Well, good afternoon. It's time to start the session, and my job was supposed to be to introduce our main speaker, Paul Craig Roberts, who's not here right now. We think he's going to show up. Is this right, Jeff? We're pretty sure he's going to show up. But we do want to start the session on time. Dr. Roberts had written some controversial things on free trade, and the way we had planned to run the session was to have him give some remarks followed by some commentaries. But since he's
If he's not here, we're going to start with the commentaries.
That does seem fair, doesn't it?
And I believe the first commentator is going to be Guido Hulsman.
So thank you, Professor Roberts, for this excellent talk,
which I enjoyed very much,
Brought lots of new information, was not yet aware of.
It's of course somewhat awkward to comment on these arguments that were rather devastating and smashing for the traditional case for free trade.
Therefore let me just maybe make some general remarks on what I believe
Meaningful Discourse on Free Trade
could be about today. So the first fact that I would
notice, and it's a fact, is that undoubtedly we wouldn't say that everything
is well and perfect with international
economic order. So certainly we could say there are large
imbalances, and these imbalances express themselves in
huge wage rate differentials. From wage theory we know well that
Weigh-trade differentials are due, on the one hand, to differential physical productivity of the factors of production,
but as we know from the theory of government interventionism, there are lots of other factors that also come into play,
and these, as we know in the case of international trade, have contributed to creating the situation that we face today.
So the reason why the wage rates are much lower in the former third world is that for a very long time government in these countries have derived their inspiration for the economic policies from Western universities, the University of Western Europe, but also the United States.
and they have applied the top-notch knowledge that was taught there in the 1940s, 1950s, 1960s in their countries and well, we all know what top-notch in those days meant in terms of economic policy was Keynesianism and government interventionism, the full monty from price fixing to central planning, foreign exchange controls, hampering of trade and so on.
and certainly a huge factor that has contributed to the imbalances that we face today.
And since many of these governments came back on the decisions that they have taken previously,
often we are not talking about the same persons, often we have kind of a new government being elected
or there was a revolution going on and in any case they changed policies so they became much more free market friendly
We're not talking here only about the tiger states, but about many other countries, both in Latin America and in Southeast Asia in particular, now even the Soviet Union or the former Soviet Union.
So as a consequence, these places have become much more interesting for foreign investments.
And as a consequence, Western capitalists, rather than bothering with labor unions in Germany, France or Detroit,
and rather than bothering with their governments, who are not very sensitive to business questions, decide increasingly to invest their money in those countries.
So huge investments in India, Malaysia, many other countries of southeastern Asia and this capital could have been invested or has been invested before in the western countries
Western countries and as a consequence what we observe as an outflow of capital which goes in hand with a relative impoverishment of the population in the Western world and a relative enrichment of the population in the developed world.
Now the question is, can we do anything about this? The second question is, should we do anything about this?
Now, let's address the second question first. If we take a libertarian point of view, well, from a libertarian point of view, clearly, there's nothing wrong with this, and quite to the contrary, it's something that will in the long run certainly be approved beneficial for all members of the world population, and that in the short run might even also be beneficial both for the people who profit directly from it and for the Western population.
In the libertarian point of view, there's nothing wrong with this and we should welcome such an event.
The other question is can we prevent this if this were our aim for whatever reason?
And I think the answer is plainly the negative.
We in the West can add to the problems that we have right now.
The problem that we confront is that after five or six decades of interventionist policies in the developing world,
The Third World, the governments there increasingly change their policies. That's nothing that we can have an impact on, a direct impact.
And so by preventing the outflow of capital, as I take it Professor Roberts is advocating it, we wouldn't change our situation.
We could possibly prevent the accumulation of capital within our borders, but we could not prevent that capital would flow there, either in the form of money, of people, of consumer goods.
Certainly not in the long run, we couldn't prevent it.
Let me now maybe conclude with another observation on the pernicious nature of this debate, and the debate is pernicious because it shifts the attention from the field where there is a real problem, where the attention should be focused, to the field of trade policy, about which I've been talking so far.
There is no problem whatever with trade per se, both on a practical level and on a theoretical level.
You cannot make a case against free trade. I haven't seen any convincing argument so far.
But we have a problem as far as monetary policy is concerned and as far as the international monetary order is concerned.
Now just consider one fact that the present monetary regime that is freely fluctuating
fiat paper moneys have contributed to the imbalances that we confront in the world economy.
Think for example of the policy of the Bank of Japan, the Bank of China, who for some
years now, in the case of the Bank of Japan for some decades, have accumulated dollar
holdings or dollar assets in order to keep the exchange rate of their currencies low,
to promote exports.
Now, that's certainly not the ideal type of a situation
that the advocates of the system of freely fluctuating paper
monies had in mind when they promoted the system
in the late 1960s and the 1970s.
What they had in mind was that exchange rates
would adjust to prevailing economic conditions.
That is, if one country is exporting very much,
The exchange rate would go up, so there would be incentives for capital exports and decrease of their commodity exports and so on.
So in a way, it would be ideally, or it was conceived to be ideally, a very smoothly adjusting system, but that's not at all what we have experienced.
What has happened is that, as I've said, the central banks, for whatever reasons, have counterbalanced the effects that would have resulted under the system that has been promoted in the 1960s and 70s by people like Fritz Machlob and Milton Friedman.
And as a consequence, they have created even more. They have reinforced the imbalances that we've talked about.
And the danger, the great danger therefore is, at the present hour, that just as in the early 1930s, we will repeat the same errors that we've committed in the early 1930s.
When we think of the Great Depression, we think immediately of, well, the Black Friday of 1929, but that was not what created the year-long depression.
Depression. That was just a currency crisis, a stock market crisis that has happened many
times before and has been repaired in a fairly short time. The situation was turned into
a Great Depression because of the government interventionism of the following years. And
here we need to mention in the first place the trade policy. How should we date the beginning
of the Great Depression? I would say it was June 1930 with the Smooth Holy Tariff Act,
which brought the International Division of Labor to a standstill and incited the other governments to adopt similar measures
and therefore cut off international trade and the International Division of Labor and really brought about the Great Depression.
And that's the same situation that we face today.
We have a very unsustainable international monetary order that has already created one bubble that has burst in 2001
and that will, if we continue on its, well, maintaining the system, create several more bubbles and now in order to repair the imbalances that have, among other things, been created by the system, there are people, like Professor Roberts but many others too, who propose to repair the defects by trade policy and that would bring us exactly back to 1930. So, to conclude, the great danger that I see in the present debate is that it shifts away attention from
to an area where there is no problem at all, neither practical nor theoretically, and thus promises to bring about the same mess that we experienced once.
All of this would then give another illustration of Hegel's famous dictum that there is only one thing that we learn from history that we never learn from history.
Thank you, Guido. We'll turn it over to Joe Salerno.
I was asked to fill in at the last minute, and indeed I had done something or contributed to this debate.
