Let's Discuss Religion otherwise known as Comparative Advantage & Trade

Ralph Gomory gave a talk today at the New America Foundation, a think tank who also gets it with online media!

As I listen to President Obama's speech acknowledging structural problems with the U.S. economy, yet do not see policies that will actually do what is needed and never mentions manufacturing or trade, one person I find quite insightful is mathematician Ralph Gomory.

Ralph Gomory - Does America Need Manufacturing?

 

Frankly, there is no way to really know what Gomory is talking about without understanding the theory of comparative advantage and how it relates to economies of scale. So ya just gotta take his word on it that he knows what he's talking about. I highly recommend his & economist Baumol's book, Global Trade and Conflicting National Interests (Lionel Robbins Lectures), to get a good grasp on the theory itself.

Did you watch the entire talk? If you didn't, stop reading and hit that play button baby. Those who watched, read on.

Some points I want to highlight from this talk:

Comparative Advantage

Now this is one place where the ability to read equations really comes in handy. I will not go through the proofs here, but in their book, clearly Ricardo's theory does show one should not abandon manufacturing due to scale of demand.

So, what is Scale of Demand? Well, taking a stab at it as a layperson, if one country say can make better and more cheaply super duper high flutin' whirly birds and another country has a comparative advantage in corn flakes, since the amount of trade in corn flakes is in the billions whereas the super duper whirly bird makes about 3 sales a year.....uh, that whirly bird country shouldn't be giving up making corn flakes anytime soon because they will go broke. In other words, just whirly birds ain't gonna equal the previous national output.

The problem is a lot of economics cats do not understand economies of scale, and joyfully demand when specialization is realized, that nation should abandon other entire manufacturing sectors. They miss the tipping point in trade, overall output, national GDP, due to the above and recommend we all walk off the economic cliff following some free trade pied piper bad math tune.

An example is this much touted green economy, which is tilting at windmills literally. A green economy simply cannot replace in volume the lost contributions to GDP as well as income traditional manufacturing contributes. Beyond a Don Quixote adventure, the touting of green jobs is a good example of the misapplication of comparative advantage and don't forget a public relations balm so America will forget their job was just offshore outsourced. (so are green jobs btw).

Many readers as well as writers on EP have top tier education, hence can completely relate to Gomory's comments on the blow off answer on why jobs are offshore outsourced is that somehow Americans need more education and training. Most of us are perfectly aware existing world class training does not translate into financial security in today's global labor arbitrage world. It is completely insulting to claim Americans lack education and skills to those of us who indeed have them and are cast aside due to some desire to bump up quarterly profits or offshore outsource a corporate division.

70% of R&D is in manufacturing and the idea of trading manufacturing for services industry is not credible again due to above. The biggest sector in services is tourism. Now how is that workin' out for Jamaica as a leader for economic growth?

Another myth Gomory dispels is the sound byte R&D will replace manufacturing. Most valued added in R&D is after the innovation and one cannot disconnect R&D from manufacturing. In other words, let's say Helen sits in her garage for 10 years and invents a really cool way to store data in clothing buttons. Awesome! Revolutionary! (The Borg? I digress) but....that innovation breakthrough by Helen ain't where the money is. After billions in retooling of button factories, new machines and paying off major fashion hounds to show off the new buttons which store data, make corporate mega deals to get existing technology to interface with the shiny clothing close devices....and finally there is a demand for billions for remote body storage of all your itunes in cool little clothing buttons ....this is when the money rolls in...$$$$.

But, as one can see, it ain't rolling into the United States if all of those buttons are being manufacturing in China.

Another point, which hopefully EP writers will tackle soon, is just how skewed and murky traditional data points, such as productivity, job creation, GDP and so forth have become due to global supply chains and globalization. Where did the product get made? Why in MexiforniaBanglaRomanialand!

I also appeciate the distinction of productivity increases caused by technology, which boosts national GDP, whereas false productivity by labor arbitrage, actually offshore outsources GDP right along with the jobs.

If you have read this far, you might enjoy this interview aricle on Gomory: Fresh Take On Trade:

First, Gomory says, there is a “fundamental divergence” in the interests of multinational companies, which benefit from the comparative advantages of other countries, and the interests of their home nation.

“What a company wants is profits, and what a country wants is more GDP,” Gomory said in a recent discussion in his New York office. “With the coming of globalization, a company can be very profitable by building its plants abroad, importing into the United States and using cheap labor. At that point, they are no longer adding to the U.S. GDP; they’re adding GDP to some other part of the world. The goals of the country and the goals of the company are no longer linked.”

Now who among us can argue this isn't true, yet we are continually bombarded by the main stream media and corporate press kits that somehow the interests of IBM are the interests of America.

Equally important is Gomory’s second major point. “Globalization should not be confused with free trade,” he says. “Free trade is not globalization, and globalization is
not free trade. People try to use the known virtues of free trade and say that they apply to globalization, but that’s a misunderstanding of what economic theory has to offer. Free trade occurs when you trade in finished goods, not when you give away things needed to enhance productivity.”

