View source for Why Competitive Markets Benefit the Poor

I have already written that the labor market and commodity markets are connected with each other. Competitive markets for goods mean that firms are price-takers, that is, they are subject to market forces - competition from supply and demand - and do not independently set prices, "take them from the market." This means that their trade margin, unlike firms operating in non-competitive markets, is not subject to them from above - they cannot just take and increase prices without regard to competitors and buyers.

But that doesn't mean firms don't have bottom-up maneuvers. If labor markets are uncompetitive in terms of demand for labor (firms have a clear advantage and bargaining power), you can simply lower wages by widening your margins. Here a situation arises almost according to Marx - firms appropriate their earnings from workers, taking advantage of their dominant position. However, for this effect to be sustainable, it is required that the corresponding situation in the labor market.

If both commodity and labor markets are competitive, the economy develops. And here one non-trivial moment is hidden. The fact is that modern technologies are very expensive. In order for firms in developing countries to implement them and get the return that takes place in developed economies, there must be appropriate incentives: expensive labor.

As the economic historian R. Allen notes, "why don't Peru, Zimbabwe, Malawi and India borrow the technologies of the Western countries? Do they really not want to enter the circle of rich states? The answer is simple - such borrowing does not pay off. Western technologies of the 21st century involve the use of huge capital per worker. This investment can only be recouped if the investment in machinery and equipment can replace a larger amount of capital used to pay labor, that is, when wages are higher than the cost of acquiring fixed assets.

In short, if your developing country has low competition in both product and labor markets, even if you have access to technology, you don't implement it. You are looking for easy ways. Especially when you have an administrative resource.

Think of Japan <ref>[https://youtu.be/G2A5MMS4f2M THE JAPANESE ECONOMY: THE MEIJI REFORMS, RESOURCE LIMITATION AND THE ECONOMIC MIRACLES] FURYDROPS youtube</ref>: it is unlikely that their miracle would have been possible if the relationship between firms and employers had not changed. Successful firms shared profits with their employees, which expanded domestic demand. In the 50s, the main employment was in small firms with low wages. But the rapid development of industry and the active growth of incomes of workers began to occur in small firms, starting from the 60s. The surplus of labor has disappeared, just as the dual economy has disappeared - where in big corporations (especially state corporations) they pay a lot, and in small firms they don't pay much (this is how it is now in China).

[[Grigory Bazhenov]] 2022-05-31
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