Is it possible for a nation to become impoverished by trade by outsourcing everything? Some people seem to think so. For example, see this comment by a “William Ryan” on this Carpe Diem blog post:
Then we can just let China and Mexico make everything for us so the few at the top can hoard all profits and prosper from.
The problem with this sentiment is that it is mathematically impossible. If we stick with the standard theory of trade (and one which these folks appear to accept), then the actor that produces something at the lowest economic cost will specialize in that production. However, it is impossible to be the lowest-cost producer in everything. “Lowest economic cost” is a relative term. If one has a lower economic cost at one thing, s/he necessarily has a higher economic cost in another thing. The example we gave yesterday of Bananaland and Fisherland provide a mathematical example of this concept.
This insight was developed by David Ricardo 200 years ago. It is still relevant today.
A Force for Good 
Thanks for the link Jon. However, there are several problems with the Smith/Ricardo thesis that should be pointed out. Number 1 is that it completely ignores strategic considerations that argue against specialization. For example, Alexander Hamilton, the 1st Treasury Secretary, in 1791 was well aware of the free market theory of Adam Smith. The advice he was getting from the free marketeers of his day was that the newly formed United States ought to specialize at what it was best at, which at the time was agriculture: after all, there were huge wilderness areas that had never seen a plow once. But Hamilton recognized (rightly IMO) that the ability to manufacture the materiel needed for war was a strategic necessity. And so US manufacturing was shamelessly protected right up until about Reagan–a fact that is NEVER pointed out by free-market true believers.
2. The theory that there should be a division of labor among countries subtly contradicts the theory that there should be a division of labor within countries. In the Ricardo example, it assumes that expert wine producers can easily just switch over and become expert weavers–that is, people need to be generalists instead of specialists. E.g., in my little town there is still a glove factory that’s been a going concern since 1883. On Ricardo’s theory, that is an inefficient allocation of capital and labor (97% of all clothes are imported). But if that factory ever gets shuttered, the women who run those sewing machines aren’t about to pack up and move to Seattle to work on the Boeing assembly line. (This is also something Hamilton pointed out.)
3. Even if it is decided that national specialization is a good idea: (a) it’s not always clear what a country ought to specialize in, and (b) to get the national economy to move in the preferred direction requires command ‘n’ control interventions in the domestic market–socialism IOW. Take the US: What should we specialize in? Clearly apparel is not our bag, but if you look at a list of US exports, nothing in particular stands out. So what’s it going to be? Tool and die machinery? Aerospace? Oil and gas? Soybeans, corn and chicken? OK, so you think it should be aerospace. Fine. Now who’s going to tell that corn farmer in Iowa to sell his farm and invest in an airplane parts factory?
4. Ricardo’s theory only applies to small Bananaland republics. Even if the US produced every single airplane, spaceship, and satellite that is used on Planet Earth, that sector simply cannot generate the revenue needed to drive the entire US economy.
5. And even if aerospace was enough, what happens if people decide they don’t need to fly much because there’s hyperloops everywhere or Japan floods the market with cars that can fly or whatever? One lesson from paleontology is that specialist species go extinct. The ones that survive the mass extinction events are the generalist species that can make a living in a number of ways. A nation state is rather like a species: it persists and transcends individuals–and like species, it is risky to specialize because the future environment can change. Take Saudi Arabia: they are doing the right thing according to Ricardo, by specializing in oil and getting everything else from the ROW. But that situation isn’t going to last forever. Hence they are now scrambling to diversify their economy before the oil eventually runs out.
6. Ricardo’s theory made sense in 1817 because capital wasn’t nearly as mobile as it is nowadays. Now the advice would be to move all production to Portugal. Get rid of the vineyards and move the entire cloth factory to Portugal, and bring in cheap labor from Poland and Syria. Because of the cheaper cost of labor, everything can be produced more efficiently in Portugal. And how to pay for the wine and cloth? Easy: sell off little slices of the old vineyards and sell stock in the cloth company to Portuguese flush with foreign exchange. As for the displaced workers, the answer is socialism: unemployment insurance, food stamps, public housing, socialized medicine.
Bottom line: Be careful what you wish for.
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With respect, reading your objections I do not think you understand the Smithian/Ricardian thesis.
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Which part? The part about how the Ricardo theory neglects strategic considerations, or the part how the theory depends on the relative immobility of capital? Both problems BTW that were recognized by Ricardo himself, to his credit, if not his latter day disciples.
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All those parts, because none of them are true.
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There are many problems with what you wrote. The least of which has to do with nation states. Nation states do not trade or specialize. Individuals do.
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There is no evidence for your hypermonadic metaphysics. As much as you would like to abolish all borders and destroy the United States as an entity in favor of a global libertarian fantasyland, that ain’t gonna happen. You are, however, free to leave any time you want!
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Actually, there is. In the definitions of “balance of trade.” All Imports and Exports are are the summation of the activities of individuals.
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“As much as you would like to abolish all borders and destroy the United States as an entity in favor of a global libertarian fantasyland . . .”
Ah, the straw man logical fallacy “tell” of cognitive dissonance. Please do not make stuff up. I never said that I want to abolish all borders, destroy the United States, and support any type of global fantasyland. In fact, it is just the opposite. I do not want US consumers damaged by tariffs and protectionist legislation.
“You are, however, free to leave any time you want!”
Since the US was founded on the concept of freedom and you are trying to take that away with tariffs and protectionist legislation, I suggest you move post haste to Germany, which you like to rave about.
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Let’s go point by point through your criticism and I’ll explain why it’s either 1) absurd, 2) an incorrect criticism, 3) a misunderstanding of the theory, or 4) irrelevant.
1) “But Hamilton recognized (rightly IMO) that the ability to manufacture the materiel needed for war was a strategic necessity…”
True, but has nothing to do with trade. Who buys war material? The government. The government can direct its purchasing power. If the government wants to buy only US made war materials, it can do that. No tariffs needed. This is perfectly consistent with the free-market view.
2) “The theory that there should be a division of labor among countries subtly contradicts the theory that there should be a division of labor within countries.”
No. The logic is exactly the same. No contradiction whatsoever. Your example does not work; you make the mistake (and one which is repeated throughout your comments) of confusing the individuals with the government/country. This one firm may be operating on the same level of (or better) efficiency as the importers; thus is makes no sense for them to shut down. They are competitive.
3) “Even if it is decided that national specialization is a good idea…”
This is where you really miss the Ricardian/Smithian insights. They show exactly the opposite, that you don’t need central planners (in fact, that’s exactly what they were writing against). Individuals, by virtue of their exchange, make these determinations. It is just crudely summed up to be called “national.”
4) “Ricardo’s theory only applies to small Bananaland republics…”
No. He was writing at the time about a massive monarch economy that expanded the globe: England. Nothing, but nothing, in Ricardian insights demand a small republic.
5a) “And even if aerospace was enough…”
This is something of a strawman. Ricardian specialization doesn’t demand only a single industry. The argument is specialization in industries where one has a comparative advantage. In the world right now, for the US, that is in high-tech manufacturing, R&D, pharma, financial services, education, etc.
