Posted on 06/27/2003 8:03:39 AM PDT by Mad Dawgg
The Myth of "Exporting Jobs"
by William L. Anderson
[Posted June 27, 2003]
As U.S. trade deficits continue to pile up, and as the economy continues in its slow-growth patterns, a number of economic commentators have been accusing American corporations of causing the trouble by "exporting jobs." Now, given the bounty of economic myths that economists and media pundits seem to foist upon us, one should not be surprised at anything we read in the academic literature or popular press, but the newest set of fallacies that we are hearing is especially insidious.
In his path-breaking Principles of Economics, Carl Menger writes in the first chapter, "All things are subject to the law of cause and effect." While such a truth seems to be self-evident, one needs to be careful in separating cause and effect or determining the correct line of causality. Unfortunately, the modern pundits are guilty of convoluting the order of things; thus, we hear nonsensical things like trade deficits are the result of budget deficits or that free exchange creates an overall decrease in a country's standard of living. As usual, the "experts" blame business leaders while politicians and bureaucrats are given a free pass.
This is not a standard article on defense of free trade; writers in the Austrian tradition like Murray Rothbard, Henry Hazlitt, and Mark Brandly have eloquently explained the process and have painstakingly pointed out why attempts to throw sand in the gears of trading relations between individuals can only make matters worse, and I do not think I can improve on their work.
However, the "newest" set of challenges to free trade, some from the right and some from the left, need to be answered. Furthermore, we need to point out why U.S. businesses continue to look overseas for investment opportunities and give a reasonable explanation as to why trying to block such activity will only make things worse in this country.
The first and most important thing to point out here is that the phrase "exporting jobs" is a misnomer. A job is not a good, nor is it a service, so it cannot be imported or exported. Only goods can fit that terminology, and one can neither purchase nor sell a job, so to say that U.S. corporations are "exporting jobs" is at best to be using economic language in a sloppy and inaccurate way; at worst, it is yet another contribution to the Keynesian morass that pervades modern economic thinking. (One can exchange things like labor and capital, but neither of those are jobs. The term "job" is a formal designation we give to action associated with the creation of goods, but they are not goods themselves.)
That being said, there are serious problems for which advocates of free trade are being blamed—when, in reality, the failure of government to permit free trade within the borders of the United States is ground zero. Far from causing our standard of living to deteriorate, real free trade would permit new economic opportunities not only for people at home, but also for people abroad.
The first question one asks is why U.S. corporations choose to do more and more of their investing overseas, as opposed to investment being centered within our borders. To say that corporations simply are chasing after cheap labor is only partially correct, as there is more to successful capital investing than finding workers willing to toil for peanuts. If that were truly the case, as critics of the left and right are charging, then low-wage backwaters like Rwanda and Zimbabwe would receive the lion's share of investments from the West.
That individuals and corporations do not choose to invest simply where labor is cheapest should be obvious to people, since most capital development originating from western business owners is done either in other western countries or the more economically advanced regions in Asia. Moreover, the decision to invest apart from one's home country is a much more complicated affair than the critics may be saying.
Things like language and cultural barriers, as well as changes in the legal environment are important items for firm managers and owners to consider when they are deciding whether or not to invest huge sums of money into a place. Transportation facilities and costs, as well as proximity to a certain market also fall into the decision matrix.
I mention these things because overseas investing by American firms has been especially targeted by individuals on both the right and the left who see something sinister in a U.S. company shutting down some operations in this country to locate them where labor is cheaper. (If one recalls, the most repeated line from the 1992 U.S. presidential election was independent Ross Perot's "giant sucking sound" that would be heard if Mexico and this country were to liberalize trade.)
Economist Paul Craig Roberts, who has devoted a number of his syndicated columns to trade issues, writes that the relatively free flow of capital, technology, and information (what he calls "outsourcing") across international borders is not the same as the free flow of traded goods. He writes:
Trade implies reciprocity. It is a two-way street. There is no reciprocity in outsourcing, only the export of domestic jobs. That's why the United States is currently running a $125 billion trade deficit with China alone, a Third World country. . . . An economy can, of course, stand some outsourcing. But when goods and services in general are outsourced, where is the economy?[i]
Roberts has written elsewhere that production of goods creates wealth because of the "value added" process of manufacturing. For example, a tree is first cut down, then sent to the sawmill, then made into lumber, and finally into the finished product of a house, furniture, or whatever it may be. At each stage, there is "value added" to the raw material.
While no doubt there are changes at each stage of manufacturing and distribution, the "value added" concept has no place in economic thinking and clearly is at odds with Menger's emphasis that the value of the factors of production emanates from the value of the final product. In other words, value flows from the final product backwards (or downwards), not upwards, as Roberts suggests. To put it another way, the concept of "value added" is something used for accounting purposes, but is not a true form of economic measurement.
Beyond that, there are other problems with Robert's analysis—although I also need to add that the prospect of manufacturing more and more things overseas does have implications at home, things with which I will deal (and find that Roberts in this area has some important and insightful things to say). The first deals with the notion that if we "ship out" all jobs, we will somehow have nothing to do.
