Economists are Making a Grave Mistake (Downsides of the Law of Comparative Advantage)

Gone with the Wind blog ^ | unknown | Gone with the Wind blog

[John Filson]

Economists are Making a Grave Mistake

The economic concept of "comparative advantage" is the holy dogma of "free trade", economic globalization, and offshore outsourcing of jobs. Although comparative advantage is generally true for what economists traditionally measure, economists have ignored some important counter-factors. It indeed does optimize economic output under ideal conditions. However, there are important factors which make the situation less than ideal:

• Disruption of distribution or communications paths

• Restrained flow of labor
• The theory mostly addressed output (goods and services), ignoring job availability, stability, and other important factors.
• Past trends may not be indicative of future trends.
• Distribution of the benefits of free trade can be very uneven.
• Some countries are more interested in military advancement than in consumer prices, and subsidize certain specialties.
• Some countries sacrifice benefits, retirement programs, safety, environmental safeguards, and human rights to achieve low labor rates. In other words they scorch both people and planet to "beat us".

Disruption of Distribution or Communications Paths

When sailing ships used to go on exploring trips, they generally would go in pairs of ships instead of one single ship. Sometimes a single larger ship would have been more economical, but two ships were used in case one failed. If one ship had a problem that could not be overcome, then the crew of the problem ship and perhaps supplies were transferred to the remaining good ship. Space probes will similarly have redundant or "backup" tools and instruments in case something fails. It costs more to launch and build probes with redundant parts, but the backup systems can save a mission from disaster.

The "comparative advantage" philosophy of economics generally ignores this principle. It in essence encourages economies to put all their eggs in one basket because under ideal circumstances it is more efficient. However, Murphy's Law usually lurks around the corner. Comparative advantage is at odds with Murphy's Law.

Distribution is Safety
Every major "industrial" country should strive for some level of self-sufficiency in major or critical categories, such as manufacturing and technology. Although I don't necessarily propose an even mix for each country, entire industries and professions should not be allowed to simply disappear from a given country in a blind 100% adherence to "comparative advantage" dogma. A rule of thumb for "balanced trade" is to keep about half of the original pre-globalized industry in the home country (unless of course it becomes an obsolete industry such that no nation specializes in it). Further, a newly globally-targeted industry should be allowed to shrink via a natural attrition rate rather than sudden decimation. See blog article for more.

Let's take a specific example from the United States. Manufacturing and computer programming jobs are leaving the US for lower-cost countries such as China and India. If a country or terrorist group wanted to attack the US, rather than use missiles or bombs aimed at the continent, an enemy only has to disrupt the flow of goods and services coming across the ocean. They could cut the high-speed cables that run along the bottom of the ocean, making international internet and phone communications difficult and expensive. They could fire regular military missiles at cargo ships carrying goods to the US from China. The US economy could be crippled for a while, perhaps triggering a nasty recession.

Another possible scenario is that India and Pakistan get involved in a war in which their nuclear weapons are eventually used. India and Pakistan have long been at odds with each other, so this is not just a remote possibility. Under such a scenario it is likely that Pakistan would target the key economic centers in India. Those centers currently handle software development, maintenance, and many other services for many large US companies and banks, and are increasing their portion of such services as time goes on. Attacking such software centers would put the US economy at great risk. It would take a good while to rehire or retrain all the programmers and service workers to replace them and learn each company's software from scratch.

In fact there are indications that Muslim fundamentalist terrorists based in Pakistan have planned attacks on India's economic centers. Thus, war between nations is not necessary to trigger some of the scenarios presented here.

Or suppose the US goes to war with China over the long-standing Taiwan disagreement. Much of our economy, infrastructure, and even military equipment depend on parts and equipment from China. They too could choke off our economy and make us physically vulnerable, especially if such a conflict lasts several months. A sneaky software "gift" from the US once caused a large explosion in the Soviet Union. For a while, part of the Soviet Union looked just like our left-corner logo.

