Emmanuel Arghiri Emmanuel’s theory of unequal exchange is in complete contrast to the main traditions of Marxist thought on imperialism and the world economy, and is equally distant from conventional non-Marxist theories. It is a genuinely original contribution. Marxists have generally identified the mainspring of imperialism either with the development of monopoly (in exchange or in production) or with the expansion of capitalism at the expense of pre-capitalist modes of production. Emmanuel’s break with these traditions is indicated by the subtitle of his book: ‘a study of the imperialism of trade’. He claimed that free trade between two wholly capitalist countries can still be ‘unequal’, and that this unequal exchange is the foundation of the massive inequalities that exist in the world economy. His explanation does not rest on any monopoly by capitalist firms, nor does it involve any exercise of state power in international relations. Note that ‘imperialism’, in this context, refers to exploitation and inequality, but not (as it usually does) to military or political domination of some countries by others. Emmanuel extended Marx’s theory of ‘prices of production’ to the determination of international prices, making the key assumption that goods and capital are internationally mobile, while labour is not, so prices and profit rates are equalized internationally by competition, but wages are not. This seems at least a reasonable starting point. I shall argue that Emmanuel’s theory provides a potentially useful component of a theory of the world economy, but cannot be regarded as complete in itself or as a complete account of the way the world system works. EMMANUEL 201 The term ‘unequal exchange’ is not new, and has often been used by other writers, usually very loosely. Unequal exchange, so called, may be ascribed to monopoly pricing, to ‘transfer prices’ used to evade tax, and so on. Alternatively, it may be argued, following Marx, that high productivity labour in an advanced country produces more ‘value’ (in the terms of the labour theory of value) than lower productivity labour in more backward areas. The product of an hour’s labour in an advanced country will then exchange for the product of a great deal more labour in an underdeveloped country. In this case ‘unequal exchange’ is merely a reflection of divergences in productivity that have other causes. Mandel (1975, ch. 11) seems to combine all of these arguments at once in an account which is both eclectic and lacking in rigour. Roemer (1982: 55-60) presented a model in which returns to capital are equalized, even without capital mobility, so countries with more capital have higher average incomes. Lewis (1969) is more interesting, and will be discussed briefly at the end of this chapter. Emmanuel’s theory is set out in his book Unequal Exchange (1972, cited below as UE), which also contains, in the edition cited, a debate between Emmanuel and Bettelheim. See also Amin (1977, part IV) and Gibson (1980) for discussion of Emmanuel’s theory. An article by Emmanuel (1974), which is really a contribution to a different debate, elaborates some of his views, especially on demand and capitalist development. His more recent work has taken a rather different direction (e.g. Emmanuel 1982); I shall concentrate on Unequal Exchange because of the influence it has had. 9.1 UNEQUAL EXCHANGE The statement of the theory in the body of Emmanuel’s book was modelled on Marx’s solution to the transformation problem, so international exchange was presented first in terms of labour values, which were then ‘transformed’ into prices of production. Following Bettelheim’s criticisms of some of his statements (from a more orthodox Marxist standpoint), Emmanuel counter-attacked by elaborating a consistent treatment of prices of production rather than retreating under fire. I will, therefore, present the theory in its more developed form (as set out in Appendix V to the English MARXIST THEORIES OF IMPERIALISM 202 edition) without using labour values at all. In this section the presentation will be informal; for a more formal statement, see the appendix to this chapter. Emmanuel defined a factor of production as ‘an established claim to a primary share in society’s economic product’. Criticized by Bettelheim for looking at production only in terms of monetary magnitudes and not at the material basis of these magnitudes, he replied that the social relations of production are precisely relations of property ownership, of appropriation, and hence of claims to a share of the product. In a capitalist economy, there are two factors (two classes). Mobility of labour tends to equalize wages between industries, while competition between capitals (mobility of capital) tends to equalize profit rates. Prices of production (equilibrium prices) are thus made up of money costs (wage costs, materials, depreciation of fixed capital) plus a profit margin sufficient to give the general rate of profit on the capital invested. Prices and the rate of profit can only be determined simultaneously, since the prices of materials and capital goods enter as costs, while profit must be calculated on the capital required, which depends on the price of capital goods. This is a standard problem in Marxist economics, and the algebra is now well understood (see UE, Appendix V or any modern text on Marxist economics, e.g. Howard and King 1985). The first complete solution was by Bortkiewitz: Emmanuel’s solution is modelled on Sraffa (1960). The formal statement is in the appendix to this chapter. In Emmanuel’s story, as in Marx’s, the real wage is assumed to be fixed. I will discuss the determinants of wages later, in section 9.2. In simple terms we can think of the profit rate as determined by the gap between what is produced and the fixed wage level, together with the methods of production used and hence the capital intensity of production, and we can think of prices as determined by costs (of which wages are a major component) plus profits (determined in the way just described). Turning to the world economy, Emmanuel made the key assumption that capital is mobile internationally, so a single rate of profit is formed at the world level, while labour is not mobile between countries, so workers in different countries are not (directly) in competition with each other, and different national levels of wages may be formed. Products are assumed, at this stage EMMANUEL 203 in the argument, to be freely traded (transport costs are ignored) so a single set of prices of production exists for the whole world. If two countries (or groups of countries) have different wage levels there are two ways in which the profit rate can be the same in both, without any product having two different prices (free trade and competition rule out multiple prices for the same good). First, if they produce the same products, profits can only be equalized if the high-wage country has higher productivity, so costs are the same (or, more strictly, so labour and other costs plus the general profit rate add up to the same price of production). In this case, differences in wages correspond to, and are explained by, productivity differences. Although Emmanuel accepted that this explanation applies to some goods, he did not treat it as the normal case, on the grounds that there is an international division of labour in which countries (or groups of countries, advanced and underdeveloped) specialize in different goods. The second possibility is the one in which ‘unequal exchange’ can occur. The two countries may produce wholly different commodities, so they are not in direct competition with each other. If one good is produced only in the high-wage country and the other only in the low-wage country, the price of each must incorporate wage costs, so their prices reflect the differences in wages. To put it simply, the products of the high-wage country are dearer and the products of the low-wage country cheaper than they would have been if wages were the same in the two countries; this is what Emmanuel calls unequal exchange. Two points should be noted here for later discussion. First, it is assumed that wages are given independently of prices: ‘wages are the independent variable’, so wage differences are the cause of unequal exchange. Second, there must be some barrier that prevents all production moving to the low-wage country and enjoying lower costs of production. The theory thus assumes a predetermined pattern of international specialization. Exchange is ‘unequal’ because the low-wage country has to pay more for its imports than it would if wages were the same in both countries, without getting higher prices for its own exports. It thus has to export more to get a given amount of imports. Correspondingly, the high-wage country gets more imports in return for a given amount of exports. Whether the actual amounts MARXIST THEORIES OF IMPERIALISM 204 traded would stay the same at different prices is another matter; the argument is concerned only with the terms of trade. To see how the theory works, I will take a very simple and unrealistic numerical example, to illustrate the principles involved. I have deliberately set it up so that the two countries are as alike as possible. Suppose there are two countries (A and B) and two goods (1 and 2). Country A produces only good 1, while country B produces only good 2. I will compare two cases: with wages the same in the two countries, and with wages higher in A. I assume that the production of five units of good 1 (in country A) requires one unit of labour, together with inputs of one unit of good 1 itself and one unit of good 2, as means of production, at the beginning of the period. For good 2 (in country B) conditions of production are exactly the same; five units are produced by one unit of labour and one of each commodity. Wages are assumed to be fixed in real terms. In the first case, with wages the same in A and B, each worker must be paid enough, at the beginning of the year, to buy one unit of good 1 and one unit of good 2. For each worker employed, a capitalist must lay out, at the beginning of the year, enough money to buy one unit of each good to use as means of production, plus a wage enough to buy one unit of each good. To calculate profits, we must know the money costs and money receipts. We cannot, in general, calculate costs without knowing the prices of the goods, and we cannot calculate the price without knowing the costs and profit. What we must do is to find both simultaneously. (In this case we can get to the rate of profit directly since it is obvious that the two goods must sell for the same price; this is not so in general.) In this particular case, all costs are in the form of capital outlays at the beginning of the year, so annual costs are the same as capital employed. We can write: selling price = cost + profit, but rate of profit = profit/capital = profit/costs; so, writing r for the rate of profit: selling price = (1+r) costs. EMMANUEL 205 The price equations follow directly, given that the rate of profit must be the same in both countries: 5p1 = (1 + r) (2p1 + 2p2) 5p2 = (1 + r) (2p1 + 2p2) where p1 is the price of good 1, and p2 the price of good 2. From these equations, it follows immediately that p1 = p2 and r = 0.25 or 25 per cent. The actual levels of p1 and p2 cannot be determined, but this does not matter; it is only the terms of exchange that count, together with the real purchasing power of the wage, already fixed by assumption. Now suppose that the wage rate in country A goes up, so it will now buy one and a half units of each commodity, while the wage in B is enough to buy one unit of each, as before. Following exactly the same procedure, the price equations can be set out again: 5p1 = (1 + r) (2.5p1 + 2.5p2) 5p2 = (1 + r) (2p1 + 2p2) The rate of profit, r, falls to 1/9 or 11.1 per cent (add the equations and (p1 + p2) cancels out), and relative prices follow; p1 = 1.25p2. The low-wage country, B, now has to export 1.25 units of its export, good 2, in order to buy one unit of its import, good 1. Its ‘terms of trade’ (export price divided by import price) have worsened by 20 per cent. Since real wages have gone up, if only in one country, and productivity is still the same, the profit rate is reduced. Nothing has been said about the amounts produced and traded; to say anything about this would require additional assumptions. The theory of unequal exchange is, in the first instance, a theory of prices, of the terms of exchange, which depend on costs per unit of each product and on the wage rate for a unit of labour-power. As an illustration, I will set out a possible outcome, in terms of production, consumption, and trade, of the example of pricing given above. Suppose that goods 1 and 2 are always used in fixed proportions, one unit of good 1 to one of good 2, both as means of production, and when they are bought as consumer goods by workers or by capitalists, regardless of their relative price, and that all wages and profits are spent on consumer goods with no net investment. Both assumptions are very restrictive; more realistic MARXIST THEORIES OF IMPERIALISM 206 cases will be discussed later. Suppose that 100 workers are employed in each country. With wages equal, as in the first set of price equations, we get the pattern of production and consumption set out in table 9.1. In constructing the table, I have assumed that profits are consumed in the country in which they originate. With free mobility of capital this need not be so, since profits in one country may accrue to capitalists elsewhere, but this is a rather different matter from unequal exchange, and will be discussed later. Table 9.1 Sources and uses of goods; equal wages Notes: (1) Sources of goods (production, imports) shown as +, uses as − (2) Assumptions given in text Table 9.2 Sources and uses of goods; wages increased in A Notes as for table 9.1 Now compare table 9.1 with the