Manufacturing and the law of comparative advantage

[Francesca R]

Except you can't find a quotation of anyone claiming that markets magically and spontaneously generate themselves.

Whereas you said:

Originally Posted by Muldur

His doing so [Ford increasing worker compensation per hour] was solely motivated by his need for a market.

. . . and others rejected this, and the idea that increasing pay for no other reason than to give employees more disposable income will not increase profits.

And you haven't even come close to defending your statement.

[daenku32]

Originally Posted by Francesca R

Maybe you should learn more about it then, since nothing about the principle of comparative advantage prevents unplanned economies exploiting it.

You might as well say that evolution can't happen without an intelligent designer.

Unplanned economy would somehow have to convince company B to import a more expensive product simply because company A sold something to that country. I'd like to hear an example of how that happened.

At least the evolutionary scientists work on explaining how such things would happen.

[Francesca R]

Er, no. In an unplanned economy, a firm decides to supply what it can do more efficiently (higher margin/lower cost) than any alternative available to it.

That is, after all, what comparative advantage is.

[daenku32]

Originally Posted by Francesca R

Er, no. In an unplanned economy, a firm decides to supply what it can do more efficiently (higher margin/lower cost) than any alternative available to it.

That is, after all, what comparative advantage is.

No. Comparative advantage is about trade. So even if you can make something more efficiently than you could make anything else, you are still going to need a customer. And unless you are the lowest price on the market you aren't going to get any in a laissez-fair environment.

That is unless something in command decides that they should go ahead and buy your more expensive product anyways, because it comes from a trading partner.

[Francesca R]

Originally Posted by daenku32

No. Comparative advantage is about trade. So even if you can make something more efficiently than you could make anything else, you are still going to need a customer. And unless you are the lowest price on the market you aren't going to get any in a laissez-fair environment.

That isn't correct. The example below copied out of Wikipedia's page on this shows why.

In that example, one country has an absolute advantage in both shoes and shirts; it is the lowest price on the market for both. Yet it still does better by manufacturing mostly shoes and trading those with the less efficient country for shirts. As long as the exchange rate is somewhere between [1 shoe = 1 shirt] and [1 shoe = 2 shirts], both countries gain from trading, and they will do this voluntarily.

(The example has an error in it, actually, which is the part I crossed out)

Quote:

For example, if, using machinery, a worker in one country can produce both shoes and shirts at 6 per hour, and a worker in a country with less machinery can produce either 2 shoes or 4 shirts in an hour, each country can gain from trade because their internal trade-offs between shoes and shirts are different. The less-efficient country has a comparative advantage in shirts, so it finds it more efficient to produce shirts and trade them to the more-efficient country for shoes. Without trade, its opportunity cost per shoe was 2 shirts; by trading, its cost per shoe can reduce to as low as 1 shirt depending on how much trade occurs (since the more-efficient country has a 1:1 trade-off). The more-efficient country has a comparative advantage in shoes, so it can gain in efficiency by moving some workers from shirt-production to shoe-production and trading some shoes for shirts. Without trade, its cost to make a shirt was 1 shoe; by trading, its cost per shirt can go as low as 1/2 shoe depending on how much trade occurs.

The net benefits to each country are called the gains from trade.

http://en.wikipedia.org/wiki/Comparative_advantage

[daenku32]

Originally Posted by Francesca R

That isn't correct. The example below copied out of Wikipedia's page on this shows why.

Quote:

The more-efficient country can gain in efficiency by moving moving some workers from shirt-production to shoe-production

This move is only possible in a command structure.

[Francesca R]

Again incorrect. It only takes information to be somewhat freely avaiable and it can happen by itself, via nothing other than people and firms responding to their incentives.

Nobody in the example is doing anything less profitable for themselves as a favour to a trading partner.

[stevea]

Originally Posted by michaelsuede

I would debate that America actually has a strong manufacturing sector.

It does not. [...]

