surplus value	V Value	f Other factors	R Cost of production c+v+f	T Rate of profit	p Profit TK	L Price of production R+p
A	240	50	100	20	170	—	150		80	230
B	120	50	20	100	170	—	70		40	110
	360	100	120	120	340		220		120	340

With More Than Two Factors: Wages, Profits, and “Others"
A	240	50	100	20	170	24	174	20%	48	222
B	120	50	20	100	170	24	94		24	118
	360	100	120	120	340	48	268		72	340

The classical theory of rent was worked out systematically for the first time by James Anderson in 1777, in a pamphlet dealing with the Corn Laws, with a clarity that Ricardo himself did not improve upon. The essence of this theory is based on the consideration that the market price of the product of a branch with diminishing returns, such as agriculture, must be just enough to cover the cost of production and the profit on capital (price of production) of the last production unit that has begun to operate so as to equalize supply and demand. The prices of production of all the other production units being lower than that of the last, and the market price being the same for all the sellers, all the enterprises but one obtain a rent. This is the difference between the market price and the price of production. Thus, according to Adam Smith, ground rent is what is left after paying the usual wages, allowing for depreciation of tools and implements, and providing the farmer’s profit that is normal for the area concerned.3

“So long,” wrote John Stuart Mill, “as any of the land of a country which is fit for cultivation … is not cultivated, the worst land in actual cultivation … pays no rent.… A standard is afforded for estimating the amount of rent which will be yielded by all other land.”4

This is what Marx called differential rent. If we look more closely we see that the whole of the marginalist doctrine that subsequently invaded political economy is nothing more than a carrying further of the idea of differential rent, applying it to the entire capitalist market by arbitrarily extending the premises of diminishing returns and of perfect continuity to all branches of production.

From what has gone before it would seem to follow that the differential rent of the classical economists, the rent in which they believed to the exclusion of any other kind, is not a factor. Far from determining price, it is determined by the latter: “Rent, it is to be observed, therefore,” said Adam Smith, “enters into the composition of the price of commodities in a different way from wages and profit. High or low wages and profit are the causes of high or low price; high or low rent is the effect of it.”5 Ricardo confirmed just as categorically this view of the matter: “Corn is not high because a rent is paid, a rent is paid because corn is high.”6

If this were so, differential rent would not be a factor in the sense in which I have used this term; at all events, it would not enter into the determining of relative prices on the same basis as wages and profits do, as I have shown in Chapters 1 and 2.

Let me insert, in my numerical example, differential rent into the economy of country A, dividing its export branch into four enterprises, A1, A2, A3, and A4, with diminishing returns (see opposite).

At first sight it looks as though even if we accept the classical theory that rules out any rent other than the differential kind, its unconditional assertion that prices are the cause and rent the effect is not well-founded. According to the classical economists themselves, the price is what enables the worst land to pay the wages of its workers and provide its capital with the general rate of profit. But what is this rate? It can be calculated only if we already know at least the total amount of rent. In my example the rate is 20 percent because the total of rent comes to 48 and only 72 is left to be divided among the capitalists. If therefore price continues to depend on the rate of profit, as the classical writers agree it does, and if the rate of profit depends on rent, then it can also be said that, in a sense, price depends on rent.

On taking a closer look, however, we find that the classical economists were right, within the context of their own assumptions. In my diagram I started from a certain scale of returns that I chose arbitrarily. In a situation such as I have supposed, demand must meet with a certain supply, which imposes its conditions. But the classical economists assumed a continuous series of plots of land of infinitely small size, the returns from which ranged from X to O. Given this assumption, whatever the price might be, an adequate number of plots could always be found in the series, the worst of which would obtain, by selling at this price, only the general rate of profit, and the total of whose rents would be exactly equal to the excess of surplus value over the total of profits.

Let us suppose that the best plot of land in A produces, with K capital invested, c constant capital consumed, and v wages, x units of product; that the second best plot of land produces, with the same amount of capital invested and consumed and the same amount of wages paid, only x—1; that the third best produces x—2; and so on, the worst plot of land producing (still with the same inputs) only x — (x — 1) = 1. Let us further suppose that branch B retains the parameters of my numerical example, that is, K_b = 120 and v_b = 60, and that the rate of surplus value is 100 percent, in other words that v_i = m_i. Prices will then be:

See text page opposite

I. For a quantity x:

The price cannot be less than this, because in that case even the best plot of land, even without rent, would not realize the general rate of profit, which is (v + 60)/(120 + K), and would be withdrawn from production. Nor can it be greater, because then it would enable the second plot of land to realize this general rate of profit and consequently to add its production to that of the first plot.

If K and v are regarded as negligible in relation to 120 and 60—this is the assumption of the microenterprise, which is made by both the classical and marginalist writers—the price will be:

2. For a quantity x + (x — 1) = 2x — 1, the price will be:

It cannot be less than this, because in that case the second plot of land, which pays no rent, would not realize even the general rate of profit, 50 percent, and would be withdrawn from production; it cannot be greater, because this would enable the third plot to realize the average rate of profit and compete.

At this price, however, the first plot of land collects from the sale of its product

Since, with c + v + K/2, this plot of land already covers its cost of production plus the general rate of profit, the surplus

constitutes the rent. This rent is so much the bigger as 1/(x — 1) is bigger, that is, as x is bigger than x — 1. In other words, differential rent is an increasing function of the rate of variation of returns.

3. For a quantity x + (x — 1) + (x — 2) = 3x — 3, the price will be:

Then the rent of the second plot of land will be:

and that of the first plot will be raised to:

and so on.

If c + v + K/2 = L and if we have n + 1 plots of land, meaning n plots of land paying a rent and one plot (the last) without rent, then the price will be L/(x—n) and the rents will be:

As we see, the price may vary indifferently from L/x to L/(x — n); production and rents will have to follow. If x is considered as being very large in relation to L, that is, if we assume that there is always a very small plot of land of very high fertility, then L/x can be considered as being infinitely small. On the other hand, as n draws nearer to x, L/(x — n) tends to become infinitely large. Consequently, in the assumption, made by the classical and marginalist writers, of a very wide range of productivities and a very large number of very small plots of land, the lower and higher limits vanish and price becomes completely undermined, though all rents are derived from it.

Figure 2 may perhaps enable the direction of determination to be seen more clearly.

Figure 2

If we use prices as the ordinate and quantities as the abscissa (see Figure 2 above), we observe that, the curve o — o′ being given by the function of increasing costs, the equilibrium price depends on the demand curve. If this curve is D₁ — D′₁, the equilibrium price E yields a total rent of HJBC == [1/(x — 1)]L. If the demand curve is D₂— D′₂, the equilibrium price E′ yields accumulated rents of HJBC + KECF = [3/(x — 2)] L, and if the demand is D₃ — D′₃, the equilibrium price E” yields accumulated rents of LE′FG + KECF + HJBC = [6/(x — 3)]L.

It is clear that the steeper the slope of the demand curve, D — D′, in other words, the less elastic the demand, the higher will the equilibrium point E be situated, and consequently the higher will be the price and the larger the amount of accumulated rents. We thus see that, in given conditions of production with diminishing returns and perfect continuity, it is demand that determines prices, and through prices, rents, and not rents that determine prices. Here we have the typical case the generalizing and sophistication of which has constituted the entire structure of marginalism.

On this basis it would seem that we ought not to regard rent as a factor in price, and still less as a factor in unequal exchange. Although this rent is paid by the foreign purchaser, where an exported commodity is concerned, whereas it does not entail in return any charge upon the community of the country that receives this rent, it is, as presented by the classical economists, the product of free competition and the objective conditions of production, and so of the laws of operation of the capitalist system, and has not been engendered by any monopoly that would infringe these laws—as is the case, we have seen, with the superwages of the advanced countries.

For the monopoly of landownership is not, from this standpoint, the element that gives rise to the rent; it is the element that determines its transfer from the capitalists to the landlords. If no landlords existed and the land were put at the capitalists’ disposal free of charge, the differential rent of the classical schema would not cease to exist; it would simply be appropriated by the capitalists themselves. Thus, Ricardo could write: “It has been justly observed that no reduction would take place, in the price of corn although landlords should forego the whole of their rent. Such a measure would only enable some farmers to live like gentlemen, but would not diminish the quantity of labor necessary to raise raw produce on the least productive land in cultivation.”7

It is thus clear that, according to the classical writers, rent is the effect not of an institutional monopoly, such as landownership, but of the objective fact of the differential returns given by production units. The equilibrium price corresponds to the price of production of the least productive enterprise. The result is that all the other enterprises must necessarily realize a superprofit. The monopoly of landownership merely decides who is to benefit from this superprofit. Ground rent, said Ricardo, does not create wealth, it only transfers it.

2. Absolute Rent, a Determinant of Prices

While accepting the differential rent of the classical economists, Marx introduced the category of absolute rent. Based on the assumption that agricultural capital has an organic composition lower than the social average, and so that the value of agricultural products is greater than their price of production, he defined absolute rent as the difference between value and price of production—differential rent continuing to be the difference between the market price and the individual price of production8

From this standpoint the two rents are essentially, qualitatively different. While differential rent depends on demand, since it is determined by the market price, absolute rent depends solely on the monopoly of landownership, since it is this monopoly that is responsible for the fact that, in contrast to all other commodities, the product of the worst plot of land is sold not at its price of production but at its value; which (1) gives the same absolute rent to all the other plots of land, a rent that is added to the differential rent proper to each; (2) ensures that even the worst plot of land still provides its owner with a rent; and (3) shows that absolute rent does not result from prices but, on the contrary, modifies them.

I know the weaknesses in Marx’s argument on absolute rent and have no intention of enlarging upon them here. This is perhaps the weakest chapter in Marx’s theory. Nevertheless, I will briefly mention a few essential points.9

All Marx’s calculations in the numerical examples that he gives are based on the premise that the real price of the product is governed by value. But the very existence of landownership makes such a relationship unnecessary, since it does away with the competition of capitals. Marx gives no precise reason why the market price of agricultural products should be governed by value. His imaginary conversation between a farmer and his landlord tends to show that the latter intercepts the excess of value over price of production. In the absence of the landlord, this excess would have been poured into the capitalists’ general pool that enables a general rate of profit to be formed. The landlord succeeds all the more easily in his negotiations because, according to Marx, it is in the end all the same to the capitalist whether he pays this surplus to the landlord, as rent, or pays it into the “common fund” of the capitalist class.

Let us distinguish between the theoretical and practical planes. For the abstract farmer, representing the class of farmers, it is not at all a matter of indifference whether he pays this surplus to the landlords or into the capitalists’ common fund. In the first case the farmers lose it irrevocably and completely. In the second a certain part of it comes back to them in the form of an increase in the general rate of profit. On the practical plane and so far as each separate farmer is concerned, this “reimbursement” may be seen as a negligible quantity, but the individual farmer does not decide whether ground rent in general should exist or not, but fights out the issue of his rent, and he is in all circumstances interested in reducing or annulling that.

If we agree that it is the monopoly of landownership that makes this transfer possible, without any sort of consent being given by the farmer, there is no reason to assume that it is restricted merely to the excess of value over price of production. From the existence of capital as the second factor in prices, transforming values into prices of production, and, further, from the existence of the monopoly of landownership, it results that value is no longer in itself a significant magnitude in the conflict between the landlord and his farmer, and that it has no direct determining effect on prices.

