A question regarding free trade... cheap labor inhibiting innovation?

[Adam Smith]

Originally posted by Urban Ranger
We keep hearing lots of workers get killed in fires because factories put locks on the escape doors and bars on windows. [And completely non-existent firefighting facilities, of course]

I am aware of that. Also cases of not paying agreed upon wages, and large fees for leaving employment. WSJ had an article a year or two ago about conditions like these in some Japanese-run factories in Shenzhen (sp?). This does not help ingratiate the Japanese to the locals. The Ford and Phillips factories I saw in Changzhou looked entirely western in appearance, and did not appear to have these kinds of problems. Clearly there is a role for unions in helping to enforce existing labor and occupational safety laws in China.

[Urban Ranger]

It's good that they have factories with decent conditions

Unfortunately, they seem to be in the minority.

[St Leo]

Originally posted by Imran Siddiqui
Explain the cotton gin, then .

42.

Oh, fine. I said "discourages", not "stops".

[DAVOUT]

Originally posted by Adam Smith


The real question is why people keep paying stupid amounts of money for shoes. My lawn doesn't care if my shoes have a swoosh.

This is not an economic issue : the liberal economy assumes that any consumer s demand is legitimate provided it can be paid for.

But this is one of the mecanisms which explains how the modern occidental economies 1) increase the spread of incomes; 2) inflates the GIP figures.

[Kidlicious]

Re: True But Irrelelvant

Originally posted by Adam Smith
You might want to check the World Bank statistics in THIS thread, indicating that Chinese per capita income has risen by a factor of four since 1960, even after accounting for inflation.

Was the per capita income 100 or something in 1960, and now it's 400?

[Kidlicious]

Re: A question regarding free trade... cheap labor inhibiting innovation?

What I hear is that modern equipment is being used more and more in combination with cheap labor? So the answer to your question is probably no, but expensive labor has traditionally encouraged innovation more than cheaper labor through out history.

[Carolus Rex]

Re: A question regarding free trade... cheap labor inhibiting innovation?

Originally posted by Sava

So... does shipping jobs to cheaper labor markets (that are often manipulated in Socialist fashions) inhibit technological and systematic innovation with regards to manufacturing? And in addition, doesn't the weakening of America's manufacturing sectors weaken America in the long run?

"I think not" is my answer to both these questions.

Let's start with the second question and some related trade theory. In even the simplest trade model (where trade is driven by differences in technology), it is easily shown that everybody involved in trade can gain (the distribution of these gains in the real world is, alas, a different story). Trade is thus not a zero-sum game (where one part's loss is identical to another's gain), instead it increases the pie enabling everyone to have a larger slice...

Even countries which have an absolute disadvantage in the production of every good, can do better by specialising in the good where they are relatively less backward and trade this one for the good(s) they do not produce themselves.

In the original exposition of the Ricardian model (published in 1817 IIRC), the two countries used as an example were England and Portugal, and the two goods were wine and cloth; it was England who had the lower labour productivity in both goods...

Now, label one of the countries "the US" instead, and the other one "China". The two goods/sectors can be called "manufacturing goods" and "research and development". In theory, if the US's comparative advantage is in R&D, then it should let go of manufacturing production and concentrate its resources in R&D.

This would ensure the highest standard of living for US residents and that, from a global point of view, resources would be used in the most efficient way. Whether the US has a comparative advantage in R&D is, ultimately, an empirical question.

Another, more empirical, way to look at it is this. The economy is dynamic, not static. New sectors, products and professions appear all the time, while others contract or disappear. Yesterday's economic locomotive need not be the solid base in tomorrow's society. Clinging on too long to past successes may prevent you from employing your resources in new and promising sectors.

Turn back the clock a century or two... Agriculture was at the time the biggest and most important sector in most of today's developed countries... Would you advocate, that because agriculture was the dominant sector (in terms of prodcution and employment), that resources should not have been reallocated to the vital and booming industrial/manufacturing sector? That status quo would have been better and that the weakening of the US's agricultural sector would weaken the US in the long run? Why should things be different today?

