Arnold Kling  

Getting Ricardo Wrong

PRINT
The Employment Situation... More Choice, Less Satisfaction...

Charles Schumer and Paul Craig Roberts rewrite Ricardian trade theory.


Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today's case, to a relatively few countries with abundant cheap labor. In this situation, there are no longer shared gains - some countries win and others lose.

This is absolutely false. Ricardian comparative advantage can exist within a country. It can exist with mobile factors of production.

They go on to say that


To call America's economic recovery "jobless" is inaccurate. Lots of new jobs are being created, just not in the United States.

This also is false. What David Ricardo developed was the first general equilibrium model in economics. Anyone who understands the principle of general equilibrium understands that one country cannot "lose" jobs to another country. An industry can lose jobs, but in general equilibrium there is full employment.

When there is not full employment, this is an issue of fiscal and monetary policy. It is not an issue of trade.

UPDATE: See also The New Republic, which also slams the Schumer-Roberts piece. (Brad DeLong says that this is Noam Scheiber writing)

For Discussion. It the concept of general equilibrium just impossible to explain to a non-economist?


Comments and Sharing


CATEGORIES: International Trade



TRACKBACKS (1 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/42
The author at Truck & Barter in a related article titled Thoughts on Free Trade writes:
    Entire regions don't win or lose, but individuals in those regions do, and in the aggregate, the entire world is more productive. [Tracked on January 7, 2004 5:48 PM]
COMMENTS (63 to date)
Eric Krieg writes:

Well, it wouldn't be the first time that Chuckie Schumer said something totally false. It's nice to know that he knows as much about economics as he does about guns.

Steve writes:

--To call America's economic recovery "jobless" is inaccurate. Lots of new jobs are being created, just not in the United States.---

How on Earth is this inaccurate?

Regardless of some stupid 200+ year old THEORY, we are not creating enough jobs to absorb our ever-growing population, while India is creating 10,000s/week in their own country by way of offshore outsourcing. This makes the statement above TRUE.

Steve writes:

Why do economists blindly accept Ricardo and Smith as profits (in the Biblical sense) and don't believe anyone could every have a correct theory that is different? PC Roberts is an EDUCATED ECONOMIST and a right-winger. Keep that in mind, folks.

Remember: everyone accepted that the world is probably FLAT until the 1500s or so.

Eric Krieg writes:

Steve, regardless if you think the statement is true, IT'S CHUCKIE SCHUMER SAYING IT!

The guy makes Hillary look Republican.

Did Chuckie vote for the tax cuts?

The point is that, regardless of the trade situation, unemployment can be addressed by fiscal and monetary policy. But it can only happen if guys like Chuckie are on board for tax cuts. And his isn't on board.

One of the many reasons I left New York was because Chuckie was the Senator. What a maroon. Thank God I left before Hillary got to town.

Not that Dick Durbin (with the emphasis on DICK) is much better, but at least I have one Senator with a clue.

Eric Krieg writes:

It's prophet, by the way. Not that I should be giving spelling lessons or anything.

Boonton writes:

Steve,

Ricardo and Smith are not accepted as prophets. If they were we could just say 'this is how it is, be quiet'. Ricardo and Smith are accorded such respect because their theories have held up to scrutiny. Both emperical as well as mathematical 'thought experiments'.

Economics is not as strong a science as physics but it is highly scientific. Theories are not overturned just on your say so. Nor are theories respected only because they have a fancy name attached tothem.

Steve writes:

Ah! Thanks! I thought that looked wrong! That's why I casted it to (Biblical) type.

...and your response to the fact that one of the great GOP (PC Roberts) champions is agreeing with him???

Eric Krieg writes:

>>...and your response to the fact that one of the great GOP (PC Roberts) champions is agreeing with him???

Steve, unlike Democrats, Republicans allow dissent. He can think and say and associate with whoever he wants to.

I mean, Dubya invited Ted "The Swimmer" Kennedy over to watch "13 Days". It doesn't change how I feel about Dubya (or The Swimmer, for that matter).

Eric Krieg writes:

I just googled PCR. Are there protectionist libertarians? I have to guess so if he really coauthored that screed with Chuckie.

Boonton writes:

"Steve, unlike Democrats, Republicans allow dissent. He can think and say and associate with whoever he wants to."

Really? Tell that to John McCain. Compare Republican dissent on, say, the recent invasion of Iraq to the Democrats. The Democrats have a nearly complete spectrum on the issue.

Steve writes:

Or abortion, gay rights/marriage, etc etc... The Dems go straight across the spectrum on a variety of issues that the GOP only sees ONE side of.

PCR archive:
http://www.townhall.com/columnists/paulcraigroberts/archive.shtml

You're right. He is a libertarian protectionist.

He even worked for the Cato institute (pure libertarian free-trade-anti-labor-group):
http://www.townhall.com/columnists/BIOS/cbroberts.html

He mentions in one of his articles that he was a free-trader just like you guys until not too many years ago.