This becomes clearer when Marx speaks of the modifications caused to rent by shifting to the cultivation of more fertile soil. If the new level of fertility, says Marx, requires a capital that is smaller but with the same organic composition in order to produce the same quantity of products, the rate of rent (ratio between rent and capital invested) remains unchanged, but its amount declines if demand does not change. Thus, let us assume a situation like this: 100c + 50v + 50m = Value 200 (francs). If the quantity produced is 200 kilos, the price will be 1 franc per kilo (since price is governed by value). If we assume the general rate of profit to be 10 percent, the rent must be 35 francs, since with the 165 francs left to him the farmer covers his cost of production of 150 and the 10 percent profit on his invested capital, which is also 150. Thus the rate of rent is 231/3 percent.

If productivity now doubles and, demand being inelastic, the market is still “equilibrated” with 200 kilos, we shall have: 50c + 25v + 25m = Value 100, quantity produced 200. According to Marx, the unit price will fall to 0·50, from which it follows that the amount of rent will fall to 17·50, its rate remaining unchanged at 23 1/3 percent.

But why should the price fall from 1 franc to 0·50? What obliges the farmer to reduce his price, since neither the quantity produced nor the demand has changed? Competition from another farmer? This is excluded by virtue of the monopoly of landownership. Why should the landlord, who is strong enough to annex the difference between price of production and value, not be strong enough to annex the difference between the new productivity and the old? Why, in the example given above, could we not assume that the price would continue to be 1 franc the kilo and the farmer’s profit 7·50 francs (10 percent), while the rent rose by 35 francs to 117·50, thus soaking up the entire difference?

It is impossible to discover any foundation for Marx’s premise that the market price rises, under the pressure of rent, to the amount of the individual value of the worst plot of land, then stops and moves no more. If nothing can prevent it from rising to that point, what prevents it from rising higher? In Theories of Surplus Value Marx says that it is not always the individual value of the worst plot of land that determines market value.10 What then does determine this? It seems that at this point Marx abandons this determination to the law of supply and demand. But what are the limits? The lower limit is obviously the price of production on the worst plot of land. That we can understand. But what about the upper limit? Is it the individual value of the worst plot of land? That we cannot understand.

If, however, the upper limit is the best plot of land eliminated from cultivation—the marginal plot, as would be said nowadays—as seems to emerge from another argument in Theories of Surplus Value,11 the category of absolute rent becomes superfluous, everything being reduced to differential rent on the basis of this best plot of land eliminated from cultivation, which is brought into use as soon as “market value” has risen sufficiently to guarantee the average profit to this plot. In that case, however, Ricardo’s theory is modified only on a secondary point, with the standard of the best plot not under cultivation substituted for the standard of the worst plot under cultivation.

Market value, says Marx, can never be greater than the individual value of the product of the least productive unit since—he claims—market value must represent real value. Yes, if the thing concerned is freely reproducible at this “real value.” No, if it is not—and in agriculture it is not. For a piece of writing from Marx’s hand, these passages are singularly lacking in precision. It is impossible to conceive Marx formulating such gratuitous assertions if he had himself prepared this text for publication.

If market value, Marx goes on, is less than the individual value obtainable from a certain plot of land, then this plot will receive only part of the absolute rent. But why should the market value be lower than this? Obviously because otherwise another plot of land would come into use. So it is the best plot of land not under cultivation that determines the market value and thereby the “absolute rent.” But it is also this same plot of land, operating through the same mechanism, that determines the differential rent. If this is so, it is not very clear what is the use of this category of absolute rent, which has nothing absolute about it, since some plots of land are free from it, not momentarily but in equilibrium, and since the same factor that determines this rent, namely, the competition of capitals, also determines “impairments” of it.

Marx himself, as might have been expected, asks the question that has been forming in the reader’s mind from the start of this chapter: “If landed property gives the powers to sell the product above its cost price, at its value, why does it not equally well give the power to sell the product above its value, at an arbitrary monopoly price?”12

The reply he gives, however, is disappointing and confirms the reader in his feeling that what we have is not a finished text but scattered notes that Marx wrote down with a view to working them up later, something that unfortunately he did not have the time to do. It would be tedious to go over this reply in detail, but what seems to be emphasized is that a limit is set to the rise of this monopoly price by the competition of imported products.

It is true that any national monopoly does find one of its limits there, another being the elasticity of demand. But it is impossible to see why this limit, imposed by external trade, should coincide exactly with the individual value of the worst plot of the land under cultivation in the country itself.

Finally, Marx, referring to Richard Jones, invokes the fact that improvements tending to diminish differences in the fertility of plots of land under cultivation increase the absolute produce of each plot, and therefore raise the rent.13 As Marx argues, this phenomenon confirms the existence of absolute rent, since, in itself, bringing the plots into uniformity should tend to reduce the differential rent.14

This argument would be valid if we kept to the standard of the worst plot of land under cultivation. If, however, we make the zero point the best plot of land eliminated from cultivation in a given state of social needs, there is nothing surprising in the fact that the improvements that equalize the plots under cultivation nevertheless increase the total rent, since they increase the difference between the plots under cultivation, taken as a whole, and this marginal plot. Here we have a case of leveling up. If we were to assume a leveling down, through general deterioration of the plots under cultivation, the result would then be an overall reduction in differential rent. The category of absolute rent does not seem necessary in order to explain these variations.

Must we then, in rejecting Marx’s absolute rent and noting that Ricardo’s differential rent is derived from prices and does not determine them, reject rent as a factor in prices and thereby in unequal exchange? I do not think one can draw this conclusion.

First, as regards absolute rent, it will be seen, if we look more closely, that what is involved in the brief summary I have given of Marx’s proposition is not so much the actual existence of this rent but what measures it, that is, the difference between value and price of production. Absolute rent can very well exist, however, without this yardstick and without this limit. If all the land, good or bad, under cultivation or not, is monopolized, if there is no land without an owner, except land that can produce nothing and is absolutely uncultivable, then the best plot of land not under cultivation comes into use not when the market price has risen sufficiently to cover its price of production, but when it has risen sufficiently to cover this price of production plus the rent demanded by its owner.

Absolute rent would then be the amount of the rent that would be demanded by the owner of the best plot of land eliminated from cultivation if he were to be asked to lease it out, and differential rent would be the difference between the price of production of each plot of land under cultivation and the price of production of the best plot of land eliminated from cultivation.

If this is so, the worst plot of land under cultivation also pays a rent, and even a twofold one, namely, an absolute rent equal to the rent that is, or could be, demanded by the owner of the best plot of land not under cultivation, and a differential rent equal to the difference between its price of production and the price of production of this eliminated plot.15

It is obvious that if economic reality were perfectly continuous, and if every landowner preferred to accept any rent at all, however tiny, rather than let his plot of land lie fallow—two assumptions that underlie both the classical theory of differential rent and modern marginalism—then absolute rent would practically disappear, because the difference between the prices of production of two plots of land situated so close to each other as the worst plot under cultivation and the best not under cultivation would be negligible, and because the competition between landowners would be such that the owner of the second plot would be content, in order to be able to find a farmer for it, to accept a rent so small that the sum of the two would also be negligible, and we should then be able to say with pertinence that the worst plot of land under cultivation does not pay rent.

However, on the one hand, reality is not continuous, and, on the other, competition between landowners (like all competition, incidentally) is far from being perfect. The difference in fertility between two plots that are neighbors on the scale of returns is not usually an insignificant sum; and, above all, a landowner does not usually put his land up to public auction in order to lease it out without delay. He looks around at leisure to find a farmer. He cherishes hopes; the return from each plot has not been defined in centigrams by laboratory analysis and is not posted up on the doors of the Town Hall, but is estimated subjectively. He regards it as normal to wait a while rather than “throw away” his plot of land. He becomes stubborn—considerations of self-respect come into the matter—and prefers to lose money rather than seem to have been made a fool of. He is unreasonable. In short, he is a man, and not the infallible electronic machine that the marginalists have put in the place of every economic agent. But the mere fact that every landowner is inclined to wait, and does in fact wait a certain time between one farmer and the next, and in no case agrees to go below a certain limit that he regards as equitable, for reasons that have nothing to do with objective economic laws, automatically sterilizes part of the supply and causes the market to reach equilibrium at a level higher than that which would have been attained if the economic agents had acted in accordance with marginalist “rationality.” What was a subjective and irrational attitude in each one’s head becomes ex post extremely rational and effective conduct, since this is what preserves rents, and above all that rent of the worst plot under cultivation which is an observed fact but which pure political economy has never been able to digest.

In their fight against this rent-of-the-worst-plot-under-cultivation, the classical writers make use of some brittle devices. If, wrote John Stuart Mill,

when the demand of the community had forced up food to such a price as would remunerate the expense of producing it from a certain quality of soil, it happened nevertheless that all the soil of that quality was withheld from cultivation, by the obstinacy of the owners in demanding a rent for it … the increase of produce which the wants of society required would for the time be obtained wholly … not by an extension of cultivation, but by an increased application of labour and capital to land already cultivated.… Even, therefore, if it were the fact that there is never any land taken into cultivation for which rent … was not paid … it would be true, nevertheless, that there is always some agricultural capital which pays no rent, because it returns nothing beyond the ordinary rate of profit.…16

Where does Mill find evidence that the return on this additional capital from a plot of land “already cultivated” would suffice to cover the price of production, so that the farmer would prefer this solution to leasing the best plot of land not under cultivation, even if he should be obliged to pay the rent that its obstinate owner demanded? The argument would be valid if Mill had confined himself to saying that the return from intensive cultivation constitutes another limit, alongside those I have mentioned—external competition, elasticity of demand—to the rents that would be engendered by extensive cultivation. All monopoly prices are limited by something, and ground rent is no exception.

However, every monopoly, whether agricultural or industrial, engenders a twofold rent, absolute and differential; and Marx was right, despite the fact that the unfortunate draft he has left us lets him down so badly. A monopoly is not obliged to regulate its prices by the price of production or the value of the least productive enterprise in the branch. It has to reckon with the elasticity of demand, and perhaps with foreign competition, substitute products, etc., but it does not have to reckon with the productivity of the least satisfactory enterprise in its group. There is nothing to rule out the possibility that it may give a rent to the least productive enterprise. In this case all the other enterprises in the same group will necessarily enjoy both this rent and the differential rent arising from differential productivity.

Thus, absolute rent exists, and this rent is undeniably a factor in prices and in unequal exchange. If an absolute rent is inserted into my diagram (Figure 2), the supply curve o — o’ will be shifted to the left, toward the position o₁ — o′₁, and whatever the demand curve may be, it will be cut by the new supply curve at a point higher up the price scale (Figure 3).

Figure 3

3. Differential Rent as Determinant of Prices

While the problem regarding absolute rent seems to have been solved, can we agree that differential rent is, as certainly as the classical economists supposed, the effect of prices rather than their cause? The best way to go about answering this question would seem to be to examine what would happen if private ownership of land did not exist.

Ricardo, as we have already seen, is categorical on this point. Even if the landlords renounced their rent, the product’s price would not fall. Differential rent would continue to exist and would be pocketed by the farmers.

