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12 January 2011

Mr. Michael Schuman
The Curious Capitalist
TIME magazine

Dear Mr. Schuman:

You write that “Conventional economics tells us that since the U.S. has a clear technological advantage in designing a product like the iPhone over the still-developing Chinese economy, the U.S. should be exporting iPhones to China.  That’s the kind of theory you learn in Econ 101.  But, as the ADBI study shows, that’s not what’s actually happening in the new world economic order – because Apple has outsourced the manufacturing of what it has designed” (“Is the iPhone bad for the American economy? [2]” Jan. 11).

Wrong.  If that’s what your Econ 101 professor taught you, you wuz robbed.

What economics teaches – be it Econ 101 or Econ 999 – is that, with free trade, there develops detailed specialization of labor that spans the globe, with each separable part of the production process performed by those producers who perform that part at the lowest cost.  So the fact that America has a comparative advantage at designing products like the iPhone does not mean that America has a comparative advantage at manufacturing such products.  Indeed, the better Americans become at design, the more we do (and should) specialize in that part of the production process and leave other parts to be performed by peoples elsewhere.

Put differently, Americans succeed at doing high value-added tasks such as information-technology design precisely because we don’t have to spend much of our time and resources performing other parts of the production process.

Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

(HT Nick Mueller)