« Greg Mankiw's Ten Principles of Economics -- the tourist platter. And math and PC. | Main | Poor sales MINUS quality of labour »

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Great, except that if you are not doing research and development that naturally accompanies manufacturing of some sort then there are no secondary or tertiary benefits in the development and use of technology. For example: Acoustic imaging has been developed to detect imperfections in alloys to better identify structural problems in things like car frames, it turns out it can also be used in health care, possibly to save lives. If the cars are solely being produced in Japan then what is the incentive for the Japanese government to offer Japanese tax dollars to North American Universities and research teams to fund the research that produces these innovations. What of the secondary benefit? "Well, why not grow the information in the same way" would be the natural response, again and again, until every person in North America is a farmer or a miner working for subsistence. The bottom line is that the research and development process creates jobs, improves education and gives a growing population a sustainable economy. That can't happen without some sort of industry, government subsidized (protected) or not. Until there are no borders and a single global economic governance structure this is a silly criticism of protectionist measures. Not to say that there aren't good ones out there.

What's funny is that, as an economist, you are protected through government subsidy. Heaven forbid someone had to grow these kind of ideas, you might actually find out what they are worth; but I guess if it put you out of a job that would actually prove your point :)

The trade/technology analogy is interesting, but like many analogies it is as interesting for where the analogy breaks down as for where the analogy holds.

1) A technology that works for a time will generally always work, as long as its invariant requirements are met. The laws of physics will not change to prevent an internal combustion engine from converting gasoline into power. We may become unable to meet a technology's requirements (i.e. we run out of gasoline), but generally the circumstances under which our access to the technology might change are straightforward and predictable.

Trade is not reliable in this way: the terms of trade are always shifting. It may be possible to trade 30 bushels of corn of an iPhone today, just as one can trade a gallon of gasoline for some quantity of power. But next week, those 30 bushels of corn may not be convertible to an iPhone, for reasons that are unpredictable to even the smartest individual agent.

Therefore our relationship to reorganization of matter and energy via trade has to be somewhat different, hedged and tolerant of greater uncertainty, than our relationship to technology.

2) Technological reorganization is a current phenomenon. We have no technologies that offer matter organized in a newly pleasing form now in exchange for an uncertain promise of future input provision. We could imagine such a technology, in a science fiction world with time travel, but in practice it simply doesn't exist. Current outputs of technology are based on current input. The fact that international trade in practice often involves "promises" as the current input makes trade profoundly different from technology (and interacts dangerously with issue [1] and lots of social and political forces).

A naive claim like "technological improvement is net good, despite its disruptions to present arrangements, so therefore by analogy trade is good and only Luddites would oppose it" is not warranted. The issues of sustainability and reliability surrounding trade, and the social and economic phenomena that surround trade involving exchange of financial inputs for production, are important and should not be swept under the table.

1) Many technologies can be rendered obsolete by changes in prices.

2) Isn't trade-induced reorganisation a current phenomenon? Yes, there are bad technologies. And sometimes markets fail as well.

Good question. Just how far can we push the analogy? (And it's our job as economists to push all analogies/theories as far as they can go -- until they break. Just ask Gary Becker!

Steve: The terms of trade fluctuate over time. That's not a problem with the analogy. The terms of trade a farmer faces, in converting land, capital and labour into corn, fluctuate with the weather.

The intertemporal trade one is trickier. We have "lending" technologies, where you invest now and get benefits in future; but "borrowing" technologies look a bit trickier. Using up finite resources? Not exactly the same. You might be onto something there.

I think the analogy works well for a small open economy. Or an individual in a competitive market. Taking prices as given means a constant returns technology. For a large seller, facing a downward-sloping demand curve, it's like a decreasing returns technology. Except, and here's the rub, the diseconomies of scale are at the aggregate level. It's like a common property resource. The optimal tariff problem for large economies is the analog to the common property resource. Over-fishing.

It's always good to stretch your brain to think through analogies like this. Even if we decide against using it, we learn a lot more about trade and about technology.

Rick: "Great, except that if you are not doing research and development that naturally accompanies manufacturing of some sort then there are no secondary or tertiary benefits in the development and use of technology."

What's so special about manufacturing? The pro-manufacturing bias had been with us economists for too long. "We can't get rich by taking in one another's washing". Yes we can! An economy is nothing more than people taking in each other's washing. There is no distinction between goods and services.

