For the sake of simplicity imagine the world contained only 2 fictional countries:
The first country (C1) is very rich and powerful thanks to the efforts of previous generations, but it's current population loves to consume and consume and it's economy has 'evolved' away from boring repetitive manufacturing work into service based industries.
The second country (C2) is poor and it's people are hungry for success, held down by an oppressive government. One day the government of C2 decides to take its jackboot off the face of the people and said people start to manufacture things. They start with little things, trinkets and t-shirts etc. Because of their low labour costs they can sell these things much more cheaply to the people in C1 than the manufacturers in C1 can, so people being what they are, the consumers in C1 start to buy the products made in C2. Manufacturers in C1 cannot compete with the prices of the goods made in C2 and so they go out of business.
The people of C2 use the money acquired from the sales of their cheap and cheerful goods wisely and save and invest it in the capital needed to make more complex goods, such as cars, computer chips and other high value items.
Once again the manufacturers in C1 cannot compete with the low labour rates in C2 and go out of business. The government of C1 reassures the people in C1 that this loss of manufacturing capacity is not a problem, as the future lies in the 'service economy'. No-one seems to notice that, whilst the people of C1 are merrily buying up the shoes, TVs, cars and computers made by the people of C2, the people of C2 most definitely are not buying the investment and pension products from C1, nor are they bringing their cars to be serviced or themselves for a haircut. Money continues to flow out of C1 and into C2.
Meanwhile the people of C1 are getting frustrated, because whilst the manufacturing jobs they used to do provided jobs for people with a range of abilities from floor-sweeping, through engineering and design, machine operating and financial planning, the currently available jobs are sharply polarised into those requiring a brain the size of a planet, or those that require no brains at all. The average guy is frustrated - unable to be a software designer but far too smart to stack shelves.
One day - maybe 100 years later - C1 is poor and C2 is rich. Now we get to the crux of my question (sorry it took such a long time):
What happens to C1 now that it's manufacturing base has gone? Does it have to start again making t-shirts and trinkets and try and reverse the process, building up wealth and capital from scratch again? If so then it would seem incredibly, monumentally wasteful to have let the existing manufacturing base slip away and to scrap all that knowledge and effort represented in building and machinery.
When the people of C2 entered the worl economy and started producing cheap goods, would the people of C1 not have been better off accepting, say, a sharp 50% decrease in their standard of living in order to keep their manufacturing base and the accumulated knowledge and experience that goes with it, rather than simply stubbornly refusing to accept cuts in wages, letting their industry go and eventually ending up with nothing?
Am I totally on the wrong track? How can free trade work within the framework of national borders and competing governments and peoples without these cycles of impoverishment and enrichment?
I am skeptical that your model reflects the realities of free market economics. For one, if C1 was a truly free economy with sound money, it is unlikely they would consume themselves into the poorhouse, so to speak. Without government interference in the money supply, interest rates would tend to rise as people consume more and more. Higher interest rates provide an incentive to save, and as savings increase so does the availability of funds for capital investment, which helps to sustain a manufacturing base and balance out the economy.
The scenario you're describing is C1 with a central bank holding down interest rates resulting in high levels of consumer spending for long periods of time resulting in no savings and capital consumption. What C1 should do is get rid of their central bank!
I hadn't mentioned central banks because I was more concerned about the differences in labour costs skewing the way wealth flows. If the whole world startedoff poor together and all discovered freedom and capitalism simultaneously then the ride would be less rough, but I still think that the question reflects reality (albeit grossly oversimplified in the name of brevity). Surely even if people C1 liked to save a bit they would still lose manufacturing output to C2 because of the vastdifference in labour rates, causing the cycle to proceed as described above?
The model is plain unreal. For example, nominal wages do not remain constant in C2 and real wages in C1 must remain intact to create demand for products from C2. If free trade could really go anything like you suggest, the same would happen every other scale of resolution down to the individual level. What really happens is that real wages gradually come to parity in both.
Am I totally on the wrong track?
Every word is spot on.
How can free trade work within the framework of national borders and competing governments and peoples without these cycles of impoverishment and enrichment?
At several stages in its history, C1 [meaning the USA] had the highest wages, the cheapest goods, and the lowest prices. The whole world bought from C1, and loved it. This is because C1 had the best machinery, so that the highly paid workers WERE WORTH EVERY LAST CENT they were getting.
