Strange Case of Dr. K and Mr. K

by Don Boudreaux on January 5, 2008

in Myths and Fallacies, Trade

In yesterday’s edition of the New York Times, Paul Krugman again suggests that trade with low-wage countries poses real problems for high-wage America.  (Krugman’s column of December 28th is even more explicit on the point.)  I sent this letter yesterday to the Gray Lady in response:

Paul Krugman again insists that trade with low-wage countries – especially China – threatens to depress wages in America (“Dealing With the Dragon, January 4). So I again refer Mr. Krugman (the shrill pundit) to Dr. Krugman (the skilled scholar of trade).

In his excellent 1996 essay “Ricardo’s Difficult Idea,” Dr. Krugman pointed out that wages are determined by worker productivity.  Therefore, low wages reflect low productivity.  This fact, once grasped, reveals that low-wage countries have no general competitive advantage over high-wage countries.  Dr. Krugman continued: “Someone like [James] Goldsmith [a protectionist] looks at Vietnam and asks, ‘what would happen if people who work for such low wages manage to achieve Western productivity?’ The economist’s answer is, ‘if they achieve Western productivity, they will be paid Western wages’ – as has in fact happened in Japan.”

Substitute “Mr. Krugman” for “Goldsmith,” and “China” for “Vietnam,” and Dr. Krugman’s learning should calm Mr. Krugman’s fears.

Sincerely,
Donald J. Boudreaux

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{ 22 comments }

Neil West January 5, 2008 at 12:37 pm

How can wages also not be affected by opportunity costs? Do not opportunity cost drive up wages in highly productive countries such as the US and also help explain the lower wages of other countries. I don't think that this necessarily detracts from worker productivity affecting wages. Please correct me if I am wrong.

chunkstyle January 5, 2008 at 12:54 pm

This ongoing series is illuminating in the sense that Dr. Krugman once upon a time was a respected economist. Does he really believe the stuff he writes now, or is it all simply red meat for NYT liberal audiences? I guess the trade-off for Mr. Krugman in terms of partisan accollades is worth turning his back on actual economic analysis.

On a related note, how long can he ride his reputation with less-informed audiences? Eventually, people, even the most strident, should be able to see the contradictions empirically. It would seem that eventually he will devalue the Krugman brand name so that his advice will be seen as low- to no- value.

Martin Brock January 5, 2008 at 1:12 pm

These letters don't address Krugman's claims at all. Sure, development raises productivity, and productivity raises wages, unless someone holds a gun to my head and demands the fruits of my higher productivity. How free are China's workers and other foreign workers to demand the fruits of their higher productivity as they become more productive? Many nominal "libertarians" routinely ignore this question, because they aren't really libertarians at all. They're capitalist lackeys. They might as well be lobbyists representing some quasi-state corporatist agency before Congress. They deal in vague assertions of the nobility of their corporate mission.

Capitalists are the people with authority over productive means, and they demand favoritism from the state, just like everyone else. In China and other socialist states, the state itself claims direct authority over productive means, so the distinction between capitalists and the state is even blurrier than it is in the U.S. The state is never the workers. This conflation of roles is the most incredible imaginable. The state is an authority and a monopoly of forcible authority, so identifying the role of a "private" capitalist with a statutory authority is not nearly so incredible, and in a quasi-socialist state, this identification is precisely what I expect.

So I'd like to see more figures on real U.S. wages in recent years and fewer politically correct aphorisms. I largely share your political principles already, so I learn nothing from the aphorisms.

Babinich January 5, 2008 at 1:12 pm

Don,

I implore you to challenge Paul Krugman to a verbal duel.

Randy January 5, 2008 at 1:34 pm

I was watching CNN at the airport the other night, and saw Lou Dobbs referencing Krugman. I laughed out loud. I wonder how someone like Krugman feels about having someone like Lou Dobbs using him as a source for his prime time rants.

Per Kurowski January 5, 2008 at 1:34 pm

The detonator for Paul Krugman´s “Dealing With the Dragon” is that “The price of oil briefly hit $100 a barrel…. what does it mean, aside from the obvious point that the economy is under extra pressure?” He then lays the blame of that squarely on China saying that “in recent years China has been responsible for about a third of the growth in world oil consumption”.

