8.12.03

CARNIVAL OF THE CAPITALISTS NO. 10 visits A Penny For, who did a fine job classifying posts. For those of you who came over here to read about factor price equalization, it appears as though explaining the argument will be a never-ending task. Carnival contributor The Calico Cat is the latest poster to fret about the changing patterns of specialization resulting from open trade.
The problem for the United States, not addressed by Mr. Prather, is that free trade will cause the economy of the planet as a whole to increase. But how will the United States fare?

As I've written before, the ease in which jobs can be exported today, because of technology, is unprecedented in the history of economics. This will cause all wages throughout the planet to equalize. This will be of great benefit to a country like India, but it will painful to the United States.

Most jobs involving what I consider to be "real work" will be moved overseas, and the only jobs left here will be marketing and sales, services that cannot be performed overseas (such as cooking food), and ownership of capital (making money from already having money).

The United States' only source of continued wealth is our huge stockpile of capital. As Gordon Gekko said in the movie Wall Street, we will no longer create, we will only own (he said something similar to that, anyway).
Let's walk this cat backwards. First, an Oliver Stone movie, particularly one that starts with somebody shorting NASA after the shuttle crash -- when the opening of the movie is set in May 1985, before the crash -- is a not particularly good argument from authority. Second, the money has always been mobile, it can be used to own productive capacity anywhere, presumably including places where workers can be cheaply hired. To the extent that it is not being used to provide machinery to work with that cheap labor, there must be incentives to use the money to own other machinery and work with other workers. (How many times do we have to beat down the "giant sucking sound" arguments?)

Now let's walk backwards to the "real work." Conjures up images of 10,000 comrades carrying lunch buckets into Magnitogorsk to fulfill the Five Year Plan, doesn't it? But improvements in information handling and in change-on-the-fly tooling make such images of mass production and mass marketing something for dystopian movies. Those developments do not have to mean all manufacturing has to move to low-wage locations, a lot of it can take place in residential neighborhoods with relatively few people and a lot of clever tooling doing the work. It also does not have to mean immiserisation of people in a rich neighborhood. If it's a bit hard to see why internationally, consider a parable of two towns, Wilmette and Waukegan. Suppose Wilmette is originally self-sufficient in food, manufacturing and trade, and Waukegan subsists on the food its inhabitants grow. Now let Waukegan trade with Wilmette. Waukegan gets the advantage of Wilmette's trading expertise, and obtains manufactured goods from Wilmette. As time passes, the manufacturing activity moves from Wilmette to Waukegan, and Waukegan begins to trade its manufactured goods for foodstuffs from Wauzeka. In no case does any community become worse off as a consequence of the trading, although Wilmette is still richer on a per-capita basis than Waukegan, as is Waukegan compared to Wauzeka. There is no reason not to think of the developed countries as continuing to be more prosperous as a consequence of international trade in exactly the same way that each of the midwestern cities become more prosperous as a consequence of inter-regional trade. (Note this Econo Pundit post that shows increasing export trade in services from the U.S. That's the international analogue of Wilmette doing the financing and the market making first for Waukegan and later for Wauzeka.) We then have to work backwards to Calicao Cat's assertion about wages equalizing. The real returns to equally productive resources will be equal in all countries, provided the solution is determined. That is not the same thing as asserting that all wages will be driven down to the level of the least-paid worker, which is the bastard child version of the factor price equalization theorem that seems popular in some circles.

Dean at Dean's World has nailed the more important effect of globalization, which is one that is a consequence of adjustment costs, in this case known as immobile factors.
Here's what I honestly think: it's older workers who get hurt by loss of manufacturing jobs. The older you are, the greater trouble you have transitioning to a new skilled labor position. Younger workers tend to be more adaptible and in a better position to make choices to keep their flexibility in a dynamic environment. It's the folks who have not educated themselves, have not educated themselves, who find themselves in their 40s and 50s wondering what the heck to do with themselves.
There is the real equity problem: those older people might have correctly chosen semi-skilled but at the time good paying jobs in heavy industry based on the information they had at the age of 15 or 16. In addition, in unionized industries, those are the people who have survived the layoffs and downsizings thanks to seniority, and it is their perspectives that are heavily weighted in any contract voting, sometimes to the detriment of employment prospects for younger workers.

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