And I want to read part of what I had contributed, which does touch on the question raised by Professor Roberts, which I think is an important question, because I think international trade theory is subject to some serious misconceptions, beginning with what Ricardo intended when he set forth his theory of comparative advantage.
Now, this theory was universalized, more or less, by Mises in a brilliant stroke, which applied it not just to countries, which had rigid borders at the time Ricardo was writing, but applied it to families and individuals.
So what I think is happening is that the participants, or some of the participants in the debate, were talking at cross purposes.
I think this has been hashed out on the Mises list and on the blog.
But the earlier critics of Roberts, mainly supply-siders, fellow supply-siders, I think did misconstrue his original argument.
So let me just write or read you some of the response that I had to that original argument.
In his articles, and there were two of them, one appeared in the Washington Times, the other appeared in the New York Times.com,
and that was in the early part of actually late 2003 and early 2004.
In his articles attacking the application of the Ricardian argument in favor of free trade to the modern world, Paul Craig Roberts is half right.
It seems to me his critics, such as Bruce Bartlett and others, others being other supply-siders that initially replied to him, have misconstrued his argument at least on one score.
The Ricardian theory of comparative advantage does only apply under the assumption of absolutely rigid immobility between countries.
Absolutely rigid factor immobility, that is the inability of labor to move because of immigration barriers or because of cultural attachments, and secondly the inability of capital to move because there wasn't really a well-developed international capital market while Ricardo was writing in the very early 19th century.
However, Roberts is also half wrong. Even though an outflow of domestic capital, such as the so-called outsourcing, which everyone now has become a word that everyone cringes in fear of, it's like depression used to be.
So even though an outflow of domestic capital, all other things equal, causes real wages in the capital exporting country, for example the U.S., to fall or not to reach levels they would have reached in the short run, there is an increase of labor productivity and therefore output in the capital importing countries, for example China and India.
China therefore develops an increased real demand for U.S. exports, which raises real prices and real wages in these industries.
In other words, China is now richer. It's a better market. They have more goods, more valuable goods, because of the American capital that is supplementing their labor force.
As a result, they become a better market for our goods. The real price of our goods go up because now they're bidding for our exports with more real goods and services.
So what is actually happening is it is true that prices and wages are falling in our import competing industries, but they're rising in our export industries, and Roberts misses this point.
In addition, the allocation of capital to more value-productive uses throughout the world intensifies the division of labor and allows the U.S. labor force to specialize in even more productive industries, raising real wages further in the U.S. and throughout the world.
Thus, for example, if you were to cut off New Jersey from the rest of the country, somebody would like to do that, no thanks to the Sopranos,
that would mean that the division of labor would become much less refined in New Jersey, it would still be a division of labor.
Now, if you reverse that trend, you would suddenly find that, yes, the industries that were providing bananas and other things, in hothouses, when bananas would be $10 a banana or something like that, those industries would suffer tremendously, but elsewhere in the US economy, we would be now importing bananas at much lower prices.
Now, in order to pay for these bananas, people would move out of those industries that were shrinking into industries that were much more value-productive, so real wages for all but the, all laborers in New Jersey, except those who were skilled in banana raising, in hot house banana raising, okay, they would fall, okay, unless they could learn another skill of equal value, okay, so there would be a few industries in which people maybe incurred permanent reductions in their real wages, but overall, because now
Now, New Jersey is becoming integrated into the rest of the U.S. division of labor.
Real wages would rise tremendously.
And then I go on and say, thus, in the late 19th century, the enormous flow of capital from Great Britain and Germany to the industrializing U.S.
made products more abundant and real wages higher for British and German workers, as well as for American workers.
Because now American workers working with additional German and British capital were much more productive.
So they had more real goods to bid for the products, the export products, of Germany and Great Britain.
Now, there was a shift in labor towards those export industries. Some people did incur short-term losses and wages and so on.
But for the most part integrating the U.S. into the division of labor and having capital flow from these countries to the U.S.
making the labor more productive did benefit the entire world, including German and British workers.
The same result occurred when capital and jobs flowed from the East Coast to the West Coast of the U.S. in the late 19th century and the first half of the 20th century.
Somehow, Roberts misses this point. Three other empirical points that tell against Roberts' argument.
First, since the mid-1980s, the U.S. has been a net importer, not exporter of capital, which is the mirror image of our huge current account deficits.
So this argument is empirically inapplicable in any case. We're not exporting capital. We're importing tremendous amounts.
We're a net importer of capital, which increases the amount of capital per worker in the U.S.
Now a lot of this capital is eaten up by the huge deficits in the last year or two.
But that's a separate problem. That's a problem of the second deficit, the federal budget deficit. That's the problem.
Not our current account deficit. In other words, if people are investing in the US, they have to send real goods and services here, which means that we're going to have a current account deficit.
We're going to purchase more from the rest of the world than we sell to the rest of the world. That is simply the mirror image of the fact that many people want to invest in the US.
That's exactly what happened in late 19th, early 20th century when tremendous amounts of German and British capital flowed into the US.
We grew tremendously due to these huge balance of payments deficits, because the only way we can import capital, the only way foreigners could get the dollars to invest in the US economy was to sell us more than we were selling to them.
So there was a balance of dollars that they held that they could invest. And that's our situation today. Roberts is wrong to say that outsourcing somehow reflects an outflow of capital.
It's a gross outflow of capital, but net, more capital is flowing in overall than is flowing out.
Two is my second point. It appears that Roberts focuses on the loss of jobs in one manufacturing sector,
in one sector, which is the manufacturing sector here in the U.S., and ignores the addition of jobs in U.S. export industries,
such as aerospace equipment, agricultural products, and so on.
But this redistribution of jobs is precisely what is to be expected from a worldwide intensification of the division of labor.
Thirdly, it is the change in a nation's real wages and not the number of jobs gained or lost in selected industries that indicates the economic optimality of any change in the economy.
It is curious that Roberts, a pretty good economist in other respects, does not address these obvious points in his articles.
Since this goes back to Ludwig von Mises, more than 50 years ago, Ludwig von Mises recognized and carefully spelled out the limited applicability of Robert's law of comparative advantage or cost.
In those conditions of free international movement of capital and labor in which the law does not apply, which is in the later 19th century when capital was flowing to and fro,
to and fro, and when we did have immigration, so the law of comparative advantage, as Mises points out, did not apply under those conditions, at least not to nations, it still always and will always apply to individuals and to families.
So, for example, in the U.S. in the early 19th century, the law of comparative advantage did not apply to the states.
It did not apply to New Jersey and so on. Why? Because capital and labor was flowing in and out.
However, the law of comparative advantage, now operating through value and prices and profits,
did direct individuals into their most value-productive employments and their resources, their capital resources, into their most value-productive employments.
That's how the U.S. grew. Now Mises calls that the law of association. This is what brings society together.
This is what brings people into communication with one another. There's free trade and or there's trade and then people recognize the benefits of trade
And as trade expands, they also recognize that they can increase their incomes by specializing and producing fewer and fewer things for themselves and more things for the market that's expanding.
