Friend of mine made this criticism of purely free market, how would you respond?:
"While I am generally in favor of a free market, I don't think I could possibly advocated for a totally free market, but I will present a hypothetical situation to try to clarify my understanding, and explore the subject a bit more. There's a theoretical company that manufactures all of it's goods in china for 50% cheaper than it would if it were to manufacture those goods in the united states. It is based in the united states, and used to have factories here, but the cost analysis drove those jobs overseas, because of national minimum wage laws, and lack there of in china. On average, the jobs that were shipped over are paid $5/hour as opposed to $10/hour. Are you saying that workers should accept lower wages to combat the exporting of jobs. Is your definition of "competition" a lower standard of living for our country? That's the problem in my eyes, is that we have raised our standard of living to the extent that people need a certain wage level to survive. If you have a way of clarifying this, or explaining how lower wages in our country would make our society and our economy a better place, I'd be glad to hear it, but from any angle I look at it, I would think that lowering our wages would decrease our standard of living, thus decreasing our society's economic freedom on a broad scale. Less money in the pockets of the people, less spending in general, less saving, investing by a fewer and few number of people, more social stratification between those with money and those without, etc. Again, I would be happy to hear a free market solution to this, but it seems that in order to remedy these ill effects of the free market, some intervention must be done. I do think there is a way for that intervention to be made in a widely accepted, grassroots way, such as developing bottom up independent commissions to set international trade standards rather than having those trade standards set from the top down, making government more accountable to the people in general, and other methods that I'm sure we could imagine to make our economic system work for the general public."
Freedom has always been the only route to progress.
"national minimum wage laws" = "purely free market"?
Something doesn't add up here.
But to the heart of his question:
"On average, the jobs that were shipped over are paid $5/hour as opposed to $10/hour. Are you saying that workers should accept lower wages to combat the exporting of jobs. Is your definition of "competition" a lower standard of living for our country? That's the problem in my eyes, is that we have raised our standard of living to the extent that people need a certain wage level to survive."
His "problem" really comes from a lack of understanding of economics, history, and reality.
First of all, in a truly free market, it would be almost impossible for it to be cheaper to manufacture goods halfway across the world and ship them over here (save the invention of some kind of low cost teleportation device or some other form of speedy travel). Even if we assume China has a truly free market as well (which is a pretty darn big assumption), it would still be an enormous stretch to assume that there would be many products that would be more economical to manufactor overseas as opposed to domestically (especially in a country as resource-rich and climate/geographically diverse as the U.S.). But realistically, China would not have a completely free market, which would make it virtually a net loss when compared to conducting business in the purely free market in any sense. There are more economics to explain why this is, but that is the basic reality.
Second, look at the historical evidence. Peter Schiff lays out the case in a session before Congress...
(jump it to 12:46, or click here)
So just to recap...we were producing the best cars, and the cheapest price, there was no minimum wage and there were no unions...and the workers were making the highest wage in the world, (and paying no federal income taxes or payroll taxes, to boot.) Doesn't exactly sound like his doomsday scenario lines up with history.
See, people tend to forget that the world didn't begin in the 1930's. We experienced the period of the greatest level of growth and relative prosperity the world has ever seen from roughly the 19th century to the early 20th century...before all of these government interventions that all these statists deem "necessary". Funny, they never seem to offer any explanation as to how the world got on without them. How in the world did civilization survive without medicare?!
And finally, he doesn't have a firm grasp on reality: "we have raised our standard of living to the extent that people need a certain wage level to survive." Think about what he's saying. He's literally saying that we are so productive, so prosperous, that it actually costs us more to survive. In other words, we have such a huge supply of things, and are able to aquire them so cheaply, that it is actually more expensive to live. Now what sense does that make? That's like saying my new electric blanket is so effective at keeping me warm, and produces so much heat, that I actually need more blankets than I did before, just to keep from freezing. It makes absolutely no sense.
What he's doing there is conflating "expectations" with "survival". The truth is, he doesn't know a damn thing about "survival". He is buying into the illusion that unless you have running water, 24/7 electricity, air conditioning, indoor plumbing, refrigerators, washing machines, cable television and high speed Internet, you'll die. Yes, we have raised our overall standard of living to the extent that people expect a certain lifestyle. This does not mean that without this extreme comfort of living one would literally die...and it certainly doesn't mean that one simply deserves or is entitled to such a lifestyle simply because he happened to be born within a certain arbitrary border as opposed to another.
If people couldn't survive on a lower standard of living, how the hell are these Chinese he's talking about doing it as he's saying it's not possible? How is it even called a standard of living?
