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  • Munger on China

    Posted by Joseph Fouche on February 21st, 2010 (All posts by )

    Charlie Munger

    Charlie Munger

    From Charlie Munger in a speech at UC Santa Barbara:

    Another example of not thinking through the consequences of the consequences is the standard reaction in economics to Ricardo’s law of comparative advantage giving benefit on both sides of trade. Ricardo came up with a wonderful, non-obvious explanation that was so powerful that people were charmed with it, and they still are, because it’s a very useful idea. Everybody in economics understands that comparative advantage is a big deal, when one considers first order advantages in trade from the Ricardo effect. But suppose you’ve got a very talented ethnic group, like the Chinese, and they’re very poor and backward, and you’re an advanced nation, and you create free trade with China, and it goes on for a long time.
     
    Now let’s follow and second and third order consequences: You are more prosperous than you would have been if you hadn’t traded with China in terms of average well-being in the United States, right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It’s obviously China. They’re absorbing all the modern technology of the world through this great facilitator in free trade, and, like the Asian Tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So, you start in a place where you’ve got a weak nation of backward peasants, a billion and a quarter of them, and in the end they’re going to be a much bigger, stronger nation than you are, maybe even having more and better atomic bombs. Well, Ricardo did not prove that that’s a wonderful outcome for the former leading nation. He didn’t try to determine second order and higher order effects.
     
    If you try and talk like this to an economics professor, and I’ve done this three times, they shrink in horror and offense because they don’t like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second and third order consequences. The best answer I ever got on that subject – in three tries – was from George Schultz. He said, “Charlie, the way I figure it is if we stop trading with China, the other advanced nations will do it anyway, and we wouldn’t stop the ascent of China compared to us, and we’d lose the Ricardo-diagnosed advantages of trade.” Which is obviously correct. And I said, “Well George, you’ve just invented a new form of the tragedy of the commons. You’re locked in this system and you can’t fix it. You’re going to go to a tragic hell in a handbasket, if going to hell involves being once the great leader of the world and finally going to the shallows in terms of leadership.” And he said, “Charlie, I do not want to think about this.” I think he’s wise. He’s even older than I am, and maybe I should learn from him.

    Originally posted on the Committee of Public Safety.

     

    56 Responses to “Munger on China”

    1. Tom Holsinger Says:

      “The enemy has his own problems of which you are unaware.” Especially if you really, really don’t want to know about them.

      China will grow old before it grows rich.

    2. TMLutas Says:

      The example’s wrong because it holds variables to be constants. There is a reason why the PRC is a billion backwards peasants with a few hundred million climbing up the modernization S curve as fast as they can. The people were held back by their government.

      What makes them dangerous at this stage is not some sort of internationalist duty to spread the gospel of Marx and Mao but rather the deathly fear their leadership has that the people will catch on to how the leadership is reducing their standard of living by manipulating exchange rates to maximize employment and regime stability. That’s the sort of thing that leads to rope parties in the streets.

      To keep the people distracted the leadership is cultivating xenophobia and nationalism. That poisonous witches brew, born of regime weakness, is our biggest problem with the PRC. At some point, the leadership will either figure out how to get off the tiger and transition to something more stable (and coincidentally safer for the rest of the world) or they’re going to fall and we’re likely going to get a regime that is less dependent on xenophobia and nationalism.

      I strongly suspect that you can’t make it all the way down the free trade path to those poor 2nd and 3rd order effects before the toxic political regimes that caused the economic differential in the first place are replaced with something much safer. The problem is that to prove it you’re going to have to cross disciplinary lines in a way that is probably uncomfortable for most academics. And academics tend not to study things they are uncomfortable with.

    3. Andrew_M_Garland Says:

      Munger [edited]: China will grow faster economically. They are absorbing the world’s modern technology through free trade, as the Asian Tigers have proved.

      China starts as a weak nation of 1.4 billion backward peasants, and may progress to be a much bigger, stronger nation than we are, maybe even having more and better atomic bombs.

      Of course China will grow “faster” because they start from a much lower per-capita base. And, if they are great managers and avoid useless regulation, they will become richer per-capita than the US.

      Then, they have no reason to fight a nuclear war with the US, a then-poorer nation than China.

      We are all doomed anyway if becoming wealthy means a greater desire to fight wars. It can’t possibly be US policy to keep as many people poor for as long as possible. The typical complaint about the wealthy West and Europe is that we are all soft and unwilling to fight, because we have so much stuff.

      Let’s have everyone become rich through trade. Maybe they won’t want to end their prosperity by bombing their trading partners. And, maybe all together, we will maintain sufficient military strength to oppose the despots running poor, oppressed, and angry countries.

    4. Tatyana Says:

      Ah, I just finished a comment for the earlier thread (to David’s Manufacturing post) re: possible free trade economic scenarios [very, very primitively speaking]. Glad to see continuation of the topic.

      This is what I think: in the next round – of second and third consequences – competition becomes especially important. US and Europe have huge advantage (R&D, laws defending private property, etc) – this race is handicapped already. But with time passing while China gains her own experience and R&D (or steals ours…Clinton’ administration comes to mind) this relative advantage shrinks. So the answer is to never stagnate. The race is on, there is no time to became inept and just consume substandard imported goods. We have a huge capital and experience of using it – we shouldn’t waste it on purchasing products produced someplace else. Not only we’ll burn the capital, we’ll lose the skill necessary to move on in that race.

    5. Phil Says:

      In the meantime, the unilateral lowering of tariffs on our part has been less than good for the free market as a whole; it allows the government to pursue disastrous economic policies at home, while introducing significant time lag between the imposition of those policies and their consequences, which both decouples the decisions from their consequences in the public mind, and increacing the amplitude of those consequences.

      The state can do drastically stupid things and the economy will chug along normally _for a while_, until everyone’s too in debt to do anything and caught in a liquidity trap, which then gets used by the Keynesians-of-the-week to expand government even more.

    6. Joseph Fouche Says:

      Unilateral disarmament is never a good idea.

    7. Bill Waddell Says:

      “You are more prosperous than you would have been if you hadn’t traded with China in terms of average well-being in the United States, right?”

      By what measure is this true?

    8. Andrew_M_Garland Says:

      This is the argument for free trade, especially if the other country is underpricing its goods, either directly or through an undervalued currency.

