This is my first post but I have been studying Austrian economics for a while now. I have a specific question to ask. Whenever the idea is brought up that if we could lower taxes and regulations and free up the market it would make corporations want to produce things domestically, people frequently say that it would ALWAYS be cheaper for them to produce things in China because workers are willing to work for nearly nothing. How can we compete with that? Maybe the regulatory system and tax system could be made friendlier to business but in a globalized economy, wouldn’t it generate greater profits for most large corporations to always produce things in third world countries or emerging markets where workers are happy to work for much less than Americans would?
I hope someone here can help me with this question because it comes up a lot is conversations with liberals and others who scoff at the idea that reducing regulations and lowering taxes will mean more domestic production. I don’t have a good answer yet, perhaps someone here could provide one?
In reply to 1, people usually say Germany and Japan successfully keep wage rates high because of protectionism. AFAIK, Japan is certainly protectionist and mercantilist.
In reply to 1, people usually say Germany and Japan successfully keep wage rates high because of protectionism. AFAIK, Japan is certainly protectionist and mercantilist.
Why are they net exporters to China? Why can’t we be net exporters to China? What do they have that we don’t?
It’s not just about price. You have to remember productivity. The US has the highest wages because the US has the most skilled workers. Now for those whose marginal productivity is lower than minimum wage, you face a problem. They get no income and businesses can’t hire them. This is why Peter Schiff has been on a tear lately about minimum wage causing unemployment. If we want those low skill jobs to come back, and we really want to improve the condition of the poor, then we need to get rid of the minimum wage.
They are net exporters to China because they tax Chinese goods heavily. At least that’s the case with regard to Japan (I haven’t studied Germany).
Koreans too, tend to buy Korean garlic because the government will arbitrarily tarriff Chinese garlic at 600% if some old farmers demand protection.
I don’t know why we would wanna be like them. Their goal is to work hard all day and never take vacations so that they can export stuff and then get shiny MONEY (yay!), then buy a $40 restaurant meal with it because their markets are so protected.
Americans are smarter. They let Chinese people work all day for them, and the Chinese government extort from its citizens, in order to subsidize Americans and give them free stuff. Good deal IMO.
In spite of all that’s been said and done, the US still has an enormous industrial base and is still one of the world’s leading exporters. The problem is how the industrial base has changed since the '50s and the early '60s. This is in part due to changes in regulation and taxation, but is also part due to the changing nature of the global economy. Since the '50s and the '60s most of the world has opened up for trade with the US, including the former “Red Menace”, China and Russia.
Where the American (and also German and Japanese) industry excels is at products requiring high capitalization per worker. Examples of this are advanced microprocessors, “exotic” chemicals, sophisticated machining tools etc. In these sectors labor costs aren’t as paramount as in “low tech” industries (a sweatshop producing 100% cotton t-shirts for example): what really matters is the capital invested in making the workers productive and to acquire the latest technologies.
As you rightly said even by reducing legislation and taxation it would still be cheaper to just buy some goods from China or Taiwan. These goods, not surprisingly, would be those requiring low capitalization per worker. But it wouldn’t matter: the US could sell more competitively priced goods requiring high capitalization and just buy the rest. That’s called division of labor.
Of course there’s a big question. Due to legislation and taxation concerns and thanks to advances in industrial automation relatively high tech products can now be manufactured in countries with low capitalization per worker. Two examples: the iPhone and the XBox 360. Both are designed and sold by American companies but both are manufactured in China. While it’s pretty obvious these products are not on par with, say, a top of the line molding machine, they still require a whole lot of capital to be designed and manufactured. Would a reduction in taxation and regulation convince Apple and Microsoft to move their assembly lines back to the US? That’s the big question.
Domestic production would be encouraged if savings rates increased, because more savings would mean more investment, meaning more capital per worker, meaning workers could be paid higher wages while still remaining internationally competititive. If an American factory had twice as much capital per worker as a German factory, for instance, its workers would be twice as productive, so it could afford to pay them twice the wages of a German worker and still remain competitive (http://mises.org/daily/5455). Japan and Germany have had, historically speaking, much higher savings rates than America, which helps explain their ability to remain competitive in manufacturing, due to them having more capital invested per worker, and China too has a high savings rate, around 50% of GDP, which certainly hasn’t done its manufacturing industry any harm. Savings rates would increase naturally if the state monopoly on currency was abolished, as the sound money that replaced it would mean higher interest rates than the current Fed-induced 0% (creating more incentive to save), and inflation would be almost non-existent, increasing the value of savings. They would also increase if the welfare state was eliminated, as people would have to save to fund their own retirement and to support themselves during periods of unemployment.