I wonder if Columbus thought the earth might be flat?

Steve writes:

ACCEPT THAT THE WORLD HAS CHANGED FROM 200 YEARS AGO!

You MUST realize that Ricardo's theory cannot be applied today because any form of "retraining" we can do after losing our jobs to foreigners will be WORTHLESS because knowledge jobs (the only ones left to retrain into) are the VERY jobs being exported.

The only people who will be able to maintain income and income growth will be the "superstars" like Arnold, politicians, columnists, and CEOs. THIS IS WHY THEY ARE SO GUNG-HO ABOUT IT!

Accept that it is US (the common man) vs. THEM (the superstars).

We didn't elect congressmen to destroy our livelihoods, we elected them to improve our standard of living...and what are they doing? Writing H1B laws, offshoring government work, opening the borders to all comers, allowing 19 highjackers into the country, etc etc...

Tell me how I'm wrong.

Boonton writes:

It would seem if your view of the world is correct you can fight fire with fire. Move to India and take the programming job there. Sure it will be a pay cut for you, but then you'll have an edge over native Indians who speak English only as a 2nd language. Since labor is so cheap over there you can live like a king! $12K there will feel like $150K here!

If your position is correct then this will work.

Cap'n Arbyte writes:

My comments on this issue got to be pretty long (Roberts irritates me a lot!) and I ended up making them into a blog article.

I'm not using MT so I don't know how to make this into a real trackback, but here's the link:
http://arbyte.us/blog_archive/2004/01/Roberts_Again.html

Steve writes:

India doesn't exactly have a liberal immigration policy. This has been covered on this board before. Besides, why should I have to move there? According to you free-traders LOTS of new jobs that pay better should be available HERE.

WHERE ARE THE NEW BETTER PAYING JOBS?

Steve writes:

Kyle--

You can prove it by showing all these higher paying jobs that are being formed to replace all those old crappy $150k programmer jobs.

That is the mantra you guys believe, that we will all be able to find higher paying jobs. THAT IS THE BIG LIE.

Why are we allowing this wage deflation spiral occur? because we've been force-fed this globalization crap for 20+ years, and it's all a LIE.

Boonton writes:

India doesn't have a liberal immigration policy? I think you'll find it a lot easier to get into India (maybe not as a citizen) than it would be for an Indian to get to America.

John Thacker writes:

Steve, you're the Flat Earther. People believed that the Earth was flat because it looked flat to them. You're relying on the same kinds of anecdotal evidence.

Remember that Greek scientists and others knew that the world was round long before Columbus. Ordinary people didn't always accept that, but even in Columbus's time, the educated still knew that. Many of the ordinary people, like you Steve, refused to listen to "theories" and "scientists" and only believed the evidence of their own eyes, no matter what the data or mathematics said.

Steve, if there is ever a day where there is not full employment for a reason other than fiscal and monetary policy (or transitory reasons), that means that we will have ended scarcity and entered a utopia, where anything can be had without work. In that case, it's not a problem.

Steve apparently wants the US to adopt the same sorts of policies that have worked so spectacularly poorly for Japan and continental Europe in recent years. Odd. Steve would lower the standard of living for the average working American, because he apparently can't stand the idea of foreigners getting less poor as well. To Steve, every dollar obtained by a foreigner is snatched out of the hands of an American. To Steve, it's a zero sum game, where wealth isn't created. (Too bad that the mass of evidence is against him.)

In regards to the question, it is apparently impossible to explain the concept to Steve. I would say that the question is a hard one to answer, because understanding the concept of general equilibrium and comparative advantage goes a long way to making someone an economist, or at least understanding of economic thinking.

Steve writes:

I don't think India is importing Americans on H1B visas.

John--The proof is in the pudding, pal. WHERE ARE ALL THE NEW HIGH PAYING JOBS? There is ZERO anecdotal evidence that globalization has created new high-paying jobs that the globalizers promised. I understand the theory. The theory is that better jobs will be formed. THEY HAVEN'T!! ADMIT THAT.

Why would PC Roberts lie, folks? What benefit would he have to being ostricized by his peers for speaking out against this? If you guys think he's a liar, tell me his ulterior motives. I've already told you the "mainstream" economists' motives.

Programmers are grossly overpaid? Who are you to judge? Why is it that the only people who shouldn't lose salary have "Chief" as part of their title?

If my tone is ANGRY, it's because I'm tired of being punched in the mouth by globalization, and then told that it shouldn't hurt *much*. We are not going to take this anymore. We're sick of seeing EVERY job that makes any sort of money getting sent offshore! I know, what on Earth can we do about it, right? Guess what? I VOTE AND SO DO A LOT OF OTHER VICTIMS.