5b) “One lesson from paleontology is that specialist species go extinct…”
True, but irrelevant. We’re talking economic systems, not paleontology. Perhaps a better comparison would be the parts of a body that allow it to operate: the eyes focus on seeing, not hearing. The ears are for hearing and not seeing. The calf muscle just focuses on moving the calf, not the arm. Etc.
6a) ” Ricardo’s theory made sense in 1817 because capital wasn’t nearly as mobile as it is nowadays…”
True. And Ricardo laments the idea that capital isn’t more mobile (he talks about how it forces capitalists and consumers to accept lower returns for their goods). But this isn’t a knock on the insight.
6b) “Because of the cheaper cost of labor…”
No. This is absurd, as we addressed in this very blog post.
6c) “Easy…”
No. This is absurd; it rests on the “fixed pie fallacy.”
6d) “As for the displaced workers…”
No. This is absurd because of the Ricardian insight (also, socialism existed centuries before free trade became a thing. If we accept your “Reagan” timeline, socialism predated that by approximately 2,000 years. In its modern form, by 100. And, interestingly, socialism has been shrinking worldwide since general trade liberalization, at least in poorer countries as they become wealthier).
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Thanks for the comments Jon. Taking a couple of the points: (1a) governments using their purchasing power still a form of protection. And the consumers of government services (the tax paying citizens) pay a higher price than they would otherwise, rightly IMO. However, the larger general point is that trade results in brittle supply chains, and is a point of leverage that is used by nation-states against each other. E.g., Arab nations embargoed oil in 1973 because of US support for Israel. Lately, the US has been applying economic sanctions to Iran by refusing to buy their oil. Such examples can be multiplied. This is not to say that all trade is bad, but it is to say that 100% free trade must be tempered by strategic considerations.
(3-5) Specialization at nation-state level: when none of the top 20 US exports very greatly exceeds all the rest, to say the US is a specialized economy doesn’t even make sense. In contrast to Saudi Arabia, which is obviously specialized in oil, the US economy is highly diverse. It’s a real stretch of the English language to say it’s specialized–a mere terminological quibble, I’ll grant you. Economic diversity, however, is a good thing in itself: it makes more efficient use of diverse talents within the society, is more resilient to economic and strategic shocks, and a diverse economy will grow faster in the long run, not least because of the technological spillover effect.
(2, 6) The very idea: Ricardo’s theory depends on capital staying put–this doesn’t happen in the real world, at least not anymore. In Ricardo’s own example, both cloth and wine are produced cheaper in Portugal than England: Portugal has an overall absolute advantage, but England has a comparative advantage in cloth. Thus, the idea situation, according to Ricardo himself, would be to outsource English cloth, and get both cloth and wine from Portugal. I quote:
“It would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose.”
Good for capitalists and consumers qua consumers, but consumers qua workers, not so much–as Ricardo rightly points out. And so what exactly prevents English capitalists from outsourcing everything? Ricardo has the answer:
“Experience, however, shews, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and intrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property 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 nations.”
There it is. Comparative advantage depends on the willingness of capitalists to take less profits! And in this modern era where the slogan “Greed is Good” is taken as a commonplace truism, those feelings of capitalistic benevolence have been regrettably weakened–to say the least. Thus, Ricardo himself demolished his own theory as any sort practical prescription in a real world economy.
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1) your first comment is wrong. Trade stregthens supply chains, not weakens them.
2) “Specialization at nation-state level: when none of the top 20 US exports very greatly exceeds all the rest, to say the US is a specialized economy doesn’t even make sense…”
Only if you keep with the strawman you present, which is incorrect.
3) “The very idea: Ricardo’s theory depends on capital staying put…”
No, it doesn’t. We already addressed this nonsense. Ricardo doesn’t even believe that.
4) “Portugal has an overall absolute advantage, but England has a comparative advantage in cloth. Thus, the idea situation, according to Ricardo himself, would be to outsource English cloth, and get both cloth and wine from Portugal…”
No, that is incorrect, as we have already shown.
5) ” Comparative advantage depends on the willingness of capitalists to take less profits! ”
No, that is incorrect, as we have already shown.
You’re dependent on a bad interpretation of Ricardo.
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Warren
“(3-5) Specialization at nation-state level: when none of the top 20 US exports very greatly exceeds all the rest, to say the US is a specialized economy doesn’t even make sense.”
No one, especially not Ricardo, suggested or even imagined specialization at the nation-state level. that would be absurd. Perhaps you’re confused by the fact that Ricardo often used very simple examples of two countries each producing the same two products to illustrate the principle of comparative advantage.
Surely you understand that his examples shouldn’t be taken literally as recommendations that countries should specialize at that extreme level. In fact there must be at least two producers of different goods within a country for comparative advantage in foreign trade to even operate.
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(1-5) All mere assertions. Not arguments. Meanwhile, I at least provide some historical evidence and Ricardo’s own words to back up my arguments.
Just a couple of points:
“Trade strengthens supply chains”
I’m trying to imagine what the heck you are talking about. The context is war and economic sanctions. Give me one example where trade made a supply chain stronger during an international crisis.
The only other substantive comment is a referal to a previous comment:
“True. And Ricardo laments the idea that capital isn’t more mobile (he talks about how it forces capitalists and consumers to accept lower returns for their goods). But this isn’t a knock on the insight.”
And this is blatantly false: in the exact quote I posted above, Ricardo says he would be sorry to see weakened the willingness of “men of property” to accept lower profits for the sake of the national greater good. Ricardo does not “lament” the immobility of capital–he says immobility of capital is a direct result of patriotic feelings!
I get Ricardo’s “insight”. The comparative advantage theory is beautiful and clever. It is elegant. Even when one country has absolute advantage, trade based on comparative advantage could result in a win-win situation. And I get how trade with low wage countries could help high wage countries. Ricardo should get the Nobel Prize.
But “could” is operative word. Win-win situations are not entailed by free traders seeking the highest rents. Ricardo himself discusses the several qualifications that need to be taken into account for comparative advantage that you, Jon, blatantly ignore.
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Warren, you continue making the same mistakes. Countries do not trade. Individuals do. Countries are not high wage or low wage. Individuals earn high wages for having skills that other individuals value more than the money they have to give up to get the.
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BTW, you missed the valid points that Jon made. Perhaps you ought to read them again, but this time drop desire to “win” an argument. Look at it from the viewpoint of trying to learn economics.
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“Look at it from the viewpoint of trying to learn economics.”
FYI, I studied econ at University of Chicago. No, I was not an econ major (I got my degree in the Geophysical Sciences department), but it was still a requirement to take econ. I ate it up. I was “Chicago School” all the way. Friedman was my hero. I remember the professor saying that if a foreign country subsidized steel, and then dumped it below cost onto the US economy, we should be happy for the “gift”, even if it resulted in the destruction of US Steel Inc.: the destruction is “creative”; the capital and labor are freed up to move to those industries where the US retains a comparative advantage.
During the NAFTA debates, I thought Ross Perot was crazy and wondered how he became a billionaire, because he “didn’t understand economics”. I bought into it, hook, line, and sinker. It was going to be great: 3rd world workers would be lifted out of abject poverty, and US workers would benefit too! A rising tide lifts all boats! That’s what they told us.
