By Stephen A. Marglin
Stephen A. Marglin is Walter S. Barker professor of economics at Harvard University.
April 25, 2004
CAMBRIDGE, Mass. — The theory of comparative advantage claims that a
country should specialize in the goods that it can produce more easily
than other countries. For example, if your country is relatively better
at making computer motherboards and mine is relatively better at
manufacturing television sets, yours should specialize in the former
and let mine do the latter. With each country playing to its relative
strengths, all would gain from trade, the theory says.
But if every country has a comparative advantage in something, why are
there persistent complaints about jobs moving to Mexico, China or
India?
The theory of comparative advantage was the brainchild
of 19th century economist David Ricardo, who used it to explain how
Portugal and England might mutually benefit from the differences in
their natural resources. Hot, sunny Portugal ought to specialize in
wine, advised Ricardo. Temperate, rainy England should stick to woolen
cloth.
But the theory doesn't apply well to the contemporary world, and outsourcing shows why.
Suppose there's an all-purpose widget that high-tech Americans can
produce at several times the speed of low-tech Indians. It might seem
that with all-purpose widgets, there is nothing to trade. Not so, says
the economist: Even in a world of all-purpose widgets, there is a
second commodity, leisure. Ricardo would say that Americans have the
comparative edge in widgets and Indians enjoy the advantage in leisure,
which is to say, not producing the widgets with their inferior
technology. Instead, India would sell its leisure to America.
In other words, U.S. producers should substitute Indian labor for their
own. Both Americans and Indians gain from trade. We get more leisure
without reducing the quantity of available widgets here because we can
supplement our reduced domestic production by importing widgets made
with our technology in low-wage India. In India, it's more widgets for
the same amount of work, even taking account of what is shipped
overseas, because a superior technology replaces an inferior one.
Where does it go wrong?
First, we don't live in Ricardo's world, where trade is determined by
fixed natural resources. In his world, technology and capital are
immobile: You can't move Portuguese vineyards to England, nor can
England's lush sheep pastures survive in Portugal's climate. Today,
technology and capital move almost as easily across international
borders as within a country.
Second, the theory imagines a
world of generic Englishmen and Portuguese who are both worker and
consumer, both worker and owner. The Englishman raises sheep and
manufactures cloth, consuming part of his production and trading the
rest for Portuguese wine. A Portuguese grower-vintner produces wine for
his table and ships his surplus to English tables. Today, few of us
consume a significant part of what we produce. Consumption is separate
from production. Even more important, few of us own the machines, tools
and equipment needed to produce goods and services. Instead, we work
for wages. The distinction between worker and owner is basic to
capitalism.
The comparative advantage theory might still be
useful if widget workers had a significant ownership stake in their
factories, and if labor markets functioned like model competitive
markets, in which workers were free to work as much or as little as
they desired at the going wage. In such a world, there is, by
definition, no unemployment beyond the leisure the individual chooses.
Outsourcing might lower wages in this country and raise them in India,
but U.S. workers would profit from the dividends and capital gains they
received as shareholders, and the lower prices they paid as consumers.
And these gains, according to the comparative advantage theory, would
be greater than what workers lost in wages.
But American
workers don't, in general, own much stock, and U.S. labor markets fall
far short of the ideal in which the worker gets to choose how much to
work. In today's world, we can't understand international trade in
terms of abstractions like "Americans" and "Indians" because the
consequences of outsourcing are dramatically different for different
groups. American owners can gain while American workers lose. Consumers
can gain while workers lose.
Shareholders prosper from the
cost reductions associated with substituting Indian labor for American
labor. Some workers lose big-time because the added leisure that comes
from shifting production abroad is not widely shared. An unfortunate
minority lose their jobs altogether — their "leisure" is involuntary.
For these folks, the added profits generated by outsourcing are cold
comfort. U.S. consumers who don't lose their jobs benefit from lower
prices, again cold comfort for folks whose old jobs are now overseas.
Economists may talk about winners compensating losers, but I've never
heard a convincing story about how a 50-year-old mother of two is to be
compensated after her manufacturing job is outsourced. She may, if
lucky, find a comparable job somewhere, but only at the price of
uprooting the family. Her husband may find another job in their new
place of residence. Staying put, her only alternative may be a
low-paying job.
The only clear winner would seem to be the
Indian worker, who enjoys an increase in income and consumption without
any corresponding increase in work time or effort. But even here the
standard explanation oversimplifies: The Indians are unambiguously
better off only if we don't count the costs of the disruption to their
communities and other "externalities" such as the substitution of rapid
Westernization for a more gradual evolution of Indian culture colliding
with globalization.
Economists trumpet the virtues of free
trade as if the differences between textbook theory and the world were
of little importance. No wonder economics is hard to translate into a
language that addresses the concerns of ordinary folks.
The
great 20th century economist John Maynard Keynes began "General Theory
of Employment, Interest and Money" by observing that before we can
construct relevant theories for the present, we have to unlearn the
useless theories of the past. In Keynes' view, shedding the old was
more difficult than building the new. He concluded with the observation
that "practical men" who chart national policies are more often than
not the slaves of useless theories.
The practical men and women
who are responsible for trade policy today are equally the slaves of
outmoded dogma. The first step to a better trade policy is to clear our
minds of the cobwebs of comparative advantage, the refuge of those who
find it easier to justify the havoc wrought by outsourcing than to
re-examine received ideas. We need trade and we need trade policy. We
don't need free-market mantras.
