Unequal exchange

Dependency theory and the exploitation of nations

Books discussed in this article

Zak Cope

Divided World Divided Class: Global Political Economy and the Stratification of Labour

Kersplebeded, 2015 • 460 pages • $24.95

John Smith

Imperialism in the Twenty-First Century: Globalization, Super-Exploitation, and Capitalism’s Final Crisis

Monthly Review Press, 2016 • 382 pages • $24.00

There has long been an implicit divide in the socialist movement between what is often derisively characterized as Euro- or first world Marxists and dependency theorists. The latter are often equally dismissed, from the other side of that divide, as nationalists or third-worldists. The divide is in the first place and above all, political. But the politics at issue reside, to no small extent, in the analysis of how world capitalism is structured. Dependency theorists, seeking inspiration and direction from the pioneering work of the late Maoist-oriented Arghiri Emmanuel, argue that trade between the developed and developing nations is itself engineered to produce and reproduce conditions of accumulation that systemically drain value from the South, where it is increasingly generated, and redistribute it to the Global North where it is captured. It creates, therefore, a permanent tendency of lagged development in the Global South and a subsidized, superannuated Global North.

This pervasive “unequal exchange” based on global labor arbitrage differs from the more recognizable, and familiar forms of colonialism, post-colonialism, and captured markets that (first world) Marxists traditionally center their attentions on; the familiar panoply of power imbalances between capitalist nations whose firms exercise monopolistic/monopsonistic leverage, patent privilege, price fixing, debt peonage, etc.

John Smith distinguishes the issue of neoliberal globalization from these more studied forms of imperialism this way.

How do “companies in the developed economies” “extract product” from the workers in Bangladesh, China and elsewhere? The only visible contribution these workers make to the bottom line of firms in “developed economies” is the flow of repatriated profits from FDI (foreign direct investment), but not one penny of H&M’s or General Motors’ profits can be traced to their independent suppliers in Bangladesh or Mexico; all of it appears instead as value added by their own activities. This conundrum, inexplicable to mainstream economic theory and therefore ignored, can only be resolved by redefining value-added as value captured; in other words, a firm’s “value-added” does not represent the value it has produced, but the portion of total, world-wide value it succeeds in capturing through exchange, including value-extracted from living labor in far-flung countries.1

If imperialism, in broad terms, is the domination of the political economy of one nation or region over another, Smith examines how this operates in the contemporary neoliberal context. He argues, quite rightly, that the economies of the advanced nations are increasingly vested in the “super-exploitation” of impoverished workers in the developing world. Furthermore, socialists have often underestimated the degree to which the Global North relies on modern imperialism by failing to properly assess the degree to which outsourcing contributes to the maintenance of global profitability. Smith marshals an enormous arsenal of facts purporting to demonstrate how the rescue of Northern capitalism has come at enormous expense in terms of poverty, unsafe conditions, and an accumulation of untoward human misery in the Global South.

Cope takes this one step further. Extending his perspective over a broader sweep of imperialist history, Cope argues that imperialism eventually unified all sectors, strata, and classes of the Global North. The seemingly pervasive racism and chauvinism and the long retreat from revolutionary politics has, he argues, deep materialist roots in the exploitation of the Global South, which creates in the Global North a common cross-class interest in the maintenance of the system of global inequalities. He buttresses his argument with historical case studies of Britain’s Labour Party, the Democratic Party, and Germany’s SPD finding a common root for the ideologies of empire, settlerism, and “social fascism” in the material conditions arising from the structure of the world economy.

The theorists of unequal exchange envision the world economy as a single entity in which capital is mobile across nations, but labor is geographically fixed. The world, in the hypothetical stage prior to trade, is divided between a high wage, low profitability North and a low wage, high profitability South—two worlds with fundamentally differing rates of geographical exploitation. The free movement of capital is sufficient to equalize international profit rates, and to flatten national differences.

But, given the inability of labor-power to move en masse to regions where pay is high, northern wage rates are affixed with a monopoly privilege, a geographical premium. If uniform profitability requires a sharing of global surplus value on an equal basis according to the distribution of capital, then the movement from national prices to uniform international prices systematically compensates national capitals for wage and exploitation differentials. This offset, all other things (organic compositions of capital,2 turnover times,3 etc.) being equal, comes first at the expense of southern profits and then is passed down the line to third world workers whose living standards are squeezed to indemnify their employers. Higher wages and lower rates of exploitation in the North mean a higher price for northern commodities, than would otherwise exist if the free flow of labor were allowed to equalize international wages somewhere between the two global extremes. And this holds whether the exports from the North are raw materials, intermediate goods and food supplies, or finished industrial products. It is not what is produced that condemns the third world to penury, but the structure of world exchange itself. In Emmanuel’s words, “One country can only gain something at the expense of another by taking more goods than it provides or by buying the goods it obtains too cheaply and selling those it provides at too high a price.”4

In the end—claim Emmanuel, Cope, and Smith—a few hours of labor in the Global North are exchanged against many hours of labor from the Global South. This reward is redistributed to the North in the form of higher direct wages and profits, and by the availability of enhanced tax revenues that make possible a more generous welfare state and more elaborate infrastructures than could otherwise exist.

At the other extreme, is an impoverished, super-exploited third-world working class that bears an increasing burden for the self-expansion of world capital on its shoulders. Forced upfront to compensate third-world capitalists for the loss of profits, southern workers are increasingly compelled to accept intensified conditions of super-exploitation, so severe that their levels of compensation are often below that physically needed for the reproduction of their power to labor.