Since then I accumulated other graduate degrees in science and philosophy of science. So it’s been thoroughly drilled into my head that scientific theories must be tested against empirical experience in order to count as valid and true. So here is the logic:
Ricardo’s comparative advantage model —>
All free trade is good —>
Prediction: Rising tide lifts all boats
————————————–
Observation: Rust Belt
The prediction was not observed, therefore, the theory–all free trade is good–is false. It is easy to see where things went wrong: it’s not in Ricardo’s neat little model involving wine and cloth and pro-football players with better things to do than mow lawns. That is fine as far as it goes. It’s in the unwarranted logical leap to the conclusion that all free trade is always good. Ricardo himself NEVER EVER said that–but if all you read are blog posts that cite other blog posts, you will never know that.
The idea that technical models will solve all our problems is called the “Illusion of Technique”. It doesn’t happen. To see free-trade true believers insist that free trade is always good despite all empirical evidence to the contrary, one realizes that “economics”, in America at least, is about as scientific as “Creation Science”. Convincing you guys that you are wrong by pointing out empirical evidence and the flaws in your logic is just as impossible as convincing a creationist that the world is older than 6,000 years old.
The working class of this nation knows better. They see the results of your free trade theories in their paltry bank accounts, the physical devastation of their neighborhoods, and rising death rates of their family members. Thank God we live in a democracy: us consumers still get to vote. Thus, while you will never be convinced, you can at least be defeated.
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“I was not an econ major (I got my degree in the Geophysical Sciences department)”
I can tell. I took a course in geology. It was required and I loved it. But, I am wise enough not to contradict people much more well versed in geology than I am. If I disagreed with someone who was much more well versed in geology than I, I would try to learn from them instead of merely contradicting them. Perhaps you ought to do the same since you are not nearly as well versed in economics as Professors Perry ad Boudreaux or Jon Murphy.
“Friedman was my hero. ”
Friedman was an advocate of free trade. Perhaps, you did not learn that much.
“I thought Ross Perot was crazy and wondered how he became a billionaire”
Ross Perot was not crazy. He made his money selling computer systems to the federal and state governments. Economics was not his strong suit. But, he was very good a partisan politics.
“Since then I accumulated other graduate degrees in science and philosophy of science.”
And, none of those are economics.
“So it’s been thoroughly drilled into my head that scientific theories must be tested against empirical experience in order to count as valid and true.”
Ah, then you must have taken at least one course on statistics. And, you should have read about at least one bogus study where the “scientists” manipulated the data to get the results that they wanted. My professors always said, if your results don’t agree with logic and long held theories, check your data and find your error. Their counsel was the same very, very rarely does scientific research prove some earth shattering discovery that changes the world. Much, much more often your scientific study contains an error in your data, data collection, sampling techniques, etc.
“Ricardo’s comparative advantage model —>
All free trade is good —>
Prediction: Rising tide lifts all boats”
There are your first two errors. All free trade is not good. It will hurt some employers and workers who are not competitive enough to survive a truly competitive market. Your prediction is also false. A good economy does not mean that everyone will benefit. You could be a kid looking to make some money this summer, but the higher minimum wage eliminated a lot of previous means of employment for teenagers.
“Observation: Rust Belt”
Another error: Technological obsolescence, high corporate taxes, and restrictive regulations hurt many industries in the Rust Belt.
The rest of your rant was simply straw man logical fallacies and thinly veiled disparaging comments. But, I could not resist addressing these two:
“us consumers still get to vote.”
Not “consumers.” Political cronies who want to use the power of government to steal from American consumers to reward political cronies.
“you can at least be defeated”
When government is involved, those who get concentrated (and undeserved) benefits normally win over those where the costs will be dispersed over the many American consumers and taxpayers who have to pay for them.
Perhaps we can raise tariffs to bring back textile and clothing manufacturing! I am sure that you will enjoy paying $200 for a pair of Levis.
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Greg, thank you for the thoughtful post. You are right to be cautious about distrusting academic experts, but consider geology: it was dogma for over a century that one could not extract economical amounts of hydrocarbons out of shale formations. But a couple of guys in Wyoming and Texas disbelieved all the expert geologists in academia and USGS and the Majors. But those guys kept trying with just a few million $$ until they figured out. As a result the US is now basically an autarchy WRT to hydrocarbons.
Before that, in the 1930s, Alfred Wegener was ridiculed and called crazy for his theory of “continental drift”. Never mind the empirical evidence was already there in form of continental morphology, common rock types, and especially common fossils. But it wasn’t until the 1960s with the advent of the sea-floor spreading data that plate tectonics became the mainstream theory.
So it’s quite possible for an entire profession to be lost in the weeds over important, basic issues. IMHO, American economics is in a similar position as 1950s geology: the evidence is out there for anybody who’s not married to antiquated theory. Unfortunately, as someone said, science tends to progress one funeral at a time, so a lot of old dudes have got to die off before there’s a sea change.
You see, statistics is great for teasing out patterns that aren’t obvious. But the best scientific patterns don’t require statistics: all you have to do is look. That’s where we’re at now. Just drive around Youngstown Ohio and look, and you can see the failure of US economic policy. And that policy is informed by experts, and it’s all based around free trade.
I agree with you that the corporate tax structure is completely FUBAR: it’s like a reverse tariff. If a US company exports something, it gets taxed on the profit, so the price has to be raised even before you get to the foreign tariffs that are universally erected against American products. Meanwhile, a foreign company doesn’t pay US corporate taxes, and they get import their stuff for an average tariff of only 3%.
The proposed new border tax only gets it half right: it slaps a 20% tax on imports, while exports get to go tax free, and US-to-US transactions also get taxed at 20%. Meanwhile, the corporate tax is vastly reduced. But why are we taxing American consumers while in effect subsidizing foreign consumers? There should be a 40% tariff on imports, while profits made from US manufactured goods to US consumers should be tax free: Sure imports go up by 40%, but domestic purchases go down by 35%–not a bad deal considering the jobs saved. If that doesn’t raise enough cash for the tax to be revenue neutral, then exports should be taxed as well IMO. Again, why should US consumers subsidize foreign consumers?
As for jeans costing $200, gimme a break. Imported clothes are only about 20% cheaper than US produced clothes, but that’s apparently enough to capture 97% of the US market.
Which brings up another thing: you guys never fail to point out the immoral suffering consumers will be forced to go through if the price of imports is increased. What you all always FAIL to point out is the opposite effect that Ricardo himself pointed out: that if the cost of living for workers goes down due to cheaper imports, the capitalist can pay less wages and make more profits. In practice, due to inflation, this means nominal wages stay flat while real wages go down.
So US workers have been subject to a quadruple-whammy since the adoption of free trade as the national economic policy: (1) mass immigration floods the supply of labor; (2) outsourcing reduces the demand for labor; while (3) cheap imports put downward pressure on wages; while (4) non-imported expenses like housing, education, and medical care are going through the roof!