If you want to argue that our living standard as evolved so greatly that most people lack the same rudamentary skills necessary to get by as well as many impoverished Chinese do, fine, that's a decent argument. But this again does not automatically equal death to these people. Again our relative prosperity allows us to provide for these people through charitable acts. Think of all the charity that takes place now, when the government takes close to 50% of the population's productive output. Look at how many people we are still able to care for, and the standard of living they are able to enjoy. Sure, your ignorant friend here may spit on the homeless American's lifestyle, but there are literally hundreds of millions of Chinese who would kill to take his place. Imagine how much more charity could be provided if all of that productivity wasn't siphoned off by the coercive State.
And this is not to even consider the quality of life to be rendered in general from such a more productive society. It would be difficult to imagine what the world would look like, how far along we would be, if a population this size (especially one that inhabits a resourceful geography as the U.S.) were completely free. Just think about how far ahead we are compared to the poorest countries in the world (and realize that what few advancements they do have are more than likely directly attributable to outside influences from the more developed nations). I imagine the difference between what the U.S. is economically and what it could be had it been a truly free market all along would absolutely dwarf that. (If nothing else other than the fact that technological advancement is exponential).
But the point is, a free-er society is a more productive, and therefore more prosperous one. And before someone goes around claiming that one needs some arbitrary "living wage" to survive because we are so prosperous in America, he needs to step back and really recognize what he has...
...and ask, What exactly is poverty?
If you have a way of clarifying this, or explaining how lower wages in our country would make our society and our economy a better place, I'd be glad to hear it, but from any angle I look at it, I would think that lowering our wages would decrease our standard of living, thus decreasing our society's economic freedom on a broad scale.
No problem. Lower minimum wage = higher employment = more productivity = more stuff = lower prices = more prosperity.
Less money in the pockets of the people, less spending in general, less saving, investing by a fewer and few number of people, more social stratification between those with money and those without, etc.
That's interesting. "Less money in the pockets of 'the' people". "The people" meaning who? Union workers who benefit from minimum wage laws through an artificially inflated salary at the expense of lower skilled workers? Or just employed people in general? Sure, there may be less money in their hands...at first. But this would also mean that previously unemployed people would now be able to secure employment...and earn some income (aka "money in the pockets of people")...but on top of that, they will now be doing something productive, thus helping to make a greater total of goods and services to go around...meaning more stuff, meaning lower prices, meaning a dollar buys more than before, meaning people are more prosperous.
in order to remedy these ill effects of the free market, some intervention must be done
The classic statist refrain. Yes, "ill effects" of the "free market". He's either operating under the assumption that Utopia on Earth is attainable, or he's committing a non sequitur, simply stating that because the world isn't perfect, it necessarily means coercive force must be used over market interaction.
Friedman spoke eloquently on this:
I do think there is a way for that intervention to be made in a widely accepted, grassroots way, such as developing bottom up independent commissions to set international trade standards
If he seriously believes that coercive international trade standards can be formulated, implememented, and maintained by a "grassroots" structure, he's simply committing a wishful thinking fallacy.
But what's more, why is there a need for coercive intervention in the market? Why can't cooperation, regulation and order devolop organically (or "spontaneously") from the bottom up, like so many other facets of life?
...making government more accountable to the people in general, and other methods that I'm sure we could imagine to make our economic system work for the general public.
Again, anytime someone talks about "government being more accountable" and "working for the general public", it basically boils down to wishful thinking. There is just no such thing.
Libertyandlife quoting a friend:On average, the jobs that were shipped over are paid $5/hour as opposed to $10/hour. Are you saying that workers should accept lower wages to combat the exporting of jobs. Is your definition of "competition" a lower standard of living for our country?
Imagine a scenario where goods are transported from NYC to Chicago using human carriers on foot. On average it costs $5000 to ship 1lb of goods this way. An entrepreneur invents a wheel, a cart, and attaches them to a horse, offering to ship 1lb of goods for $500 and THREE times faster. Are you saying that workers should accept lower wages to combat the exporting elimination of jobs? Is your definition of "competition" a lower standard of living for our country?
z1235:Imagine a scenario where goods are transported from NYC to Chicago using human carriers on foot. On average it costs $5000 to ship 1lb of goods this way. An entrepreneur invents a wheel, a cart, and attaches them to a horse, offering to ship 1lb of goods for $500 and THREE times faster. Are you saying that workers should accept lower wages to combat the exporting elimination of jobs? Is your definition of "competition" a lower standard of living for our country?
Good point. This guy is confusing nominal wages with real wages.
If Company X cuts the wages it pays workers in half, it is operating with lower costs of production and will make a higher rate of return. This high rate will attract more competitors into the field, until that excess is eliminated and prices are driven down to the new, lowered costs. So while I might have lost my job when Company X shipped to China, the money I do have will acquire more at the store because prices are lower; the same $1 bill will fetch me more goods. My real income, i.e. my purchasing power, has been increased thanks to the more efficient division of labour.