That is the crux of the problem. Ricardo’s reasoning is correct on the condition that we assume that the farmer who cultivates the best plot of land retains from year to year the exclusive right to his share. In that case, though, it would not be a matter of abolishing private landownership but only of handing it over to the capitalists themselves. And nothing, of course, prevents a single person (whether physical or juridical) from combining the attributes of capitalist and landowner. The fact that the formal title to property is abolished changes nothing if the real content of this right continues to exist and is exercised by the farmer himself.

If, though, a system could be imagined in which nobody had an exclusive right to the land, not even someone who had cultivated it previously—supposing, for instance, that the plots of land were reallocated periodically by a drawing of lots, then the market price would not be governed by the price of production of the worst plot but by the average price of production.

This is what happens with fishing and also with hunting, in countries where this is carried on over unoccupied, and ownerless land. For unpredictable reasons, due to sheer luck, the productivity of fishermen is not identical. No one can be certain beforehand which is the spot most propitious for fishing on any particular day. And even if someone did know this, he might not be able to profit by the knowledge, since the sea is at the disposal of the first fisherman to cast his net, and no natural link, such as might entail a prior right, exists between the fisherman’s equipment and the natural element in which he operates—unlike the situation in agriculture, where a link of this kind is inevitably established between the capital invested and the material basis of production.

Thus, it is not necessary for the price of fish to allow the general rate of profit to be realized by the least lucky of the fishing concerns for new capital to be invested in this branch. So long as the price allows an average rate of profit to the entire branch that exceeds the general rate by however little, new capital will flow into it, since every fresh entrepreneur may reasonably hope to obtain this average rate for himself. This competition prevents the price of fish from rising above this point, and so differential rent is impossible.

The same thing happens in agriculture, too, if, despite the fixation of capital in land already under cultivation, and the conditions of priority thus established, which might, at first sight, give rise to a rent, uncultivated and ownerless land is available in practically unlimited quantity and its productivity cannot be known exactly beforehand. This was the case in the United States in the eighteenth century and down to the middle of the nineteenth, and it was also the case in the African colonies, with the European plantations of coffee, sisal, cocoa, rubber, palms, and so on. By declaring unoccupied all the land that was not under cultivation or was not occupied on an individual basis, in accordance with the European legal fiction that refused to recognize collective (tribal) ownership, the colonial powers put immense tracts of land at the disposal of the colonizers without requiring any payment from them beyond a small tax that was negligible in comparison with the return to be had on the capital to be invested.17

Depending on the chance results of prospecting activity that was inevitably incomplete, on intuition and luck, everyone selected and secured a concession. But the extent of the unoccupied land and the difficulties of penetration were such that there was no reason to suppose that the first wave of planters acquired the most fertile land. They prospected only where access was possible, given the means then available to them. The construction of new communications opened up new areas to prospecting and the setting up of plantations. Thus, the hundredth or thousandth concession owner had the same chance of gain as the first one. Under these conditions, for a capital to be invested in coffee, for example, it was not at all necessary for the price to be such as would enable the worst plantation to realize the general rate of profit; it was enough for the price to be that at which the average plantation would realize this rate, since the new capitalist was just as likely to hit upon a superior plot of land as on an inferior one.

This is just what happens in industry. The returns realized by firms in the same branch of production are different, but when the differentiating factor is not something monopolizable and actually monopolized, but consists simply of the quality of management and organization, or of those thousand imponderable and unforeseen elements that contribute to a firm’s success, then it is not necessarily the last-born firm that has the lowest return, as the marginalists suppose—each new firm has the same chance as all the rest. As a result, when, for example, there is an issue of shares in a new factory making electronic apparatus, no investor bothers to find out how much profit the worst of the existing electronic apparatus factories is making—what interests him is the average return on electronics shares, and it is on this information that he bases his decision. He may buy these shares even though some marginal firms already operating in this line are not merely not making a profit but may actually be suffering losses.

It is clear that, under these conditions, the price cannot rise above the average price of production, and differential rent is out of the question. Things are quite different if production in a branch depends on a monopoly of some kind—a patent, a license, a royalty, ownership of land, etc.

We may thus conclude that, even if competition between landowners were to prevent the formation of absolute rent, the mere fact that property in land exists, whether or not it be separated from capital, entails an increase in the price of the product as compared with a situation in which this property in land does not exist; and it thus obliges the foreign purchaser, if the product be exported, to pay a tribute that corresponds to no productive service and costs nothing in return to the exporting community, either in labor or in time.

An international division of labor based on the cost of production, in which rent, where it exists, is allowed for, cannot correspond to the world optimum sought by the classical writers and the modern liberals. An institutional change that abolished or reduced rent would render some specializations pointless, even though the objective conditions of production had not changed.

Finally, this tribute is neither useful nor necessary to the development of capitalism in general. Private ownership of land, though it afflicts most of the actual capitalist models, is not a constituent element in very possible capitalist model. It may even be said that the tendency of capitalism in general has always been to limit ground rent or to avoid its appearance.18

4. Quasirents

A kind of rent other than ground rent that undoubtedly is a factor in prices is that constituted by oil royalties. The cost structure in 1963 was as follows:

	In U.S. dollars, per ton
	Costs of production	Royalties	Total
United States	18 to 21	—	18 to 21
Venezuela	5·5 to 5·7	6 to 7	12 to 12·5
Middle East	2 3 to 2 5	5	± 7·5

The selling price of crude petroleum in the Middle East was ± $12·50 per ton.

In 1959 the four chief oil-producing countries of the Middle East received the following royalties:

Iran	$252 million
Iraq	$242 million
Saudi Arabia	$315 million
Kuwait	$345 million
Total	$1,154 million

The populations of these countries were:

Iran	19 million
Iraq	million
Saudi Arabia and Kuwait	million
	35 million

The royalties thus represented over $30 per head. For Kuwait and Qatar they represented about $1,600 per head, which would put these little countries in the front rank of the advanced countries if these sums were used internally, whether for consumption or for investment. In fact, however, the greater part of this money, especially as regards Saudi Arabia and Kuwait, is not used by anyone—neither by the people nor even by the potentates who receive it. British Petroleum sends a check to the king of Saudi Arabia or to the sheik of Kuwait. They pass this check on to their bank in London, receiving in exchange another piece of paper called a “credit note,” together with a personal checkbook. With this they buy, perhaps, a few Rolls-Royces and some high-class sporting guns; then they go to London and enjoy the service of a luxury hotel for a week or two; they sample Scottish smoked salmon and cutlets of best English mutton; they buy some jewels, some suits, some gewgaws. This is about all that Saudi Arabia or Kuwait receives in terms of real value—if what has been listed above can be regarded as real value—from its oil royalties. The whole does not exceed a few hundred thousand pounds a year, whereas the royalties amount to hundreds of millions. The rest is mere paper work. The monarchs’ credit balances pile up in their banker’s ledger. One day they order the purchase of some shares or other. At once, the bank sends them a debit note, on the one hand, and, on the other, a certificate of deposit of x shares of the y or z company—two more pieces of paper that balance each other. Later on the bank collects dividends for them and sends them a credit note—yet another! And so the game goes on. And they fancy they are millionaires many times over.

What has actually happened is that the oil companies have indeed paid out many thousands of millions—not, however, to these monarchs or their countries but to Britain and the other industrial countries, the great consumers of oil, where a proportion of these sums is eventually invested by way of stock-exchange operations. In the end the actual price that these rich countries pay for the oil they buy is not $12·50 per ton but $7.50 or $8.00, as the greater part of the $5.00 royalties comes back to them. This is another form of indirect exploitation of the underdeveloped countries, perhaps even more subtle than unequal exchange, but it is outside the scope of the present study.

However, and this is of cardinal importance, if the foreign oil companies were to be driven out of the Middle East, and nationally owned companies were to take their place, the result would be still more disastrous for the countries concerned. As in such a situation we must assume that the royalty payments would be abolished, competition between the oil-producing states would cause the price of oil to come into line with its price of production, about $7.50 per ton, and these states would lose even that part of the royalties that formerly came to them as real values. This might perhaps make no difference in the case of Saudi Arabia or Kuwait but it would mean a substantial failure to gain for Iraq and Iran. As John Strachey very rightly observes, in this situation Britain would gain in terms of trade even though she lost in income from overseas investment.19 However paradoxical this may seem, the presence of the foreign companies has led the Arab and Iranian governments to establish a rent that has prevented the price of Middle-Eastern oil, already very low (less than half the American price) from sinking still further through the working of unequal exchange.20

III. INDIRECT TAXES

I. Indirect Taxes as a Factor

As already said in Chapter 1, indirect taxes fulfil the conditions of my definition of a factor, since they undeniably constitute an established claim to a primary share in the economic product of society. It is not the same with direct taxes, which constitute an established claim to a second-stage share, a sort of redistribution of this product.

It may even be said that indirect taxes constitute the factor par excellence in relative prices, since, in the sharing out of the economic product of society, what distinguishes the first distribution from the second is precisely the fact that the former takes place indirectly, through relative prices, whereas the second takes place directly, through immediate transfer from one economic subject to another. The very adjective “indirect” itself is based on this distinction, for there is no other mechanism than prices for indirect distribution. Direct taxes can in certain circumstances influence the general level of prices, but can in no way affect relative prices.

Here, finally, there can be no doubt about the direction in which determination takes place. Indirect taxes are the effect of a voluntaristic act, independent of the “objective” laws of the market and even prior to the working of these laws. We must not confuse the obligation that the authority that imposes a tax is under, to take account of the foreseeable reactions of the market, with the question of what prices depend on. This obligation relates to the need to fix a rate that will be compatible with a certain situation, in order to increase the return the tax brings and not to cause disturbances detrimental to economic activity. In the end, however, whatever the rate chosen, whether it be good or bad, well or badly calculated, too high or too low, beneficial or harmful, it will none the less exert all its effects on equilibrium prices.

If, as we have shown, wages are fixed in advance in accordance with the factors specific to them, and if the rate of profit of the branch affected by the indirect tax must in any case come into line with the average rate of profit, the tax can react only upon prices—leaving aside the slight effect it will have on the profits of the branch through the reduction in the general rate of profit caused by the actual amount of the tax. Given worldwide circulation of capital, this effect is absolutely negligible.

2. The Effects of Taxes on Exports and Imports on the Terms of Trade and on the Trade Balance

The classical and neoclassical writers do not seem to have taken the foregoing into account when they made the repercussion of taxes on prices depend on the elasticity of demand. On this point I quoted in the Introduction Ricardo, John Stuart Mill, Bastable, Taussig, Sidgwick, Edgeworth, and Marshall. With differences of wording and slight differences of conception, all these writers agree in general that in the field of external trade, the incidence of a tax on exports upon the foreign purchaser is a decreasing function of the elasticity of external demand, while that of a tax on imports upon the foreign seller is an increasing function of the elasticity of internal demand. In other words, the more elastic the external demand for an exported product, the less substantial will be the improvement in the terms of trade as a result of a tax on exports, and the more elastic the national demand for an imported product, the more substantial will be the improvement in the terms of trade as a result of a tax on imports.

This assertion can be understood only if we identify, or confuse, the net barter terms of trade with the gross barter terms of trade. If the external demand for a given product is very elastic, considerably greater than unity, the volume of the producing country’s exports can decline substantially as a result of a tax on exports that increases the price of the product in question. This may have disagreeable effects on the country’s trade balance and on its economic equilibrium, but the country’s terms of trade will improve in proportion to the tax. It is hard to see how the price of the product could be prevented from rising in proportion to the tax, except in the very short run.

