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Quotation of the Day…

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… is from page 81 of Martin Wolf’s superb 2004 book, Why Globalization Works [2]:

The shrinking import-competing industry is not competing with imports from foreigners, but with what its own domestic export industry can pay.

This point is crucial, although a bit more general than Wolf here makes it out to be.  This point is central to the basic economics of trade but is almost completely lost on the general public.

Wages and salaries in domestic industry X aren’t as high as they are simply by accident or because the owners of that industry are so generously disposed toward their workers that they pay these workers wages and salaries above what these owners must pay in order to secure the services of these workers.  Instead, wages and salaries in industry X are as high as they are because those wages and salaries get bid up to those levels by competition from other domestic employers – including, but (contrary to Wolf’s suggestion) not limited to domestic firms that export – who would profit from using those workers.  If there are generally no good alternative options open to workers who now work in industry X, their wages and salaries would not have been bid up so high and, thus, industry X would be much more likely to ‘out-compete’ any foreign rivals who arrive on the economic scene.

Put differently, the very fact that domestic industry X is now losing market share to foreign rivals means that the values of alternative uses for workers and other inputs in domestic industry X are generally higher than are the values of continuing to use these workers and other inputs in domestic industry X.  This reality is a good thing, generally speaking, for these workers and other inputs.

Of course, transitions are often difficult and, for many flesh-and-blood workers, the general rule doesn’t apply.  For any number of reasons – some economically justified, others not so – some particular workers in domestic industry X are paid wages well above what these workers can earn in alternative employments.  But our understandable concern for these workers, and our realization that specific exceptions to general patterns and market forces always exist, should not lead us to overlook the fundamental reason why wages in domestic industry X are so high that domestic industry X now has difficulty maintaining market share in the face of new foreign competition.

Further, I say again, there is nothing at all unique about the new competition that comes from imports (or from immigrants).  Any change in consumer spending and techniques of production ‘destroy’ some jobs and industries while creating others.  And they do so no less and for exactly the same reasons that imports ‘destroy’ some jobs and industries.

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