Stylesjl gave a link w/ citations. A rebuttal must address the evidence, not present opinion. Fail !

Originally Posted by IchabodPlain

It's bad because the loss of manufacturing employment disproportionately affects some locales more than others.

So your objection evaporates if the job loss is evenly geographically distributed ?

Quote:

Lastly, there is the psychological effect of the loss of pride when companies which were once icons of American industry move their main plants out of the country - a sentiment found routinely when you hear people say "we don't make anything in this country anymore."

So accepting reality "a bad thing" ?

Originally Posted by Muldur

Henry Ford once said: "If I want to sell cars in the US, I have to have a pool of people with the money to buy them, and the leisure to enjoy them." He understood you can't have a customer base without good employment to empower it.

“The trouble with quotes on the internet is that it's difficult to discern whether or not they are genuine.” -Abraham Lincoln

Someone name "Muldur" said it twice on different websites, but it's unlikely Ford ever used the post-1970s phrase "customer base", or even "pool of customers". This smells like a fib.

Originally Posted by Tsukasa Buddha

Well, many disagree with the "law". An example:

Dubious assumptions of the theory of comparative advantage

So one paper by one individual is an example of MANY disagreeing ?

Originally Posted by Muldur

The problem is that the context has changed from when the Law was formulated. Smith, et al, were speaking within a paradigm of local industries with strong ties to the communities they were in. Those close ties were depended upon to restrain greed and exploitation. With the advance of industrialization, and the breaking of the business/community tie, those restraints were removed.

Smith was specifically describing international trade. His examples were the production and wheat and (linen) cloth in the America and the East Indies vs Britain, Germany, Poland, Hungary (with examples of Spain and Portugal too) circa 1776, not local, nor with strong community ties. You have absolutely no familiarity with Adam Smith. This surpassed the politeness of "fib" an demands the description"lie".

Originally Posted by JJM 777

I assume that you assume that we all assume that "good" means "good for Americans".

The OP topic was about manufacturing in America. Does he need to nationally qualify every phrase in two short sentences ? Pedantic objection (and silly circumlocution). Unless you are claiming that "this is a good thing." means that a good for America requires bad elsewhere (perhaps you hold some conservation of goodness' belief?) then your objection stinks of vulgar anti-Americanism.

Originally Posted by Muldur

There comes a point where there is simply too much total stuff.

Basic error - value is not synonymous with quantity. Did they have too many cell phones in 1980 ? Do we have too many 65mpg sedan's and gigabit isps today ?

Quote:

The system collapses because there's so much to buy that no more is needed.

Certainly you can cite evidence for this unprecedented and unusual claim. When did such a system exist or collapse ?

Quote:

Companies have tried to stave that off with "planned obsolescence" , but that only goes so far.

If a company vends a product with too-early or too-late obsolescence for the price and therefore less value, don't it's non-complying competitors win ? Basic economic fallacy.

Quote:

Ultimately, we are stuck in a situation where an ever DEcreasing number of people can more than supply all the stuff that consumers theoretically want and need.

Claims w/o evidence are not a logical argument. [[There are more needs and wants than are dreamt of in your philosophies, Muldur.]] Failure of imagination is not a form of evidence.

Quote:

The keystone of the issue, that without jobs to provide income, consumers CAN'T consume, has been forgotten, which is why the system is collapsing.

If 'jobs' is a forgotten topic, why is it so prevalent in the news and econ papers ?
Assuming "the system" is collapsing indicates apocalyptic thinking. Not an argument, a claim.

--

my ignore list grows ....

[stevea]

Originally Posted by Francesca R

Again incorrect. It only takes information to be somewhat freely avaiable and it can happen by itself, via nothing other than people and firms responding to their incentives.
...

And the prices of goods in a free market transmit precisely that information.

There is so much misunderstanding, confusion, ignorance of basic economic concepts in this thread (and IMO this forum generally), as you and Ziggurat point out. Are you aware of any good econ101 type material on the web ? There should be a better way to dispose of bad arguments.


