Friday, July 15, 2005

Jobs & Free Trade

In An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith criticized governments for outlawing the use of labor-saving technology, granting monopoly privileges and subsidies to certain industries, and aiding in the creation of cartels. Adam Smith believed, as economists do almost unanimously today, that competition and choice lead to prosperity, but protectionist measures inevitably lead to misallocation of resources and poverty. To understand this, we must first understand the basic question: why do we buy things from other people?

We could make everything ourselves, right? Isn’t being self-sufficient a good thing? As a matter of fact, being self-sufficient is a good thing, that is, until you consider what you have to give up to be self-sufficient. Suppose you earn $20 per hour at your current job, and you typically spend thirty minutes buying your groceries each week ($10 in time) and the groceries cost $30. The total cost of your trip to the grocery store, excluding any minor transactions costs such as gasoline expenses, is $40 – equivalent to two hours of your time. Suppose you are also entirely capable of growing your own food. Let’s say you can purchase a few plants for $15 and spend approximately two hours maintaining your garden and harvesting your food each week. The total cost associated with growing your own food in this case is $15 for the plants plus $40 for the two hours per week, or $55. Is it worth the loss of $15 per week to be “self-sufficient?” No. In fact, you are spending more money or more time to accomplish the same outcome as you had when you purchased your groceries at the grocery store. In being “self-sufficient” you are making yourself poorer.

Now, let’s change our suppositions in the previous example. Let’s say that you earn only $6 per hour, and all other variables are the same. Your cost of groceries is $30 plus the half hour of your time, which is equivalent in this case to $3. The cost associated with growing your own food are $15 for the plants, plus two hours of your time each week, or $12. For you to buy your groceries, it would cost $33. For you to grow your own food would cost $27. Because your time is less valuable, it is cheaper for you to grow your own food. It follows that the only time that one should be self-sufficient is when one’s current specialty does not pay highly and/or when the cost of purchasing a good exceeds the cost of making it oneself. A poor society is self-sufficient. A wealthy society, by its very nature, produces that in which it specializes and purchases all else. To do otherwise would be more costly.

Undoubtedly you agree in practice as well; if it is cheaper for you to buy something, you do not make it yourself without the added feeling of accomplishment to account for the difference in cost. However, we are not only dealing with the issue of making goods ourselves versus purchasing them from others. In fact, we recognize that on an individual level, people should not be truly self-sufficient, but should capitalize on their own unique skills. Why is this different for countries?

No supporter of protectionist policy in the United States would argue that you should make everything yourself rather than purchase it from other people in the United States. Who is to say that other people in the U.S. are our ‘friends’? Is a foreign stranger sufficiently different from a stranger in our own country?

There are companies that I simply do not buy from because I disagree with the political or social objectives that they support. Certainly it is the freedom of all individuals to choose from whom they purchase or whom they do not. However, we make these choices in the absence of tariffs or quotas. When I refuse to buy an equivalent, lower-priced item because I disagree with the political agenda of the manufacturer, I am saying that the difference in price is not sufficient enough to warrant the negative externality (supporting their political agenda indirectly) that I bear. I am the only person qualified to make this decision for myself and I bear the cost of this decision. On the other hand, if I were to make a law that would impose a tax on Bad Political Agenda, Inc., while not imposing a similar tax on Good Political Agenda, Inc., I would make it more costly for EVERYONE to buy from Bad Political Agenda, Inc.

I had a discussion recently with some out of town guests who believed that free trade would harm the U.S. because of "lost jobs" to workers in foreign countries who were willing and legally able to work for less pay. While I agreed that minimum wage laws stifle the ability of the U.S. to compete in exporting certain manufactured goods, not permitting free trade would only cause further misallocation of resources. We might keep some jobs, but to do so would be at the cost of other jobs at which we would excel. I also made the point that "losing jobs" is not necessarily a bad thing - losing the end result of a job is the bad thing. Jobs are costs, not end results. We work not for the sake of having a job, but for the sake of having a salary! If our goal is to maximize the number of hours we spend working, then by all means, outlaw free trade -- in fact, we should just outlaw trade in general so that everyone is always employed! But if our goal is to maximize wealth, we must realize that free trade and specialization is key. When we find more efficient ways of doing business, our productivity remains the same, but the cost (i.e. the number of hours worked or the number of employees needed) is less. Free trade is a mechanism that allows us to receive the same (or superior) product with less work because it is comparable to finding a more efficient outcome.

No comments: