Re: Outsourcing a plus for the US economy.?

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Paul,

While I am in general agreement with the point you made in this article, I am surprise that you did not mention the insight that I had gotten from you that comparative advantage is merely Say's Law internationalized and only applicable under full employment.

Further, it may be useful to view out-sourcing is not really trade, it is cross-border wage arvbitrage.  Corss border wage differentials are very different in nature from wage differentials within an integrated economy, in that the economic aspects of the disparity is greatly reduced, while non-economic scio-political factors dominate. Outsourcing to China and India is not the same as NY outsourcing to N. Carolina.  Besides outsourcing does not involve the principle of comparative advantge since CA involves two coutries trading two complete commodities.  Outsourcing  is one country producing all coomodities off shore.

Also your article may have distorted what Mankiw said. He only said outsourcing was good for the US economy.

I wrote recently in an article on Presidential Election Cycle and the Fed:

Council of Economic Advisers chairman Martin Feldstein, a highly respected conservative economist from Harvard with a reputation for intellectual honesty, had advocated a strong dollar in Reagan's first term, arguing that the loss suffered by US manufacturing was a fair cost for national financial strength. But such views were not music to the ears of the Reagan White House and the Treasury under Donald Reagan, former head of Merrill Lynch, whose roster of clients included all major manufacturing giants. Feldstein, given the brush-off by the White House, went back to Harvard to continue his quest for truth in theoretical economics after serving two years in the Reagan White House, where voodoo economics reigned.

Feldstein went on to train many influential economists who later would hold key positions in government, including Lawrence Summers, treasury secretary under president Bill Clinton and now president of Harvard University, and Lawrence Lindsey, dismissed chairman of the Bush White House Council of Economic Advisers, and Gregory Mankiw, Lindsey's replacement, who sparked an uproar last week by saying, in the same intellectual tradition: "Outsourcing is a growing phenomenon, but it's something that we should realize is probably a plus for the economy in the long run." Nearly 2.8 million factory jobs have been lost since President George W Bush took office in 2000 and the issue looms large ahead of the coming election in November, where victory in rust-belt states such as Ohio, Illinois, Pennsylvania, Indiana and Michigan could be key, as well as high-tech states such as California, Texas, Massachusetts and North Carolina. Democrats have seized on Mankiw's comments as evidence that the Bush White House is insensitive to the plight of unemployed and underemployed voters, notwithstanding that the Clinton economic team held in essence the same views.

I am finishing an article on National Wealth which will appear in Asia Time in a week or so.  It touches on parallel issues. Here is a draft excerpt:

National Wealth
By
Henry C.K. Liu
 
Wealth is defined by Webster’s Dictionary as a large aggregate of real and personal property; an abundance of those material or worldly things that people desire to possess; riches; also the state of being rich. In measuring a civilization, one focuses on wealth of tradition, of culture, of creativity, of morality, of knowledge, of expertise, of spirit, of compassion, etc. The Greeks glorified beauty and the Romans worshiped power, but Christ taught the Christian world to love the poor and the weak and celebrate only the spiritual wealth of the meek.  In classical economics, wealth is abundance of all material objects which have economic utility.  Yet in a knowledge economy, knowledge is wealth and in an information economy, information is wealth.  In a dollar economy, wealth is denominated in dollars.

In recent decades, gross nation product (GNP) has been the generally accepted measure of national wealth.  But all secular wealth is derived from life.  Even on a personal level, when life ends, all else secular, including wealth, ends for that individual, even hope, which is potential for wealth.  Material wealth is poor compensation for poor health.  From this, one can logically deduce that national wealth is based fundamentally on population.  Without population, there is no nation, let alone national wealth.  When the population of a nation increases, so does its national wealth, unless the economic system is dysfunctional, in which case the fault is not with population growth, but with the economic system.  The physical, mental, intellectual, cultural and spiritual health of the population has a direct impact on the national wealth.
 
Many economists subscribe religiously to the dogma of scarcity as a natural law of economics which underpins the law of supply and demand.  When clean air and water were abundant, instead of constructing an economic theory from this happy natural condition, economists defined these gifts of nature as non-commodities, external to the concern of economics, until of course clean air and water became scarce through pollution, then and only then would scarcity make clean air and water legitimate economic issues.  Similarly, population growth in a world of scarcity is considered a burden to the economic system.  These economists, of whom Thomas Robert Malthus being the spokesman, argue for the need of population control based on the dogma of scarcity.
 
