On April 17th, 2006, I contributed this essay to Tech Central Station – an essay critical of Lou Dobbs, Paul Craig Roberts, and several others who back then predicted that Americans would soon be be deeply impoverished by free trade. (I cannot now find a link to the Tech Central Station version; the link here is to my essay’s reappearance at Free Republic.) You can read the essay in full beneath the fold.
Tech Central Station: “Dobbs’s Disciples” (Why America is Growing Richer, Not Poorer, From Free Trade)
Donald J. Boudreaux
Economist Paul Craig Roberts has joined recently with the likes of Lou Dobbs and Sen. Charles Schumer to denounce so-called “outsourcing” — that is, the importation of services.
Roberts is aware that, throughout history, free trade has raised the living standards of ordinary people. But, he says, this historical record is irrelevant to today’s world. He explained the reasons in a January 6, 2004, New York Times op-ed written with Sen. Schumer and entitled “Second Thoughts on Free Trade”:
“First, new political stability is allowing capital and technology to flow far more freely around the world. Second, strong educational systems are producing tens of millions of intelligent, motivated workers in the developing world, particularly in India and China, who are as capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost. Last, inexpensive, high-bandwidth communications make it feasible for large work forces to be located and effectively managed anywhere.”
In short, Roberts alleges that the American standard of living is threatened by the world’s growing prosperity, improved education, better governance, and greater fluidity of capital and resources to move in search of higher returns.
Roberts’ argument is deeply flawed. Its most fundamental defect is his implicit assumption that the world’s stock of non-human capital is fixed.
Suppose for the moment that the world does possess only a fixed amount of capital goods — a fixed amount of factories, robots, machine tools, industrial chemicals, and R&D labs. In this case, Americans would indeed suffer from improvements in foreigners’ work ethic, education, and emancipation from their governments’ misguided regulations. Some capital goods that today are here, raising the productivity of workers in America, would relocate tomorrow to other countries whose citizens can now use much of this capital more effectively than they could in past. As capital flees America, the productivity of U.S. workers falls because these workers will be partnered with fewer efficiency-enhancing capital goods. Americans’ only hope of keeping much of this capital from fleeing would be to accept lower wages. Workers suffer. Capitalists get filthy rich.
But one of the defining features of the modern world is capital’s expansiveness, its non-fixity. Capitalists the world over know that in every place governed by a rule of law and marked by a reasonably free market, a strong work ethic, and a spirit of commerce, profits can be made by employing workers there. And this employing of workers is done by creating capital in those places.
As people in China and India become freer, and as advanced technology enables them better to serve customers in America, some jobs currently done in America will indeed be ‘outsourced’ to these distant lands. But America’s loss of some capital to foreign countries creates opportunities for other investments in America.
The reason is that as some capital and jobs leave America, workers — along with some supply routes and capital equipment remaining in America — are freed up to work at other tasks that in the past were insufficiently profitable. By freeing up this labor and capital, outsourcing increases the profitability of new investment opportunities. These diligent and honest workers, along with some capital equipment, remain in place, willing to work, all in an economy and culture friendly to enterprise. Perceiving these profit opportunities, entrepreneurs sweep in and create new capital, capital that never before existed and that would not be created were it not for the fresh opportunities opened by outsourcing.
And this new capital creates not only new products for consumers to enjoy but also new jobs for domestic workers.
Don’t think me Pollyannaish for predicting that new capital and jobs eventually will be created to replace the capital and jobs attracted abroad by outsourcing. My prediction is based not on fanciful wishes, but on the fact that the capital drawn away from America by outsourcing was profitably invested in America before new foreign opportunities attracted it away.
Why was this capital invested here in the first place? The reason is that property rights in the U.S. are secure, taxes are reasonably low and predictable, corruption is minimal, and American workers are well trained and hard-working. Also, producers and consumers in the U.S. have direct access to history’s greatest legal, physical, and economic infrastructure. So when particular goods and services become more profitable to produce elsewhere — because of the principle of comparative advantage — these features of the American economy that prompted the initial investment don’t disappear. They remain. And they prompt entrepreneurs to create new capital and jobs in place of the departed capital and jobs.
America grows richer, not poorer, as we trade openly with a freer and more prosperous world.
Don Boudreaux is Chairman of Economics Department at George Mason University.