In Marxian economics, the value of a good is an objective thing. Goods are worth the value of the labor used to produce them. Therefore, when two goods are exchanged between parties, the only fair price or rate of exchange is one that reflects the value of the labor in each. If it takes an hour of labor to produce a yard of cloth and 2 hours labor to produce a bottle of wine, the only fair rate of exchange is two yards of cloth for 1 bottle of wine or a price price of cloth/yard that is 1/2 the price of wine/bottle. This is because, only at the 1/2 ratio of exchange or prices will equal amounts of labor be exchanged for one another.
If, however, cloth and wine are traded at a different rate or relative price, say 1 yard of cloth for 1 bottle of wine, then the exchange is unequal because one hour of labor from the cloth maker is being exchanged for 2 hours of labor from the winemaker. Such an unequal exchange is not only unfair, but it also exploits the winemaker by taking one hour of his/her labor and giving it to the cloth maker without compensation. In Marxian terms, the exchange will alienate the value of one hour of labor from the winemaker.
From this point of view, much of international trade is based on unequal exchange. When workers in one nation are paid lower wages than workers in another, the low wage country ends up trading goods that required more labor to produce than was used to produce the goods the country receives in exchange. Such trade exploits the low wage workers to benefit the high wage workers. Of course, if you throw capital into the mix, the exchange of labor intensive for capital intensive goods means that lots of labor (in the form of labor intensive goods) is being exchanged for less labor (in the form of the capital intensive goods). This exploits the workers in the labor abundant country to benefit owners of capital (better known as capitalists) in the capital abundant country.
The concept of unequal exchange is simple and appeals to an intuitive sense of, and desire for, fairness that is at the heart of socialism. However, it is misguided from the point of view of neoclassical economic theory which conceives of voluntary exchange as mutually beneficial and value producing. From this point of view, the object of exchange is not to trade equal value for value, but for both parties to trade something of lessor value for something of higher value.
Of course, this is only possible if we allow for individuals to have differing values for goods (i.e., a subjective concept of value), or to face different trade offs between producing one good or another (i.e., differing opportunity costs). An example of the first case would be two kids trading an apple for a banana based on the fact that the kid with the apple likes bananas more than apples, and the kid with the banana like apples more than bananas. By trading one for the other, they both give up something they like less for something they like more. Through this arbitrage, both parties are better off as a result of the trade precisely because they have differing subjective values for the two goods and this difference creates the opportunity for mutually beneficial trade.
David Ricardo's hypothetical scenario of trade in wine and cloth between England and Portugal is an example of the second case. In this scenario, England and Portugal can both produce wine and cloth, but they require differing amounts of labor to produce a unit of either good. The table below lists the hypothetical amount of labor needed to make cloth and wine in England and Portugal.
Labor
Required to Produce
Cloth |
Labor
Required to Produce
Wine |
|
England
|
100
|
120
|
Portugal
|
90
|
80
|
According to the Theory of Comparative Advantage, both nations would be better off if they specialize in the production of the good for which they have the lower opportunity cost. In England, the opportunity cost of producing one unit of cloth is the amount of wine it could have produced if it used the labor of the 100 workers needed to make the cloth to make wine instead. Given that it takes 120 workers to make a unit of wine, England's opportunity costs for producing one unit of cloth is 100/120 or 0.83 units of wine. Applying the same logic to Portugal, we see that its opportunity cost for making wine is 90/80 or 1.13 units of wine. If we further apply this logic to the production of wine, we see that England's opportunity cost for making one unit of wine is 120/100 or 1.2 units of cloth, and Portugal's opportunity cost of producing one unit of wine is 80/90 or 0.88 units of cloth. So England should specialize in producing cloth, Portugal in producing wine, and they should trade the goods between them.
However, according to the Marxian concept of equal exchange, this exchange will only be fair or non-exploitative if the rate of exchange of cloth for wine is set so that equal labor is traded for equal labor. Since it takes 100 workers to make one unit of cloth in England and 80 workers to make one unit of wine in Portugal, the Marxian equal exchange rate of England cloth for Portuguese wine would be 100/80 or 1.25 wine for 1 cloth.
But does it make any sense for the two countries to trade cloth and wine at this rate (or the relative price it implies)? England would be getting 1.25 units of wine in exchange for 1 cloth, which requires the labor of 100 workers to produce. Since those 100 worker only produce 0.83 wine, England clearly benefits from getting 1.25 wine in exchange for 1 cloth. But, it is a different story for Portugal. It must give 1.25 wine, which requires the labor of 100 workers, in exchange for 1 cloth, which would only require 90 workers to produce for itself. Therefore, Portugal would be exchanging the work of 100 workers for something that it could have produced with 90. Thus, trade based on the Marxian concept of equal exchange would make Portugal worse off than if it didn't trade at all.
In broader terms, the Marxian analysis (and the concept of fairness in general) focuses on what one party gets out of the exchange versus what the other party gets. Neoclassical economics focuses on what each party can get by trading as opposed to what what each one could do for themselves if they didn't trade . That is to say, the question of whether England is getting more or less out trade than Portugal is irrelevant. What matters is whether England and Portugal are both getting more out of trading with each other than they would by not doing so. This focuses the analysis on the choices each party makes over the alternatives that are actually available to them rather than comparing their situation to some ideal scenario.
Of course, many people will make fairness arguments without consciously taking a socialist stance or knowing the first thing about Marxian micro-economics. For instance, in the mid 1990s their was a big controversy over Nike's operations in Vietnam as epitomized by the NYT article. A common meme in the exploding debate involved comparisons of Nike's profit and Michael Jordan's endorsement fees with the wages being paid to Vietnamese workers. The staggering disproportion seemed to speak for itself but did it speak to the most important issue?
From the perspective of neoclassical economics the most important issue is not whether an NBA superstar gets paid more than a Vietnamese factory worker, but whether the Vietnamese factory worker is better off working in the Nike plant than not doing so. When researchers looked at this issue, they found that workers in plants run by multi-nationals were paid wages that run an average of 10% above the local wage rate and that US affiliated multinationals paid a premium of 40% in high income countries and up to 100% in low-income countries above the local market wage. Also, in 2000, Vietnamese workers in foreign owned plants were found to be in the top 20% of the population in terms of household expenditures. So, from this point of view, the Vietnamese workers were better off working for Nike than working in the other jobs available to them.
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