Steve writes:

If Ricardian advantage isn't a bunk theory, tell me what Americans have an advantage in that cannot be taken away by offshoring or human importation over the next 3-5 years.

Steve writes:

--Unemployment is caused by excessive wage rates, which may be caused by (as Arnold mentions) fiscal and monetary policy. Globalization may cause rebalancing of employment among the industries, but not unemployment on net, because overproduction is impossible — there is always demand for labor.--

Ok. This is true, cap'n. But education is worthless now because even the lowest of the low-end analysts in this country are "grossly overpaid" by your standard.

You can't SURVIVE in this country by being anything other than "grossly overpaid" by your standard because the maximum world-wage for any sort of knowledge work is about $5,000/year, and non-knowledge work is even less. Try to survive on that.

High tariffs and zero income tax worked just fine for us from 1770s through the 1900s. Why do economists not see this?

Steve writes:

Have you guys even READ the article and given it 1/2 a chance? Read it with an OPEN mind and you might learn something about the real world.

Steve writes:

Sorry about my angry rants, folks. I WANT to be WRONG in my aformentioned thoughts. The past 3 years have proven me right, but I still hope to be proven wrong. :(

Sorry, again...

Kevin Brancato writes:

Steve,

-----"Have you guys even READ the article and given it 1/2 a chance."-----

I have read it, and I even READ it again, as well as other articles Roberts has written on the same subject. I disagree with him, but let me try a different type of argument, springboarding off:

-----"WHERE ARE ALL THE NEW HIGH PAYING JOBS?"-----

So let me get this straight.

You're saying that when everybody outside America is trying hard to become as productive as Americans, partly helped by Americans who have invested their earnings elsewhere to obtain high returns, Americans become poorer, because Americans send all their good jobs elsewhere?

But if Americans are sending all the good jobs elsewhere shouldn't Americans left in the bad jobs be producing less than they used to?

Then where is your evidence that Americans are producing less because of modern mobility? (Historical production patterns look no different than coming out of any other recession. See pages 4-6 of http://www.federalreserve.gov/Releases/G17/Current/g17.pdf.)

If you have no evidence that the US is producing less, shouldn't you be happy that others are producing more?

Kevin Brancato writes:

I don't think I linked to the right data; it's late.

Cap'n Arbyte writes:

Steve,

To begin with, I doubt that the $150K/yr computer programmer is the correct baseline for comparison. The tech bubble was hugely distortive. It took several years to build and it'll take several years to undo. One of my grade school friends briefly made $200K/yr, but not any more. He rode the bubble both up and down. I want to know what those programmers were making in 1994.

People who shift industries are almost certainly going to make less money than before the shift. This is as it should be; they're inexperienced in the new field so they won't be as productive. Their wages will grow as they gain experience, just as happened in their old jobs.

If you'll permit a bit of hearsay (I can't discuss my source or be too specific), I'm told that wages in foreign countries for technology jobs are rising very quickly. Their labor pool is finite, and competition among globalizing firms has driven up their wages substantially. This makes it less easy for them to displace American workers.

Steve, I really wish I could predict where the new jobs will be. But I can't, for the same reason that a person in the 1960s couldn't have predicted the hot jobs in the 1990s -- it's *hard* to predict the future. Who could predict personal computers, computer networks, the scale of modern software projects, etc.?

I think the Next Big Thing will be biomedical. Or maybe something in nanoscale manufacturing. Those are hunches about technology, but ask me to predict job titles and I can't give you an answer. I have no idea. I can't predict the future.

But as surely as we prospered during the transition from 50% employment on farms to 2% employment on farms, we'll prosper this time, too. It's inexorable, the logic of economics demands it. (But if you told people then that 48% of the population would lose their jobs, they'd have reacted very negatively!)

Cap'n Arbyte writes:

Steve, that's probably not a satisfactory answer. I don't think I can give you one. It feels similar to opposing some large public works program -- people can visualize the Grand Thing that would be built, and internalize the alternative as "having that Thing, or not having it." But "not having it" isn't what would really happen. You'd have that spending go towards a multitude of small diverse things instead, based on individual preferences, but that multitude can't be visualized or stated with any specificity. You can't draw an artist's conception of it, so it's at an automatic disadvantage against the vision of the Grand Thing in the minds of most people. But it's still real!

Steve writes:

--Quote--
You're saying that when everybody outside America is trying hard to become as productive as Americans, partly helped by Americans who have invested their earnings elsewhere to obtain high returns, Americans become poorer, because Americans send all their good jobs elsewhere?
--END--

YES!

--Quote--
But if Americans are sending all the good jobs elsewhere shouldn't Americans left in the bad jobs be producing less than they used to?
--END--

No, sir. We are left with NO jobs (which is WORSE than crappy jobs) or jobs that produce less income.

