Shaking Up Trade Theory — Finally someone at Business Week comes around to what others have been saying for years now. Of course they are only doing it because the most famous living economist finally threw down.
Ever since Americans began fretting about globalization nearly three decades ago, economists have patiently explained why, on balance, it’s a boon to the U.S. Yes, some Americans lose their jobs, either to imports or because factories move to cheap-labor countries such as China or India. But the bulk of this work is labor-intensive and lower skilled and can be done more efficiently by countries that have an abundance of less-educated workers. In return, those countries buy more of our higher-value goods made by skilled workers — for which the U.S. has a comparative advantage. The lost jobs and lower wages in the U.S., economists say, are more than offset when countries specialize like this, leading to more robust exports and lower prices on imported goods….
Nobel laureate Paul A. Samuelson in the Journal of Economic Perspectives (JEP). In the piece, the 89-year-old professor emeritus at Massachusetts Institute of Technology, who largely invented much of modern-day economics, questions whether rising skills in China and India necessarily will benefit the U.S….
Already, some 14 million white-collar jobs involve work that can be shipped electronically and thus in theory could be moved offshore, according to a study by economists Ashok D. Bardhan and Cynthia A. Kroll at the University of California at Berkeley’s Haas School of Business.
The hit to wages could be powerful if that happens.
These notions that free trade is not the greatest thing for America has been a debate at the Mises.org website and was exemplified by a definitive artivle by Paul Craig Roberts called, Clarifications on the Case for Free Trade
The case for free trade is based on David Ricardo’s principle of comparative advantage. Ricardo addressed the question how trade could take place between country A and country B (England and Portugal in his example) if country B was more efficient in the production of tradable goods (cloth and wine in his example) than A.
In other words, if Portugal could produce both cloth and wine at lower cost than England, how could trade between the countries benefit each?
Ricardo found the answer in relative or comparative advantage…
If factors of production are as mobile as traded goods, the case for free trade–that it benefits all countries–collapses. There is no known case for free trade if factors of production are as mobile as traded goods.
For some time I have been pointing out that the collapse of world socialism and the advent of the Internet have made factors of production as mobile as traded goods. Indeed, factors of production are more mobile. Capital, technology, and ideas can move today with the speed of light, whereas goods have to be shipped.
related links:
The Financial Express of India summarizes the debate.
A battle royale has just been initiated in the rarefied world of economic theory, although the rumblings have not yet reached these shores. The first salvo has been fired by no less a person than Paul Samuelson, and the targets he has chosen include some of his most prominent acolytes and disciples.
The MIT professor, winner of the Nobel Prize in 1970 and research mentor of countless economists, who later became major scholars in their own right, has re-assessed his entire stand on globalisation and the benefits that accrue from the process. In doing so, Samuelson has been scathing in his critique of some of his students, including Jagdish Bhagwati, once a member of his innermost circle.
In an article in the Journal of Economic Perspectives, Samuelson has postulated that free trade, far from being an unqualified blessing, may prove to be a major drawback under certain circumstances. The major cult figures who are sought to be chastised by the guru on this issue are Gregory Mankiw, Bhagwati and countless other ‘globalists’. The first two have been mentioned by name in the article’s opening paragraphs as purveyors of ‘polemical untruth’. In the corridors of theoretical economics, you cannot get more direct than this.
Radio Interview of Samuelson regarding the situation. EXCELLENT! Names names. Attacks Greenspan.
via I. Fletcher
Some of the local faith-based dolts I encounter still trot out the old saw about the decline in the value of the dollar as “benefitting exports”. What exports?
If you removed import parts from a Harley, you’d have a very heavy push scooter. Most cars are either built abroad or the factories are owned abroad. Zenith, RCA, Motorola are owned and mostly built abroad. This past year saw the U.S. importing more foodstuffs than were exported for the first time in our history.
If you watched any of the recent Charlie Rose technology week shows, one featuring the CEO’s of Cisco, Intel, Yahoo and Google concluded — not only might a repeat of the program, five years hence, find one or all of these firms headquartered offshore, their grandkids might graduate from high school [here] and head off to China or Germany or Singapore to college and study in the language they’ll be using for the rest of their productive careers.
If your kids are going to grow up and compete in a dynamic field, they have to go where the action is.
Psshh… who needs a job anyways?