The only exception would be the case of diminishing returns. In this case, if external demand is very elastic, the incidence of the tax will be shared in accordance with the gradient of the two curves, that of returns and that of demand, between an increase in the price paid by the purchaser and a diminution in the cost of production of the product. Then the barter terms of trade will improve less than proportionally to the tax, but the factoral terms, both simple and double, will improve in strict proportion to the tax, since the share of the tax that the foreign purchaser does not pay will be gained by the national economy in the form of a diminution in pure cost.

Figure 4

The demand curve D — D′ being given (Figure 4), the equilibrium price without tax is E′. If a tax AA′ is applied, the supply curve OO′’ will be displaced to OT — OT′, parallel to O — O’, since the tax is the same for all quantities (E′Z = AA′). The equilibrium price with tax is E′. All other things being equal and the price of the commodity against which exchange is made being assumed as unchanged, the barter terms are improved by N′M′, i.e., in a smaller proportion than the tax, since N′M′ < AA′; but the factoral terms, simple and double, are improved proportionally to the tax, since FT = AA′. The part of the tax FT — N′M′ that the purchaser does not pay is gained by the selling country in the form of a diminution in unit cost, since the cost, which was AB for a quantity Q has become A′B′ for a quantity Q′.

But:

AB = AA′ + A′B

and:

A′B′ = A′B + BB′

so that:

AB – A′B′ = AA′ + A′B′ – (A′B + BB′)

or:

AB – A′B′ = AA′ – BB′

or:

AB – A′B′ = FT – N′M′

so that:

Diminution in unit cost = tax minus increase in equilibrium price.

When reading economic writings on this subject, one often has the impression that it is too easily forgotten that the terms of trade have nothing to do with quantities exported or imported, but solely with unit prices. Very often economists imagine they are arguing about terms of trade and the national income when in fact they are arguing about the balance of trade.21

A tax on imports, however, whatever the elasticity of internal demand for the imported product, can in no circumstances affect the terms of trade, barter or factoral; it can, however, improve the trade balance to a greater or lesser extent, depending on the elasticity of demand. The exception once again is provided by the case of increasing costs on the part of the foreign seller; in this case the improvement in the trade balance through reduction in the quantity imported will bring about a reduction in cost and in equilibrium price and will improve the barter and simple factoral terms of trade, but not the double factoral terms. In the case of increasing costs, however, there is, in practice, a considerable difference between a tax on exports and a tax on imports. The former affects overall demand, and reduction in this has its effect on costs—we must suppose that the country or countries applying the tax are the only or the chief exporters, since otherwise the tax becomes impracticable—whereas the latter affects only a small part of demand, that of the importing country applying the tax, and unless we assume that this country is the chief consumer of the product taxed, the reduction of this demand will usually have a negligible effect on the cost-of-production curve. The difference arises from the fact that though it often happens that a country is almost the sole producer of a given product, it is very rare for a country to be almost the sole consumer of such a product.

To sum up:

1. Constant costs—inelastic demand

The tax on exports falls entirely on the foreign consumer and improves all the terms of trade, barter and factoral.

It improves the trade balance.

The tax on imports affects neither the terms of trade nor the trade balance.

2. Constant costs—elastic demand

Tax on exports: same improvement in terms of trade as above. Tendency to worsening of the trade balance in direct proportion to the degree of demand.

The tax on imports has no effect on the terms of trade. It tends to improve the trade balance in direct proportion to the degree of elasticity.

3. Increasing costs—inelastic demand

Tax on exports: same improvement in terms of trade as in (1). Improvement in trade balance.

Tax on imports: no effect either on terms of trade or on trade balance.

4. Increasing costs—elastic demand

Tax on exports: partial improvement in barter terms; total improvement—to the amount of the tax—in the simple and double factoral terms of trade.

Tendency to worsening of the trade balance in direct proportion to the degree of elasticity.

Tax on imports: if the country’s consumption represents a considerable specific weight in world consumption, its barter and simple factoral terms are improved. No effect on double factoral terms.

Tendency to improvement of trade balance in direct proportion to degree of elasticity.

Finally, if costs are decreasing and demand is elastic—if demand is inelastic the effects are the same regardless of costs, since elasticity of demand constitutes the very condition for the functioning of non-proportionality of costs—then the tax on exports improves the barter terms of trade more than proportionally to the tax, and the simple and double factoral terms proportionally to the tax. It tends to worsen the trade balance in direct proportion to elasticity of demand. The tax on imports, subject to the same reservation as in (4)—that the consumption of the country in question has a substantial specific weight—will tend to worsen the barter terms and the simple factoral terms but not the double factoral terms. It will tend to improve the trade balance.

3. Taxes on Exports as a Means of Defense for Underdeveloped Countries

It follows from the foregoing that a tax on exports can be a very useful device in the hands of the underdeveloped countries, with a view to redressing their terms of trade, which are suffering from the inequality of exchange due to low wages. If wages cannot be raised, either in the country generally or selectively in the export sectors, the only means left to these countries for preventing the excess surplus value from draining away abroad through unequal exchange is to make up for the inequality in the rate of surplus value by imposing a tax on exports. This tax increases the amount of money received for the commodity taxed without increasing either the real social costs of producing it or the profit of the capitalist producer.

This last point is important because, in the absence of a structural change in the competitive system inside the country, an artificial increase in the selling price through international agreements, such as has already been experienced in the case of coffee and cocoa, entails a superprofit for the producing concerns, and thereby an influx of capital into the branch and overproduction, which soon crashes through all the price floors that may be laid down by conferences.

The fixing of export quotas is also found to be useless in practice. In the first place these quotas, which are necessarily based on extrapolation from previous export figures, take a long time and much difficulty to negotiate. The development of the production of each exporting country being very different, it is in practice impossible to find base years satisfactory to everyone. The general criteria laid down at the opening of conferences are soon broken through by the selective criteria that have increasingly to be adopted the longer the conference goes on, in order to dispose of the objections raised by certain especially tough negotiators.

Depending on whether the exporter is a big producer whose exports count for a lot in the world market, or a small producer whose exports are more or less marginal, the positions taken differ. The small exporters tend to blackmail the big ones. It is rare for an agreement of this sort to be made without some breakaways, which, however insignificant in themselves, offer a bad example and a germ of dissension for the future. Finally, if and when the agreement is made, many of the signatories are left feeling that their interests have been harmed, and they are already looking forward to the next revision. As these arguments and revisions of agreements are made on the basis of existing production potential, each of the countries involved is interested in letting this potential expand, in disregard of all the restrictions recommended or imposed by the agreement.

The very application of these agreements implies a procedure that is complicated and vexatious both for the producing countries and for the consumer countries and that goes very much against the principles of free enterprise that are nevertheless maintained in force. Insofar as these agreements prove at all effective, that is, insofar as they are followed by a certain increase in prices, the pressure of overproduction, which nothing can check, becomes irresistible.

All qualities of a product are not affected to the same extent by any stabilization of the market that may be achieved. An all-around improvement in prices following an artificial shortage brought about by quotas will benefit the producers of some qualities more than the producers of others, depending on the structure of demand.

At each momentary improvement in demand, appeals to export in excess of the quota flow into the directing office. Fraudulent exports increase, together with the traffic in forged certificates of origin. Some country that by mistake or through the skill of its negotiators has obtained too generous a quota sometimes finds that it cannot fulfil this quota. Normally, it ought to lose its right to the amount it cannot supply at the next revision of quotas. But there is another country that has exceeded its quota because it was unwilling or unable to restrict production. Normally, it ought to destroy this surplus, which would give it an incentive to take more effective measures to restrict production in the future. But then the former country, which has an available quota and not enough product to fill it, sells certificates of origin to the latter country, which has the product but not the quota. If the two countries are neighbors and their production goes out through the same port, this semiclandestine operation, performed with the more or less tacit connivance of the local authorities, is considerably easier to carry out. Finally, instead of adapting production to quotas, what happens is that quotas are adapted, automatically, and either openly or not, to production—which ends by depriving the system of all meaning.

Let us imagine, however, that a worldwide tax on exports is established, a sort of international excise, expressed as a percentage of the current market price and collected by an international organization that appoints agents in all export ports. The product of this tax will be paid back to the exporting country in the form, say, of a development fund, subject to the sole condition that it may not be returned, directly or indirectly, to the branch producing the exported goods. All the inconvenient features of the direct agreements to raise prices or the quota systems, listed above, are eliminated. An increase in prices will be brought about automatically, without any hitches and without clashing with the mechanisms of free trade that govern international trade. Production and consumption will come into line on their own, at the new point of equilibrium conditioned by whatever the elasticity of demand may be. The tax would not modify the relative status of the producing countries, and all the frictions under that score would be eliminated. Fraud would be much more difficult. The risk would remain that some or all of the tax might find its way back to the producers, perhaps through a reduction in the taxes on exports already in force in the producing countries. Apart from the fact that this procedure would be forbidden by the agreement, this risk would be practically nil if the restitution procedure adopted were such that it ruled out any movement of the money concerned through the state budget, a special fund being provided for instead, which should be independent of the budget. Since in the underdeveloped countries customs receipts form the most substantial item in state revenue, it would be very hard to abolish them once they have been established, especially if the only motive for doing so were to violate an international agreement the beneficial effects of which would be felt without delay, in the form of credits on the special development fund to be set up. Let us also not forget that the sanctions, which in any other agreement would be limited to expulsion, something that the offending country very often wants to bring about, could in this case have a much greater bearing, since the international organization charged with collecting the tax would at all times be in debt to the recalcitrant country.

Finally, with this system there would be much less need than with quotas or contractual price raising for the cooperation of the consumer countries. From the standpoint of the ethics of international relations, a measure like this would be a measure of legitimate defense, which the poor countries could adopt without shame in order to ensure for themselves a just (partial) restitution of the losses due to their terms of trade.

Comparative Costs

I. THE INTERNATIONAL DIVISION OF LABOR

I. General Observations

In its authors’ minds and in the way it was formulated, the proposition regarding comparative costs has a twofold significance. (1) As regards the formation of international value, it reverses the direction of determination, so that it is no longer the relative quantities and remunerations of the factors that determine equilibrium prices, but the reciprocal elasticities of demand, and consequently market prices, that determine how the factors are remunerated.1 (2) As regards the international division of labor, it ensures a relative optimum, each country specializing in the branches in which it possesses a comparative advantage.2

In challenging the classical economists’ fundamental assumption of noncompetition in the capital factor, I have rejected, in the foregoing chapters, the formation of international value in accordance with comparative costs. It now remains to examine from this standpoint the alleged optimization of the international division of labor.

When approaching this subject, there is one observation that has to be made at once: optimization of production on the world scale can only be conceived either as a saving of human labor in order to achieve a determined economic result, or as the securing of a better economic result with the same amount of human labor, whether direct (living labor) or indirect (past labor), expended on producing the means of production.

Now, under the system of commodity economy it is not the quantities of the factors expended in production that are the immediate determinant of specialization, but their costs in money. Consequently, optimization through the working of comparative costs can have meaning, on the world scale, only if there is such a correspondence between money costs and real costs, between the remunerations and the quantities of the factors, that a comparison made on the basis of the prices of production of the capitalist enterprises, the immediate agent of specialization, produces in every case the same results as a comparison made in accordance with the social costs of the countries concerned.3

The classical writers seem to believe in this correspondence. We shall see in the paragraphs that follow, however, that it can be accepted only with qualifications that are so restrictive that the alleged optimization loses all practical significance.

