A Reply
to Schumer and Roberts*
By
George Reisman**
Charles Schumer, the senior senator from
New York, and Paul Craig Roberts, an assistant secretary of the Treasury
in the Reagan administration, have written an
article in The New York Times of January 6, 2004, in which they
question the benefits of free trade in conditions in which there is
mobility of capital and thus effective mobility of labor, as well as
mobility of goods.
They cite the case of a New York
Securities firm that plans to replace its American software engineers who
earn $150,000 per year with equally competent Indian software engineers
who earn only $20,000 per year and who modern telecommunications equipment
will enable to work as effectively as if they were physically present in
the United States rather than in India. The also cite the fact that the
number of radiologists in this country is expected to decline
significantly because M.R.I. data can be sent over the Internet to Asian
radiologists capable of diagnosing the problem at a small fraction of the
cost.
Exactly the same alleged problem, of
course, is present, at least implicitly, in the construction of modern
factories and other modern facilities of production in China and elsewhere
in what has up to now been the "third world." Such developments
radically increase the productivity of workers who earn very low wages by
American standards and thereby enable those foreign workers to outcompete
far-more highly-paid American workers in the production of more and more
goods.
The question is, are such developments to
be feared as an assault on the American standard of living and thus serve
to justify government intervention designed to thwart them?
The means of answering this question has
been supplied by none other than David Ricardo, the discoverer of the law
of comparative advantage.
The additional principle of Ricardo that
is relevant here is his distinction between "value" and
"riches," which, he showed, are capable of moving in opposite
directions.
Although Ricardo, was a proponent of the labor theory of value, his
doctrine does not depend on it, any more than does the law of comparative
advantage. Indeed, it can be applied to the very examples cited by Messrs.
Schumer and Roberts. All we have to do is understand "value" as
money income and "riches" as the goods and services that money
income can buy.
Thus, here we are with American software
engineers and American radiologists being replaced by much lower-paid
Asian software engineers and radiologists. What causes them to be replaced
is that they are unwilling to accept wages as low as their Asian
competitors. The fact that they are replaced rather than accept the wage
cuts needed to be competitive implies that they choose to move to
alternative lines of work, which, while offering less money than the jobs
they have lost, do not require reductions as severe as those needed to be
competitive in the jobs now filled by Asians. The former software
engineers take jobs that offer $100,000 or perhaps just $50,000 instead of
the $150,000 that they had been earning. The former radiologists leave
radiology and enter other branches of medicine at lower, but still
considerable pay, in the process increasing the supply of physicians and
reducing their rates in those other lines—a path to more affordable
medical care, it would seem.
To understand what is present, all one
need do is to generalize the situation. Imagine that in case after
case Americans are confronted with lower-cost competitors, which causes a
decline in their money incomes. But the decline in their money incomes is
always less than the reduction in costs achieved by the
competitors. Now all one need do is realize that the cost reductions
achieved by the competitors show up as price reductions in the things
Americans buy. And those price reductions, founded on cost reductions
greater than the decline in American incomes, will also be greater than
the decline in American incomes. In other words, American real
incomes, as opposed to their nominal incomes, rise. Ricardo's principles
both of comparative advantage and the distinction between value and riches
are at work.
Of course, if one looks only at the
situation of an isolated group, such as software engineers or
radiologists, the decline in income is far more pronounced than any
decline in the prices the members of these groups must pay. But by the
same token, in every such isolated case the immense majority of Americans
gets the benefit of some reduction in costs and prices with no reduction
in income—for example, all the patients who earn their livings other
than as software engineers or radiologists and who can now get their MRIs
less expensively.
Despite everything I have said about
falling wages and prices, it should be realized that under a system of
fiat money, such as we have today, it is practically impossible that the
general level of money wages will actually fall in the United States. For
one thing, practically all of the dollars that go abroad to purchase
imports or, now, to pay wages, come back to the United States, to buy
goods and services here. Indeed, in this process, China and Japan are
actually significant suppliers of capital funds to the United States,
albeit largely in the form of the purchase of U.S. government securities.
(So much for fears of capital export. The overwhelming bulk of the capital
invested in Asia is made possible by the rapid increases in production
there, not by the export of capital from the United States or other
advanced countries. The capital formed there is of such magnitude as to
make possible, as I say, the actual import of capital into
the United States rather than its export from the United States.)
This return of funds from abroad serves to
increase the demand for labor in various lines, thereby working against a
general fall in wage rates. Of course, of much greater influence on money
wages is the endless rapid increase in the quantity of money in the United
States. When this factor is taken into account, the effect of free trade
should be understood merely as retarding the rise in domestic prices in
comparison with what it would otherwise be—of helping to prevent prices
from rising as rapidly as inflation of the money supply serves to raise
wage rates and would otherwise serve to raise prices
The economic development of China, India,
and all other areas of the present-day third world, their full integration
into a system of global division of labor and their attainment of
"first-world" status, is earnestly to be desired not only by the
populations of those countries, whose standards of living would obviously
be enormously increased, but no less by the populations of today's
first-world countries, whose standards of living would also be very
greatly increased. What would be achieved, along with the benefits of
comparative advantage, is the maximum possible economies of scale in every
branch of production, given the world's population. Above all, every
branch of science, technology, invention, and business innovation would be
pursued by a far larger number of highly intelligent and motivated
individuals than is now the case. The result must be far more rapid
economic progress across the entire globe, raising the living standards of
all far above the living standards of today's most advanced countries.
The fear of other people's intelligence
and ability applied to the production of goods we consume is not only
profoundly wrong but also extremely dangerous. If we follow the line of
Schumer and Roberts, and their avowed mentor, Keynes, and instead of
allowing ourselves to benefit from the competition of the rest of the
world, seek to impede others' progress, we should not be surprised if we
end up finding much of that intelligence and ability turned against us, in
producing the weapons of future wars rather than the better and more
economical consumers' goods it can and wants to produce and which we want
to consume.
Let Schumer, Roberts, and all other
advocates of state intervention restrain their desire to unleash the Polizei
and the troops to stop people from doing what benefits them. They need to
read more of Ricardo, and Mises and Bastiat, before urging such policies.
–––––––
[1] David Ricardo, Principles of Political
Economy and Taxation, 3rd ed. (London: 1821),
chap.
XX.
Copyright © 2004 by
George Reisman. All rights reserved.
**George Reisman, Ph.D.,
is professor of Economics at Pepperdine University’s Graziadio School of
Business and Management and is the author of
Capitalism: A Treatise
on Economics
(Ottawa, Illinois: Jameson Books,
1996).This
article originally appeared on web site of the Ludwig von Mises
Institute on January 9, 2004.
|