Emmanuel and Cope, in particular, have attempted to provide rough estimates of the value transfers that occur through this process. Emmanuel estimated decades ago that unequal exchange costs the third world thirty hours for each hour exchanged with the developed nations. Cope, updating Emmanuel, and translating this into dollars, estimates current value transfers from the non-OECD (Organization for Economic Cooperation and Development) to the advanced nations to be almost $5 trillion in 2008, with nearly $3 trillion transferred annually through low-priced non-OECD goods imports alone.5

The point is that if all the layered forms of transfer—unequal exchange, monopolistic rent extraction, labor arbitrage, financial exploitation, currency speculation, etc.—are bundled, workers of the advanced nations are seen, by Cope and Emmanuel, to consume more value than they create. If Smith is not explicitly prepared to go that far, his argument leaves no doubt that the logic of trade is certainly compatible and not in contradiction with that conclusion. But let there be no mistake: It is the theory of “unequal exchange” and not the other, less disputed, sources of imperial transfer that forms the core basis of the controversy.

If first world socialists are blind to this, it is because—or so claim dependency theorists with some real justification—of their near willful inability to pierce beneath the surface. The key lies in the upward transfer of values through the operation of global production chains and not from the overt—but relatively modest—direct extraction of repatriated profits from capital invested productively or through loans in the developing world, which first world socialists trot out to repudiate the theorists of unequal exchange. Dependency theorists accept that profits arising from FDI (foreign direct investment) are too modest to provide a complete picture. That, after all, is their main argument. But first world Marxists are fixated, according to these dependency theorists, only on the smallest piece of the big puzzle.

The offense is compounded by the question begging insistence of first world Marxists that northern workers are, in fact, higher paid because they are more exploited; that, in other words, the productivity differential exceeds the pay differential (in real wages) between North and South.6 It is not necessary to reproduce the arguments of Cope and Smith against this assertion to point out the obvious. If, in fact, trade transfers values, then the statistics used to justify productivity differences, which incorporate those very transfers, are themselves products of a prior distortion that inflates measurements of productivity in the North and diminishes them in the South.7

This argument is also, as will be shown below, contingent. The general condition necessary and sufficient for unequal exchange of labor time through trade are, as will be argued below, rates of international currency exchange that fail to equate one hour of labor expended in the Global North with one hour of labor expended in the Global South. If that is true then it makes no difference how an hour of productive labor time is nationally distributed between workers and capitalists. Lower rates of exploitation in the imperialist metropolis are a corollary of the assumption that trade takes place in the context of a uniform international rate of profit, that organic compositions do not have an international bias, and that the tendency of profit rate equalization results from the “overflow” of surplus value from the Global South upwards. Drop that assumption and any discussion, much less insistence, that the relative rates of exploitation favor the North or South is unnecessary, but as we will argue, also, no less incorrect at every level of the analysis. 8

Value transference on the scale that Smith and Cope argue for, if correct, would be no less horrific, no less bracing, no matter how we postulate relative rates of exploitation.

The political implications of unequal exchange—if supportable—would be convulsive and transformative for how we think and how we engage in class struggle and class-struggle politics. For the thesis of unequal exchange, especially as Cope and Emmanuel extend it, calls into question the basis for international labor solidarity.

If first world workers produce less in value than their wages allow them to appropriate, they are simply no longer an exploited class, but a labor aristocracy, a new petty bourgeoisie. Emmanuel stated the implications bluntly. This does not mean

workers and capitalists of the imperialist center have straightened out everything, which separates them. But what separates them is no longer an antagonistic opposition, that is to say, an opposition, which can only be resolved by going beyond the existing system; it is an opposition between partners for the sharing of the spoils in the framework of the system. This is the very meaning of reformism. They are therefore natural allies in any outcome in which it is a question of confronting the suppliers of these spoils.9

If first world workers, blue collar and white alike, are the objective allies of their employers in the modern structure of capitalism, which classes and which struggles should revolutionaries support? The question all but answers itself: To those classes in world capitalism that have a fundamental interest in overturning imperialism. Cope pulls no punches: “Since the entire population of the imperialist bloc benefits from imperialism to varying degrees, the anti-imperialist united front in the Third World must necessarily confront the First World in toto, and not just its haute bourgeoisie.”10

A “socialist” revolution, to paraphrase Emmanuel, in the privileged North—if such a thing, given this understanding of the structure of world capitalism, were even conceivable—would lead to a form of social imperialism. The property upon which rests the claims of first world capitalists to the fruits of international exploitation would be expropriated. But it would be an expropriation and redistribution downwards from one set of exploiters to their junior associates. It would leave the fundamental framework of unequal exchange and national privilege intact. A revolt on a pirate ship that expropriates the captain and the officers, redistributing the booty on an equal basis, cannot be said to create a pirate-commune since the pirates’ booty is based, above all, on wholesale robbery.

Unequal exchange is an internally consistent argument flowing logically from its premises. But do those premises withstand scrutiny as legitimate applications of the laws of value: does the formation of a uniform international rate of profit transfer surplus value; and is the unequal exchange of labor time also an unequal exchange of value?

