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In my column for the May 14th, 2008, edition of the Pittsburgh Tribune-Review I boasted of how knowledge of sound, basic economics gives to all who possess it the ability to see the world very differently – much more fully and accurately – than the world is seen by the economically benighted [2]. You can read my boast beneath the fold.
Getting the right picture
We’ve all seen a drawing that looks like two very different things depending upon how the viewer looks at it. In one case, for instance, what at first appears to be the craggy face of an old woman suddenly looks like a beautiful woman standing in a sexy pose. If you look for the old woman in the drawing, you see the old woman. If you instead look for the gorgeous babe, you see the gorgeous babe.
Same picture. Same objective reality. Two wholly different sightings.
And so it is in economics. The very same set of facts — the very same objective reality — often tells two (or more) very different stories depending upon the attitude and knowledge that the observer has when examining these facts. More imports from abroad and the losses of specific domestic jobs that they typically entail are seen by some as a sign of trouble for the domestic economy. Others see these same facts as a boon — as the opportunity to get valuable goods and services at lower costs and as releasing scarce domestic labor to produce outputs that would otherwise be too costly to obtain.
Indeed, one of the most common of these “interpretation differences” involves labor and jobs. When I write, as I do in the previous paragraph, of “scarce domestic labor,” many readers will wonder what I’m talking about. These readers see labor as expendable, as resources not especially valuable.
Think about it. The overwhelming objection to imports is that the domestic workers whom they displace are unlikely ever again to find employment at wages close to those that they once earned in their now-defunct jobs. This objection rests on the presumption that these workers were overpaid in their former jobs. Here’s why.
Every employer is willing to pay each worker up to the extra amount that that worker contributes to the employers’ bottom line. If hiring Jones will raise a firm’s revenues by $20 per hour, that firm, if it must, will pay up to $20 per hour for Jones’ services. Should the firm refuse to pay, say, the $19.50 hourly wage that Jones demands, that firm forgoes the opportunity to increase its profits by $0.50 per hour. (Ask: If a machine promises to give you $20 for each $19.50 that you feed into the machine, would you decline this opportunity?)
Of course, every employer also prefers to hire workers at wages as low as possible. (Wouldn’t you prefer to use a machine that charges you $2 for each of its $20 disbursements rather than one that charges you $19.50?) So why would any firm pay a worker wages that closely reflect that worker’s value to the firm? The reason is competition. If Jones can produce an hourly value for Acme Corp. of $19, or $20 per hour for Widget Inc., Widget Inc. must pay Jones at least $19 per hour to obtain this worker’s services. Otherwise, Acme Corp. will hire Jones while Widget Inc. loses an opportunity to fatten its bottom line.
Therefore, wages in a competitive market economy generally reflect the hourly value of workers to their employers. Employers do not hire workers out of charitable impulse or pay them much more than these workers could earn in different jobs. Nor are workers routinely expendable. Employers need workers no less than workers need employers.
So when Lou Dobbs and other skeptics of free trade complain about workers losing their jobs to imports, they see only the craggy-old-lady version of the reality. When proponents of free trade sing the praises of imports, they see the beautiful-woman version of the same reality. Free-trade proponents see that workers who lose jobs today generally do have comparable opportunities in other industries.
But free-trade proponents see even more. Unlike with any of those static drawings where one perspective is as correct as the other, for the economy there is usually one perspective that is objectively most accurate. And this correct perspective is the one that encompasses not only what’s happening today but what will likely happen in the future.
When freer trade eliminates some jobs, it releases labor and capital to produce things that previously were too costly to produce. The result: Consumers eventually get not only the imports, but also the additional domestic production made possible by those imports. Also, these domestic resources become more productively employed because competition shifts them from less-productive to more-productive enterprises and industries. The snapshot perspective of trade skeptics causes them to miss these future benefits.
When trade is free, even craggy and slothful economies can be transformed into lively and fertile ones. That’s my perspective.