Americans are smarter. They let Chinese people work all day for them, and the Chinese government extort from its citizens, in order to subsidize Americans and give them free stuff. Good deal IMO.
Very true.
The q is, since that obviously cannot last forever, or even much longer [the Chinese cooolies are committing suicide in protest of exactly that, which the govt there kinda listens to], and we don’t have the industrial base to make our own shirts, as Kakugo pointed out, what will we do?
I don’t think high wages are the problem. Germany and Japan have high manufacturing bases with high wages. I believe it’s quite a few factors such as onerous regulations, high taxes, expensive health insurance, and the lawsuit happy culture that all contributed. Certainly the fiat money system doesn’t help either which allows the US to run endless trade deficits, which could not be done under a gold backed currency.
If we de-mercantilise, wouldn’t our standard of living decrease? We will be improving the economies of other countries, which means that we will now compete with them for products as well. Is this too shallow of an analysis? Would there be a crazy amount of innovation if other countries suddenly shoot up in economic power?
That is a very shallow analysis. Getting rid of tarriffs would make goods enormously cheaper. The same would be true of food if we got rid of farm subsidies. Nominal wages may go down, true, but we’re concerned with real wages.
Canada has roughly the same GDP per year as India, yet India has a much greater population than Canada. That means that averaged out, a single Canadian could be as productive as even a thousand Indians. This also exists within countries (Steve Jobs is thousands of times more productive than I am).
It doesn’t matter if you can hire a whole army of “labour”, what matters is the productivity of the money you spend on the labour. Wages per person don’t matter, money input per product produced matters.
A lot of people have started hiring personal digital assistants from the Phillipines, but found they preferred someone who could actually follow instructions from Canada or the US even though they cost 4x as much per hour.
Who would you rather be stranded on an island with, you and an illiterate retard, or you and someone who is as productive as you? Which society would make you better off?
I find if you think about it that way, it helps. You can see that it actually benefits you to be with more productive, richer people. You wouldn’t want to send all of the geniuses in our society to the gulags would you, even if they compete with you for products? Don’t forget that they also create products, and they create more products per person the more capital there is available to them.
http://mises.org/daily/2361 Reisman says that globalization can be deceiving because it results in progressively lower nominal wages but it serves to progressively increase the standard of living of all.
I also think any argument against expanding the division of labour worldwide results in disasterous logical consequences. If we shouldn’t allow people in China to industrialize and compete with us for products, how about them yokels in Alabama? Surely we should restrict trade to people within our own richer state (say, New York) or else we will de-industrialize. And why should a Manhattanite let his money flow to Harlem if it will cause a reduction in his standard of living? And why should I trade with my neighbour across the street if it will reduce my standard of living? Everyone in my house should have to work together to grow some food and hopefully if we have extra time, sew some shirts (if we don’t die due to lack of medicine the next time we get sick).
Another question would be, why are all these people idiotically engaging in trades in which they lose? Well, the mercantilists say that they aren’t actually losing, those trades are in their self-interest on an individual level–it’s just that when you compound a million wins on a micro level is results in a loss on a macro level. Funny how that should work. Millions of people individually bettering themselves works to hurt them. I guess we should throw the lessons from The Wealth of Nations out the window then.
Since these questions obviously lead one to endorsing free trade, the division of labour society, and comparative advantage, most in the economics profession are free traders. Even economists like Paul Krugman are supportive of free trade and globalization. It is only non-economists, politicians, rent seekers, and “economic historians” like Ha-Joon Chang who seem to be in favour of mercantilism.
Who would you rather be stranded on an island with, you and an illiterate retard, or you and someone who is as productive as you
That is a straw man of my question. The better question is “would you rather be stranded on the island with an illiterate retard who makes tons of stuff for cheap or some pretentious person who will want some high standard of living?”
Morally I am against what I am discussing - of course we should help (or at least stop hurting) people from Africa, but from the perspective of someone who doesn’t want his own standard of living to go down, you want to retain a cheap labor source from abroad. Thus, the idea behind tariffs becomes not to help your own businesses at home but to prevent foreign businesses to rise from poverty, ensuring a cheap labor source for yourself. If Africa doesn’t evolve beyond an extremely cheap labor source, that is convenient for us, no?