Re: Outsourcing a plus for the US economy.?

["William B. Ryan" <william_b_ryan@xxxxxxxxx>]

Comparative advantage is based on the premises that
1) pricing reflects natural differences in factor
endowments; and 2) labor is a commodity to be
purchased and sold like any other.  Reject either
premise and this so-called "law" collapses to
complete irrelevance.

Recardo's example was the hypothetical "Portugal" and
"England" producing wine and cloth.  Portugal is
better at producing both but is "comparatively"
better at producing wine, so should specialize in
wine in the integrated trading system, letting
England supply cloth.  This would reflect relative
differences in natural factor endowments, presumably
climate and land.

A more recent textbook example is the "lawyer" and
"her" "secretary."  The lawyer is a better lawyer and
typist than her secretary, but the law firm's
productivity is enhanced if the lawyer specializes in
law and the typist specializes in typing.  It is by
no means sure that this would reflect natural
differences in factor endowments.  If there had been
equality of opportunity when both were young, perhaps
the typist would now be the lawyer and the lawyer the
typist.  Here, the relative differences are entirely
artificial or social.

Two countries, one producing automobiles primarily
for its own population, the other with no capacity to
produce automobiles whatsoever but with a teeming
population.  The first, after a century of struggle,
treats its workforce as something other than a
commodity.  The second treats its workforce as
chattels.  Build a factory in the second.  Suddenly
it has "comparative advantage" in selling automobiles
to the first.  There is of course no comparative
market in the second for automobiles or anything
else.

The case can be made that the exploitation of natural
comparative advantage is enhanced through reasonable
trade controls, and degrades to the extent they are
removed.

Doing otherwise progressively enslaves the workforces
of net exporters, and impoverishes net importers.
--




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



____________________________________________________________
Find what you are looking for with the Lycos Yellow Pages
http://r.lycos.com/r/yp_emailfooter/http://yellowpages.lycos.com/default.asp?SRC=lycos10