      Protectionism Makes People Poorer. Period.
      Cafe Hayek by Don Boudreaux on February 18, 2010

    9. T. Greer Says:

      Ricardo’s tricks work best when they are applied to individuals and industries, not states and civilizations. Through which lens shall we view China? Are we libertarians eager to aid a great swathe of humanity just as deserving as ourselves to our heights of prosperity, or are we mercantilists who seek to keep economic power away from enemies so soon to be?

    10. ArtD0dger Says:

      So Munger thinks that if we trade with China, a second or third-order consequence will be that China will grow rich and powerful and eclipse U.S. leadership. And he agrees with Schultz that if we don’t trade with China, China will grow rich and powerful and eclipse U.S. leadership.

      This makes the ascent of China a trade issue how, exactly?

    11. Jonathan Says:

      TM Lutas makes good points. Also, second-and third-order effects are generally difficult to predict, so who knows. Finally, rather than focus on China we could speculate as to how fast the USA would grow if we radically reduced taxes, business regulation and lawsuits. On the last point, my guess is that the answer is in the range of somewhat weaker than the Chinese rate of growth to much stronger. How much would we worry about Chinese economic growth if the US economy were growing 5-10% annually?

    12. Nicholas Says:

      “So the answer is to never stagnate.”

      This is a profound statement on many levels. One who strives to never stagnate is generally onto a winning strategy IMO, whether it is a country or an individual.

    13. dearieme Says:

      “Let’s have everyone become rich through trade. Maybe they won’t want to end their prosperity by bombing their trading partners.” The leadership of Germany twice decided to risk their people’s prosperity by launching lunatic aggressive wars.

    14. Bill Waddell Says:

      Becoming rich through trade – or becoming rich through anything for that matter – means selling more than you buy. Can the good professors over at Cafe Hayek, or Charlie Munger, or anyone at all, cite an example of a country that prospered as a net importer?

      The trade imbalance we began under the Carter years that has grown increasingly the deeper we got into the ‘service economy-we don’t need manufacturing-free trade’ mentality. In 2009 we bought more than $380 Billion dollars worth of stuff from other countries than we sold to other countries. That is $380 Billion dollars + that left the US economy for good.

      As David Ricardo, author of the theory of Comparative Advantage – the economist the boys over at Cafe Hayek are so fond of quoting – said in the book he wrote on Comparative Advantage, “No country can long import unless it also exports…”

      When you sit down and read “On The Principles of Political Economy and Taxation”, you come to the inescapable conclusion that both the US and Chinese economists read Ricardo’s book on Comparative Advantage – but only the Chinese understood it.

    15. renminbi Says:

      Waddell- have you ever taken a course in price theory?

    16. Bill Waddell Says:

      Renminbi – yes

    17. Phil Says:

      TM Lutas makes good points. Also, second-and third-order effects are generally difficult to predict, so who knows. Finally, rather than focus on China we could speculate as to how fast the USA would grow if we radically reduced taxes, business regulation and lawsuits. On the last point, my guess is that the answer is in the range of somewhat weaker than the Chinese rate of growth to much stronger. How much would we worry about Chinese economic growth if the US economy were growing 5-10% annually?

      We won’t get a chance to find out until the Mandarins can’t buy cheap ipods or television sets in spite of increasing taxes, business regulations, and a tort system bordering on privatized totalitarianism.

    18. david foster Says:

      Phil…just to clarify, I think you’re talking about Mandarins of the American rather than the Chinese variety?

    19. Phil Says:

      Yes. Perhaps I should have said “nomenklatura.”

      Hey, does nomeklatura mean “big name” in Russian? Just like “Daimyo” does in Japanese?

    20. Tatyana Says:

      Phil: no it doesn’t.

    21. Andrew_M_Garland Says:

      Bill Waddell wrote [edited]: “Becoming rich through trade or anything else means selling more than you buy.”

      I disagree. A person’s income (or a country’s) is what he produces. People buy and sell things to take advantage of the efficiency of each person producing a lot of something specialized, then trading it for other things.

      People who buy things from China are not sending their wealth away. They are trading valuable things to obtain the advantages of specialization.

      By Mr Waddell’s reasoning, if I buy Florida oranges, I am sending my wealth to Florida, perhaps never to see it again.

      About “trade imbalances”

      Consider this explanation at Cafe Hayek by Don Boudreaux on August 16, 2007
      You Want Balance?

      [edited excerpt] Ignore anyone who complains that trade is “imbalanced.” These complaints makes lack even a whiff of economic sense.

      General Motors, Ford, and Chrysler each have huge trade imbalances — huge and growing trade deficits — with their workers. These companies buy far more from their workers than their workers buy from them. Perhaps auto makers should hire workers only on the condition that the trade in each case is “balanced”: each and every worker would agree to spend his or her entire salary on products made by the auto maker.

    22. Robert Schwartz Says:

      Worth reading if you are interested in this topic:

      “Uncle Sam vs the Dragon” by Daniel W. Drezner, 17 Feb 2010
      http://www.spectator.co.uk/spectator/thisweek/5780913/uncle-sam-vs-the-dragon.thtml

    23. Michael Kennedy Says:

      I think the Chinese may be reacting to the growing suspicion that Obama has no idea what to do about our debt and might even be flirting deep down with the idea of default. If I were the Chinese leadership, which Tom Friedman is so enamoured of, I wouldn’t be happy either. I still think the Chinese are “the Jews of the Orient” and not even the oligarchy of the PLA can harness the acquisitive instincts of their citizens. Read James Clavell’s novels of Hong Kong. They are not Germans.

      Time is on our side with China.

    24. Bill Waddell Says:

      Andrew,

      The examples you cite are rather incomeplete.

      If I send my money to Florida to buy oranges, in fact I will never see that particular money again. I must have more money coming in than I a spending on those oranges or soon enough I will run out of money to send to Florida to buy oranges. That money doesn’t have to come from Florida, but I have to have it coming into my household from somewhere. Right? I don’t have to sell to Florida – but I better be selling something to somebody in order to continue to have money to send to Florida.

      Same with the good professor’s silly auto example. Of course the auto makers do not have to have a positive balance with each employee, but they had better have a positive balance in total – taking in as much or more than they are sending out – or they will (they did in GM’s case) go under.

      I never did, and never will, argue that we have to have a positive trade balance with China or any other country individually. Rather, we have to have an overall trade balance (if not a surplus) just the same as GM or the guy who wants to buy oranges from Florida.

      We don’t. Last year we imported $380 billion more than we exported. That is the same thing as GM paying its employees and suppliers more than their revenue – or me spending more than my paycheck on Florida oranges. That path only leads to ruin.

