===== Original Message From "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.
Correct. After all if there are areas of high unemployment within a nation,
then fiscal policy -- where more revenue is collected in the high employment
area and more G expenditures in the low employment area tend to create jobs
and reduce the depressed nature. similarly central bank policy can help-
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.
But proponents of CA suggest (see The Economist) that the US will invent NEW
(yet unforeseen) high skilled jobs in the Technology sector -- which the
labor force in Chinan and india will not have a comparative advantage.
Henry, you are correct -- as I suggest in my piece, with internationally
mobile financial capital and an ualmost unlimited low-skill and high skilled
labor force in India and China, it is absolute advantage raather than
comparative advantage that counts.
And with US Universities willingly taking Asia students into engineering and
computer science, etc. programs, the high tech skills are quickly passed on to
these large population Asiatic n ations -- giving them an absolute sdvantage
in these new still unfotrdrrn tech jobs. The only jobs remaiinng in the US at
the limit will be nontrafeable goods and services.
Also your article may have distorted what Mankiw said. He only said
outsourcing was good for the US economy.
Why? Because US gets imported goods at lower price than the same quality
goods can be produced in tghe US -- and, implied in Mankiw's "lomg run"
qualification for the "ggod for the US economy, he assumes that unemployment
will not be a sgnificant problem as the new unforeseen higher-skilled jibs
appear. How does he know they will appear? Well he looks at history without
realizing the economic system is nonergodic and therefore prbability
distributions that governed past historical events need not exist in the
future.
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.
Unfortunately Martin Feldstein would not recognize the "truth in theoretical
economics" if it hit him over the head. Feldstein is a conservative ideologue
wedded to the classical ergodic system.
Feldstein went on to train
[Train? I would say brainwash. I have known Larry Summers since he was a
child of a former colleague of mne at the University of Pennsylvania. When
Larry was a graduate student at MIT ,he invited me to give a seminar to the
grad students in order to explain the difference between what they were
learning and Keynes's economics. But Larry nneded NBER support in his early
professional career -- and Feldstein held the NBER pursestrings.}
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.
Your right about Clinton's team -- rmeber when the poverty intellectuals
resigned from the Clinton Administration when Clinton removed welfare support.
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.
GNP is income-- which technically not the same as wealth-- isnce the latter
is a stock and the former is a flow ---although there is usually a high
correlation between GNP and 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.
This is simplly because economic is the study of the functioning of an
entrpreneurial economy. Economics would have little of import to say if we
still lived in the Garden of Eden.
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.
Mathus's law was based on the idea that population grew geometrically, while
resources were finite-- or at best, with technical progress, grew
artihmetically. Today's malthusians all tend to subscribe to this geometric
vs arithmetic grow concept -- and hten mathematics assures the ultimate
outcome.
In reality, in the last two centuries, at least in the case of agriculture,
food production potential has grown at a geometric rate that exceeds the
population growth rate -- despite medical technology that has increased life
expectations.
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.
Right.
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."
Notice this implies a zero rateof growth of population--oor at least mouths to
feed. Thus if the populstion ages say due to medical advances and better
health care, then the "natural" real wage should fall to induce a decline in
the birth rate. WOW What Alan Greenspan could do with that Ricardian theory
and Social Security benefits!
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.
Of Course this assmues little or not technological innovations in food
production---
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 absence of a general glut -- is implied in Say's Law and ALL general
equilibrium models which ASSUME that a price vector exists that clears all
markets simultaneous -- and therefore there can not be a "glut" on the market.
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.
If aggregate effective demand is sufficient to make it profitable for
employers to hire all the available workers-- even if they have to pay more
than subsistence wages, they will gladly do that. In a full employment economy
-- workers and entrepreneurs are never adversaries-- that is a message of
Keynes's economics.
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.
The problem is that at less than full employment - but high employment and
workers having some power to obtain significant economic rents, groups of
workers may demand moneypay increases that exceed productivity increases and
are therefore inflationary. This can lead to a struggle between groups of
workers with other groups of workers to get a bigger share out of current
production while their employers are quite willing to pay higher wages as long
as the market can pay higher prices. Thus in a free market economy where full
employment is somehow guaranteed, groups of workers and their capitalists
employers are allies-- and inflation can result. In essence, Monetarist tight
money policies is an attempt to create weak markets for goods so that
entrepreneurs will stand up to their workers and deny wage increases.
Post Keynesian want an incomes policy where society agrees (a social contract)
on how growth in GNP is allocatyed among the money groups of workers,
pensioneers ,a nd profit receiptients in society.
Paul
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