As for the minimum wage, I agree it is a form of price fixing. But more than that, the MW is like trying to stop a bleeding artery. It’s mere window dressing. In booming economies, you don’t need a minimum wage because the natural rate of wages is high. We don’t need higher MWs or more food stamps–we need to manage for tight labor markets by taxing imported consumption while not taxing domestic consumption.
Bottom line: a tight labor market is a happy labor market, and since workers are consumers, if workers are happy, then consumers are happy.
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Warren said, “You are right to be cautious about distrusting academic experts”
One should always be distrustful when another says that he has the answer and it involved the use of government power.
” . . . it was dogma for over a century that one could not extract economical amounts of hydrocarbons out of shale formations.”
No. It was dogma for those who wanted to use government power to force people to conserve energy and subsidize ineffective and inefficient sources of energy. But, as economists predicted, individuals would find a way to innovate and make oil and gas plentiful despite dire “political” speak of “peak oil.”
” . . . plate tectonics became the mainstream theory.”
And, if someone can up with a study proving plate tectonics to be wrong . . . we would tell him to go back and find the error in his data.
“So it’s quite possible for an entire profession to be lost in the weeds over important, basic issues.”
Neither energy nor geology were lost in the weeds. Those advocating for political solutions are the ones who are always lost in the weeds.
“IMHO, American economics is in a similar position as 1950s geology”
Neither geology nor economics are lost in the weeds. Those who advocated for political solutions, of course, were wrong.
“Just drive around Youngstown Ohio and look”
I’ve been to Youngstown. It is a wonderful example of misguided, though well intentioned, politicians and advocates of political solutions to social and economic problems.
” . . . you guys never fail to point out the immoral suffering consumers will be forced to go through if the price of imports is increased.”
Because it is a very important point. Why should someone have to subsidize American companies that are not providing better quality goods at lower prices?
” . . . if the cost of living for workers goes down due to cheaper imports, the capitalist can pay less wages and make more profits.”
No, he can’t. The price of labor is determined by the supply and demand for that type of labor.
“(1) mass immigration floods the supply of labor;”
So you oppose people moving to the US to improve their standard of living?
“(2) outsourcing reduces the demand for labor;”
No. Outsourcing means someone outside an existing firm is getting hired. It happens all the time. My companies hires computer experts to upgrade our systems every couple of years.
“(3) cheap imports put downward pressure on wages;”
No, it does not as previously explained.
“(4) non-imported expenses like housing, education, and medical care are going through the roof!”
Yep. All due to government meddling.
” . . . we need to manage for tight labor markets by taxing imported consumption while not taxing domestic consumption.”
No. That would not create tight labor markets. All that does it take from American consumers to reward less efficient and less effective American capitalists. We all that crony capitalism. And, that is a bad thing.
“Bottom line: a tight labor market is a happy labor market’
No. Labor prices are based on the supply and demand for such labor.
” . . . and since workers are consumers, if workers are happy, then consumers are happy.”
No. Workers choosing to work for uncompetitive employers will be “happy” as long as they choose to work for such employer. Consumers denied choice and force to pay higher prices for lesser quality goods will be unhappy. Oh, and politicians and political cronies will be very happy. And, we never want those two groups to be “happy” because that means they are stealing from American taxpayers and consumers.
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Greg, that last post doesn’t even pass the Turing test…
FYI here is what Ricardo had to say about the effect of cheap imports on the price of labor.
It has been my endeavour to shew throughout this work, that the rate of profits can never be increased but by a fall in wages, and that there can be no permanent fall of wages but in consequence of a fall of the necessaries on which wages are expended. If, therefore, by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise. If, instead of growing our own corn, or manufacturing the clothing and other necessaries of the labourer, we discover a new market from which we can supply ourselves with these commodities at a cheaper price, wages will fall and profits rise…
Now, you may be right that the great Ricardo is deeply mistaken here, but your glib assertion about wages being determined by supply and demand does not address Ricardo’s point.
As for immigration policy, you are wrong: foreigners do not have a God-given right to move to the United States.
And regarding your concern that tariffs on imports are an immoral tax on consumers, a border tax on imports is neither more nor less immoral than any other consumption tax. If the tariff can be made revenue neutral, your objection is rendered moot.
For example, the corporate income tax is basically a stealth, federal sales tax, since the cost of the tax must be passed on to consumers. Projected corporate tax revenue for 2017 is about $320B. Meanwhile, the US imports $2.3T worth of goods. Thus, increasing the average tariff by 14% would be enough to recoup the lost corporate tax revenue.
In this scenario, the hit to US consumers is exactly zero. Similarly, government revenue is unaffected. Meanwhile, US producers get a big boost as consumers switch from expensive imports to newly cheaper US manufactures (because US manufacturers no longer have to pay corporate taxes). In addition, there is a bonus in our terms of trade: because the US economy is relatively large, the tariff would have the effect of lowering ROW prices, reducing the price of imports, and thus offsetting the cost of the tariff somewhat.
And because the corporate tax would be zero, there is no more incentive for US corporations to hoard offshore profits. These could freely move to the US to offset reduced foreign capital inflows as the trade deficit narrows. More jobs would be created; the GDP growth rate would increase.
Why aren’t we doing this? A: The irrational, suicidal, quasi-religious faith in “free trade”….
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Warren said, “that last post doesn’t even pass the Turing test…”
Your comments do not pass the intelligence test. See how easy it is to be insulting.
“FYI here is what Ricardo had to say about the effect of cheap imports on the price of labor.”
You misunderstand Ricardo. The supply and demand of labor is what determines the price of labor.
“As for immigration policy, you are wrong: foreigners do not have a God-given right to move to the United States.”
We all have a natural right to improve our economic circumstances.
“And regarding your concern that tariffs on imports are an immoral tax on consumers”
Tariffs are immoral, unethical, and a drag on the economy. They benefit political cronies at the expense of American consumers.
For example, the corporate income tax . . .”
. . . is another bad idea that punishes American consumers.
“Why aren’t we doing this? A: The irrational, suicidal, quasi-religious faith in “free trade”….”
No. Government is the problem. And, you are zealously advocating for “big guv” to save us once again. It won’t. I will leave you with a quote of another great economist:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
Friedrich August von Hayek
You cannot design a “system” whereby failing employers can effectively compete against others without hurting consumers to favor political cronies. That is why your idea is bad. Leave government out of trade and let each individual decide what is best for him or her.
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If believe that Don Boudreaux said it best (He is talking about steel producers, but the same arguments apply to all American producers demanding government protection through tariffs):
“Knowledgeable people are aware of the parade of excuses that you and other trade-restrictionists offer for why American consumers should allow Uncle Sam to force them to pay higher prices so that steel-industry operatives reap more revenues. None stand up to economic or ethical scrutiny.
You say that foreign steel producers are subsidized. So what? If true, this fact means only that Americans get better deals on steel. If foreigners wish to give to Americans the gift of lower-priced steel, who are you – and who is the U.S. government – to prevent American consumers from accepting this gift? Your success in preventing us from accepting such a gift makes us Americans as a whole poorer than we would otherwise be, despite the fact that such “success” conveniently results in higher revenues for domestic steel producers.