situation where wages are higher in country A, as in the second set of price equations above. The results are given in table 9.2. Since country A’s product now Output Used as input Used by workers Used by capitalists Net imports Country A Good 1 500 −100 −100 −50 −250 Good 2 0 −100 −100 −50 +250 Country B Good 1 0 −100 −100 −50 +250 Good 2 500 −100 −100 −50 −250 Output Used as input Used by workers Used by capitalists Net imports Country A Good 1 500 −100 −150 −27.78 −222.22 Good 2 0 −100 −150 −27.78 +277.78 Country B Good 1 0 −100 −100 −22.22 +222.22 Good 2 500 −100 −100 −22.22 −277.78 EMMANUEL 207 exchanges at a higher price, consumption in country A can be higher without any increase in production and productivity. Instead of importing 250 units of good 2 in exchange for 250 units of good 1, they import 277.78 units and only export 222.22. Although wages have gone up in A and not B, the total profit in country A now exceeds that in B, where they were previously equal, because the rate of profit is equalized, and the capital advanced is increased in A by the wage increase (remember that wages are paid in advance, so the capitalist expects profits on the advance of wages). Before leaving the example, consider how the cases shown in the tables would be recorded in conventional national income measurements. These figures are normally shown in money terms, so let the price of good 2 be fixed at $1. In the first case each country would have a gross product of $500, and a net product (output – replacement) of $300 ($500 − $200). In the second case, country A’s gross product is valued at $625 (500 units at $1.25) and its net product (net national income) at $400 ($624 − $225), while country B’s gross product is still $500 and net product $275. Just looking at national income figures, therefore, gives the impression that the high wages in country A are justified by a higher level of productivity, but this higher ‘productivity’ is an illusion produced by the prices at which the output is valued and is a result, not a cause, of the higher wages. Physical productivity is, of course, the same before and after the wage increase. The ‘prices of production’ calculated in the example are equilibrium prices, determined by the equilibrium condition that the profit rate should be equalized. Actual prices fluctuate around these levels, but always tend back towards them because whenever the price of (say) good 1 is above the equilibrium level, profits will be higher in country A than country B, and capital will flow into A, expanding supply and pushing the price down. An objection to the theory that will occur to many economists is that a wage increase will lead to a balance of payments deficit, and hence to a devaluation of the currency of the country concerned. However, exchange rate changes make no difference, because of the key assumption that wages are fixed in real terms, as a given quantity of commodities. A devaluation can only affect equilibrium prices if wages are fixed in money terms, and can be reduced in real terms by reducing the value of the currency. As for the balance of payments, a deficit on the current account can only arise if domestic MARXIST THEORIES OF IMPERIALISM 208 investment is greater than domestic saving but, with freely mobile capital, any excess of investment over saving is financed by an inflow of capital, and any current account deficit is matched by a capital account surplus. To give some impression of what this theory might mean in reality, consider an example given by Emmanuel (UE: 338, 367-8; I have made some of the calculations more explicit). His critics had pointed out that imports into the advanced countries from the Third World amounted to $25 billion (in 1965), which was only 2.5 per cent of the advanced countries’ national income of about $1,000 billion. In reply he argued that if wages account for 50 per cent of the cost of these imports, and if wages in the Third World would have to increase by twenty times to bring them to the level of those in advanced countries, then the price of Third World exports would have to rise roughly tenfold (there would be repercussions on profits to take into account), to $250 billion, 25 per cent of the advanced countries’ national income, a very considerable amount. One can, of course, doubt whether anything like the same volume of trade would take place at these prices; Emmanuel’s argument is concerned only with prices, and not with the amount traded. Note that it does not matter what kind of goods are produced in the high-wage countries, so long as they do not face competition from low-wage producers. There is no presumption that high wage, high price goods are high technology products, or anything of the sort, though they might be. Emmanuel’s example is the price of timber: since wages in Sweden, Canada, and other softwood exporting countries have been high and rising, softwoods have sold at high and rising prices, while African hardwoods have not. 9.2 WAGES The key factor in Emmanuel’s theory of international prices is the difference in wages between advanced and underdeveloped countries, so an account of wage determination is needed. It is essential for wages to be independent of market forces, over the time span required to establish equilibrium prices, since wage costs could not underpin an equilibrium set of prices if they were themselves liable to fluctuate. This rules out any market theory of wages. The classical wage theory (Ricardo, Malthus), in which wages are EMMANUEL 209 determined by physical subsistence needs, would not help either, since there is no reason for these needs to differ markedly between countries. Instead, Emmanuel’s starring point was Marx’s famous, if rather cryptic, statement that the ‘quantity of commodities necessary for the worker’ contains an ‘historical and moral element’ (which may therefore differ between countries and over time), but ‘nevertheless, in a given country, at a given period . . . is also given’ (Capital I: 171). This can be interpreted as meaning that the real wage is very resistant to downward pressure in the short run, even over decades, since workers have adopted a certain pattern of life and entered into commitments which cannot easily be changed (the historical element). So, for example, the layout of cities may compel certain spending on transport, the physical character of the stock of housing may be such that it requires certain spending on maintenance, heating, and so on, if workers are to be able to function at all. The moral element can be read as a claim that once a certain standard of life has become the norm, there will be great resistance to changing it. The wage may fluctuate around this given standard of living according to market influences, but any fluctuations are too short-lived to be incorporated into it (hence wages are the independent variable). According to Emmanuel, ‘historical and moral’ factors operate relatively uniformly within each country, but not between