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Hyperwage Theory Part 21
Hyperwage Theory Part 21
Hyperwage Theory
Part 21
In the time of the Mercantilists in the 1600s, there was actually the so-called Theory of Low Wages, but never in the history of economics has there been a Theory of High Wages. Thus, for the first time in economic history, a fool on the hill proposes the Hyperwage Theory.
The rationale for the theory of low wages is quite obvious. The mercantilists were afraid the commodities they were exporting would become too expensive for their overseas customers. They controlled the price of labor because it was easier to produce more babies for child labor in 10 years than to dig for gold in the rainforests. In other words, there was an oversupply of labor.
Unfortunately, the same theory of low wages is unknowingly being practiced in Third World countries, courtesy of their corrupt governments. I call this the Strategy of Poverty which is the title of the first chapter of this series.
Why is the theory of low wages accepted? First, it is the obvious intelligent solution. Second, only a stupid economist would have the courage to go against conventional wisdom.
But then again, I must remind you that I make a distinction between the intelligent solution and the genius solution.
In fact, I don’t subscribe at all to the train of thought that low wages will result in lower prices of commodities. This is such a very stupid train of thought. Pardon, my language, but I have to give you a sense of proportion and magnitude according to the perspective of the Street Strategist.
Leontief Paradox
Harvard professor Wassily Leontief was credited for the input/output (I/O) analysis in economics which we shall touch on when we discuss the very important Keynesian multiplier soon.
He was also credited with the Leontief Paradox. There is a theory in economics called the Heckscher-Ohlin Theory that states that each country exports the commodity which uses its abundant factor intensively. For example, the US, being capital-intensive, would be exporting commodities which are, of course, capital-intensive. The Philippines, being labor-intensive, will be exporting products which are labor-intensive.
The H/O Theory seems easy to prove because, intuitively, that should be the case. However, there was no actual test until Leontief invented the I/O analysis.
And what did he find out in 1954? The US imports (km) was 30% more capital-intensive than US exports (kx). In other words, the US exports were more labor-intensive than their imports. That was mind-blowing! The US was selling products that were more labor-intensive than the products it imported.
Of course, the economists attacked Leontief and faulted his statistical analysis. The first Leontief test showed km=1.30 kx in 1954. The second Leontief test in 1956 showed km=1.06 kx. The Baldwin test in 1971 showed km=1.27 kx.
The debate continues for the Leontief Paradox, but from the perspective of Hyperwage Theory, the Leontief Paradox is no paradox at all. Why? Because the mere existence or the mere possibility of the truthfulness of the Leontief Paradox raises a cloud of doubt over the Theory of Low Wages.
In other words, the Leontief Paradox suggests that high labor cost does not necessarily turn off consumers; the US is selling products that are labor-intensive and this is ironic because US labor costs are very high.
Price reduction?
Let’s take the case of computers. The computers made by HP are made in the US using high labor. Obviously, these workers are earning beyond the minimum wage of US$5.15 because only the working students at McDonald’s get the minimum wage. Let’s say the HP workers are paid $20 an hour (P1,120 hourly; P8,960 daily; P233,000 monthly at $1=P56).
The CPU inside HP is made by Intel Corp. which also uses hyperwage labor. Eventually, the Notebook computer of HP is sold in the US for $2,000 or around P112,000.
Question: When the Notebook is sold in a Third World country like the Philippines whose typical wage of workers is only P10,000 (or about P233,000/10,000 = 23.3 times), will the selling price of the Notebook computer be P112,000/23.3 = P4,800 only?
Of course not, and it would be stupid to expect such a reduction. What does this mean? The price of commodities from other countries produced using hyperwage salaries already includes the cost of their hyperwage labor, and damn the Third World countries if they don’t buy these computers.
Cost-plus approach
This is a reminder that hyperwage countries which are also the rich First World countries (surely, this is not merely statistical coincidence, but real cause and effect) includes in their price their hyperwage labor and they don’t care if the Third World countries could not afford them.
And this brings us to the question: Will Third World products still be affordable if the labor wage was set to a minimum of P20,000 ($357) for the domestic helpers or around P70,000 ($1,250) for entry-level engineers?
You know, First World countries are laughing at us. It’s not their fault that we inflict this pain to ourselves, this modern-day slavery of P2,000 ($35.70 per month)!
As for the rich countries, they have no qualms about selling their bakery equipment from Norway or Netherlands at their own prices which includes their hyperwage labor.
Will the price of world commodities be divided into multiples (divide by 10 or divide by 15) to suit the purchasing power of the Third World? No way. They will probably shave off 10%. But they will never sell it for 10 centavos to the dollar.
Since Intel or AMD or some CPU maker control the world market, they can charge their own prices which already factor in their hyperwage labor.
In short, the rich countries are operating under a cost-plus approach. Their selling prices are based on their costs plus their profit. It does not matter if their labor wages are extremely high. They simply add on their profits to whatever costs they incur.
Oil
In a previous chapter, I have already discussed oil, the perfect commodity for comparison because every country’s economy is oil-based because oil is still the cheapest, abundant source of energy.
Will the selling price of oil in Third World countries be cheaper because the latter’s labor is very cheap?
No way.
Every price in the country, including the vegetables from Baguio, are set to the world market price of oil, and that is an economic reality. Its price ceiling and its consequent profitability depends on the purchasing power of the people.
In fact, one reader told me, in financial models for their foreign company in the Philippines, labor accounts for only 5% of their cost.
I dare say, even if labor was 45% of cost, consumers will still buy your products if they have the purchasing power.