The "Do Nothing" Nation

The US is increasingly relying on other nations to provide basic and important goods and services that keep our nation running. Actual production of the goods, services, and knowledge that consumers, businesses, and the military rely on are done by other nations in increasing levels. We are becoming a nation of owners, managers, and marketers that no longer know how to work the front lines. "Real work" is not being done in the US anymore. Corporate bosses bicker in boardrooms over whether blow-dryers should be beige or translucent instead of invent, improve, or manufacture blow-dryers.

Aside from the economic risks of losing access to the front-line "economic soldiers" to other nations, there are less training paths in which future managers and marketers can learn their trade. How can a US manager of software development learn how to manage software developers without ever having the chance to be a software developer? Software development will no longer happen in the US frequently enough to cultivate future managers. Can we have generals who never experienced live battle? Are we going to have to start sending manager jobs overseas also because we lack the experience at home?

An alarming number of my experienced techie friends are fed up with a dwindling demand for their skills, and are preparing to move out of tech and into fields such as interior decorating, massage therapy, landscape architecture, herbal consultant, lawyer, etc. Although these are fine careers, they don't really provide the kind of expertise that is going to keep US a forward-moving economic power. We are handing over our economic keys to other countries, and they will drive away with more modern workforces and industries.

Uncle Foo Foo
The US is increasingly losing jobs that actually produce something tangible or directly contribute to technical progress. Instead we are moving toward marketing, social, and "fluff" jobs. Not to disrespect social fluff jobs, but we need to balance the mix. Our "jobs portfolio" is losing diversity. Lack of diversity usually leads to mayhem in the longer run.

Dependency Kicked Us Once Already

One of the reasons that the Great Depression of the 1930's was so severe is that when times grew tough after the stock burst of 1929, nations reduced trade with each other in order to protect their own industries and workers. This cycle spiraled out of control, leading to horrible economic conditions for many nations, including the US. These desperate conditions were a major catalyst to Hitler's rise and Word War II.

Free trade proponents will argue that this is evidence that wide-open trade is good. However, it is really evidence of the opposite: The more you depend on other nations, the more their problems become your own. I am not for shutting off all trade, but rather having

balanced trade. Balanced trade is where enough foreign trade is allowed to promote diversity and competition, but not enough to eliminate entire national industries and professions.

Even in 1997, before I was aware of the global threat to my software career, I felt uneasy about how fragile the global economy was. During that year a financial collapse in many Asian banks was starting to spill over into other continents. Many economists worried about a domino effect resulting in a global recession or perhaps depression. By shear luck, the dot-com bubble was growing at that time and probably saved the world from a big recession. Next time there may be no such lucky bubble to save us.

Too much interdependence increases risk. Just as investors are encouraged to diversify their investment portfolios, countries should keep their specialties and services similarly diversified. Those who didn't diversity were burnt badly in the dot-com melt-down, for example.

We should heed history's consistent lesson: Don't put all our economic eggs in one basket.

Restrained Flow of Labor

"Free Trade" is lopsided in practice. Although goods and services can readily change borders to find the "lowest cost producer", labor cannot. This creates an imbalance between skills available and skills used. For example, a computer programmer in the US cannot directly compete with one in India whose typical salary is one-seventh that of the US. The US programmer would have to accept minimum wage to be comparative cost-wise. He or she is economically better off becoming a plumber or Walmart sales clerk. A perfectly good skill goes to waste. (More about education and retraining options is discussed later.)

Someone who would otherwise be an above-average computer programmer cannot compete with an average-skilled computer programmer in India because of the huge labor rate difference. Resources are NOT being efficiently allocated by "free trade" because the one who is technically better qualified will not get the job.

It would be like giving the job to the "C" student, not the "A" student. Free trade is failing to allocate based on merit. (The example is not to imply that Indian programmers in general are less skilled, just that the allocation of jobs currently depends more on location than skill.) It is a clear case where free-trade is not producing the most efficient allocation of goods and services. One could argue that the alternatives have their own flaws, but they cannot argue that free-trade is producing the optimum solution here. Mental fruit is left rotting in the field. (Free traders will suggest one can readily switch fields, but past statistics on those displaced by globalism are generally not rosy.)