    25. Bill Waddell Says:

      Andrew,

      Where I part company with you and the good professor over at Cafe Hayek is with your statement:

      “A person’s income (or a country’s) is what he produces. People buy and sell things to take advantage of the efficiency of each person producing a lot of something specialized, then trading it for other things.

      People who buy things from China are not sending their wealth away. They are trading valuable things to obtain the advantages of specialization.”

      That is true only so far as we have produced something tangible to trade with the Chinnese manufacturer.

      To borrow a page from the professor’s playbook and make an absurd example,

      If I sell you a life insurance policy for $100 – he (and I presume you) would say that $100 of wealth was created by virtue of the fact that I am $100 richer and you have something you think is valuable – the policy.

      Then you turn around and sell me a car insurance policy for $100 – now we have swapped $100 bills – and the service econmy folks think that $200 of wealth has been created.

      Then I sell you a policy for your boat – the count is up to $300, and you counter by selling me a health insurance policy for the same $100.

      All we have done is swapped the same $100 back and forth for paper four times. We have not created any wealth, but the service economy folks would have us think that the wealth of the United States went up by $400 as a result of all of this.

      As the last holder of the $100, I now send it to China in payment for an iPod, but the Chinese never buy anything from the USA. They merely swap that $100 around China for various services.

      Bottom line – the $100 is gone from the USA for good. We are out the money forever – it is no longer available for us to swap back and forth. All of those insurance policies we both thought were so valuable are actually worthless because there is no money left in either of our pockets to make them valuable. We do have an iPod that soon wears out and becomes worthless, while the Chinese have the $100 somewhere in circulation forever.

      The only real wealth created was done so by the Chinese guy who created a $100 iPod out of a few yuan worth of plastic and silicon. You and I created nothing of real value.

      That is the problem with the service economy. All it does is moves the same money around from one person’t pocket to another – always on the individual perception of value – but never creating any new wealth. Only making something tangible out of something less creates actual wealth. The entire theory of Comparative Advantage is based on the the best means to proportion the “The produce of the earcth – all that is derived from its surface by the united application of labour, machinery and caipital” according to the guy who came up with the theory. This extending it to sevices is a modern day concoction of guys like Boudreax and is wholly out of step with the core concept of Comparative Advantage.

    26. Andrew_M_Garland Says:

      To Bill Waddell, about your 2/22 9:16 post,

      You wrote: “Last year we imported $380 billion more than we exported. That is the same thing as GM paying its employees and suppliers more than their revenue – or me spending more than my paycheck on Florida oranges. That path only leads to ruin.”

      That $380 B is part of an accounting identity. It does not tell us whether we are prospering or failing. The US populace and government spent $380 B more on foreign goods and services than we received from selling goods and services to foreign buyers.

      “We” were able to do this because foreigners loaned or invested $380 B more into US accounts and property than US interests loaned or invested into foreign accounts and property.

      http://www.econlib.org/cgi-bin/searchCEE.pl?searchtype=CEESearchPara&id=93&andor=&query=balance trade

      In balance-of-payments accounting terms, the current-account balance, which is the total balance of internationally traded goods and services, is just offset by the capital-account balance, which is the total balance of claims that domestic investors and foreign investors have acquired in newly invested financial, real property, and equity assets in each others’ countries.

      For example, When Toyota builds a $300 million auto plant in the US, it shows up as a $300 MM capital investment, and finances a $300 MM trade deficit (buying $300 MM more from foreign sources than we sell to them).

      It may be a good sign that foreigners want to invest more in the US than US investors want to invest in foreign assets, but it really doesn’t tell us much.

      – –
      To Bill Waddell about your 9:57 post,

      Your post is complicated, and seems incorrect to me in many of its details. I’ll respond to what I think is your main point, that “the service economy” is a fiction that does not create wealth. You propose that “The produce of the earth – all that is derived from its surface by the united application of labour, machinery and capital” is the only real production of wealth.

      Well, OK, in a physical way, but also a misleading way. Much of what we want in life is physical and requires manipulating the physical environment. Services increase that productivity, and so are valuable and create wealth, although indirectly through other people.

      Say 20 men go into the fields each day to grow crops. They can gain an extra two hours of useful work each day, and grow more crops, if they hire a cook and two waiters to make and serve meals to them.

      The cook and waiters provide a service that makes everyone more efficient at growing crops, more efficient than if 23 men went into the fields without cooks and waiters. The cook and waiters provide a service of real value that creates wealth.

      If the group of 23 is productive enough, they might all hire a musician to entertain at meals. This gives them some incentive to work harder and have music, rather than work less and go without. The services of the musician creates wealth, although indirectly.

      So, I just don’t get your point that “[edited] All the service industry does is move the same money around from one person’s pocket to another”.

      – –
      You also say “[edited] Bottom line – the $100 is gone from the USA for good. We are out the money forever – it is no longer available for us to swap back and forth. We do have an iPod that soon wears out and becomes worthless, while the Chinese have the $100 somewhere in circulation forever.”

      This treats the $100 as a magical item, worth more than anything it can be traded for. Actually, money is a tool, like a hammer. We manufacture money as a measured claim on wealth, and it is merely a stand-in for some unspecified item or service in a market economy.

      We get the IPod, and the Chinese may get $100 worth of Florida oranges. It is not relevant which wears out first. If they circulate that $100 internally forever, we are even better off. The price of Florida oranges will be a bit less, and we can create more money electronically as bank balances, at little cost, to represent the products that we want to exchange in the future.

    27. Robin Goodfellow Says:

      @Bill by the same logic if I were to receive that $100 bill and trade it to a musician in exchange for a live musical performance then still nothing of “value” was created. The value in an insurance policy is that if something happens (loss of life, loss of health, loss of property, etc.) then the insurance policy will pay out and the loss will be offset by a monetary gain. This is especially advantageous in extremely unlikely but potentially extremely devastating circumstances, such as death of a sole income earner in a large family, loss of a vehicle important for commuting, etc.

      The fallacy you labor under is the idea that any aspect of the economy is any more substantial. Keep in mind that that $100 bill you’re imagining is itself just a piece of paper. In many ways the economy is just a shared delusion. Some things that people value others do not value at all (insurance, bizarre collectibles, etc.) But that’s mostly irrelevant. It doesn’t matter whether I like bread-and-butter pickles either, all that matters is whether there are enough people who place a sufficient value on such things and that those people are themselves capable of producing sufficiently valuable labor. Does the fact that I don’t like bread-and-butter pickles make me any poorer? Extremely unlikely.