Nice new avatar Francesca

[psionl0]

Originally Posted by Francesca R

That isn't correct. The example below copied out of Wikipedia's page on this shows why.

In that example, one country has an absolute advantage in both shoes and shirts; it is the lowest price on the market for both. Yet it still does better by manufacturing mostly shoes and trading those with the less efficient country for shirts. As long as the exchange rate is somewhere between [1 shoe = 1 shirt] and [1 shoe = 2 shirts], both countries gain from trading, and they will do this voluntarily.

(The example has an error in it, actually, which is the part I crossed out)

That is an interesting example but it doesn't show how the two countries currency exchange rate affects the viability of trade between the two countries.

To see how, I have re-written the Wiki as follows:

Suppose that in country A it costs $1 to make a shirt and $2 to make shoes (in its local currency) while in country B it costs $4 per shirt and $6 for shoes (in its local currency).

If the exchange rate is less than $1A = $3B then it would cost country B less than $3 to import a shirt and less than $6 to import shoes so neither product would be made in country B.

If the exchange rate is between 3:1 and 4:1 (say, $1A = $3.50B) then it would cost country B $3.50 to import a shirt and $7 to import shoes. Meanwhile, it would cost country A $1.14 to import a shirt and $1.71 to import shoes. Both countries then benefit from trade if country A focuses on manufacturing shirts and country B focuses on manufacturing shoes.

If country B's currency is "junk" status (worth less than 1/4 of country A's currency) then even though country A is the more efficient manufacturer, country B would end up producing the shirts and the shoes.

This example seems to suggest that poorer countries are disadvantaged when they share a common currency with richer countries. A central authority that can practise some form of equalization is needed in this case. This is why the US federation model is a success and the EU is failing badly.

[Francesca R]

Originally Posted by psionl0

That is an interesting example but it doesn't show how the two countries currency exchange rate affects the viability of trade between the two countries,

[ . . . ]

If the exchange rate is less than $1A = $3B then it would cost country B less than $3 to import a shirt and less than $6 to import shoes so neither product would be made in country B.

That is an invalid outcome. The example is a two-country, two-commodity world, and balances of payments have to balance. In other words, nobody can import everything without earning the foreign exchange to pay for it. Country B would starve and everyone living in it would die.

In reality, either the FX rate would freely adjust to between 3 and 4 (you meant "more than $1A = $3B), or country B would voluntarily lower its prices to country A, which is exactly the same thing, and then, again, B would buy at least some shirts from A and B would sell A at least some shoes, and both B and A would have higher income with trade than without it.

If you want a hypothetical where the central authority intervenes forbids trade, via non-market policy, then you've just shown that a command economy can thwart the principle of comparative advantage--which it can--but that is exactly the opposite of what the other member wanted to argue.

[psionl0]

Originally Posted by Francesca R

That is an invalid outcome. The example is a two-country, two-commodity world, and balances of payments have to balance. . . .

Yes, a two-country two-commodity world is not very realistic. Still, you put up the example.

My main concern with the example is that it tried to explain comparative advantage without mentioning money ("As long as the exchange rate is somewhere between [1 shoe = 1 shirt] and [1 shoe = 2 shirts] . . ."). There seems to be an incorrect view in some quarters that economics is about the exchange of goods and services and that the movement of money simply mirrors those exchanges. I'm sure that you would agree that purely monetary policies have a powerful influence on the trade of goods and services.

If it was just about shirts and shoes then the scenario would probably play out the way you have described. However, the reality is that the exchange rate between countries A and B would be determined by the total amount of international trade that both countries engage in - including debt instruments. The exchange rate has to be just right for trade in shirts and shoes to be profitable for both countries.

[Francesca R]

Originally Posted by psionl0

Yes, a two-country two-commodity world is not very realistic.

That is a straw-critique for the logic, which carries over into realistic situations that are too cumbersome to use as illustrations.