All of the above pertained to the second question. As for the first, there is nothing that prevents multinationals to locate production where the goods can be put together by cheap labour, and the R&D headquarters where circumstances are favourable to R&D. Hence, the negative connection you mention between outsourcing of production and R&D need not be true at all. But beware of clinging on to the past!

Edited: That being said, I do believe that the US will fall behind India and China in the future. When these slumbering giants take off... However, the best thing for the US to do (as for any country) is to use its resources where they are relatively speaking most productive.

Carolus

[Kidlicious]

Re: Re: A question regarding free trade... cheap labor inhibiting innovation?

Originally posted by Carolus Rex


"I think not" is my answer to both these questions.

Let's start with the second question and some related trade theory. In even the simplest trade model (where trade is driven by differences in technology), it is easily shown that everybody involved in trade can gain (the distribution of these gains in the real world is, alas, a different story). Trade is thus not a zero-sum game (where one part's loss is identical to another's gain), instead it increases the pie enabling everyone to have a larger slice...

Even countries which have an absolute disadvantage in the production of every good, can do better by specialising in the good where they are relatively less backward and trade this one for the good(s) they do not produce themselves.

In the original exposition of the Ricardian model (published in 1817 IIRC), the two countries used as an example were England and Portugal, and the two goods were wine and cloth; it was England who had the lower labour productivity in both goods...

The Ricardian model is based on the assumptions of full employment and perfect mobility. The problem with applying that model to the current US trade situation is that since China's wages are so much lower than the US's wages there will be unemployment, at least in theory on the US side. In actuality there is umemployment on both sides. With umemployment you have trade imbalances and weak currency. You also have a loss in national wealth and stagnant wages.

Originally posted by Carolus Rex
Now, label one of the countries "the US" instead, and the other one "China". The two goods/sectors can be called "manufacturing goods" and "research and development". In theory, if the US's comparative advantage is in R&D, then it should let go of manufacturing production and concentrate its resources in R&D.

This would ensure the highest standard of living for US residents and that, from a global point of view, resources would be used in the most efficient way. Whether the US has a comparative advantage in R&D is, ultimately, an empirical question.

What is the size of the global R&D industry compared to the global manufacturing sector? You can't seriously think that we can compete globally if we only compete in the R&D industry. There simply isn't enough work for us there and most people aren't smart enough to do that kind of work.

Originally posted by Carolus Rex
Another, more empirical, way to look at it is this. The economy is dynamic, not static. New sectors, products and professions appear all the time, while others contract or disappear. Yesterday's economic locomotive need not be the solid base in tomorrow's society. Clinging on too long to past successes may prevent you from employing your resources in new and promising sectors.

Yes, the economy is dynamic. That's why resources are allocated to new productive industries as those industries develop. Higher employment rate and wages do not mean that the economy is not capable of creating new MORE productive industries. If the industries are MORE productive they will develop. Let us specialize on a case by case basis if we can outsource less productive industries.

Originally posted by Carolus Rex
Turn back the clock a century or two... Agriculture was at the time the biggest and most important sector in most of today's developed countries... Would you advocate, that because agriculture was the dominant sector (in terms of prodcution and employment), that resources should not have been reallocated to the vital and booming industrial/manufacturing sector? That status quo would have been better and that the weakening of the US's agricultural sector would weaken the US in the long run? Why should things be different today?

Poor example. In your example labor was already freed up by productivity improvements in one sector. The growth in manufacturing employment created jobs. In the situation that we are talking about jobs being lost in the US, not because of productivity growth or new industries being developed, only because of businesses taking advatage of cheaper labor.

[Carolus Rex]

Re: Re: Re: A question regarding free trade... cheap labor inhibiting innovation?

Originally posted by Kidicious

What is the size of the global R&D industry compared to the global manufacturing sector? You can't seriously think that we can compete globally if we only compete in the R&D industry. There simply isn't enough work for us there and most people aren't smart enough to do that kind of work.