A preliminary question arises here: are we justified, in any case, in using money costs or prices of production when talking about Ricardo’s comparative costs? Some writers hold that this is not possible, and therefore, before examining the conditions mentioned above, I think it proper first of all to clear the ground by considering an argument that the opponents of comparative costs have made much of, but which, it seems to me, is only a futile dispute arising from a singular misunderstanding of Ricardo’s words.

2. The Terms of the Comparison

Because Ricardo was so unlucky as to construct his example in terms of labor costs, his detractors have dealt unfairly with him, quibbling on this point. Ohlin, for example, thinks that the classical economists “go back on their steps” and prefer, when dealing with international trade, to argue on the basis of simple, untransformed labor value. Angell says much the same thing but thinks that the problem is solved on the basis of the labor theory of value itself, since, if prices are determined by labor costs, a comparison between prices gives the same result as a comparison between labor costs. (In this he makes not one but two mistakes, for it is just as wrong to say that labor costs constitute an indispensable element in the theory of comparative costs as it is to believe that, in Ricardo’s view, comparison in accordance with these costs gives the same results as comparison in accordance with prices.) Samuelson also says that the law of comparative costs is a proposition derived from barter, which does not necessarily apply to a money economy.4 Finally, as I had occasion to mention in the Introduction, Maurice Byé also alleges that the theory of comparative costs is inseparable from the idea of barter.

This serious misunderstanding about comparative costs is all the more curious since from the very beginning the theory was closely linked with the debate on the monetary problems of Ricardo’s time. It was in “The High Price of Bullion” (1809) that Ricardo first expounded the theory by assuming that the distribution of money in the different countries would establish such a relation between prices that exchanges would be undertaken in accordance with comparative costs, and as if money did not exist. Later, in Chapter 7 of his Principles, he contemplated two possible cases: (1) with metallic or convertible currency, specialization according to comparative costs would be effected by movements of money and subsequent price changes in accordance with the quantity theory; (2) with fiduciary and inconvertible currency, the same effect would be obtained through alterations in the rate of exchange.

True, Ricardo deals with these matters in a way that lacks synthesis and is perhaps even rather uneven; but the two cases can easily be illustrated.

Let us suppose that in his example the figure 80, 90 express escudos in Portugal and the figures 120,100 express shillings in England, and that before trade began an escudo was worth two shillings. Let us further suppose that the price at which the respective demands reach equilibrium is: one of wine = one of cloth, an intermediate rate between the Portuguese cost ratio of one of wine = 8/9 of cloth and the English cost ratio of one of wine = 12/10 of cloth.

It is clear that, despite the comparative costs, at 1 escudo = 2 shillings Portugal can sell nothing to England, whereas England can sell everything to Portugal. The wine and the cloth, bought in England at 120s. and 110s. respectively, realize in Portugal respectively 80 esc., or 160s., and 90 esc., or 180s. The wine brings in 331/3 percent and the cloth 80 percent. The English therefore start to sell cloth to Portugal without buying anything from her. Portugal’s trade balance becomes negative and the monetary mechanism starts to function.

I. With metallic or convertible money. Bills of exchange drawn on Lisbon will depreciate in London, and as there is no equivalent to be had, their rate will soon fall to the level of the lower limit of the transport costs for metallic money (gold points), and then the only way to settle them will be either to despatch escudos in the form of coins to London, melt them down, and have guineas struck from them at the Mint, or else to send ingots of gold and exchange them for notes at the Bank of England. In either case the amount of money in circulation (what Albert Aftalion would call incomes) will diminish in Portugal and increase in England. Prices will fall in Portugal and rise in England.

If the respective rise and fall come to 142/7 percent, wine will cost the same in Portugal and in England, that is, 684/7 esc. = 1371/7s. This will thus constitute a first limit. Beyond it, Portuguese wine starts to become interesting in England, and some of the bills of exchange on Lisbon are bought by English wine importers. In the vicinity of this limit, however, English cloth continues to be much more interesting in Portugal than Portuguese wine is in England. Indeed, let us suppose that prices rise and fall, in England and Portugal respectively, by 15 percent. The prices will be:

Portuguese wine is thus still too dear in England, compared with the cheapness of English cloth in Portugal. Exports of English cloth continue to exceed imports of Portuguese wine; an excess of bills of exchange on Lisbon continues to glut the market in London; and the flow of metallic currency or gold ingots from Portugal to England continues to bring down prices in the former country and push them up in the latter.

If these upward and downward price movements reach the level of 284/7 percent, prices of cloth will be equal in Portugal and in England, at 642/7 esc. and 1284/7s. respectively. This percentage thus constitutes the second limit. Beyond this limit, it becomes more interesting to export cloth from Portugal to England than the other way round.

Between these limits, 142/7 and 284/7 percent, there is an equilibrium percentage that is determined by the reciprocal elasticities of demand. As we have assumed that these elasticities are such that one of wine = one of cloth, this percentage is 231/13 percent. At this percentage (of rise and fall respectively, in England and Portugal) one of wine = 617/13 esc. = one of cloth = 1231/13S.

2. Fluctuating changes. If the export of escudos in the form of coins is forbidden in Portugal and is out of the question, or if the currency of Portugal is neither metallic nor convertible, then, under the conditions we have assumed, bills of exchange on Lisbon will continue to depreciate in London beyond the gold points. Nominal prices will remain stable in Portugal and in England, but the escudo will fall farther and farther in relation to the shilling. At 1 esc. = 1 1/2 s., the bills of exchange on Lisbon that are circulating in London start to be taken up. This rate constitutes the first limit. Below it, by buying an 80 esc. bill of exchange on Lisbon for a little less than 120s. it is possible, with this bill, to buy one of wine in Portugal and resell it in England for 120s.

In the vicinity of this rate, however, there is a greater demand in Portugal for English cloth, which now costs only a little over 66 2/3 esc., as against 90 esc., the local cost of production, than there is in England for Portuguese wine that costs a little under 120s., as against 120s., the local cost of production. Bills of exchange on Lisbon therefore go on depreciating. They cannot, however, fall below 1 esc. = 11/9 s., because below that rate English cloth costs more in Portugal than the local price of production, which is still 90 esc., and bills of exchange on Lisbon vanish from the London market. In contrast, at this rate Portuguese wine is very cheap in London, since its price is 80 esc. x 1 1/9 = 88 8/9 s., as against 120s., the local price of production. There will therefore be bills of exchange on London offered in Lisbon that will find no takers.

Consequently, the rate of the escudo, which we assumed to be 2s., before the beginning of trade, varies freely thereafter between 1 esc., = 1 1/2s., and 1 esc. = 1 1/9s., these limits corresponding to one of wine = 8/9 of cloth and one of wine = 12/10 of cloth. (There is the same ratio between 8/9 and 12/10 as between 1/ 1 1/2 and 1/ 1 1/9.)

As we have assumed that the reciprocal elasticities of demand are such that one of wine = one of cloth, the rate of exchange will eventually reach equilibrium at 1 esc. = 1 1/4s. without any change in nominal prices. At this rate, English cloth bought in London for 100s. will sell in Portugal at 80 esc.; this eliminates the Portuguese cloth industry, which can sell only at 90 esc. and ensures that in Portugal one of cloth = one of wine = 80 escudos. At this rate, too, Portuguese wine costs 100s. in London; this eliminates the English wine industry, which can sell only at 120s. and ensures that in England, too, one of cloth = one of wine = 100s. And England exchanges her cloth for Portugal’s wine at a rate determined by the law of comparative costs, as if money did not exist. Not only is the validity of Ricardo’s proposition not affected by the introduction of prices and money economy—on the contrary, it seems that the very mechanism by which it works is that of prices and money.

To cut short the otiose discussion about labor costs and show clearly that what matters for the study of comparative costs is the relationship between costs and not their structure, several supporters of the theory have tried to use neutral common denominators. Thus, Senior and Cairnes proposed an indeterminate aggregate of labor and abstinence, which Cairnes called “sacrifice.” Mangoldt used as standard a third article produced in both countries; but this latter condition was superfluous, since the comparison is made, in any case, not between the costs of the same article in the two countries, but between the costs of two or more articles in the same country.5 Very sensibly, Marshall used for each trading country a separate and independent standard, namely, the cost of some third article produced in the country itself and only there, and reduced the cost of each of the commodities, being subjected to the arbitrament of comparative costs, to “bales” of this imaginary product, which, according to Letiche, represents a given quantity of productive services.6 Marshall’s thesis means that we are not at all obliged to use a common standard for both (or all) trading countries. Any standard whatsoever would do for any country, even if this were not the same as that used for the other country, since we are not comparing absolute values but relative ones, and the variation of the standard itself does not affect the ratio between the magnitudes that it measures. Bastable and Edgeworth replaced “hours of labor” by “units of productive power” or other similar expressions aimed at indicating different combinations of factors. Finally, it was Jean Weiller, perhaps, who stated the problem in the most correct way: “It is enough to agree on a common measurement of the physical cost of production; it matters little whether this be amount of labor or unit of productive forces, provided that it be identical within one and the same country.”7

We may thus conclude that, in the spirit of the law of comparative costs, the “hour of labor” is merely a simple unit of reckoning, so that the elements of the theory mean nothing but that in Portugal, for reasons that do not concern international trade, one of wine = 8/9 of cloth, whereas in England one of wine = 12/10 of cloth. These are the apparent costs in each of the two countries, only the ratio between which matters.

It could not be otherwise, since the author himself acknowledges that under capitalism commodities exchange in accordance not with labor value but with (equilibrium) prices, which differ from labor value, to an extent depending on the proportion of capital invested in each branch. Marx later gave the name of prices of production to these equilibrium prices, when he studied in a systematic and thorough way the fundamental problem of the transformation of values. What enabled him to do this was the concept of surplus value and the equivalence between the sum of prices and the sum of values to which this leads. Ricardo lacked these theoretical elements and this was what prevented him from working out the theory of transformation. But that did not at all prevent him from seeing and accepting the principle of this transformation and coming to correct conclusions on all the particular cases he had to examine.

3. The Assumption of Equality in Organic Composition of Capital

Let us now look at the implications of Ricardo’s proposition in regard to the international division of labor. As we saw in the first paragraph of this section, in order that the optimization called for by the classical writers may be achieved, there must be no divergence between the relationship of the equilibrium prices of the various commodities of each other and that between their real social costs.8

A first circumstance that may lead to such a divergence is constituted by possible variations in the general wage level. Ricardo himself allows that a modification of this level taking place in a country entails an inverse modification of prices in the branches where capital intensity is higher than the social average, a modification in the same direction in the branches where capital intensity is lower than average, and no change at all in the branches of average capital intensity.9

Now, in order that the indicator of comparative costs may reflect the objective conditions of production, it is necessary that institutional variations in wages, due to trade-union struggle, political circumstances, etc., have a neutral effect on equilibrium prices. As this is possible only in cases in which all the branches, within each country taken separately, have the same capital intensity, or, to use Marxist terminology, the same organic composition of capital, it follows that the optimization in question is dependent upon this particularly strong assumption. If it does not apply, variations in wages in one or other of the countries participating in exchange may shift the comparative advantage from one of the branches under consideration to another, without any change in the objective conditions of production, and if this happened it would make nonsense of optimization through specialization dictated by comparative costs.