    28. Tatyana Says:

      Andrew_M_Garland: your cook and waiters’ example only works if there are 20 men who produce basic product from the fields (product that Bill Waddell talks about: the fundamental of any exchange).
      Bouncing bills (to borrow BW’ example) from cook to waiter to musician will not produce any wealth. What’s more, very soon – as soon as all their bills they received from the Gang of 20 in exchange for their service will come to an end -they all will go broke. They all can only continue offering their services if the system has constant infeeds from others who produced a product with greatly positive balance of its intrinsic value (something sellable for more than what was invested in its manufacturing). Otherwise it’s unsustainable.

      Or look at it this way: transaction of money for services is like connection between elements in a complicated electrical scheme. It might contain a computer, a printer, a monitor, couple of speakers, amplifier, home theater, microphone, etc etc etc. But if a plug is pulled of the power grid, all these components of service economy that used to interact in 1000 different ways among themselves become dead. That power, that energy comes from tangible goods created from thin air and raw ore. Its creation and subsequent sale produce surplus, positive balance, that enables further “bouncing” between serving parties.

    29. Bill Waddell Says:

      Robin & Andrew,

      In order to understand what you guys are trying to tell me, let me offer an extreme example.

      Let’s say we do NO manufacturing, agriculture, mining or fishing in the USA. We import 100% of it from someplace that does it cheaper.

      Then let’s say the only professions we have are poets and musicians, along with doctors, bankers, lawyers, insurance brokers, retailers, restaurants, hotels and government employees – but all of the equipment and supplies used in those professions and all of the goods they sell are imported.

      Finally, let’s say that no one else appreciates our services or the quality of our music, poetry or any of our other services – so we export nothing.

      It would seem to me that all of the people in the US who work in those services would be simply passing the same money back and forth to each other – at rates and in an uneven distribution depending, of course on the perceived value of the various services, but all along we would be sending some of our money out to other countries to buy the actual tangibles things we would be consuming – food served in the restaurants, medicines and equipment used by the doctors, paper used by the lawyers and government folks, and the musical instruments needed to keep us entertained.

      How do we pay for it when there is only one way money is flowing – out? The money goes ’round and ’round among us in the US as we avail ourselves of each other’s talents, but at each step some of it leaves the US because we all need real stuff to survive, and most of the services consume real stuff too.

      Now, even though I went to the University of Cincinnati instead of an actual college, I understand that money is not real, and that it only serves as a surrogate for something else that actually has value. But the question stands – how is it that we do not end up slowly but surely transferring all of those things that actually have the value represented by the money to other countries?

      Are you suggesting that we simply arbitrarily declare our music to have higher value because we appreciate it so much, even though no one outside of the US is willing to pay us to listen to it? If I were to become the most talented poet in the history of poets (in the minds of my fellow citizens only – no one outside the US shares that opinion and still will not pay me for my poetry) and therefore be able to charge you more for my time, are you suggesting that new value has been created and the government should print up some more money to reflect the fact that my poetry is more valuable than other poets. And are you suggesting that the people in China, for instance, will recognize that US dollars have not devalued as a result of printing more of them simply because the people in the US think my poetry is better – even though the Chinese do not share that opinion?

      Are you suggesting that, so long as the value we place on all of these services is recognized by someone, and it doesn’t matter whether that person lives in the United States or lives in some other country, this is an economic model that will enable the United States to continue to thrive and survive?

      It seems to me that you are suggesting that Ricardo, in contriving his theory of Comparative Advantage, was all wet when he wrote that value is based on commodities, and that exports have to balance out imports.

      I’m not seeing the logic, but again I do not have a particularly high level of education. Please enlighten me.

    30. Tatyana Says:

      May I remark along the way, not entirely on topic?
      Bill, that was masterful.

    31. david foster Says:

      Let’s try a thought-experiment here…

      The year is 1850, and the leaders of the American South (unlike their historical counterparts) are favorably disposed toward industry. They spend less investment $$$ on plantations, and more $$$ on textile mills, iron foundries, locomotive-building shops, machine-tool manufacturers, etc. And these enterprises are operated by slave labor. Although their efficiency is less than that of Northern manufacturers, their labor costs are *far* lower, so on balance they can underprice their Northern competitors.

      There are no tariff barriers between states, and railroads/rivers provide reasonably cost-effective transportation. Surely Northern manufacturing erodes substantially, except for certain luxury items where brand is all-important and certain large/heavy product types where transportation costs are very high.

      What is the impact of this on the standard of living in the Northern states? Ignoring (for just one moment) the moral questions of trading with a slave society, are the Northern states better off or worse off because of this trade?

      (I’m not suggesting that the lot of the typical Chinese worker is analogous to that of the antebellum American slave–clearly, it’s not–but neither is the Chinese employee a free worker in the American or even the European sense)

    32. Bill Waddell Says:

      Thanks Tatyana

      David – the effect of course, is the dramatic lowering of northern wages in order to compete with their southern bretheren until the suppply and demand for labor puts them in balance with the cost of a slave to do the same work. Therein lies the real destructive affect on the United States of this gross misapplication of the theory of Comparative Advaantage.

      Logically, wages in the United States will fall in order to compete with China, while wages in China will rise – until they are in balance … but the globe is a big place and then manufaturing will be taken up in Africa, say, and wages in the US will fall further, and wages in China will decrease until all three places are in balance, but then we move on to the Amazon rain forest where there are more people to work cheap, and the cycle continues, theoretically of course, until there is one global wage. Countrties with a beginning high wage – i.e. the United States – are the big losers, while the most oppressed people in the world might win out.

      It is precisely because of this effect – and the realization that wages are depressed in certain countries for reasons – mostly evil ones – that have nothing to do with free markets and the laws of supply and demand, that Ricardo was very clear that comparative advantage is not about the cost of the labor – it is about the hours of labor.

      “The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour”

      Every American company manufacturing in China knows that it takes 5-10 Chinese hours to make what can be made in one American hour. By Ricardo’s theory, China would derive a Comparative Advantage from moving all of its manufacturing to the USA, instead of the other way ’round. It is only because of the policies of China which serve to keep Chines wages at about 2-4% of American wages that lousy Chinese productivity is not manifest in much higher Chinese costs.

      In Ricardo’s world productivity rules – not cost – and what people are paid for their hours in any given country has no bearing on determining comparative advantage. Wages – high in one country and low in another for the same work – are an entirely different subject.