Unequal exchange in the (hypothetically closed) national economy

The question of labor equivalency has, it is true, the assumption of an expenditure of physiological labor (mental and physical) in both time and intensity. But the expenditure of labor-time must be socially equalized before it can assume the substance of labor—or abstract labor—in its phenomenal form as money. The transformation of equal expenditures of physiological labor into socially unequal quantities of abstract value is itself a social event that emerges where exchange becomes the social form of the process of production. Products are exchanged on the market, therefore, not according to equal but according to equalized quantities of labor. That ongoing transformation of concrete and diverse physiological expenditures of labor time into socially equalized abstract labor is the first phenomenal form of unequal exchange.

Expressed in other terms, labor-time can be made into an objective unit of measure only when the work of different individuals is abstracted from and requantified in a form that is universally recognized as an equivalent of abstract labor —money. Money (the price unit) is the phenomenal expression of a homogeneous magnitude of the fundamental substance of social labor-time: “simple average labor.” Simple average labor is the labor of the “average worker,” the laborer working with the “average degree of skill and intensity.”11 The unit of abstract value, the expenditure of an hour of simple average labor, is invariant. Changes in the average degree of skill and intensity as capitalism evolves affect the productivity of labor, its hourly output, but not the unit of measure.

Skilled work requires longer professional training and more significant general education than the average for workers. If the period of training is shortened, or the material resources and labor diverted to training are reduced, the value of the products of skilled labor falls. That much can be established. But it would be futile to search for an a priori algorithm, an operating principal, for the practical equalization of physiologically disparate expenditures of concrete labor-time among different skills as these skills evolve over time. This incessant reduction and rebalancing, nevertheless, takes place under capitalism, but not directly through the conscious will of organized producers. It occurs roundabout through market exchange and competition, through the ceaseless movements of capital in search of profit, in a process that takes place “behind the backs of the producers.”12

An hour of skilled work produces more value than simple, average labor; more value still than rote labor. It does so not because skilled labor is more “productive,” but because skilled labor power is itself the product of a greater expenditure of labor-time in its formation and maintenance—its production and reproduction—than is the labor-power required for average and for unskilled, brute work. Watchmakers produce commodities of a higher value than ditch diggers in a comparable period of time, not because watchmakers, with their lengthier, specialized training, would also be more productive in digging holes or because ditch diggers, with little training, would be less productive in assembling watches. There is, to the contrary, no such thing as an “abstract unit of productivity” that skilled workers have in more abundance than unskilled workers. The relative physiological (physical and mental) expenditures of any two labors in an equal period of time are dimensionally incomparable on their own terms. But these reductions are made every day in the marketplace. That is why the concept of “abstract labor” is not possible without reference to the qualitative properties of work activity.

That is also is why rationales that reference supposed productivity differentials as explanations for the wage disparities among different skills are the product of mainstream economic theory—of ruling class rationalization—and have no place in serious arguments based on Marx’s theory of value.13

Price is value in the form of money. Through the equation of the monetary price of the annual value product (money income of productive laborers and capitalists), V + S, with the number of hours performed in the year by productive (value creating) labor, the labor-content of the monetary unit at any moment in time can, in principle, be established.14 Because of this identity, any economic activity expressed in prices is simultaneously represented by so many hours of abstract value of socially standardized labor-time units of work. Accordingly, the wages of skilled labor and rote labor, given the assumption of a uniform national rate of exploitation, are represented through this equation as so many deviations from the mean. And each capital’s wage bill, a mixture of labor of different skills, represents the amount of socially standardized labors set into motion. An equal wage bill among different capitals may represent very different amounts of employed labor, but it represents an equal power to generate value in a given time.

Expressed differently, this relative ranking of wage rates within a national economy, or even between closely similar economies, is a snapshot barometer of the value-generating array and relative weight of diverse skills that a national economy has at its disposal. There should be no confusion however. Neither wage rate disparities nor value disparities arising from an “hour” of labor expended by different skills involve a transfer of value. Although from a formal standpoint, an unequal exchange of hours takes place in the exchange of commodities of equal physiological labor through unequal prices, skilled labor does not exploit unskilled labor.

What then of the equalization of profit rates within the national economy, despite differing organic compositions of capital? Do capitals with high organic compositions of capital that activate lesser quantities of labor, standardized in terms discussed above, exploit capitals of low organic compositions by compelling the latter to “yield” a portion of their surplus value? Profits are, after all, a distributional relationship among capitalists that arise from their mutual interdependence and their common need to march commodities through the market process before surplus labor can be turned into profits. Uniform profitability signifies an equality of exploiters—a “capitalist communism”— whereby individual capitalist units draw from the collective exploitation of the working class on an equal per-share basis, per-share, that is, of the collective pool of invested capital.

This “equalization process” more than virtually anything else, is the subject of widespread confusion among Marxist economists. For the equalization process does not result from capitals “relinquishing” surplus labor (or from surplus value being taken from workers employed by spheres with low organic compositions of capital) to be appropriated by sectors with high organic compositions. Surplus value, here, does not represent an original money price materialized in commodity form. It is, rather, an expenditure of surplus-labor time, which cannot be realized in price form, and therefore as profit, in those branches of the economy from which it originates. To put it less cryptically, it is not surplus values that flow, but capitals. Investment streams from sectors with lower than average profitability to sectors with higher than average rates of return. Profit rates are equalized through the ebb and flow of capitals, the alteration of existing supply and demand relations, and by changing the aggregate structure of production. From these manifold movements, market-clearing prices emerge that allow profit rates to be equalized.

Profits are not transferred by branches with low organic compositions of capital and captured by sectors with high organic compositions. Rather, firms satisfy the demand for their commodities by bringing to market a different quantity of output than would otherwise be needed to realize the full expenditure of labor through sales. The fluctuation of investment directs capital-intensive industries and sectors to supply a (relatively diminished) quantity of commodities that support the pricing of such goods above value. They thereby attain a higher rate of profit when compared to what would otherwise transpire had these commodities been sold at value. Conversely, labor-intensive sectors supply a relatively greater volume of output and realize a diminished rate of profit than would otherwise be the case if they were sold at value. From the hypothetical vantage point of value for value exchange, labor is squandered when the quantity of commodities supplied exceed the absorptive capacity of the market to be sold at value and attain a premium when sold above their value.

But where capitals are instead equalized, what would otherwise be seen as a squandering of labor must now be understood as a socially necessary expenditure. The competitive process simultaneously standardizes the labors of heterogeneous skills, while distributing this labor in a manner commensurate with a uniform rate of profit. The profits that these capitals yield are not proportional to the masses of labor—and therefore the masses of surplus-labor—they activate. Unequal quantities of labor activated by equal capitals are instead equalized with one another so that the individual deviations of profits from surplus values self-cancels when taken as a totality. It is this totality of profits, this mass of surplus value, which the system has at its disposal that determines the limits of its ability to expand.

National commodity values are determined by the organic composition of capital and the prevailing rate of exploitation. Those commodities produced under conditions that mirror the social composition of aggregate capital are marketed at value, because at value they earn an average rate of profit. The “average” commodity, in other words, is sold at value, which is at the same time its price of production. Commodities associated with organic compositions that deviate from this average are sold at prices that diverge from their values in such a manner that these various upward and downward divergences self-compensate when taken as a whole. There is no transfer of surplus value at work in this equalizing process; any more than there is in the standardization process of various skill levels of labor around the average. Solely the prior movement of capital in search of profit maximizing opportunities effects profit rate equalization.

The transfer and capture of value, so central to the theorists of “unequal exchange,” does not take place within the competitive jockeying of productive capital in pursuit of profit. And this cannot be emphasized enough. Where such transference does take place is through the intermediary links attached to it by the commercial sector, finance, and of the state. Of course, all these additional claims on aggregate surplus value also participate in the process of profit rate equalization. But, creating neither value nor surplus value, these ancillary sectors do so by appropriating a portion of the predetermined market prices of commodities and the incomes they generate through sale. Through the difference between wholesale and retail prices, through interest charges on loans, and through taxes, values are hived from the productive sphere to support nonproductive activities. The commercial sector and finance, insofar—and only insofar as it concentrates loanable capital for production—are a necessary expenditure of value to further accumulation. They exist symbiotically with the productive spheres of capitalism.

This, of course, all relates in the first instance to the free movement of capital, which is a theoretical and heuristic construct and which has never been and can never be the historic norm. Where monopolistic powers of varying degree can be exerted they generally are. And these powers, whether exercised on the selling side or the buying side, buoy monopolistic profits by hindering the self-expansion of the totality of capital. Concentrated capital suppresses the competitive sector by exacting monopolistic rents. These rents are a barrier limiting the potential enlargement of the more competitive sectors. And monopolies maintain their power by underutilizing their own existing productive capacity, which, if put into play, would compel them to drive down market prices and sacrifice existing advantages.

In contrast therefore, the relationship of the monopolistic sectors to the competitive sectors tips the scales towards parasitism. There are two sectors—competitive and monopolistic—with at least two different levels of profitability, and potentially more given the varying degrees of concentration, in contrast to a uniform competitive rate of profit. But the salient point is this: Monopolistic prices have the appearance of appropriating profits’ shares that would, under competitive circumstances, accrue to other capitalists by erecting barriers to the free flow of capital. Concentrated capital creates artificial scarcities at the monopolistic end and a verisimilitude of overproduction at the more competitive end. The resulting changes in prices reflect the altered structure of aggregate production in comparison to the hypothetical state of free competition. Even here it would be incorrect to see monopolistic rents as “capturing” or “transferring” values. For prices are formed simply within a narrower context, one with more restricted latitude for capital movement. Monopoly pricing no more transfers values from the more competitive sectors, than does skilled work from unskilled labor or high organic compositions of capital from low organic compositions.

Unequal exchange in international trade

When exchange is restricted within national boundaries, abstract labor cannot assume its most developed form. Abstract labor takes a leap forward when international trade unifies all countries and when the products of national labor shed their local characteristics and are delivered to the world market. But now the standardization process of equal physiological labors into unequal units of abstract labor requires the addition of new links to make the jump from the national to the world market. For not only does labor first have to be equalized on its own soil—where the majority of its interactions still take place—but these nationally equalized labors also and simultaneously have to be standardized on an international scale. Capitalism has not created a unitary world state with free mobility of labor and a single currency. The standardization process therefore has to add another degree of roundaboutness. This is accomplished through the intermediation of international exchange rates.