different countries, so unequal exchange operates between countries. On a purely analytical level, his pricing model could just as well describe relations between highand low-wage industries in a single country. He still had to explain how the ‘historical and moral’ element changes over time and why it differs between countries. He argued that trades union pressure and political action can change the equilibrium wage by sustained action over a long period of time. Economic development does tend to raise wages, but not directly. Rather, economic development, by centralizing workers, creating needs for higher levels of skills and so on, makes conditions more favourable for trades union and political action to raise wages. Emmanuel also claimed that high wages are good for development, for reasons to be considered later, so a circle is set up in which relatively high wages lead (over a long period) to higher wages still, and so on. Emmanuel’s model thus divides economic forces into three groups which act over different time scales. In the short run, prices MARXIST THEORIES OF IMPERIALISM 210 and wages fluctuate around their equilibrium levels. In the longer run, equilibrium prices are determined in the way that has been described, while equilibrium wages are relatively fixed and act as the ‘independent variable’. Given an even longer time scale there is no equilibrium state, since the process is cumulative. Is this account of wage determination acceptable? The difficulty in forming a judgement is that although Emmanuel’s arguments are plausible enough, there are other theories that are equally plausible. The factors involved are so ill defined that it is difficult to settle the issue by using historical or empirical evidence; indeed, it is not clear that the theory has any real content at all, beyond acting as an excuse for treating wages as given. Suppose prices in international trade are systematically biased in favour of the high-wage countries and against the low-wage countries: why does it matter? In Emmanuel’s basic model, with products and capital freely mobile between countries, it is not clear that it matters at all. There are three classes: the working class in each country and a single capitalist class. It is clear that no distinct national capitalist classes with distinct interests can exist when capital is freely mobile between countries and a single profit rate is formed. If workers in one country succeed in raising their (equilibrium) wage, they do so at the expense of profits; this clearly follows from the idea (on which Emmanuel insists) that wages are the independent variable, so a wage increase in one country cannot reduce the (given) wage in the other. All that happens is that a wage increase anywhere harms capital on the world scale, and a wage reduction anywhere benefits capital. If capital were not freely mobile the effect would fall on the national capitalist class alone. Can we say that the high-wage country benefits as a country? Clearly not, since there is no national interest, but two diametrically opposed class interests. High wages benefit the workers, of course, but no one ever supposed otherwise. They are not gaining from unequal exchange but from high wages. 9.3 DEMAND AND DEVELOPMENT Emmanuel claimed that unequal exchange acts as the basis for a process of unequal development, on two different counts. First, capital is attracted to demand, so the high incomes generated by EMMANUEL 211 unequal exchange attract further investment, and start a cumulative process of development. Second, high wages lead to the use of capital-intensive methods of production, which raise productivity and promote development. The argument that demand attracts capital investment is clearly out of place in the models discussed so far, which assume free movement of goods and a predetermined pattern of specialization between countries. High incomes in a country as a result of high wages and unequal exchange may mean more demand, but this demand is just as likely to be demand for the products of the lowwage countries as for home-produced goods and, correspondingly, the low-wage country’s low level of demand will also be divided between both countries’ products. There is, in fact, one good reason to expect the opposite, that high wages and prices will repel capital. If the products of the high-wage country sell at high prices, as the theory requires, then this will generally mean that less will be sold, and, correspondingly, income and employment in the high-wage country will be reduced. The critical factor is the ‘elasticity of demand’ for the country’s products: the percentage fall in the quantity demanded when price increases by one per cent. If this is greater than one, then the fall in the quantity sold will outweigh the increase in prices, and total sales revenue will be lower. If it is less than one, then a price increase will lead to increased receipts and an increase in national income. In the numerical example of section 9.1, I assumed that demand was independent of price (elasticity of demand, zero) to get the result that a higher wage level corresponds to a higher level of national income and expenditure. There are complications (a change in output will also affect spending on imported means of production and, in addition, income changes will affect the composition of demand: increased demand for particular products from countries with increased income may not exactly offset reduced demand where income has decreased), but the basic principle should be clear. Price increases have a double effect: they increase income for each unit, but they reduce the number of units sold. The overall effect may go either way. Is anything then left of Emmanuel’s argument that high wages and prices generate increased demand which attracts capital? If we MARXIST THEORIES OF IMPERIALISM 212 accept his (implicit) assumption that high wage and price levels mean increased incomes, then his argument can be rescued by a simple change in the assumptions, a change implicit in his arguments. Suppose some goods are traded internationally but others are not. Non-traded goods include perishable and bulky goods, construction, and many services. Protective tariffs can also artificially prevent certain goods being traded which otherwise would be. In this case, high incomes in a country will mean high levels of demand for non-traded as well as traded goods. Since nontraded goods can only be produced locally, capital will flow into a high-wage country to meet this demand, generating more employment in these industries, more incomes and hence more demand. If, for example, half of income is spent on non-traded goods then each dollar of income from the production of traded goods will generate another dollar of income for producers of nontraded goods, taking the repercussions into account. This model, which Emmanuel did not make explicit, is reminiscent of a Keynesian foreign trade multiplier, or of the theory, in urban