The above considering that the USA´s per capita consumption of oil is about 14 times that of the Chinese and 2.3 times that of those in the European Union, does indeed sound like construing a shaky protectionist argument. The Chinese do pollute a lot, but mostly with coal.

The problem of oil in the USA is not solved by more diplomacy as implied by Krugman but by consuming less oil and entering into those long term uptake contracts that by reducing the volatility of the oil price could benefit both consumer and producers.

Yes, Krugman speaks about $100 a barrel but less than nine years ago the price was $10 and The Economist wrote in May 1999 that it was heading towards $5, and of course no one was investing a dime in exploration.

Martin Brock January 5, 2008 at 1:58 pm

Krugman states in the article that China accounts for only nine percent of oil consumption, but because China currently grows rapidly, it accounts for a third of the growth in demand. Randy responds with a lot of irrelevant moralizing about U.S. consumption. What should the U.S. do about the rising price of oil? Increase the efficiency of oil consumption and explore alternatives including new sources of oil, things the market is already doing. Gasoline demand actually fell recently, an almost unprecedented event in recent decades. Krugman doesn't dispute this answer, but he goes on about negotiating with China on monetary policy and carbon credits. Maybe the monetary policy issue is within the realm of Presidential authority, unfortunately. Carbon credits are a thoroughly incredible proposition. A license to emit carbon is practically a license to do business of any kind. Talk about a corporative state. It's even a license to breath, even more a license to fart.

Sam Grove January 5, 2008 at 4:00 pm

What should the U.S. do about the rising price of oil?

The framing of the question implies a collectivist bent. The "U.S." as in, "the government", should stop dicking around in the economy…this includes corporates subsidy, get out of the way and stay out of the way.

Let oil prices rise and people will adapt.

Student January 5, 2008 at 11:00 pm

Once again, Cafe Hayek misses Paul Krugman's point.

His concerns are distributional. I know for a fact that Dr. Krugman would not recant his 1996. He has said on many occasions that trade will result in international net gains. His concern is that those gains will be largely concentrated at the top of the income scale, which he believes justifies expanding the social safety net.

If you want to complain about Krugman, stick to the fuzzy arguments. His economic arguments are solid.

Bob Smith January 5, 2008 at 11:40 pm

His concern is that those gains will be largely concentrated at the top of the income scale, which he believes justifies expanding the social safety net

Even if the gains were so distributed, so what? How exactly does rich people making more money cause people poorer than them to need a bigger safety net? It doesn't follow.

Gil January 6, 2008 at 2:02 am

Or so what if countries like Indian and Chinese workers can do the job for less money? Don't workers in a free market compete with each other for the employer's money? Just as competition between businesses is supposed to bring down prices, so too for workers? Is this where the answer for lower wages is a signal for workers to find new untapped areas of productivity?

Jason January 6, 2008 at 2:33 am

"lower wages is a signal for workers to find new untapped areas of productivity" This is the most compelling intellectual argument, but unfortunately almost everyone sees it as horribly indifferent. The irony is that productivity is the basis for better standards of living, yet by definition that means lower costs per units of goods or services. If someone is doing the same thing and his or her pay goes up, either there's an inflation problem or everyone else's standard of living is going down.

Randy January 6, 2008 at 5:08 am

Jason,

Re; "…unfortunately almost everyone sees it as horribly indifferent."

I understand the sentiment, but I think it ignores the value of not having to work. I also find it difficult to imagine any horror in the fact that people are forced to adapt as the environment changes, especially considering that the "changes" in the modern world are so very minor compared to those faced by our not so distant ancestors. Yes, your factory job is gone and you're going to have to learn to operate some other kind of machine – maybe a forklift, maybe a computer, or maybe a guitar. Stop whining and do it.

Per Kurowski January 6, 2008 at 10:25 am

How free are China's workers and other foreign workers to demand the fruits of their higher productivity as they become more productive?

Posted by: Martin Brock | Jan 5, 2008 1:12:11 PM

And the same question from another angle is: How sure are the local USA workers that lose their jobs of that the global increase of productivity will flow back to them so as to at least increase the real wages of those with jobs and does not get captured somewhere else?

