Re: Outsourcing a plus for the US economy.?

[pdavidso <pdavidso@xxxxxxx>]

>===== 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