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Quotation of the Day…

Tweet [1]

… is from page 2 of Robert C. Allen’s 2011 book, Global Economic History [2]:

51YTF59+MPL._SX311_BO1,204,203,200_Most technology is invented in rich countries, and they develop technologies that use more and more capital to increase the productivity of their ever more expensive labor.

DBx: This short quotation is long on significant implications.  One is that innovation and the labor-saving and labor-complementing techniques that it generates are not random (economists say “exogenous”) events.  Most are directed, or are sparked, by profit opportunities.  If labor is inexpensive, the expected payoff from devoting creativity, effort, resources, and time to developing labor-saving methods of production is low.  As labor becomes more expensive, this expected payoff rises.  Likewise, and in more detail, innovative effort to save labor will generally be more intense for those tasks that are currently performed by high-wage labor and less intense for those tasks that are currently performed by low-wage labor.  That is, the higher the labor cost of performing a particular kind of task, the greater in the incentive of innovators to create labor-saving methods of production and for businesses to use those less-labor-intensive methods of production.

A second implication is that this logic also explains observed changes in patterns of trade.  Recall that trade is simply a form of innovation [3].  Businesses in the home country have greater incentives to search abroad for lower-cost sources of supply the higher are per-unit production costs in the home country.

A third implication is that when we witness increased use of labor-saving techniques, as well as increased trade that takes advantage of lower-wage foreign labor, the reason is that the cost of labor in the home country is rising.  If this increased cost of labor is artificial – as occurs, say, when government raises minimum wages or mandates family leave – then workers in the home country suffer.  Their employment options shrink because of these mandates (and not because of trade, although it often appears as if trade itself is the culprit).  But if this increased cost of labor is genuine – that is, if it reflects the greater scarcity of labor relative to the demand for labor – then we should celebrate.  The reason is that workers’ real pay is rising.  And while this rising real pay does indeed intensify businesses’ incentives to further economize on the use of labor, the root cause of this search for labor-saving techniques is the reality that workers’ options have expanded and improved (for it is these expanded and improved options for workers that drives their wages higher).