economics, of a city’s ‘economic base’ of ‘exports’. It is essential to the argument that each country should produce both traded and non-traded goods. Traded goods are necessary for unequal exchange to have something to bite on; you must trade to benefit from favourable terms of trade. Non-traded goods are essential to convert high incomes into an attraction to capital from outside. High prices reduce employment in the export industries by reducing the quantity sold, but the increased demand for nontraded goods may offset this. If, on the other hand, the fall in sales as a result of increased prices outweighs the increased income per unit, the mechanism works the other way round and multiplies the reduction in income and employment through a reduction in demand for non-traded goods. Non-traded goods must, of course, be produced by local labour. Their prices are determined in the same way as those of traded goods, so identical non-traded goods will have higher prices in highwage than in low-wage countries, since their prices incorporate higher wage costs. This introduces a complication, as Emmanuel realized. If real wages in one country are to be, say, twice those in another, then money wages (translated at current exchange rates) EMMANUEL 213 will have to diverge much more, perhaps by four or even ten times, since high wages and a high cost of living (high price of non-traded goods) go together. To put it another way, if productivity in nontraded goods is the same everywhere, and so is the rate of profit, then higher standards of living in one country compared with another can only come from a high purchasing power in terms of traded goods (whose prices are the same everywhere), so if the fraction of traded goods in workers’ consumption is rather low, it will require a large difference in money wages to generate a moderate difference in living standards. The divergence in money wages determines international prices, since capitalists’ production decisions are governed by money costs and not by what money wages will buy. Relatively moderate divergences in real wages may thus be the foundation for extreme inequality in exchange. In discussing the role of unequal exchange in creating local demand and attracting capital imports, I have assumed that demand depends on the total incomes generated locally. It is not clear that this is correct, since with international mobility of capital we cannot specify in advance where capital has come from, nor can we predict where profit incomes will be spent. Profits accruing to British capitalists from production in Africa may well be spent in the Bahamas. Workers, on the other hand, must clearly spend the main part of their wages in the locality where they are employed. Emmanuel, rightly, stressed the importance of wage incomes as generating a local demand which attracts capital. If the stress is laid on workers’ demand for consumer goods, however, the role of unequal exchange is altered. It is high wages, rather than unequal exchange as such, which create an enlarged market. The role of unequal exchange is to permit the equalization of profits between countries, so that the effect of high wages falls on profits everywhere, not just in the high-wage country. Without this equalization of profits, high-wage countries would be low-profit countries and could not attract capital. I should stress that the model built up in this section is mine rather than Emmanuel’s, though I think it embodies the essential points of Emmanuel’s arguments. I have tried to indicate the points taken directly from Emmanuel by linking his name clearly with them. MARXIST THEORIES OF IMPERIALISM 214 It is worth pausing to take a general look at the picture of the world economy built up in this section. It might appear to be an under-consumptionist model, in that development is made to depend on demand, and specifically on workers’ consumption demand, but it is not. There is no assumption that demand is lacking on a world scale. The question under discussion is: where does growth take place? With free mobility of capital between countries, the critical factor is the division of new investment between different locations. With a predetermined pattern of specialization between countries in the production of traded goods (which is essential to the theory, as presented so far) the scope for expansion is determined outside any given country, on the world scale. What the pricing mechanism of unequal exchange does, is to determine the terms on which a country participates in this world division of labour, and that, in turn, governs the scope for expansion in the nontraded goods sector. In this model, then, unequal exchange does not generate a cumulative growth of inequality between countries unless there is a cumulative growth in wage differentials. Emmanuel did indeed predict a cumulative enlargement of wage differentials, which turns out to be crucial to his whole argument: again his theory of wages emerges as the heart of his whole theory. 9.4 METHODS OF PRODUCTION The second main plank in Emmanuel’s argument linking unequal exchange to real development, is that high wages lead to a high organic composition of capital and also a high ‘organic composition of labour’. (The latter phrase is Emmanuel’s own invention.) Again, unequal exchange is important primarily as a mechanism that permits relatively high wages in one country without a corresponding relative depression of profits. As far as the organic composition of capital is concerned, the basic point is simple. Capitalists try to minimize costs (competition forces them to do so) by substituting means of production for labour when wages are high. More exactly, they use more of those means of production produced in low-wage countries, since those EMMANUEL 215 produced in the high-wage area itself will also be increased in price. The effect, therefore, is to reduce employment in the high-wage country in much the same way as substitution of lower-priced for higher-priced products does, and to reduce the attraction of capital to the production of non-traded goods in high-wage areas. It is not, then, at all clear why mechanization caused by wage increases should be beneficial to capitalist development in the country where the wage increase takes place. One can, of course, say that mechanization is development, and thus define the problem away (I don’t think Emmanuel quite did this, though he came close to it at times), but the real question is whether it provides a further impulse for sustained or cumulative development. Emmanuel’s answer is to argue that mechanization alters the social character of work and of production and thus lays the foundations for further wage increases. This links up both with his theory of wages (above) and with the organic composition of labour, to which I now turn. High wages, according to Emmanuel, bring about a high ‘organic composition of labour’. By this he means a high proportion of skilled workers, professionals, and