Once strategic game-theoretic considerations come into play, then I think the analogy breaks down. You can make promises with people, in a way you can't with nature. Nature isn't trying to form expectations about what you will be wanting to do. Time consistency problems and dynamic programming. (Just to forestall environmentalist objections: remember the distinction between vows and promises. There is no promisee with a vow.)

Oh - I missed what was meant by 'current phenomenon'. Sorry.

Once strategic game-theoretic considerations come into play, then I think the analogy breaks down.

Then again, that's also where standard market theory breaks down, too.

Stephen: "Then again, that's also where standard market theory breaks down, too." Hmmm. Yep.

Stephen,

Obsolescence is a different thing. The old technology still works, one can hold it in reserve while one chooses a new technology. With trade, the old technology often disappears. The technology analogy basically treats trade as a black box production process. Twenty years ago I could send inputs to the black-box called South Carolina and get furniture out. Now I send inputs to the black box called China and get furniture. I think I've kept South Carolina around, but if the China-box suddenly stops working, I cannot revert to the South Carolina box and get furniture the old way, certainly not in the short term and maybe not ever. Yet I can still build cabinets by hand, even though I've not done so in 100 years, because technology doesn't decay. (The supply chains that made practical my use the old technology may have changed, but that's trade letting me down again, not technology!)

Talking this through reminds me that while technology is forever, individual devices do decay. So maybe devices are a better analogy. Maybe rather than thinking of trade as a "technology", which once discovered is fairly permanent (although inputs may become scarce), we should think of trade relationships as a bunch of wonderful machines that occasionally appear on our doorstep, whose inner workings we don't understand . (i guess i'm just restating black box, but work with me.) Like a wonderful machine, a trade relationship can create great opportunities for current gain. But we may be unable to repair or reproduce the machine, and it may break unpredictably. So we shouldn't come to rely upon the "alien technology" without hedging our bets and holding alternatives in reserve.

Nick,

Yes, terms of trade can change with any technology. If uranium becomes sufficiently scarce, nuclear energy would disappear as a practical matter even though know-how surrounding the "technology" is in principle permanent. So, point taken.

But I stand by my assertion that with trade the fickleness of terms of trade is so different in degree as to render it different in kind. We can make long-term predictions about resources, and a nation-state can unilaterally provision for, say, sustainable wheat production, with a strong probability of success. Undoubtedly, such long-term plans are modified -- technologies grow obsolete, but that is only because the new technologies strictly dominate the old technologies leaving long-term planning goals in tact. With trade, the only way to provision for the long term is to diversify sources (or simply let hope be a plan that a trade relationship endures on reasonable terms). Trade patterns are historically much more fickle than technological means of production. Old technologies are still willing to serve whenever we ask.

Part of that fickleness is intentional, as you and Stephen and I all agree. With trade, the technology views its user as a technology, and is actively trying to alter the terms of trade in its favor, or make use of leverage gained through trade to pursue other goals. Standard market theory and trade theory both break down on the messy, complicated shoals of game theory. But the mechanics of the internal combustion engine are largely immune to game theory. Even the physical world is full of changes to which we must adapt. But the physical world can't hold a candle to the "fluctuations" in circumstance that human beings inflict upon one another.

By the way, I think technology is an important analogy for trade, and I use it often myself in my own thought. As Nick suggests, we learn from analogies (as well as models) as much if not more from understanding where they break as from congratulating ourselves when they hold. But it would set me off to hear the analogy used pedagogically in order to persuade people that if one is not a Luddite, one must be supportive of "trade", whatever people mean by that. To do so is to use analogy not as a tool for critical thinking, but as a trick to slip ideology beneath the critical faculties.

Both stories are really useful - I use versions of both in my Ivey course, which in part is an introduction to international trade.

It's funny - the only reason I discovered you had posted on it previously is that I did a Google search, because I couldn't remember if the story originated with David Friedman or Steven Landsburg (turns out neither). Did a search and you showed up! Glad I did the search - otherwise I would have written a long redundant post.

Manufacturing technology has been, and still is, an economic equalizer. It gives information and knowledge a person attains value through the opportunity to innovate and improve on present technologies or create new technologies all together. The problem is that if you don't have land, that opportunity can't simply be grown. What we were able to do though, which was unique in economic history, was that if someone didn't have land, he could develop a technology to farm the land more efficiently and trade his knowledge of that technology to a manufacturer for capital; However, someone only gets the chance to develop that technology if a basic education in math and science is made available to each person, despite where each person fits into the economic class structure i.e. protected. On its own that education is useless unless it is coupled with an ability to observe the currently applied technical processes, which means that there has to be some local technology present, protected or not, and regardless of whether it is adding to productivity at the present time or not, because history tells us that at some point it will pay off in the future. The bottom line is that if you say that protectionism is bad for trade of goods and services then you have to acknowledge that technology is not good that can be traded within that definition, so it's a poor analogy.

