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Global Economy Myths and Realities

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Global Economy Myths and Realities

America’s comparative advantage in technological capital won’t disappear anytime soon. The Shape of Work to Come 2017
Economy, finance, and budgets

Ned Ludd, an English textile worker, famously destroyed the first automatic loom in 1779, for fear that it would harm employment. In the same period, Adam Smith argued that free trade, far from harming employment, would create new jobs, thanks to the international division of labor.

Two and a half centuries later, most of us don’t realize that while Smith proved right, Ludd had a point. President Donald Trump, like some populist leaders in Europe, believes that restrictive trade measures are needed to restore full employment and increase wages. But limiting trade—protectionism—would prevent the creation of new jobs, even as innovation continues to destroy the old ones. In the United States, many continue to believe that factory jobs declined because manufacturing moved offshore; in fact, industrial production in the U.S. has remained constant over the last 25 years, though employing only half the labor. Increases in productivity, owing to scientific and technological innovation, have displaced workers.

In a dynamic economy like that of the U.S., the process of creative destruction replaces obsolete jobs with new jobs in innovative sectors. Critics object that these new jobs are unstable, which is often true; innovation builds on itself and accelerates. The solution: a labor market that is as fluid as possible, making it possible, for example, for workers to move easily and to retain portable skills from one job to the next. It is also vital that tomorrow’s workers receive an extensive, high-quality general education so that they can adapt when conditions change.

On all these points, American workers still do better than Europeans, as shown by the U.S. return to nearly full employment over the last two years. And American workers remain more productive than workers elsewhere, not only because they are often better educated than their counterparts in China or Mexico but also because they have ready access to technologically sophisticated equipment and infrastructure. In this way, a Chinese or Mexican immigrant, as soon as he arrives in America, becomes more productive than he would have been at home. The nation’s comparative advantage in accumulated technological capital will not disappear anytime soon.

American manufacturers locate production outside the country these days less because of cost than because of an international division of labor. According to the Boston Consulting Group, production expenses in China are now only 5 percent less than they would be in the U.S., if one adds the cost of energy and transportation to lower Chinese salaries. Manufacturing in China is, for an American industrialist, a rational way to organize the division of labor: more sophisticated and creative tasks remain in the U.S., while the more repetitive work, at a constant level of quality, gets assigned to Asia. Further, Chinese producers often work with machines acquired from the U.S., while the increase in purchasing power enables the Chinese consumer to buy American goods. Adam Smith’s win-win principle of trade applies here and in other country-to-country comparisons.

How is it possible that these verified and replicable principles of the science of economics are not better known and understood? The reason, Milton Friedman explained, is the asymmetry of perception: a factory that closes or that moves to China is visible, media-friendly, and sometimes dramatic, while a business that starts up is invisible—we don’t even know where it is. In response to creative destruction, some basic economic literacy would be helpful, as part of the rehabilitation of general learning in schools. Further, since job loss is a cause of real pain for individuals, families, and communities, better forms of aid to the displaced are essential. It is worth considering an innovative social safety net along the lines of Friedman’s negative income tax, proposed long ago. (See “The War on Work—and How to End It.”) The social costs of beneficial economic change can be made more democratically acceptable—and less likely to provoke counterproductive policy reponses.

Photo by Bill Pugliano/Getty Images

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