I only used the labels "manufacturing" versus "R&D" because it was what Sava used in the original question. You can think of the two sectors as "manufacturing of industrial goods of type A" and "manufacturing of industrial goods of type B". Or, if you like, wine and cloth. My point was not to interpret the "R&D" sector literally, but rather that there will always be something for every country to produce and gains to be reaped from trade.

The original Ricardian model has been extended to cover, amongst other things, many sectors/goods. You can label one of them "R&D" if you wish and the 999 others whatever you like (cars, coffee, computer games, movies etc...). The basic insight survives: each country should specialise in the production of the goods where it has a comparative advantage.

The basic point is this: in principle there is nothing that prevents a country from producing everything itself (the closest real world examples are probably North Korea and Cuba). However, by specialising in some goods and trade some of these for the goods it does not produce, the country will increase consumer possibilities. Furthermore, the world's resources will be put to their most efficient use.

Imagine, for example, that the Swedish government is worried about "unfair" low wage competition from Brazil regarding coffee production. Surely, it would be better if coffee was cultivated in Sweden, with Swedish workers earning Swedish salaries instead of Brazil "stealing" these jobs?

So it's decided that huge investments are to be undertaken so that Sweden can produce its own coffee, which will "create" new employment opportunities in this beautiful country. Imagine the costs involved in turning Sweden into a successful coffee producer! All those resources used up to create and uphold an industry that Sweden has no natural advantage in...

But why stop here? There is also "unfair" low wage competition from ananas producers, oil producers, computer assembly lines in China, from textile industries in the Baltic states and China and so on and so on... All that employment that could have been ours... Thiefs!

To show the gains from trade is straightforward: let two countries produce two goods themselves under autarchy (no trade). Compare the total output (and hence consumption) with the case where each specialises in the production of one good and trade is allowed. You will find that both production and consumption are higher with free trade. This is important for many reasons, not the least being environmental...

Take this down to your own, personal level. Do you produce your own shoes? Your own clothes? Do you shoot your own movies? Do you cultivate your own vegetables? Do you raise your own cattle? Do you cut your own hair? Do you build your own computer? Do you have a bank that is your own? I guess the answer is "no" to most of these questions and my follow up question then is, why not? According to your logic you're losing a lot of employment opportunities by having someone else doing all that for you...

Originally posted by Kidicious

Higher employment rate and wages do not mean that the economy is not capable of creating new MORE productive industries.

I never said that. On the contrary, my point is exactly what you're saying. But if resources are not freed up to be used in these new sectors (due to protectionism to keep old sectors alive), the opportunities might be missed.

Originally posted by Kidicious

If the industries are MORE productive they will develop. Let us specialize on a case by case basis if we can outsource less productive industries.

It is not the case that new technologies will be adopted just because they are more productive. There are many, many examples of inferior technologies becoming the standard despite that there were better choices available. This has not so much to do with our trade discussion, though.

Originally posted by Kidicious

Poor example. In your example labor was already freed up by productivity improvements in one sector. The growth in manufacturing employment created jobs. In the situation that we are talking about jobs being lost in the US, not because of productivity growth or new industries being developed, only because of businesses taking advatage of cheaper labor.

On the contrary, it's a good example. Resources were, as you say, freed up by technological improvements. There was violent resistance, mainly through a movement called the Luddites, against the introduction of the machines, which would "destroy jobs" (strange how the world always seems to repeat itself...). The same thing will happen (freeing up of resources) if the US manufacturing sector contracts due to foreign competition. There are always structural adjustment problems, of course, giving government an important role to play. Instead of spending money keeping old industries alive, they could help the labour force overcome the difficulties (retraining programs for example).

In Switzerland, Swiss Air laid off a lot of people a couple of years back and there was much talk about personal tragedies at the professional level. A month or two ago, however, I read in a weekly magazine that ca 85-90% (it was a very high figure) of the laid-offs, some of which were interviewed, already had new jobs.