Knowing the labor content of the national currency, the existence of an (hypothetical) exchange rate that supports a balance of trade in merchandise across nations, simultaneously performs this reduction. To illustrate, if the abstract labor represented by an average hour of labor performed in the US were to be expressed as $100 in monetary value and an average hour of Chinese labor as 500 yuan, when the exchange rate of yuan to dollars in balanced trade is 12 to 1, a basis would be provided for international standardization. One hour of abstract labor performed in the American economy expressed as (multiples of) $100 in commodities is exchanged against (multiples of) 1,200 yuan in merchandise. That means that one hour of labor of average skill and intensity performed in the American economy is socially equalized with 2.4 hours of Chinese labor of average skill and intensity. Every one hour worked in the American economy, to state it otherwise, requires 2.4 hours of work by Chinese labor to create the equivalent dollar value in trade.

This form of “unequal exchange” enacted in the international marketplace is no more a form of labor exploitation by one national working class against another, than is the parallel reduction within the national economy a redistribution of value from the lesser skilled to the more skilled.

If wage rates were to rise in China and fall in the US, and the rate of exchange between yuan and dollar remained equal, the rate of exploitation and the rate of profit would fall in China and rise in the United States. Trade dynamics would remain the same, though the basket of goods traded might be different.

“Unequal exchange” as a general theory of underdevelopment rests on the untenable proposition that one hour of commodity-producing labor performed anywhere in the world economy is the equivalent of any other. Without this central conceit, everything else collapses. Cope, for instance, recalculates the wage share of exports from the developed countries to the Global South and the wage share of exports from the developing countries to the Global North, on the basis of “average” wages (and therefore, under his assumptions, as if there were a uniform rate of exploitation). He then compares these recalculated flows (based on a hypothetical “equal” exchange) with the actual figures, subtracting the former from the latter, to demonstrate the net transference of value through trade.

But this approach is meaningless and misleading for not having first recognized the need to reweight the relative contribution of the working class of the Global North to total value creation and to recalculate the global contribution of each based on this reweighting.15

But more important, it represents another instance of the common but fundamental misunderstanding of how profit-rate equalization occurs and the social process it represents. It harkens back to the erroneous belief that profit-rate equalization is analogous to a liquid that cascades from one sphere of production to another cancelling the effect here not of varying organic compositions as discussed above, but of differences in national rates of exploitation. This perspective repeats the theoretical error of seeing surplus labor time not as a social relationship, but as a material object with the characteristics of a fluid that can be captured in its overflow.

Surplus labor does not take the full form of profit in the national spheres where it originates, because commodities are produced to meet a specific volume of international demand, a demand that differs from the output otherwise required to realize the full expenditure of labor-time in price form. Competition compels capital to set a price floor determined by the need to attain an average rate of return on investment and pushes production to satisfy that need and no other. Were the aim of capitalist competition to realize, instead, the full expenditure of labor in the sphere in which it is performed—a practical impossibility—the volume and composition of commodities supplied would be fundamentally different. And these differences would correspond to an altered distribution of capital and social labor among the various spheres of internal and external production, as well as differences in the choices of technologies, which are themselves only defensible within a given constellation of relative prices.

That is why, in the first instance, the hybrid world imagined in Emmanuel and Cope’s recalculations of value “transferred” through competitive international exchange are fundamentally misconceived. If the purpose of capitalist production were value-for-value exchange, products produced in such excess volume that they can only be sold at prices below their values would tell capitalists that a portion of the labor activated could not be socially confirmed. That portion which could not be realized in price form could not be judged as social labor. But under capitalism there is no feedback mechanism, other than profit rate equalization, for businesses to recognize whether their investments of capital are socially validated. And insofar as an adequate rate of profit is attained, the social labor associated with that capital is deemed socially necessary regardless of whether it supports value-for-value exchange.

How does this all fit together? In international trade there is a (hypothetical) transformation of national prices of production into international prices of production—that is, into uniform world prices. Assuming Cope and Smith’s hypothesis that third world rates of profit before trade exceed first world rates, the relative growth rates of capital experiences a relative geographical shift as production follows in pursuit of profits. In this flux, first world goods become scarcer relative to the growth of demand. The rate of growth of accumulation in the developed world, in other words, lags behind the growth of profits. Unit prices for first world goods therefore rise. Conversely, the rate of capital accumulation in the lesser-developed nations exceeds the rate of growth of profits because output here grows relatively faster than demand. This causes unit prices to fall.

In both trading regions, capital accumulates, albeit at different rates, and profits increase, again, at different rates until profit rates are equalized. It may well follow that the terms of trade are biased in favor of the advanced nations, but only because the relative rates of economic growth have shifted in favor of the third world.

How then is this an explanation for underdevelopment?

Beyond the redistribution of capital in pursuit of profit, international trade, as Cope and Smith are fully aware, opens other means for modifying metropolitan rates of profitability that are impossible within the closed confines of a national economy. It is through the introduction of global production chains with the South, which remain among the most illuminating parts of their discussions. Through these chains northern capital has mobilized its strongest countertendency to the rise in the organic composition of capital and a decline in the rates of exploitation—the profit squeeze—that plagued the system through the 1970s. Foreign trade cheapens the elements of constant capital, and the necessities of life for which the variable capital is exchanged. It tends, therefore, to raise the rate of profit by increasing the rate of surplus value and by moderating the rate at which the organic composition of capital grows. Secondarily, that portion of northern capital directly invested in nations where the rate of return is higher enters into the averaging process elevating the general rate of profit of metropolitan capital.

