Wage levels are set mainly by population size and growth rates. Countries with large populations, rapidly growing, tend toward low wages. This is especially true because the laboring class tends to have a much higher birth rate than the owning class, often twice as high. Labor is the main cost in most consumer goods. Therefore, cheap labor means low prices, creating an advantage in trade.
Capital therefore tends to move to low-wage countries.
Herman Daly believes that the effect of unrestricted capital mobility is the same as the effect of unrestricted labor mobility. If the U.S. had unrestricted borders, we would enjoy endless cheap labor, but wages would plummet. Unrestricted capital flow will have the same effect, Daly says. Daly's words have a special resonance today when Asian economies have been devastated by overcapacity for cars, chemicals, and electronics. But when all the factories crank out more cars than people can buy, down come car prices.