THE FACTOR PRICE EQUALIZATION THEOREM. First, the technical version, from Mas-Colell, Whinston, and Green,
Microeconomic Theory, p. 535:
An important consequence of this discussion is that in the 2x2 production model, if the factor intensity condition holds, then as long as the economy does not specialize in the production of a single good, the equilibrium factor prices depend only on the technologies of the two firms and on the equilibrium prices p. Thus, the levels of the endowments matter only to the extent that they determine whether the economy specializes. This result is known in the international trade literature as the factor price equalization theorem. The theorem provides conditions (which include the presence of tradable consumption goods, identical production technologies in each country, and price-taking behavior) under which the prices of nontradable factors are equalized across nonspecialized countries.
Now the qualifications, in
ibid at pp. 537-38:
Consider the general case of an arbitrary number of factors L and outputs J. For given output prices, the zero-profit conditions constitute a (nonlinear) system of J equations in L unknowns. If L > J, then there are too many unknowns and we cannot hope that the zero-profit conditions alone will determine the factor prices. The total factor endowments will play a role. If J > L, then there are too many equations, and for typical world prices, they cannot all be satisfied simultaneously.
The preceding does not mean, as one science fiction writer (let us not be too harsh on science fiction writers; they start from the premise that laws of conservation of motion do not hold, it is too much to expect they be aware economics
has laws of conservation) asserts,
Once the Invisible Hand has taken all the historical inequities and smeared them out into a broad global layer of what a Pakistani brickmaker would consider to be prosperity -- y'know what? There's only four things we do better than anyone else: music, movies, microcode (software), and high-speed pizza delivery.
From there comes a
Winds of Change omnibus post on social stratification that takes the Science Fiction version of factor price equalization as its premise, and a
Glenn Reynolds column asking why that Science Fiction version isn't greeted with glee by (some on the Left) individuals who prefer to reduce income inequality, and a
Greenfield Gerbil post that hints the prosperity might be only illusory, while suggesting much of trade policy is motivated by "I've got mine" thinking, and hoping for some economics commentary.
There is in fact some recent economic commentary, on point, from
Paul Krugman, who is very good when he is writing about international trade. Sample:
Now we know that the club isn't that exclusive, after all. South Korea and several smaller Asian economies have made a full transition to modernity. China is still a poor country, but it has made astonishing progress. And there are signs of an economic takeoff in at least parts of India. I'm not talking about arid economic statistics; what we've seen over the past generation is an enormous, unexpected improvement in the human condition.
How was this improvement achieved? Whenever I give talks about my latest book, someone asks whether I still believe in free trade. The answer is yes — not because I have any fond feelings about multinational corporations, but because every one of those development success stories was based on export-led growth. And that growth is possible only if rising economies can expand into new markets. Some critics of globalization seem to be nostalgic for the era before the big growth in third-world exports of manufactured goods. I'm not, because I remember the way that era really felt, our despair over the possibility of development.
Thus, contrary to Glenn Reynolds's worst fears, it is possible for the factor-price equalization to mean higher living standards for trading partners, rather than lower living standards.
I’m not sure what I think about this issue. I don’t think that jobs and wealth are fixed — thanks to technology and the spread of democracy and lawful government, the world is a wealthier place overall. But that doesn’t mean that everyone will be better off, at least in a relative sense. And there’s no question that changes that make people feel economically insecure — even those that make society as a whole wealthier — can engender political problems.
In particular, trading partners can be made better off in an absolute sense if not in a relative sense, and that is sometimes hard to see. The difficulties of coping are particularly great for older workers in industries for which imports are being substituted, such as
steel, which might be
losing its tariffs to head off a more global tariff war that might ultimately be
ineffective at stopping the gales of creative destruction although they're less foolish than
some alternatives (in both cases I have linked to articles that take on particularly foolish arguments.)
It could be worse.
Consider Japan. There is a country that has to export manufactured goods as its only natural endowment is knowledge. (Precious little by way of farm fields or mines there; most of their railroads are rapid-transit lines.) The adjustment costs there are likely to be particularly severe.