We could guarantee jobs for everyone if we immediately abolished trains and resorted to hauling freight around on our backs. But would our standard of living increase? The point is not for people simply to have jobs, but to have good jobs, and the kind of constant manoeuvering and restructuring that efficiency requires will have to take place whether you are living under capitalism or communism.
John James' point is also important. We really have no idea whether globalization in a truly free market would look the way it does now. There are so many ways in which outsourcing is subsidized or otherwise encouraged, by high corporate taxes, IMF and World Bank loans, preferential "trade" agreements, etc.
Say we have an embargo with China. Drywall bought by the US public is more expensive. Now we remove the embargo. The price of drywall falls a lot. Now American drywall makers become unemployed en masse, right? What about all of the new jobs created because the inputs to the construction industry are now cheaper? Companies have lower average variable costs, meaning that their marginal revenue is then higher than the average total costs. This means that there is a profit to be earned. More companies will enter the market. This leads to higher employment.
Of course, there would also be some frictional unemployment.
Plus, remember - the best way to improve the quality of life of people in other countries and thus open up new markets for US goods is to trade with them.
Another side of the argument:
So the US should be imposing trade quotas? That means that Americans are entitled to the jobs and the children in Taiwan working 12 hours per day to make a living are not entitled to the job? Just because they happened to be born somewhere else?
Some guy made this argument on some news outlet, but I can't find the video.
I would agree that the guys main problem is in looking at nominal wages as opposed to real wages. He is also not thinking at all like an economist, he is not seeing the bigger picture, he isn't seeing the benefit of everyone else in the economy paying less for the now cheaper goods, now all of those other people have more money, with this money then can invest, with this investment the economy can produce more and create more jobs. The more capital, the more productive a worker can be, the more productive, the higher the real wages.
John James, what is this talk about not importing from China in a free market, what are you basing that on? That doesn't make any sense.
Joe:John James, what is this talk about not importing from China in a free market, what are you basing that on? That doesn't make any sense.
Who said anything about not importing?
John James: Joe:John James, what is this talk about not importing from China in a free market, what are you basing that on? That doesn't make any sense. Who said anything about not importing?
John James: Even if we assume China has a truly free market as well (which is a pretty darn big assumption), it would still be an enormous stretch to assume that there would be many products that would be more economical to manufactor overseas as opposed to domestically (especially in a country as resource-rich and climate/geographically diverse as the U.S.).
Even if we assume China has a truly free market as well (which is a pretty darn big assumption), it would still be an enormous stretch to assume that there would be many products that would be more economical to manufactor overseas as opposed to domestically (especially in a country as resource-rich and climate/geographically diverse as the U.S.).
law of comparative advantage, the division of labor, etc. Shipping stuff across oceans, even vast ones like the Pacific is not THAT expensive. There would be TONS of products that would be more economical to manufacture overseas than in the US. Are you taking into account opportunity costs? Just because we could make something in the US doesn't mean that its most economical to; there is a very good chance it would be more worth people's while to produce things that are worth even more money than the cheap goods we import from China.
tunk: Good point. This guy is confusing nominal wages with real wages. If Company X cuts the wages it pays workers in half, it is operating with lower costs of production and will make a higher rate of return. This high rate will attract more competitors into the field, until that excess is eliminated and prices are driven down to the new, lowered costs. So while I might have lost my job when Company X shipped to China, the money I do have will acquire more at the store because prices are lower; the same $1 bill will fetch me more goods. My real income, i.e. my purchasing power, has been increased thanks to the more efficient division of labour.
Tunk if Company X cuts its wages, doesn't it lose workers to other firms? Workers will seek work at the market price, at the least Company X won't be able to hire new workers nearly as quickly as other companies. Maybe if the entire industry unanimously cuts wages then the industry's costs of production will go down. I don't know how they would do that as a group though, since cartels usually break apart.
In the long run, is there any difference in the purchasing power between two scenario's where one has half the nominal wages of the other, all things equal? I think this is making the mistake of assuming that labor constitutes all the costs of production...
I'm inclined to think that real wages are highest in the scenario where nominal wages are not halved because wages don't constitute all costs but I'm not sure.
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger
Jargon:Tunk if Company X cuts its wages, doesn't it lose workers to other firms?
I meant cut wages as a result of outsourcing; i.e. the company fires you and hires someone else at half the wage. As a result of the falling shipping costs and favourable trade agreements associated with modern globalization, it will be profitable for most firms to imitate Company X. Costs of production in the entire industry will tend to fall, ceteris paribus, so firms will start competing in terms of price, and eventually that will fall as well. This will happen regardless of whether labour constitutes all the costs of production.