I don't know if the line next to your avatar is true, but if you're a communist I find it ironical that you want to prevent workers in third world countries their right to a job and a salary (their purchasing power will be higher with free trade than in autarchy; something that is also easily shown in the simplest Ricardian model). I thought solidarity was a key component in that ideology?

That being said, in all fairness, there is a respectable "trade and wages" debate going on. My own belief is that US workers' salaries are not set in Beijing, but depend largely on how the US labour market functions.

Carolus

[Carolus Rex]

Here's a point of view from a much more sophisticated advocate for free trade than myself. Please read it, it's well written, funny and highly illuminating.

http://slate.msn.com/id/1916/

Krugman also exposes the critical assumption(s) he makes when he builds his case. An honesty you don't encounter everyday...

Carolus

[Ned]

Originally posted by Adam Smith
I am aware of that. Also cases of not paying agreed upon wages, and large fees for leaving employment. WSJ had an article a year or two ago about conditions like these in some Japanese-run factories in Shenzhen (sp?). This does not help ingratiate the Japanese to the locals. The Ford and Phillips factories I saw in Changzhou looked entirely western in appearance, and did not appear to have these kinds of problems. Clearly there is a role for unions in helping to enforce existing labor and occupational safety laws in China.

Unions in China? The fascist Chicoms aren't stupid. They know that a major reason the West moves factories and jobs to China is the lack of unions. They are not about to kill the goose that lays the golden eggs.

[Ned]

Carolus, very good summary. The point about unions resisting new technology as it reduces the number of jobs has to be emphasized. This is an ongoing problem with unions who NEVER seem to get it and are always opposing every innovation that increases productivity if that results in fewer jobs. I remember the controversy when mainframe computer began to be used by businesses. The uproar was tremendous and Congress (Democrats) almost acted. I remember the controversy about "fireman" on diesel railroads, about the navagator on planes, and so on and so on.

Businesses are many times forced to leave to non union locations simply to survive. The presence or absence of unions is a major factor in the movement of manufacturing jobs in the world.

Another major factor for the movement of jobs outside the US is, of course, corporate taxes. If one can make a widget outside the US and sell it into the US, one can arrange transfer pricing to capture most of the profit outside the US in low or no tax jusrisdictions.

Finally, there is the issue of environmental laws that make some manufacturing in the US prohibitively expensive regardless of labor costs.

All other things being equal though, investment in new technology can keep American manufacturing competitive. But usually, the environmental and tax issues tend to overwhelm the labor cost issue.

[Jack_www]

I think it has to do with the fact that companies want to save money NOW, and dont want to wait for future technology that may or may not come. Also investing in new technology can be costly and a company may still chose to ship their factory out of the country then to stay and build a new factory with new technology that would improve productivity.

Also one thing to remember that in Asia and other regions were corporations are moving most of their factories to are providing jobs to the people living there, many of them in proverty. Also what is happening Asia is similar to what happen in the United States during the industrail revolution.

[chequita guevara]

Originally posted by Carolus Rex
Here's a point of view from a much more sophisticated advocate for free trade than myself. Please read it, it's well written, funny and highly illuminating.

http://slate.msn.com/id/1916/

Krugman also exposes the critical assumption(s) he makes when he builds his case. An honesty you don't encounter everyday...

Carolus

Yes, but it fails to take into account variations in pay scales. Manufacturing jobs pay far more than service sector jobs. While the number of jobs has increased, the rate of individual pay over the same period has dropped by 10% in real dollars when you exclude the top 1% (the short-term gains in indivudal pay has been lost since the Bush recession). Family income has only increased because of the rise of two-earner families. Over the same period, poverty has increased, personal bankruptcies have increased (and not because of reckless spending), and the number of people without health care has increased.

[Adam Smith]

Originally posted by chegitz guevara Yes, but it fails to take into account variations in pay scales. Manufacturing jobs pay far more than service sector jobs.

This has to do witht he distribution of hot dogs between the manufacturing and service sectors. This can eventually be remedied by job retraining (Krugman notes that there will be employment shifts) or increases in service sector productivity. Overall, the number of hot dogs still increases.