You will, in response to this argument, ominously warn that if Uncle Sam doesn’t “retaliate” against artificially low-priced imported steel from China, then Chinese producers will eventually bankrupt all American steel producers and, thus, one day hold monopoly power in the American market. Sounds scary – but it’s a fanciful tale. Today, steel is produced in at least 37 countries (and by many more times that number of individual firms). Even if all U.S. steel producers do go bankrupt – and even if no new steel producers will be able to be launched in the U.S. in the future – and even if we ignore the many substitutes for steel such as aluminum and carbon fiber – with so many suppliers of steel in the world it’s incredible to suppose that Chinese steel producers will ever have monopoly power in the American market. (Protectionists such as yourself have a lot of cheek: among your familiar tactics for securing monopoly power for yourselves is to instill in people an implausible fear of monopoly power from abroad.)
The bottom line, sir, is that producers’ existence and operation are justified only if and insofar as they serve consumers. You, however, operate under the false and self-indulgent assumption that consumers exist to serve producers. If consumers aren’t spending their money in ways that promote the interests of U.S. steel producers, you run to the government and demand that it force consumers to change their spending patterns. Of course, you dress up your resort to coercion against consumers with all sorts of fine talk about “fairness,” and “level playing fields,” and “playing by the rules.” But this talk is disingenuous (although you might now be so unreflective that you’ve come to believe it). The trade “rules” that you and other protectionists are so fond of saluting are nothing more than arbitrary restrictions written by government officials to appease special interest groups (such as steel producers). These “rules” violate a more sacred rule – a more sacred right – the right of people to spend their money in whatever peaceful ways they choose.
Protectionism is simply an elaborate and devious means used by some – in this case, U.S. steel producers – to rob the American public.”
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American workers who care nothing for the plight of consumers will drop out of the work force before they accept a wage that can’t at least provide for such necessities, and thus inefficiently drive up the cost of goods and services for the ever-virtuous American consumer.
Now, the arrival of cheap imports of TVs, clothes, toys, cell phones, air conditioners, autos, energy, etc. entails that a lower wage can now provide for these basic necessities of American life. And in a free market where workers compete for jobs, low skilled workers will bid down wages until they match the new natural minimum wage–they don’t have a choice if they want to work; they can’t take higher paid skilled jobs; meanwhile, unemployed skilled workers now find the old minimum wage acceptible because it provides all the necessities, plus the surplus they were used to before.
Walmart employs the same strategy when they hold training classes for their workers that teach them how to apply for food stamps and other government assistence. Food stamps lower the cost of living for low-wage workers, allowing them to bid down the price of their own wages, and so Walmart gets to pay lower wages. And since Rent = Production – Wages, profits go up. Just like Ricardo said 200 years ago. And thus the income inequality gap increases.
If you want to quibble and say profits won’t go up because competition will force producers to lower prices because of the lower wages, OK fine. But that still doesn’t change the fact that wages are lowered because of cheap imports purchased by low wage workers.
Now, you may choose to disagree with the above analysis for some reason I can’t think of, but (a) that IS Ricardo’s; and (b) if you say otherwise, you are the one who “just doesn’t understand” Ricardo’s economic theory.
Thus, another nasty little secret of the free trade theory is exposed. All you free traders ALWAYS talk about how wonderful it is for consumers to enjoy cheaper products. But you all NEVER mention the fact that your own theory proves that it’s a wash for wage earners–there is no consumer surplus because the cheaper goods merely result in lower wages! :rolleyes!:
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Oops, this part got cut off from the front:
Part I: “You misunderstand Ricardo. The supply and demand of labor is what determines the price of labor.”
This is why I sometimes wonder if you are a bot. It’s like there’s a subroutine that regurgitates the same answer that gets triggered by certain key words without any real understanding of the content of those words. I put out that Ricardo quote without comment, to let Ricardo speak for himself, and yet you say I misunderstand Ricardo. Basically you’re saying Ricardo misunderstands Ricardo, and that entails you misunderstand Ricardo.
Again, this is what Ricardo said: if the cost of living of low-wage workers declines due to cheap imports that low-wage workers tend to consume, then even if the number of workers and available jobs stays the same, the price of wages will decline, allowing the capitalist to capture higher rents. That is what Ricardo said. I know 19th century English prose can be difficult to comprehend, but that’s simply what he said: wages go down, even though supply and demand stay the same. Sorry, but that’s what he said.
The challenge for you is to understand why the great Ricardo would ever speak such apparent blasphemy. Allow me to explain: according to Ricardo, in the absense of an evil government mandated official minimum wage, there is still a “natural” minimum wage below which all workers will refuse to accept. You libertarians think that the natural minimum wage in the United States ought to be whatever, the lowest wage on the planet is–i.e., barely enough to buy potatoes and a mud hut.
But as Ricardo himself said, the natural wage depends to a large extent on the habits and customs of a nation. These days, normal Americans demand more: they want housing with a real floor, a roof that doesn’t leak, electricity, indoor plumbing, central heating and enough cash to pay the heating bill, air conditioning if gets superhot, clothes that don’t have holes in them, a mobile phone, a flat screen TV, and a street legal car, a few toys for the kids. Healthcare is optional.
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Warren said, “This is why I sometimes wonder if you are a bot.”
Ah, the name calling “tell” of cognitive dissonance rears its ugly head again. Sad.
“. . . you misunderstand Ricardo.”
No. You misunderstand Ricardo.
” the lowest wage on the planet is–i.e., barely enough to buy potatoes and a mud hut.”
I love hyperbole. It tends to destroy the argument of the one who uses it.
” . . . normal Americans demand more . . .”
And, if they can afford it, they can have more. That is why it is important to keep those who imagine they can design an economy from getting any government power. For, as history has taught us, they simply use it to steal from American consumers to reward political cronies.
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Warren said, “the ever-virtuous American consumer.”
Ah, now you are making disparaging statements about people who simply want better quality goods at lower prices and are unwilling to give the inefficient and ineffective producers their hard-earned money. Sad. Pathetic really.
” . . . they don’t have a choice if they want to work . . .”
More hyperbole. Sure they do.
” . . . they can’t take higher paid skilled jobs . . . ”
Sure they can. Learn skills other people value.
“Walmart employs the same strategy when they hold training classes for their workers that teach them how to apply for food stamps and other government assistance.”
Ah, I see that you are resorting to making stuff up. Sad.
“But that still doesn’t change the fact that wages are lowered because of cheap imports purchased by low wage workers.”
Wages are not lowered. Companies figure out how to make better quality products for less prices than their competitors or they go out of business.
” . . . Ricardo’s economic theory.”
You don’t understand Ricardo. I know that you think you do, but you don’t. Jon Murphy has pointed this out several times, and it is readily apparent to me as well.
” . . . your own theory proves that it’s a wash for wage earners–there is no consumer surplus because the cheaper goods merely result in lower wages!”
False.
“roll eyes!”
Ah, the pretend eye rolling “tell” of cognitive dissonance.
I cannot remember what you do or did for a living. But, I am certain of one thing: Your success did not depend on your understanding economics. You don’t.
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” the lowest wage on the planet is–i.e., barely enough to buy potatoes and a mud hut.”