    33. Andrew_M_Garland Says:

      To Bill Wadell,

      My summary of your statement:
      (1)”Let’s say we produce nothing tangible, importing these things instead. We devote our time to services only, and no no one else appreciates our services so we export nothing.”

      “(2) Then all of the people in the US would be simply passing the same money back and forth to each other.”

      “(3) All along we would be sending some of our money out to other countries to buy the actual tangible things we would be consuming, such as food, medicine, and equipment.”

      (1) and (2): I agree that if a country creates nothing physical and can sell no services, then they starve and die, after some interval of trading whatever they have left.

      (3): We wouldn’t be sending our money to other countries, because our money would be worthless, except to trade away the few tangible things we had left. They don’t like any of our services, so they would not sell us tangibles to receive just services.

      What is the point of that example?
      (a) Do you see the US as moving to that extreme? If so, why? Please supply the basis for that belief.
      (b) Do you think trade with other countries is creating that dystopia? If so, please answer one or more of the points I provided above, rather than presenting dystopian examples as a starting point.

      You started by saying that a negative balance of trade would lead to disaster, and I presented the fact that this represents net investment in the US, and is not a worry. So, what are your other concerns, or how am I wrong in what I presented?

      I would understand your position better if you would present the positive case for concern, what is now happening and why. This would be better for me than extreme what-if discussions.

      – –
      To Tatyana:

      I propose that 23 men dividing up the work and support to grow food can be more efficient and satisfying than 20 men growing food and cooking for themselves. So much more efficient that everyone is better off, even the original 20 men.

      Like Bill Waddell, you point out that it all collapses if no one grows the food. I agree, but what is your overall point? Are you saying that we should not forget to grow the food? I agree.

    34. Bill Waddell Says:

      Andrew

      “I presented the fact that this represents net investment in the US, and is not a worry. So, what are your other concerns, or how am I wrong in what I presented?”

      The $280 billion is not an investment in the US. It is virtually entirely a combination of extending credit and draining wealth.

      In 2008, for the first time in the years of data I have found, Direct Foreign Investment in the US equaled US Direct Foreign Investment in other countries. That gap, from the US being a net gainer on DFI has been closing consistely to the point that it is now break even. The current trend will soon take it negative, if it is not already there. (assuming an economic recovery at some point in the not-too-distant future)

      Growth in goods produced per person – real productivity – in the US was at a 9% annual rate during the Nixon-Ford-Carter years; slowed to 5% during the Reagan-Bush1 years; and has further slowed to 2.5% during the Clinton-Bush2 era.

      Goods produced as a percentage of GDP has dropped from about 60% goods/40% services when Reagan took office to a currentlevel of about 35% goods/65% services.

      During the same period – as we shifted from a manufacturing and agriculture econmy to a service economy, 20 million manufacturing jobs were lost, replaced by lower paying service jobs.

      During that same period, the balance of trade that was about even when Reagan took office, and has grown to the $280 billion annual level last year. The trend line has been steadily widening since 1981.

      You say that “I agree that if a country creates nothing physical and can sell no services, then they starve and die, after some interval of trading whatever they have left.” Every scintilla of economic data can be plotted on a trend line that says this is where we are going.

      At what point on the trend line do you supppose is the tipping point? How wide must the gap be? $400 billion? $500 billion? A trillion? Do we actually have to reach the point at which “our money would be worthless, except to trade away the few tangible things we had left” before the proponents of this ridiculous interpretation of Ricardo’s theory say ‘oops’?

      Regarding your comment to Tatyana – yep, that is Ricardo 101 – except it is not 23 men. The reality is 20 American men givig their work to roughly 150 Chinese men, with 3 American men to provide services in support of the Chinese. It only looks like an effective use of resources because, while Chinese productivity levels are 5-10 times worse than the US, those Chinese men are paid 20 times less. You don’t have to read very far into Ricardo to understand that the theory is all about hours and productivity, and he specifically admonishes not to get fooled by labor wages.

      The notion that the Chinese are better at assembly work, or textiles or toys or anything elee is ridiculous. They are much, much worse. The ‘comparative advantage’ companies draw from sending work to China is completely derived from the fact that their economic and political structure keeps them a small step above slave wages. That is hardly what Ricardo had in mind.

    35. Andrew_M_Garland Says:

      To Bill Waddell,

      I can’t conclude much from your blizzard of facts. You would have to explain the significance of each one in more detail. For now, let’s try just the first one, along the lines of the original discussion.

      You said:

      (1) The $280 billion [trade deficit] is not an investment in the US. It is virtually entirely a combination of extending credit and draining wealth.

      (2) In 2008 Direct Foreign Investment in the US equaled US Direct Foreign Investment in other countries.

      (3) The current trend will soon take it [DFI?] negative, if it is not already there.

      (1): In previous posts you stated $380 billion, here it is $280 billion. What do you mean by “entirely a combination of extending credit and draining wealth”. Where is the data and what is the particular definition of these two things?

      I find it hard to believe that people in the US are intentionally draining away their wealth to foreign lands. Except, I might agree if you mean that the US Government is borrowing money and stupidly wasting it, if that is part of the issue.

      If foreigners are extending credit to US interests (other than the US Government), why is that bad?

      (2): What is Direct Foreign Investment? Do you think it is good or bad if this goes up? What part of the cash flows are “indirect” Foreign investment, and what are they made of?

      If foreigners build more plants in the US than the US builds plants abroad, then this is good for the US (more invested capital equipment), and it shows up as more goods purchased from other countries (a larger trade deficit), which you regard as bad. So, is greater DFI good or bad, or hard to say?

      (3): Arguing by extrapolating trend lines is useless unless you can relate it to an underlying process that can truly be extrapolated. Even then, it is easy to go wrong.

      For example, the value of all agricultural production has declined as a percent of GDP. This is another way of saying that food has become cheaper as a percentage of what we make. That is good. But, you could/might extend the trend line to claim that we are on our way to zero food. So, arguments by extrapolation don’t convince me, but they might point to some underlying reality for which you could make some solid argument.

    36. david foster Says:

      To continue my North/South analogy:

      IF the northern states could produce some product that could be sold in volume to third parties (Europe, for instance)–say, ships and certain crops (they could also sell maritime transportation services to carry the crops to their destinations), THEN they could do quite well for themselves, since they could take advantage of very cheap products from the South while still having a good source of income.

      This only works, though, if these northern products/services cannot be readily duplicated in the south…say, because of the specific skills involved in shipbuilding and ship operation, and the climate & soil required for certain crops.

