Uncle Sol Starting a thought farm

Welcome Hazim

A long time friend of mine, going by the handle "Hazim" has recently agreed to become a contributor to this blog. You'll find his posts, I'm sure, to be entertaining and often controversial. His view is certainly unique, and we don't always agree (though, we often do), but his voice is certainly worth hearing. I hope you enjoy his perspective as much as I do. Welcome, Hazim.

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Geeking Out: Higher Value to Lower Value

For most of my adult life I have argued in favor of free trade, toeing the laissez-faire line. However, there comes a time in any intellectual life when the facts before you cause you to question a long-held belief. Recently, I have had one of those experiences.

The economic benefits of free trade, supposedly handed down from the great Adam Smith himself, lie in a calculation of advantage. Smith did espouse the benefits of trade where an absolute advantage (where one nation is able to produce a good more cheaply than another) was had by each nation in producing a certain good, making trade an option that would improve the productivity of both nations. Later on, David Ricardo argued that trade also was advantageous when both nations could produce a good, but each of them focused on the one good that each of them could produce more cheaply, even if one of the nations could produce both goods more cheaply.

I know, if you haven't studied economics, this all sounds very complicated, and I'll admit, it took some concentration to really understand how this worked. And, in theory, when discussing two nations with comparable standards of living, each of them only producing one product to consume domestically and trade with one other nation, it works. Both countries are, in fact, better off, even if one of the countries can produce both goods more cheaply than the other.

However, this is much like saying that a feather falls to the floor at the same rate as a bowling ball. In a vacuum, this is true. In the real world it doesn't quite work. In the real world, one nation doesn't just trade one good with one nation. Instead, trade happens with millions of products with hundreds of countries simultaneously. And while Ricardo's theory looks good on paper, the feather never makes it to the floor quite as quickly as the bowling ball. It becomes even more complicated when you consider differing standards of living between two nations with differing rates of employment.

The argument is often made in free market circles, that trade is much like technology. When a country is able to obtain a good from another country more cheaply than it can produce that good itself, then it benefits the majority of people to trade that good, even though some workers may be temporarily displaced. They are displaced the same way when new technology arrives that makes those workers unnecessary for the task they are currently performing. As the argument goes, those workers are now freed up as resources to move on to more highly valued uses. Therefore the society becomes more productive, goods are obtained more cheaply, and the standard of living is raised.

A difficulty arises, though, when the standards of living are greatly skewed between the two nations. When this happens it becomes possible for a highly valued use of resources to be moved much more cheaply to another nation. And while this still frees the resources in the first nation, it doesn't free them up for more highly valued uses. Indeed, unless we're all going to become medical doctors and rocket scientists, it's hardly possible.

Hence, I have come to that point in life where a reversal of opinion, when faced with relevant facts, is upon me. You can now call me a protectionist. I now believe that our economy would be better served if we produced, ourselves, those things which we are able, and only traded freely for those things it is very difficult for us to produce.

Indeed, by way of Mish's Global Economic Trend Analysis I have found this report in the New York Times.

Companies — and their engineers — are being drawn here more and more as China develops a high-tech economy that increasingly competes directly with the United States.

A few American companies are even making deals with Chinese companies to license Chinese technology.

Xi’an — a city about 600 miles southwest of Beijing known for the discovery nearby of 2,200-year-old terra cotta warriors — has 47 universities and other institutions of higher learning, churning out engineers with master’s degrees who can be hired for $730 a month.

I guess I need to strike "rocket scientist" from my list of possible higher-valued uses. Looks like we all have to become MDs.

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