so on, in the total labour force. Even if basic wage rates and the scale of wages were the same everywhere, areas with a large proportion of high paid skilled workers would have a higher level of per capita income and therefore larger markets. Why should there be a connection between high basic wage rates and a high proportion of skilled workers? A casual comparison of rich and poor countries suggests that these two factors do, in practice, go together, but what is needed is a relation of cause and effect, not just a statistical association which might well be the result of a some third factor. It is possible to argue that mechanization is the result of high wages (see above), and that mechanization, in turn, leads to the training and employment of engineers, technicians, and so on. However, Marx argued that mechanization tends to eliminate skills, and Braverman (1974) has reemphasized this aspect of Marx’s thinking. Braverman also argued that conventional classifications of skills are seriously misleading; farm workers and others usually classified as unskilled, are, in fact, highly skilled. This does not directly undermine Emmanuel’s position, since he was concerned with the proportion of socially recognized skills, MARXIST THEORIES OF IMPERIALISM 216 recognized by being paid above the rates for other workers. It does, however, suggest the possibility that certain skills are recognized and rewarded because they are particularly important in high-wage countries, while traditional craft skills may be badly rewarded precisely because they are practised in low-wage areas. If this is so, then a high or low organic composition of labour becomes merely the way high or low wages are manifested, rather than being a distinct result of high or low wage levels with its own distinct effects. I conclude that Emmanuel has not succeeded in demonstrating this part of his case. 9.5 CRITIQUE OF THE THEORY Before going on to the main criticisms of the theory, it is worth looking at some historical examples which Emmanuel presented to show how the theory can be elaborated to deal with the complexities of the real world. First, consider England in the period of the industrial revolution. England made a decisive advance during this time, laying the foundations of a century of dominance in the world economy. Real wages, however, did not rise to any substantial extent until after the major advances had been made, contrary to Emmanuel’s theory in which wages are the independent variable and high wages lead to development. Emmanuel claimed that wages in England were relatively high even before the industrial revolution got under way, and that the Corn Laws (import restrictions on grain), by raising the price of subsistence goods, raised money wages even though real wages failed to rise; the mechanism of unequal exchange depends, as we have seen, on relative levels of money wages. Instead of the workers being the beneficiaries of unequal exchanges, the benefits went to landowners in the form of a ‘super-rent’. This is an ingenious argument, but there are still criticisms to be made. First, the conquest of world markets for cotton textiles, which provided a crucial opportunity for industrialization, was the result of reduced prices, not high prices. The price cuts were made possible by technical advances, and while Emmanuel can say that the Corn Laws held prices higher than they would have been EMMANUEL 217 otherwise, this still leaves technical advance, increased productivity stemming from mechanized production, as the main driving force of the industrial revolution. High money wages followed the breakthrough in development: they did not cause it. Second, it is not clear how the ‘super-rent’ accruing to the landlords fuelled economic development. In so far as it was saved, and became a source of capital accumulation, it should not have contributed to a relative advance in England if capital were internationally mobile (which it was not, to any great extent, at that date, but which the theory requires). In so far as the extra revenue was spent, it created extra local demand, though how much of landlords’ extra revenue was spent on industrial products must be doubtful. A second example is the colonies of European settlement. Emmanuel argued that the USA, Canada and Australia became rich, while Latin American countries did not, mainly because the social conditions under which migration took place, together with the form of appropriation of land (which was relatively freely available in the USA, by comparison with Latin America), favoured high wages, and this set the mechanisms of unequal exchange into operation. South Africa, he argued, developed to a lesser extent precisely because of the availability of cheap local labour. Tariff protection, according to Emmanuel, played an essential role, but only in excluding imported goods, especially industrial products, from the enlarged market created by high wages. This argument is attractive, since the relative success of the USA, Canada and Australia is a major historical problem that calls out for a Marxist analysis. There must, however, be doubts about this explanation. The major export products of the USA, Canada and Australia were also produced in other parts of the world where wages were much lower. Where countries with different wage levels produce the same commodities and trade them on the world market, the high-wage country must have correspondingly higher levels of productivity (or lower profits). So, again, advances in productivity appear as the driving force, with high wages the result rather than the cause of development. High productivity in agriculture, in these cases, must have been at least partly the result of favourable natural conditions and plentiful land. In any case, US exports in the early stages were MARXIST THEORIES OF IMPERIALISM 218 quite largely produced by cheap (slave) labour in the plantations of the southern states. Emmanuel’s theory of unequal exchange can be viewed on two levels. One could argue simply that he has filled a gap in the Marxist analysis of the world economy by providing an analysis of the determination of international prices and by developing some of its consequences. This is my view of it, and it amounts to a substantial and important contribution. Emmanuel, however, made a stronger claim. Even if we agree that unequal exchange is only one of the mechanisms whereby value is transferred from one group of countries to another, and that its direct effects account for only a part of the difference in standards of living, I think it is possible to state that unequal exchange is the elementary transfer mechanism and that, as such, it enables the advanced countries to begin and regularly give new emphasis to that unevenness of development that sets in motion all the other mechanisms of exploitation and fully explains the way that wealth is distributed. (UE: 265) As Emmanuel knew, the disparities in standards of living and productivity