World Economics Question

[DarkCloud]

Hi. I've been pondering something and would welcome any thoughful feedback.

Assuming that the basic precepts of the Free Trade theory of Comparative Advantage holds true, namely that the country which has a comparative advantage in some goods will produce them...

And assuming that it is likewise true that although Free Trade ultimately increases the supply of wealth and innovation in the world that the DISTRIBUTION of said wealth will not necessarily be equal.

Would it not be true that in the next 15-30 years we could expect to see a stratification within countries much different than before.

For example,

If the United States maintains comparative advantage in Capital (K) and Technology (T), then it would gradually import manufactures (M) in higher quantities.

Assuming that the amount of Blue collar workers does not appreciably decrease in the US, and they are instead paid lower wages- whereas those in K and T are paid higher wages- would it not be incorrect to assume that the middle "working class" in America could theoretically disappear.

In such a world, the working class in other LDCs (Less Developed Countries) would see their standard of living rise, as was revealed in a WSJ article on India on May 1 or 2nd... that discussed how wages and quality of life for construction workers are rising in India due to labor shortages.

Therefore, could we not see this:

United States: Hi Technology Jobs (best paid on planet), Hi Education Jobs (best paid on planet)
Everyone Else (Dirt Poor)
...Limited Middle Class.

Canada: Hi Technology (okay), Hi Edu (okay), Energy Extraction (okay)
Reasonable middle Class

China: Hi Tech (okay), hi Edu (poor), Energy Extraction (poor), Labor (High)
Limited Middle Class; Developed Country.

Nigeria (assuming stability): Tech (poor), edu (poor), Energy Extraction (medium), Labor (poor)
Limited Middle Class: Developing Country

France: Tech (ok), edu (ok), Energy Extraction (none), Labor (poor)
...Huge Population of Poor.

The assumptions on each particular country may not be correct, but the basic theory- that some countries will be stratified as they are now:

RICH
MIDDLE
POOR

in a traditional arrangement, whereas some will become only countries of the RICH, others only of the POOR, and others mainly of the MIDDLE

is a theory I have been pursuing.

--
What do you think about the theory. I'd like to see if some quantifiable holes can be punched into it, since I enjoy free trade, but for political purposes a distribution among countries of this sort appears definitely ripe to lead to Chavista revolutions, or a reimagining of Marxist thought in countries that see the three tiered stratification disappear.

~DC.

[DaShi]

I support globalization. Once we get rid of trade and other barriers between all countries and introduce a truly global market, we can have a global revolution

[DarkCloud]

Interestingly enough, that and what I outline above is the stated Communist Party theory in China "we must undergo a period of capitalization before true communism can be reached." I thought it was bizarre and disingenous when I first heard it... but oddly enjoy, even though they probably were lying to themselves, they may turn out to be right, anyway!

[Alinestra Covelia]

Well, the Communist Party is largely abandoning the command structure economy, although it has stated otherwise - just to keep its Communist credentials.

It is at least superficially devoted to some social aspects that are not per se communist and which you'd see in European states - the affirmative right to education, state provision of services, etc. that you don't see so much in America. But right now honestly it's a mad rush to capitalism. Hospitals will turn you away if you can't pay, universities are costly and only the well off can pay for them, etc.

Hopefully the government will undergo the same sort of "conscience revolution" that the West had after the initial surge of Industrial Revolution and "robber barons" era. Where the government institutes actual structures to provide state services and funds them as an alternative for citizens who can't afford to go private.

[DarkCloud]

Um, Ali, you sort of missed my point.

I appreciate the response, but I was discussing whether the World Capitalist system might indeed create a situation where some countries only have rich and poor people, others only have poor people, and others are the traditional (rich-middle-poor) type...

By redistribuiting- for example America would become RICH-POOR; canada would remain stratified, and others would shift- thus causing what the Communists have long stated would happen- the eventual exploitation of the poor (which they were wrong about in the 20th century since democracy and social welfare ensured the incoporation of the poor into society.)

Then I attempted to make a joke regarding something I heard many times while I was in China (since it related to DaShi's statement), and supposing that perhaps we might soon see a return to "workers' paradises" or authoritarian governments- like those in Venezuela and Russia due to economic system malfunctions.

[Aeson]

I don't think you'll see the US lose it's middle class, not while it continues to be a tech/education leader. That is because when you have the rich you are talking about... they rely on various industries that in many cases have to be local. Skilled industries that tend to comprise the middle class. Electricians, mechanics, plumbers, police, construction, ect. You can't outsource those things to a call center in another country.