India may allow a few visa workers into their country, but surely they will not allow every displaced American programmer in. Free-trade is only half free. True market fluidity would allow people to cross borders to find a better fit for their inherent abilities.

Adam Smith Does Not Guarantee Jobs

Contrary to popular belief, market economics theory does not guarantee jobs or a middle-class society. Perhaps it has worked out that way for the past 200 or so years in the US, but as any good investor will tell you, past performance is no guarantee of future performance. The pace of change in technology is accelerating, and the economic issues and problems that result from this is new, unexplored territory.

Current economic thinking seems to emphasize creating inexpensive goods and services rather than creating good jobs. Some economists say they are one in the same, but there is no decent evidence that this is the case. It is only speculation on their part. Is having cheap Walmart trinkets more important than having satisfying, productive, and diverse jobs? Should we risk global economic collapse (see above) and limited jobs just to enjoy a few decades of cheap trinkets?

Further, comparative advantage does not aim to optimize human happiness. Taking something away from somebody, such as a job, creates strong suffering; but not getting the future benefits of something, such as cheaper goods, and not really knowing much about it does not make a very big emotional impact in the population. People generally don't miss what they don't have.

In other words, the pain of the downsides of comparative advantage tends to be stronger than the happiness caused by less-expensive goods. A loss of a good job is often a very personal life catastrophe, while cheaper goods is perceived as a nice little bonus. There have been far more riots and protests over lack of jobs or low pay than over expensive goods throughout modern history (the possible exception may be food availability). Economists and politicians cannot ignore the "human factor" in democracies because people will vote on the weight of their emotions far more than on an abstract benefit. The proof is in the tears falling in the pudding.

It is ironic how "brain workers" now have to focus more on "soft factors" such as diplomacy and customer service in order to survive the globalization of their careers. However, economists keep focusing on widget output instead of human suffering. It seems the economists should be required to take People Skills 101 along side us nerds.

The Next Big Thing, Where are You?

The Next Big Thing usually came around to save displaced workers in the past, but we don't know if that will always be the case. Usually the disruption was in relatively low-skilled or physical-labor-intensive areas. Thus, the transition to another low-skill occupation was not that difficult. One could simply trade in one low-skill occupation for another with a bit of training. When farming disappeared there was factory work or mining to take it up. When mining and factory work started dwindling in the 1960's, there were more low-skill jobs in food services, retail, phone support services, etc. Also, semi-skilled and specialized trades such as electrician and plumbing came of age.

The higher-skilled workforce was mostly immune to all this. A four-year degree in a technical or knowledge-intensive field generally gave one a relatively safe middle-class or upper-middle-class career.

Until now. The internet and high-speed communications is eating into many technology and knowledge-based professions, rendering them a dead-end career or long-term unemployment risk. Unlike the prior blue-collar migrations, one cannot easily just hop on to the next profession. Formal education is more expensive and time-consuming than most blue-collar training. Plus, the college degrees offered that are not at risk of being globalized are rapidly dwindling.

One could perhaps go from being a farmer to a factory worker to a retail clerk in one life-time, but it is not realistic to expect everyone to get three college degrees and master 3 different professions in a lifetime. The only option for a displaced "knowledge worker" may be to go back into the blue-collar trades. They might as well burn their college degree to risk not appearing "overqualified". Some of my programmer friends who attempted to switch into blue-collar trades found that their technical background created a stigma against them.

Education is not the Answer

Many politicians, CEO's, and even Alan Greenspan are suggesting that yet more education is the magic savior of US knowledge workers. But they are almost always not specific. When pressed for

details, they usually just make references to historical Next Big Things that saved jobs in the past. Let's more closely examine the options of a hypothetical displaced computer programmer that we will call "Sue". (I was a computer programmer/analyst myself, I would note.) What kind of new training or education should Sue get so that she can work again?