Smith and Cope are clear that global labor arbitrage is the main driver of production chains. The reconcentration of production jobs on the world market to low wage nations is based primarily on one criterion: whether wage differentials of prospective third world workers (and overhead regulatory costs) permit unit costs to be reduced. Once the feasibility of that has been determined, labor arbitrage can take the form of direct investment or outsourcing.

But this process needs some additional unpacking. From a broader standpoint, labor arbitrage is not merely the shift of work from better- to poorer-paid workers. It is a shift of work from the hands of those who create more value to those who create less. From capital’s perspective, the resources once marshaled to train, educate, and maintain industrial workers in the North are no longer necessary. It is not that displaced northern employees are over trained and overeducated, but that the same level of skill can now be reproduced in the third world, at an adequately comparable level, for a fraction of the cost. And, as we have argued, the value-enhancing ability of an hour of social labor is intrinsically linked to the quantity of social resources sacrificed to attain and preserve those skills.

Labor power, whatever its level of skill, is a commodity and, like every other commodity, has production and reproduction costs. The modern system of “free trade” liberates national capital to roam the world in search of labor power where the reproduction costs of ability in multiform skills are minimized.

What attracts capital to the third world is not the “higher rate of exploitation,” an index that is unknown and unknowable to capitalists, but low wages. And those low wages are, in turn, conditioned by the costs of reproducing that level of skill, previously a preserve of the first world, which determines labor’s comparative ability to generate value. The labor that the average industrial worker of the developing nations is now able to carry out is far above the average in complexity that it was capable of performing several decades ago. By the same token, the resources now mobilized to create that labor power in the third world is far below what was previously required decades ago to train similarly skilled labor in the advanced economies of the world.

This has had two consequences. On the one hand, it hollows out much of the industrial working class of the advanced economies. The welfare state, in its heyday, socialized the mass maintenance costs of first world workers. It trained and preserved their skills and provided for several generations of relatively skilled labor. It never abolished inequality, exploitation, or the appropriation of wealth by the few. But these skills can now be purchased in the international market on the cheap. First world businesses have no need to invest the resources needed to mass equip these now superfluous workers for higher value-added work in the emerging automated industries of the future where the anticipated demand for additional labor is weak. These workers have, in effect, been scrap-heaped.

Not so the equipment they previously attended. Rather than invest domestically in productivity enhancing innovations that reduce the cost of intermediary inputs—innovations that raise the organic composition of capital down the production chain—the Global North has exported its existing technologies to the emerging economies. There such inputs can be manufactured by low-wage workers at lower value; a place of industrial hellholes where productive capital is increasingly employed under nineteenth century working conditions, with its attendant danger, waste, pollution, and squalor.

It is a nightmarish version of uneven and combined development, where the emerging economies are locked into a claustrophobic, feverishly competitive niche in a global network that condemns them to low value-added work. It places third world capitalists, as Smith and Cope quite rightly emphasize, into intense rivalry with one another for access to first world markets. It compels third world labor to accept wages often below that needed for its own reproduction for fear of losing employment opportunities to other third world competitors. And it subjects third world economies to compounded pressures of declining profitability.

The theory of “unequal exchange” correctly identifies the moving parts in this engine, but misspecifies the transmission. First world capitalists and workers do not appropriate the values produced in the Global South through the competitive exchange of commodities associated with systematically different levels of exploitation. A uniform rate of profit, in any case, assumes a level of capitalist equality that has never existed. And if it had, the theory of unequal exchange would have no explanatory power in itself for having fundamentally misspecified how profits are shared through the creation of prices of production.

Rather, metropolitan economies benefit in the first place—and for Rust-Belt workers any such shared benefits are quickly dissipating—from the creation of a division of labor that condemns developing countries to low-wage, low-value-added spheres of production and monopolizes for itself high-value-added industries. Once this division is imposed it is difficult, though by no means impossible, to escape from it. The most advanced technologies, jealously guarded by reactionary patent laws and surrounded by a near impenetrable thicket of cartel-like pricing and legal safeguards, remain beyond the reach of most third world economies. These advantages are doubly reinforced through buyers’ and sellers’ monopolies exercised by first world firms and by the concentration of reserve currencies in the hands of metropolitan financial institutions all of which actually do, in contrast to production chains, drain value from the South. And where emerging economies attempt to escape this developmental impasse through loans that enable them to purchase beyond their ability to sell, they court the ever-present peril of debt peonage.

The theory of unequal exchange grew out of dependency theory, itself a challenge to status quo justification for the world division of labor. Mainstream doctrine has long theorized that as long as each country specializes in those branches, and chooses those techniques within those branches, that makes the most extensive use of its most abundant factor, the international division of labor would be optimized and world output would be maximized. Socialists have always argued to the contrary that it is just this very division of labor that blocks development. And socialists have further asserted that it is not simply by transferring its factors from agriculture to industry that a country escapes underdevelopment, but rather by mechanizing and modernizing both sectors. Global production chains, while superficially satisfying these prescriptions, nevertheless continue to condemn developing economies to the bottom of the value-added linkages in those chains.

