Posted on 02/07/2017 4:56:55 AM PST by Tolerance Sucks Rocks
It’s well-known among people who bother to learn the facts that U.S. manufacturing output continues to rise despite the reality that the number of Americans employed in jobs classified as being in the manufacturing sector peaked in June 1977 and has fallen, with very few interruptions, ever since.
Nevertheless, some people – for example, the Economic Policy Institute’s Robert Scott – continue to insist that the loss of manufacturing jobs in the U.S. is largely due to increased American trade with non-Americans. Other studies find empirical evidence that labor-saving innovation rather than trade is overwhelmingly responsible for the loss of manufacturing jobs.
Were I forced to choose between these two alleged competing sources of manufacturing-job losses – trade versus labor-saving innovation – I’d go unhesitatingly with the latter. If trade were the main source of American manufacturing-job losses, it would be very difficult to explain the continuing rise in American manufacturing output. But I believe that asking “Are most American manufacturing-job losses due to trade or to labor-saving innovation?” misses the bigger, or a more fundamental, point – namely, the answer to this question doesn’t matter because trade and labor-saving innovation are, economically speaking, identical to each other.
Trade is Innovation
Trade by its very nature is labor-saving. I could bake my own bread with my own hands and my own pans in my own kitchen. But to do so would take more of my own time than is required for me to earn, by teaching economics, enough income to buy bread from a baker. My specializing in teaching economics and then trading for bread saves me some of my labor.
Or I could bake my own bread by using a fancy bread-making machine that sits on my kitchen counter. But I can’t make such a machine myself; I must trade for such a machine, as well as for the inputs – including the electricity – that it requires to produce yummy bread. So it might fairly be said that any bread that I produce in my own home with my incredible bread machine is the result of trade.
Either way – trade with a baker, or my use of the incredible bread machine – I get bread in exchange for less labor than I would have to use to supply myself with bread were I unable to trade with a baker or to use this machine.
What difference does it make if labor is saved by dealing directly with a machine or with another human being?
Recall David Friedman’s report of car production in Iowa (here as related by Steve Landsburg, with emphasis added by Don Boudreaux):
There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.
International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars. Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.
The task of producing a given fleet of cars can be allocated between Detroit and Iowa in a variety of ways. A competitive price system selects that allocation that minimizes the total production cost. It would be unnecessarily expensive to manufacture all cars in Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily expensive to use the two production processes in anything other than the natural ratio that emerges as a result of competition.
That means that protection for Detroit does more than just transfer income from farmers to autoworkers. It also raises the total cost of providing Americans with a given number of automobiles. The efficiency loss comes with no offsetting gain; it impoverishes the nation as a whole.
There is much talk about improving the efficiency of American car manufacturing. When you have two ways to make a car, the road to efficiency is to use both in optimal proportions. The last thing you should want to do is to artificially hobble one of your production technologies. It is sheer superstition to think that an Iowa-grown Camry is any less “American” than a Detroit-built Taurus. Policies rooted in superstition do not frequently bear efficient fruit.
In 1817, David Ricardo—the first economist to think with the precision, though not the language, of pure mathematics—laid the foundation for all future thought about international trade. In the intervening 150 years his theory has been much elaborated but its foundations remain as firmly established as anything in economics.
Trade theory predicts first that if you protect American producers in one industry from foreign competition, then you must damage American producers in other industries. It predicts second that if you protect American producers in one industry from foreign competition, there must be a net loss in economic efficiency. Ordinarily, textbooks establish these propositions through graphs, equations, and intricate reasoning. The little story above that I learned from David Friedman makes the same propositions blindingly obvious with a single compelling metaphor. That is economics at its best."
To repeat an especially important insight: “International trade is nothing but a form of technology.” That is, trade – intranational and international – itself is an innovation. Finding specialists with whom we can profitably trade requires transportation and communication – both of which today are, as it happens, greatly facilitated by advanced machinery. Yet other, less obvious innovations are involved – for example, the supermarket. The organizational form of the supermarket lowers consumers’ costs of learning about and acquiring groceries. (Superstores, such as Walmart, lower those costs even further.) In international trade, the seemingly simple box that we know today as the shipping container is a labor-saving innovation that dramatically reduced the costs of ordinary men and women from around the globe to trade with each other. Ditto the giant, magnificent modern cargo ship.
Our ability to trade is enhanced by technological innovations. Thus, innovations help us to save labor both directly (as with an incredible bread machine on my kitchen counter) and indirect (as with the shipping container that better enables me to acquire goods assembled by workers who live thousands of miles distant from me).
The bottom line is that trying to measure what proportion of some number of job losses is due to innovation and what proportion of those job losses is due to trade is rather pointless: from one valid perspective, all of the job losses are due to innovation; from another valid perspective, all of the job losses are due to trade. But from any perspective, the very fact that particular jobs are lost means that labor is saved.
Republished from Cafe Hayek.
The case against protectionism is based on the theory of comparative advantage.
Mathematically, that theory is hard to refute, unless there is something wrong with the assumptions, to wit:
- Free mobility of labor
- Costless and easy retrainability
I don’t think either of those things are always true. If you’ve been trained to do a job for 25 years, settled in an area and have a family, it isn’t going to be easy for you to relocate, and it may not be cheap or quick to retrain you to a new skill. Further, that new skill—which will be in the areas which would have comparative advantage going forward—may not be immediately evident.