Our manfacturing base did not die because we had to compete with China. It died because unions and taxes and regulations made it impossible to make a buck, so the businesses closed down, or decided "Better to pay those Chinese and Indians to do the work, even if they do a less efficient job with inferior machinery, than do it here and with effiecient workers who are overpaid because of unions, and with all thesestate taxes and restrictive regulations stealing our profits.
Source for all this: Peter Schiff in Crashproof, and a Rothbard article.
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Dave, thanks again for posting to answer one of my convoluted queries. I'm not sure I necessarily agree that all Chinese products are inferior (or that those that are inferior will remain so). Memories of my friend's GM employed (and now unemployed) father mocking Japanese cars when I was a child stay with me! Aside from that, let me see if I get it now:
If you suddenly add a billion people to the world labour force, it is going to affect the wages of everybody else. However this needn't be disastrous as the extra production these new labourers bring will drive down prices as well.
Bearing that in mind does my original point still stand (i.e. if employees and bosses in the USA had accepted a temporary (if severe) cut in wages and profits, they would have kept their infrastructure and their jobs and been able to varry on from there?
Equally bearing in mind the massive outflow of capital and knowledge that left the USA and the desctruction of its manufacturing infrastructure, where does the USA go from here except, as I suggested, to start from scratch again, which seems a momentous and utterly stupid waste? Is there another way back or , more pertinently, is their a politically acceptable way back for a people that thinks it's entitled to a certain standard of living and a minimum wage of 'x'?
Please excuse the numerous typos and misuse of 'their' as opposed to 'there' in my previous post - I had a heavy night last night and have a headache and shaky hands :-)
Dave, thanks again for posting to answer
YW
if employees and bosses in the USA had accepted a temporary (if severe) cut in wages and profits, they would have kept their infrastructure and their jobs
I don't know enough to answer that one. There is still the problem of taxes and "regulations". I'll give you a simple current example. I had someone come over to install some new windows in the old house I'm at now. The guy told me he is seriously considering going out of business because of an Earth Day law just passed, requiring only certified workers to handle repairs to old houses, because of possible lead paint on them.
where does the USA go from here except, as I suggested, to start from scratch again
Is there another way back or , more pertinently, is their a politically acceptable way back
Maybe you mean some laws could be passed to save the economy. Like maybe protective tarrifs, or wage and price controls, or forcing everyone to buy a GM car, like they were just forced to buy health insurance. Well, it is the mighty lesson of this site, detailed and explained in all its majesty, that "laws" mean coercion, by definition. Economic coercion means making someone do something with his money that he is totally convinced is BAD for him. Why should we assume he is stupid? Especially since historically and theoretically, he is absolutely right every time? Laws can only destroy an economy. Like they have damaged ours very badly.
In particular, a law to protect and save an industry means 300 million people will have to empty their wallets to keep a few thousand workers employed. In other words, they are being overpaid, and everyone will have to carry them on their backs. How on earth can this be good for an economy?
Thanks for replying. I read the Rothbard article. I'm guessing it was written in the 1970s.
It's interesting to see that the his eminintly sensible prediction about someone buying up a bankrupt US company at pennies on the dollar and then continuing production at a lower price competitive with far eastern competition because of much reduced capital costs has not come to pass - bankrupt companies have just disappeared.
Secondly the bit about Far Eastern workers being less productive does has not proved true - once they have access to the same equipment as western workers they become equally productive.
I definitely am not in favour of tariffs, price controls or any kind of coercion - they obviously don't work. What I meant by 'politically acceptable' was more a rhetorical point to emphasize that electorate is never going to vote for a dose of bad tasting medicine, no matter how effective.
Also Murray doesn't factor in to the fact that when a market economy answers to a totalitarian government (a la China) then said government can force down and hold down prices through currency manipulation, thereby keeping it's people relatively poor but also impoverishing the USA as well and effectively engaging in the 'predatory price cutting' which he rightly mocks as suicidal in a free market.
Basically China's government stacks the deck! How can you play fair against someone who cheats?
He didnt exactly predict it, if you read the context. And it didnt happen because the same reason that made the first comapny go bankrupt [not foreign competition, btw] is what is stopping the next potential one from bothering. Check out wikipedia on the "rust belt" about this.
Huh? He says the reason they WERE less productive is for the very reason you mention, that they didnt have the equipment. So we are all in agreement here.
