Artificial Scarcities Are Not Wealth

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In his essay that I addressed yesterday, Pat Buchanan writes:

You cannot have a rising standard of living when your highest-paid production jobs are being exported overseas.

I suspect that the above sentence strikes most readers as merely stating an obvious, indeed trivial, truth. But it’s wrong. And understanding why it’s wrong – why it’s wrong beyond its use of the familiar yet misleading notion that jobs are “exported” – is necessary to any informed discussion of trade.

Of course, what Buchanan means by writing “your highest-paid production jobs are being exported overseas” is that valuable tasks once done for domestic (say, American) consumers by fellow citizens are now done for domestic consumers by foreigners. And Buchanan likely agrees that the reason for such a switch of who performs these tasks is that foreigners can now perform these tasks at lower costs than can Americans.

Let’s call the good that high-paid American producers once produced, but are now imported from low-paid foreigners, a “doohickey.”

Americans can now get the same quantity of doohickeys that they value by at least $X per unit – where $X is the price they paid for each doohickey when fellow Americans produced doohickeys – for a price of less than $X. So Americans as consumers of doohickeys are clearly better off.

Also better off are those American producers who now sell more – or who fetch higher prices for their outputs – because at least some of the money American consumers now save when buying doohickeys is now spent on these other American-produced goods and services.

But there’s a deeper, more important, and less obvious point to grasp.

The reason Americans now import doohickeys is because Americans no longer have a comparative advantage in doohickey production. And the reason Americans no longer have a comparative advantage in doohickey production is because their cost of producing nondoohickeys – goods and services other than doohickeys – has fallen relative to foreigners’ costs of producing nondoohickeys. This is another way of saying that American labor applied to the production of nondoohickeys now generates more value than that labor would generate were it kept artificially in a protected American doohickey industry.

Americans’ comparative advantage at producing nondoohickeys – which is another way of saying Americans’ comparative disadvantage at producing doohickeys – means that the same amount of American labor previously used to produce only Y-amount of doohickeys can now produce enough value to allow Americans to acquire Y-amount of doohickeys plus even more doohickeys (or more of other goods or services that previously would have been unaffordable).

Looked at differently, suppose the Portuguese invent a revolutionary process for producing doohickeys – a process that now allows one unskilled worker in Portugal to produce the same quantity of doohickeys that once required the full-time work of 5,000 MIT-trained engineers. (Note, by the way, that the essence of the situation doesn’t change if an American had invented this new process and commenced to employing a single unskilled worker in America to produce the doohickeys.)

Should we lament this development? Would Americans really become poorer by importing low-cost doohickeys from Portugal? (Or: Would Americans really be kept rich, and the American economy keep growing, if Uncle Sam slaps a prohibitive tariff on doohickeys and, thus, protects high-paid doohickey production jobs in America?)

Clearly not.

It’s true that 5,000 MIT-trained engineers would lose their high-paid jobs in the U.S. doohickey industry. But is their labor so robotic, so narrow, so inflexible, so specific to doohickey production, that they have no other ways to earn good incomes? No other way to produce other outputs? Clearly not – for if it were, this labor’s opportunity cost would be near-zero. And if this labor’s opportunity cost were near zero, it would be extremely unlikely that these workers would ever have been able to command high pay for producing doohickeys.

…..

In sum, paying people high wages to help the domestic economy cope with artificially created scarcities is not a recipe for economic growth.

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