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.
Ding ding ding. We have a winner.
And, therefore, the act of moving the item from San Diego to Chicago...ADDED VALUE!
Argue all you want about which part adds what value.
Love your Zots.
I don't think it is.
Actually it's Fascism in it's original defintion. By either meaning, we're still screwed though.
Since this theoretical point is irrelevant to the present discussion, the writer's citing of it is moronic. In any given specialty within an industry, there IS a limited number of jobs. Granted, during an economic boom, that number would be expected to expand. Oops -- but the point of departure of this article is the practice that corporations are engaging in, which guarantees that, independent of market conditions, jobs FOR AMERICANS will shrink. The economy in general, and IT in particular, could enjoy the biggest boom in history, yet these companies would continue firing American high tech workers.
Oops II: The author "forgot" to mention the other side of outsourcing (which Roberts and Buchanan have both dealt with at length) -- the abuse of H1B and L-1 visas by American firms to import cheaper, usually Indian labor. Call it "insourcing." The firms fire American workers, and replace them with Indians -- after forcing the Americans to train their replacements.
Of course, he wouldn't mention that side, because it would show just how ugly things are....
(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.)
The feds aren't "harassing" Stewart, they're prosecuting her, because she's a crook. And as a writer pointed out in the New York Post a couple of days ago, the feds are minimally concerned with her insider trading. What guaranteed her prosecution, was that she engaged in obstruction of justice by not simply denying that she engaged in insider trading, but by repeatedly lying about it to the feds. As the writer noted, her lies were stupid as hell, and she was so arrogant as to lie even to her own lawyers, while telling the truth to her employees (who are not bound by lawyer-client privilege). Thus, as the writer felicitously put it, "she treated her lawyers like employees, and her employees like lawyers."
This guy reminds me of another "economist" who in The Freeman (since renamed Ideas on Liberty) wrote a few years ago, arguing that corporate managers should be paid ABOVE their market value. (Somehow, it didn't occur to him to argue that workers should be paid above market value.) Extend the same sort of logic, and you're giving annual raises and bonuses to executives who have led their firms into the red.
Now, I can see an economist arguing for paying someone his market value -- and that's about it. Argue for overpaying or underpaying anyone, and you leave economics behind, and enter the realm of bad theology. The guy writing in The Freeman was less an economist, than a sycophant of corporate managers. And the same is true of the author of this article. As if there were any doubt, he has to go and fawn over Martha Stewart, of all people! It as if he doesn't want there to be any doubt, that for him the most arrogant, crooked executive is just as deserving of loyalty as the most competent, honest one.
I agree with you on many points. But I cannot agree with your concept of the value (which is not unique, BTW). I think that the real value, in its actual reality is always subjective. It is in the eyes, needs and desires of human beings. And so it is local, individual, sometimes arbitrary and irrational and hard to evaluate.
The trap comes from the natural desire of economists to make value material and measurable in scientific way. You can do it to some extent by calculation the capital, material and labor which was invested in its production.
This is a reasonable approach sometimes. But sometimes it fails. For example a clever technician can fix in a few moments the expensive appliance which otherwise would be a worthless piece of junk. It happened to me a day ago when my air-conditioner got fixed. Before the fix it was worth very little. After the fix it has value of couple hundred dollars. Was this value added during the repair or not?
He says that the "harassment" of Martha Stewart will lead to other people not investing, but gives no evidence supporting his claim. I would argue, contrarily, that a failure to prosecute Stewart would erode investor confidence, because the "little people" who carry the stock market would see it as a rigged game for the benefit of crooked fat cats. If anything, the prosecution of a Stewart should restore investor confidence.
If this guy were smart, he'd say something like, "It is not necessary to use the machinery of the state, to punish Martha Stewart. The market, in its inherent wisdom, has already done that, in causing her [and her stockholders, but since they're the little people, I guess they don't count] to lose hundreds of millions of dollars, as a result of her getting caught lying." But he feels such a deep and abiding political loyalty to Stewart, that he can't even bring himself to say that. He didn't want her to lose her money or her freedom.
As another example, you are using a piece of equiptment to produce goods. I come along and instruct you in how to use the equiptment better, so that your output of goods per hour increases by 30%. Did my service increase the value of the equiptment to you? Obviously. Was this value added by the service?
When your airconditioner fell into disrepair, your wealth deteriorated.
When the rapairman fixed it, he used his labor to make a physical change and added value to your air conditioner.
It depends on whether or not you made a physical alteration to the equipment.
If you merely made an adjustment, there is no value added.
Value is determined by supply and demand in the market.
There are only two ways of determining this for equipment that you already own: determining the cost of replacement with an identical piece of equipment or determining the resale price you would recieve from selling the equipment.
Not true. The trade of products creates wealth if the relative value to different people is different. For example, I may need food more than a vehicle I own. You, a farmer, may need a vehicle and have extra food. Trade - and we are both better off.
The total amount of goods (vehicles and food) remains the same, regardless of the trade.
Wealth has not been created by the exchange.
When you say services don't create wealth, do you mean the PRODUCTION of services or the CONSUMPTION of services?
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