Two points. First, it does not impoverish the USA at all. How does 300 million people getting all their stuff at a discount impoverish us? If we have willing slaves to do our work for us, how are we worse off? As for the jobs lost, there is always other work to do.
Second, it's suicidal for them indeed, in the sense that they could be living much better than they are now. But it's not hurting us in the least. They are commiting suicide in order to feed and clothe US. Look around your house. How many things are made in China? 70%? Imagine if you had to pay double for it all. No question, those fools are slaves all right, OUR SLAVES.
Why are they doing it? Probably because they have very mixed up ideas about economics.
Surely if the 300 million Americans merrily buying everything from China are unable to sell anything back to the Chinese because their government is holding down the value of their currency, making American products prohibitively expensive, then one day the Americans will find they have no money and no manufacturing capacity? At that point the temporary Chinese impoverishment can be lifted and with no American competition they can charge whatever price they like!
Also I should have further qualified the bit about far eastern workers by saying that although they now have the same equipment and are equally as productive as American workers, their wage rates are still much less than American workers because of the Chinese government's currency manipulation.
And once again your point about their 'always being other work to do' is no doubt true, but if the 'other work' replacing your lost job is a massive step backwards in term of enjoyment and wages (say by going from a machinist to a shelf-stacker) then that's not much help to either the worker in question or the American economy?
The fact that China is holding down the value of its currency is basically increasing the purchasing power of the American consumer. The deflated currency allows you to buy those widgets with the plastic label "made in china" at lower prices than you would normally. This means that your standard of living increases at a lower cost. Because you are saving money, you get to put the more of your income into capital investments which, in turn helps businesses grow and create jobs. These jobs then increase the income of more people, including Americans, allowing them to buy Chinese products with some of that income and using the rest to put into more capital investments.
Protectionist policies are as bad for the U.S. as they are for China. If we put a tariff on Chinese goods, China will put a tariff on American goods. This decreases the purchasing power of everyone and hurts the ability of business to grow.
Finally, let us assume America loses its manufacturing capacity to a Chinese monopoly of industry. If the Chinese companies charge exorbitant rates for their goods, that leaves an opportunity for the resurrection of American manufacturing that would charge more reasonable rates. Also, there is the issue of how American demand for those Chinese goods could possibly be sustained if we are losing money to spend on those goods.
No money? Say a computer sells for $1000 to in the USA, and 1000 yuan in China. Say the exchange rate should be 1 to 1. Then 300 million computers will cost the US citizenry 300 billion dollars.
Those sly Chinese, however, pull a fast one and declare 2 yuan to the dollar, undervaluing their currency. Then those 300 million computers, bought in China, will cost the US citizenry 150 billion dollars. They have the same computers, and an EXTRA 150 BILLION DOLLARS to spend as they wish. How do they have less money?
No manufacturing capacity? Let's take a worst case scenario. The Imperialist Chinese, in a cruel move bent on the destruction of the American economy once for all, decide on the ultimate devaluation. They are going to GIVE AWAY their computers to the USA.
"Mwahahahaha. We have destroyed their computer industry. All their computer factories will have to close. All their computer workers will starve. This unemployment will create a chain reaction, as the unemployed will not be able to buy food, so their supermarkets will lay off workers, and so on down the line, till no one at all has a job. We have triumphed," says Fu Manchu gleefully.
On the other side of the ocean, we have 300 million more computers, 300 billion dollars more to spend, a few closed factories and unemployed. How will these factories and people be put to useful employment? How long will it take? The answer to these q's depends not at all on China. It depends on one thing How restrictive regulations and taxes and unions and minimum wage laws are. Thus Texas, which has no state tax and few state regulations and gives little power to unions, is BOOMING right now. I think 60,000 jobs are created every month. In the middle of this depression. What is their secret, I wonder?
Well, that is to our advantage, as explained above. You realize that giving the computers away for free or charging less for them is really the same thing, of course.
Of course losing one's job is never fun. The q is, why is it SO HARD to find a new one? Why is nobody using those empty factories and hiring those unemployed to make something new? The ultimate reason is that it NO LONGER PROFITABLE to start a business in many parts the USA, for the reasons above. China has nothing to do with it. They just give us free computers. They are doing us a big favor, and we should be grateful and hope they never wise up.