Malthus (1766-1834), British economist, sociologist and pioneer in population theory, in his An Essay on the Principle of Population (1798), contended that poverty is unavoidable without population control since natural population increase is geometric while the increase of the means of subsistence is arithmetic.  Thus famine and disease are natural constraints on population and war is the social constraint.  In 1803, Malthus admitted the preventive check of “moral restraint”, paving the way for neo-Malthusian birth control theories which influenced classical economists, especially David Ricardo (1772-1823).  But as history has since borne out, global food production growth has long outstripped global population growth and the biggest problem in modern agriculture is not excessive demand but falling prices caused by over-production.  Many advanced economies, such as those of France and Japan, have found it necessary to adopt incentive policies to stimulate population growth in order to maintain economic growth.

Ricardo's interest in economics was sparked in his late twenties by a chance reading of Adam Smith's Wealth of Nations (1776). Ricardo’s law of rent was seminally influenced by Malthusian concepts. He propounded his iron law of wages and a labor theory of value.  The iron law of wages asserts that wages naturally drift towards minimum levels and cannot rise above subsistence levels.  The theory of value maintains that in exchange, the value, not the price, of goods is measured by the amount of labor expended in their production.  When the market price differs from value, it causes either inflation or deflation, producing drags on economic growth. To Ricardo, rent is a result and not a cause of price.

Ricardo observed that money, by which he meant gold-back specie money, not fiat money, “is subject to incessant variations from its being a commodity obtained from a foreign country, from its being the general medium of exchange between all civilized countries, and from its being also distributed among those countries in proportions which are ever changing with every improvement in commerce and machinery, and with every increasing difficulty of obtaining food and necessaries for an increasing population. In stating the principles which regulate exchangeable value and price, we should carefully distinguish between those variations which belong to the commodity itself, and those which are occasioned by a variation in the medium in which value is estimated, or price expressed.”

Ricardo asserted that a rise in wages due to inflation produces no real effect on profits, as prices of products also rise while a rise in real wages ahead of inflation has a great effect in lowering profits. Labor, when purchased and sold as a commodity, may increase or diminish quantitatively in supply and has a natural price and a market price. The natural price of labor is that price which is necessary to enable laborers to subsist and “to perpetuate their race without either increase or diminution.”  But there is nothing “natural” about this natural price of labor. Population grows naturally without intervention and the growth tends to be concentrated on the laboring poor who have the least capacity to intervene on their fate.  Ricardo’s natural price of labor depends on the price of the food, necessaries, and conveniences required for the support of the laborer and his family.  With technological and social progress, the natural price of labor always has a tendency to rise, while the natural price of commodities, excepting raw produce and labor, has a tendency to fall through innovation.  The market price of labor is determined by supply and demand.  Unemployment then is a condition to depress the market price of labor by increasing supply to saturate demand.  When the market price of labor exceeds its natural price, the condition of the laborer is flourishing and happy. When, however, by the encouragement which high wages give to the increase of population, the number of laborers is increased, wages again fall to their natural price, and indeed from a reaction sometimes fall below it.  So goes the argument for population control for the good of the laboring class or as Ricardo put it the laboring race.  The Christian Church, having for most of its history allied itself with establishment interests, opposes birth control for more than religious and moral reasons.

When the market price of labor is below its natural price, the condition of the laborers is most wretched and poverty results.  It is only after their privations have reduced their numbers, or the demand for labor has increased through economic growth, that the market price of labor will rise to its natural price, and that the laborer will have the moderate comforts which the natural rate of wages will afford.  Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse, which an increased capital gives to a new demand for labor, be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labor may give a continued stimulus to an increase of people. Thus, then, with every improvement of society, with every increase in its capital, the market wages of labor will rise; but the permanence of their rise will depend on whether the natural price of labor has also risen; and this again will depend on the rise in the natural price of those necessaries on which the wages of labor are expended.  As population increases, these necessaries will be constantly rising in price, because more labor will be necessary to produce them.  If, then, the money wages of labor should fall, whilst every commodity on which the wages of labor were expended rose, the laborer would be doubly affected, and would be soon totally deprived of subsistence.  Instead, therefore, of the money wages of labor falling, they would rise; but they would not rise sufficiently to enable the laborer to purchase as many comforts and necessaries as he did before the rise in the price of those commodities.  These, then, Ricardo concluded, are the iron laws by which wages are regulated, and by which the happiness of far the greatest part of every community is governed.