between advanced and underdeveloped countries are far larger than can be explained by unequal exchange in itself. There are many commodities that are produced in both groups of countries and there are enormous differences in productivity between countries. We must therefore look at the connection between unequal exchange and the process of capitalist development in a broader sense. I have argued that Emmanuel’s arguments mainly come down to asserting that high wages are the key to development, and that unequal exchange is important in permitting wage disparities to exist without corresponding inverse differences in profit rates. High wages, we are told, promote development, first, by creating a larger local market and, second, by encouraging mechanization. There is considerable merit in both of these arguments, though it is not clear that either would explain a cumulative growth of inequality between countries. Cumulative divergence can, however, be EMMANUEL 219 explained if we follow Emmanuel in saying that wages will increase further in high-wage countries as an indirect, long delayed response to industrialization and that they will remain low in low-wage countries in the absence of this stimulus. His wage theory is therefore critical, and I have argued that it is plausible, but by no means beyond criticism. There is a further major criticism of Emmanuel’s model. I have presented it throughout in terms of a given division of activities between countries, or groups of countries, so high wages in a particular country mean a correspondingly high price of production for its products. The objection is very simple: why should the highwage, high-price products go on being produced in the high-wage countries? Given free mobility of capital between countries why should any investment go to the high-wage countries at all? For some products the answer is clear: oil will be extracted from Alaska, the North Sea and so on because it is a scarce natural resource which must be extracted where it is found. But the advanced countries specialize mainly in the products which are least tied to the location of natural resources: manufactured goods, especially high technology products whose raw material content is very small relative to total cost. Emmanuel was aware of this problem, and made several attempts to meet it. One attempt is to argue that there are so many different products that ‘a high wage country can never find itself in a position where it cannot discover a specialization that . . . is free from competition on the part of the low wage countries’. Thus India, having taken up textiles, displacing Britain, could now move into producing textile machinery, and so on, but ‘if India were to specialize one day in metallurgy and engineering . . . Britain would find no difficulty in taking up [textiles] again’ (UE: 145-6). This argument is simply wrong. Countries do not choose what to specialize in (and if they did, they could choose to do everything). In Emmanuel’s model, production is in the hands of competing capitalist enterprises, which are free to move capital between countries, and are driven by the blind forces of competition to produce wherever costs are lower. If they are free to produce all goods in low-wage countries, with productivity and other costs equal, then they will do so. Emmanuel met this problem in a rather MARXIST THEORIES OF IMPERIALISM 220 roundabout way: he recognized that, on his own arguments, the underdeveloped countries would do better if they only traded amongst them selves, and discussed whether they might decide, collectively, to do so, concluding that they would benefit by not trading with high-wage countries and, instead, producing the goods that they (collectively) import at the moment. However, he thought that this would involve setting up a state monopoly of foreign trade, while his theory assumes free competition. However, as I have argued above, the real problem is to explain why free competition itself should not produce the outcome without any need for a foreign trade monopoly (cf. Brewer 1985). Free competition clearly has not done so, but it remains to explain why. His strongest argument is presented almost as an afterthought. The rich countries are benefiting from an existing specialization. If production is to start up in poor countries, it will have to suffer the handicaps of an infant industry: ‘during this “acclimatization” period of the new branch, the ratio between the costs of the old producers and the new is not one that can be deduced from merely calculating the effect of the difference in wages’ (UE: 151). During this time, he says, the high-wage countries have time to ‘adjust their aim’. These points are still rather doubtful, since the establishment of ‘prices of production’, the theoretical basis of his whole argument, requires a sufficient timespan for the mobility of capital to take effect, and if it is difficult and costly for a poor country to take up a new branch of industry, it should be equally hard for a high-wage country. In practice, it is probable that the advanced countries have more flexible economic structures, but this implies a greater technological capacity, not simply a difference in wages. Emmanuel’s final argument does carry conviction: the period of adaptation when a new branch of industry is introduced into a country is ‘too long for the relatively short view taken by private capital, which under a competitive system is the exclusive agent of the introduction and establishment of the new branch’ (UE: 51). The foundation of the argument, then, comes down to this: to set up production in a new location takes longer than to alter the scale of production in areas where a line of business is well established. The period required is long enough for private capital to be unwilling to do the job, despite the profits it would reap at the end of the day. In EMMANUEL 221 theoretical terms, there is no doubt that this is a good argument (and a fairly well known argument too – it is the basic argument for tariffs to protect infant industries). It does not seem to me to be enough in itself to explain the pattern of development of the world economy over the last two centuries, though it may be an important part of the explanation. The first thing that has to be explained is the rapid development of areas of European settlement (the USA, Canada, etc.) in the nineteenth century. Private capital did flow into these areas, and established new industries there. Why were ‘infant industry’ problems overcome in some places, while in low-wage areas, where export production should have been very profitable, the problems of establishing new industries were insuperable? Second, in Emmanuel’s framework it does not matter what branches of production the high-wage countries specialize in since they will benefit from unequal exchange anyway. However, in practice, the rich countries are those which have a large, modern industrial sector, even where they