For many years, economics has been plagued with the "lump of jobs" fallacy in which it is believed there are only a limited amount of things to do and once they are done, people have no means of employment. The truth is the polar opposite; there literally are an infinite number of things that must be done. As Alchian and Allen have noted in their 1983 book Exchange and Production, the elimination of some tasks due to improved methods of productivity frees up scarce labor to do other things. That, they point out, is how an economy grows, a simple truth that seems to have escaped most of the economics profession.
However, while Roberts no doubt agrees with that assessment, his point cannot be ignored. Take my present home of Cumberland, Maryland, for example. During the latter half of the 19th Century and for much of the 20th Century, Cumberland was a manufacturing center and home to many firms. However, following World War II, firms closed down here and either have gone out of business or relocated.
That phenomenon has changed the face of employment here. In its manufacturing heyday, people in Cumberland (which had twice the population it has today) were relatively well off compared to people elsewhere in this country. Today, while most people enjoy a standard of living that is absolutely higher than people here enjoyed five decades ago, they are relatively poorer compared with people in other cities. Furthermore, the economic future here seems to be more of the same.
While the changes here have been somewhat tragic, there are reasons why they occurred. First, this area for many years has been strongly pro-union, and few manufacturers and investors want to deal with labor unions if they can avoid it. Second, the State of Maryland has a leftist government and over the years has proven itself to be extremely hostile to private enterprise and private property. Third, as Maryland's economic position has deteriorated, the state government has taken an even more active role in trying to make up the difference, which means high taxes, bureaucracy, and other such barriers to private investment.
Roberts himself points out that the relatively well-educated but low-earning laborers of many Asian countries gain an advantage to workers in this country because of our legal situation. He writes:
The advantage (of foreign workers) increases with the absence of tort lawyer extortions and harassing and fining IRS, EPA, OSHA, EEOC and other regulatory bureaucracies, whose budgets demand a never ending supply of wrongdoers to be penalized.[ii]
In one sense, the Law of Comparative Advantage still holds. If workers overseas own a comparative advantage to workers here because of the predations of U.S. national, state, and local governments, it still is a comparative advantage and one cannot fault people for taking advantage of that situation. However, we must add that such a situation is self-inflicted. If U.S. workers want to price themselves out of market after market, they are free to do so, but must pay the consequences.
(The current federal harassment of Martha Stewart is another example of this phenomenon in action. The economic meaning of this episode to other investors, entrepreneurs, and executives is that doing well in the United States will lead to one's being targeted by prosecutors and tort lawyers. The end result is less investment here, which ultimately means that Americans are wildly cheering themselves into a long-term condition of a lower standard of living.)
Without the regulatory burdens that American firms typically face, much more manufacturing would go on here. To restrict people from closing operations or investing overseas, as Patrick Buchanan has urged, would only make things worse, however. First, the imposition of even more restrictions, regulations, and legal burdens would simply discourage investment; such policies ultimately would have the effect of chilling the creation of new goods. Second, the low cost of overseas manufacturing at least means lower costs for goods here. Eliminate that possibility and we have the prospect of no jobs and fewer goods at home.
To put it another way, U.S. policies already in place lead to fewer economic opportunities. Choking off the possibility of overseas investment will not improve the situation here. In this case, Buchanan is presenting a false choice: he declares that if firms in this country are forbidden to invest in other firms, they will invest the same amounts of money here. That simply is not true.
On one last issue, Roberts also has written that the growth of U.S. agriculture sales abroad is proof that we are becoming a Third World economy. Given the nature of vast growing lands in this country, that is not an accurate assessment of things. Not only does this country enjoy the lands where agriculture can thrive, but also his picture of U.S. farming being a low-tech, peasant-like activity is also false.
Farming in this country is both capital intensive and extremely high-tech. A productive U.S. farm cannot be compared with a small plot of land worked by peasants in India. Granted, this leaves out the discussion of environmental regulations, farm subsidies, and the irresponsible government distribution of water in arid regions to agricultural entities located in the western states, but to say that the production of food somehow is a lowly thing is a bit silly and ignores the scientific advancements that have been made in this area.
In short, Roberts is partly correct. Policies pushed by politicians and bureaucrats in this country have eliminated many economic opportunities. The answer, however, is not to close off our borders, but to close off the government. We cannot have big, intrusive government and a healthy economy at the same time.
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William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive.
[i] Paul Craig Roberts, “Notes for Free Traders,” March 5, 2003.
[ii] Ibid.
You are confusing economics and contract law. The two are NOT the same thing.
You contracted for goods and services with the vendors, to cost a certain amount of money which is to be paid at a certain point in time.
Those two paragraphs actually do a better job of explaining the Soviet Union and why it imploded than anything else does.
Much of the Soviet Union's manufacturing subtracted value from the raw materials--the finished goods were worth less than the cost of the raw materials, let alone raw materials plus transport plus labor.
You can do that ... almost ....