Supposedly there are "higher-level" computer positions such as project manager, business analyst, software engineer, etc., but these are skills that come mostly from experience, not from a book or college course. Sure, college may help some, but these are mostly experienced-based positions because they require a lot of "soft skills" such as interacting with users, customers, managers, and others in a diplomatic fashion and understanding business habits, business culture, and office politics.

Computers make many non-technical people nervous because they don't understand them, yet at the same time don't want to appear ignorant. I have seen office workers cry and throw fits over computer issues more than any other thing, with the possible exception of layoffs. Thus, liaisons between computers and people have to know how to comfort people without hurting their feelings. It is often a tricky tight-rope act.

But, computers don't care if you hurt their feelings; they only want precision, clarity, and consistency regardless of how terse or dry the delivery. They welcome the ugly truth without even a hint of a drooping brow. Software can be like a loyal dog who only demands the right kind of food. You can frown and cuss at the dog, but he always happily comes back for more input (food).

The resulting logical nature of computer programmers tends to make them strait-forward and sometimes blunt. This is the opposite of what is needed for machine-to-human liaison and IT manager positions. Making the transition requires more than just additional book knowledge; it may require a personality overhaul. Most companies appear to prefer someone with A-level people skills and C-level tech skills over the reverse for such liaison positions. (I've met very very few who master both.)

These are the kinds of skills one obtains from skipping class and partying away the night, not digging ones nose into a calculus book for tomorrow's exam. George W. Bush is the new role model for a more up-to-date education "curriculum".

Further, there is often only about one such position for every five or so programming positions. Thus, this path is not a general solution for most displaced programmers because there is "not enough room at the top" to accommodate them all, even if they could obtain the needed soft skills.

What about entrepreneurship? I have personally tried to start up 2 businesses of my own with dismal results. It takes a wide variety of skills, especially marketing, to succeed. Statistics will show that a heavy majority of new businesses fold within 5 years. Entrepreneurship is not a general solution for all displaced white-collar workers.

Will more formal education in the same field make Sue more desirable in the eye of employers so that she is competitive compared to cheaper overseas labor? My experience is that formal education makes only a few percentage points difference in the eyes of most employers of programmers. A five percent difference in perceived value is not going to help much when they are comparing to the up to seven-to-one ratio of labor rate differences. Even if we factor in the overhead of managing overseas labor, it may be a difference of roughly five percent versus fifty percent: an entire order of magnitude. Plus, having a masters or PhD often just makes a citizen look too expensive -- in other words, "overqualified".

Formal education tends to be out-of-date anyhow. The higher the course number, the more detached the professors tend to be from the real world and technology trends. The pundits and lobbyists who claim that American tech workers lack sufficient formal education are simply either naive about the computer industry or are lying because they can.

What about going into a new technology field?

Biotechnology is rumored to be hot. However, the current employment quantities for this field are not anywhere close to what computer programming was. Plus, biotechnology work is probably just as offshore-able as programming. Why spend another three years in college just to have your new field also stripped away by the hungry sharks of globalism?

The US has no monopoly on science and technology education. Asian countries tend to put a lot of value in education, and are making sure they are competitive in that arena. The US still has a (perceived) edge in cutting edge research universities, but as far as rank-and-file "techies", the US has nothing special. It just costs more here, that's all. Probably less than one in ten technology jobs are in cutting-edge research, and cutting-edge research is increasingly moving offshore also. Trying to out-compete Asia via education is race to the bottom. The laws of physics are the same in Asia, but not the labor rates. Thus, it is more logical business-wise to do physics and math-related research over there.

