Costs Are Not Benefits; Reducing Costs Is Not Harmful

by Don Boudreaux on September 28, 2009

in Myths and Fallacies, The Economy, The Future, Trade

Commenting on this post, rickweber says:

I think I understand Paul Craig Roberts’ argument that free-trade may hurt one nation in the short-run (if they are significantly different).

My take on P.C. Roberts’s concern is not simply that free trade can lead to short-run losses for a rich nation but, rather, that free trade will lead to impoverishment over the long-run. (About five years ago he predicted somewhere that unless the U.S. protects its workers from low-wage foreign workers, the U.S. would be a third-world country in twenty years.)

A more germane point is that no one has ever denied that changes in trading patterns can, and do, reduce the incomes of some persons. (As I often point out, the popularity of the Atkins diet hurt some bakers and brewers, just as it helped some butchers.) To go from this rather banal fact to P.C. Roberts’s conclusion that trade with a significantly poorer country will harm a rich nation, though, is quite a leap.

And how does one measure “hurt a nation”? The fact that some domestic-workers’ wages fall, or that some domestic-firms lose market share, cannot be the relevant test because, again, those things are the regular and unavoidable consequences of market economies guided ultimately by consumer sovereignty. Trade across international borders plays no special role in causing such things.

So the phrase “hurt one nation,” to have intellectual and policy traction, must be read to imply something worse — say, a sustained decline in a country’s real per-capita income, or a sustained decline in the ability of ordinary citizens of that country to consume.

But on this more meaningful reading of “hurt one nation,” P.C. Roberts is clearly mistaken. How can a nation be hurt in this way if it gains greater access to lower-cost inputs?

Suppose, for example, that a genius invents a low-cost machine (much like the one in Star Trek) that can safely and comfortably transport human beings from point A to point B — from our home to the local supermarket, or from our home to Tahiti — instantaneously and for only pennies per transport. This machine is soon sold for $1.99 and becomes, say, an app on a cell-phone or is clipped on to one’s belt.

The great majority of Americans who now work in the transportation and travel industries would lose their jobs. The demand for automobiles would plummet, as would the demand for airplanes and for airline services. Even the demand for hotels and motels would fall dramatically, as many business travelers would just beam themselves back home for the night rather than sleep in a far-away, strange bed.

But would America be made poorer by this marvelous invention? Of course not. We’d be made materially much richer.

The low-cost availability of a device that does away with our need to spend lots of time and resources building cars, flying airplanes, and staffing hotels is not fundamentally different than is the low-cost availability of whatever goods and services become newly available to us as a result of freer trade.

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martinbrock

But would America be made poorer by this marvelous invention? Of course not. We’d be made materially much richer.

In the short term, airline pilots and others would be made materially poorer. There's no use in denying that. We become richer only as these people become productive otherwise, so we may consume the new goods they produce, since we no longer need their former produce. That doesn't happen overnight. You can imagine your miraculous, $1.99 transporter into existence instantaneously, but real economies don't respond so rapidly.

But let's imagine a slightly different scenario. I discover the secret of this transporter, and I have a perpetual monopoly over its production. I don't want to sell it for $1.99, so I instead charge users per trip. I don't charge less than an airline for a trip from N.Y. to L.A. I charge more, but I still drive airlines and hotels out of business, as you say, because I charge less than the cost of an airline ticket plus a hotel. That's still progress for my customers, of course.

I can produce my devices for a dollar, so I become incredibly wealthy, but rather than reinvesting my incredible wealth in some new productive organization employing former airline pilots producing goods for consumption by others, I decide to hire them to build me a private castle and a pyramid for my burial. I also hire them to fly my personal fleet of 767s, which I buy at firesale prices, because I enjoy flying for its own sake. I pay my pilots less than pilots previously earned of course, because the supply of their skills now far exceeds the demand.

That's a ridiculous scenario, but so is yours. Where is reality on a spectrum between your ridiculous scenario and mine? That's the real question, and these hypothetical scenarios don't much help us to answer it.

Economiser

Why would you have a perpetual monopoly? Your patents would last 20 years, after which you'd have a lot of competitors selling the device for pennies. And you'd have bootleg devices being produced in black markets around the world.

So just because you have a monopoly for 20 years, why would airline pilots want to work for you building a castle and a pyramid? Surely there's some other job they could get outside of the airline pilot/construction worker fields. If you paid more than the market wage, you'd have experienced construction workers lining up to build your pyramid and doing a much better job at it than airline pilots.

