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April 04, 2017


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Jonathan da Silva

Is there any negative effect from higher wages driving up rent and land prices? This might even be deleterious the other way? At least in terms of competitiveness?


Thinking out loud... and maybe not thinking it through ;-D

What if VAT and/or NI was partially replaced with LVT this would increase the effective return to wages and stop the increase driving up rents (land prices being capitalised rent).


It's interesting watching the psychological barriers at work in these pieces.

If you make labour expensive you alter the capital labour ratio and make it more cost effective to replace people with machinery. So you get rid of the hand car wash and replace it with a full automatic machine. You get rid of foreign imported baristas and start getting your coffee from a machine.

The jobs are lost - permanently. That is the task of the private sector - to innovate, automate and eliminate jobs because people are expensive and not very efficient compared to a machine.

So you then have to find something else for the people to do to fill their time. Often the private sector pulls those people in at the next higher level of automation, and then the process repeats - as it is doing with IT workers being outsourced to India and ultimately replaced with deep learning AI neural nets for the boring stuff.

This is the virtuous cycle that drives productivity forward. You have to have enough spending to create the demand, and expensive scarce labour to make the machines worthwhile.

To make labour scarce in a modern economy, the public sector has to take it away at the living wage. The alternative is to starve people to death or finish them off with the diseases of poverty.


«If you make labour expensive you alter the capital labour ratio»

The topic of the post and this argument have been advanced (and IIRC our blogger mentioned it in the past) as the main of several reasons why the industrial revolution developed in England: relatively expensive workers made capital relatively cheaper replacing workers with steam powered machinery.

The government of Singapore had a similar deliberate strategy: at some point 2-3 decades ago they raised wages by decree, to make labour relativelively more expensive and put a *ceiling* on the wage level that qualified for a work permit for immigrants, in order to price Singapore citizens out of low-wage jobs (and in effect reserve them to low skilled immigrants), and to push employers to create higher added-value jobs, to escape what is called today the "middle income trap".

That was done cleverly and apparently worked pretty well. Something like that is pretty much inconceivable in England today because the elites still remember the attempt at their unseating by the syndicalists in the 1970s and have chosen for England a low skills low wages "plantation economy" model.


«Is there any negative effect from higher wages driving up rent and land prices?»

That's a very interesting topic, and is an aspect of "Baumol's cost disease".

Indeed usually demand, often from rising exports, drives up wages, that drives up immigration and asset prices, for example as in Germany's post-WW2 boom. Consider conversely northern England: falling demand, from falling exports etc, drove down wages, drove emigration, and a collapse of northern asset prices.

But there is the strange case of southern England: low wages, big imports, are happening at the same time as high immigration, rising asset valuations.

Usually that combination does not make sense.
The most likely explanation of that combination happening in southern England today is that immigration and asset prices have become detached from imports and wages thanks to ballooning government sponsored credit funding years of asset stripping. A pretty common strategy in the anglo-american culture countries (but not only them), as it delivers huge electoral success for tory parties.

Hugo Evans

Cooperative or conflictual?
Is this not the question posed by the Neo-kaleckian model of demand regimes? The mechanism that operates to bring about investment and associated productivity gains is high utilisation rates, and tightening labour markets. The social democratic dream on the upswing goes awry as capital seeks to reassert discipline, even over profit. Is there any way to bring this mechanism about today without regional coordination to reflate and defend labour market institutions, rather than shunting the reserve army around. The eurozone institutionalises what was once a phase in the political business cycle, leaving us with neither cooperation or conflict, but indifference.


As usual for our blogger's posts so many interesting issues raised, like a good tutorial topic...

«Those words “doing more business” are important.»

As to that I think that if JM Keynes had used "effective sales" instead of "effective demand" and "sales" in general instead of "demand", because his policies were really about stimulating sales, his approach would have been much better received by business and less liable to be associated with inflationary pressure.


«is capitalism cooperative or conflictual? Are the interests of workers compatible with those of capitalists or not?»

Political or economic? Short term or long term? That probably matters a great deal.

«It’s this that divides social democrats from Marxists.»

I suspect perceptive Karl would argue that in the short term the economic interests of some (significant) parts of labour and some (significant) parts of capital can be aligned, e.g. against rent, but not only.

But I reckon that social-democrats don't necessarily think «the interests of workers compatible with those of capitalists», but that the interests of capitalists as a whole don't include an interest in the complete exploitation of workers, precisely to avoid the collapse of capitalism because of an excess of exploitation leading to a collapse in sales.

My guess is that the mroe common social-democratic view is that while capital is politically dominant "managing" the rate of exploitation and alienation is both tolerated by capitalists and more achievable than trying to abolish exploitation.
Regrettably that can become more like defending the rate of exploitation and alienation "because competitiveness" or "because end of history" (see the Rubin wing of the Democratic party or the Mandelson wing of the Labour party).

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