In my last column, I said our system of free market capitalism was flawed. It is not just an issue of income inequality that is structurally built into the system. It is that the system we have been operating under was constructed in a different time and under different circumstances.
The free market economy arose in the 1700s, which was a time when Canada didn’t even exist. The world’s population was around 500 million and vast stretches of land were “unexplored.” This made for a very different view of the world economy.
Indeed, there really wasn’t such a thing as a “world economy.” Resources flowed to those with the capacity to take them and this was predominantly countries in Western Europe. At the time, when a mine played out, you simply went and found another one. If you needed more trees, you shifted to a different continent. More food? Obtain it from faraway lands.
Although resources have always been limited (we only have one Earth), the birth of free market capitalism operated on a premise of infinite supply, or at least the capacity to develop an unlimited supply. The creation of the cotton fields in the southern United States was driven by European demands for fabric, not domestic consumption.
But we don’t live in an unexplored and wild world any more. Countries occupy all of the land base, with the exception of Antarctica. And there are discussions about how to divide up that continent as climate change accelerates deglaciation.
You can’t simply take something from another country. Nor can you plant a flag and start growing your own crops. We now live in a world of trade.
Don’t get me wrong. Trade is not a flaw in our business model. Indeed, taxes on the trade in goods were the principle source of income for the early federal government in Canada. The ability to trade goods with other nations is a major factor in the development of nation states.
But over the last 50 years, the cost of transportation of goods or trade between countries has declined dramatically. The balance between transportation costs and labour costs has been fought on the unemployment line.
Corporations are doing exactly what they are designed to do. They are intended to generate money for their owners. And when it costs less to build something in a different part of the world and transport it to your country than it costs to build it locally, then corporations do just that.
Ironically, many of the people who rail against government regulations which restrict business and trade also rail against the loss of jobs, the gutting of resource communities, and forced migration of workers, which are a result of removing restrictions on business and trade!
But the system is working the way it is supposed to, which has resulted in perpetuating economic structures that are archaic and, in some cases, punitive. As one of my friends put it, the poor are in the position they are in as a consequence of Ferdinand LaSalle and his Iron Law of Wages. Keep a surplus of workers around and wage levels will remain at the level of subsistence.
When corporations and companies can export their labour demands, then there is always an abundant supply of workers. The low cost of transportation means our manufacturing capacity has migrated. This is the basis of Thomas Friedman’s book The World is Flat and his subsequent book arguing the world is Hot, Flat, and Crowded. Our economic models need to change.
But it is not in the best interests of corporations to change the economic model. They have trillions of dollars invested in the present model. And perhaps more importantly, people employed by companies, large and small, are not interested in change if it puts their livelihood at risk.
Yet change is happening. And income inequality is a reflection of these changing times. The Conference Board of Canada released a report illustrating how the income gap is widening and arguing the gap is a detriment to innovation and growth.
In absolute terms, the bottom 20 per cent of wage earners are now better off than 40 years ago but not by much. For example, the average wage was $14,500 in 2009, compared to $12,400 in 1976 taking inflation into account. Over the same time period, the average income in Canada increased from $51,100 to $59,700.
All of this comes back to asking the fundamental question which started this particular series of columns – how do we change our economy to one which will respect the environment, mitigate climate change, and recognize the limited carrying capacity of the planet? More on that next week.
But systems which fall out of equilibrium – and our economy is one of those – have a nasty habit of self-correcting in the most unfortunate way.