If some nations are seemingly extricating themselves from this, it was not through their adherence to the theory of comparative advantage. China, to take the most dramatic example, has done what virtually every other successfully developed nation has done in the past: engaged in industrial espionage. In the 1870s, American textile companies sent employees to work in British factories to take notes on equipment and work practices. The Stalinist regime engaged in mass intellectual property theft, industrial espionage, bribery, and theft of goods from importers. Later, the Russians and East Germans stole US computer chip designs during the Cold War. South Korea has long collected information from foreign companies, a fact openly discussed on South Korean television. Bloomberg News reported (March 15, 2012) that,

14 U.S. intelligence agencies issued a report describing a far-reaching industrial espionage campaign by Chinese spy agencies. This campaign has been in the works for years and targets a swath of industries: biotechnology, telecommunications, and nanotechnology, as well as clean energy. One U.S. metallurgical company lost technology to China’s hackers that cost $1 billion and 20 years to develop, U.S. officials said last year. An Apple global supply manager pled guilty in 2011 to funneling designs and pricing information to China and other countries; a Ford Motor engineer was sentenced to six years in prison in 2010 for trying to smuggle 4,000 documents, including design specs, to China. Earlier this month, the National Aeronautics and Space Administration told Congress that China-based hackers had gained access to sensitive files stored on computers at the Jet Propulsion Laboratory.

Of course, had the Chinese an ounce of socialist intent, these “secrets” would have found their way into the public domain for the benefit of other developing economies. What the Chinese experience has revealed, however, is precisely what self-serving nonsense the entire mainstream theory of development truly is.

Smith and Cope, whatever faults their analyses may have, raise a valuable challenge not only to mainstream theory, but to Marxists for whom the depth of our political opposition to militarism and intervention has often been unmatched by an equal commitment to understanding the oppressive reality of “peaceful” global trade. What they have not demonstrated is that first world workers are no longer an exploited class, nor in the process of becoming such a class. Nor have they demonstrated that revolutionary socialism in the developed world has lost its relevancy due to the existence of a permanent labor aristocracy.