If the users of the theory incorporated some of these issues—which show up as socialized costs—into the cost of the items being made, I think that sometimes protectionist policies, or at least a multi-year taper into the new production regime, would be cheaper. The displacement costs are never considered, it seems to me.
You may assume that the centerpiece of a protectionist policy is the tariff. The tariff is just the blunt object meant to enforce the overall agreement.
The most important piece isn’t protectionist at all except in spirit, which is to address the reasons companies leave. In a world of automated manufacturing, wages aren’t the key issue, the regulatory and legal climate is. Go after the reasons companies leave, clearing away the regulatory threats and hurdles and companies are less inclined to leave. Working in Mexico or China carries with it another set of problems that you wouldn’t choose if you didn’t have to.
The other part deals with the target country’s own protectionist policies, opening them up to your products. That is something that has been ignored until now. A lot of these countries have hidden tariffs that keep our products out, while our markets are open to them.
When Trump talks about making the markets fair, people just hear “tariffs” and “protectionism” but don’t hear the details which are quite free-market.
Another thing to remember, is that the economy isn’t healthy if you can get it cheap at Walmart, but your brother-in-law is living on your couch because they closed the factory here.
“labor-saving innovation rather than trade is overwhelmingly responsible for the loss of manufacturing jobs.”
And that labor-saving innovation birthed by the necessity of productivity made illegal by ill-advised “minimum wage” laws.
And the ones prevented from opening for similar reasons ?
The author does not mention taxes or regulation (labor, trade, etc.) of any kind. Yet both (vast categories each) are critical to comparing the costs of manufacturing between locations.
For example ... we don't hesitate to take on trading partners whose industries operate under environmental standards and using employee pay scales that would be illegal here in the U.S. Am I really a "protectionist" if I recognize the stupidity of outlawing slavery here in the U.S. while trading with countries where it is (for all practical purposes) a common practice?
Does Trump really want tariffs, or is he using the the threat of imposing tariffs to get the best possible deal?
Exactly. I don’t know what we have now, but it sure ain’t “Free Trade.” Does China open up her markets to US products? Hell, no.
Your starred assumptions may be better described as:
- The fungibility of mundane labor.
To wit: work that pretty much anyone can do with minimal training can be done anywhere by anyone. The “mobility” you note isn’t that workers can move, it’s that the work can - to wherever cheaper labor can be found.
Our upper management comes right out and tells us jobs are being moved to low-cost areas. They are not talking about regulation they are talking wages.
What usually happens is that a factory reaches the end of its useful life or needs to go through a major upgrade in order to support the production of new products, and the company simply decides that they're better off building a new one overseas than replacing or upgrading the one here.
The only thing virtually certain in economics is change. There will always be innovations, declines, new or depleted resources and these changes will inevitably cause disruptions to people who had been previously content and comfortable. Either you adapt, or you live with what wealth you accumulated or receive from generous people. Whether it be nations or individuals, everyone is subject to inevitable changes and shifting comparative advantages. Protectionism is a losing strategy. Innovative, free thinking, unhindered capitalism creates the wealth and the social justice that follows. The degree of social justice in any culture correlates directly with the wealth that culture generates. Trump will be successful if he unleashes capitalism rather than trying to “protect” it.
Minimum wage set by government is a protectionist policy. Rag on that policy. These so called ‘free trade’ deals have created a welfare class.
For example ... it's hard to sell a Honda from Marysville, Ohio in a country where most people ride bicycles everywhere they go.
Maybe true 30 years ago, but Beijing and Shanghai now has some of the worst traffic jams in the world.
And taxes, the cost of regulatory burdens, the cost of materials, etc.
Well, we sure aren’t going to sell them asphalt for new roads, either. LOL.
Note that the population if 1977 was about 220 million compared to the population today of 324 million.
That is a population increase of 47%.
As shown in this chart, manufacturing jobs in 1977, comprised about 22 percent of all nonfarm payrolls.
But manufacturing jobs today only comprise 9% of nonfarm payrolls.
That is only 40% of the 1977 level.
So not only has the population gone up by 124 million, the percentage of the working population engaged in manufacturing is less than half of the 1977 level.
Certainly automation plays a major role, but all of those cars, trucks, tractors, electronic devices, appliances and garments coming here across borders and oceans didn't manufacture themselves in totally automatic factories.
There is also one other aspect, which is a catch-22 of sorts. Technological innovation has made it such that, in any developed society, there is for all practical purposes no poverty, as poverty has been defined throughout human history. As Robert Rector has pointed out on numerous occasions, 'poor' people in America have lifestyles very similar to the rest of America, with housing, food, and clothing, along with access to the commonplace technology, everything from radios and TVs to microwave ovens and refrigerator/freezers to the internet, smartphones, and video games. Historically, the disincentive to poverty was its life-crushing aspects of hunger, nakedness, and the cold (or heat), but that is no longer the case in any of the developed world.
In such a cornucopia world, there are only two incentives to work and succeed: to have *better* goods and services (bigger houses, newer cars, designer clothes, faster internet), or an ingrained work ethic. But an ingrained work ethic only "works" where there is work to be had, and global mercantilism has taken away much of that opportunity-to-work, which is why some level of protection is necessary. Just how much is anyone's guess, and if history is any indication we will go too far in the protectionist direction, just as we went too far in the globalist direction, but where we are is untenable.
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