Ricardo argued that like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature.  The clear and direct tendency of the poor laws and labor regulations is in direct opposition to these obvious principles: it is not, as the legislature benevolently intended, to amend the condition of the poor, but to deteriorate the condition of both poor and rich; instead of making the poor rich, they are calculated to make the rich poor; and whilst the present laws are in force, it is quite in the natural order of things that the fund for the maintenance of the poor should progressively increase till it has absorbed all the net revenue of the country, or at least so much of it as the state shall leave to us, after satisfying its own never-failing demands for the public expenditure.  “This pernicious tendency of these laws is no longer a mystery, since it has been fully developed by the able hand of Mr. Malthus; and every friend to the poor must ardently wish for their abolition,” Ricardo wrote.  Poverty then is not the result of the rich getting more than the poor, but the result of economic underdevelopment.  This has been the position adopted by most liberals.  Ricardo also suggested the impossibility of a "general gllut" (an excess supply of all goods) which has since been disproved by facts in recent decades when overcapacity has become the curse of the global economy.
The year of US independence, 1776, was a year of grand treatises in economics and politics.  Adam Smith published his Wealth of Nations, the Abbé de Condillac his Commerce et le Gouvernement, Jeremy Bentham his Fragments on Government and Tom Paine his Common Sense.  British mercantilism had led to a rebellion by the colonists to establish a home-grown liberal republican government dedicated to laissez-faire, a statist policy against monopolistic mercantilism and in opposition to British “free-to-exploit” trade in the name of free trade.

Free markets for labor do not exist because of a disparity of power between employers and employees.  Laborers must work to earn current income to enable them and their families to eat daily. Subsistent wage means laborers have no savings.  Entrepreneurs can delay investing their capital until the market price of labor is right.  Hunger quickly lowers the market price of labor to near or even below subsistence levels. Notwithstanding the disparity of bargaining power between capital and labor which prompted Karl Marx to call on workers in 1848 with a battle cry of “nothing to loose but you chains,” there were two other problems with Ricardo’s iron law of wages. 

The first is something that Henry Ford figured out a century later. Ford realized that workers who were paid at subsistence levels could not afford to buy the cars they made in his factories. Ford worked out a wage-price ratio under which his workers would have enough money after basic living expenses to buy the cars they produced.  In the new industrial democracy, Ford was able to sell many more cars than his competitors who eventually went bankrupt selling only to the very rich. By paying his workers well, Ford became very rich.  The more workers he hired, the more cars he sold.  Population growth translated into growth markets with rising wages.  That formula was the fountainhead of the rapid growth of national wealth in the US.  Demand management has been generally accepted as indispensable in market economies since the New Deal when President Franklin D. Roosevelt adopted Keynesianism after the 1929 crash. The second problem with Ricardo’s iron law of wages is that the working population is the fundamental asset from which a nation derives its wealth.  By adopting policies based on an economic theory that structurally keeps wages at their lowest levels, a nation condemns itself to the lowest possible level of national wealth.  Post-1978 China is a classic example, despite its high growth rate.

Supply side economists have in recent decade promoted the arguments of Say’s Law.  In 1803, Jean-Baptiste Say, (1767-1832) published his Treatise on Political Economy in which he outlined his famous Law of Markets.  Say's Law claims that total demand in an economy cannot exceed or fall below total supply, or as James Mill (1773-1876) restated it, “supply creates its own demand.”  In Say's language, “products are paid for with products” or “a glut can take place only when there are too many means of production applied to one kind of product and not enough to another.”  Yet, as post-Keynesian economist Paul Davison has pointed out insightfully, Say’s law only applies under conditions of full employment, a condition not cannot exist under supply-side theory of using unemployment as a necessary device to keep down wages, the increase of which is defined as the main cause of inflation.  Monetarists use tight money to keep unemployment high at a politically-acceptable level to control inflation, that is to say, to protect the value of money at the expense of worker income.