Certainly the middle class could get smaller though.

[VetLegion]

By redistribuiting- for example America would become RICH-POOR

You are asking whether American middle class could disappear? Possible but not likely.

[DarkCloud]

VetLegionI'm asking in toto whether free trade's theory of comparative advantage might create such stratification systems in hypothetical societies.

One hypothetical stratified society which I suggested was America... The main question was regarding the theoretical framework.

I apologize if it was a bit confusing, that's why I used practical examples- However, Aeson and VetLegion, I agree with you both that some industries cannot be outsourced. However, as manufacturing wages go down, could not those industries suffer from a glut of applicants, therefore driving down payment in said occupations?

Nevertheless, I do see an interesting trend in America whereby $24/hour auto workers for example are being rehired at $15 an hour- which is much more in line with world competitive rates- which is good from a free trade point of view and benefits America in the aggregate.

However, it fails to ultimately benefit the workers in said industries more than it harms their earning power.

[DanS]

Perhaps I don't understand your question, but comparative advantage by itself won't lead to stratification. It may be that it impacts the wage distribution, but who's to say it only goes one way? Also, who's to say that the impacts mentioned aren't merely a temporary effect of people moving away from jobs in which no comparative advantage exists?

[Dinner]

I would image that free trade does increase stratification while making the whole world economy much wealthier. I mean much of the lower middle class was created by laborers who artificially raised their wages by threatening to strike but now they can't really do that since management can just relocate any where to take advantage of lower wage, less militant labor.

Does that mean the middle class will disappear? No you'll still have lots of jobs that can't be outsourced though the total size of the middle class might go down. The key for long term prosparity is to educate everyone you can as highly as you can and to find ways to get capital into the hands of people who have new good ideas. Thus you keep having start ups creating new jobs and capital to replace those old jobs which go to the less developed world. Sadly I don't see this happening right now. We're making college less affordable not more affordable.

[Victor Galis]

It seems that your theory is very simplistic. The real world is much, much more complicated than basic economic theory.

Let's start with your assumptions:
-US keeps advantage in K. What does this even mean? Currently the US is a net debtor, and barring further decreases in the value of the dollar, it will become even moreso. At some point people will stop lending to the US in dollars and the party ends.
-US keeps advantage in T. This is somewhat unlikely. Technology, at least in as far as it is relevant to production, generally belongs to the producers. If those producers are big multinational firms, they can bring their technology with them wherever they locate their operations. You might mean skilled workers, but the US's current advantage there is only that it can drain talent from the rest of the world. If anti-immigration politicians have their way, this will soon dissappear.

Other objections:
As wages rise in developing countries, the incentive to use them as sources of cheap labour decreases and the pressure on the US middle class is relieved. Furthermore, as those developing countries become richer their consumption increases dramatically, boosting demand for all sorts of consumer goods. (The real endpoint here is environmental catastrophe or resource shortages.)

Also, as developing countries become richer, there's nothing to say their educational system will continue to suck. There's nothing to say they can't attract companies and their technology in with good tax incentives. The real world is dynamic. More likely the countries that will end up poor are those that can't figure out how to take advantage of the system. (Or possibly those with few natural resources if commodity prices keep going up.)

[DarkCloud]

DanS
Thanks for the response.

Perhaps I don't understand your question, but comparative advantage by itself won't lead to stratification. It may be that it impacts the wage distribution, but who's to say it only goes one way? Also, who's to say that the impacts mentioned aren't merely a temporary effect of people moving away from jobs in which no comparative advantage exists?

I think you understand my question. Perhaps my grasp of economics isn't as detailed as yours since I would assume that wage distribution and in toto economic stratification would tend to track each other.

That is, as Oerdin points out--

much of the lower middle class was created by laborers who artificially raised their wages by threatening to strike but now they can't really do that since management can just relocate any where to take advantage of lower wage, less militant labor.

a situation could very well be created where the class of the poor rises, the middle class shrinks, and the capitalist class in some countries grows disproportionately (since they are in charge of companies which can outsource);

This would happen simply because not everyone is suited to a white collar or pink collar job. Some people thrive best with manufacturing jobs or the trades- and as mfg. people shift to the trade industries, that would tend to depress the wages for the trade industries, correct?