So in those conditions of free international movement of capital and labor in which the law does not apply, Mises reached precisely the opposite conclusion of Paul Craig Roberts.
Mises believed that monetary calculation, in the form of differing rates of return on investment, would direct capital to its most value-productive uses, extending and intensifying the global division of labor and raising living standards for all participating nations, just as the unhampered movement of capital within the US had enormously increased the living standards over the past two centuries for the citizens residing in all the states of the US. And then there's a long quote, and you might want to look at this, I won't read it here, from Mises,
from Human Action, it's on pages 161 to 163, in which he carefully spells out under what conditions the law of comparative advantage applies, Ricardo's law of comparative advantage applies in the modern world.
And basically what he says is that only in those situations in which there's rigid barriers to the movement or mobility of factors of production does it apply.
Now Roberts comes to that conclusion also, but Mises went further and says it always still does apply to the individuals and families and so on.
It applies on an individual level. That is, everyone is directed into the comparatively most advantageous employments and so on.
and so on. And for the reasons I specified before also, when it does not apply to nations, it doesn't mean somehow that capital flowing out hurts anyone, in a long run sense.
Capital falling out of a nation to other areas where it's more productive, to the third world countries, enormously develops the productivity of labor in China and India,
and increases the market for our goods and raises wages and prices and profits in the export industries.
It looks like Mark is ready to speak.
Mark Thornton.
Yeah, I apologize for not being here just a little bit earlier.
I was out looking for our speaker, Mr. Roberts.
and we're still hopeful that he'll be here but and he apologizes but when he
heard that Guido was speaking he got upset that his lecture was being
outsourced to cheap foreign labor thank you Richard appreciate it until very
Very recently, I have been disengaged, not really engaged in this debate at all.
International trade really isn't my forte.
Last week, however, I stepped in it.
Some of you may have seen my article on lewrockwell.com.
It was where I took a look at the unemployment rate in the United States.
It's kind of puzzling.
Why is there so much complaints?
Why is there so much uneasiness? Why is there so much concern in our economy if we're out
of a recession and our unemployment rate is 5.6 percent, which is pretty normal in the
ballpark of neither an expansion nor a contraction. So why is there all the concern? Well, I went
back and took a look at it and found out that if you considered all of the recently unemployed
Unemployed, but not calculated unemployed, that the unemployment rate actually would
go up from 5.6 to 7 percent, and at 7 percent basically you are in a recessionary scenario.
Every time we've been at 7 percent unemployment in the United States in the last 50 years
or 55 years, we've also been in a recession or a depression, and that's fine.
Unfortunately, the article was titled, Is Lew Dobbs a Communist?
Lew Dobbs is the host of the CNN Money Show, 6 o'clock, and he's been talking about broken
borders and outsourcing and all that business quite extensively.
So rather than people not reading an article about the unemployment rate, apparently many
people did.
I got a lot of positive responses, but I did get a large number of negative responses and even some things that would be considered hate mail.
A couple people called me a communist, while several others called me a shill of the giant corporations.
I thought that was kind of a good mix.
Several several readers said that I was insensitive and a couple of others
thought I was too thinned skinned. Several readers told me that my work as an
economist was unproductive and useless while several others thought it was
important enough to suggest that I should be outsourced or replaced by cheap
And of course I was reminded several times that if economists know so much about money and the economy, how come they're not all millionaires?
So I knew I had stepped into it and so I'm working on my response in terms of addressing the reader's concerns as well as some of those of Mr. Dobbs on CNN.
I would like to point out, however, that I didn't call him a communist. I just associated him complaining about labor markets and labor conditions and the plight of the working poor with what we traditionally hear out of socialist, communist, democrats, liberals, whatever.
And actually Mr. Dobbs comes off a little bit better than that group.
Now, I do want to try to address the issues here. One is that, is there a problem with free trade? Or the other side of that coin is, what is the problem in labor markets? Some of which has been touched on here today.
Now, one of my biggest concerns with Lew Dobbs, Paul Craig Roberts and a lot of the other people concerned about outsourcing of jobs, broken borders and that sort of thing, is that there really haven't been any major developments in terms of free trade.
We haven't seen any major policy shifts where the United States and other foreign countries have, where there's been a sort of a paradigm shift where we've gone from high protectionism to free trade.
That really hasn't happened to any significant extent in recent years.
We have seen a general lowering of transactions cost between countries with better transportation systems, the internet, lower telephone rates and so on.
But no major shift.
So my first inclination is that whatever is going on here isn't related to free trade.
It's related to something else that's going on in the economy.
in the Economy. But before I get to that, those other things, well what is, what would be the impact of free trade in the sense of going from protectionism to free trade?
Okay, well you basically have to start reallocating resources. Capital does have to be reallocated. Labor does have to be reallocated. We know that all too well right here.
I'm from Auburn, I've worked in this area, Montgomery, Columbus, Auburn, and so on.
And we know the impact of this kind of dramatic policy shift, probably as well as any place in the country.
With the NAFTA, North American Free Trade Organization, one of the biggest impacts that that had on was the American textile industry.
And ladies and gentlemen, whether you know it or not, you are in what used to be the region of the American textile industry.
And since NAFTA, basically one plant after another has been closing.
Okay, so we've seen the types of resource reallocation going on in this very area for the last 10 years.
in the last ten years. And we've seen plant closings, we've seen layoffs, we've seen companies moving overseas. It's one of those dramatic policy shifts that makes the results of free trade so readily apparent.
So what happened? Well there was a lot of complaining, a lot of bitching, a lot of moaning, and a lot of pain involved in all that as we eliminated the protectionism and got into free trade.
The city of Columbus, Georgia, which is about 35 miles to the east of here, is a very good example of that.
Columbus, Georgia is an old mill town where they produced a lot of fabrics, a lot of textiles, they also had iron foundries, and they have a military base.
Prior to NAFTA, Columbus, Georgia was one very sorry looking town.
Low wage jobs, a very old capital base in terms of the housing, building structures.
Everything was basically old. Capital was worn out. Housing is old. The workforce was low-paid and not uneducated but low levels of education.
That's what Columbus, Georgia was with protectionism. With free trade, most of those textile factories closed.
is a much better city today than it was ten years ago.
Instead of textile mills and iron foundries,
Columbus, Georgia now is characterized by a little bit of high-tech industry
and financial services industries.
They have two of the top 100 corporations in America,
Aflac, the duck, and Total Systems,
which is a credit card information processing company as well as banks, financials, all
the rest tied up into that company and basically they've been expanding output, increasing
the number of jobs and the types of jobs which are for high skilled, high paying jobs.
The city has revitalized itself, a lot of things have been renovated.
It's educational basis or institutions have improved a great deal and it's a much improved
city just visually, you can tell, a great deal of improvement over a relatively short
period of time.
