Originally published July 12, 1982
A NOTE IN Thomas Balogh‘s stimulating new book, The Irrelevance of Conventional Economics, tells the following story: When Professor Paul Samuelson was asked by a Harvard mathematician to name “one proposition in all of the social sciences which is both true and non-trivial,” he confessed that this was a test he always failed. “But now,” Samuelson wrote, “some 30 years later … an appropriate answer occurs to me: the Ricardian theory of comparative advantage; the demonstration that trade is mutually profitable even when one country is absolutely more or less productive in terms of every commodity.”
The anecdote is worth attending to because the so-called Law of Comparative Advantage is the foundation of most arguments for free international trade, and the dogma has been sanctified by practically all economists, liberal or conservative. The law thus provides at least part of the justification for deeds such as GE’s closing an electric iron factory in California and replacing it with one in Singapore (see “America’s Setting Sun,” NL, June 14).
As expounded by David Ricardo in The Principles of Political Economy and Taxation–one of the half dozen most influential books in the history of economics-the law develops like this: Suppose (there goes an economist imagining things again!) that a certain amount of wine exchanges for a certain amount of cloth. Suppose that in England it would take a year’s labor of 100 men to make the cloth, and of 120 men to make the wine, while in Portugal the man-years required are 90 and 80, respectively. In these circumstances, it would be to Portugal’s advantage to make only wine and England’s to make only cloth, with the countries then exchanging the surpluses: Portugal would multiply its wine output 2.125 times ([90 + 80] ÷ 80), and England its cloth production 2.2 times-and since the cloth and the wine are equal in value, both countries would come out ahead.
I say that the law is false in the modern world, however, and I say that Ricardo knew why [editor’s emphasis]. “Such an exchange,” he observed, “could not take place between individuals of the same country. The labor of 100 Englishmen cannot be given for that of 80 Englishmen, but the labor of 100 Englishmen may be given for the produce of the labor of 80 Portuguese, 60 Russians, or 120 East Indians. The difference, in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.”
Ricardo went on to declare that “feelings, which I should be sorry to see weakened, induce most men to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign countries.”
What Ricardo could not foresee, and what his modern followers have overlooked, is that the new multinational corporations fail to share the feelings of patriotism or indeed of prudence that he ascribed (somewhat naively even in the 19th century) to the capitalists of his time. Today capital flits freely from here to there, moving as indifferently from the United States to Singapore as it did in Ricardo’s day from London to Yorkshire.
The results of this movement are neocolonial exploitation in the Third World and spreading unemployment in the industrial West, leading in turn to Reaganomic doctrines of lower wages, less concern for worker safety, disregard for the environment, and abandonment of consumer protection. Teenage girls now making electric irons in Singapore, though exploited by our standards, may be better off for the moment than they were before GE hired them. But the mature American men and women who lost their jobs when GE abandoned its plant in California are irremediably worse off. Many-perhaps most-of them, having worked with reasonable faithfulness (at least matching that of GE toward them) for 15-20 years, may never find a comparable job as long as they live.
This sort of thing is happening every day in what Lester C. Thurow calls “sunset” industries, and if you believe in the Law of Comparative Advantage, you see nothing wrong with it. Singapore produced irons will be (possibly) less expensive than California-produced irons, and American capitalists and consumers may benefit even though American workers will certainly suffer. We now have a good many” sunset” industries: textiles, steel, shipbuilding, electronics, optics, and of course automobiles. We also have 10 million unemployed.
Professor Thurow fears that our whole economy, except for service industries and agriculture, will be shipped abroad. He proposes a massive national R&D effort to identify “sunrise” industries and to channel investment into them. It would, he says, be better to underwrite the development costs of such hopeful undertakings than to shore up doomed firms like Lockheed and Chrysler. The professor points, too, at the Japanese experience, claiming that Japanese prosperity results from just such cooperation among big government, big finance and big business (in Japan there is no such thing as big labor).
The Japanese model gives me pause. I wonder what is to prevent the Japanese from moving into our new “sunrise” industries. The challenge comes not just from the Japanese, I hasten to add: GE and dozens of other multinationals are as American as apple pie; yet the effect on American workers of their operations in Singapore and Taiwan and Mexico is in no way different from that of Toyota and Panasonic. It was not so many years ago that we had a “sunrise” industry making TV sets and today that sun is slipping into the western ocean. I can’t see why the yet-to-be-invented “sunrise” industries won’t suffer the same fate in due course. As Ecclesiastes had it: “The sun also goeth down.”
So what is to be done? Well, nothing, according to the Law of Comparative Advantage. Its adherents may drop a tear for GE’s former workers in California and sigh at the wasteful abandonment of the Ford plant in Mahwah. But they steadfastly accept these disappointments, secure in the stern faith that the long-run result will be lower prices and hence a higher standard of living for American consumers.
Three questions occur to me. First, how long will the run be? Second, how will unemployed American consumers get the money to pay the promised lower prices? Third, how do you explain the steadily increasing prices of electric irons and TV sets and cameras and automobiles, despite their being produced in the allegedly more efficient and assuredly lower-wage Orient? I leave the questions rhetorical.
Discard Ricardo’s law, as he surely would have done, and you may find it is precisely at this point that the Japanese have something to teach us. A much complained-of fact is that it is exceedingly tough for American firms to establish branches in Japan or even to obtain Japanese import licenses. This is partly bureaucratic bungling, partly preserving foreign exchange for essential imports, and partly requiring foreigners to produce goods in the Japanese way if they want to sell them in Japan.
These matters, it is important to notice, have little to do with tariffs in the usual sense. What is being protected is less Japanese fledgling industry than customs, and the Japanese don’t propose to allow them to be corrupted for any number of pieces of silver. As has long been noted, tariffs inefficiently shield new or weak industries. Import regulation, on the other hand, does help preserve a national way of life.
THIS IS a very sound approach, and one that we have taken as well, albeit not always for the right reasons. President Eisenhower, for example, restricted the importation of oil in the mistaken belief (yes, I credit him with having been merely naive) that he was protecting a war industry (our war-making ability would rather have been enhanced by keeping our oil in the ground and using foreign oil in peacetime). An accepted provision of Cordell Hull‘s Reciprocal Trade Agreements bans products that are “dumped” -that is, sold at a loss. And we quite reasonably refuse entry to automobiles that do not meet our safety standards, to drugs we judge to be harmful, to beef from cattle we believe to have been infected with hoof-and-mouth disease.
In short, we have long acted to protect Americans as consumers and Americans as entrepreneurs. If we protected Americans as workers in the same way, we’d have less trouble with “sunset” industries.
It is easy to foretell that multinational corporations will fiercely resist giving up the American market for products manufactured cheaply abroad. Moreover, they will succeed in mobilizing some consumer organizations and doctrinaire free-traders in their behalf.
There will also be those who worry, quite properly, about employment in the Third World. The reply here is that to break out of their underdevelopment, the nations of the Third World will have to encourage trade among themselves. If goods manufactured in the Third World had to be sold there, the multinationals would be constrained to produce what the Third World needs (maybe neither irons nor calculators) at prices it can afford. That way lies increasing prosperity, instead of neocolonialism and permanent poverty.
From our point of view (which is the only basis for our legislation), it is futile to try to prevent the flight of American capital abroad even if we wanted to. It would be easy to avoid the concomitant harm done to American workers, though, and to stop encouraging the flight of capital. Such protection would be no harder to handle than present regulations about drugs and diseases.
Unless we come to understand that the Law of Comparative Advantage no longer holds, and unless we therefore do something to protect American working men and women-in other words, us-we can expect industry after industry, no matter how thoroughly researched and comprehensively planned, to vanish with the setting sun. And as we continue to force additional millions of our fellow citizens onto the relief rolls, we can expect our standard of living to fall steadily lower among the industrial nations of the world.
The New Leader