  1. John Smith, “Imperialism in the Twenty-First Century,” Monthly Review, Volume 67, Issue 03 (July–August 2015), https://monthlyreview.org/2015/07/01/imp.... The paper was, according to MR, “abstracted” from his forthcoming book of the same title.
  2. The organic composition represents capital per worker (assuming a working day of any given length) for a given production period. It is a ratio between two quantities of value: the value invested in the capital stock and the value newly created during the production period.
  3. The turnover time consists of the production period plus the circulation period required to repatriate the funds expended in production to the capitalist after the sale of the merchandise.
  4. Arghiri Emmanuel, Unequal Exchange Revisited (Institute of Development Studies, 1975), 56.
  5. Nikolai Brown, in Third Worldism: Marxist Critique of Imperialist Political Economy has illustrated this in a usefully concise fashion. Abstracting, for purposes of simplicity from fixed capital, assume an exchange between two capitals, in which wages are paid at the rate of $20 an hour by capitalist A (from the Global North) and at the rate of $1 per hour by capitalist B (the Global South). Assuming further that this collectively generates $15 of surplus value, Brown concludes that the “value of labor” is $18 per hour ($36/2 hours worked). The surplus value is divided between A and B according to the wage disparity (assuming a uniform rate of profit, where only variable capital is invested): the North getting $14.28 (20/21 x 15) and the South receiving $.72 (1/21 x 15). Because the worker employed by A receives in wages more value that s/he produces (20 >18) that worker is a net exploiter, a coexploiter, along with his/her employer of the worker employed by the Global South. Capitalist A walks away with an overwhelming amount of the value and products collectively produced. Nevertheless, both A and B, remarkably, see this exchange as equitable for having received an equal return on their capital. Both capitalists bring the product of one hour of labor to the marketplace, worth $18, but re-price that one hour in accordance with the need to distribute profits “equally,” that is commensurate with investments. Even so, unless capitalist A exercises monopoly power as a seller and monopsony power as a buyer thereby compelling capitalist B to sell its products below value and to buy its own products above their value, the transaction as described has no foundation. And even if so, this theory reverses cause and effect. It is not the high level of wages that creates monopoly power, but monopoly power that makes higher wages possible. As a description of exchange per se, it is patently absurd. In the first place, capitalist B can only buy up to the limit of its ability sell. Its purchasing power consists of a meager $1.72. And without an adequate market for A’s exports, the $20 in wages, monopoly notwithstanding, cannot be sustained. It should be clear, even without further elaboration, that this entire scenario is incomplete and unconvincing at this level of abstraction.
  6. It is this naïve use of statistics that vitiates Michael Kidron’s attempted rebuttal of “unequal exchange.” See chapter 5 of Capitalism and Theory, “Black Reformism: The Theory of Unequal Exchange,” Pluto Press, London 1974.
  7. Productivity statistics generated by the mainstream are also, and more importantly, theoretically irrelevant. They are a measure of gross productivity, which includes constant capital—transference of preexisting values—in the numerator and unproductive labor time expended in the denominator. If comparisons of productivity to wage differentials were to have any meaning in this context, they would have to measure net productivity (variable capital + surplus value both measured in prices indexed to a base year divided by the wages of commodity producing labor alone also indexed to a base year). Instead they measure gross productivity (constant capital + variable capital + surplus value indexed by a base year divided by the wages of productive + wages of unproductive labor indexed to a base year). Unless it can be proven that gross productivity grows at the same pace as net productivity and that total real wages grow in tandem with the wages of productive workers, the calculations are meaningless for deriving any sense of the relative rates of exploitation between the two global regions. Compounding that distortion, the Bureau of Labor Statistics also explains quite pertinently that: “As manufacturing firms outsource or offshore production of intermediate inputs the value of manufacturing output is unchanged, but the shift to U.S. nonmanufacturing or to imported intermediate inputs is accompanied by a reduction in (US- B. F.) labor hours and therefore an increase in the measure of labor productivity.”
  8. Charles Post (http://www.thenorthstar.info/?p=4524) and Anwar Shaikh (http://www.thenorthstar.info/?p=4524) deny, in effect, that differences in regional rates of exploitation are germane to the flows of value in international trade. The key variable, they contend, is the organic composition of capital. So unless it can be shown that there exists a systematic bias in the regional distribution of industries that export labor- and capital-intensive commodities, there can be no proof those workers in the Global North benefit from unequal exchange. Their argument may be well established on empirical grounds as unequal exchange is seemingly belied by some very basic facts—for example, the rise of new industrial powerhouses China, the BRICS, and the Asian Tigers; as well as the decline of wages and living standards of workers in the US and other “advanced” economies. But rather than examine these empirical arguments in detail, three brief points should be made. First, Shaikh and Post share with the theorists of unequal exchange an explanation of profit rate based on the transfer of value. Profit rate equalization, they implicitly contend, occurs through divergences in the organic compositions of capital around the mean, which act, in effect, as social magnets with positive and negative polarities that attract or repel surplus value. And they also operate under the unexamined assumption that the expenditure of an hour of labor on any national market generates the same quantity of value in trade. Second, while Post and Shaikh are quite right to contend that the existence of an empirical correlation between high capital intensity production methods in the developed regions with low organic compositions in the underdeveloped regions is highly improbable, that improbability itself, even if factually supported by the existence of several significant economic outliers, is not a theoretical refutation. More important, even if this contention were empirically correct, it is largely irrelevant. It simply finesses the issue of regional disparities in rates of exploitation, which is the crux of the argument for the theorists of unequal exchange. It is difficult to precisely ferret out Post and Shaikh’s justification for this. But reasoning backwards from their conclusion suggests why it is nevertheless inconsistent with their framework. Working under their hypothesis of zero correlation, consider two industries, one from a developed region, one from an underdeveloped region both with organic compositions of capital equal to one another and to the international average, but associated with very different rates of exploitation. There are two possibilities. Either both sell their output on the international market at prices that equal their national values, in which case there is no uniform rate of profit. Or both deviate from their values in accordance with their understanding of the law of profit rate equalization and there is a flow of value from the more exploited region to the lesser. Shaikh and Post argue that there is no basis for the assertion of a systemic basis for unequal exchange and therefore no regional bias in the transfer of value. The argument of this essay, in contrast, is that there is systemic unequal exchange, but that such exchanges are wrongly associated with transfers of value and therefore cannot explain underdevelopment or the persistence in wage disparities.
  9. Arghiri Emmanuel, preface to Unequal Exchange and the Prospects for Socialism (Communist Working Group, Manifest Press, 1986), at http://snylterstaten.dk/english/preface-....
  10. Zak Cope, Divided World Divided Class: Global Political Economy and the Stratification of Labour Under Capitalism, revised second edition (Montreal: Kersplebeded, 2015), 213–14.
  11. Chapter 1, in Karl Marx’s Capital: Volume One; https://www.marxists.org/archive/marx/wo....
  12. Ibid.
  13. Under the assumption of a uniform rate of national exploitation, where the costs of training are privately borne by the worker or the employer or some mix of the two, wage differentials are an index of the value producing differentials of skilled, unskilled and “average” labor under capitalism—the deviations from the mean. To the extent that society socializes these training costs, the basis for these wage inequalities progressively loses their capitalist justification. Certainly a genuinely socialist society would eliminate entirely the basis for social differentiation arising from the acquisition of skills. This would in no way negate the necessity to assign different weights to the products of different labors of varying skill in the national accounting and planning schemes.
  14. Productive labor is commodity-making labor employed by private capital. It can be expended on material or immaterial products. What distinguishes productive from unproductive labor, however, is that the former works for the self-expansion of capital. The costs of circulation (sales, finance, and government), on the other hand, borne by capital, including the capital expended on wages, structures, and other business supplies, are overhead as are the taxes needed to support public infrastructure and government services. Overhead costs are a necessary sacrifice of capital to minimize the turnover times of capital that are a drag on accumulation and for the political preservation of capitalist society. Unproductive labor is socially necessary and is otherwise performed under conditions that are formally identical to productive labor. But the wages of unproductive workers are not part of capitalism’s variable capital nor is the surplus labor time expended in these pursuits counted as surplus value.
  15. To illustrate, reconsider N. Brown’s example above as a framework, but with standardization ratio of 2.4 Chinese hours for every one American hour worked, as a proxy for the Global South and North respectively. Assuming that each hour worked by an American worker creates $100, 2.4 hours of Chinese labor must be expended to create that same $100. If there is balanced trade, each side brings $18 worth of goods to the marketplace. That means .18 of an hour of work in the US is exchanged against .432 Chinese hours (.18 x 2.4). American workers are paid $20 an hour, so that the wage portion of the $18 worth of exports is $3.6. Chinese workers are paid the equivalent of $1 per hour, so the wage portion of Chinese exports is $.43. Of the $18 in American exports, $14.40 is profit; $17.57 represents the profit portion of Chinese exports. Although there is an unequal exchange of labor, there is an equal exchange of values.

Issue #97

Summer 2015

Delusions of green growth

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