So that type of paradigm shift when you see the results of going from a protectionist
scenario into a free trade scenario, once you get through the process of reorientation,
the results are, from what we've seen in a lot of places around this area, have been
very favorable.
All warmed up.
And now it's my great pleasure to introduce Paul Craig Roberts.
Probably most people know him as one of the most prominent and influential proponents of
supply-side economics.
He also has done some work that has some affinity with the Austrian School.
I think probably outside of this room, the Austrian School would probably be best known
for its critics of socialism and central planning, especially back in the days when the standard
thinking in mainstream economics was that central planning was really a better way to
to Allocate Resources and Markets, and we can think of the arguments of Mises and Rothbard
and Hayek along those lines, but Paul Craig Roberts also falls in that group. He wrote
a couple of books in the early 1970s, Alienation and the Soviet Economy, which was published
in 1971, Marx's Theory of Exchange, Alienation and Crisis, which was published in 1973. So
So along with Mises and Hayek and Rothbard was arguing against that conventional wisdom
of the efficiency of central planning.
His resume, his academic resume would be the envy of most academic economists.
In addition to those two books, he's also written at least a half dozen other books.
He's had his academic articles appear in the Journal of Political Economy, the Journal
Journal of Law and Economics, Public Choice, The Independent Review, and many more.
He's also written quite a bit for the popular press.
His work has appeared in the New York Times, the Washington Post, the Los Angeles Times,
the London Times, the Wall Street Journal, where he was an editor, and Business Week,
among other publications.
Dr. Roberts received his Ph.D. from the University of Virginia.
He was a distinguished fellow of the Cato Institute from 1993 to 1996.
He held the William E. Simon Chair in Political Economy at the Center for Strategic and International
Studies from 1982 to 1993.
He was Assistant Secretary of Treasury for Economic Policy in 1981 and 1982, and he played
made a major role in designing the Economic Recovery Act of 1981.
Before that he was on the congressional staff and drafted the Kemp-Roth bill.
Currently he is a senior fellow at the Hoover Institution, John M. Olin fellow at the Institute
for Political Economy and a research fellow at the Independent Institute.
So it gives me great pleasure to introduce to you Paul Craig Roberts.
Well thank you very much for that introduction and for reminding them that I'm a friend.
They may feel differently in a few minutes.
When Lew gave me the opportunity to speak to this conference, of course there are other
topics I could speak about that I would be much more comfortable speaking about and which
would bind us emotionally and we would all be on the same wavelength.
But I think Lew kind of wanted me to stir you up and get your blood running hot so it
puts the conference off to a good start on the first day.
And I continue to hope that I can help you get your mind around this problem so that
you can participate in the policy that will be forthcoming.
If people with the biggest commitment to freedom don't participate in shaping public policy,
then you end up with a lot less freedom instead of just a little less freedom and it's always
is better to have a little less than a lot less.
So keep in mind that I'm just a messenger,
and I haven't any agenda other than to put something before you
that I think you need to be aware of.
You need to get your mind around.
And I haven't any solution, assuming I can convince you
that it's a problem.
What I want to do is to go through with you what the classic case for free trade is and
explain to you why the conditions on which that rests have been vitiated by new developments.
And then I want to try to take you through the latest work in trade theory which impugns
And that was even the original classic case for free trade that I would have defended at
least prior to being confronted with that work.
So to begin, you know, Ricardo, David Ricardo addressed the question, how can a country
that is a low-cost producer in all goods trade with a country that's a high-cost producer
in all goods?
And the other side of that is on what basis could a high-cost producer of all goods trade
with a low-cost producer?
And this was not obvious to economists at the time.
And Ricardo came up with this principle of comparative advantage.
Now, for comparative advantage to operate, two conditions are necessary.
One is that factors of production have to be domestically mobile so that they can flow
to where they have comparative advantage.
And the other is that they must not be internationally mobile or not very mobile internationally
Because if they are, then they will be able to flow away from comparative advantage at home
to where absolute advantage is greatest abroad or to where their productivity is highest
and maximize profits by avoiding comparative advantage at home.
So, the second condition is that countries have different opportunity costs of producing different goods.
So, in other words, the internal cost ratios of producing one good in terms of another good must vary among countries.
If that's the case, then both low-cost producers and high-cost producers can benefit from trade, because even if you are the low-cost producer, your opportunity cost of producing one good in terms of another may be worse than the opportunity cost of a high-cost producer, and these are the four magic numbers, as Samuelson called them, and comparative advantage became Samuelson's answer
to the distinguished mathematician who was pressing him for just one economic theorem
that wasn't trivial and what he could come up with was comparative advantage.
Now these conditions, varying relative costs, internal cost ratios differing and immobility,
International Immobility of Factors. These conditions are one of them held until recently.
Factor immobility has been vitiated in recent years by the collapse of world socialism and
by the rise of the high speed internet. These two developments have made factors of production
As for the relative cost differences that are the second key to the workings of comparative
advantage, they've given way to modern production functions which are based on acquired knowledge
in place of the inherent differences that were based in climate aptitudes, resource endowments.
Modern production functions operate the same everywhere.
So there's no longer any necessary relative cost differences, only absolute cost differences.
So these two developments bring it in to the conditions on which the case for free trade
rests in the literature.
Now true, there are still bits and pieces of the principle left in climate-based crops,
in natural resources, and in historically gained advantages that countries have been
I'm able to retain, but there are no longer necessary reasons for these relative cost
differences in producing modern outputs.
Now there's no real point in telling me that free trade is not based on comparative advantage
or the comparative advantage doesn't depend on international factor immobility.
This is Kindleberger's text from which everyone in my generation and the generation after
learned about international trade and Kindleberger, if I can find it, I meant to get here earlier,
this didn't work out.
Kindleberger says, quote, the basis for trade is found in differences in comparative cost.
Here I have a recent peer-reviewed article, The History of Political Economy, by trade
theorist Roy Ruffin, who is also an expert on Ricardo, and he's addressing himself to
To a controversy, who actually deserves credit for comparative advantage?
There is some controversy.
Now, many of you may know Alchin and Allen in their famous textbook.
They give credit to Robert Torrance.
You may know that the historian of thought, Blaug, Mark Blaug, gives credit to the Mills.
And, Ruffin is now, this is a recent article, 2002, David Ricardo's discovery of comparative advantage and he says that the hard part of the discovery was coming up with the key assumption of factor immobility.
When he contrasts torrents with Ricardo, here's what he has to say, that the key assumption of trade theory,
the inability of factors to move from a country where productivity is low to another where productivity is higher.
He takes the credit away from Torrens on the ground.
Torrens did not mention this requirement at all.
This observation was Ricardo's home run.
That Ricardo had emphasized the four magic numbers, to use Samuelson's later words,
And went on to state that in his example, you know, Portugal has the absolute advantage
in production of cloth and wine, and in this case, Ricardo states, it would undoubtedly
be advantageous to the capitalists of England and to the consumers of both countries that
under such circumstances, the wine and cloth should both be made in Portugal and therefore
Both the capital and labor of England employed in making cloth should be removed to Portugal for that purpose.