    37. Tatyana Says:

      Andrew: yes, that’s my point. And when we have disbalance in trade of $380mln it tells me that we did stop growing our food – now we buy more than we produce. BW have explained why this is an unsustainable practice.

    38. Bill Waddell Says:

      “I find it hard to believe that people in the US are intentionally draining away their wealth to foreign lands”

      You find it hard to believe that Walmart takes your American dollars and spends them in China?

      And you can draw no conclusions from trend lines that run unabated in a negative direction for 25 consecutive years?

      Curious that you have thus far defended your point of view with theory only, and assail every fact offered to the contrary as incorrect or irrelevant, or you ignore it all together.

      In the midst of massive unemployment and the worst economic debacle in 80 years, you are comfortable arguing that the US economy should continue to follow the same fundamental theories that have driven it since 1980?

      I give up – you and the dwindling few theorists who still think that moving our manufacturing base to China is somehow good for America are certainly entitled to your opinions.

    39. Michael Kennedy Says:

      Not all of the shift of manufacturing to China or Indonesia has been on purely economic terms. California, and I suspect it is not unique, has chosen to drive manufacturing away because it is dirty and makes bad smells. We used to have a numbers of industries that did basic processes, like metal plating. A friend of mine, another sailor, gold plated the winches on his sailboat for his own amusement and because he owned a plating company. Because of the toxic waste issue, those plants have closed. The fiberglass boat building industry of Orange County, once thriving, was closed down because of the air quality enforcement of zero emissions. Boat yards have been burdened with high costs for the disposal of bottom paint that has been removed from boat bottoms. As a result, most racing sailboats in California go to Mexico for this service and for many major repairs. These are small examples, perhaps but represent a powerful trend that has accelerated the loss of manual jobs and manufacturing.

      California is making itself into an amusement park that produces nothing. Now, the irrigation water to the Central Valley, one of the world’s great agricultural areas, has been cut off by a federal judge to protect the Delta smelt, a two inch fish that gets into the pumps. The unemployment rate in much of central California is nearly 40%.

    40. Andrew_M_Garland Says:

      To Bill Waddell,

      You write:

      Curious that you [Garland] have thus far defended your point of view with theory only, and assail every fact offered to the contrary as incorrect or irrelevant, or you ignore it all together.

      This is a strange response to me. I have been asking you for some detail about what you claim. You know, definitions and links to supporting data. I have been asking you about your argument, what little there is.

      You propose a pile of “facts”. When I have concentrated on one or two of your facts and claims (the US trade deficit and the supposed dangers there) you have avoided a discussion of what the facts mean. Then you claim that I am the “theorist”.

      Of course I suspect that you have made mistakes, but you won’t support your claims or demonstrate your superior understanding to show me how I am mistaken. You won’t stay on one topic and demonstrate your case. Maybe you have a case, but I doubt it, and you haven’t explained it.

      – –
      The fundamental meaning of a foreign investment in the US is that foreign goods are imported into the US (sold to US interests), and the value of those goods is used to buy that investment.

      The import of goods (sales of goods into the US market) is necessary to get the Dollars that are used to buy the US investment. So, all foreign investment in the US is necessarily balanced by the import of foreign goods. It is a mathematical identity.

      When Toyota builds a $200 million auto plant in the US, it has to use $200 MM of US dollars. It gets those dollars by buying US Dollars with Japanese Yen. Those Dollars came from prior transactions which imported foreign goods into the US.

      The money flows can be complicated, but it boils down to this: Toyota arranges to sell $200 MM of foreign goods to US interests, and it takes ownership of an auto factory (which it constructs with the Dollars) in repayment.

      You can’t like foreign investment into the US and hate US trade deficits at the same time. They balance each other.

      Or, maybe you like trade surpluses. In that case, you like net US investment in foreign countries. (But, I guess you really don’t like US interests to invest outside the US.)

    41. Bill Waddell Says:

      Andrew,

      I understand perfectly

      Toyota spent money to build plants in the US, as did KIA and a whole lot of other folks. However, in 2008 US companies spent more money buildng plants in other countries than foreign companies spent building them here.

      That, too, is a trend that has been moving in the wrong direction – more US investment elsewhere than foreign investment coming in, although I understand that you reject facts such as these when they do not support your theory.

      Separate and apart from the adverse foreign investment, the US imported $380 billion more than it exported.

      I have been on that point fairly myopically for quite a while.

      You are the one who has introduced no facts – just a rehash of Comparative Advantage theory.

    42. Andrew_M_Garland Says:

      To Bill Waddell,

      I don’t dispute your figure that the US imported $380 billion more than it sold (but I would still like confirmation from a link to the data you use).

      The question is, why do you think this is bad, or matters at all? What is the pathology that you think is revealed by this? Or, do you think an unbalanced trade figure is harmful in itself? If so, why?

      If you claim that some trend is dangerous, then please support that with (a) the data that supports the trend, (b) why that trend is bad, and (c) what is causing that trend.

      I need more information about your position. Throwing out various statistics doesn’t make your case. We have to know what the statistics mean.

      So far, you haven’t answered or acknowleged any of the questions or criticisms I have made toward your claims. If you think that you have answered, be kind enough to point out my questions and your answers. Maybe I just misunderstand you.

    43. Pawn Says:

      Mr. Waddell,

      It’s gone past moving the manufacturing base. The design base, where the innovation occurs, the engineering, has also been moved. These things go hand in hand in a very subtle way. This is what will relagate us to consume until we are exausted. We will stagnate while they innovate and produce.

      “They copied all they could follow
      but they couldn’t copy my mind,
      so I left them sweating and stealing
      a year and a half behind.

      -Kipling

      BTW, you and Mr. Garland should call each other on the phone. It would be a better medium for your discussion. Maybe write up a post on what you figured out. IMHO.

    44. Andrew_M_Garland Says:

      Manufacturing Myths
      11/22/09 – cafehayek

      First, the real value of U.S. manufacturing output today is four times what it was during the alleged golden years of American manufacturing might, the 1950s, and more than twice what it was in 1980.

      Second, in 1959 the percent of gross value added to U.S. GDP by nonfinancial corporate businesses was about 53 percent; in 1980 it was about 55 percent; today it’s about 50 percent – hardly evidence that the financial sector is growing cancerously and destroying or crowding-out Americans’ capacity to produce non-financial outputs.

    45. Bill Waddell Says:

      Actually that data is hopelessly inflated by the Bureau of Labor Statistics and the Depertment of Commerce’ own admission.

