In today’s edition of the New York Times, Paul Krugman offers up the old pauper-labor “theory” for why trade with low-wage countries is likely to harm typical workers in high-wage countries.
Here’s a letter that I sent in response:
Paul Krugman worries that, although trade between high-wage countries is mutually beneficial, “trade between countries at very different levels of economic development tends to create large classes of losers as well as winners” – and so is suspect because it likely harms ordinary American workers (“Trouble With Trade,” December 28).
A famous trade economist argues that this concern is misplaced. In a 1996 essay, this economist – responding to a protectionist who fretted that western trade with low-wage countries would harm workers in the west – wrote that this protectionist “offers us no more than the classic ‘pauper labor’ fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates.”
Donald J. Boudreaux
It’s worth noting here also the apt and spot-on correct closing lines of this 1996 essay: “Ricardo’s idea is truly, madly, deeply difficult. But it is also utterly true, immensely sophisticated — and extremely relevant to the modern world.”