--Quote--
If you have no evidence that the US is producing less, shouldn't you be happy that others are producing more?
--End--

What evidence do you have that we a producing MORE? Don't give me GDP growth. GDP measures CONSUMPTION (FINAL SALES) not production. GDP is being finances by DEBT right now, NOT PRODUCTION. For example, I'm about to plunk down $300,000+ for a new (note: NEW) house. That gets shown as part of GDP, but since I don't have 3/10 million to plop down, it's all debt, not a result of MY producing ANYTHING! Sure, I know, by union bretheren are producing something, but it's fueled by debt in the first place.


--Quote--
People who shift industries are almost certainly going to make less money than before the shift.
--End--

So WHY enact policies that will force this to happen? WHY should we vote for politicians that support this sickening practice?

--Quote--
I'm told that wages in foreign countries for technology jobs are rising very quickly
--End--

Using the law of 72, tell me how many years of gringing unemployment it would take for an Indian IT worker's salary (1/6th of average USA at the time of this writing) to reach mine. It'd have to double 3 times over, so even at 20% wage growth, it could take 10 YEARS! In the meantime, we're going to lose jobs by the truckload here. That's too long to be jobless.

--Quote--
Their labor pool is finite, and competition among globalizing firms has driven up their wages substantially
--End--

BAH. The universe is also finite, but it's so large we'll never run out of space. Their labor pool is finite, sure, but when their unemployed labor pool is larger than our ENTIRE labor pool, wage deflation will start to occur in rapid fashion in the USA.

--Quote--
I think the Next Big Thing will be biomedical. Or maybe something in nanoscale manufacturing.
--End--

I tend to agree. What's to stop the wages for these fields to IMMEDIATELY become $5,000/year when they start offshoring them within a year of first-creation? These are the EXACT PERFECT TARGETS FOR OFFSHORING. That is the crux of PC Roberts's argument! Why bother getting educated when they're just going to offshore it immediately?!?!?!?!?!?!?!?

--Quote--
But as surely as we prospered during the transition from 50% employment on farms to 2% employment on farms
--End--

Exactly! We are in an information-based economy, man. and ALL (I mean ALL) information based work can and **WILL** be done offshore!!!!!!!!!

Why can't we slow the process down (I'm not trying to STOP it, just slow it) so we can get re-trained in something have have some hope of realizing any sort of gain from our education?

For instance, as was covered here in the past, I am trying to break into the finance field and get as far away from the IT carnage as I possibly can. Low-level finance is heading offshore faster than call-centers, but I had to make a guess 2+ years ago that finance would be "okay" so I could start my eduction! Now what am I going to do? All the IT is GONE, soon all the finance is GONE. I'm too old, too poor, and too tired to get YET ANOTHER DEGREE and then see THAT industry go offshore immeditely, too.

Even if wages in India are rising at say 50%, China is not too far away and they will not rise that fast (300,000,000 unemployed). What's to stop the vultures from leaving India and heading to China?

**The term is "Race to the Bottom"**

David Ricardo's original work is hard for modern students to read -- which does not excuse Charles Schumer and Paul Craig Roberts for getting it wrong almost 200 years later. Two hundred years have brought myriad changes to the circumstances, but Ricardo's brilliance was in covering _all_ these possibilities and more in one stroke.

For those interested, one of Ricardo's original discussions of comparative advantage can be found in Chapter VII of his _On the Principles of Political Economy and Taxation,_ (specifically par. 16, http://www.econlib.org/library/Ricardo/ricP2a.html#Ch.7)

Two wonderfully clear explanations of comparative advantage written soon thereafter can be found in

1. James Mill's _Elements of Political Economy_ (specifically, Chapter III, http://www.econlib.org/library/MillJames/mljElm3.html#Chapter%20III,%20Interchange)
and

2. his son John Stuart Mill's _Principles of Political Economy_ (specifically, Book III, Chapter XVII, http://www.econlib.org/library/Mill/mlP46.html#Bk.III,Ch.XVII).

I also recommend Morgan Rose's brief overview of the history of economic thought on comparative advantage: http://www.econlib.org/library/Columns/Teachers/comparative.html

What Ricardo introduced was recognized by thinkers of the time and ever since because he addressed not just the easy problem and solution: that people gain from trade if they have an absolute advantage or excess production of goods over what is demanded. His explanation answered the question of how and why trade benefits nations (and their citizens) even when the nation appears to be absolutely less advantaged in every way at producing every possible good or service. That even then there is a gain from specializing in production and trading those goods (a gain that turns out to be larger not the richer or more endowed the country, but the more different the country's productive abilities are from the rest of the world!) is the true meaning of comparative advantage.

Don Boudreaux writes:

A theory validity -- or, alternatively, its invalidity -- has nothing to do with how old it is. Contrary to Steve's suggestion, theories aren't like automobiles or phonograph records: to the extent that they are valid, they don't wear out.

What matters is a theory's ability to make reality more understandable. The theory of comparative advantage scores large points on that front.