Oerdin I definitely echo your sentiments about college costs... they're becoming almost bizarrely high... and the standard of living at colleges now seems to be a large part of the culprit. A lot of these megamilliondollar cafeteria facilities, etc. add a lot to the bottom line for students- at little direct practical educational benefit.

Victor

It seems that your theory is very simplistic. The real world is much, much more complicated than basic economic theory.

Thanks for pointing that out and for your reasoned response. I know I'm no expert in the field and value others' experience. There definitely are a lot of factors and assumptions to consider in this case.

If I'm correct then, in reading your propositions, Victor- a future scenario could be that the US declines in K, and T, and therefore L becomes more attractive, thus the rich in america suffer, and the economy as a whole suffers, but the middle class will once again grow?

As wages rise in developing countries, the incentive to use them as sources of cheap labour decreases and the pressure on the US middle class is relieved.

Well, I'd agree about that, but as countries develop a mature domestic market and can invest more in reliable and standard infrastructure, then they will have less reason to invest in America- correct? Since by investing inside themselves will be less "bad-money" inflation prone in the circumstance when everyone's standard of living is going up, correct? (To clarify- I realize intra-investing will lead to inflation, but could that inflation be considered "good" inflation since it leads to a "building up" of the country's propensity for future development of wealth?)

Therefore, in a sense (and especially if you add in rising resource costs for transportation), the pressure on the US middle class would not be relieved since the foreign firms wouldn't be investing to build US industries AND they would be withdrawing capital.

I am having a little difficulty conceiving all the variables and possibilities here, so I'll try to draw a little chart- please correct me if I'm wrong.

United States NOW (assumptions that may be horribly incorrect.)
K abundant
T abundant
(t) abundant (land)
L deficient
M deficient

US in victor's simulation in 10 years
K deficient
T deficient
(t) abundant (land)
L abundant
M deficient (Would this be growing)

Is this a correct way to assume your proposition?

If so, then wouldn't this still tend to lead to an international stratification of countries?

In complete free trade, certain countries would specialize in several of the factors in which they are best in. Often, the countries would be in flux as new technologies are discovered, but wouldn't they tend to stratify toward national core competencies?

In this case, it doesn't matter exactly HOW the US stratifies, just that it does in some direction. If it loses its advantage in "K" and multinationals relocate, then it'll restratify toward a more "middle class" society like Canada-- but countries that are "K" abundant would tend to eliminate their middle classes- and countries that are "M" abundant would be stuck focusing on "M" for long periods of time (barring political or social unrest)

-
I appreciate your response Victor and it makes me feel a lot less as though the world as a whole is headed for a "doomsday scenario" though it does expose severe weaknesses in the United States, which might very well be headed for troubled economic times.

~DC.

[DanS]

Originally posted by DarkCloud
DanS
That is, as Oerdin points out--

But as I understand it, that has minimally to do with comparative advantage. The working classes could agitate for artificially high pay in an industry with a comparative advantage as well.

It might be true that this agitation is much less effective during the period in which industries change to those in which a country has a comparative advantage -- i.e., you may not be able to identify what is a temporary impact and what is a permanent impact.

[Dinner]

If everything is more or less static, and it almost never is, then I could see the scenario in the OP playing out but that doesn't take into account innovations. It seems the key to maintaining a healthy middle class in a free trade environment is creating an innovation economy where the government helps as many people as possible become as well educated as possible (and the key is to have the masses better educated then the masses in other countries you compete against) and makes it easy for people to launch new start ups.

The idea being that the older companies will always be off shoring some jobs so you have to replace them with new jobs. Educated people are more likely to come up with innovations so you want to encourage entrepreneurs and you want to make it easy to mate up ideas with capital so new businesses can innovate and create wealth.

The US is doing extremely poorly on the education part (and getting worse instead of better) but does ok with the starting businesses part and pretty good with the mating capital to entrepreneurs part. If we want to avoid the scenario in the OP then we have to drastically improve education including affordability.

[Traianvs]

Originally posted by DarkCloud
Interestingly enough, that and what I outline above is the stated Communist Party theory in China "we must undergo a period of capitalization before true communism can be reached." I thought it was bizarre and disingenous when I first heard it... but oddly enjoy, even though they probably were lying to themselves, they may turn out to be right, anyway!

Well iirc, didn't Lenin say that communism is just the next logical step after capitalism (and well with socialism still in between them)?