I don't see what the problem is.

martinbrock

I have a perpetual monopoly for the same reason that I have the transporter device, because that's the hypothetical. I don't really have the transporter device either, you know.

So I don't have a monopoly for 20 years. I have a perpetual monopoly.

The airline pilots might find other work, but I have most of their former salary, in monetary terms, and I offer it for my castle and pyramid and personal 767 fleet, and monetary authorities don't want to create inflation (hypothetically), so they don't monetize the pilots' labor otherwise, i.e. creditors don't extend credit to other economic organizations reemploying them.

I'm happy to hire the experienced construction workers instead, but then these workers aren't building something else, so the effect is similar. The airline pilots are still doing something other than airline piloting and presumably earning lower wages. If they could immediately earn higher wages doing something else, why were they airline pilots in the first place?

You don't see the problem, because you deny the hypothesis. I could deny Don's hypothesis too. I could tell you why this transporter device violates all sorts of physical laws, but that would defeat the purpose of Don's post.

My point is that Don's hypothesis presumes what he wants to prove. So does my hypothesis, but I don't really want to prove the point. I only want to illustrate another extreme.

We don't have an ideally free economy as a matter of fact. A not so free economy can drive common wages down while concentrating consumption among a few. Nominally "egalitarian", socialist economies actually do this in practice, ironically.

An economy can have this effect, and I don't really know how much our economy fits my description rather than Don's. It's an empirical, not a theoretical, question.

EricHH

The idea that technological progress and cheap imports have similar effects sounds like one of those "counter-intuitive ideas of economics" that Bryan Caplan is collecting over at Econlog.

I recall arguing against an interest rate cap for payday loans and telling proponents of the legislation that it would have the same effect as a price ceiling. "Think of what would happen if the price of bananas was legally fixed at a penny a pound. They'd disappear!"

"You're right...but still--payday lenders are exploiting the poor!"

Oh well...

Thomas DeMeo

Your example doesn't work very well when the real issue is the pain caused by very large labor imbalances. Labor is becoming dramatically more fungible very quickly. When a new technology comes along like your transporter example, there would be a great deal of creative destruction, but there would be large potions of the economy that would be unhurt or better off. You could find something new to do and be better off. With highly fungible labor, the entire world market for labor will have to find equilibrium before new opportunities are available to those higher cost workers.

Bret

Here's a slight variant that might be a concern:

Let's say this wonderful device, after making us, on average, far better off, even though it caused the obliteration of the existing transportation and hospitality sectors, suddenly stopped working. Perhaps because the genius was an evil genius and built an expiration date into the device. Or something like that.

At that point, we have neither the device nor the older ways of getting about. Sure, we can rebuild those, but it would be quite a setback in the meantime, especially since both the infrastructure and know how would be long gone.

This case is potentially more like trade with China. Sure, they supply lots of great stuff cheap and we don't even pay the full price since they have been just holding dollars. But they are a potentially very hostile regime and they may set us back quite a bit at some point. Sure, we'll recover, but it could be quite painful.

I personally don't trade with anyone (individual or nation) that I believe wants to hurt me.

vikingvista

"suddenly stopped working. Perhaps because the genius was an evil genius and built an expiration date into the device"

Economics is not about what is imaginable--I can imagine 32 levitating midget Elvi in polkadot miniskirts successfully directing economic output and solving all economic problems. It is about expectations given the reality of nature and incentives. Fantastic scenarios aren't a good reason for policy.

If you think the mutual enrichment that Americans and Chinese experience by trading with one another will somehow worsen ill will, then by all means, maintain vigilant intelligence and defense services. But it seems to me the best way to worsen relations and decrease the cost of Chinese antagonism is to close down trade.

NathanS

And what if the sun stopped shining tomorrow? Could I use that as a case for why universal health care was trivial in the face of more pressing issues?

Randy

Bret,

Potentially hostile.

But then, China's willingness to trade is a very strong signal that they are potentially friendly, don't you think? In fact, forget the potentially part. We are trading, and trade is friendly. Sure, they might stop, and we might stop, but right now we're trading - we're friends.

Bret

It's certainly a signal that they aren't hostile (I don't need entities to be friendly, just not hostile). However, while they are run by a communist regime, I find it doubtful that their primary motivation is creating prosperity. That, to me, makes them potentially hostile.

OnlyShawn

Who is this "china" that "we" are trading with? What do "they" make?

