Re: Outsourcing a plus for the US economy.?

["Barkley Rosser" <rosserjb@xxxxxxx>]

     No, the second country will have a comparative
advantage in something, even if it has lost it in
autos, which it may or may not have.
     My favorite real world example of comparative
advantage is in agriculture within the free trade
zone of the US, for the three largest crops produced,
corn (maize for non-Americans), wheat (corn for Brits),
and soybeans.  Compare Illinois, Iowa, and Kansas.
Illinois has an absolute advantage in all three crops
over the other two, and Iowa has an absolute advantage
over Kansas in all three.  However, yields decline most
rapidly for soybeans and least rapidly for wheat as one
heads west.  Illinois is the number one producing state
in the country for soybeans, Iowa is the number one
producing state in the country for corn, and Kansas is
the number one producing state in the country for wheat.
Does anyone remotely think that anything is to be gained
by Kansas engaging in protectionism against Illinois
soybeans?
       The solution to the trade issue is really serious
assistance to workers laid off by import competition
(or outsourcing), including if need be government
employment along the lines proposed by the folks at
UMKC.  Despite some vague moves in that direction
recently in the US, we do not do it seriously (and Bush
has just proposed eliminating such aid for workers
laid off due to NAFTA).  The example to keep in mind
is very open economy Sweden.  They have at times
spent as much as 2 % of their GDP on such programs,
a much more worthwhile way to go than protectionism.
Barkley Rosser

----- Original Message -----
From: "William B. Ryan" <william_b_ryan@xxxxxxxxx>
To: <socialcredit@xxxxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, March 05, 2004 11:28 AM
Subject: Re: Outsourcing a plus for the US economy.?


> 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
>
>
>
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