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

[Ned]

I understand that we have added 500,000 new jobs in the last quarter when you count people starting new businesses.

Also, I believe the vast majority of the jobs lost in the last two + years are "manufacturing" jobs, very consistent with the both increasing productivity reducing employment and with jobs moving abroad to cut costs.

[Solly]

Chegitz

"Innovation is largely driven by the need to cut costs. If labor costs are dirt cheap, it makes no monetary sense (or cents) to invest heavily in R&D to lower those costs. This is one of the fundimental contradictions inherent in capitalism, btw. "

Where's the contradiction pal?

[Kidlicious]

SOB. I lost a long post. Damn it. I'll post here tomorrow.

[Kidlicious]

Lost another post. Sorry, this one's gonna have to be short. I'll get right to the point.

The Ricardian Model does not hold when you have unemployment and lower wages in one nation. Typically you have lower wages in the developing nation. You also have massive unemployment in the developing nation also. The developing nation isn't limited to exporting goods that it would have a comparative advantage in if wages were equal in the developed nation. It can export any good it likes because of its lower wages and massive (and increasing) unemployment. The developed nation has no comparative advantage because of its higher wages. That is, even goods that can be produced with the least amount of man hours it can not make a profit doing so. It is constantly having industry after industry invaded by the developing nation. It's workers have to continuously find other work in industries that haven't been taken over yet. The result is unemployment and stagnant wages. And since the assumptions which the Ricardian Model don't hold true the result of the model doesn't hold true. That is, goods are produced where labor is cheapest, not where the labor can produce the largest quantity.

Oh, and about being a communist? All I have to say to that is WORKERS OF THE WORLD UNITE!!! not compete. Workers lose when they compete.

[Ned]

I'm sorry, Kid, but what you just said didn't make much sense.

The selective "targeting" did occur when Japan Inc. poured resources into one industry at a time trying to capture US market share. This went on for at least two decades. The targeted industries, such as memory chips and cars, suffered greatly from Japan's "dumping." But, I don't think this had anything to do with unemployment in Japan.

[Carolus Rex]

Originally posted by Kidicious
SOB. I lost a long post. Damn it. I'll post here tomorrow.

Ouch! Happened to me too the other day. Here's what I do when I know I'll write a long post: i) I write it in Word first and saves it in case there will be problems and ii) I post when the US is asleep (not a viable option to you, perhaps?).

Carolus

[Carolus Rex]

Originally posted by Kidicious

The Ricardian Model does not hold when you have unemployment and lower wages in one nation. Typically you have lower wages in the developing nation.

To be honest, the basic Ricardian model does assume full employment and I don't know whether unemployment has been incorporated in later developments or not.

But you're wrong about the low wage part. In fact, it is exacxtly that (i. e. the low wage) that helps the country with lower productivity to be able to produce a good at a lower cost than the other country despite its technological backwardness.

Before you reply "Aha, what did I say! That's unfair low wage competition", remember that the other country's (the country with higher labour productivity) gain from trade is completely independent of the "unfair" low wage competition from the developing country.

Again, by specialising in the good where it has the comparative advantage, and "letting" the "poor" country produce the other good and trade for it, it will get more of both goods compared to if it where to produce both goods for itself. The same is true for the "poor" country. It's a win-win situation...

Originally posted by Kidicious

The developed nation has no comparative advantage because of its higher wages.

The concept of comparative advantage is, admittedly, a difficult one. This is simply wrong.

Originally posted by Kidicious

And since the assumptions which the Ricardian Model don't hold true the result of the model doesn't hold true.

I agree with you that one should be very careful in taking results from neat and (by definition) over-simplified models as hard facts about how the real world works. But at least the assumptions (and the sensitivity of the results to changes in them) are laid bare for everyone to inspect and judge. This is more than what can be said of much of the general debate, where one "truth" after the other is asserted without any clear logic.

Carolus

[Carolus Rex]

Originally posted by Carolus Rex

I agree with you that one should be very careful in taking results from neat and (by definition) over-simplified models as hard facts about how the real world works. But at least the assumptions (and the sensitivity of the results to changes in them) are laid bare for everyone to inspect and judge. This is more than what can be said of much of the general debate, where one "truth" after the other is asserted without any clear logic.

Carolus

In fact, that's why I like Krugman's piece above so much. It clearly illustrates the point.

Carolus

[Kidlicious]

Originally posted by Ned
I'm sorry, Kid, but what you just said didn't make much sense.

The selective "targeting" did occur when Japan Inc. poured resources into one industry at a time trying to capture US market share. This went on for at least two decades. The targeted industries, such as memory chips and cars, suffered greatly from Japan's "dumping." But, I don't think this had anything to do with unemployment in Japan.

The impact of Japanese exports on the US economy has been limited in the past because they didn't have much unemployment there. But since more nations are now more aggressive in targeting US markets the effect is significant. Japan itself now has more potential to effect the US markets because of the importation of Chinese goods to Japan. Since the Chinese are importing the cheap goods Japan now has more resources to import to the US.

