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JuicyLesson #121: More on the distribution of wealth and free trade

More on the Distribution of Wealth and Globalization (Free Trade)

We have been talking about the fact that wealth in the world world is very unequally distributed to the extent that the wealthiest eighty-five (85) people have as much wealth as the poorest half of the world’s population, or a total of 3.5 billion people. It is also important to realize that the lower half of that top 1% has far less than those in the top half; in fact, both wealth and income are super-concentrated in the top 0.1%, which is just one in a thousand. (To get an idea of the differences, take a look at an insider account by a long-time investment manager who works for the well-to-do and very rich. It nicely explains what the different levels have — and how they got it. Also, David Cay Johnston (2011) has written a column about the differences among the top 1%, based on 2009 IRS information.)

Year Bottom 99% Top 1%
1922 63.3% 36.7%
1929 55.8% 44.2%
1933 66.7% 33.3%
1939 63.6% 36.4%
1945 70.2% 29.8%
1949 72.9% 27.1%
1953 68.8% 31.2%
1962 68.2% 31.8%
1965 65.6% 34.4%
1969 68.9% 31.1%
1972 70.9% 29.1%
1976 80.1% 19.9%
1979 79.5% 20.5%
1981 75.2% 24.8%
1983 69.1% 30.9%
1986 68.1% 31.9%
1989 64.3% 35.7%
1992 62.8% 37.2%
1995 61.5% 38.5%
1998 61.9% 38.1%
2001 66.6% 33.4%
2004 65.7% 34.3%
2007 65.4% 34.6%
2010 64.6% 35.4%

Sources: 1922-1989 data from Wolff (1996), 1992-2010 data from Wolff (2012)[2].

According to the data in this chart, in the year 2010, the richest one percent of the global population controlled about 35% of the total world wealth while the rest of the world’s people ninety-nine percent had about 65% of the world’s total wealth. Just incredible!

As far as the impact of Free Trade on the job market in Canada is concerned, the old adage that tariffs are necessary to raise the cost of goods coming into the country so that workers here still maintain the domestic market for which they produce is undercut by at least two arguments. First where Canada cannot compete with the U.S.A. in the production of steel for example due to American absolute [1] or comparative advantage[2] then Canada should get out of steel production and put its capital, natural and human resources into the production of a good in which we Canadians enjoy an absolute advantage over the U.S., pulp and paper for instance. In this case, trade theory dictates the following: Canada should export pulp and paper to the U.S. and import steel while obviously the United States should export steel to and import pulp and paper from Canada. In this way, production in both countries is more efficient than if both nations put resources into the production of both pulp and paper and steel. Less resources are wasted this way than if both countries produced steel and pulp and paper.**

[1]Absolute advantage occurs when a country A produces a good, cars for example, more cheaply than country B does while, at the same time country B produces aluminium more cheaply than country A; in this case, country A is said to have absolute advantage in the production of cars while country B has absolute advantage in the production of aluminum. Therefore, in this situation, country A should export cars to and import aluminum from country B. By the same logic, country B should export aluminum to and import cars from country B.

[2]Comparative advantage occurs if country A had an absolute advantage in the production of any and all goods under consideration. Thus country A is better in both goods, the question then becomes in which good is Country A more better; it is in the production of that good that country A is said to enjoy comparative advantage. Consider the data in the following chart:

Country Petrochemicals (1000’s) Trucks

Canada. 20. 30,000

USA. 30. 60,000

In order to prove the point about comparative and absolute advantage, we have to work under the following assumption: that the value of resources – human, capital and natural – are equal in both countries for each of the goods under consideration. That is that the USA and Canada use the same value of resources to produce 30,000 petrochemical products in the USA and 20,000 petrochemical goods in Canada. The same is true with the production of trucks in the two countries, in other words, it takes Canada the same value to produce 30,000 trucks cf. to the value of resources used by the United States to produce 60,000 vehicles. By simple math, (Quantity 2 minus Quantity 1) divided by Quantity 1 or (30 minus 20) divided by 20 or 10 divided by 20 = .5 or 50%. By the same logic, we see that the Americans are 100% more efficient than Canada in truck production.

Therefore we say that the Americans enjoy ABSOLUTE advantage in the production of both trucks and petrochemicals and have a COMPARATIVE advantage in the production of trucks. Therefore, according to trade theory, the US should export trucks to and import petrochemicals from Canada. On the other hand, Canada should export petrochemicals to and import trucks, in which the Americans enjoy a COMPARATIVE advantage, from the U.S.A. In that way less resources are needed and in the situation of resource scarcity which makes economics, the science of scarcity and choice necessary, this saving of resources is an important consideration.

Secondly, using the aforementioned steel vs. pulp and paper example*, Canadian jobs, in theory, would not be lost in a tariff-free environment due to the fact that steel workers would be transferred to the pulp and paper sector to meet the demand for Canadian pulp and paper while American pulp and paper workers would be transferred to the steel sector to meet the increased demand there. Let me repeat that this is theory and it supposedly works in both countries for both steel and pulp and paper production.

Just because Dr. Thompson lived and thrived in the sixties and seventies, does not make what he is saying irrelevant to our lives today. Workers, for the most part are still exploited and taken advantage of by bosses; the common folk still get ripped off at every turn. Power and wealth are still as concentrated as ever and bourgeois politicians still make laws to help themselves and their friends.

That’s it for now.

I wish you peace. Hi Hilton. You’re the man, man!

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