Class War by Judo

Class warfare is the mode of clawing back the profit, through complete success requires actual revolution. For the hard Left, this is the true aim of class warfare. For the soft Left, well-drilled labour unions in closed shops squeezing profits by tough collective bargaining are fighting the good fight. A more formidable arm of class war as practised by the soft Left is the collective mandate an electoral majority hands to the state to “slice the national cake” by transfer payments and public goods, so that its distribution will be more favourable to the working class than the original distribution intended by those who had arranged the baking of the cake in the first place.

The Logic of Distributive Shares

Class war scenarios drawn from Marxist metaphysics can neither be verified nor falsified, and arguing about them is not the best of fun. Disciplined common sense, on the other hand, has conclusions to offer about the shares of labour and capital in the “cake” that help us understand the world even if we disagree with them.

It is a truism that if a firm wishes to maximise the present value of its profits over time, it must so deploy its resources that the marginal unit of capital it hires and puts to work has the same productivity as the marginal unit of labour. If it made a mistake and one of the factors it employed had a higher productivity than the other, it could improve its position by redeploying its resources and employ more of the more productive factor while releasing some of the less productive. All firms that survive in a market with reasonably free entry must at least roughly approximate this balancing act. The result is a reasonably efficient economic system.

However, auxiliary assumptions are needed to make the system work properly. Factor productivities must be decreasing in the sense that if, all other things being equal, more labour is employed, its marginal product would decline, and so would the return on capital if more of it was invested. However, the “all other things remaining equal” clause is never satisfied, so that the decreasing-returns-to-scale proviso serves only the criterion of logical completeness. Far more important in practice is the assumption of price flexibility. If an influx of foreign capital depresses the marginal return yielded by it, but the rate of interest remains rigid and does not decline, there would be excess supply of capital and some of its stock would be left idle. Similar disequilibrium would result in the labour market if the supply of labour increased or the demand for it fell, but wages remained at a rigid level fixed by the legislator or collective contract.

The Deus ex Machina in this system is the progress of technology, which may increase the productivity of capital (e.g. data processing, computerised design) of labour (school teaching aides, ambulatory surgery) or both in much the same proportion. The labour-saving or capital-saving bias of technological innovation obviously impacts the distributive shares, but is not necessarily impacted by them. Taking a very long-term historical perspective, we might suppose that since the stock of capital tends to grow faster than the working population, innovation preventing the return on capital from declining would be good for stability and hence might be favoured by the innovators, but this idea is perhaps too clever by half and it is wiser to treat technology as an exogenous variable.

When Workers of the World Unite

The neo-classical theory of factor shares sketched above makes plain good sense intellectually, and it offers a fairly reassuring world view. Failing major rigidities, such as fixed wages or regulatory obstacles to capital market movements, the incentives in the system would seem to keep it in a balance that undergoes no brutal swings and is efficient at keeping the available factors at work in the most efficient manner. Neither capital nor labour has some obvious built-in handicap exposing it to exploitation by the other.

This suggests that we should expect the distribution of incomes to be fairly stable, with only moderate ups and downs in over time in the measure of income inequality. Capital would go on accumulating, raising corporate profits and personal incomes from ownership and enterprise, but the accumulation would increase the demand for labour, hence raise incomes from wages.

However, for the last three decades or so, this has stubbornly failed to happen. The return on capital tended to rise, profits grew with little interruption and inequality of personal incomes expanded spectacularly. Unskilled and semi-skilled wages in the developed economies stagnated.

Opinion that was formerly reconciled to the “Washington consensus” has now become bitterly hostile to it, deciding that capitalism was intrinsically unfair. There is probably no intellectually respectable way to give a clear meaning to the notion of fairness, for, unlike justice, it has no clear rules which define it. Nevertheless, people of good will and good sense will have notions of rough justice, rough equalities and a rough sort of “Buggins’s turn”1 in life’s ups and downs when they mean that an outcome is fair. By that standard, the sharp divergence of wages and profits in the recent past is at worst not unfair. At best, it should be welcomed as a giant advance against world misery, hunger and hopelessness.

Over this very inegalitarian period, half a billion breadwinners in China, Vietnam, Thailand, Indonesia and the Indian subcontinent have migrated from rural under-employment and near-hunger to urban employment and a somewhat more hopeful future. They got their well-deserved Buggins’s turn. As long as the pool of Asian rural underemployed was not at least partly drained, the wages of the European and American semi-skilled could not rise in response to capital accumulation all over the world. Globalisation made sure of that. For the last few years, the pool of the Asian labour reserve being now partly drained, wages in that region have taken off, rising about 10 per cent p.a. over the inflation rate. It must now soon be Buggins’s turn for the European and American semi-skilled.

It is as if the workers of the world had united to achieve equality among them, with the poorest uplifted and the better off pausing to wait for the poorest to catch up with them. Meanwhile, the lucky rich served to bring about the capital accumulation which made the whole process possible. Their easy rise is now probably also drawing to a less auspicious close.

How Judo Lets the Weak Defeat the Strong

In the customary mode of class war, organised labour wrestles with capitalist employers by collective bargaining aided by the odd strike or work-to-rule as well as by using its electoral weight to bend policy so that it should redistribute income from profits and the rich towards wages and the poor. Such wrestling is the daily fare of both business and politics in the developed world, and it is normally successful to some extent. Diverting income from corporations and the well-to-do who save much, to wage-earners and the needy who save little, reduces the rate at which the capital stock is increasing and hence also the rate at which the demand for labour increases, wages rise and jobs are created. For a small though immediate victory, labour and the soft Left trade away the far greater long-run winning trend that would carry them along to great heights if they gave up the old-fashioned wrestling for crumbs, and yielded in judo fashion to the force of the adversary, and allowed unfettered capital accumulation to curb the return on capital and lift the income of the labour it seeks to use.

The unconsciously judo-like tactics of the South Koreans and of course the Japanese who started the practice by working merrily on while they were officially on strike, achieved in two generations a level well above the highest ambitions of the average European wage earner.

Standard economic history teaches that labour during the Industrial Revolution rose from abject misery and subjection by organising and resisting exploitation. It is more plausible to conclude that labour rose from misery thanks to being too weak to be able to depress high profitability and hence the rapid accumulation of capital. The judo fighter yields to his stronger opponent by calculating design. Labour in 19th century Europe and 21st century Asia yielded to capital, not by design, but by its intrinsic weakness. Yet the result is much the same. One wonders whether the clamour for social justice can be powerful enough to undo such a slow but benign outcome of the class war.