It's not only the workers in industry X that benefit, but consumers as a whole. They now have more money available to spend as a result of the lowered prices, and when they spend it, they will create opportunities for employment in other industries. As well, the stockholders of Company X (who probably include retirees) benefit from increased returns. The gains outweigh the benefits.
Jargon:is there any difference in the purchasing power between two scenario's where one has half the nominal wages of the other, all things equal?
The price of product X will fall, the price of competiting subsititutes will fall, and the price of any good that uses X as a factor of production will fall as well. The net effect is to raise real income.
Joe:I would agree that the guys main problem is in looking at nominal wages as opposed to real wages. He is also not thinking at all like an economist, he is not seeing the bigger picture, he isn't seeing the benefit of everyone else in the economy paying less for the now cheaper goods, now all of those other people have more money, with this money then can invest, with this investment the economy can produce more and create more jobs. The more capital, the more productive a worker can be, the more productive, the higher the real wages.
Nevertheless, he is rationally following his self-interest. Since he lives under a democratic state, it follows that he'll probably vote for politicians who campaign on protectionism in his chosen line of work. Even if he does see how consumers as a whole would benefit by paying less for the now-cheaper goods, he may just not care - he's concerned with his own standard of living, even if he claims otherwise.
It seems to me that many people view economic issues the same way they view social standing - entirely in relative terms. We've seen for a long time that many people see wealth as a "zero-sum game", but I, for one, never quite understood why. For those who see increased wealth as a means to attain greater social standing, and social standing is a relative thing, it follows that they'll at least tend to see increased wealth as a relative thing also. And just as relatively greater social standing can be attained by either building oneself up or tearing down others, so can relatively greater wealth be attained by either increasing one's own or decreasing that of others. Wealth in absolute terms means nothing to these people.
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Joe:law of comparative advantage, the division of labor, etc. Shipping stuff across oceans, even vast ones like the Pacific is not THAT expensive. There would be TONS of products that would be more economical to manufacture overseas than in the US. Are you taking into account opportunity costs? Just because we could make something in the US doesn't mean that its most economical to; there is a very good chance it would be more worth people's while to produce things that are worth even more money than the cheap goods we import from China.
You're missing the point. The scenario that was presented describes an American company that is choosing to operate at "home" in the U.S. or export it's operations to a foreign country. My point is that if you have a pure free market domestically, there is almost no scenario where it will be a net gain to move operations overseas...especially if the country you're moving to is not a free market. The industry you're in would have to be one of the few in which the resources are just not available in the U.S., or are just so much more readily available elsewhere that the distance and added taxes and regulations would still not be enough to decrease profit below the domestic level.
I never said goods would not be imported. Obviously, as I keep saying, there exists a limit to the amount of work that can be done at any given time, and desires are infinite...so yes, even at full domestic operating capacity there will be a market for imports...but this notion of a company seeing it more profitable to "ship jobs overseas" would largely be a myth.
John James: so yes, even at full domestic operating capacity there will be a market for imports...but this notion of a company seeing it more profitable to "ship jobs overseas" would largely be a myth.
so yes, even at full domestic operating capacity there will be a market for imports...but this notion of a company seeing it more profitable to "ship jobs overseas" would largely be a myth.
"Shipping jobs overseas" as a phrase is loaded and meaningless, but I don't see how a free market would necessarily eliminate action, and in particular (labor) price arbitrage. It is still perfectly possible (even likely) that someone in free China (Alabama) could perform an operation cheaper than someone else could in free USA (California).
If I had 20 people making Part #32 for my product at a total cost of $400 per part and I saw Part #32 offered in a Chinese catalog for $100 why wouldn't I fire the 20 workers and start ordering Part #32 from the catalog? Did I just "ship" these jobs to China?
z1235:I don't see how a free market would necessarily eliminate action
?
It is still perfectly possible (even likely) that someone in free China (Alabama) could perform an operation cheaper than someone else could in free USA (California).
Right. Too bad there are a few other things that work into the equation.
John James: z1235:I don't see how a free market would necessarily eliminate action ?
I could be wrong but it seemed (to me) that you implied that a free market would be devoid of price discrepancies and of arbitrage (entrepereneurial) opportunities to take advantage of same (i.e. action). As if all price arbitrage and opportunities worth profiting from would already have been taken by a free (maximally efficient) market. As if no real $100 bills would be left laying on the pavement.
It seemed (to me) that you implied that price (arbitrage) opportunities as they exist today are mostly caused by differing levels of government intervention/regulation. Pls correct me if I was wrong.