I love hyperbole.
“wages are lowered because of cheap imports purchased by low wage workers.”
Wages are not lowered.
You fell into my trap. You just proved you are a fake. The “potatoes and mud hut” come from Ricardo himself. It is now plain you have never read Ricardo himself. That much is obvious. I know it is useless to try to educate you, but for the sake of any fence-sitting lurkers with a genuine urge to learn something, this is from Chapter 5 of On the Principles of Political Economy and Taxation:
With a rise in the price of food and necessaries, the natural price of labour will rise; with the fall in their price, the natural price of labour will fall.
See that last part? “the natural price of labour will fall.” In case you don’t know: “price of labour” means the same as “wages”. So wages of workers ARE lowered when the cost of living is lowered. That is not my theory, it is Ricardo’s. If you have never seen it before, that unsurprising, but not my problem.
An obvious implication of Ricardo’s theory of wages is that if cheap imports lower the cost of living, then wages will be lowered as a result. Since he’s a smart guy, Ricardo duly notes this fact in Chapter 7 “On Foreign Trade”. (I already quoted this part, but here it is again):
If, instead of growing our own corn, or manufacturing the clothing and other necessaries of the labourer, we discover a new market from which we can supply ourselves with these commodities at a cheaper price, wages will fall and profits rise
Granted, this is that 19th century prose that can appear dense, so allow me to break it down for you: logically, it’s an “if-then” statement. However, the “if” part itself consists of two subparts. He is discussing the necessities of life for a worker: first he discusses the original state of autarky, where grain and clothes are produced domestically. Next, “a new market” is discovered from which grain and clothes can be purchased “at a cheaper price”. By “new market” Ricardo means a foreign country–which is abundantly clear from the context of the chapter. Basically, Ricardo is trying to predict what will happen to wages if the grain and clothes necessary for workers is replaced by cheap foreign substitutes. That’s the “if” part. Now we get to the “then” part: IF the price of grain and clothes are lowered due to cheap imports, THEN “wages will fall and profits rise.”
I hope that helps. Now you know the real reason the Corn Laws were repealed.
As for your appeal to the authority of Jon, he has yet to make a single comment on Ricardo’s Iron Law of Wages. This is typical for free trade boosters: they cherry-pick and loudly proclaim the parts within Ricardo’s writings that seem to support the free trade theory that all trade is always good, but those parts in Ricardo that argue the opposite are “pay no attention to the man behind the screen” stuff.
Ricardo’s ideas are not difficult, but they are dangerous: thus, his theory that cheap imports do not in fact improve the standard of living of low-wage workers must not be allowed to see the light of day.
Here is an interesting link. It is not a blog, but it is informative nonetheless:
http://www.econlib.org/library/Ricardo/ricPCover.html
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“You fell into my trap. You just proved you are a fake.”
No. You are an idiot. You do not understand Ricardo. You take quotes out of context to try to prove he was wrong about comparative advantage.
“The “potatoes and mud hut” come from Ricardo himself.”
Here is your quote: “You libertarians think that the natural minimum wage in the United States ought to be whatever, the lowest wage on the planet is–i.e., barely enough to buy potatoes and a mud hut.” And, my response was “I love hyperbole. It tends to destroy the argument of the one who uses it.” I call that taking a quote out of context. I also call that a straw man logical fallacy that misrepresents who libertarians believe. If you really intended to set a “trap”, then all you did was catch yourself in your own web of logical fallacies and misunderstand of Ricardo.
“He used that reference, but It is now plain you have never read Ricardo himself.”
Ricardo never said anything about “libertarians.” Duh. Have you read anything more than leftist politically partisan blogs?
“this is from Chapter 5 of On the Principles of Political Economy and Taxation: ‘With a rise in the price of food and necessaries, the natural price of labour will rise; with the fall in their price, the natural price of labour will fall.'”
See that word “natural”? What is the difference between “natural price” and “market price”? If you do not understand the difference, then that is not surprising and not my problem.
“An obvious implication of Ricardo’s theory of wages . . . ”
No. You misunderstand Ricardo as I have said many times before.
“Now you know the real reason the Corn Laws were repealed.”
No. You misunderstand British history as well.
“. . . those parts in Ricardo that argue the opposite are “pay no attention to the man behind the screen” stuff.”
That is because you read Ricardo out of context and with a complete misunderstanding of his work.
“Ricardo’s ideas are not difficult, but they are dangerous”
They are dangerous to political cronies who would steal from American consumers.
“http://www.econlib.org/library/Ricardo/ricPCover.html”
The Library of Economics and Liberty is a great blog! But, I see you did not understand those economists either. I also guarantee you that none of those economists would agree with you silly misrepresentations of Ricardo and comparative advantage.
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silly misrepresentations of Ricardo and comparative advantage.
Dude, for the last several posts I haven’t talked about comparative advantage at all: I’ve been trying to discuss Ricardo’s theory of wages. There is no way after my last post that you cannot understand Ricardo’s theoretical claim that cheap imports lower wages for the working class.
But you ignore that part completely because Ricardo’s theory of wages totally explodes the fundamental pillar of the free trade religion: that any sort of protection is an immoral reduction in the standards of living for all those poor Walmart shoppers! What a disingenuous joke!
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Old boy, for the last many comments that you have made, you have been wrong about all things Ricardo. You failed completely to understand the difference between natural wages and market wages.
You take a lot of quotes out of context and make a lot of logical fallacies in a feeble attempt to promote political corruption and cronyism in order to steal from American consumers. You have, however, made an excellent case for your being both unknowledgeable and disingenuous. Sad.
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Oh brother. Let me help you: there is a natural minimum wage below which the least skilled members of the work force simply won’t accept; this may or may not be the market rate for wages. One reason the $7.25 minimum wage is a joke is because in a lot of places the natural minimum wage is above this level. But even where I live in one of those west Pennsylvania Rust Belt towns that went 80% for Trump, I suspect if the official minimum wage was abolished, the cheapest wages wouldn’t drop much, if at all.
As Ricardo points out, the natural minimum wage is a function of the nation: he said that that Englishmen would rather starve than subsist on oats like the Scots, or god forbid potatoes like the Irish. English workers want their wheat bread and will insist on it. And as Alexander Hamilton pointed out, even unskilled American workers expect “a degree of opulence” that is considerably higher than the Chinaman or East Indian or a Mexican peasant. You probably consider this fact to be immoral somehow, but it is a fact nonetheless.
Then there is the free market wage: this wage can be above, at, or below the natural minimum wage. Ricardo’s Iron Law of Wages is that in mature economies, the market hourly rate for the least skilled workers will trend inexorably toward the natural minimum wage. AND this will have an effect on all wages. You know how it is: when the McDonald’s burger flipper is suddenly making as much as the shift manager due to a jack in the official minimum wage, the manager is going to demand a raise as well. And so on.
Ricardo also pointed out that there are times when the increase in capital investment vastly outstrips the supply of labor: then the market rate for wages can be higher than the natural minimum wage. Think Minot, North Dakota, during the shale-oil boom when even convenience store clerks were buying new pickup trucks.