Here's a letter that I sent to the NY Times in response to Schumers and Craig Roberts's op-ed.

Don Boudreaux
George Mason University

Editor, The New York Times
229 W. 43rd St.
New York, NY 10036-3959

Dear Editor:

In ?Second Thoughts on Free Trade? (Jan. 6th), Charles Schumer and Paul
Craig Roberts mistakenly assert that the benefits of trade diminish as
productive resources move more easily across international borders.

Borders do not alter the laws of economics. Just as Manhattanites benefit
from trading with Brooklynites even though resources have long moved free
and easily across the East River, so too will Americans continue to benefit
from international trade regardless of how easily resources traverse
national borders.

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University

Kevin Brancagto writes:

Steve,

I gave you a link to data. Look at it. Not only are we producing MORE, when adjusting for an economic downturn, our capacity is up too, meaning producers predict producing MORE.

Steve writes:

Chairman Boudreaux--

You'd change your tune if your job was in ANY way in danger due to this situation. Trust me. Clearly you have risen to a level in your career where you need not fear this. 99.999999% of the rest of the world has not. So, you no play the game, you no criticise the rules. Capice?

PC Roberts is saying that BECAUSE we are in a different era, Ricardian theory is INVALID. Not just because time has passed, but because all the things that give our country a "comparative advantage" are GONE! All that matters is cheap labor, the cheaper the better! We have no cheap labor, therefore we must RACE TO THE BOTTOM!

Kevin--

I'll read your link with an open mind and post later in the day how I feel about it.

Steve writes:

Kevin--

--Quote--
Manufacturing output increased 0.9 percent in November. The overall factory operating rate rose 0.6 percent, to 74.3 percent, a level 0.7 percentage point above its year-earlier level but 5.9 percentage points below its 1972–2002
average.
--End--
5.9 percentage points below its 1972–2002 average.
5.9 percentage points below its 1972–2002 average.
5.9 percentage points below its 1972–2002 average.

AVERAGE. Not peak 5.9% below in capacity utilization than the AVERAGE from 72-02. That is HUGE.

We've got OVERCAPACITY. Why are the supply-siders continuing to try to goose the overcapacity instead of goosing demand? --another topic, I guess

Don Boudreaux writes:

Steve,

It's true that I'm secure in my job. But the messenger's identity doesn't determine the argument's validity or invalidity. If it did, I would be justified in dismissing arguments against free trade on the grounds that many who make such arguments are at risk of losing their jobs or have actually lost their jobs. Such a reason for dismissing these arguments is unjustified.

Craig Roberts is wrong at several different levels. First and less-importantly, he gets Ricardo wrong. Second, regardless of what Ricardo wrote, the theory of comparative advantage in no way requires for its applicability that some resources be immobile.

A final point (I appreciate your patience!): job loss is the result of economic change; it is not peculiarly the result of international trade. ANYtime consumers change their spending patterns, even when shifting demand from domestically produce product X toward domestically product Y, workers in Y industry will be less well off. There's nothing at all unique about international transactions.

The economy would be ground into unimaginable poverty (spiced only by tyranny) if the state attempted to freeze all economic activity and prevent all further economic change.

May I suggest a very short and very readable book? The Choice, by Russell Roberts (Prentice Hall, 2nd ed., 2000).

Don Boudreaux

Boonton writes:

"What evidence do you have that we a producing MORE? Don't give me GDP growth. GDP measures CONSUMPTION (FINAL SALES) not production. GDP is being finances by DEBT right now, NOT PRODUCTION. For example, I'm about to plunk down $300,000+ for a new (note: NEW) house. That gets shown as part of GDP, but since I don't have 3/10 million to plop down, it's all debt, not a result of MY producing ANYTHING! Sure, I know, by union bretheren are producing something, but it's fueled by debt in the first place."


Actually your home purchase would not be represented in GDP. The only thing included in GDP would be a consumption item that would be approximately the rental value of your house. This is to represent the fact that each year you 'consume' living services from your house. This will probably be very close to what you pay each month.

There's to sides to debt, you borrow but someone else must have the assets to lend you.

Steve writes:

Don-- I beat you to the punch on "The Choice". I read it and have recommended it here before. I am still underimpressed that trade in goods is the same as offshoring labor. Sorry.

So you don't have to worry about free trade affecting you in a negative way. OF COURSE you're pro-free trade! You see all the benefits and NONE OF THE RISKS. And you're in POWER, while the people who are suffering are NOT. This is exactly what Marx was talking about. It's the common man vs the superstars.

Eric Krieg writes:

I don't think that you can separate the Clinton bubble from the current hysteria about Indians stealing tech jobs.

The tech jobs and the salaries paid to programmers during the bubble were mirages. They weren't real. They were fueled by mis-invested capital, not by real demand.

So to complain that programmers are losing jobs to Indians, or just losing jobs in general, itself is not real. The jobs that were lost were not real, so the job loss is not real.