I recently watched the video for Rammstein’s song “Amerika” – in which they pointedly complain about how American culture is a mjor export from the US – with references to mickey mouse, coca cola, and wonderbra included in the german-language lyrics. Funny – and scary – at the same time.
Especially:
This is not a love song.
This is not a love song.
I don’t sing my Mother-tongue.
No, this is not a love song.
The US has been proclaiming itself the shining example to the rest of the world, for as far back as I can remember. Now, we are startled that the rest of the world has been listening – and working to obtain the same things we have – and are able to directly compete with us for everything we thought was ours alone.
And – if the Rammstein song is any indication – we can expect scant sympathy from the rest of the world, for our desire to keep a monopoly on anything.
This changes nothing.
Cowardly politicians made the case for globalization by saying “It’s inevitable, we need to change in order to compete.” instead of making the hard case that it’s better for everyone.
Now that it isn’t better for everyone, guess what?… “It’s inevitable, we need to change in order to compete.”
What are we going to do, tax source code or Intellectual Property going across the Internet? The fact is that it is inevitable and unstoppable, without ridiculous controls on basic freedoms for individuals and businesses. Even if Ricardo falls and Inevitability is the only argument in favor, it looks like we don’t have any choice.
Sooner or later, there will be no white-collar jobs either. Any non-physical job will be handled electronically, autonomously and nonetheless flawlessly.
Free trade has been an excellent thing. So we discovered that menial labor can be done overseas and for less and that stuffed shirts reading technical support checklists can be outsourced to India? Groovy.
If we want a high standard of living, we’re going to have to EARN IT. That rocks!
Fix the schools, fix the system, fix everything. It’s all been long overdue people!
The poor countries are benefiting enormously and that’s wonderful. I never sought to live a cozy life while others suffer being denied opportunities.
So, to all you naysayers … quit crying in your porridge and go out there and earn your keep, you lazy bastards. We live in a land of opportunity and too many lazy bums weep their selfish woes instead of taking charge and using the vast free resources available. We live in the information age … go learn something azzholes and be useful instead of crying for handouts or about how things are too tough. And educate your children, you schlubs.
The internet has decoupled the physical locus of the input to the work function (the domain) from the physical locus of the output of the work function (the range).
Before the internet, Ricardo made sense. The internet has smashed Ricardo to bits. Ricardo, to my limited understanding, postulates the locus of the work domain being mapped to, roughly, a nation-state. Within the envelope of the nation-state, the domain of work may indeed lead to aggregations that evince clusters of comparative advantage.
The impact of the Internet is analogous to a giant boot striking a puddle of mercury: as the droplets disperse, physical aggregation is no longer required to meet the requirement of competitive advantage.
The U.S.A. HAD (used to have) a lock on the factors of intellectual competitive advantage: 1) university system; 2) law and order; 3) financial capital; 4) intellectual capital… There used to be compelling reasons for foreign nationals to come to this jurisdiction to make money. We harvested their intelligence, paid them a wage, collected our taxes.
Now that intellectual capital is as fluid as financial capital, there is no convincing reason to create physical aggregations in the USA. After the event of 9/11, we no longer represent an absolute security premium. With work done elsewhere, and wages earned elsewhere: 1) How will we collect the taxes we used to collect?; 2) How will we harvest the salaries that we used to harvest?
The Internet is analogous to a bank clearing system for financial capital: intellectual capital can be harvested from anywhere and delivered anywhere. Before the internet, we could harvest the world’s financial AND intellectual capital. Now, we gather capital based on a disappearing security premium…that disappearing security premium, in conjunction with the net, is moving intellectual capital offshore.
Before, 1% of the population could generate ideas sufficient to employ 94% of the population (with 5% or so unemployed due to physical limitations, or structural limitations to our ability to churn/changover factors of production). Now that “thought” in its rawest form has moved offshore, the locus for creating physical representations of those thoughts – work – can also be offshore. What will the “post-knowledge” economy look like? What is “post knowledge”? Will we, as a society, be able to continue to create ideas, build them into physical realities, and sell the ideas and related products and services faster than the rest of the world? For how long?
I believe that the 85% white-collar society in the USA is in for a rude awakening. We are exporting our wealth at a record clip, and going more deeply into debt each day. As ideas and the physical instantiation/manifestation/manufacture of those ideas also moves offshore, we will be paying to buy back the ideas and the byproducts of those ideas. I believe that our domestic wage structure MUST float DOWN to global levels, with a consequent diminution of our standard of living.