And Ricardo also said that there are also times when the market rate for wages can be below the natural minimum wage either due to a major crisis or simply the fact that there are too many people and not enough jobs. When that happens, Ricardo warned that lots of other bad things will happen: things like starvation, pandemics, mass emigration, vastly increased crime rates, and also things like, you know, political revolutions? Think guillotines…. Luckily, the USA is still something of a democracy, so instead of heads literally rolling in Wall Street, we got Trump and Bannon and Navarro instead. But don’t kid yourself: the average working class bloke is about as fed up as a French laborer in 1789. We’ve had enough, and we are going to hold the economics profession accountable. Your little experiment has gone on long enough….
Any questions?
As for your accusation of intellectual dishonesty–that I took those Ricardo quotes out of context and that I am misrepresenting what he said: Either put up or shut up. I challenge you: if you are correct, it would be very easy to go into Ricardo’s book and pull out the quotes that show exactly why I’m full of crap. Do it. Do it. Do it. The thing is, if you could have done it, you would have done it. Because you have actually read Ricardo, right? But you can’t do it. You can’t do it, because I did not take those quotes out of context. Read them and weep. Sorry to burst your bubble.
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Old boy, you still do not understand the different between a natural wage and a market wage.
It does not matter what your “opinion” of what the least skilled worker will accept. Reality normally differs from what political partisans like yourself opine.
Ricardo does not state that wages are a function of the nation. And, wages do not reflect whether the English prefer wheat bread, or Americans want more than what others have. That is all opinion, not fact. And, those opinions are irrelevant to the labor market.
The market wage is determined by the supply and demand for labor. And, no, the natural wage has no effect on the market wage.
When demand is high for labor like in Minot, North Dakota, then the price of labor increases assuming the supply of labor remains constant. It is not capital investment that creates the price of labor. It is the demand relative to supply.
I loved your rant about the French Revolution. You do not understand your history any better than you understand economics. And, your comparison of today’s working conditions with those of the French Revolution was hilarious. But, I see you are now preaching violence to steal from American consumers. Of course, there are likely to be a few other fools like you. I would not mess with my Pennsylvanian brethren if I were you. They are all expert marksmen.
You obviously do not understand Ricardo or economics or history. You have taken quotes out of context, used logical fallacies, and now you rant crazily because you are wrong and you know it. You sound very much like a political crony whose business either failed or is failing because you cannot compete.
Sorry to burst your political cronyism beliefs. They are wrong.
Why would I have any questions for someone who is as uninformed and as disingenuous as you are?
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“Why would I have any questions for someone who is as uninformed and as disingenuous as you are?”
Um, that is a question. And my answer is that you probably don’t know everything, and could be benefited by learning something new. Consider this nonsense:
“Ricardo does not state that wages are a function of the nation.”
I have repeatedly showed to you that this is false, by quoting Ricardo himself, and explaining in painstaking detail his logic. I guess all I can do is provide more evidence. Not that it will do any good, but here goes anyways. This is taken from Chapter 5 and it directly contradicts your mistaken belief that Ricardo does not state that wages are a function of the nation:
“It is not to be understood that the natural price of labour, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. ”
Got it? He’s talking about the natural price of labor, and he explicitly says not only that it differs “very materially” in “different countries”, but that it also “varies at different times in the same country”. Now, you may disagree with that, but we are not talking about your theory–we are talking about Ricardo’s theory. That’s what he says: the natural price of labor is relative to the nation.
Then you double down with this:
“And, wages do not reflect whether the English prefer wheat bread, or Americans want more than what others have. That is all opinion, not fact.”
Again, this is just crazily against what Ricardo himself stated. As they say, you can lead a horse to water…. But here is some more water anyways:
“[The natural minimum wage] essentially depends on the habits and customs of the people. An English labourer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin”
OK? The natural wage “depends on the habits and customs of the people,” according to Ricardo. And if matters of habit and custom are not matters of opinion, I don’t know what else is.
Then you triple down with this tidbit:
“And, those opinions are irrelevant to the labor market. The market wage is determined by the supply and demand for labor.”
I don’t know where you got that idea, but it absolutely did not come from Ricardo. Blogs are good, but primary sources are better. At least that’s what they told me at Chicago. So here we go again:
“ it appears then that wages are subject to a rise or fall from two causes:
1st. The supply and demand of labourers.
2dly. The price of the commodities on which the wages of labour are expended.
[EMPHASIS IN THE ORIGINAL!]
So you got the first part right–that wages are a function of supply and demand. Where you err is the supposition that these are the only forces. As Ricardo says, wages also depend essentially on “the price of the commodities on which the wages of labour are expended.” This is a point he emphasizes here, and repeats several times in his book.
This shouldn’t be too hard to understand. Here is the syllogism: the commodities workers demand for their natural minimum wage depends on the “habits and customs” of the time and place; and the price of wages depends on the price of those commodities. Therefore, the price of wages depends on the habits and customs of the nation. Man alive….
But I can see why the cognitive dissonance is just too much to bear. Because if the effect of cheap imports is merely to depress the price of working class wages, your entire reason for being evaporates. And that can’t be.
And then this final bit of rubbish:
“ And, no, the natural wage has no effect on the market wage.”
This is such blatant disregard for Ricardo. I take back my assertion that you’ve read Ricardo. Once again, here it is from the real deal:
“However much the market price of labour may deviate from its natural price, it has, like commodities, a tendency to conform to it.”
I don’t know how Ricardo could have stated it in a more clear fashion. When the market price of labor is above the natural price, then more workers show up either through rising birth rates or immigration. When the market price is below the natural price of labor, the number of workers decline, either through rising death rates or emigration.
Honestly Greg: you have lost this one. Give it up. You are only digging the hole deeper. You should be happy that you learned something new! 🙂
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Oh, and when I said “a tight labor market is a happy labor market”, that’s also from Ricardo:
“It is when the market price of labour exceeds its natural price, that the condition of the labourer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family.
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“Um, that is a question.”
No. It was a rhetorical statement. I should have known it would be lost on you.
“I have repeatedly showed to you that this is false, by quoting Ricardo himself, and explaining in painstaking detail his logic.”
No. You have repeatedly taken a few statements by Ricardo out of context to argue for political cronyism.
“That’s what he says: the natural price of labor is relative to the nation.”
No. He does not say there is a connection between the country and the price of labor.
“And if matters of habit and custom are not matters of opinion, I don’t know what else is.”
That is opinion, not fact.
“I don’t know where you got that idea, but it absolutely did not come from Ricardo. Blogs are good, but primary sources are better. At least that’s what they told me at Chicago. So here we go again:
“As Ricardo says, wages also depend essentially on “the price of the commodities on which the wages of labour are expended.”
No, you idiot. He says natural wages, which have nothing to do with market wages. Duh.
“When the market price of labor is above the natural price, then more workers show up either through rising birth rates or immigration. When the market price is below the natural price of labor, the number of workers decline, either through rising death rates or emigration.”
Yep. Exactly! Do you see why natural wages have nothing to do with market wages. Natural wages do not cause market wages to be higher or lower. Demand relative to the supply of labor does that.
