"British workers hit hard"

There's one curious thing about Ukip's notorious posters that hasn't been mentioned - that they represent a flat rejection of orthodox neoclassical economics.

"British workers are hit hard by unlimited cheap labour" says one poster. However, in theory this would be true even if our borders were completely shut to foreign workers.

The idea here is simple. If there were unlimited cheap labour overseas, foreign companies would be able to produce very cheap goods which would undercut UK firms. Those firms would then either close down - which would raise unemployment and cut UK wages - or would force their workers to accept lower wages. Either way, some British workers would be "hit hard." This would happen so long as there is free trade, even without immigration. This is factor price equalization, which is a cornerstone of basic trade theory.

In pretending that British workers can be protected from cheap foreign labour by immigration controls alone, Ukip is therefore rejecting factor price equalization.

Now, to some extent it is right to do so. FPE doesn't hold precisely*. But there is some truth in it: it's no accident that the relative labour market conditions of unskilled workers in the west have deteriorated since the entry of China and India into the world economy.

Nevertheless, this poses two questions for Ukip. One is: if unlimited cheap foreign labour is kept out of Britain, what do you suppose it will do? Many of the answers involve threatening UK wages via trade rather than via immigration.

The second is: if you're rejecting basic economics in one big regard, why are you so keen to accept it in others? Just as it's too simplistic to say that FPE holds completely, so it's also too simplistic to say that immigrant labour greatly bids down domestic wages: immigrants are complements to British workers as well as substitutes, and even if wages are bid down, the consequent disinflationary pressures should allow the Bank of England to run a looser monetary policy thus providing a boost to the demand for labour.

Ukip, then, seems to be rather selective in its faith in basic economics. Call me Mr Cynic, but I suspect that such selectivity might not be entirely based in empirical evidence.

* In this context - yet again - there's a useful distinction between mechanisms and models. As a precise model of the world, FPE is inadequate. But as a mechanism/tendency it contains some truth.

Comments

[Luis Enrique]

maybe their next poster will say British workers hit hard by cheap imports?

I do not understand why you chose the phrase "orthodox neoclassical economics". The idea that free trade plus cheap overseas labour might have a negative impact on workers in richer countries is hardly confined to narrow orthodoxy, in fact the narrowly orthodox are probably more positive about free trade than members of other schools.

the models mechanisms thing still puzzles me too. Nobody thinks models provide "precise" predictions about the world, and the lesson of a model of factor price equalization is that that mechanism may be important.

[Boffy]

"and even if wages are bid down, the consequent disinflationary pressures should allow the Bank of England to run a looser monetary policy thus providing a boost to the demand for labour."

Surely, a Marxist believes that if wages are bid down, then profits are bid up, not prices bid down, just as Marxists reject the idea that inflation is caused by wage rises.

Marx explained this in "Value, Price and Profit" arguing against Weston. A rise in wages, reduces profits. The additional workers demand raises the price of wage goods initially, but the reduced demand from capitalists reduces the prices of producer goods and luxury goods, so that the overall effect on the general price level is zero.

But, then the higher prices of wage goods, causes profits in that sector to rise and that in the other sectors to fall. Capital moves to the production of wage goods where higher profits are to be had, and away from the production of luxury goods and producer goods. The increased supply of wage goods reduces their price back to its original level, and vice versa for the other sectors, so again the effect on the general price level is zero.

The notion of wage rises causing inflation and vice versa is a Keynesian position not a Marxist position. In fact, Marx's position is closer to the Monetarists. Inflation is caused by a devaluation of money, for example by printing more money tokens than are required for circulation.

[George Hallam]

" unlimited cheap labour overseas, foreign companies would be able to produce very cheap goods which would undercut UK firms... This would happen so long as there is free trade, even without immigration. This is factor price equalization, which is a cornerstone of basic trade theory."

Yes, so all we need to do is dump free trade.

[Matthew]

What about tradesman such as plumbers? It is clearly true that FPE holds with manufacturing and to some extent services, but some things such as the building trades cannot be exported overseas.

I am no UKIPer but this is clearly what they are alluding to however feeble their economics and indeed their solutions might be.

[Dave Timoney]

The UKIP posters are economically illiterate because they are not about economics. They are about rights, and specifically emotionally-charged property rights: "our money", "our jobs", "our laws".

They are in a long tradition that can be traced back via Gordon Brown ("British jobs for British workers") and Margaret Thatcher ("our rebate") to Hogarth's Roast Beef of Old England. In fact, someone really ought to ask Nigel Farage: where's the beef?

[Keith]

I think you make a good point.