The rest of the article references the Horizon Project, a set of policy recommendations that really deserve public support....if you want to have a prayer's chance of changing economic direction.

One of the concepts is to give incentives to corporations to create manufacturing here as well as jobs. I think a national strategy on trade, manufacturing, economics is long over due but I add this caveat.

IBM in particular, but many corporations are just as guilty, do receive state, local and federal subsidies on the promise to create jobs. Yet, these corporations continue to offshore outsource jobs, do not create jobs in the localities where they promised they would....yet their contracts are not revoked and they are not penalized even for breach of contract.

One minor point, maybe Gomory is getting through to Intel CEOs. Recently they shut down a China FAB and invested in 32nm United States ones. G.E. also recently announced outsourcing isn't all it's cracked up to be. (although the fundamental investment numbers are still huge, at least 10 to 1, in offshore outsourcing manufacturing by both of these corporations).

Meta: 

Comments

Free Trade Advocates were pushing that trade was good

because it lowered prices a la Wal-Mart. But the problem was that free trade and globalization has reduced wages far more than the lower prices. To make up that deficit and to maintain a living standard people went into debt.

You must have Javascript enabled to use this form.

this is why I'm such a fan of his book

Because he really doesn't "blast" the concept of trade at all, they analyze scenarios of trade, I'll call them regions, and so this book is actually very pro trade. I think this is one of the biggest misunderstood contributions, it's variable dependent. So, if we got these corporatists away from running trade policy, had a national strategy, one could use these models, and create strategic trade that probably would increase exports and probably imports too.

In other words, if we had a national trade policy, plus the ability to monitor, analyze, adjust accordingly, based on the statistics as well as the theory, one could be extremely "Pro" trade yet create a true "win-win" sort of scenario.

I don't know if it's because Gomory is really a math head, or what, but I find a lot of his work beyond rational, some of it to me is almost breakthrough, kind of thinking past the paradigm. But to me it doesn't go into this "either you are for free trade or against it". I think their point really is, trade is not so simple as a "yes/no", or "black/white" answer, it's almost an optimization problem, it's a system, which has a lot of interaction, feedback to it, and contained within that optimization/system analysis, are policy recommendations, even at the high international economic level.

Another thing I liked is the U.S. "get off" of what China or other countries do and "onto" what is the U.S. gonna do. i.e. action instead of reaction.

You must have Javascript enabled to use this form.

RebelCapitalist gotta agree with you

I yelled about it for 25 years. I am a devout capitalist but I am not an idiot. When you give away the store you can't expect to maintain a healthy, robust, economic engine. Third world countries were always a people without capital and we are headed to the same fate.

What to do? I'm not at all big on government intervention and hope that the people can express our distaste of outsourcing at the cash register.

I still remember a world where quality mattered, where built in obsolescence was not a business model. How I long for those times!!!!!!

You must have Javascript enabled to use this form.

The problem is price

I've become not-a-capitalist under the very pressures you've been yelling about- but I'm also not-a-communist. The problem, as I see it, is that price doesn't have enough bandwidth to convey enough information for the end consumer to make an informed choice. We try to make it up with lies, er, advertising, but price is held to be such a big signal that even name-brand advertising can't entirely overcome it.

What we need is a couple more channels of bandwidth to the end consumer. Country of Origin labeling laws are a stab at this, as is (gasp, they're doing something good) Wal*Mart's new Sustainability Index, which in six months will be on every shelf price tag at Wal*Mart, and due to their 700 lb gorilla status in retailing, will likely be on every store shelf in every store by 2020.

Perhaps we also need a quality index.
-------------------------------------
Maximum jobs, not maximum profits.

You must have Javascript enabled to use this form.

-------------------------------------
Maximum jobs, not maximum profits.

Use the bar code to know origin

A month ago I received this in an e-mail. I can't vouch for the validity of the info but it could be true.

"Want to buy US made products? BUY USA by watching for "0" at the beginning of the number. We need every boost we can get!

f the first 3 digits of the barcode are 690, 691 or 692, the product is MADE IN CHINA.

471 is Made in Taiwan .

This is our right to know, but the government and related departments never educate the public, therefore we have to RESCUE ourselves.

690-692 … then it is MADE IN CHINA .
00 - 09 … USA & CANADA
30 - 37 … FRANCE
40 - 44 … GERMANY
47 ... Taiwan
49 … JAPAN
50 … UK

You must have Javascript enabled to use this form.

Seebert

Price is there as a cost mechanism. Regarding information to the end user, price does this very well. If something is too expensive, and demand is elastic, quantity sold will be less than if the product/service was at a lower price. What else would you include on a product or service, outside of any product information and the price of that product?

Regarding Wal Mart, I for one am highly skeptical of their recent moves. What could be happening with them is that they see a government that for once may actually go after them. Be it in health care plans or green stuff. So they're going to come out first to look like a good guy to the government. On CNBC, there was an analyst who talked to someone at the Arkansas retail giant, and he basically hinted that they freaked out when they saw what happened at GM or the banks. But I also suspect that their move into healthcare, for example, has more to do with the rumors of the company doing two things a) entering the field with their own services and b) they've been structuring the company to absorb such costs and to promote this new health agenda to the detriment of their competitors.