[Kidlicious]

Originally posted by Carolus Rex


Ouch! Happened to me too the other day. Here's what I do when I know I'll write a long post: i) I write it in Word first and saves it in case there will be problems and ii) I post when the US is asleep (not a viable option to you, perhaps?).

Carolus

I do that sometimes. Not last night though.

[Kidlicious]

Originally posted by Carolus Rex
But you're wrong about the low wage part. In fact, it is exacxtly that (i. e. the low wage) that helps the country with lower productivity to be able to produce a good at a lower cost than the other country despite its technological backwardness.

Lower cost yes, less man power no. Remember that the model claims that more goods will be consumed through trade, not that the goods will be produced at the lower cost. In the real world the two are often different.

Originally posted by Carolus Rex
Before you reply "Aha, what did I say! That's unfair low wage competition", remember that the other country's (the country with higher labour productivity) gain from trade is completely independent of the "unfair" low wage competition from the developing country.

There is no gain because the developed nation can never produce a good cheaper than it can be produced in the developing nation.

Originally posted by Carolus Rex
Again, by specialising in the good where it has the comparative advantage, and "letting" the "poor" country produce the other good and trade for it, it will get more of both goods compared to if it where to produce both goods for itself. The same is true for the "poor" country. It's a win-win situation...

The developed nation has no comparative advantage. It's win-lose.

Originally posted by Carolus Rex
The concept of comparative advantage is, admittedly, a difficult one. This is simply wrong.

I think it's very simple if you understand that the theory depends on the assumptions holding.

Originally posted by Carolus Rex
I agree with you that one should be very careful in taking results from neat and (by definition) over-simplified models as hard facts about how the real world works. But at least the assumptions (and the sensitivity of the results to changes in them) are laid bare for everyone to inspect and judge. This is more than what can be said of much of the general debate, where one "truth" after the other is asserted without any clear logic.
Carolus

Clear logic requires that our argument is based on true assumptions. Without true assumptions our argument is not logical.

[Kidlicious]

Originally posted by Carolus Rex


In fact, that's why I like Krugman's piece above so much. It clearly illustrates the point.

Carolus

"Suppose that our economy initially employs 120 million workers, which corresponds more or less to full employment."

Poor assumptions. See they don't update the model. They just keep using it the way it is.

[Kidlicious]

That particular Krugman article isn't about international trade. It's about the effect of productivity growth on employment. And it's all wrong.

We can look at international trade though to illustrate this though. The reason that developing nations are able to export so many goods to developed nations is because they are developing. As they develop workers lose their jobs. That frees up labor for production of exports.

Krugman is interesting and he has some insight on some stuff, but he's dead wrong to assume full employment and perfect mobility in a dynamic economy. He's really making himself out to be a supply sider with this argument. Supply doesn't create demand. There always has to be some other stimulus for demand to clear the market when there is productivity improvements. The Chinese must export or their economy will collapse. In fact, it will probably collapse anyway.

[Carolus Rex]

I have to leave soon, but here are some short comments.

Originally posted by Kidicious

There is no gain because the developed nation can never produce a good cheaper than it can be produced in the developing nation.

Yes, it can. Take the stylised example of a "rich" versus "poor" country with the "rich" country having a higher productivity in the production of all goods. What does it mean that the "rich" nation's labour productivity is higher than the "poor" nation's?

It means that one unit of "rich's" labour (however it is measured) will produce more output than one unit of labour (measured in the same way) in "poor" will. Thus "rich" will not need as much labour to produce one unit of a good as "poor" does.

Since the total cost of producing a good is the wage times the amount of labour needed to produce the good, the total cost can be lower (despite that "rich's" wage is higher) than if the good had been produced in the poor country.

The mirror image of this for the "poor" country (as I said above), is that its low labour productivity is off-set by its lower wage.

Originally posted by Kidicious

The developed nation has no comparative advantage. It's win-lose.

We don't seem to agree on that, so I'll just say it one more time. This is wrong. Saying that a country doesn't have a comparative advantage is a contradiction in terms.

Carolus

[Kidlicious]

Originally posted by Carolus Rex
I have to leave soon, but here are some short comments.



Yes, it can. Take the stylised example of a "rich" versus "poor" country with the "rich" country having a higher productivity in the production of all goods. What does it mean that the "rich" nation's labour productivity is higher than the "poor" nation's?

It means that one unit of "rich's" labour (however it is measured) will produce more output than one unit of labour (measured in the same way) in "poor" will. Thus "rich" will not need as much labour to produce one unit of a good as "poor" does.

Since the total cost of producing a good is the wage times the amount of labour needed to produce the good, the total cost can be lower (despite that "rich's" wage is higher) than if the good had been produced in the poor country.

The mirror image of this for the "poor" country (as I said above), is that its low labour productivity is off-set by its lower wage.

Yes the cost can be lower where levels technology and training, but only until the developing nation obtains the technology, trains its work force or they get some MNC to do it for them. That's the way it's working in the real world.

Originally posted by Carolus Rex
We don't seem to agree on that, so I'll just say it one more time. This is wrong. Saying that a country doesn't have a comparative advantage is a contradiction in terms.

Carolus

It's not a contradiction. Since they have no advantage they have no comparative advantage.