/sarcasm

You trade, as an individual, with individuals, not a country.

Bret

Typically one trades with an organization. For example, when I go to the grocery store, it is incorrect to say that I traded with the cashier. That person is only acting as an agent for an organization.

It is true that "china" doesn't make anything. However, talking about "china" was simply shorthand for those organizations who happen to be in "china" that are comprised of persons who potentially want to hurt me or are aligned with others that are so inclined.

OnlyShawn

Fair enough. I made my point, however. You're trading with corporations, at the most, not the government. I have no doubt that the government may wish you harm....but the corporations simply want your money.

danielkuehn

I'm in an odd position of not disagreeing with a single thing you said, but wondering why an example on how technological development is good is relevant to trade policy?

Because they both displace some labor and so if they share that common problem but we like technological development anyway we should like free trade anyway?

I feel like I'm missing something. I agree with you on protectionism, Don - I just don't get the argument here. If it's a basic "things that have net benefits also have gross costs" argument, that's fine - but I don't think any protectionism advocates would argue with that. I think they'd argue about whether there are net benefits, period. That's where they need to be corrected.

DonBoudreaux

Daniel,

Protectionists such as P.C. Roberts fear low-wage foreign workers because imports produced by those workers will eliminate many high-wage jobs in America.

If eliminating the demand for many skills that currently fetch a high wage in the domestic economy were truly hazardous to the economic health of the nation, then we should also fear inventions such as the one I mention in my post.

muirgeo

Your comparison I believe is faulty.

Low wage workers DO NOT increase productivity. Highly efficient machines DO.

So at least in theory the use of highly efficient machines can allow us to either have even higher standards of living or work fewer hours per day.

Adding to the pool of low wage workers simply brings down everyones wages except the few on the top. Thus everyone either has to work harder or have a decreased standard of living... the difference in wage loss NOT being made up by the availability of more cheap things.

Here's another angle....

You can get to Utopia where machines do all the work for humans using machines... you can't do so using human labor.

vikingvista

You're trying to have it both ways, muir, which is why you have it half right.

If foreign labor deprives people of productive work, then so do machines. Automating a plant reduces the number of workers needed to produce the same amount. Much plant automation results in jobs being reduced to a few controllers and a maintenance crew.

But that is not the whole picture.

Machines and foreign labor both reduce the costs of inputs to American production and reduce costs to consumers. The other advantage, the one most often overlooked, is the advantage to consumers of having people direct their productive efforts toward other ways of satisfying consumer desires.

MWG

???

danielkuehn

OK, that's what it seemed like the argument was. Presumably, though, it's not just a low-cost question. Productivity improvements resulting from U.S. owned technology presumably involve consumer and producer surplus that "stays in the U.S.". That's not the case with imports, where U.S. consumer surplus is preserved and even increased (by virtue of the fact that imports are lower cost), but producer surpluses are lost to foreign countries.

I'm not making the argument but it's the sort of neo-mercantilist argument that is made by protectionists. The protectionist argument seems to go farther beyond "it's bad to have cheap stuff". That's so ridiculous on it's face that it can't be all there is to it. So I wonder if the technological development angle of argument misses their essential quarrel with free traders.

Marcus

I'm a computer programmer. 50 years ago I would have been a factory worker. So would have most of my fellow computer programmers.

Now, it may be that my father would have had a difficult time making such a transition. I think that is a legitimate concern. However, his son didn't have any difficulty with the transition and neither did most of the children of all those other factory workers.

Yet, if the protectionists had their way, today I and most of my fellow programmers would still be working in a factory.

Understood properly, it is all the new opportunities Americans have which drive factory jobs overseas. The dependable workers who would have been factory workers 50 years ago are doing something else and are largely priced out of the factory worker market.

danielkuehn

Re: "Yet, if the protectionists had their way, today I and most of my fellow programmers would still be working in a factory."

I have no idea if that's true or not. I think it's very possible the programming industry would have emerged despite protection. But that's besides the point. I'm not advocating protectionism here - I'm just wondering if Don's argument fully addresses the protectionist concerns.

louh

Look at what happens in countries that rely on their natural resources for their existence. Welsh miners did themselves a great disservice by clinging to an industry that had long since outlived it's usefulness. Competition leads to innovation, which leads to new industries and jobs.

NathanS

What prevents the "lost producer surplus" from working in another industry they have a comparative advantage at?

danielkuehn

I agree with your implication - it would be used for the next best use of productive assets. Obviously this would offer lower surplus (otherwise they would have done that in the first place), but that gap would be made up in the benefit accruing to consumers from lower prices.