--------------------------------------------

www.venomopolis.com

You must have Javascript enabled to use this form.

I appreciate this article for it's own sake

I didn't want to get myself into trouble in our last flame war Robert- I was in enough trouble already- I nearly posted, in response to your "religion is not economics" a "yeah, but economics is a religion" with exactly this example- the unthinking religious adherence to free market ideals and theories without actually understanding the math behind those theories.

I also think that's why nobody has paid attention to any Pope's economic theories for a century or two at this point, despite the very good sense in those seven documents I listed- because Catholic economics goes against treasured theories and rights that mainstream traders and brokers believe in.
-------------------------------------
Maximum jobs, not maximum profits.

You must have Javascript enabled to use this form.

-------------------------------------
Maximum jobs, not maximum profits.

Always a Gomery fan but now for the nitty gritty

Fantastic column and clip, Mr. Oak, and always a Gomery fan.

Of course, what we have are not economies of scale, but economies of DE-SCALING! The processes are dismantling and cannibalizing the economy - to the detriment of the multitude, while enriching the smallest number!

I'm no longer sold on certain people accepting this ideology, as it were (except for the dummies who follow), but a method for enriching themselves.

One of the comments/questions towards the end of the clip, (it was subtle so it might be missed) concerned the killing of the "Buy American" clause in the federal stimulus package, which ensured further loss of American jobs and further increases in importing STUFF - for building those transportation - and other - systems as provided for in the stimulus bill.

The item which killed that was the Bretton Woods Committee letter to congress (dated Feb. 11, 2009) and signed by all the usual suspects from Goldman Sachs, Citigroup, BofA, Morgan Stanley, their associated foundations and groups, along with various foreign signatories from Asia, Russia, etc., etc., and the usual types: Kissinger, Scowcroft, Roubini, Stiglitz, (Pres. Obama's people: Laura Tyson, Diana Farrell), Morrici, Blinder and on and on.

Sellouts all - who are paid to aid in the dismantling of the economy - or what actually little remains of it.

Fundamentally, as long as we continue to accept the monopolization of land and the monopolization of capital - as we have been raised to be accepting of - this situation shall continue.

Thanks again for this great stuff!

You must have Javascript enabled to use this form.

most of the Q&A

had some exception points and that absurd corporate blast on "Buy American" which was barely anything and ya know, who cares that's the entire theoretical basis of Keynesian stimulus so what's the point in doleing out a massive wad of cash if one isn't going to follow the theory of temporary public expenditures direct to income (wages) of the citizens, directly into domestic spending, i.e. "buy American"...

So, any attempts to do a Keynesian Stimulus by the theory itself get blasted and I suspect strongly some of these same cats are blasting the Stimulus saying it didn't work...

well, from my view, it was never going to work because they did not follow the theory from the get go.

Have you noticed also in D.C. that manufacturing is a truly dirty word, like anyone working for manufacturing policy, lobbying for legislation probably gets a seat at best at the kiddie table in the kitchen?

If you see any "Dorgan style" of floor speech with huge numbers on big charts, showing just how critical to job creation, GDP manufacturing is, please capture the video and let's post it.

I also haven't been tracking on GM. When I saw they had in place no one who knew anything about making cars in the executive team, wet behind the ears administrators working on this....the idea the government was stepping into GM to save a domestic auto industry didn't seem valid to me....so what is going on now?

Thank Gomory, I doubt he's getting rich off of any of his efforts. ;)

Another thing that would be awesomely cool is if NAF enabled instant messaging stream, so the virtual audience could type in some questions and then the moderator could ask a few of them. I don't know about NAF but in terms of speakers, they are inviting some very good experts to lecture I noticed.

You must have Javascript enabled to use this form.

Great piece, also

I totally agree on the incentives model, especially regarding taxation. The 50-state industrial policy chaos that the video hit on was something I hit on in my last piece and agree we need better national coordination. At the end of the day, we aren't in a real free trade system, just a fraud of it. We need to start playing the game the way our so-called friends are, that is look out for our national interests first. Sadly, we have a government, and really it doesn't matter if their Democrats or Republicans, who either cannot comprehend or do not care about the reality of the situation. Once more, kudos on the piece and video.

--------------------------------------------

www.venomopolis.com

You must have Javascript enabled to use this form.

keep up MM (or manufacturing every day) series JV!

I was thinking we need, in big red screaming letters, just how important the manufacturing sector is to overall GDP as well as high paying wage growth (as well as twin deficit reduction).

Have you noticed this???? The most critical sector gets almost zero press in the financial MSM, except some liberal arts fluff piece, as if manufacturing is just so passé?

I feel like screaming, hey financial journalist dude, is your liver passé? Can you live now without your lungs because they are just too out of economic fashion? ;)

Yeah, that playing states off of each other in a race to the bottom, similarly to how nations are played off of each other by MNCs to be the ultimate slave labor pool was a fantastic question/commentary, as well as your amplification on this problem and probably why all of the incentives (beyond robbing the taxpayer) are just on paper.

You must have Javascript enabled to use this form.