I realize this is a heartless statement if you HAD one of those jobs and you were making that inflated salary. The truth can hurt.

The prevelance of guys like Steve, more than 3 years after the bubble burst, leads me to believe that the recession is not over. Until everyone admits that the bubble was an illusion, we can't move forward to the next up-cycle.

Steve writes:

Eric--

The salary was real. I have the deposit slips to prove it. How could it be more real than that?

Steve writes:

And of course the recession isn't over. It won't be over until November 5 2004.

Cap'n Arbyte writes:

Steve,

I'll respond more after work today, but one quick point. I'd like you to stop using the argument that only people who aren't at risk are supporting free trade.

I work in the technology industry. My company has globalized. There are people being trained to do my job right now in India. In fact, over the past year or so I trained the person who's training them. I'm going to meet the Indian guys in a couple weeks, actually. I expect I'll like them. I still support free trade and globalization.

Maybe you'll think I drank my own kool-aid. Or maybe my confidence is capitalism is well-grounded.

Steve writes:

Cap'n--

You're cutting your own wrists. If you enjoy such activities be my guest. I won't stop you.

Kevin Brancato writes:

Steve,

In the process of cutting his own wrists, will the Cap'n be making you better off or worse off?

Steve writes:

Kevin--

WORSE because he is allowing this to continue and making it an acceptable business practice. If he would stand up for what is right and try to end this practice (perhaps have a little pride and ownership of his job) he would help us all out.

Eric Krieg writes:

>>The salary was real. I have the deposit slips to prove it. How could it be more real than that?

It wasn't real because the products you worked on never made any money. You were just burning through capital.

That's where all the money that's missing from my 401k went!

Talk about drinking the cool aid! You Silicon Valley people were burning through capital, working on stuff that never amounted to anything and never made one cent (Example: WEBVAN).

That's not a job, Steve! That's FRAUD.

Don Boudreaux writes:

I can't resist responding to Steve's Marxian argument.

My father went as far as 6th grade in school; my mother finished high school. Both worked for most of their lives in a shipyard (my dad as a welder, my mom as a typist).

My parents never once suggested to me or my siblings that the world was one of the powerful or "the superstars" against us, the common people.

My parents taught me not to steal, not to cheat, to tell the truth, and not to threaten innocent people with violence. Protectionists violate most, and in some cases all, of these basic rules necessary for a civil, peaceful, and prosperous society.

Protectionists use government force to steal money from innocent consumers -- threatening consumers with violence unless consumers follow protectionists' orders on what goods and services to avoid buying. Many are also dishonest, asserting that competition that happens to come from outside of some ultimately arbitrary geo-political border is harmful to society at large -- asserting that a policy of preventing consumers from taking advantage of the best deals that consumers find, as consumers themselves judge these deals, harms society and that permitting politicians to superintend the buying practices of consumers will somehow make things better.

Some protectionists really believe this claim. They are wrong, but not liars. Some protectionists know better but spew this vile falsehood nevertheless.

Don Boudreaux

Eric Krieg writes:

>>And of course the recession isn't over. It won't be over until November 5 2004.

Steve, I think that you're still drinking the cool aid.

I like that phrase. You know, that's how I feel when I talk to a Dean-iac. They're drinking the cool aid!

Don Boudreaux writes:

There's a mistake in my last post. I meant to say the following:

Protectionists use government force to steal money from innocent consumers -- threatening consumers with violence unless consumers follow protectionists' orders on what goods and services to avoid buying. Many are also dishonest, asserting that competition that happens to come from outside of some ultimately arbitrary geo-political border is harmful to society at large -- asserting that a policy of preventing consumers from taking advantage of the best deals that consumers find, as consumers themselves judge these deals, BENEFITS society -- that permitting politicians to superintend the buying practices of consumers is an essential key to prosperity.

Don Boudreaux

Eric Krieg writes:

Everything Don knows he learned in Kindergarten!

Don Boudreaux writes:

Yes, much fundamental learning does (and should) occur early on. Those basic rules -- don't hit other people, play by agreed-upon rules, don't take other people's stuff, don't envy other people's material possessions, keep your promises, tell the truth -- these work. They don't lose their effectiveness as we age. Indeed, the value of following them likely intensifies.

Some people might think it silly to apply such basic rules to an analysis of international trade. I don't. If we all agree that net harm is generated if I stick a gun to my neighbor's head and tell him I'll shoot him unless he buys my eggs rather than eggs from a farmer across town, then someone please identify for me what significant difference comes into play when (1) I persuade agents of the government to act as my enforcer, and (2) the farmer in competition with me is in another country?

Don Boudreaux

Lawrance George Lux writes:

I have not had time to read all the commentaries, but will try my own response to Arnold's question:

It the concept of general equilibrium just impossible to explain to a non-economist?