You have no argument with me on that - my point was simply that an allusion to the universally agreed upon benefits of technological development doesn't begin to address those issues. I'm not MAKING protectionist arguments myself, I'm just laying them out and wondering about the extent to which Don addresses them.

hamilt0n

I think a basic understanding of comparative advantage might a necessary condition for being a libertarian (at least you're a utilitarian).

danielkuehn

RE: "at least you're a utilitarian"

I am? That's news to me!

It's a good rule of thumb in a lot of cases, but I'd hardly say it's my philosophical perspective.

hamilt0n

Should read: (at least IF you're a utilitartian). Important typo.

Moggio

About this "marvelous invention", I am still looking for a science-fiction book (maybe an economic one!) which "deals with" all or, more probably, some of the consequences of this (Star-Trek) machine for our modern economies. Please could you help me? Thanks in advance.

Randy

Costs are not benefits, and a job is a cost. I imagine an ideal world as one in which having a "job" is optional. A world in which necessities are free or nearly free, and luxuries are traded for luxuries.

Mike

You're kidding, right? A job is simply an exchange of time for money with a premium based on skill. I'm guessing you've got a problem with division of labor too. Better get to making pins.

Full disclosure: I'm new here and might not have noticed your sarcasm.

Randy

Mike,

Nope, no sarcasm. If I could have the things I want without working for them I most certainly would stop working. A job is a cost. I bring this up to counter to the idea that "creating jobs" or "keeping local jobs" is inherently good. I see the historical trend moving toward a society that works less and less but has more and more. A society in which necessities are already very cheap and in which most of us create luxuries for a living. I see no reason why the trend should not continue - unless of course, the political types stop it in favor of "creating jobs".

Jeff

Sure, that's creative destruction. Makers of buggy whips re-applied their skills to making cars. I get it.

But that's not what's happening to US jobs. If the car manufacturers had moved operations overseas, in places where US workers couldn't work, then the buggy whip makers would have had to start from scratch. They would have entered much lower paying jobs, and lots of them wouldn't be able to buy cars. We'd be worse off.

If we had transporters, we'd all be better off, if US workers could make, service and sell them. If US workers could not do that, because of labor immobility (geographical), then then the entire country would be in exactly the same situation as before. Sure, travel costs are lower, but so are wages. So, no difference. That's not creative destruction, that's just busy work.

Noah Yetter

This is completely false and it's extremely easy to see why. Just imagine the transport devices are gifts from an alien civilization, and require no power or maintenance or upkeep of any kind, meaning there are no jobs associated with them whatsoever. Guess what, we're still better off now than before we had them.

Yes, people employed in transportation and travel and et cetera will have to find new employment. This is a good thing! Labor is a resource, and we now have a great deal of it available to do new things with. THAT'S where the gains come from when efficiency increases: applying the saved resources to new uses.

Marcus

You make the same mistake that many people make concerning this issue: you're missing all the new jobs and services that would be possible because of this new technology. Entrepreneurs would grab a hold of such a technology and build new and innovative business models around it.

Instead of having so much of the work force tied up in the transportation industry they would now be freed up to do more productive work.

Jeff

No sir. You're engaging in the non sequitur. I know that as knowledge progresses the available goods and services increase. I get it.

I don't base any of my claims on the negation of that fact.

I base my claims on the effects of bid constraints in regulated markets.

louh

Would you prefer high tariffs, less choice and a higher price on domestically produced goods ?

Marcus

"I base my claims on the effects of bid constraints in regulated markets."

I'm not trying to be argumentative but I didn't get that out of your post.

In the post I was replying to you wrote, "If we had transporters, we'd all be better off, if US workers could make, service and sell them. If US workers could not do that, because of labor immobility (geographical), then then the entire country would be in exactly the same situation as before."

I believe that is a false statement. We would not be in the same situation as before even if American workers did not make, service or sell them.

And the reason is because of all the new opportunities such a technology would create. Or, more accurately, entrepreneurs would create.

vidyohs

Jeff,

Don't you find it more than a little humorous that you're talking about an invention that allows instant transport to any place on the globe and then turn around and talk about labor immobility?

If I can zap myself to New Zealand and buy wool direct from the sheep rancher (eliminating the middle man and his markups), and then zap myself back home, what is to keep the millwright from zapping himself to New Zealand and working at his skill there, then zapping himself back home for the night?