export primary products as well, while the poor countries are those which have a large peasant or precapitalist agricultural sector. The ‘rich’ countries are also those that are ‘advanced’ in a more general sense. This has to be explained, and I do not believe that wage differences are the primary cause. Lewis’s version of unequal exchange (1969: 17-22) makes an interesting contrast with Emmanuel. In Lewis’s model, labour is the only cost, and all countries produce food, which is traded, and hence has a single world price. Underdeveloped countries have much lower productivity in food production than advanced countries, so they must have correspondingly lower wages. Other goods are produced only in advanced countries (manufactures) or only in underdeveloped countries (products of tropical agriculture), so their prices must reflect the different wage levels in those areas. Exchange in non-food goods is ‘unequal’ in a sense rather like Emmanuel’s, and for very much the same reasons; prices reflect wage differences. In Lewis’s model, however, wage differences stem from productivity differences in the industries which exist in both areas. MARXIST THEORIES OF IMPERIALISM 222 9.6 SUMMARY Emmanuel’s essential contribution was to extend the analysis of prices of production (equilibrium prices in a capitalist system) to the determination of international prices, when capital is mobile between countries and labour is not. His analysis hinges on the existence of a given, predetermined, pattern of international specialization. (In this, as in other aspects of his work, Emmanuel had much in common with dependency theorists.) The major weakness in Emmanuel’s arguments is that he was unable to explain why all capital does not flow into low-wage areas. He argued the contrary, that high wages attract capital (since markets are large) and induce the use of more mechanized methods of production. I have argued that this analysis can only be justified on rather special assumptions. APPENDIX TO CHAPTER 9 In this appendix, I will briefly set out the algebra of prices of production, first with a single wage rate (the usual case) and then with different wages in different sectors (assumed to represent different countries). I will not use Emmanuel’s notation (UE, appendix V), which is based on that of Sraffa and seems to me to be rather clumsy. Instead I will use my own notation based on that of Morishima (1973) which is now fairly widely used. I will also alter Emmanuel’s model in some technical matters to simplify the exposition. I assume that all means of production are used up in a single period of production, in order to avoid complications connected with depreciation. Emmanuel did not make this simplifying assumption, and disputed Sraffa’s treatment of depreciation (in a note added to the English edition). As far as I can see, Emmanuel’s method is simply a different way of writing Sraffa’s equations. I also assume that the purchasing power of the wage is given as a list of physical quantities of different goods. This is one alternative considered by Emmanuel, who favoured a model in which wages are fixed as a quantity of the ‘money commodity’. He noted that the commodities actually bought by workers depend on prices, so both of these devices are somewhat artificial. EMMANUEL 223 The basic problem is as follows: given the technical conditions of production and the real wage, find a set of prices such that the rate of profit is the same in all industries. First, define some notation. Number all goods, 1 to n. Let aij be the quantity of good i required, as means of production, to produce one unit of good j, and lj the amount of labour. These coefficients are assumed to be fixed. Let the wage per hour of labour be w, and the prices (as yet unknown), p1, p2, . . ., pn. The wage, we assume, must be sufficient to buy quantities of goods given as b1, b2, . . ., bn, so w = p1b1 + p2b2 + . . . + pnbn If, say, the ith good is used only as a means of production, then bi = 0, and if it is used only in consumption then aij = 0 for all j. Luxuries, goods which do not enter into the real wage and are not used as means of production, can be ignored. Wages are assumed to be advanced at the beginning of the period of production (following Marx and Emmanuel, but not Sraffa). Let r stand for the rate of profit (as yet unknown). We can now write down the equations. Capital advanced (per unit of product) is the same as the cost of production, because capital is simply the sum the capitalist has to lay out in order to produce. Cost plus profit must be equal to price, and the profit must equal the capital advanced multiplied by the general rate of profit, so: p1 = (p1a11 + . . . + pnan1 + wl1)(l + r) p2 = (p1a12 + . . . + pnan2 + wl2)(l + r) pn = (p1a1n + . . . + pnann + wln)(l + r) Incorporating the equation for the wage gives: p1 = [p1(a11 + b1l1) + . . . + pn(an1 + bnl1)](l + r) p2 = [p1(a12 + b1l2) + . . . + pn(an2 + bnl2)](l + r) pn = [p1(a1n + b1ln) + . . . + pn(ann + bnln)](l + r) There are n equations with n + 1 unknowns (n prices and the rate of profit). However, only relative prices matter, so we can fix the price of one good arbitrarily and solve for the remaining n − 1 prices MARXIST THEORIES OF IMPERIALISM 224 and the rate of profit. Counting equations is a rather primitive approach; any mathematician knows that it ensures neither that a solution will exist nor that it will be unique. Fortunately, it can be shown that prices will indeed be determinate and positive, if the real wage is set at a level that permits a profit to be made at all. The analysis can be written more compactly in matrix form. Let A be the matrix with elements (aij), B the real wage vector; L the vector of labour requirements and P the price vector. We can write the equations as P = P(A + BL) (l + r) where BL is the matrix (not the scalar) product. This is a (slightly) disguised form of a standard problem, finding the eigenvalues and corresponding eigenvectors of a matrix. Now for Emmanuel’s main subject: pricing with different wages in different sectors. Let wj be the wage in the jth sector, corresponding to a real wage vector Bj = (b1j, . . ., bnj). The equation for good j must now be written as pj = [p1(a1j + b1j lj) + . . . + pn(anj + bnjlj)](l + r) The structure of the equations is not changed in any essential way. There is, of course, no need to have a different wage in each sector; there could be just two wages for two countries. Notice that changed bij coefficients enter into the equations in much the same way as a change in methods of production. An increased real wage in any sector is equivalent to a cost-increasing change in technical coefficients. It can be shown (e.g. Himmelweit 1974) that any change which reduces costs (at the prices ruling before the change) will increase the rate of profit, and conversely that cost increases reduce the profit rate. Hence an increase in wages in any sector reduces profits, and low wages anywhere raise profits.