Accordingly, Ricardo realized it was necessary to dispose fact of immobility between countries.
So that is the case for free trade as we know it.
is Comparative Advantage and those are the conditions for Comparative Advantage.
And there's not much point either in arguing that the case for free trade is merely the willingness of people to make deals.
Because this is not the case. The case for free trade has always been that it brings advantages to the countries as a whole.
And that is the result of the workings of comparative advantage because countries get more output for less input.
And it's very interesting that both Ricardo and Adam Smith explain fact immobility in terms of national interests.
Experience, however, shows that the fancied or real insecurity of capital were not under
the immediate control of its owner, together with the natural disinclination which every
Every man has to quit his country of his birth and connections and entrust himself with all
his habits fixed to a strain to government new laws.
Check the immigration of capital.
These feelings, which I should be sorry to see weakened, induce most men of property
to be satisfied with a low rate of profits in their own country rather than seek a more
advantageous employment for their wealth and foreign nations.
Now you all know Adam Smith in Invisible Hand. I want to give you the context of the Invisible Hand passage. This is Smith.
By preferring the support of domestic to that of foreign industry, he intends only his own security, and by directing that industry in such a manner
Industry, and such a matter, as its produce, may be of the greatest value he intends merely
his own gain.
And he is in this, as in many other cases, led by an invisible hand to promote an end,
which was no part of his intentions.
So for Smith it's very clear that the capitalist is first and foremost a member of the national
community, and in fact the capitalist in Adam Smith is so thoroughly British that his identity
is completely defined by the internal relations of community with, quote,
the country of his birth and connections.
Now, having got through that reasonably quick,
I haven't tried to draw diagrams in so long.
So long, I hope I can still do it.
This is the latest work in trade theory.
Global trade and conflicting national interests.
Notice that conflicting.
It's a very great challenge to the economics profession.
It comes from two of the most distinguished members.
It was a Lionel Robbins Lectures and it's published by MIT Press.
Now, in the classic case that I ran through briefly, there is a case for free trade always,
if there is sufficient fact immobility and different relative costs, different opportunity costs within a country.
and this latest work, there may be no case for free trade at all and all I can hope to do is to give you a general outline, a basic concept and if you want to really engage your work, you'll have to turn to the book itself.
Now, as I understand it, the Garmery and Bellman book differs from the classical world. Production functions are based on acquired knowledge, not on inherent attributes.
In their simplest case, there are two countries and ten products and the result is 1,022 equilibria in which one country is a sole producer in a particular industry.
So each one of those equilibria has one country as a sole producer.
Now, I want to try to grab this thing, if I can.
Oh, I see.
." Can you see that? Yeah, if only. I understand that.
Okay, here, they're measuring world income, and here, they're measuring the share of
We've got two countries. We've got France and we've got the U.K. So this is, if we measure the U.K. share or the percent.
So, if you're measuring the U.K. share this way, you're going from near zero to 100, then you're measuring France's share this way, so whatever the U.K. doesn't get, France is.
So, if the UK has 80 percent, then France has got 20.
And let's see, I think I need to tell you the reason for this distribution of these 1,022 points.
Okay, trouble is, I don't have enough hands, wrong list.
All right, the reason for that dome shape is basically if England tries to produce everything itself it fragments its workforce,
Of course, this productive capacity cannot take advantage of increasing returns to scale.
And the authors are insistent that the most important modern production functions for high-tech manufacturing
are increasing returns to scale, not the constant returns or linear production of a classical model.
So, that then gives you the reason for the dome shape.
It's basically, if you try to produce everything,
you lose the, you become fragmented
and you lose the productive capability.
Now what is, this is an upper boundary
and this is a lower boundary.
And obviously, this swirling comes crazed here.
And what's the difference between these points, assuming that's the high point, I haven't got it drawn right.
The movement from here to here, assuming you were here, so you can be anywhere, you can be anywhere in this, anywhere, anywhere.
Any of these are stable equilibria.
There's nothing that produces the maximum best outcome by virtue of the model like in the classical world. Any of these are stable.
Now, this movement up here, or the movement anywhere from bottom to top, this is achieved by countries achieving the best combination of industries, given their strong points, so you get a bit of the comparative advantage left in some sense.
Inventors, though basically they're talking about supply chains, synergies, there's some
things you can't produce without other things or you can't do it very well, and of course
any remaining natural advantages.
Now this is the simplest case, which is about all I can handle.
What they then do is they derive the individual country curves from this curve.
So this will become UK, UK national income and this is still the UK share of world income.
Now this curve looks a little bit different, it's not dome shaped, it's kind of like a
A Hill shape. Blackboards used to be higher. I didn't quite get it right, but...
Now, why does it look like that? That graph is taken from the other one, but what you do is you multiply the world income in the first graph by the UK share at each point, see, and so that gives you this shape.
Now why is it sort of a hill shape skewed to the right rather than the dome shape?
Well, the initial rise is due to the fact that both world income and the UK share are rising.
See, both here, world income and UK share are rising. I carried on a little bit too far.
Then, what happens? World income starts turning down, but UK share keeps rising.
So, the slope changes. You can see that the slope of the rise changes. It was steeper, and then when you get over here, the decline in world income more than all sets the rise in the UK share, and so there it goes.
Now, if we do this for France, we get the mirror image, we would get the mirror image
of this thing, assuming I could, I should have found a black boy and practiced drawing
Well, I could have done better.
What do we get now?
Well, we get three zones. We get two zones of mutual gain and one zone of conflict.
First of all, this is the U.K.'s optimal point, and if I had this right, this is France's.
So, if England's got too much of world production and France doesn't have enough, they can
And gain by movement in this direction.
Over here, France has got too much and England doesn't have enough.
Their gains from trade, they can move in this direction.
But notice, this isn't supposed to be this wide, I've got the best thing drawn.
Once you get here, there's only conflict because for the English to get better from trade,
France is going down, or if they're here, for the French to increase, the Brits are
There's a couple other things to note.
If the UK has got 100% and that's like having no trading partner at all, that's autarky.
and so if they had a hundred percent and you had this and it's over here this
entire range is worse than free trade is worse for Britain than no trade. Same for France.
This seems to be partly a feature of increasing returns, because if you have increasing returns,
Companies who get a jump or a start can keep out the others.
Entry cost, you know, in the classic model there's really no entry cost, it's linear
production.
But if there are increasing returns, whoever gets there is hard to dislodge.
Since production is based on acquired knowledge and not inherent attributes, you get these results.
And what can you make of them all? Well, you know, you could say, oh, I don't really know what they make of them all.
But some things are obvious. One, you've got an explanation of Japanese industrial policy, you've got a more thoroughgoing statement of the infant industry argument.
But if you think about this and you start contrasting it with classical model, you can see why these properties are there.