Labor immobility would be a thing of the past, and the invention would go farther towards lifting the little guy out of poverty than anything else ever invented by man, simply because labor mobility would be the norm.

Let's take this farther. What would prevent a manufacturer from giving zappers to his workers from Bangladesh and having them show up at this factory in Lowell, Ma at 0800A.M. every morning, paying them wages in the high end range for Bangladeshies, and them they zap themselves home to momma and the kids each evening., where because of their high wages they are the wealthy. With the zapper it is a whole new ball game.

Hey, that was fun!

Gil

Actually there's more to international labour issues than transportation as many people do move to other places around the world now. Trying to move to places where all sorts of cultures, tribes, jurisdictions, nationalities with different languages, etc., makes things rather difficult.

vidyohs

You insist on being a simpleton.

Let's take my example of an American firm in Lowell, Ma, hiring workers from Bangladesh and providing them with instantaneous teleporters they wear on their belt and cost $1.99.

They don't move anywhere, diptstick, they teleport to work and teleport home. In essence they show up for work and then they go home, no different than anyone else today, only their home is 8,000 miles away in Bangladesh and they move instantly twixt the two. They would have no legal domicile here in the USA.

If the employer provided a cafeteria, the Bangladeshies wouldn't even have to leave the factory, so who would give a crap about the local cultures, tribes, jurisdictions, nationalities, or local languages. It would be a place of employment, no more, no less.

I'll grant you this, there would be issues, but the issues like the premise are just funny what ifs.

We can make a what if profitable, or we can make a what if a disaster.

Jeff

Heh. It is funny. And maybe, just maybe, we'd get a free market in labor which really would benefit everyone.

But I can guarantee you that those international transporters would have customs agents on the other side. And draconian rules against working illegally will still be in place.

For example, Singapore flogs people who work there illegally.

So, it is ironic. It is funny. But governments will restrict travel just like they do today.

vidyohs

Have more faith in people, Jeff. After all even in the Soviet Union from day one through the collapse of communism there was a thriving black market because people learn to get around governments when they really want to.

But, this is off the subject, so I'll drop it.

Janza44

You make some pretty poor assumptions in your argument. First of all, you say that a car we import is the same as one we produce ourselves, when in fact the imported car is cheaper. So now that I can buy a car cheaper, lets say 25% cheaper, than I in turn have a 25% cheaper car payment each month, which means I have that extra money to spend every month. What do I do with that money? I'll probably buy stuff, I might go out to eat more often, buy a bigger tv, better cell phone, go on a vacation, it doesn't matter, I get to buy more stuff. Somebody has to produce this stuff that I can now afford. Or I just take out a smaller loan on my car, this means that I lowered my demand for credit, allowing business owners to have easier access to credit which allows them to create more jobs.

Meanwhile, over in the country that is making our cars, demand for low skilled labor is increasing, which in turn raises their wages, which means they can buy more things from the United States(we are the largest exporting country in the world).

Also do the autoworkers that lose their jobs necessarily go to a lower paying one? If I'm an electrician that loses my job at an auto plant I may find an equal paying one somewhere else, or I could go back to school and become more specialized and raise my wage to a much higher one that I previously had.

Jeff

Ok, say the car is cheaper. Your wages are lower, so there's no net benefit.

It's not true that "autoworkers that lose their jobs necessarily go to a lower paying one." It is true that higher labor supply implies lower wages.

Geographical labor immobility in the US means US workers compete against labor worldwide, but US workers cannot bid on jobs worldwide. Since US workers compete in a constrained bid market, but foreign labor does not (foreign workers can bid on all job), US workers will suffer higher competitive intensity. And foreign labor is advantaged by lower competitive intensity (US workers can't bid on some jobs).

Worse, the US tax code actually encourages the use of foreign labor over US labor. Suppose company outsources and earns $100 million. If the foreign country taxes at 20%, it takes $20 million from company. When the company sends the remaining profits back to the US, it pays $15 million in US taxes. But if the money stays offshore and the builds factories and employs workers overseas, then the company shields $15 million from US taxes.

The US actually encourages companies to hire foreign workers. Corporations should pay zero taxes on repatriated monies. In general, corporate taxes should be much lower, too. but that's another question.

Labor is not a free market. We're reasoning about relatively free markets existing side-by-side with what are essentially government controlled markets. That's why much of the traditional free market arguments fail.