Classical and Neo-classical theories are mostly based on this simplistic, even tautological, assertion of supply creating its own demand. Classical economists were aware of widespread unemployment and that markets could and did fail.  But they concluded that these were due to excess supplies and demands of particular commodities and not excess supplies (or gluts) of commodities on a macro scale, in other word, problems of sub-optimization caused by market inefficiency.  But markets exist only because of sub-optimization inefficiency, otherwise, if everyone produces only what he needs or what the market will absorb, there is no surplus to trade.  Ricardo, supported by James Mill, extended this proposition to savings and investment.  If one produces more than one consumes, then the surplus is saved and by definition invested.  No one would produce in excess of consumption needs if one does not have a desire to either exchange the products or invest its profits. Supply, therefore, is demand. This virtually all the Classical economists held to be an irrefutable truth.  But again, in a truly efficient market, only a fool will produce more than he consumes.  Markets are in fact the composite of well-meaning fools thinking they act in their self interest, but in fact act in their own self disadvantage which they then seek to recover through the market.  Thus a general glut is unavoidable through sub-optimization.
Ironically, Malthus and the French economist, J.C.L. Simonde de Simondi in their belief in the inevitability of general gluts, became exceptions to classical economist faith in perfect markets.  They argue that income comes as wages to workers, as profit to entrepreneurs and as rent to land-owners. Classical economics ordains that wages are consumed and profits invested, but make no stipulation as to what happens to the rents received by land-owners who presumably may choose to consume or not to consume it.  As long as profits are positive, worker income is mathematically less than net output, leading to a general glut of goods even though the investment-savings identity holds, if land owners fail to consume their rent in peace or spent it on war.  Malthus made the famous argument that landlord consumption functionally increased to "fill" the glut in demand which framed itself as a modern proposal for the revival of feudalism in which the aristocracy owned the land and consumed conspicuously, leaving behind in history a network of tourist attractions in the form of grand palaces and heroic monuments.  Since landlords do not produce anything, nothing is added to output but their very unproductiveness is actually functionally necessary since it maintains demand for goods while, at the same time, reduces investment that may lead to a general glut. But should landlords hold back consumption in peace time, a general glut will be unavoidalbe.
Malthus's identification of the landlord class as functionally beneficial stands in stark contrast to Ricardo view of them as parasitical. It had been the fundamental question behind the class struggle between the land-owning aristocracy and the rising bourgeoisie that gave rise to the French Revolution which had influenced the views of both Ricardo and Malthus.  The power struggle after the French Revolution between the land-owning bourgeoisie and the rising industrialists had no class content, only an intra-class rivalry, not until the industrialists won and produced a social structure of mobile capital improving labor productivity that led to the Revolutions of 1848 in which class struggle expressed itself through failed democratic revolutions.
 
Karl Marx’s critique of Malthus started from a position of agreement. Marx's idea of capitalist production, however, is characterized by his concentration on the division of labor and his observation that goods are produced for sale for money and not for consumption or direct exchange for other goods. In other words, goods are produced simply for the intention of transforming output into money as capital to purchase other commodities for investment. The possibility of a lack of effective demand, therefore, is held only in the possibility that there might be a time lag between the sale of a commodity (the acquisition of money) and the purchase of another (its disbursement). This possibility, also originally crafted by Simondi in 1819, endorsed the idea that the circularity of transactions was not always, and in fact seldom if ever, complete and immediate. If money is held, Marx contended, even if for a little while, there is a breakdown in the exchange process and a general glut can occur.  Moreover, in finance capitalism, which arrived after Marx life, money does get held speculatively to produce a general glut as an opportunity to buy cheaply for future profit. Marx, like Malthus, also accepted the savings-investment identity but reached a different conclusion. Since investment is part of aggregate demand, circulation does continue in time even if money is held. The drive for accumulation, Marx concluded, will continue unhindered and thus a crisis of the sort Malthus described can never happen and if it did, would be practically inconsequential. What can happen, as Ricardo originally claimed, is that a single good may be oversupplied causing a very temporary and small adjustment of proportions which might seem as a general glut but in fact is not.  Thus, all the Classical economists, except for poor Malthus and Sismondi, therefore were generally in agreement over the validity of Say's Law, at least in the long run and under conditions of full employment. They all also agree on the identity of savings and investment as well as the possibility of separating output and price theory.   Thus when supply-siders promote supply-pushed economic stimulation while they accept unemployment as structurally necessary for combating inflation, they are walking with only one leg of Say’s two-legged Law.

In 1815,  Ricardo published his ground-breaking Essay on Profits, in which he introduced the differential theory of rent and the law of diminishing returns to land cultivation.  With wages stuck at their natural level, Ricardo argued that rate of profit and rents were determined residually in the agricultural sector.  He then used the concept of arbitrage to claim that the agricultural profit and wage rates would be equal to the counterparts in industrial sectors, showing that a rise in wages did not lead to higher prices, but merely lowered profits.  In his formidable 1817 treatise, Principles of Political Economy and Taxation, Ricardo articulated and integrated a theory of value into his theory of distribution.  For Ricardo, the appropriate theory was the "labor-embodied" theory of value, or LTV, i.e. the argument that the relative ‘natural’ prices of commodities are determined by the relative hours of labor expended in their production at the natural price of labor. 