Per Kurowski January 6, 2008 at 10:40 am

What should the U.S. do about the rising price of oil?

Posted by: Martin Brock | Jan 5, 2008 1:12:11 PM

1. Help promote market based long term contracts between oil consumers and oil extractors that takes something away from that oil-price volatility that benefits no one.

2. I quote a letter of mine that the Financial Times published on April 2, 2005.

A sensible country would raise tax on petrol, so what is US waiting for?

Sir, it is hard to understand the United States of America!

It has a huge fiscal deficit; it has a huge current-account deficit; it is by far the world’s biggest oil consumers both in absolute and in relative terms; now willing to explore for oil and gas in Alaska, it shows itself to be aware of the difficult energy outlook the world faces; it seems aware and resolute about the environmental problems (ignore the Alaska part) as it imposes other expensive environmental regulations, such as recycling—which, as no one likes to do it, requires the hiring of Salvadoreans; it speaks all over the place about having to reduce the vulnerabilities of its oil supplies.

As any other sensible country would, in similar circumstances, increase the taxes on petrol consumption and substantially help to solve all the above-mentioned problems; and as the US has always shown willingness to pull together as a nation, recently even to the extent of going to war on shaky grounds, the big question remains: why is it that the leaders of the US do not even want to talk about a substantial tax on petrol?

Mace January 6, 2008 at 11:20 am

"The framing of the question implies a collectivist bent."

Thank you Mr Grove, my thoughts exactly.

mcwop January 6, 2008 at 7:16 pm

Student, exactly what evidence do you or Krugman have on the distributional effects? What safety net are you talking about?

vidyohs January 6, 2008 at 8:33 pm

"As any other sensible country would, in similar circumstances, increase the taxes on petrol consumption and substantially help to solve all the above-mentioned problems;
Posted by: Per Kurowski | Jan 6, 2008 10:25:25 AM"

Gotta love you Brits. Per Kurowskiduck, I visited your lovely Island with my family. I stayed in a B&B near Mildenhall for one night on my return to Iceland. My host picked us up from the train station in his auto, and drove us to Mildenhall the next day to catch our flight.

I noticed the price of "petrol" was so outrageously much higher than what I was used to paying and asked my host about how it affected the driving habits of himself and his fellow countrymen……as I could see with my own eyes there were plenty of autos and "lorries" on the roadways, no shortage as compared to the USA.

In your sensible country of high taxes on "petrol", my host said to me, "Mr. vidyohs, we aren't going to give up our autos. We'll do without in other areas but we can't give up our autos."

Ahhhh, how senisble. Yes, please teach us how it should be based upon the wisdom of your fellow countrymen. In other words, how sensible countries would do it.

The fact is PKduck, the tax can be raised to catapulting us to revolution and in between now and then we, like you, are going to operate our autos.

And, until a viable alternative to "petrol" is found, the sensible thing to do is to access more of what (oil) we make "petrol" from. And, at a cost that is not affected by our relations with other countries.

vidyohs January 6, 2008 at 10:04 pm

Well PKduck,
In retrospect I have to admit an error. I assumed you were a Brit but in rereading your above post there is no real evidence of that. My apologies if I was mistaken.

My bad for taking the term "petrol" to indicate you were Brit, when I have been in enough other countries where the same term is used instead of gasoline.

Russ Nelson January 7, 2008 at 2:35 am

Student, wealth is not 'distributed'; it is earned in trade.

Mcwop January 7, 2008 at 9:22 am

Krugman should be more concerned about Government's downward pressure on wages.

Government is failing to:

1) Stop illegal immigration of low skilled workers
2) Public schools are turning out kids that do not have basic high wage skills such as reading and writing. (I suffered in bad public schools, but the schools have become much worse since graduating 20 years ago. It is really sad.

Regarding oil prices in Europe. The US can sustain higher gas prices, but could not support the levels in Europe. We are a far bigger country in terms of area, and have to move goods much further. Not directly comparable.

James January 7, 2008 at 8:35 pm

Hey, he stole my idea!

http://thechiefbrief.blogspot.com/2008/01/mr-krugman-meet-mr-ricardo.html

Of course the author developed it much better, so I will give him a pass.

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