The variety of alternatives dwindles with each off-shoring round. First it was just manufacturing, but now all "knowledge-based" careers and phone-based customer-service careers are being threatened (see illustration below). Ironically, technology, knowledge-based careers, and phone-based customer service were supposed to be some of the anecdotes to loss of manufacturing jobs. What remains is marketing-oriented positions and positions that require more direct customer interaction. Many techies went into technology in part to avoid heavy human interaction because they knew they lacked such skills. Now they have fewer alternatives. Schooling has not proven very effective at teaching social and marketing skills. In fact, retraining in general has not proven very effective:

"A 2001 Labor Department audit found that only 1 in 5 who participated in programs for displaced workers found jobs for which they had been retrained; nearly 40% ended up working part time or for less than they had earned before; 28% had not yet found any work at the end of their training." - Time Magazine, Feb. 2004, (Emphasis added)

Getting back to our Programmer Sue example, the other kinds of semi-skilled jobs remaining are those that involve physical work, such as plumbing, office equipment repair, building electrician, and so on. These are probably the best bets for most displaced ex-software experts. However, they pay only about 2/3 as much as computer software-related careers, and often involve risk of physical injury or electricution. (At first it looked like jobs were moving away from physical dangers found in the likes of mining, farming, and hunting. But now it seems like we are moving back toward physical dangers again in order to make a buck.)

Further, many of these jobs will probably be under the globalism gun when remote-controlled robotics

comes into age. Technology reminiscent of NASA's Mars rovers or the planned Hubble repair robots may soon enable people from low-wage nations to perform plumbing, equipment repair, wall painting, cashiering, food service, and many other jobs in the US. Remote robots will probably even be able to repair each other. Such technology does not require any giant breakthroughs to work; it does not require "artificial intelligence" because it uses cheap real intelligence: offshore human labor.

Such machines may not be as fast as a hands-on human, but with labor rates of 20-cents an hour in some parts of the world, it may not matter much. Two may be possible for less than the price of one local human. Plus, they could work 24-hour shifts as remote workers in different nations with different time-zones can participate in a project. The main technical obstacle to this right now is overseas communications bandwidth. However, sufficient bandwidth for such remote robots is roughly less than a decade away, based on current rates of growth. Where will it all end?

Even now, to a displaced programmer such as Sue, it is a lot like being eighteen-years-old all over again, except this time there are less options, and if one has a family, more responsibilities. So much for "family values".

Less Places to Hide - This illustration shows each "cycle" of offshoring reducing the kinds of jobs available. Although there may be some "vertical" growth in the remaining categories, the disappearance of whole categories currently seems to be moving at a faster pace than such growth. Even if this was not the case, the larger-scale variety of career options shrinks. For example, there may be more varieties of sales clerk jobs available, but not everyone is cut out for sales, at least not enough to replace their pre-offshore wage level. This reduction in the variety of jobs available may be a reason for the dwindling middle class. If the kinds of jobs narrows, then fewer will posses the narrower talents needed, creating sharper wage and opportunity differences. Perfectly-good talents may be wasted or poorly rewarded.

More on sprawling losses.

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Offshoring Web-log and News

[John Filson]

Some interesting thoughts from someone who refuses to drink the free trade Koolaid.

[John Filson]

comparative advantage ping

[JLS]

Some interesting thoughts from someone who refuses to drink the free trade Koolaid.
_______________________________________________________

Hmmm:

1. I hope he and you are really good a making shoes.

2. And certainly you would expect broad support on a site named FREE Republic for the concept that the government can tell you who you may or may not purchase a product from. Are you similarly in favor of restricted trade in medical services and the government telling you who is your MD ala Hillary?

[bikepacker67]

I think a site named FREE Republic would be VERY INTERESTED in making sure we are not dangerously dependent upon other nations for our technology.

Maybe you just forgot the "Republic" part, eh?

[Honestfreedom]

Yeah like the protectionist, statist, Socialist koolaid is better.

[John Filson]

Science and Engineering enrollments are down drastically.

When all of our chips are made offshore, how will we guide missiles during a world war? When all programming is done by people in third world countries, which of our children will remain interested in science and engineering careers?

Specialization to the point that critical skills are forgotten could spell our demise. Aren't you worried at all about that?

We all should be.