      You see, they don’t know how to account for “intermediate inputs”. In other words, if the chair manufacturer stops making chair legs, seats and backs, lays off all the employees who used to make those components, and then buys all of those inputs from China, but keeps the final assembly in the United States, the calculations for Productivity and GDP still give him credit for the whole chair.

      The folks in Washington don’t know how to separate part of production from the whole thing.

      The result is that only outsourcing the whole chair results in a deduction from “manufacturing output”, even though the value adding component in the United States fell drastically.

      Same with their productivity statistics. The BLS calls outsourcing/offshoring intermediate inputs a ‘productivity gain’.

      The boys over at Cafe Hayek know this – they simply choose to ignore it and knowlingly spew out bad data because the bad data supports their theory.

      You can read about it in this New York Times article:

      http://www.nytimes.com/2009/11/09/business/economy/09econ.html?_r=3&adxnnl=1&adxnnlx=1257768315-di+sHHrYQtu0fLYZbkMd5Q

    46. Andrew_M_Garland Says:

      To Bill Waddell,

      The Times article you link to doesn’t cite a source. It estimates the statistical error as 3.3% annualized growth vs the unadjusted figure of 3.5% growth, about a 6% fractional difference in the growth rates. I don’t know offhand how to apply that to the statistics for industrial production.

      Where do you get your statistics for industrial output, and how do you adjust them, according to your studies of the problem? How do you know that the value of industrial production in the US is dropping, leaving us with an unsustainable economy?

      You are tiring me out. You choose to reply to particular things, but not the many questions I asked above about just one of your claims. You are sniping, not discussing.

      The central question for me: Why should I care about trade imbalances with the rest of the world, when I don’t care about trade imbalances between (say) Massachusetts and Florida? Why is it so different to send $10 to someone in Florida to buy oranges, or $10 to someone in France to buy Brie?

    47. Bill Waddell Says:

      And you, my friend, have offered up nothing but a regurgitation of what some college professor has told you about the Theory of Caomparative Advantage, with no original thought as to how it might be impacting the current economic debacle.

      I am reminded of the quote from Good Will Hunting, “You blew 150k on an education you could have gotten in $1.50 in late fees from the public library.”

      Your central question is “Why should I care about trade imbalances with the rest of the world, when I don’t care about trade imbalances between (say) Massachusetts and Florida? Why is it so different to send $10 to someone in Florida to buy oranges, or $10 to someone in France to buy Brie?”

      If you don’t know the answer to that one, then God help ya.

    48. Rick Says:

      1. China grows faster because they are poorer. Big deal. Moving from 1 to 2 isn’t much of a move, but it is 100% growth. The US is still better off.
      2. China, if they are good managers, MAY become wealthier overall than the US. But that’s not a bad thing. The UK was much wealthier than the US in the early 1900’s, and now are not as wealthy – but they are still better off. What matters isn’t one’s position day to day, but whether one is better off than before in a meaningful fashion.
      3. China MAY be able to build better bombs if they get wealthy. But then what? As my uncle once said to me, “Do they really want to invade the US and deal with the urban ghettos?” Sure, they may like to take over the homes in Bel Air, but the other “stuff” that comes along with all that isn’t worth the trouble. A war would hobble them more than help them, and they know this.

      Ricardo was right on every order – trade is a benefit on many levels. Charlie’s theory is that it’s OK to be friendly with your neighbor and share information about the neighborhood, until that information allows them to improve their position in the neighborhood. So, according to that theory, I’m better off keeping the new neighbors in the dark about what’s going on because I’ll remain the top dog?

      I’ve seen this in corporate management everywhere I’ve worked. “Don’t tell accounting/marketing/management the DETAILS of what we do – they won’t understand and then they’ll ask tougher questions.” Interestingly, the ONE time I was in a position of responsibility that allowed me to inform people on how business was done, I got FEWER AND BETTER questions. It’s good to trade information, it makes everyone more useful and productive. Trade in manufacturing and business works the same way. To think otherwise is to limit one’s opportunities.

      One may say “well, what about if they limit your ability to trade via tariffs or regulations as they get wealthier – then what do you do?” I say, “this makes YOU stronger. Clearly the tariffs and regulations mean they are limited in their capabilities. Generally, if tariffs or regulations limit your ability to trade, then you need to find ways to be more efficient and productive. In the long run, if you’re smart, you become MUCH BETTER than the competition and eventually the tariffs and regulations don’t matter.” Sadly, most companies would rather spend money on lobbyists and counter regulations and tariffs to “protect” their business than be intelligent. If the money GM spent on the auto lobby was spent on better R&D and better productivity, we never would have spent a dime “saving” them.

      Sometimes, the obvious answer is so obvious the most intelligent people ignore it because it’s TOO obvious.

      Charlie’s a smart guy. I’m surprised he fell for something like this.

    49. Rick Says:

      I am reminded of a question once posed by a man I detest – Robert Reich. I’ve altered it a bit.
      “what is better out of these scenarios –
      1. the US grows at 2% and Japan grows at 1%
      2. the US grows at 3% and Japan grows at 5%
      3. the US grows at 5% and Japan shrinks by 5%”

      For some reason, most people would choose 3. But the obvious answer is 2. While we may be losing ground to Japan, the pie is bigger so while our % slice is smaller, our portion is larger overall, so we’re better off.

      Bill, Good Will Hunting was a nice movie and had pretensions of intelligence, but was actually quite lame from an intellectual standpoint.

      People will lose their jobs, no matter what, in any economy. The fact that they may be losing it because of trade is a side issue. What if a chair manufacturer in Florida comes along and can produce the same chairs for half the cost with half the staff as the manufacturer you discuss? Does this matter if it’s done in Egypt, China or Japan? Only from the standpoint that we’re sending money to those nations as opposed to keeping it here. But from the standpoint of the economy, we’ve still lost jobs even if it’s done more efficiently at home.

      The REAL point, however, is that the nation is better off. Why? Because items which I once paid $500 for now cost $250. What am I going to do with my savings? Buy something else – or invest it – or save it. But the point is, while some people have lost their jobs, more people are better off.
      Over time, those savings filter back into the economy and those who lost their jobs will find new work.

      Sucks while you’re not working, but in the long run the country is better off.

      And I’ve been laid off 4 times in the last 12 years. So I KNOW whereof I speak. Each time, I had to take a job that paid less. Yet I am WEALTHIER today than I was 12 years ago…even with the stock crash.

