This, is a picture of Henry Ford. When I was in school, we were taught in history class that he was the first major employer to pay a dollar a day to his blue-collar workers, and that this was considered utopian. However, supposedly, Ford did this out of self-interest, because he wanted the workers to be able to afford to buy his cars.

Now when I was a youngster, this explanation made no sense to me. Why give the workers higher wages, in the hope that they would give it back to you in increased sales? You could just keep the money in the first place. The answer, of course (that was, as I recall, not really explained very well in my history textbooks), was that Ford was assuming that other employers would have to match his wage increases (or at least come close). By raising the wages he paid, he could raise the wages of many other employers who were hiring from the same pool. Andrew Carnegie is said to have attempted the same tactic, although in his case the other employers decided not to follow suit, which resulted in him encountering some dramatic labor troubles when he tried to drop wages back to market levels.

Imagine we have a nation with 100 rich guys who own companies, that collectively employ nearly all the workers. How can the workers convince their employer to give them higher wages? They can attempt to unionize and strike, but this may be difficult, and might not work. They can try to lobby the government, but even in democracies it turns out that a few wealthy people can usually get the attention of the political leadership better than a much larger number of middle class or poor people. So, how can the workers get their employers to give them higher wages?

They can't. But, they probably won't need to, because someone else will do it for them. Not the union leader, or the political leader. No, the rich guy who owns a major employer will, in a single-nation enclosed economy, be forced to pay his workers better by the other 99 rich guys, who want to sell to his employees. Each one of them wants to pay their own workers low wages, of course, but they want the other 99 to pay high wages. What can force a rich guy to do something he doesn't want to do? 99 other rich guys.

Somewhere along the way, though, the rich guys had an idea. If their employees were in one country, but their customers were in a different country, then they no longer had to pay their employees well. There was the problem of having to know one labor market well enough to employ people, and a different (sometimes very different) country's consumer market well enough to sell to people. This was accomplished through division of labor. The rich guys of a poor country did the employing, the rich guys of a rich country did the selling.

Now, the rich guys in the poor country, who might otherwise have been tempted to allow their poor to get higher wages so as to improve the market they sold in, could keep their poor people poor, un-unionized, and otherwise powerless and easy to control. The rich guys in the rich country did not even need to do the employing, except for a few professional class jobs in sales, marketing, design, etc. They could have the rich guy in the poor country do the employing of the actual blue-collar jobs. In some of the rich countries, they even talked about the "disappearance" of manual labor, as if it was all automated away. This is a curious error, because it is not as if the manufacturing all went to the countries (like say Japan) where the robots were best. Mostly, they went to places with far poorer automation, the opposite of what the "automation killed manufacturing jobs" theory would say.

For the professional class, this was more or less a partial win, because while they may not have gotten much more money than before, that money went further when buying stuff, for several reasons.

1) the manual labor involved in making stuff for the middle class was now done by very poor people

2) the stuff was being made in places with very few (or very poorly enforced) environmental, health, and safety regulations

3) there were lots of places in the world that were very poor, so if they got less poor you could switch the manufacturing to an even poorer place

The professional class also benefited from the fact that all of the obvious environmental downsides of making all this stuff, was happening on the other side of the planet. Of course, the true net environmental consequences of doing the manufacturing wherever the environmental laws were laxest, was considerably higher than before, but not as obvious to a professional class worker in a rich country. When the making and consuming all happen in the same country, you are faced with an obvious tradeoff of how much to value wealth vs. the environment. Typically, poor countries prioritize wealth, and as they get less poor they gradually shift to prioritizing their environment more. But with this new system, you could have First World manufacturing volumes happen in places with Third World environmental regulations. The professional class, could feel good about their great environmental voting record, while not having to pay for their stuff being made in places where those environmental laws were enforced.

There was, unfortunately for the rich guys, another downside to the new system. If one country had the employees, and another country had the consumers, how were the consumers going to get the money to buy this stuff? At first, this was more or less ignored, because each individual rich guy was just solving the problems of his own situation, not thinking of how the group as a whole would work. But, over time, it became apparent that there were an awful lot of people who were not going to get good middle-class jobs, not even if they had a college degree. How could they become valuable consumers? The new system had an answer, of a sort.

Loan them the money.

And so, the rich guys loaned them the money. Not directly, of course. They more or less laundered the money through several different systems such that no one person probably even knew what the whole system was doing, but the end result was that many of the rich country consumers were paying for the rich country's products with credit cards and mortgages. Like any debt-fueled bubble, it worked until it didn't.