Increasing returns, not constant or even decreasing as in agriculture.
and a situation where it doesn't, you know, location no longer has any impact on, an industry can be located anywhere.
So what, you know, I don't know what to say to this, but I thought that you should see briefly the nature of this development.
Now, since we've run out of time, let me turn to the third.
I've watched through the argument for free trade, the classical argument, and I've shown what's happened to the two conditions in which it rests.
is simply not there, or they're not there in force, like they used to be.
I've given you a brief sense or notion of this approach by Gomry and Baumer.
And now let's ask the question, is outsourcing, is offshore production trade?
Or is it labor arbitrage?
What is being traded?
Trade always meant that England was producing something, France was producing something,
they were engaging in trade.
If one had the advantage over the other and they would win and the loser then would reallocate
to some other domestic function, the capital had to be mobile internally to move, labor
would be re-employed in a new venture, and this would continue to work and continue to
to produce good results, but when a firm moves a plant offshore, what is it trading?
We often speak as if the loss of jobs is due to trade competition, but in these types of
In these cases, no one is losing to a foreign firm. They're just moving offshore.
So I think it would be better to call it labor arbitrage.
You simply move to where the cost of labor is cheaper because the capital and technology work the same anywhere.
So if it's labor arbitrage, isn't trade to start with?
So the fact that the free trade model is running into trouble on the terms that I offer you,
on the terms that Montgomery and Baum will offer you, may be beside the point if it's not trade.
Now, you have to keep in mind, too, that when plants move offshore, it's not just domestic jobs, but the capital technology goes, too.
So if the capital technology goes, it's not here domestically to look for comparative advantage and re-employ the labor.
It's not like it lost a competitive game in a product.
And so what happens if you lose capital and technology? And that's the opposite of economic development.
You know, when economic development teaches you the way you develop fitness, you gain capital and technology.
So it's very hard to say you benefit from the loss of capital and technology, and jobs,
because then you have to square that with the theory of economic development.
If offshoring is good for the country, then it's good to lose capital and technology?
Well, what does that do to development theory?
How does economic theory deal with the loss of capital?
Well, it depends. It either means unemployment or it means the remaining capital is spread less thinly over the existing workforce, so productivity goes down, wages go down.
Either way, you've got something to contend with.
You've either got unemployment or you've got a decline in productivity in nearby wages.
Now we can say, oh well, factor price equalization will fix it all.
But it depends on your definition of time periods because, you know, what is the compelling
Feature about Asian labor, about Chinese and Indian labor, they are present in massive excess supplies.
Massive excess supplies. They overhang on Chinese labor markets larger than the American population.
So, factor price equalization will be a long time in coming.
and First World Wages will fall a lot further than agent wages will rise because there are massive excess supplies of labor.
This is also a factor.
It's very hard to get rid of all of these things.
You know, even when you sit down with the, with the theorists that just like the theory and you theorize and you say come on give me some more assumptions, give me another, give me an assumption to fix this, give me one to fix that.
It's hard. And then when you look at the result and you say what's this got to do with the world?
See, I can remember, one of my professors was Ronald Coase, and he used to tell us from time to time that economists should look out the window and see what's going on, because he meant that we tended to get lost in our theory and get disconnected from what's going on, and so that was one of his favorite things.
Time to time, people look out the window.
Now, let's see.
Just two more points.
Something is going on.
If we think, you know, how we assume there's knowledge in markets
in the United States is a move in university enrollments away from outsourcible professions.
So the young know something.
The situation seems to be most severe in computer engineering.
In the last year, there's been a 23% drop in enrollments in computer engineering.
MIT has experienced a 33% drop in enrollments in electrical engineering and computer science
in the last two years.
It also turns out, if news reports correct, that their best engineering graduates are
going into investment banking.
If you look at the BLS monthly job numbers, you'll see it's been three years before there
have been any, it's been at least three years, there have been no net jobs created in what
What are called, you know, knowledge skills, the knowledge skills that were supposed to take over from the lost industrial economy. None.
The economy has lost about three million jobs in the last three years and almost a million of those during two years and a quarter of economic recovery.
The only place jobs are being created or they're gross are in low-paid, menial, non-tradable services.
If you look at the BLS job projections for the next 10 years in the United States,
For the next 10 years, they say job growth in the United States is heavily concentrated
in menial non-tradable services, hospital orderlies, waitresses, retail sales clerks,
this type of thing.
I've got the list here somewhere you can find it if you want me to read it.
Only three, and so we hear education is the answer, but the BLS points out that of the
ten areas where they expect the most job growth, only three of them require any kind of university
training, rates to nurses require an associate's degree, managers of various things, a bachelor's
Post-Degree and Post-Secondary Education, some form of graduate degree.
So none of the ten projected areas of maximum job growth are in tradeable goods and services.
Now they may be wrong.
Everybody may be wrong.
Well, if this is the case, and we can't grow, at least employment-wise, the areas of tradeable goods and services, how do we balance trade deficits?
The way we're handling it now is we are simply handing over the ownership of our assets and the future income stream that the assets produce.
That's how we're handling it. We're just shoveling out the change in ownership of the assets from our hands to foreign hands.
Is there a limit to that?
Well, obviously, when they get them all.
But before that, it's probably a limit.
See, right now, it's a, you know, I don't know if you're aware of this or not, but my
understanding is the foreigners own 50% of U.S. government debt, trademarks, they own
on a quarter of the corporate bonds and almost a quarter of equities.
I don't know the percentage of real estate, but it's significant.
So at what point do they get over-invested in dollars?
You know, this is an investment problem for anybody.
You know, when you put all your eggs in one basket when you make investments, no you don't.
At what point do they get over-invested?
Now, how long can the Chinese keep the peg where they have it, on the dollar, until the currency markets decide that they can't?
That could be any time. What happens to all those cheap Walmart goods that we're getting when the dollar tanks? So then, where are the gains?
Real question, gains from trade.
They're not there if the conditions on which they're based aren't there, which is my main message.
What I very much reason that I've taken this up is, first of all, there are young people
in my family and I'm interested in them.
First of all, I'm a patriot since I like my country, if not the government.
And third, from my experience in public affairs, I know they're going to do something that's
even worse.
And what I expect the government's solution is going to be if people don't get involved
and find some way to deal with this, because they're going to deal with it, doesn't matter
what you think.
But if you don't get involved, get your mind around this and get out of denial and find
some way to deal with this, my prediction is what they're going to do is just like these
so-called free trade agreements, which as far as I can tell, they're not free trade
Agreements, there's so special deals for the politically connected.
And that's what they're going to do with this on the import side.
People are going to get import licenses who are politically connected and that's going
to be, for example, what we think of as our high tech firms which are basically assemblers
of Japanese inputs.
They're going to get licenses to import the inputs they need from Japan to make their
Everybody who's managed to get offshore is going to get their licenses to bring back their production.
But no real importer is going to be able to get it.
An importer just wants to bring in a farmer who is going to be hard pressed to get a license.
