6.1.04

OUTSOURCING AND ADJUSTMENT COSTS. No matter how many times I post on the role of adjustment costs as distinct from the benefits from specialization and trade, there's always somebody who still doesn't get it. Winds of Change, just to start the conversation, complains, "Owners of capital can invest abroad, and can, if they are clever and lucky improve their situation. Owners of labor find themselves in increasingly direct competition with lower-cost labor abroad, or with less-skilled labor which can compete because machines and systems make their skills redundant." Perhaps the trope of bourgeois and proletarians is useful as a point of departure, but it does not follow that in life, owners of capital will redeploy their capital intelligently, or owners of labor will not acquire capital to deploy. Furthermore, to the extent that capital becomes more freely mobile, the opportunities to profitably reinvest it will be acted on and arbitraged away more rapidly. And one of the profitable opportunities might be in enhancing the productivity of less-skilled labor. (That is the secret behind Fordism, enabling people to produce automobiles without first having to develop armies of master craftsmen in sheet metal working, and it persists in enabling fast-food restaurants to employ illiterate people, provided they can correctly identify the picture of the item being purchased.)

There is an interesting Kim DuToit post (that InstaPundit picks up, albeit for other reasons) with some tips on how to use the adjustment costs to your own advantage: find a job that cannot be exported. (There is another reason to consider some of the crafts he recommends: as these pages had been noting for much of October, parents and school counselors are steering promising candidates for the skilled trades away from them out of status anxiety.)

At Max at Common Sense and Wonder is yet another suggestion for how to avoid the race to the bottom: go with the flow. For the past 170 years or so, the U.S. comparative advantage has been in producing leading-edge, technology-using, knowledge-intensive goods. I concur with Mr Jacobs in part and dissent in part with this:
So in conclusion, I think that the trend that Schumer and Roberts are seeing is nothing new, and we have nothing to worry about as long as America continues to be the intellectual and technological powerhouse it is.
Check that subordinate clause. It is going to be difficult to build an intellectual powerhouse with invented spelling and exaggerated self-esteem, or to maintain a technological powerhouse with invented mathematics and reliance on somebody else's calculator or computer programming. That is the most effective way to realize Cal Pundit's fears and tear the working class down.

SECOND SECTION: Truck and Barter has been looking at the same essay by Senator Chuck Schumer (D-N.Y.) and Hoover Institute's Paul Craig Roberts (doesn't politics make for strange bed-fellows?) that Max addressed. Mr Brancato raises some points that require further discussion. There's one easy one: would a foreign country actively pursue a policy that made Americans better off if it made itself worse off? Happens all the time: that's exactly what comes with export subsidies or weakening your currency relative to the dollar. The real fun begins when Messrs. Schumer and Roberts try their hands at the factor price equalization theorem with multiple resources and multiple products. In particular, the factor price equalization theorem cannot be used to predict the driving down of radiologist salaries to the lowest price prevailing in the world. Consider again the case of a U.S. radiologist earning $125k p.a. and a radiologist in a developing country earning $25k p.a. With resource mobility, you would expect radiologists to migrate from the developing country to the U.S. until at the margin a radiologist in the developing country would be indifferent between migrating and staying home, or a student in either country would be indifferent between doing a radiology degree or taking some other training. But ... and here's where it starts to get messy ... those different wages might also reflect differences in productivity, as Mr Brancato has pointed out? There's also a complication in working out the benefits to consumers. In the U.S., consumers see lower prices, but we don't know whether we also see a deterioration of quality, or perhaps a segmentation of the market in which some radiologists, whether in the States or elsewhere, do the routine screening and others, perhaps in some of the formerly poor countries, do the hard cases. We will see a reallocation of world resources among radiology and other activities. All we can be sure of is that in such a reallocation, resources will flow from high opportunity cost to low opportunity cost uses. (That might mean some radiologists become general practitioners, but the world would lose relatively little radiology in the transition, and consumers would obtain additional consultations for day-to-day ailments.) We're looking at the equivalent of what Paul Krugman refers to as a "Marshallian improvement" that leads to an expansion of output at lower real costs to consumers, albeit with some adjustment costs borne by rich radiologists in the U.S. and poor patients in the developing country. That's no different from moving manufacturing activity from Wilmette to Waukegan, creating a bedroom community where there once were factories, and creating factories where there once were subsistence farms.

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