Quote:

My main concern with the example is that it tried to explain comparative advantage without mentioning money ("As long as the exchange rate is somewhere between [1 shoe = 1 shirt] and [1 shoe = 2 shirts] . . ."). There seems to be an incorrect view in some quarters that economics is about the exchange of goods and services and that the movement of money simply mirrors those exchanges.

Yes that is the assumption, along with there being no earthquakes or nuclear attack to disrupt things too.

Quote:

I'm sure that you would agree that purely monetary policies have a powerful influence on the trade of goods and services.

That is exogenous to the comparative advantage principle. (So are earthquakes and nuclear attack).

Quote:

The exchange rate has to be just right for trade in shirts and shoes to be profitable for both countries.

Not "just right"--there is a range of mutual gains which is clear from the scenario you made up. Outside of that, goods/services are considered non-tradable. Either a country does not supply them or there are non-market barriers whereby it is rendered profitable domestically even though it would not be without the barriers.

[psionl0]

Originally Posted by Francesca R

Yes that is the assumption, along with there being no earthquakes or nuclear attack to disrupt things too.

Strawmen can also be disruptive.

[The Dark Lord]

The notion that Henry Ford increased his workers pay so they could afford Ford cars and thus increasing his market is one of the dumbest things I have ever read.

Let's say that Ford increased the average worker's pay by the price of a car. Let's say $500. Let's also say that he had 50,000 workers and each of them used that money to buy a car. That's $25 million. But really, that's just money that came out of Ford's pocket in the form of paychecks so it has actually gained nothing. But wait, there are other costs associated with building the cars besides labor. Let's say $250/car. Oops, now Ford has lost $12.5 million doing this.

lol

[Francesca R]

Originally Posted by psionl0

Strawmen can also be disruptive.

Perhaps, leave them out then.

The principle of comparative advantage leading to gains from trade is something that unplanned economies can exploit. A command economy is not required to facilitate it, though it can thwart it.

To suggest otherwise is to argue that a free economic agent can see money sitting on a table, yet will not go and pick it up unless compelled to. Or that water will not flow downhill unless pushed.

[psionl0]

I don't understand why you are arguing about this.

The exchange rate between two countries can vary widely for any number of reasons (often in spite of government action). In the process it could create profitable opportunities for businesses in both countries and also end a profitable arrangement between some businesses.

[Marcus]

Originally Posted by The Dark Lord

The notion that Henry Ford increased his workers pay so they could afford Ford cars and thus increasing his market is one of the dumbest things I have ever read.

Let's say that Ford increased the average worker's pay by the price of a car. Let's say $500. Let's also say that he had 50,000 workers and each of them used that money to buy a car. That's $25 million. But really, that's just money that came out of Ford's pocket in the form of paychecks so it has actually gained nothing. But wait, there are other costs associated with building the cars besides labor. Let's say $250/car. Oops, now Ford has lost $12.5 million doing this.

lol

It would only work if all the other manufacturers raised their wages in response. That didn't happen, of course. What happened was that Ford jobs became prized, workers were very happy to work hard and stay right there, which was his intention all along.

[Roboramma]

Originally Posted by Marcus

What happened was that Ford jobs became prized, workers were very happy to work hard and stay right there, which was his intention all along.

Exactly. Which is what everyone else has been saying.

[IchabodPlain]

Originally Posted by stevea

So your objection evaporates if the job loss is evenly geographically distributed ?

Yes. In reality, it's usually not evenly distributed (see: Ford closings in Flint, MI as a high-profile example, but certainly not the only one).

Quote:

So accepting reality "a bad thing" ?

What is the "reality" to which you refer? If it's the psychological/economic problem of loss in confidence, then yes, it can be a bad thing.

You'll also notice I was playing devil's advocate. I'm not against free trade, but there are those who at least temporarily don't see the benefits which makes persuing those policies more politically difficult. I think addressing those concerns is smart if we, as a nation, want to continue free trade policies.