Honestly, Warren, you have proven that you do not understand Ricardo, economics, history, or even simple logic. Here let’s go back to your wonderfully illogical decision that the farmer should prefer two dresses from a Bostonian instead of 4 from a foreigner. That makes no sense as have none of your other comments. Now, just go away in shame. And, stop saying you attended the University of Chicago. You are making that great university look bad when you make that kind of thing up.
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Warren said, “a tight labor market is a happy labor market.”
Ricardo said, “It is when the market price of labour exceeds its natural price, that the condition of the labourer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family.”
Can you seriously not see why those two statements are not the same?
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Unbelievable. Greg, you always keep saying I’m taking Ricardo out of context, but you never come up with a single quote from Ricardo that supports your your glib assertion. Come on! Surely it couldn’t take too much time to grab a single quote. I gave you the link. It’s free and it’s even searchable.
Then this:
“No. He does not say there is a connection between the country and the price of labor.”
Right. He said “It essentially depends on the habits and customs of the people.” Which means the same thing Watson. You must be one of those immigrants you profess to be so morally concerned about, because it’s clear English isn’t your first language.
And here is more evidence:
“As Ricardo says, wages also depend essentially on “the price of the commodities on which the wages of labour are expended.”
No, you idiot. He says natural wages, which have nothing to do with market wages. Duh.”
See? And now you are taking Ricardo out of context: in the context of that quote, he’s not talking about natural wages; he’s talking specifically about money wages.
You’ve got to understand that Ricardo’s theory of wages talks about at least three different kinds of wages. Allow me to treat them in order:
Natural wages: This is the equilibrium wage that market wages will tend to move towards. Most fundamentally, it is measured in the minimum goods–food, clothing, housing, enjoyments–that a worker is willing to accept;
Market wages: This is the actual wages paid based on supply and demand. The market wage can be above or below the natural wage, but it will tend to move toward the natural wage.
Money wages: This is the actual dollar amount in sterling of a market or natural wage. Note that his is NOT the same as the market wage: if the money wage goes up, but the cost of goods increases as well, the market wage hasn’t changed. Similarly, if cost of goods goes down (due to, say, the sudden availability of cheap imports), this will cause the money wage to go down, but the natural minimum wage as measured in goods stays the same.
Get it? Let me spell it out in more detail: (1) First the cost of living goes down; (2) this drives down the money cost of the natural minimum wage; (3) now (temporarily) the market wage is above the natural wage; (4) but it doesn’t take long before other workers bid down the market wage until it’s the same as the new money rate for the natural wage; (5) now the market rate is back down to the natural wage, but even though the money price is down, the market wage is the same as it was before; (6) and now the worker is in the same boat as before because the natural wage measured in food, clothing, housing, enjoyments remains the same–things cost less, but he or she makes less.
Thus, according to Ricardo himself, low-wage workers aren’t really helped by cheap imports. If there’s a consumer surplus at all, it’s temporary, and a restoration of the equilibrium natural wage will be “speedily effected” as he would say.
As for tight labor markets you want to say that “A tight labor market is a happy labor market” does not mean the same as “It is when the market price of labour exceeds its natural price, that the condition of the labourer is flourishing and happy.” OK, let me spell it out again: considering the above discussion of market versus natural wages, what do you think is going on when the market wage is above the natural wage? A: either the supply of labor has dried up, or the demand for labor has increased, or both. When a labor market is in this condition, it is said to be “tight”. And workers love it, because they are now in a position to consume more than they otherwise would have been satisfied with. OK?
Finally, this: “Here let’s go back to your wonderfully illogical decision that the farmer should prefer two dresses from a Bostonian instead of 4 from a foreigner. That makes no sense as have none of your other comments.
OK then, let’s talk about Jon’s OP: we’ve now discussed this enough, we can give a Ricardian analysis of Jon’s corn for dresses hypothetical.
According to Ricardo, how the farmer reacts will depend on whether he’s the landlord or the tenant. If he’s the landlord, on the one hand, he feels screwed over: because of the clothing tariff, he can’t lower the wages he pays to his tenant farmer, so he’s missing out on a potential windfall profit. (On the other hand, he recognizes that the price of his corn is propped up by government subsidies, so in reality, he shrugs his shoulders and is satisfied with the two dresses.)
If the farmer is a sharecropper, he’s going to mad at first because of the propaganda that free traders spew everywhere–that the government is stealing from him–but at the end of the day, he’s going to shrug his shoulders because he got the same two dresses last year, and that’s all he needs.
The thing is, if the tariff was lifted, the tenant farmer would get those four dresses. What he doesn’t realize is that when he goes back the next year, the Bostonian guy is going to be out of business, whereas the Frenchman is still going to be there, but since other workers have bid down the money price of the natural wage he’s only able to afford two dresses. The consumer surplus has dried up, but that’s all he needs.
The only way there would be a permanent benefit for the farm laborer from a lifting of the cloth tariff would be if the natural wage itself went up. This would require a change in the “habits and customs” (or “opinions” in your language) of “the people” which is the same as “the nation”. In other words, 4 dresses instead of 2 dresses would become the new “necessity of life”; all workers would have to refuse to take jobs that did not pay enough to afford 4 dresses.
And that can only happen in a tight labor market.
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“Unbelievable.”
Yes. Your comments advocating tariffs and protectionist legislation is unbelievable as are your attacks on Ricardo.
Which means the same thing Watson.”
No, it does not, old boy. Just because something is your custom does not mean you get it if you cannot afford it.
“As Ricardo says, wages also depend essentially on “the price of the commodities on which the wages of labour are expended.”
No. He said the natural wage does. And, natural wages are not market wages.
“You’ve got to understand that Ricardo’s theory of wages talks about at least three different kinds of wages.”
No. He is just talking about market wages and natural wages. The market wage is the money wage.
“Get it?”
I am. I get that you are a politically partisan idiot willing to misrepresent reality to get your preferred government corruption and political cronyism.
“Thus, according to Ricardo himself, low-wage workers aren’t really helped by cheap imports.
Lol. No. You misunderstand and misrepresent Ricardo.
Warren said, “A tight labor market is a happy labor market.”
Ricardo said, “It is when the market price of labour exceeds its natural price, that the condition of the labourer is flourishing and happy.”
Those are the same in the same sense that the farmer wants to sell his crop to a Bostonian for 2 dresses instead to a foreigner for 4 dresses. Are you beginning to see your idiocy? I love your rationalization, btw, but those sentences are not the same. And, the farmer would rather sell to the foreigner for 4 dresses. Got it?
“. . .we can give a Ricardian analysis of Jon’s corn for dresses hypothetical.”
I will give the Ricardian analysis, while you want make up something silly to say in order to advocate for government intervention in private matters.
According to Ricardo, how the farmer reacts will depend on whether he’s the landlord or the tenant. If he’s the landlord, on the one hand, he feels screwed over: because of the clothing tariff, he can’t lower the wages he pays to his tenant farmer, so he’s missing out on a potential windfall profit. (On the other hand, he recognizes that the price of his corn is propped up by government subsidies, so in reality, he shrugs his shoulders and is satisfied with the two dresses.)
I read your “analysis.” Keep your day job. Economics is not your thing.
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