Let us take Ricardo’s example once more: Portugal expends 80 hours of labor for one unit of wine and 90 for one unit of cloth; England expends 120 and 100 respectively. Despite Portugal’s advantage in relation to both articles, that country will specialize in wine and England in cloth. The Portugal-England entity gains by this.

If, in accordance with what has been said in the preceding paragraph, we take these figures 80–90 and 120–100 as expressing, instead of hours of labor, the prices of production of wine and cloth in Portugal and England respectively; if we also assume that the total capital invested in cloth is four times as much as that invested in wine in the two countries; and if, finally, in order to simplify, we leave out of account the constant capital consumed, then we shall have, in order to arrive at Ricardo’s figures, the following transformation table:

Wages Equal. Rate of Surplus Value 100 percent
Country	Article	K Total capital invested	v Variable capital	m Surplus value	V Value v+m	T Rate of profit	p Profit TK	L Price of production v+p
Portugal	Wine	100	63	63	126		17	80
	Cloth	400	22	22	44	17%	68	90
		500	85	85	170		85	170
England	Wine	100	98	98	196		22	120
	Cloth	400	12	12	24	22%	88	100
		500	110	110	220		110	220

Since 80/90 is less than 120/100, Portugal specializes in wine, and since 100/120 is less than 90/80, England specializes in cloth.10 From the point of view of the two countries taken together, the results are as follows:

Before Specialization
	Wine	Cloth	Totals
Portugal: hours of labor	126	44	170
England: hours of labor	196	24	220

Portugal and England together, with 1,000 K expended 390 hours of living labor.

After Specialization
	Wine	Cloth	Totals
Portugal	2 × 126	—	252
England	—	2 × 24	48

Portugal and England together, with 1,000 K expend 300 hours of living labor to achieve the same overall result.

There has been a saving of 90 hours by the two countries taken together, while the total capital invested has remained the same. Everything has thus turned out for the better.11

Let us suppose, however, that wages in Portugal increase by one-third, without any alteration in the objective conditions of production, and without any alteration either in wages or in conditions of production in England. The transformation table will then look like this:

With Wages Unequal
Country	Article	K Total capital invested	v Variable capital	m Surplus value	V Value v+m	T Rate of profit	p Profit TK	L Price of production v+p
Portugal	Wine	100	84	42	126
(Rate of surplus value 50%)
	Cloth	400			44
		500			170			170
England	Wine	100	98	98	196		22	120
(Rate of surplus value 100%)						22%
	Cloth	400	12	12	24		88	100
		500	110	110	220		110	220

The comparative advantages have been reversed. Since 74 2/3/95 1/3 < 100/120, Portugal specializes in cloth, and since 120/100 < 95 1/3/74 2/3, England specializes in wine.

After Specialization
	Wine	Cloth	Totals
Portugal: hours of labor	—	2 × 44	88
England: hours of labor	2 × 196	—	392

Portugal and England together, with 1,000 K expend 480 hours of living labor instead of 390 before specializing. Thus, the two countries together lose, with the opening of trade, 90 hours of living labor, while the total capital invested has not changed.12

Consequently, if the organic composition of the different branches is not the same (and in reality it is not the same), only a certain disparity in wages (in some cases, as in our example, a very slight one) between the different countries is needed for an international division of labor based on comparative costs to lead, not to a gain, but to a loss for the world as a whole.

4. The Assumption of Equality in Organic Composition of Labor

A second assumption, implicit but also very strong, without which overall optimization through specialization based on comparative costs may be transformed into its opposite, is that of an identical structure of the amounts of abstract living labor, in terms of skilled and unskilled labor, and of the same scale for reducing money costs in one country to those in the others, throughout all the countries in the group.13

So as to examine the opposite case, let us isolate this factor by assuming that the organic composition of capital is the same in all branches and that the rates of surplus value remain unchanged, but that the scale for reducing complex labor to simple labor is modified in one of the countries in the group, without any change in the objective conditions of production.

If, before this modification, one hour’s labor by an engineer was equivalent, in both countries, to ten hours’ labor by a laborer, and wine needed everywhere one hour of engineer’s labor for 70 hours of laborer’s labor, while cloth needed one for five, comparative costs would break down like this:

Before Specialization, in Hours of Living Labor
			Totals
Country	Wine	Cloth	Engineer	Laborer
Portugal
Engineer			7	100
Laborer
England
Engineer
Laborer

Portugal specializes in wine and England in cloth (see page 250).

Balance Sheet for the Two Countries Together, in Hours of Living Labor

With specialization, Portugal and England together expend one-sixth hour more of engineer’s labor and save 31 2/3 hours of laborer’s labor. As in both countries one hour of engineer’s labor is worth only 10 hours of laborer’s labor, the two countries together realize a clear advantage when they start to trade, an advantage equivalent to 30 hours of abstract labor.14

Let us now assume that, as a result of socio-cultural development in Portugal, an hour of engineer’s labor in that country is worth only five hours of laborer’s labor, while the ratio in England and all the other conditions remain unchanged. The comparative costs would now break down as shown on page 251.

Despite the fact that the objective conditions of production have not changed—the amounts of concrete labor figuring in the last two columns remain the same—Portugal has a comparative advantage that leads her to specialize in cloth, since 60/75 < 100/120, whereas England has a comparative advantage which leads her to specialize in wine, since 120/100 < 75/60.

In that event, however, the result for the two countries taken together will be absolutely bad (see page 252).

See text page 249

After Specialization, in Hours of Living Labor
Country	Wine			Cloth			Totals
	Concrete labor	Coefficient	Abstract labor	Concrete labor	Coefficient	Abstract labor	Engineer	Laborer
Portugal
Engineer	2	10	20	—	—	—	2	140
Laborer	140	1	140	—	—	—
England
Engineer	—	—	—	13⅓	10	133⅓	13⅓	66⅔
Laborer	—	—	—	66⅔	1	66⅔
			160			200	15⅓	206⅔

See text page 249

Before Specialization, in Hours of Living Labor
Country	Wine			Cloth			Totals
	Concrete labor	Coefficient	Abstract labor	Concrete labor	Coefficient	Abstract labor	Engineer	Laborer
Portugal
Engineer	1	5	5	6	5	30	7
Laborer	70	1	70	30	1	30		100
			75			60
England
Engineer	1½	10	15	6⅔	10	66⅔	81/6
Laborer	105	1	105	33⅓	1	33⅓		138⅓
			120			100	151/6	238⅓

See text page 249

After Specialization, in Hours of Living Labor
Country	Wine			Cloth			Totals
	Concrete labor	Coefficient	Abstract labor	Concrete labor	Coefficient	Abstract labor	Engineer	Laborer
Portugal
Engineer	—	—	—	12	5	60	12
Laborer	—	—	—	60	1	60		60
England
Engineer	3	10	30	—	—	—	3
Laborer	210	1	210	—	—	—		210
			240			120	15	270

Balance Sheet of Both Countries, in Hours of Living Labor

	Engineer	Laborer
Before specialization	15⅙	238⅓
After specialization	15	270
Differences	–⅙	+31⅔

The balance sheet of the international division of labor in accordance with comparative costs is thus in this case obviously negative, since, for one-sixth hour of engineer’s labor saved, Portugal and England together have to expend, in order to obtain the same result as before specialization, that is, two units of cloth and two of wine, an extra 31⅔ hours of laborer’s labor. As in neither of the two countries is an hour of engineer’s labor worth more than 10 hours of laborer’s labor, the world as a whole has suffered an absolute disadvantage.

5. The Assumption of Constant Costs

Ricardo based his theory on an assumption of constant costs. John Stuart Mill retained this assumption, but his successors, Mangoldt, Fawcett, and Bastable abandoned it. Bastable began concerning himself seriously with the effect that nonproportionality of costs could have on the limits of comparative costs between which the reciprocal elasticities of demand operate. Parallel and together with Cairnes he noted that the existence of increasing costs results in the same article being produced in several countries, because in such a case the sum of the costs of all these partial productions in a number of countries comes to less than the cost of the same total production if it were concentrated in a single country.

The optimization of the group as a whole was not challenged, however, only the distribution of the advantage among the different partners being affected. John Stuart Mill’s statement that each country necessarily specializes in a single commodity was shown to be mistaken, and in addition some doubts might arise regarding the relative advantages obtained by the countries participating in trade and their terms of trade. But the dogma of an absolute advantage for the group as a whole, and of a situation for each of the partners at least equal to the status quo ante, was not really challenged, at least in regard to the latter element in it, until somewhat later, during a discussion involving a large number of economists, the most important, or the most systematic, of whom were J. S. Nicholson, F. Walker, A. Marshall, T. N. Carver, and F. D. Graham. Graham was thenceforth associated with the “paradox” that resulted from this discussion.

The essence of the argument is based on the observation that when one of two commodities offered to the arbitrament of external trade shows diminishing returns and the other shows increasing returns, the country that has a comparative advantage and specializes in the branch with diminishing returns will find itself, after specializing, in a less favorable situation than before. In this form the proposition was easy to understand and accept, but the discussion livened up when the question was raised whether under these conditions exclusive specialization (or, at least, specialization to the point where disadvantage is engendered) was a real possibility—without which, the proposition would lose all practical significance. This question divided the economists, but it was Graham who argued most convincingly for the affirmative view, according to which, not only at the starting point but also at all the intermediate positions, calculation on the basis of comparative costs leads to specialization, despite the steady worsening of the situation of the country concerned.

Here is Graham’s numerical example aimed at illustrating this thesis, as it was modified and improved by J. Viner:15 Country A produces 4 wheat in 1 hour, or 800 wheat in 200 hours, and 4 watches in 1 hour, or 800 watches in 200 hours. Country B produces 4 wheat in 1 hour, or 800 wheat in 200 hours, and 3 watches in 1 hour, or 600 watches in 200 hours. A has a comparative advantage and specializes in watches, while B has a comparative advantage and specializes in wheat. However, wheat is a branch with very markedly diminishing returns, whereas watches are a branch with slightly increasing returns.

If we take a median position during the process of specialization—A produces 4·5 wheat in 1 hour, or 450 wheat in 100 hours, and 4·5 watches in 1 hour, or 1,350 watches in 300 hours, B produces 3·5 wheat in 1 hour, or 1,050 wheat in 300 hours, and 2 watches in 1 hour, or 200 watches in 100 hours—we see that A continues to enjoy a comparative advantage in watches and is therefore interested in increasing its specialization, while B retains and even strengthens its comparative advantage in wheat and is interested in developing its specialization.

All that remains now is to see what happens with the marginal hour of labor, at the moment when specialization is complete, in order to make certain that no comparative advantage pointing back toward diversification appears at the ultimate limit.

A produces 5 wheat in 1 hour, or 5 wheat in 1 hour, and 5 watches in 1 hour, or 1,995 watches in 399 hours. B produces 1/2 wheat in 1 hour, or 1991/2 wheat in 399 hours, and 1/4 watch in 1 hour, or 1/4 watch in 1 hour. It is clear that it is to A’s interest to transfer its last hour of labor to watches, and to B’s interest to transfer its last hour of labor to wheat. Then A produces 2,000 watches in 400 hours, and B produces 200 wheat in 400 hours. Whatever the rate of exchange of wheat for watches, it is obvious that B’s situation has been seriously worsened by this trade, since it now produces only 200 wheat where previously it produced 800 wheat + 600 watches. But what is A’s situation? That depends on the reciprocal elasticities of demand, since it now produces 2,000 watches instead of the 800 watches + 800 wheat that it produced previously.