With prices pinned down by the LTV, Ricardo restated his original theory of distribution.    Dividing the economy into landowners (who spend their rental income on luxuries or wars), workers (who spend their wage income on subsistence necessities) and capitalists (who save most of their profit income and reinvest it), Ricardo argued how the size of profits is determined residually by the extent of cultivation on land and the historically-given real wage.  He then added on a theory of growth.  Specifically, with profits determined by the gap of market price over natural price, the amount of capitalist saving, accumulation and labor demand growth could also be deduced.  This, in turn, would increase population and thus bring more land, of less and less quality, into cultivation and use, such as the founding of desert cities such as Los Angles and Las Vagas.  As the economy continued to grow, then, by Ricardo’s theory of distribution, profits would be eventually squeezed out by rents and wages.  In the limit, Ricardo argued, a "stationary state" would be reached where capitalists will be making near-zero profits and no further accumulation would occur. Ricardo suggested two things which might hold this law of diminishing returns at bay and keep accumulation going at least for a while: technical progress, which was later spelled out more full by Schumpeter, and foreign trade to reduce the market inefficiency imposed by political and economic nationalism.  On technical progress, Ricardo was ambivalent.  One the one hand, he recognized that technical improvements would help push the marginal product of land cultivation upwards and thus allow for more growth.  But, in his famous Chapter 31 "On Machinery" (added in 1821 to the third edition of his Principles), he noted that technical progress requires the introduction of labor-saving machinery.  This is costly to purchase and install, and so will reduce the wages fund.  In this case, either wages must fall or workers must be fired.  Some of these unemployed workers may be mopped up by the greater amount of accumulation that the extra profits will permit, but it might not be enough.  A pool of unemployed might remain, placing downward pressure and wages and leading to the general misery of the working classes.  Technical progress, for Ricardo, was not a many-splendored thing.  It left to Schumpeter to argue that creative destruction creates more than it destroys.
 
On foreign trade, Ricardo set forth his famous theory of comparative advantage.   Using his famous example of two countriees
(Portugal and England) and two commodities (wine and cloth), Ricardo argued that trade would be beneficial even if Portugal held an ansolute cost advantage over England in both commodities. Ricardo's argument was that there are gains from trade if each nation specializes completely in the production of the good in which it has a "comparative" cost advantage in producing, and then trades with the other nation for the other good.  Notice that the differences in initial position mean that the labor theory of value is not assumed to hold across countries -- as it should be, Ricardo argued, because factors, particularly labor, are not mobile across borders.  As far as growth is concerned, foreign trade may promote further accumulation and growth if wage goods (not luxuries) are imported at a lower price than they cost domestically -- thereby leading to a lowering of the real wage and a rise in profits.  But the main effect, Ricardo noted, is that overall income levels would rise in both nations regardless.  That theory is tested valid in today’s global trade relationship. Yet Ricardo underestimated the political problem of uneven income distribution while overall income increases.

The article goes on to argue that the Henry George notion of land as true basis of wealth is misplaced.  Human capital is . Of the $114 trillion national wealth estimated by the Federal Reserve, 73.7% is in humand capital, 16.2% in financial assets, and 7.9% in real estate.
The main theme dwells on th eproposition that population is the source of all wealth and rising wages is the means of producing national wealth.

Henry
pdavidso wrote:

Will Free Trade and Outsourcing of US Jobs Inevitably Increase the
Wealth of All Nations?

              Paul Davidson, Editor, Journal of Post Keynesian Economics

Will outsourcing and the loss of US jobs ultimately lead to the benefit of all
nations as President Bush’s economic advisor, N. G. Mankiw has declared?
Mankiw is merely expressing the mainstream  economic theory that claims that,
over the long run, free trade in goods and services (including labor services)
results in more income and wealth for all nations. Even former US President
Bill Clinton at the recent Davos economic conference expressed this belief
when he stated that anti globalization activists want to “take us back to a
time that never was, on a journey that cannot be effective.

The economic theory basis for statements such as Clinton’s and Mankiw’s is
what economists call “the law of comparative advantage”. But what if this
comparative advantage theory that  a completely free trade global economy
results in income gains for all nations require logical conditions that makes
it inapplicable to the economic world in which we live?  It can be shown
that this law of comparative advantage theory has  severe logical weaknesses
that makes applying policies based on it misleading and dangerous to the US
economy.