Free Traders miss a fundamental element of Ricardo's theory of comparative advantage. One should check on his law of diminishing returns. There is no comparative advantage to trade, where all factors of Production are equal, except for Labor cost. There will only be an equalization of Standards of Living between the two Countries, until the same Wages are paid to equal work within both Countries.

The cheaper labor will always enjoy the advantage in this scenario, while the more expensive labor will always endure some loss of Standard of Living.
lgl

Boonton writes:

"One should check on his law of diminishing returns. There is no comparative advantage to trade, where all factors of Production are equal, except for Labor cost. There will only be an equalization of Standards of Living between the two Countries, until the same Wages are paid to equal work within both Countries. "

Can anyone point to one case where two nations share equal factors of production except for labor cost? How could such a situation even develop?

Don Boudreaux writes:

The print, broadcast, and web-based media increasingly feature skeptics of free trade.

I’ve visited several blogs, including this one, and encountered many skeptics who demand evidence that the theory of comparative advantage is valid.

Such evidence surrounds us. All we must do is notice it. Here's one example that struck me earlier today.

I can walk faster than my secretary. (She’s an older lady with unusually short legs.) Yet whenever I need important papers sent to the Dean's office – as I frequently do – I have my secretary walk them over.

Why? The answer is that my secretary has a comparative advantage over me at delivering papers on-campus. The reason is that I can accomplish higher-value things with the time I spend at my desk (as opposed to traversing the campus) than my secretary can accomplish at her desk.

In short, every day there are millions of tests of the theory of comparative advantage – and an equal number of test results confirming its validity. If the theory weren't valid, CEOs who are handier with machinery than their secretaries would change the printer cartridges in all of the offices printers; executives who are outstanding weekend cooks would help prepare lunch in the company cafeterias. Or, at least, the performance of these and almost all other tasks would be randomly distributed.

Don Boudreaux
George Mason University

Steve writes:

Don--I just want things to get better. I just want more opportunities for advancement. Please tell me how this can possibly happen when all knowledge-based jobs are readily and easily moved off shore for 1/10th the price?

What motivation does one have to, say, enroll in your school of Economics when economic alaysis by non-superstars will be done off shore?

I want to see the bright side of things, but there is so little good happening for the common man nowadays in terms of job security that there simply IS no bright side.

(Moderator, please note my valid email. I really do not wish to be spammed so I will not permit you to sell it).

Gautam writes:

I was going to post about how Steve seems too peeved about losing his Job to notice that atleast some amount of consideration has been given to Ricardo's theory and it has been found to illustrate trade most realistically. I think old Dave Ricardo, was not talking about abstractions but did a more than decent job of seeing the world as it is(in this particular case, his theory of Rent is a bit questionable, actually i don't think many people really like it these days :-).

Steve, please go ahead and vote for one of the candidates who wants to stop the move of jobs abroad, or that other guy who wants an International Minimum Wage. You have been guaranteed the freedom to vote your nation into troubles, and well why shouldn't you, after all the politicians are promising you safe jobs, a "slow movement of jobs offshore".

All that Economics can say is that what you don't want to suffer your children will suffer, but hey you are already suffering for what has happened in the past, what difference does it make, lets just push of the problems on the future, they aren't born yet, they don't have a say, they aren't looking, in the long run we are all dead.

So Steve, cheers and may God Bless the Unborn American (He'll need all the blessings he can get)

Xavier writes:

Steve, I started as a computer engineering undergrad in 1999. After graduation I went to law school. The IT crash certainly affected me directly, but I still believe in free trade.

Even assuming that Steve is right and the US no longer has any comparative advantage in technical labor, I don't think there's any government policy that can do anything about it. If Indian programmers are as good as American programmers at 1/6 the cost, Indian programmers are going to get the jobs. The only question is whether they will be working for American companies or Indian companies.

Steve, what's your opinion on open source software? It seems that a lot of IT professionals hate outsourcing, but they love open source. I don't understand why. Open source software is competition for commercial software, so it's clearly against the interests of employees of the commercial software industry.

Boonton writes:

The Robert's article is devasted by Slate.com. See http://slate.msn.com/id/2093649/.

Boonton writes:

There's a difference between absolute advantage and comparative advantage. Even if County I (India) is able to produce *everything* cheaper than Country U (USA) it still makes sense for both countries to trade with each other. There will still be some goods that Country I has more absolute advantage on. It makes sense for Country I to concentrate on producing this product while importing other products from Country U.

rvman writes:

LGL is right about part of this, and so is Steve - under any circumstances, trade from a labor scarce, capital abundant country to a labor abundant, capital scarce country is going to make labor in the first country slightly poorer and capital slightly richer. In this case, some skilled labor has a new competitor, which in any market drives down price. The failure of Steve's argument is that the benefits - to each country individually - outweigh the costs.