Graham seems, curiously enough, to attach no great importance to the question whether the situation of the two countries, taken together, is better or worse than before. In the first example he gives, the gain made by one country is greater than the loss suffered by the other. Then he gives a second example: A works 10 hours to produce 40 wheat and 10 hours to produce 40 watches. B works 10 hours to produce 40 wheat and 10 hours to produce 30 watches. A and B together produce 80 wheat and 70 watches. A specializes in watches and B in wheat. After specialization, A produces 84 watches, that is, + 14, and B produces 60 wheat, that is, — 20.

“But,” says Graham, “this is a net loss, since 20 wheat are worth more than 14 watches, in either country under either set of conditions. These figures illustrate the loss that List may have had in mind when he insisted upon the advantage of the development of productive forces. But neither List nor his followers have shown that this was anything more than an emotion.”16

In Viner’s improved example, the ratios between the marginal comparative costs, at the moment of the last transfer, are one wheat = one watch, and one wheat = one-half watch. At the start they were one wheat = one watch and one wheat = three-quarters watch. By taking the rate most favorable for watches, one to three-quarters and translating the whole into a conventional unit of account, we get:

Naturally, neither Graham nor, still less, Viner, stressed this point, which seems to me, however, to be of cardinal importance. It is not at all the same thing to say that the international division of labor can bring disadvantage to certain countries as it is to say that under certain circumstances this division can bring disadvantage to the world as a whole. Pareto approached the problem from the other end by looking into Ricardo’s absolute advantage. He concluded that, if the total quantity is bigger for one commodity and smaller for another, we cannot know whether, “taking into account individual differences of taste,” there is any advantage gained or not.17

However, the ratio of marginal utilities, whatever it may be in a situation of isolation, can only evolve, in the Graham-Viner case, to the detriment of watches, whereas it has been proved that, even without this deterioration, the situation of the two countries together is less good with trade than without it.

Finally, it must not be forgotten that we are not concerned to prove that in all circumstances calculations based on comparative costs will lead to disadvantage, but only that this may happen in certain particular circumstances. This is why a numerical example with selected parameters suffices to compel us to attach an extra condition to Ricardo’s proposition, namely, proportionality of costs.

6. The Assumption of Full Employment and Absence of Nonsocial Factors

The whole of classical political economy, and therefore the law of comparative costs, is built upon the assumption of full employment. The problem of finding work for men to do, which so much troubled the mercantilists, simply did not exist for the classical economists. Their “Euclidean” axiom that incomes equal value added by production, plus the ruling out of any hoarding by income receivers, excludes any idea of disequilibrium between supply of goods and purchasing power, or willingness to buy, and, therefore, any idea of overproduction, depression, and underemployment.18 The objections brought forward by Malthus and Sismondi did not worry Ricardo and J. B. Say, any more than their orthodox successors.

Once employment of the factors is ensured, in quantitative terms, the only problem that remains is that of improving it qualitatively. This task is looked after by the law of comparative costs. Cloth or wine. Diversification can take place only at the expense of specialization, and vice versa. The idea that cloth can be made, not by workers diverted from producing wine, but by workers who would otherwise be doomed to unemployment, does not enter into the assumptions of Ricardo’s theory.

In all the examples I have cited up to now, and in all the analyses I have carried out, the production potential of each of the countries under consideration was given, and it was a matter of “maximizing” the result that could be got from this potential. If for convenience of calculation, certain examples, and in the first place Ricardo’s own, were constructed in such a way as to minimize through specialization the expenditure of hours of labor to achieve the same result, it was implicit that this saving of labor would not lead to simple unemployment, but to the transfer of workers to other branches. It was in this light that labor saving was seen as a gain.

Of course, even though the hours of labor made redundant through specialization are not directed into other branches, the national economy as a whole undoubtedly and in every case realizes a gain if it turns out that production and exchange result in the same quantity of goods being available with less labor than before. Individually, the workers will also realize an improvement in their welfare if the distribution of labor and income enables everyone to transform the saving of labor into leisure. Otherwise, despite the overall advantage, one section of the citizens will obtain more goods with the same labor while another section will obtain fewer goods with less labor, the saving of the nation’s labor being translated into unemployment or underemployment.

But this is not the point. It is not a matter of the reduction in employment determined directly by saving of labor and in proportion to this saving. What is involved is something that goes beyond that—a reduction in employment due to an economic depression brought on by freedom of imports, causing the country concerned to produce fewer values and ultimately to dispose of fewer goods with trade than without trade. It is not a matter, so to speak, of a technological reduction in labor time, but of structural unemployment, or underemployment.

Refutation in theory of the classical premise that excludes this kind of underemployment is outside the scope of this study. It would be necessary to refute it within the context of the internal functioning of commodity economy, before thinking of taking away the support it gives to the international division of labor. We have here a separate and enormous subject that calls into question the entire rationality of the capitalist system. Its implications in the field of external trade, considerable as they are, form merely a subordinate question. The same is true of the influence of this trade on the level of internal activity. Within the limits of this book I will content myself with saying that if, for one moment, we were to envisage in practice the possibility of underemployment—if, in other words, the Portuguese workers who would be displaced from the production of cloth found nothing else to do, not because of some friction caused by transfer and conversion but because of a structural decline in the level of activity in Portugal resulting from the opening of the country’s market to international trade—then Ricardo’s proposition would be emptied of all meaning and would become a mere scholastic exercise.

If production equals incomes, and if incomes are destined to be spent, in one way or another, whether productively or unproductively, the mere idea of the possibility I have just described, the idea that one may suffer harm by buying from abroad what one cannot make so cheaply for oneself, is intellectually intolerable. But the statesmen of yesterday and today do not seem to have troubled about our mental comfort when they decided to make steel in Egypt or refrigerators in Brazil. And if worldwide and century-old protectionism is not just an illusion, economists will certainly one day have to revise the premises that condition their theories.

I said earlier that any aggregate of factors whatsoever can serve as common measure for comparative costs. This is so if we confine ourselves to studying the conditions in which the proposition works. It is no longer so if we require that the specializations obtained on the basis of comparative costs should give us optimization of the entire situation.

A first category of factors made up of labor and capital is just as burdensome for a single production unit as for society as a whole. All other things being equal, and taking account of all the circumstances set out above that spoil the calculation, as well as the assumption of full employment, the utilization of these factors represents an equal “sacrifice” for the individual enterprise and for the nation. But there is a second category of factors, those that I have called “other” factors, namely, rent and indirect taxes, which, while influencing relative prices and consequently the decision taken by individual enterprises, the agents of specialization, are not burdens upon society as a whole. There may even exist a third category of “factors,” such as certain natural resources liable to exhaustion, for example, certain forest or mineral resources that, insofar as they are available to production units without any equivalent, or any adequate equivalent, being required, are not true factors by my definition and do not count for the enterprises and for the establishment of equilibrium prices—the basis of comparative costs—though their utilization nevertheless constitutes expenditure on the part of society.

It is clear that in every case where factors of the second category, or productive forces of the third category, play a part, the specializations induced by comparative costs do not necessarily represent optimum international division of labor. We must thus include, among the conditions restricting the applicability of Ricardo’s proposition, one more, namely, that of absence of these “other factors.”19

Conclusions

If by economic underdevelopment we mean a certain ratio, which may be the ratio, both quantitative and qualitative, between the means of production actually set to work and the potential of the productive forces as shown by the technological level attained at the present time—or, more concisely, between the existing implements of labor and those that could exist—then the world is an underdeveloped planet. In this age of interplanetary rockets and of automation we have, for a population of nearly 3 5 billion, only 930,000 miles of railway line and an annual production of some 25 million motor vehicles of all kinds, so that several hundred million people continue to travel by the most primitive means or even on foot.

Our production of cement and steel does not exceed 450 million tons of each, so that a substantial proportion of the earth’s inhabitants live in straw huts or something similar.

It has already been pointed out that our world still largely lies fallow. Out of some 27 million square miles of cultivable land, less than one-eighth, a mere 3·38 million is under cultivation, and a large section of this eighth is worked neither by tractors nor even by draught animals.

Our world is poor. From the series published in 1955 by Kindleberger we can work out the world net product at about $330 per head per year, which is approximately the average product of Latin America: and Singer is able to declare that the economic well-being of the average person in the world outside the U.S.S.R. was in 1956 less than in 1913 and perhaps less than in 1900.

Within this poor and underdeveloped world, however, there are some islets of advanced development, in which approximately nine-tenths of the equipment and, in general, of the human and material productive forces of the entire world are concentrated. As a whole, the world of today offers much the same picture as a European nation at the beginning of industrialization, and history has proceeded as though, instead of the centrifugal forces foreseen by economic science, which were to diffuse progress from the center to the periphery, unforeseen centripetal forces had come into play, drawing all wealth toward certain poles of growth. History has proceeded, too, as if the industrialized countries had succeeded in exporting impoverishment so effectively that the forecasts of Marxism, which have begun to show signs of losing reality within the context of the industrial nations, are being realized to perfection on the scale of world economy.

In the face of these inequalities, the same problems that confronted the industrial nation at the end of the eighteenth century and the beginning of the nineteenth now stand before the world as a whole. In those days, within the context of the nation, a duty on the part of the rich to help the poor was fully recognized, but this was not erected into a right possessed by the poor. The state continued (in France) to draw a large part of its resources from the salt tax, the most devilish of fiscal devices for cruelly equalizing the contributions made by every citizen and obstructing any mechanism for redistributing incomes.

Eventually, as the unity of the national economy was consolidated, industrial society began, despite its philosophy of the independence of the producers, to take note, under the pressure of the demands of its deprived classes, of the fact that poverty and wealth were not accidental phenomena but structural ones, both of them being necessary products of a group of economic relations constituting a whole. And the salt tax was replaced by the income tax, at first proportional and later progressive.

Nothing comparable yet exists on the international plane, where we seem to be still at the stage of the moral duty not backed by any law, the stage of voluntary almsgiving. It is as if poverty and wealth were independent phenomena that happened to exist side by side in a world where national independence automatically entailed equal opportunity for development.

Not so, however. A change is already under way. As the integration of the world economy increases and becomes complete, awareness of the existence of structural connections and of mechanisms for the transfer of wealth also progresses. In a confused, intuitive way men are beginning to realize that, in a world that is both poor and unified, the enrichment of a minority would be impossible without impoverishing most of the rest of mankind; that, in relation to the present level of development of the productive forces (and I restrict this concept to the actual means of production already accumulated), some are too rich and others too poor; that, while one may be able to find reasons, whether good or bad, to explain the difference between the wages of an American metal worker who controls a power press worth a million dollars and those of a worker on a Brazilian coffee plantation who uses only a simple machete, it is much harder to explain why a building worker who puts up a bungalow in the suburbs of New York has to be paid 30 times as much as his counterpart in the Lebanon, though both of them use the same tools and perform exactly the same movements as their Assyrian fellow worker of 4,000 years ago. Inevitably, people start to wonder what would happen to the wages of that American building worker, in the present state of world production, if all the building workers in the world, and all the miners and the hundreds of millions of agricultural workers, too, were to be paid two or three dollars an hour, like him.