A bit of a stretch, but it's not that far off the Dell Computer Model - Don't have ownership of the material inventory until customer place an order and the material inventory is pulled, charge the customer right away for building the order but not having to pay the material vendors until 45 days later, and the price paid to the vendor is in part determined by hedging pravailing market rate and depending on the volume of the vendors product sold as well as the negotiated on-going monthly cost reduction based on volume and projected lowered material cost.
The above was your first post on the thread. It sounds like you disagree with the article which said:
To say that corporations simply are chasing after cheap labor is only partially correct, as there is more to successful capital investing than finding workers willing to toil for peanuts. If that were truly the case, as critics of the left and right are charging, then low-wage backwaters like Rwanda and Zimbabwe would receive the lion's share of investments from the West.
The author says education plays a role in productivity.
So, is the author clueless about everything, or is he correct about this and clueless about everything else?
Before that, they would need to stop chopping each other up and eating each other. It's hard to concentrate on ABC's when you're in fear for your life. And it's hard to get foreign technicians to work there teaching them under those conditions
No, here is that info (with sources):
Between 1972 and 1994, real wages fell 19%. ("Hours and Earnings in Private Non-agricultural Industries, 1959-1994," Economic Report of the President, February 1995, GPO, p. 326).
From 1990 through 1996, the median family income fell 6 percent. During the Depression it rose 17 percent. (Mishel, Bernstein and Schmitt, The State of Working America 1996-1997, (Economic Policy Institute, Washington, DC, 1996, p.42).
As far as Marx is concerned, his prediction that the gap between rich and poor would increase has been borne out:
America's wealthiest one percent controlled 21% percent of America's wealth in 1949, now controls 40 percent. (Steven Sass, "Passing the Buck", Federal Reserve Bank of Boston Regional Review, Summer 1995, p.16) (among others).
Top CEO salaries went from 44 times the average wage earner salary to 212 times. (Irwin Steltzer, "Are CEOs Overpaid?", Public Interest, Winter 1997, p.33).
I think it is interesting how the ill-informed are unable to accept facts and history.
Adam Smith is toted by the free trade uber alles crowd as being the first true champion of free trade, and upon being told that Smith actually promoted a nationalist trade policy that called for the imposition of tariffs in support of the national interest, they say that, well, Smith's thinking is out of date (although if he had supported their positions...)
Likewise Marx is rightly excoriated as the creator of a doomed socio-economic system, one which included tariffs on imports. Marx's tariffs were to offset the fact that state-managed means of production and distribution are inevitably and inherently inefficient and cannot sustain themselves. The tariffs were out of necessity, not philosophy, but they were really only a means to an end.
He rightly knew that his useful idiot sympathizer friends in the West--having not read, not understood, misinterpreted, or ignored Adam Smith--would gladly and freely pay the tariffs in order to promote relations with their Marxist brethren (and continue to do so).
As a bonus, he foresaw that the West-whose corporations ceased becoming American or British and started becoming international-would eat themselves in their race to increase their bottom lines; this is not genius prognostication, it’s human nature.
If a CEO can double his bottom line by putting a factory in a low-wage nation unencumbered by regulations (more on that later), and since he owes no allegiance to the US, why wouldn’t he?
So, to give a long answer to your accusation, of course I don’t agree with Marx’s economics, but he certainly read and played his useful idiots friends.
As far as federal regulations and taxes, I promote doing away with all of them, as well as the influence of the unions, and easing the burden on the American businesses. Smith advocated further tariffs to counter them, but I don’t think that would be necessary in the US.
So, if there is no added value, why is oil at the refinery more valuable than at the well head in Saudi Arabia?
If you could get a Pat B. quote stating your point Willie would buy it hook, line, and sinker! Otherwise you will never get through to Willie.
It's not. It merely costs more to transport it there.
I stopped right here..
I don't have all day to sit and watch the author split hairs.
Miniscule? First you say the author is clueless, then you agree with him.
Oh, wait, I get it. You're clueless.
You're right, no need to argue.
Put another way, taking a $10 widget and spending $2 painting it blue does not add value if the resulting blue widget will only sell for $11.
What happens is the producer makes an estimate as to how much a finished product is likely to sell for, and how much each step of manufactor is likely to cost. If the numbers look good, the product gets made, otherwise it doesn't and the components that would have gone into it get put to use in something else
If I'm thirsty in the desert, a gallon of water in a supermarket a hundred mailes away from me has no value TO ME. But a gallon of water in my hand DOES have value TO ME. The act of transporting the gallon of water TO ME so I can USE IT, has indeed added value.
Value is not an intrinsic property of an object. The value of an object is relative to a person, otherwise trade would not occur.
Services can have value.VALUE: Quite simply, this is the amount of consumer satisfaction directly or indirectly obtained from a good. service, or resource. The more a good satisfies a person's want or need, then the more valuable it is to that person. Furthermore, different people are likely to place different values on a good. Resources are valuable to the degree that they are used to produce stuff that consumers want. The bottom line is that value, like beauty, is truly in the eye of the beholder.
Ah ha!! People decide value by the price they are willing to pay. So, if I am willing to pay more for an item in Chicago than for the same item in San Diego, then that item is more valuable
Thanks for clearing that up.
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