UKIP are really the right wing equivalent to the Bennite Left of 1979-83.

The logic of rejecting free markets and free trade is a soviet style police state and siege economy where you try to negate market forces. But no one can defy the Law of supply and demand, not Tony Benn, Nigel farage or Leonid Brezhnev. Trying to do this ends up making you very unpopular, despite Putin wanting to restore the glory days.

The UKIP view of the world is irrational and just based on sewing together prejudices to make a quilt that looks pretty to the people who have woven it.

Here is a nice pretty quilt of Xenophobic ignorance, vote for us and our nice quilt of many inconsistent colours.

Far Right economics and the far left in perfect harmony. Jim Callaghan made the observation that if Tony Benn believed he could sell the restoration of rationing to the voters decades after the end of the war he was barking mad.

[Boffy]

"Yes, so all we need to do is dump free trade."

Which would mean that the price of most things that British workers buy would at least double. No more cheap suits from China, it would be back to paying £300-£400 for a suit made in Britain, and the price of manufactured goods like TV's etc. would rise by even more.

It would be necessary to dump free trade, because British wages would have to be so high to cover the cost of the basic things that British workers needed to buy the over priced commodities produced by the compatriots - everything would become as ridiculously over priced as British houses - that British industry would be so uncompetitive as to be unable to sell to even the most inefficient economies.

In other words, people might have a job, but they would end up at the other extreme, working all hours that God sends, simply to earn enough to be able to afford the basics.

[George Carty]

What's wrong with the idea of using tariffs to pay for the cost of the unemployment caused by cheap imports?

[George Hallam]

"Which would mean that the price of most things that British workers buy would at least double. No more cheap suits from China, it would be back to paying £300-£400 for a suit made in Britain, and the price of manufactured goods like TV's etc. would rise by even more."

Where on earth did you get that idea from?

The retail price of imported goods includes distribution costs and profits. Consequently they bears little relation to the dock-side price (which of course includes transport costs from far-away places).

You need hard evidence about UK manufacturing costs.

[George Hallam]

What's wrong with the idea of using tariffs to ensure that there is no unemployment caused by cheap imports?

[Boffy]

I remember how much I used to pay for suits in the 1960's and 70's, and how much the price came down when Britain started importing them, and other clothing from China!

If British manufacturing costs for these things were cheaper, then they would still be being produced here rather than in China! Even with all the distribution and transport costs the imported manufactured goods are still much cheaper!

The US is getting some reshoring because fracking is massively reducing its energy costs. We might be able to get some of these industries back if British workers work for the same wages as someone in China, Vietnam or Sub-Saharan Africa, but is that really the kind of economy you want to develop?

[Boffy]

How would tariffs prevent unemployment, or pay for the costs of unemployment? To be effective, a tarriff would have to prevent goods being imported. But, if the goods were not imported no tarriff would be collected, so it could not be used to pay for unemployment!

If the commodity was not imported, this would not prevent unemployment arising. In the 19th century, Britain occupied the same position that China does today, but it didn't prevent repeated periods of large scale unemployment!

[George Hallam]

"How would tariffs prevent unemployment, or pay for the costs of unemployment?"

Don't confuse the two things.

"If the commodity was not imported, this would not prevent unemployment arising."

Have you never heard of import substitution?

[George Hallam]

"If British manufacturing costs for these things were cheaper, then they would still be being produced here rather than in China!"

You need to enquire why they are cheaper.

There is no single currency for the world; as I’m sure you are aware, China and the UK have their own currencies.

The dock-side price of Chinese goods depends in part on the Yuan/Pound Sterling exchange rate.

In a perfect neo-classical World exchange rates adjust to so that the current account of a country will balance.

China's current account surplus last year was “only” 2 per cent of gross domestic product but this comes after two decades of massive surpluses.
http://online.wsj.com/news/articles/SB10001424052702303847804579480771793718180

In contrast the UK has been running a current account deficit. Currently it is 5.5 per cent of GDP.

Obviously, exchange rates are being determined by factors other than trade. This distorts prices so that they don't reflect the real costs of manufacturing in the UK and China.

In the long-term the UK’s current account deficit is unsustainable and either exports must rise or imports will have to fall. Alternatively, we could concentrate on import substitution. This might lead to some goods being more expensive than they are now but, given that the pound is currently over-valued, this is bound to happen anyway.

[Jonesxxx]

True that cheap labour overseas would bid down local labour except that we also have free movement of capital. Big corporations like to have all the drones in one place as it's more efficient so they prefer to invest in Britain and employ cheap foreign workers educated at someone else's expense.