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Marginal Analysis

Here’s a letter to National Review (link added):

Given Edward Conard’s generally sound instincts, it’s regrettable that he gets some important details about economics wrong (“A Trade Policy That Wouldn’t Leave Low-Wage Workers Behind,” Dec. 5).  For example, Mr. Conard evinces confusion when he writes that: “An increase in low-skilled workers spreads constrained resources – talented supervision, for example – over a greater number of workers.  This slows productivity and wage growth, because low-skilled workers don’t add to constrained resources in proportion to the demands they place on them.”

Whenever the proportion of one kind of input (say, “talented supervision”) falls relative to another kind of input (say, “low-skilled workers”), the productivity of an additional unit of the first kind of input rises.  Competition then drives up the price or wage of that input.  Because the supply of “talented supervision” isn’t fixed, the rising pay of talented supervisors attracts more people into that line of work.  This result, in turn, increases the productivity of the second input.

It won’t do to object that the supply of talented supervisors is more “constrained” – economists say “more inelastic” – than that of low-skilled workers.  Throughout history the supplies of some inputs, including “talented supervision,” have been more “constrained” than the supplies of other inputs, including low-skilled workers.  Yet this reality has not prevented spectacular economic growth in societies that, steeped in bourgeois values, accept the economic change that is inseparable from free, dynamic, innovative markets.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


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