Because trade deficit is so big, so you're going to have special deals for the politically connected firms
who's inputs are outsourced or whose production is offshored and you know people say this is free trade
and that's the way it's headed
because you know one of the things we've learned about the budget deficit is it seems to be fairly sustainable
and we now have bigger deficits than ever and bigger projections of deficits than ever if you look at the projections I mean they're really extraordinary and the interest rates are pretty much zero so the old argument that they're gonna crowd out investment and drive up interest rates and kill the economy was no sign of that hasn't been for years and years so the budget deficit is probably it can turn along
The trade deficit is different. If the dollar starts going in a big way, I mean it's gone in a big way, if you look at the change to the euro and the yen, but if it starts going in general, then there's a crisis, because how many people are going to continue to hold dollar assets while they're going like that?
And so, if they start trying to unload those things, you can see the financial panic. I mean, it'd be horrendous.
And they'd do something. Most likely, they'd try to jack up the interest rates real quick to pay a high interest rate to retain the foreign holdings of our assets.
And then you have to ask yourself, well, if the economy doesn't create jobs with zero interest rates and a very stimulative fiscal policy, how have you measured by tax cuts or by deficits, you know, supply sideways, change in the way you want to measure.
It's tremendous stimulation from any normal concept.
An economy can't produce any jobs with two years and a quarter into recovery, and we lost another three-quarter to a million jobs.
What happens to the industry?
Now you can see the more, I mean you can see the possibility of all kinds of crises and problems,
and when you have to and you know better than I do that the minute those happen that's bait
for the government, right?
I mean the government is going to move, right?
There's going to be this control and that control and this policy.
And I got into public policy a quarter of a century or more ago because of the worsening
Worsening Phillips Curve trade-offs, stagflation, because it was apparent to me that they were
going to use these Worsening Phillips Curve trade-offs, you know, more inflation, more
unemployment, to slap on wage and price controls, because it was the only solution that they
knew what they had.
And that's why I got into public policy, that's why we gened up the supply side thing, because
we were able to convince them they had the mix wrong, that you cannot take an economy
and try to pump it up with easy money and then try to restrain inflation with high tax
rates.
Because that's what the change in the management policy was, you pumped it up with easy money
and then you tried to restrain inflation on high tax rates.
And all that did, of course, was suppress output.
So up went inflation more, up went unemployment more.
Well, I think now what we face is even a worse situation
for Mischief than we faced then.
And I haven't any idea how to deal with this
or what to suggest, but it's real. It's there. It's gone too far, unattended. Denial doesn't do us any good. This is not religion.
And so, I encourage you to give it a real serious thought. Just remember all this. Go at it one point at a time.
Have a look at Ralph Gomer and William Baumel.
And I really don't know how to tell you that there's any worse economic problem we could have because there's so much blind sort of confidence or, you know, we're America, we're the best at not thinking.
Well, I've gone on about all I can do it. My voice has run out. I'm sorry to have been late, and I hope I've given you some idea of what the problems are, and I'm not sure I can answer any questions, but I can try.
and I'm not happy about any of it okay and in that case that's what we'll do if
If anybody has any questions, would you be willing to take questions?
I can try.
Okay.
Here's a question.
Yes.
Going back to your document, your respective document, you have drawn in a lower function
in each case.
And I suppose I'm not quite clear on what the lower function does.
The lower boundaries?
Okay.
Well, as I understand the argument of the law, the equilibriums fit within these boundaries and the difference between the upper and the lower is that the upper represents for any particular share of world output for the countries the best combination of industries.
The interactions between supply chains, the synergies and things that go together, any remaining natural advantages, any...
So that, you know, but there's nothing that guarantees that you'll be here on this.
Well, so now, does that represent transitional situations?
No, every one of these equilibria is stable according to them, including this one down here.
In other words, in the way I understand their work, it's not like the classical model that gives you the best outcome, the most efficient outcome because of people specializing in the comparative advantage and working out the best ratio of trade and all that.
There's nothing. So, obviously, a country that's determined or has some kind of strategy and can succeed.
See, when I first read this, I said, now I know what, what was that guy's name?
Eamon Fingleton was talking about Japanese industrial policy. At the time, it didn't make sense to me.
but you can see how somebody might say we're going to capture all the really
important high-tech manufacturing processes and we will do whatever it
takes you know we will have forced saving we'll let the Ministry of Finance
run the country we'll do whatever we're going to capture them because once you do
So much work in the classical model, so much works because there's no entry cost, because
there's linear production.
Jim? Yeah, Greg, good to see you again. Hi, Jim. From the supply side of the past wars together. I wish I was seeing you better. It seems to me, as I think about your very interesting analysis here, that you have entirely too much emphasis on the equilibrium and too little on the market as a process.
And also tend to ignore the importance of, as it relates particularly to the production cost and the issue, differences in institutional arrangements across countries.
The institutions make a big difference in terms of how those productions, what output you get from the respective inputs.
And those are not the kind of things where you can simply, you know, quickly improve your institutions as the result it affects this capital flow quickly and that sort of thing.
And with regard to the sort of equilibrium analysis, I mean, to a large, in fact, as I was sort of reflecting a little, my thought kind of was the kind of argument that Bob has previously presented with regard to perfect competition, talk about, hey, there's violations of the assumptions, because there's violations of the assumptions, we don't get these market results that these free market guys talk about, and as a result, markets don't work.
Well, I know you didn't buy into that particular argument, that we recognize that markets as a process play a very important role in revealing various things about cost and various things in terms of giving them the proper kind of incentive structure to produce efficiently and all of those kinds of things.
And I think to a large degree that you've got the same thing operating here. This analysis is basically based upon production functions being similar across countries and equilibrium analysis. And that's what's wrong with it.
Essentially, what markets do is they reveal whether you can acquire something cheaper by producing it yourself or by trade.
If you can acquire it cheaper by trade, it makes sense for you to acquire it by trade.
I know it probably comes as a surprise to you, but I outsource, for example, all the maintenance services of my car, all my plumbing services.
I answer all the lawn care service. I don't spend my time focusing on those kinds of things because I'm not very good at those things.
I agree with everything you said, except your outsourcing, because there you have comparative advantage operating.
You can't transfer your skills to the mechanic.