A conventional textbook example will make the comparative advantage argument
readily comprehensible to the reader. In this example there are two economies,
the East [i.e., cheap labor countries like India and China] and the West [
high cost labor countries such as  the United States]. Assume there are a
million workers in the East and a hundred thousand workers in the West.  Each
economy produces  two possible tradeable products – say bicycles (which uses
cheap unskilled labor) and computers (which requires skilled labor).  In the
absence of trade,  the global total of 1,100,000 workers  produce (and
presumably their employers could profitably  sell) a global total of 375,000
bicycles and 55,000 computers. After trade  each country specialises  in
producing the products it has a comparative advantage, and the result it is
assumed is that globally the 1,100,000 workers would  produce 400,000 bicycles
and 70,000 computers.

It therefore follows that while employing the same number of workers globally,
as a result of free trade, the world has gained a total of 25,000 additional
bicycles and 15,000 additional computers (even if the East has an absolute
advantage in having an almost unlimited inexpensive supply of both the
unskilled and skilled labor necessary for  producing bicycles and computers).
Consequently, the theory of comparative advantage “proves” that the real
income of the global economy has increased, thereby providing more potential
income for every person in both East and West economies. In the face of this
textbook comparative advantage “proof the anti-globalization advocates and
those who want the Bush Administration to take positive action against the
outsourcing of jobs to China and India appear to be either the roar of
ignorant fools who do not understand simple economics, or the voice of a
coddled, protected (from competition) unionized Western labor force.

 Unfortunately this comparative advantage analysis is based on unrealistic
assumptions, e.g., under free trade, the hypothesized additional supply of
25,000 bicycles and 55,000 computers automatically creates its own additional
demand. (Wouldn’t the multinational auto companies be glad to know that if
they increase global productive capacity by siting plants in countries that
have comparative advantage in auto assemblies, then they will sell (at a
profit) all the cars they can produce? There can never be surplus capacity--as
there seems to be today.)

This assertion that additional supply always creates its own additional market
demand is known as Say’s Law which, as the famous economist John Maynard
Keynes noted, assumes “that there is no obstacle to full employment”. Keynes
demonstrated that Say’s Law could not be applied  to money-using
entrepreneurial economies and that full employment was not an automatic
outcome
of free market competition. Consequently, if there is anything  economists
should have learned since Keynes, it is that one cannot prove that there  will
be gains from free trade to be shared by all trading economies unless one can
be assured that there is full employment in all nations — before and after
trade.

 That brings us to a second problem with applying this law of comparative
advantage to today’s global economy. Economic theory assumes that the gains
from trade due to comparative advantage occur only if neither capital nor
labour are mobile across national boundaries. If capital is internationally
mobile – as is necessary if one is going to have business firms free to
produce
overseas (outsourcing) --, then the proof that  this “law of comparative
advantage” assures there are gains from trade for all nations does not
logically follow.  If  capital is freely mobile, marketable goods and services
will be produced wherever geographically it is most profitable, i.e.,
where unit labour costs are lowest for producing bicycles and computers. In
such a world if foreigners have an ample supply of both unskilled and skilled
workers, outsourcing of all production of tradeable goods will be a readily
observable phenomenon.

For example, if  the East has an absolute advantage in that it possesses
unskilled and skilled workers whose unit labour costs are significantly lower
than labor costs of similar workers in the West, while the East has an ample
supply of workers to produce all  of the bicycles and computers that global
markets can absorb, then the East will attract sufficient foreign capital from
the West to hire domestic workers to produce all  the bicycles and computers
to meet demand in the global market. As a result, the East will experience a
tremendous surge in its growth in GDP. Production and employment in the West
will decline (or at best stagnate) and the West’s labor force will become
impoverished as either unemployment rates in the West rise dramatically, or
the
West’s workers are forced to accept a real wage that is competitive to wages
being paid to the abundant supply of unskilled and skilled workers in the
East.

Surely, politicians in the West should be more aware of what they are
advocating for their domestic labor force before blindly accepting the Clinton
’s “inevitable journey” into an outsourcing free trade world. Instead these
politicians must recognize that indiscriminate application of the law of
comparative advantage can be dangerous to the health of the West and
perhaps even the global economy.

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
office phone #;(865)974-3303; office fax#(865)974-4601
home phone and fax # (561)369-1951
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/Davidson.html