[John Filson]

Defending our technological and scientific independence is anything but statist. If you think we can continue on our present course without losing scientific superiority, you're dreaming. If we lose scientific superiority, we'll lose the next world war.

The question is how, not if we should take action. Don't forget that the firms you're defending as "free market" are multinational. Based on public equity statistics indicating foreign dominance of shared owned, these companies are now mostly owned by people who could care less about the American dream. You can't expect them to protect our national interests. When public equity was owned by Americans, it was an entirely different story.

Much has changed just in the past 10 years, and the old free market paradimgs are collapsing. We need a free American market again.

[KC_for_Freedom]

Even now, to a displaced programmer such as Sue, it is a lot like being eighteen-years-old all over again, except this time there are less options, and if one has a family, more responsibilities. So much for "family values".

Just to pick on this line, no one ever told Sue that she could pursue programming and be a programmer for the rest of her life. Maybe if she was the best programmer anyone ever saw, but even then technology keeps moving and Sue will have to keep up.

The world will change and change. Anyone who expects the government to stop it is building a dam of sand to stop the incoming tide.

As to family values? The government is supposed to be our family? As in "It Takes a Village"?

[John Filson]

Who says the government has to be the force that confronts our loss of scientific and engineering advantage? We have bled ourselves. It's time to stop the bleeding by choice.

[JLS]

I think a site named FREE Republic would be VERY INTERESTED in making sure we are not dangerously dependent upon other nations for our technology.

I think the "Free" in FreeRepublic is short for FREEDOM as in I have the right to trade with whomever I want. I have the right to be Free of the government telling me who I must buy from. You might be confusing FreeRepublic with IndependentRepublic which is a Ludite website you might find to your taste. Free means free not the majority can tell me who I must purchase from.

Maybe you just forgot the "Republic" part, eh?

So you not only favor Hillary care, but gun control? I think the Free was put first in the name because many if not most here want to be free in this republic. The founders wanted it that way too which is why they limited government which is what a FreeRepublic would be.

[Libertarianize the GOP]

A country can manipulate the market so as to advantage a privileged class within its society. The real question is whether a country can manipulate the market in a fashion that has a net positive benefit for its whole society.

[John Filson]

You're insisting on freedom without responsibility. You're also insisting that offshore owners of business equity are free from obligation to their host economy. These two positions are demonstrably misaligned with defending the republic. Do you really believe you have a right to destroy our republic in favor of irresponsibly free trade?

[Porterville]

I got pissed when they came out with the cotton gin. No more pickin' seeds- what am I going to do?

[Porterville]

"We are becoming a nation of owners, managers, and marketers that no longer know how to work the front lines"

This is true- I have no idea how to glue or stitch soles on the bottom of a shoe.

[John Filson]

Are you happy about the decline in hard sciences and medical enrollments in our universities? Do you recognize that this decline has come in large part because of outsourcing, offshoring, temporary visas, and other "free trade" policies? It's not about who makes your shoes. It's about who designs them and why.

[Porterville]

You are right; the government should determine what people study, where they should work, what they can buy, and how much of it.....

[John Filson]

You're saying that only government control can alter career choices, pay scales, and buying habits. That's a false dichotomy.

What are you going to do about offshore ownership of American business? Can you justify globalism that puts America up for sale to the highest foreign bidder?

[bikepacker67]

Look bud....

The founding fathers planned on the Federal Gov't to be funded, mainly, via tariffs.

So don't try to portray your "Free Traitor" bunk as an American Ideal.

[A. Pole]

The economic concept of "comparative advantage" is the holy dogma of "free trade", economic globalization, and offshore outsourcing of jobs. Although comparative advantage is generally true for what economists traditionally measure, economists have ignored some important counter-factors. It indeed does optimize economic output under ideal conditions. However, there are important factors which make the situation less than ideal:

Do not miss it!

[JLS]

How in the world is free exchange destroying our republic? Our republic was built on free exchange. If it is being destroyed it is by people like you and Hillary who want to tell us who we can purchase from.