What Steve is missing is that this case is exactly like all other trade situations. He is claiming the "jobs" are mobile - are moving overseas. What is happening is that, instead of producing a product - computer programs, technical support, whatever, here, we are importing those products from India. The job side of the equation - the fact that American companies happen to be the ones purchasing those services - is irrelevant. It could just as easily be Indian companies doing this.

Steve's other problem is that, even without this job flow, the salary of computer professionals in this country was going to fall a breathtakingly large amount. One of the results of the internet bubble is that certain inelastic inputs had highly inflated prices. In English, the wage for computer "professionals"(computer operators) was just as inflated as the stock price for Enron was. Some people at Pets.com took home $200,000 each for their work there over a few years. Just ordinary programmers. That entire company didn't produce value worth that much. As someone pointed out - those guys' salaries, replicated over an industry, is the where everyone's 401K went.

Steve suggests that his new house is part of GDP, but he didn't produce stuff worth 300k. He's right. The guys who built his house produced 300k worth of stuff. (Housing shows up in Investment) When I buy a new car, I won't be paying with my "product". The GDP growth will be incurred when I buy, but it represents the production by a bunch of guys in Flat Rock, MI. If I buy an import, it will be zeroed out - an increase of 15k or whatever in Consumption, but a decrease of 15k in Exports-Imports. (Or an increase of 15k to Imports, which is counted negatively to GDP. In either event, my contribution to GDP occurs when the thing my labor makes is sold to a user. BUYERS don't create GDP, SELLERS do.

Back to our laborers. The possibilities. One: What we see now. Two: We place tariffs or restrictions on the import of software from overseas. Prices rise, and a bunch of people in the auto/aircraft/steel/accounting/whatever industries get thrown out of work. Net result - a few programmers keep jobs, a bunch of other workers don't. Three: We place limits on use of overseas labor by American companies. American companies are now at a competitive disadvantage to Indian firms, so Dell(say) loses market share. A few more guys work at their US call center, but a bunch of people on their assembly line get laid of, along with a few from other sectors, because of higher prices. Net result: a few computer guys get richer(or keep what they have), a bunch of others poorer.

The only way to keep "high paying jobs" if there is a competitive rival source of labor overseas is to throw a bunch of other people out of work. The minimum wage increases unemployment. Protectionism increases unemployment, if it doesn't cut overall real wages. (Purchasing power, not dollars) The real source of high paying jobs is the actual ability to produce an actual large amount of product that actual people actually are willing to pay for. Pets.com, tech support, protectionist policies, these aren't them.

Boonton writes:

The Marginal Revolution cites this excellent Paul Krugman essay from before 1996 on why so many people, even smart intellectuals, do not understand Ricardo and comparative advantage.

http://web.mit.edu/krugman/www/ricardo.htm

Cap'n Arbyte writes:

Steve,

There's no "race to the bottom" because real wages are determined ultimately by the productivity of labor. I don't have time to discuss any of your other points now because Roberts has written another article that requires my dissection. :)

John Thacker writes:

rvman-- your argument, while superficially plausibly, is against completely refuted by the data. The share of income going to labor has not decreased, as mentioned in Krugman's article cited above.

rvman writes:

I am comparing a "closed" market against an "open" market. We have a continuing open market. It just happens that technology has lowered the cost of importing a specific type of product (computer tech). This - definitely - lowers the price of the product if it makes imports competitive, meaning that, holding marginal product of labor for people in this country in this industry fixed, the marginal revenue product (which equals the nominal wage, which is what people notice) goes down.

I make 5 computers a month, and am the only input. If the price of computers drops from $1000 to $500 (because some guys in India are willing to make 1 computer a month, and be paid $500 for it), my MRP (and thus wage) goes from $5000 to $2500. I now go get a job making 700 cat toys a month, worth $5 each. I get a wage of $3500. I'm worse off by $1500. However, the first five buyers of computers - the ones who would have bought mine - are better off by $500 each, for a total of $2500. Society is better off by a total of at least $1000 - more if more computers are sold than were before. Trade theory is just an elaboration of the above micro concepts, writ large.

"Labor share of income" is a hugely macro measure, very noisy. The markets we are discussing, for all of the sound and fury, represent miniscule percentages of our overall product. Even 1 million workers is what, 0.7% of our labor force? The movement to labor share caused by a change affecting them would be lost in the data noise.

articulate fool writes:

Regarding

http://arbyte.us/blog_archive/2004/01/Roberts_Again.html

More realistic numbers are 60k/year US engineers being replaced with 40k/year Indians. Something that I rarely hear is that it actually costs much more to hire an Indian, because in software the cost of communication becomes very significant as the marketing, design and implementation are separated by large distances. Creating software is purely an intellectual exercise that depends very greatly on great team communication. Bottom line is that 40k/year Indian is actually costing 100 – 150k/ year with the communication overhead, not to mention higher defect rates.

Comments for this entry have been closed
Return to top