      You may wonder how? Well – it’s called being smart. Each time I was laid off, I had to reevaluate my needs. I’ve found that I can live on far less than I once thought. And over time, I’ve found that I’ve been able to reduce debt, increase savings, and live better.

      This is why the US is great. We’re intelligent and adaptable. But if I sat around, after being laid off, and moped and complained how my job was sent somewhere else, I’d be in a bad state, wouldn’t I? Yet that is what radicals and lame-asses do. Rather than attack the issue head on with intelligence, they complain and blame, and point fingers. I am currently in a position of some responsibility seeking to grow a small company. I have an employee who, when presented with an issue, immediately explains why each solution to the issue won’t work. He offers no solutions – only negative explanations.

      He will not last. And he will complain when he is laid off. But he cannot survive because he is incapable of working well. There will be blame, complaints, etc. But in the end – he is simply wrong. There is a solution to everything if you’re smart, capable, and adaptable. AND YOU HAVE TO BE WILLING TO TAKE RISKS, particularly when you have little to lose.

      America, as it has gotten wealthier, has lost its appetite for risk and is seeking safety – “how do I keep what I have?” THAT is the surest way to lose what you have. If you follow football, then you know that the Prevent Defense, designed to keep a team leading the game to maintain the lead, only PREVENTS YOU FROM WINNING. To maintain the lead, you always have to keep doing what you do, and do it well. That’s why sharks and alligators have been around so long.

    50. ruralcounsel Says:

      TMLutas: “…the deathly fear their leadership has that the people will catch on to how the leadership is reducing their standard of living by manipulating exchange rates to maximize employment and regime stability. That’s the sort of thing that leads to rope parties in the streets. ”

      Isn’t that what our government is trying to do?

      Rick: “I am reminded of a question once posed by a man I detest – Robert Reich. I’ve altered it a bit.
      “what is better out of these scenarios –
      1. the US grows at 2% and Japan grows at 1%
      2. the US grows at 3% and Japan grows at 5%
      3. the US grows at 5% and Japan shrinks by 5%”
      For some reason, most people would choose 3. But the obvious answer is 2. While we may be losing ground to Japan, the pie is bigger so while our % slice is smaller, our portion is larger overall, so we’re better off.”

      This presumes the Japanese won’t choose to marginalize us militarily or try to exert economic blackmail when our economic goals and theirs clash. Such as seeking critical raw materials. Which, in the case of China, seems like a pretty bad bet. The weakness of economic theory is it never accounts for when economic growth becomes subservient to political goals. There always comes a point where someone thinks they can create a shortcut to global power by taking out an adversary.

    51. Tatyana Says:

      Rick:
      “Sucks while you’re not working, but in the long run the country is better off.”

      No, it is not.
      Not all people who were laid off can change their occupation. For some it is too late – they have invested 30 years of education and perfecting of practical skills which they now have nowhere to apply. For others it is simply not in their ability, their mental composition, to switch from a manufacturing job to a paper-pusher’s. And how many managers, nurses or barbers this country needs, anyway? A nation of car salesmen (of cars made someplace else) – is that something to aspire to? If it is true that not everyone has it in themselves to be an artist, the same is true of manufacturing professions. I want to design, damn it, I don’t want to be in sales or teaching or “community organizing”. It’s onanistic.

      This is not an issue of complaining and seeking someone to blame. Neither is this a question of wanting security – only of a fair play and opportunity to do what one was born to do, to be productive to the full of his ability. Millions of people ARE capable of working well but their work is taken from them. This game is rigged – by trade imbalance, by dirty deals, by theft, by cronyism, by artificially inflated union labor costs. By averting your eyes or worse – by kicking the fallen or saying “they brought it on themselves”.

    52. david foster Says:

      “What if a chair manufacturer in Florida comes along and can produce the same chairs for half the cost with half the staff as the manufacturer you discuss? Does this matter if it’s done in Egypt, China or Japan?”

      If all the chair manufacturing jobs (that were previously in Michigan and North Carolina, let’s say) move to Florida..and if you’re in the chair-making profession and want to stay in that profession–then you can move to Florida and still speak the same language, live under the same political system, and be a part of the same national culture. This is not the case if the chair manufacturing moves to Mexico or China.

    53. Phil Says:

      Or more accurately, I have the same rights in Florida that I do here. I don’t have the same rights in China, and the relative labor costs will be much lower for a businessman there who has the right guanxi than they’d be for me just off the plane from America.

      It’s a sufficiently pervasive problem that a significant fraction of China’s ‘private’ wealth is held by relatives of high party officials. (I used to have the url for that around here).

    54. Andrew_M_Garland Says:

      To Bill Waddell,

      OK, insult me. Assume I’m ignorant, maybe even stupid. God help me.

      But, I’m disappointed in you. You may have studied this matter so much more than I have. You imply that the answer is obvious and easy. But, you won’t deign to supply this answer or point to and summarize an article that does it.

      Why won’t you help me out, and all the others who could be convinced by your analysis?

    55. Andrew_M_Garland Says:

      To David Foster,

      Usually, doing something more efficiently takes fewer workers or workers with different skills.

      We assume the Florida chair manufacturer is supplying a market with chairs at half the previous price, using half the previous workers.

      “Half the workers” means those jobs have disappeared. It doesn’t matter if people in Carolina can move more easily to Florida rather than France or China. The jobs are no longer there.

      A job “disappearing” is shorthand for “there is no longer a relatively-productive use for more people working to produce that thing at the previous wage”.

      The people buying chairs can now redirect their resources toward something else they want. The people formerly making chairs can redirect their efforts toward making those other things, with help from entrepreneurs.

      I see little difference, whether the cheap-chair factory is in Florida or China. What policy makes things different or better, that does not trample on the rights of the chair-buyers to exchange their resources as they wish?

    56. Phil Says:

      You’re creating an imaginary situation and then declaring that the situation must be the same in Florida and China, when AFAICT they aren’t. You’re pretending that all the competitive advantage in this case is just because China’s figured out a magic means of making better chairs. What if they haven’t? I can argue _details_ until I’m blue in the face, and you appear to ignore them.

      I am beginning to think that free trade is the worst thing to happen to free markets and private enterprise in the last fifty years; it allows the chickenshit bureaucrats to mumble “competitive advantage!” while they do all they can to increase our costs of staying in business and therefore drive us out of business, and pretend they’re really free-market advocates while they do so.

      And since their constituents can still import cheap chairs, for a while, they are going to pretend that everything’s ok.