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Capital Is Not Fixed In Amount

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On-going correspondence with a trade skeptic:

Mr. W__:

Disagreeing with my explanation of why high-wage American workers have nothing to fear from an American policy of free trade with low-wage countries [2], you write: “High US worker productivity comes from companies investing plenty of capital for workers to work with.  But under free trade companies would move investments to countries with lower wages.  US workers will become less productive and be paid lower wages.  This is why the combination of free trade and capital mobility are bad for workers in rich nations.”

Wrong.

While you’re correct that the productivity of American workers is raised in no small part by significant private-sector investment in the U.S. – that is, by the creation and use in the U.S. of capital goods and services that improve worker productivity – for a variety of reasons you’re incorrect to conclude that American workers would suffer under free trade. Here are two of those reasons.

First, worker productivity in the U.S. isn’t kept high exclusively by investments here in capital goods and services. Also raising American workers’ productivity is the extensiveness and quality of our transportation and communications infrastructure, the relative honesty and efficiency of our legal system, and the still-dominance here of what Deirdre McCloskey calls “bourgeois virtues [3],” especially our culture of commerce, hard work, and high trust. Making trade freer would do nothing to worsen America’s performance on these fronts; indeed, I believe that this performance would be further improved.

Second, the amount of capital in the world isn’t fixed. It expands or shrinks with the bettering or worsening of investment climates in different countries across the globe.

There’s a reason why low-wage countries have in place less capital per worker than is in place in the U.S., that reason being that investing in those countries is less attractive than is investing in the U.S. And the attractiveness of investing in those countries is unlikely to improve greatly merely as a result of the U.S. lowering its trade barriers. But if the investment climate in low-wage countries improves in a way to attract to those countries substantially more investment, as long as government in the U.S. does nothing to worsen the investment climate here – say, by raising taxes exorbitantly – the stock of capital in America will not fall. Instead, the global stock of capital will rise as new capital is created for low-wage countries. Workers in low-wage countries will thus become more productive with no decline in the productivity of American workers.

Also keep in mind this fact: No small part of the high productivity of American workers is due directly to international trade. This trade not only makes available to many American workers low-cost, high-quality raw materials, tools, and inputs to work with, but also offers to many American companies vast foreign markets that enable these companies to operate at large, highly productive scales.

But in the end, all of the above is unnecessarily complex. The simple fact is this: A people are not made richer when their government obstructs their access to low-priced goods and services. They’re made poorer. Period.

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