Would capital flight prevent a $40 minimum wage?

by Jehu

Here is a really amazing paradox raised by my last two posts, as posed by Citizencokane to my blog:

“I love this way of thinking, EXCEPT… I think you are leaving out a third option:  businesses close up shop wherever this minimum wage legislation goes into effect, and re-open for business wherever the legislation is not in effect.  Meanwhile, the businesses take every last piece of real physical capital with them out of the country that isn’t cemented down to a concrete foundation.

“It doesn’t matter if the minimum wage is $60/hour if there are no jobs.  “Fine,”  you might say, “If all business ceases, then workers will just have to physically restart production on their own terms in order to maintain their sheer physical survival.”  That would be all well and good, except when they show up at the factory, they will find a dead husk of a building with all of the useful capital equipment picked clean and transferred to China.

“That is, if the legal system allows companies to move their capital overseas.  What if we prevent that?  Well, the only way we are going to prevent that is with workers’ control of the harbors, the shipyards, the airports, and with the disbanding of police and military forces.  In other words, full revolution.

“So your plan of a $40/hour or $60/hour minimum wage is predicated upon one of two scenarios:

“1.  The entire world joins us on this.

“2.  We physically prevent capital from moving to places that don’t enact the minimum wage legislation and get prepared to take over worker control of workplaces when businesses inevitably close up shop due to insufficient profitability.

“Otherwise, if neither of these two conditions hold, you are just setting up the working class for impoverishment.”

As the writer points out should we raise wages and cut hours, the capitalists have not two but three options: First, they can go bankrupt. Second, the can increase productivity. But, third, they can move to another location.

As the writer notes, I did not discuss the last option: capital flight to avoid higher wages and shorter hours. But here is the weirdest paradox:

There is no region of the world market where capital can move more freely than the European Union. Yet, it is in the EU that we find the country with the highest wages and the shortest hours is also the industrial powerhouse. That country is, of course, Germany.

Below are two charts that compare the Germany’s hours and wages to Greece’s hours and wages:


Average hours of labor in 2014: Germany versus Greece (Source: OECD)

As can be seen from the above chart Germany has among the fewest hours of labor in the European Union, while Greece has among the highest. In the Chart below, you can see Germany has among the highest wages, while Greece has among the lowest — roughly half of Germany.


Average annual wages in 2014: Germany and Greece (Source: OECD)

How can we explain the fact that, although Citizencokane’s argument makes complete sense, it is contradicted by actual data in what is likely the freest trade zone in the world — with few, if any, impediments to the freest possible movement of capital and labor that has ever existed?

I certainly don’t quibble with the writers logic in this case, but I am also perplexed because the logic fails in the case of the EU.

There are several possible explanations for this: It could be that the writer is missing something; or investment is not does not depend on hours and wages; or capital does not move like we think it does.

In fact, I think it is a combination of the three: the writer is missing that capitalists don’t care about wages, hours of labor or where their facilities are located. They only care about profits.

Capital can move freely between countries of the EU; and Germany can have the shortest hours and highest wages,  yet it can still be the industrial powerhouse of Europe because, even with the highest wages and shortest hours,  it is the most productive of surplus value of any national capital. Moreover, as the most productive of surplus value of any national capital, Germany exports far more capital than it imports.

Oddly enough, it is not that Germany has discovered how to prevent capital flight within the single market; rather, Germany excels in capital export. Capital is always moving out of Germany and into the United States, the former socialist bloc countries, as well Spain, Portugal, Greece, etc.

On the one hand, we have capital flight from Germany. On the other hand, this capital flight have no impact whatsoever on Germany’s position. The fact is that the outflow of Germany’s capital is insignificant because the capital is not needed in Germany. Germany can only invest its newly created capital up to a certain point, then it has to export the remainder, because it cannot be employed productively at an average rate of profit, or because this capital can be employed more profitably elsewhere. What German capital loses by shorter hours and higher wages, it has more than made up by accelerated development of the productive forces.

There is that concept again, “Accelerationism”.  [*makes sign of the cross.*] It turns out that higher wages and shorter hours of labor forces capital to accelerate the development of the productive forces. It does not do this because it wants communism, but because it strive always and everywhere to increase profits. With higher wages and shorter hours of labor, capital is forced to intensify the exploitation of labor power with the aim of producing the same mass of surplus value in less time.