The issue of whether you can acquire it cheaper, even with regard to the issue of Ricardo's presentation of comparative advantage, you make certain kinds of assumptions, and you talk about it, but just because the assumptions are not met, are violated in some respect, it does not mean that the general principle is if you can acquire it cheaper by trade, rather than producing it yourself, it makes sense for you to acquire it.
but I guess and I do think if we look at the current situation that it does have
some puzzling results but it also certainly has some puzzling results too
with regard to your theoretical analysis. Your theoretical analysis should be
going down but it's not going down. Productivity is actually rising more
rapidly in the last six to eight years or so than it has at any time since back
before the Supply Side Revolution. And that as we find this sort of movement of some capital abroad, and that's essentially what outsourcing amounts to, that as essentially the exchange rate is going to bring into equality the amount of things that we buy from foreigners with the amount of things we sell to foreigners, you have that outsourcing or greater investment of capital abroad, there will be an off the outflow of capital
and Capital, if you like. There will be offsets in terms of exports and capital inflows, and that the markets may not adjust instantaneously, and that sort of thing, but two years when we're talking about, and I'm a little surprised that you're throwing around sort of the Democrats' favorite numbers with regard to the 3 million jobs law, because I would presume that most everybody knows that that figure is largely fictitious. It reflects the establishment figures, which always, in terms of employment,
always lag during the recession, and if you look at the household figures, what we've got is something like a stable employment pattern, probably a creation of a couple hundred thousand jobs, which is not impressive, over a two-year period, but that's what happens during the recessions and recoveries from the recession.
So, I guess my view is that your analysis places too much emphasis on equilibrium, too little on margins as a concept, and too little on institutions you need to come to.
Now, I know that you're a big fan of our economic work and economic freedom, and tomorrow we will show you in terms of ______ about how many productivity ______ are influenced by the quality of these institutional ______.
Jim, I appreciate your remarks and I agree with many of them, but let me say, first of all, the reason diagrams are static is that you can't draw dynamic.
And so it's not the question of the analysis being static because the analysis isn't, but the diagram is.
And as far as I understand it, the various kinds of institutional differences can account for where you are here or here, from the lower boundary to the upper boundary.
So if you had all the right institutional things, you could be up here.
If you had them only half right, you'd be somewhere in here.
If you didn't have any of them right, you'd be at the bottom.
So it could well be the institutional things were there.
And I think the question that if you can get something cheaper, you take it,
is, I think, the question that they are refuting in their work,
particularly if there are industries that have increasing returns
and somebody decides to capture them and pay the price to do it.
And it can be cheaper for you while they capture it.
It's cheaper for you while they capture it, but, so the whole question of what is your time period, your time frame, right now, right now today, yes, cheaper for us, right now, ten years from now.
So that's missing from the notion that it's always to get something cheaper.
This is just to give you a notion. I'd have to try to give a course. It would be an awful lot of work. You wouldn't want to listen that long. Anything else?
The point of clarification about the role of increasing returns in this model, is this assuming increasing returns in all industries?
Because earlier you mentioned, in actuality we've got increasing returns mostly in high-tech industries, but is this model assuming it for all forms of production?
know that each of these points, there's at least one industry completely provided by
one of the countries with increasing returns.
It may be all of them, but I'm sorry, I can't.
They go through it with, see, what really upset me when I read it is they end up showing
Professor Rogers, thanks for your articles and your very lengthy defense on the media.
My question is, do you believe that outsourcing is going on on a scale based on the Bureau of Labor Statistics or whatever, on a scale that is going to have a very significant effect on real wage rates in the U.S.?
Do you believe that's happening now, will happen soon, and to what extent?
Well, I just know what I see in reports and I also know what I see as a, I'm on the board of a global manufacturer and all of the other board members, except for me, are chief executives of global manufacturers.
So I know a good deal about what they're doing and why and when I listen to them, a form of inside knowledge, they lament their merger and acquisitions during the 90s because it used up their cash and they said if they had any sense, they would close down every one of the American plants and move abroad.
So that is the mentality of global manufacturers.
So it happens we retain them because it takes huge sums of money to close a plant and then
you got it.
Now on the wages, I saw recently a Business Week report that a guy in Boston got a software
Contract, I think Family Connections or something, and he was going to outsource it to India,
and he got the idea, I wonder what I can hire all these unemployed computer engineers for.
So he ran an ad offering them Indian wages and managed to hire them in Boston.
So that's in business week.
So that does show, you know, a lot of downward pressure on wages.
And if you look at the, like I said, if you look at the enrollments, what's happening
enrollments in engineering, I happen to know that presidents of engineering colleges like
Georgia Tech, which has got to be the second or third top engineering school in the country,
The President is extremely worried about the future of engineering education in America.
They keep getting people turning down acceptances because there's no future as they see it.
So if we think knowledge is in the market, then it's in the market for education.
When you see MIT have a 33% drop in enrollments in two years, it tells you something.
Just the other day, Siemens announced that they were closing 15,000 software jobs in
the United States and Europe, moving them to India, China and Eastern Europe.
And you see these announcements continually.
Every high-tech firm that you know of has announced thousands of engineering jobs, research
jobs, even development jobs.
So if, you know, we were creating huge numbers of jobs so fast that we can't, we don't have
enough university graduates to fill them, it would be one thing, but that's not what's
happening.
They're not moving them off because they can't fill them.
So I, you know, I don't know, but you see, what you have to understand is until world
Socialism collapsed, which is recent. Indian and Chinese labor was not available. It was not available.
These were socialist countries. They wouldn't have you, and if you had any sense, you didn't want to go.
So when it starts, it starts as a trickle. A few people say, look at the changes, all this, blah, blah, blah.
Somebody tries it, it works out, the word spreads, somebody tries it, then it catches on.
And, you know, the way Ricardo would analyze this, he'd say, well, this is a movement of factors of production to absolute advantage.
See, where is the productivity of capital highest? Where labor is most plentiful?
All of a sudden there are these massive supplies of labor. They weren't there. They're there. Just like that. They appeared because of institutional changes. Institutional changes.
You can say there were all great improvements for China and India. Bad implications for high paid workers in the West.
I'm not complaining about it. There are normal workings of profit maximization, but the implications for first world employment or wages are extreme.
As I said, these excess supplies are large.
You're not going to see Indian-Chinese wages bid up, you know, the factor price equalization isn't going to work tomorrow and bid up the wages and everything's going to be smooth.
I mean, you know, decades, maybe half a century, who knows? I mean, just think of the political instability.
Also, you know, when you lose jobs, high-value jobs, high-value added jobs are the ones that are at risk if they're tradable.
High-value-added, tradeable jobs are at risk in the first world.
When you lose the jobs, you lose the capital, you lose tax base.
We have all kinds of commitments.
All of you know how underfunded is Medicare.
I mean, it's trillions underfunded before this last boondoggle, right?
And this last boondoggle, right? And so, and you're going to lose tax base. All these
commitments are there, and you're going to lose tax base. This is not trade. This is
labor arbitrage. It's definite, serious implications. You can say, oh, I'm going to get it cheaper.
And then think about it, too. What happens if people can't get good jobs, they've got to take low-paying menial jobs and then all the cheap Chinese goods and Walmart double in price?
I mean, you know, you look at the hits in store for real income.
You know, a country that is a reserve currency can get away with murder for a long time.
The United States is a reserve currency, just like Britain got away with murder for a long time.
We can get away with murder for a long time, but at some point it just doesn't go on any further.
And that's particularly true as these others develop.
So I think that all of a sudden when you have a huge supply of practically free labor, people are going to take advantage of it.
That's what you're in for.
We have a little over time.