What will our national Ponzi scheme look like when there is no one left in this country making a wage sufficient to buy products made here or imported to here?
What WILL happen: 1) We will go more deeply into debt as a society; 2) The government will continue to let the dollar fall; 3) Foreign governments will stop buying our debt; 4) Wages will fall; 5) Our standard of living will fall; 6) We will face global price deflation; 7) We will lose or our losing our security premium, so we will lose our monopoly rents on ideas; 8) As we realign our systems for educating workers, employing workers, taxing workers, and paying for the retirement of workers, we will suffer enormous social dislocations; 9) Those social dislocations will increase in frequency and amplitude over time.
BTW: the current administration just cut the budget for the National Science Foundation.
Basically, Mr. Williams, you are saying we were far above equilibrium point and with the new factors making knowledge fluid we are destined for a “correction” and quickly.
Our companies once had a significant capitalization in the form of trade secrets and “know how”. Now “our companies” are no longer ours, but global organizations which will likely allocate the labor elsewhere and we don’t significantly benefit from this.
However, don’t forget that in the end, with all things being equal. We have a vast quantity of natural resources. Only Russia clearly has a natural resources advantage over the United States. If wages fall, we have an enormous capacity for using our own raw materials that does not presently exist.
We are in for an awakening. An eye-opening one, for sure, but not a rude one. We’ll make the required painful adjustments and be fine.
Btw, isn’t it strange that intellectual property appears to no longer benefit the nations of origin but rather only corporations. Corporations may soon have leverage over governments, not governments over corporations.
We have little left to export except our brands (Coke, McDonald’s, etc.) and intellectual property (movies, music, software). Unfortunately for us, these brands represent our arrogant foreign policy towards the very countries we wish to export to. And we also expect this arrogance to carry favor regarding intellectual property rights in these same countries. Until we start treating the world with mutual respect, our economic standing will continue to decline.
John, do what you do best, namely, computers. An economist you are not and frankly, your limited grasp of economics is exposed simply by quoting Roberts. Yes, I engage in a bit of argumentum ad hominem, but the point is nonetheless valid. To your credit, you at least attempt to make a case instead of simply spewing protectionist hog-swallow. Now, to the argument . . .
“If factors of production are as mobile as traded goods, the case for free trade–that it benefits all countries–collapses. There is no known case for free trade if factors of production are as mobile as traded goods.”
What? Simply asserting that there is no case for free trade does not make it so. Comparative advantage and task specialization remain bedrock economic principles, regardless of Roberts’ assertion to the contrary. I would like to hear the reasons WHY the mobility of FOP negates these bedrock principles(and Williams, you DON’T make the case). Unfortunately for your argument, John, economic benefit accrues to ALL involved, regardless of of the mobility of FOP.
How do U.S. consumers benefit any less from the product of a crack Indian programmer who’s willing to accept fifteen bucks an hour instead of insisting on $40? And what about those $40-an-hour programmers (I’m one of them, BTW)? Well, they’ll just have to do what their forebears did: innovate, work hard, take risks, and compete.
Jeez, folks, this is Econ 101 stuff. READ MY LIPS: THERE IS NO ECONOMIC CASE FOR PROTECTIONISM. PERIOD.
“The U.S.A. HAD (used to have) a lock on the factors of intellectual competitive advantage: 1) university system; 2) law and order; 3) financial capital; 4) intellectual capital� There used to be compelling reasons for foreign nationals to come to this jurisdiction to make money. We harvested their intelligence, paid them a wage, collected our taxes.”
Dude, just talk. Writing on a blog like you’d write your doctoral dissertation doesn’t lend you credibility; in fact, it detracts from it. If this is the only place you can impress people, or rather, attempt to impress people, you lead a pretty sucky life.
The U.S. used to kick butt in steel, manufacturing, and textiles, too. We ceded those industries to countries who were better at them than we are, to the benefit of all involved. Are YOU interested in paying $150 for a crappy shirt at Walmart? I’m not. What about those poor North Carolina textile workers? Well, the went to college and got jobs programming or they became nurses.
Oh, and by the way, you STILL don’t explain how the fact that programming talent is mobile negates task specialization as an economic benefit. I’m still waiting for that argument to be made.