The most recent lollapalooza business story in Canada has to do with a humungous bank, its largest one, no need to mention it’s the Royal bank of Canada, murdering a bunch of its employees. Murdering may sound like an exaggeration because the bank didn’t actually execute or kill them in a way that they are no longer amongst the living. It only did so metaphorically but which feels like the real thing if you happen to be one of the victims. These cogs in the bank’s giant profit apparatus were simply discarded and are unlikely to get equivalent employment elsewhere, perhaps none at all. So, their lives, as they knew them up to now, are effectively over.
So, what happened? The suspect, our big bank, in this case, has taken outsourcing, or offshoring, to new and creative levels. They hired a foreign firm, no need to mention it was Indian, to take over the functions, previously filled internally by a group of long serving, loyal employees. The offshore firm brought a new twist to offshoring by not worrying about the offshore part and just importing its offshore employees onshore to work directly in Canada, at much lower (half by some estimates) wages to replace the Canadian employees. The bank was righteously upset to be accused of such odious practices: “We did not do this dastardly deed, it was the subcontractor, to whom we outsourced the work. They make the decisions, not us.” This reminded me of the maligned husband who would never have personally murdered his wife and did not have control over the decisions of the contractor he had hired to do so. Breathtaking chutzpa.
So, how does this neat, seemingly brilliant and legal way to print money actually work. And, why is it a race to the bottom? Well, since you are not all brilliant economists like me, let’s imagine this really tiny economy where there are only three people: Some guy with all the money, which we can call Capital; another chap (and to keep sexism at bay, these can be men, women or neither), call him Labour, whose only resource is brawn; and, finally, the farmer, with nothing but a plot of land endowed with wild, edible plants.
Moneybags decides to spend his entire capital to buy a hammer, which we call capital equipment, from a foreign supplier. He then hires Labour to use the hammer to crush rocks, which he believes he could sell. He borrowed the money to pay Labour. Soon enough there are enough crushed rocks to market and he sells some to Labour and Labour, with what is left, buys some food from Land owner who, in turn also buys some crushed rock.
This pleasant little merry go round runs trouble free until the guy with the Capital gets the government to enable globalization and he gets someone from a struggling foreign country to crush those hot selling rocks for much less wages. But he can’t sell as much to Labour, who is now, not so mysteriously employed at much lower wages by the land owner, who has figured out that frying some of his edibles will bring in more cash, as long he gets really low waged Labour to do the flipping over the grill.
So, where are we now? The owner of Capital has increased his profits by paying less for Labour. The landowner has increased his take by picking up a previously higher paid worker for lower wages and the foreign worker is working for really low wages which are still a lot higher than he has ever before earned. The original rock crusher is much poorer. In total, the picture is kind of grim for Labour with a smaller piece of the pie, albeit growing, but by less than the amount of loss for Labour, as there is now capital accumulation and hoarding occurring.
The next step, you guessed right, is that Capital finds someone, perhaps even the original worker, who can no longer stomach his flipping job, willing to crush those rocks for even lower wages. And that fine economic merry go round is getting shabbier and shabbier and running slower and slower as the owners of land and capital accumulate greater and greater portions of total wealth to the detriment of labour.
If this sounds like Marxist drivel it is. But it’s not quite the drivel we’d like to think because Marx did get a part of it right, the one about growing concentrations of wealth and economy killing inequality. Joseph Stiglitz, a perfectly capitalist Nobel Prize winning economist, also comes to the same conclusion. Where the nice (putting aside his difficult character and obnoxious Antisemitism) Mr. Marx got it wrong was in his solution to this pervasive growing inequality, or race to the bottom, problem, not in observing its existence. It is a problem with good solutions and we must deal with it before it brings that cute merry go round to a grinding, permanent stop.