If the people have no purchasing power, they will not buy your product. If nobody buys your product, you cannot maintain your store, you will dismiss your employees, your employees will not buy other products, and there is a downward spiral in the economy.
Affordability
I find it amusing to realize that in debunking Hyperwage Theory, the PhDs in economics find it abnormal for me to propose that the price of Microsoft Windows software ($100) should not require three months of labor by a domestic helper who earns only $35 a month. Why is my proposal abnormal?
I even find it amusing that they use wrong economics and logic to debunk the theory, and yet, in the same breath, finds it a normal state of events that a maid has to work for four months for a DVD game software.
Guys, sorry, but I simply can’t accept the status quo. The status quo is rotten and your questionable economic and labor policy is maintaining it. Why do you call yourselves poverty experts when you think that a maid in the Philippines should receive lower than in France? Because we are Third class citizens of this world? Funny.
The attacks on Hyperwage are three-pronged: hyperinflation, unemployment, and unaffordability.
Sources and sink
Let me tackle affordability from various angles.
First, as a businessman, what is your greater worry? That your commodity is priced high, or that your customers have no money to buy it?
You may say, those are the two sides of the same coin. Actually, they’re not. High price on one hand and low purchasing power on the other are two different ideas.
Take the case of a diamond jeweler. The price of diamond is dictated by the world market. Question: How many of your customers are maids? Answer: Zero.
Now, if the maids were paid P20,000, can they now afford to buy diamonds? Yes. Will you have a bigger market? Yes. Will you have bigger income? Yes. Will you have bigger taxes? Yes. Will your government have a bigger income? Yes. Can you afford higher salaries for your jewelry business? Yes. Finally, can you afford hyperwage? Yes.
I have a friend who is a jeweler. He attends many international jewelry fairs in Hong Kong or in Italy, for example. He talks about his cost of operations and how to improve profitability. Since he knows my stand on hyperwage, he tells me he cannot afford it.
I said, “But there are Germans and French in those jewelry fairs, right? Germany and France have one of the highest labor costs in the world, are they losing deals because of their labor cost? Or are you missing out on the deals because you cannot give the right quality and design?”
He even confirmed that he landed some deals because the clients liked their designs, not because their jewelries are cheap. And he bought German equipment which he used in his factory in the Philippines.
This equipment introduced productivity, speed and consistent quality that he had to transfer one of his craftsmen to another function.
On one occasion, when an office assistant resigned, he had the chance to implement hyperwage. He gave two options to the remaining assistant: Do you want me to hire a replacement for your colleague, or should I add her salary to yours, but you must do both jobs effectively?
The employee chose the latter option. The result? Her salary doubled, there were no more backlogs, she came earlier than usual, and left later than usual. And she was happy in her job. That is one result of hyperwage.
Of course, I don’t have to point out that Hyperwage also solves software and video piracy. If software doesn’t cost three months wages of a maid, people will buy them. See what I mean by non-economic benefits? You never thought that Hyperwage is the solution to intellectual property protection, did you?
Small business
The economists always remind us that 95% of our businesses are small businesses. With Hyperwage, small businesses will be wiped out, there will be unemployment, inflation, and other economic disasters.
This is one of the funniest arguments I’ve ever heard from economists and businessmen.
Well, I’ve eaten baguette in the street-side cafes in hyperwage Paris and it was a small business. I’ve bought the Financial Times in a London newsstand and it was a small business. I’ve tasted Magnum ice cream from a deli in Zurich and it was a small business. I bought smoked salmon in Vancouver and it was a small business. I’ve partaken wonton noodle soup in Singapore and it was a small business. I’ve tasted the sausages in Frankfurt and it was a small business.
I mean, come on, guys, do you really expect me to believe that small businesses will close because people have a newfound purchasing power? That’s absurd.
There are small businesses in hyperwage countries, and there is no reason to believe that there will be none in Third World countries which are going to implement Hyperwage. In fact, Hyperwage Theory predicts the opposite: There will be more businesses big and small.
I will continue my argument in favor of affordability in the coming installments. But at this stage, I would like to raise the point that it is not logical for economists or businessmen to say that Hyperwage will result in closures. Why, are there no small businesses in Japan or Finland?
Secret of wealth
Before I go, I would like to remind you that Hyperwage Theory is not merely a theory. Hyperwage is reality. All First World countries are hyperwage countries and this is not merely a statistical coincidence. For me, it is a cause-and-effect situation.
Hyperwage exists in economic reality. What I am doing is simply to explain to economists using their own tools the secret of success of the First World countries because, unfortunately, the First World do not even realize why it is successful. The secret of a wealthy nation is the true valuation of its labor.
Right now, I am using your own tools and principles to explain to you what you should have understood right away.
In fact, when I said the solution to Third World poverty is to raise the minimum wage to P20,000 per month, you should have understood immediately the ramifications and consequences of this statement.
Supposedly, I don’t have to explain to you in many chapters the implications of the theory.
Hyperwage Theory is simply an integration of ideas that explains the secret of the wealth of nations. This theory is far different from Adam Smith and therefore strange to the economists.
But then, for the convoluted mind of the Street Strategist, Hyperwage Theory is rational, logical, direct and elegant.
(Thads Bentulan, Sept. 29, 2005)
* * * * * ∯ * * * * *
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To join the mailing list send an email to streetstrategist-subscribe@googlegroups.com
A PDF copy of the entire book on Hyperwage Theory is available currently for free.
Send an email to streetstrategist@gmail.com for the latest edition.
Want to order other books by Thads Bentulan?
The Misadventures of the Street Strategist Vol 1 to 13
..................................................................................................
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