It seems to me that economic theory lags strangely behind this awareness, this “great awakening,” as Myrdal calls it, when such statements are made as Eugen Varga’s in Die wirtschaftspolitischen Probleme der proletarischen Diktatur (Problems of the Political Economy of the Dictatorship of the Proletariat): “Just as the share that comes to the individual worker during the period of dictatorship is calculated not in relation to his needs but to the output of his labor, it is also necessary to take account of higher output of labor in international commodity exchange.” True, this was published in 1920, but things have not improved much since, especially in the Marxist camp, which one might have expected to be the first to get down to the task of forging the theoretical weapon needed by the “proletarian nations,” in the way that Marx did during last century on behalf of the proletarians within each nation.

As far as the underdeveloped countries are concerned, however, awareness is advancing inexorably. Already these countries have ceased to think of themselves merely as countries that happen to be relatively poor, and instead see themselves as the poor of the world, which means that they expect the world to take responsibility for them. International aid has ceased to be regarded as a one-sided and gratuitous act on the part of the rich countries and is seen as an obligation that corresponds to a certain right of compensation.

Compensation for what? That is indeed the question, and this is what I have tried to answer. To do it I have had to discover and take to pieces the mechanism whereby one nation exploits another (what has been called “exploitation at a distance”), the task that Marx set aside for the end of his work but did not have time to complete. I do not claim that unequal exchange explains by itself the entire difference between the standards of living of the rich countries and the poor ones, even though, if we base ourselves on certain statistical data that are available, however fragmentary and arguable these may be, we arrive at a loss in double factoral terms (if not in terms of trade) that is enormous in relation to the poverty of the underdeveloped countries while being far from negligible in relation to the wealth of the advanced countries. Even if we agree that unequal exchange is only one of the mechanisms whereby value is transferred from one group of countries to another, and that its direct effects account for only part of the difference in standards of living, I think it is possible to state that unequal exchange is the elementary transfer mechanism, and that, as such, it enables the advanced countries to begin and regularly to give new impetus to that unevenness of development that sets in motion all the other mechanisms of exploitation and fully explains the way that wealth is distributed.

Now, established economic science takes no note of the exchange of non-equivalents, except where this occurs as a momentary accident of market-price fluctuations, or as the effect of imperfect competition due either to economic monopoly or to political domination. Since Condillac said that, in exchange generally, equal value is not given for equal value, but less for more, and for this was struck down by the thunderbolts of Le Trosne, for whom things exchanged were equivalent, economists have been divided into objectivists and subjectivists, but unequal exchange is denied by both parties—by one party because for them exchange is always equal in a situation of equilibrium, and by the other because for them equal exchange does not exist and, equivalence being an ex post market phenomenon, there is no such thing as either unequal or equal exchange in itself. The worsening in the terms of trade over a long period is either seen as a statistical illusion or is relegated to the jungle of those structural tendencies of the elasticities of demand, as improbable as they are ill-defined, which condemn one category of products to perpetual decline and another to perpetual rise.

As the worsening in factoral terms cannot be denied, the supporters of the first-mentioned position content themselves with repeating the basic argument of the theory of comparative costs, namely, that the gap between incomes is due to the difference in respective national averages of comparative productivity for the article exported and the article imported. If this determination were operating today, most of the underdeveloped countries ought to be able to reward their factors at a rate far superior to that of the industrial countries, since the inferiority of the advanced countries in the article imported (coffee, sugar, oil, exotic fruits) is generally much greater than their superiority in the article exported (machinery, hardware, vehicles, etc.).

As for the second conception, which is blind to the very notion of productivity, knowing only the profitability of labor, and which afflicts a certain category of products with an inferiority allegedly inherent in their natural properties, Viner, though himself a convinced marginalist, has observed with some reason that all that has been accomplished on this basis is a dogmatic identification of agriculture with poverty and industry with wealth, to refute which one has only to mention Australia, New Zealand, and Denmark, on the one hand, and Spain, Italy, and Japan, on the other. The supporters of this doctrine easily forget that what worsens is not the terms of trade of certain products but those of certain countries, regardless of the kind of products they may export or import.

It has therefore been necessary to go beyond world market relations, to study world production relations. We have had to look at equivalence inside the nation first of all, that is, under conditions of mobility (or rather of competition) of the factors, and then outside the nation, that is, under conditions of immobility (or noncompetition) of one or more factors. Then we have had to go back to the classical and Marxist labor theory of value and study successively the case of a single factor, where it is the quantities of this factor that determine equilibrium prices, and the case of two or more factors, where it is still the quantities of the factors that determine equilibrium prices, but these are weighted by their respective rewards. We have thus succeeded in integrating unequal exchange and the theory of international value into the general theory of value tout court, as propounded by the classical economists and by Marx, and proving that the former, far from being the weak spot in the latter, as the opponents of the labor theory of value have hitherto claimed, constitutes on the contrary an additional proof of its validity, since it succeeds precisely in explaining such phenomena as the long-term worsening of a certain category of prices, something that all the tricks played with the fundamental deficiencies of demand have proved unable to account for. In short, we have had to show that the formation of international value is a special case of the general theory of labor value in its developed form as the theory of price of production. This was done by using the assumption that seems to me the most realistic possible in the world of today, the assumption that the capital factor is mobile but the labor factor is immobile on the international plane.

Finally, after we had studied the relative disadvantages that the low-wage countries may suffer from free trade, it remained to refute the premise that a general and absolute advantage accrues automatically to the world as a whole from free trade and the international division of labor, by showing that under conditions of regional disparity in rewarding of the factors, and in particular the labor factor, nothing guarantees that specialization in accordance with the rewarding of the factors shall correspond to specialization in accordance with the quantities of the factors and thereby result in the sought-for world optimum.

On the basis of the classical and Marxist doctrine of labor value, I reversed the fundamental assumption of Ricardo’s theory of international trade. Instead of equal wages and unequal rates of profit, I adopted the assumption of unequal wages and of profits subject to standardization and tending to equalization. These premises led me to take on all points the opposite line to the official theory of international trade. However provocative my conclusions may be, I do not think any different ones can be drawn, once my assumptions are accepted.

What must the underdeveloped countries now do in face of the inequality of exchange and the continual worsening of their terms of trade? A sudden leveling up of their wage levels to those of the advanced countries being, of course, out of the question a priori, they can only seek means to keep for themselves and prevent from leaking abroad the excess surplus value that they extract from their own workers. Somebody has to benefit from these low wages. If the national capitalists cannot do this, owing to the standardization of profits, and if it is not desired that the foreign consumer shall be the beneficiary, then only two solutions are left: a tax on exports that will transfer this excess surplus value to the state; and diversification of production through transfer of factors from the traditional exporting branches to the branches that can replace imports, which will enable the national consumer to benefit from the low national wage level. Both of the methods described are suitable ways for channeling the excess surplus value into the hands of the national community, to be used for development purposes, the former through direct utilization of these additional items of revenue in order to finance investment projects, and the second through measures of redistribution that it is permissible to take since we accept the assumption that real wages, and thereby consumption, cannot be raised immediately.

If, though, we consider that taxes on exports presuppose agreement between several producing countries, that consequently they are difficult to apply except where there is a natural monopoly, and that, also, they bear a more or less spectacularly aggressive character that entails the risk of provoking very sharp reactions and reprisals on the part of the consuming countries, then we are left with the second solution, that of diversification. This is a very effective weapon, for it strikes at the trading partner in two ways. On the one hand, the traditional exports diminish, while the world’s needs continue unchanged for a certain period, which results in an upward pressure on prices; on the other, the traditional imports also diminish, and the partner who stays geared to an expansion of trade sees his sales fall off sharply, which compels him to reduce his prices.

In any event the equilibrium of world transactions cannot be maintained or restored unless the diversification of the production of one country or group of countries is followed by a diversification on an equal scale in the rest of the world. Since diversification requires a certain time to be carried through properly, this gives a definite advantage to the countries that take the initiative in it. When, however, “the rest of the world” is made up of highly developed countries whose existing specializations involve substantial investments; in which, moreover, any contraction of foreign trade brings dangerous repercussions on the level of internal activity; and in which, also, certain raw materials and certain products of the soil are absolutely lacking, regardless of any question of costs—then we can understand the ferocity with which the advanced countries and the international financial authorities they have set up, such as the IMF, the IBRD, the IDA, etc., combat all tendencies to protectionism and development directed toward the internal economy, wherever they appear, but especially in the countries of the Third World.

What then becomes of the international division of labor and the benefits, so highly praised, that it brings to mankind as a whole?

When we consider that most tropical products, among them those that today seem most traditional, result from transplants, which themselves were often the result of mere historical accidents; when we consider that the most formidable specialization ever known, that of England in cotton-textile goods (Marx called his time the Age of Cotton), was an entirely voluntaristic operation, the weaving of cotton having flourished in other continents before Europe, and in several countries of Continental Europe before England; that nothing marked England out specially for this particular specialization; that in the eighteenth century England possessed neither the relevant raw material nor any experience of weaving apart from the weaving of wool; that that industry had itself been implanted just as artificially a century and a half earlier, by means of a draconic ban on the export of wool, with such sanctions as cutting off the arms of anyone who broke this ban, because the cloth industry of Flanders was so much more productive that it was able, despite transport costs, to offer a better price for English wool than could be offered by the English manufacturers themselves; that, subsequently, it was through tariffs and direct legislative coercion that England made India her supplier of cotton and Australia her storehouse of wool—something that, let it be said in passing, had the effect of ruining India but enriching Australia, which is a further proof that the “old colonial system” did not in itself imply impoverishment of the colonies unless it was associated with a low wage level in the countries concerned—when we consider all this, we can legitimately harbor a few doubts as to the intrinsic value of the international division of labor.

Even admitting that however this structure may have originated, a sudden smashing of the existing structure of specializations would entail losses for the world as a whole, it would, I think, be unwarranted to suggest to the poor countries that they sacrifice their national interests for the good of humanity. One may, for example, find it absurd that Poland should neglect the production and export of the cotton-textile goods in which she has so much experience, in order to make a vehicle that costs her 1,000 hours of labor, when this same vehicle is produced in Turin with only 500 hours. If, however, a vehicle hour is worth four or five times as much on the world market as a cotton-textile hour (because vehicles are produced chiefly in high-wage countries and cotton textiles in low-wage countries), Poland may well find that her advantage lies in producing her own vehicles rather than acquiring them in exchange for her cotton goods, despite the considerable difference in productivity. If world economy does not find this to its advantage, it seems to me that this is not something that Poland specifically has to worry about.

Finally, wages being what they are, the whole problem lies in this question: who is going to pay the costs of the world optimum? If the very concept of a world economy has any meaning at all, and if it is not desired that the poor countries turn in on themselves and thereby cause a dangerous dislocation of the established division of labor, it will indeed be necessary to resolve to set up internationally at least such mechanisms of redistribution as already exist on the national scale. It will indeed be necessary to have an incomes policy on the international scale corresponding to what exists, however imperfectly, inside the nation. What the concrete content of this policy will be depends first and foremost on the social and political transformations that will come about within each country.