Nick, manufacturing is historically important. It is responsible for the "production line" model of education that created an opportunity for equality and a better quality of life. It has been sustained through a mix of trade and protectionism. If you get away from all forms of protectionism then you inevitably are paving the way back to a class structure where it is impossible to generate capital without capital. We don't have to protect manufacturing for trade necessarily, we just have to provide access to the current processes of production to our education system so that we provide opportunity to innovate. This implies some form of protectionist measures. That might mean some inefficient spending in the present, but think of it as an insurance policy against future uncertainty, as Steve pointed out in his South Carolina/China example, and as well an investment in possible future growth.

Steve: "Old technologies are still willing to serve whenever we ask."

Good point. It's like saying that the terms of trade cannot go against us, in some sense, they can only improve in our favour.

Rick: Dunno. Couldn't you argue the same points for services, or agriculture? All can use production lines, in a sense. All use labour, and land, and capital.

Paul Romer says that when he came to economics from physics, he was puzzled by what economists called 'production' and by the notion of a 'production function'. After all, nothing was actually being created; all that was happening was that existing matter was being reshaped into forms that were more valuable to us. What we call technical change is not - as economists usually say - 'producing more with less'; it's the creation of different ways of reorganising what is already there.

Sounds to me like something I wrote here eight months ago (largely discounted):

Now Gaia and its atmosphere is so large that, by definition, the only externality of any significance is the sun which forever delivers energy to its surface - and is stored over eons in the fossil fuels we've grown so accustomed to (through decaying plants and animals).

Also, Gaia when it was formed had a finite set of elements - stored in various forms and compounds. In its core - lots of decaying radioactive material (hence the source of geothermal energy and volcanic activity). On or near its surface - water, air, and exploitable resources.

So, if you were to draw the Gaia pie chart, depending upon how many colours you had available and how small you wanted the pieces to be, that is the starting point at which I (as some anonymous blog commenter) think understanding finance should start.

And therefore, as humans, all that one is doing is competing for different slices of the finite pie - ie it's a zero sum game. All the accumulated knowledge to date simply is utilized to determine how big your piece of the pie will be.
http://tinyurl.com/yzdvpm3

Tarry bitumen => cars. Same thing.

Btw, the principles are from physics - Law of Conservation of Matter; Law of Conservation of Energy

Oy. The unacknowledged ideological goals in the OP are enough to sink a barge, and it's basically a transparent swipe at left-wing critics of economic globalization, you know, associate them with the nasty Luddites.

In a nutshell, technological improvement displaces (some) workers, but it also creates opportunities at least for the children of said workers. I'm sure we all agree on this. Insofar as those gains can be kept within the polity---as long as capital can be imprisoned or held hostage---there still remains room for building a more egalitarian society, and room for us to broad economic decisions democratically. Free trade and/or free movement of capital, especially when elevated to axiomatic components of the economists' faith (as it has been), reduces the ability of democracies to make their own economic arrangements, and reduces the bargaining power of local labour.

We've been told that we can shift this role to services, because they can't easily be alienated. Except, we can't all be Starbucks baristas, and we end up with nothing to trade for the goods manufactured elsewhere.

So, absolutely not: trade is not equivalent to technological improvement. Technological improvement creates compensatory opportunities that trade does not. And freeing trade frees up the political clout of capital.

Nick, You write "What's so special about manufacturing? The pro-manufacturing bias had been with us economists for too long."

Actually, I think manufacturing is special in a way most economists fail to appreciate adequately. Manufacturing clusters. If you do manufacturing, you create an environment in which more manufacturing is likely to develop.

I really believe that this is the fundamental reason that some countries are rich and some poor. Rich countries are those with clusters of manufacturing and other clustering activities (e.g. finance). The growth of these sectors creates high demand for labour and pushes up its price. Poor countries are just the ones that got left out as the manufacturing clusters formed.

If you think about it, poor counties are the ones unfortunate enough to be stuck with "producing" manufactured goods by trading bananas or whatever for them. It does not serve them very well. The fundamental reason is that producing bananas does not create an environment that favours the growth of other activities. If you produce cars, you do create an environment in which other industries can form.

Another point about manufacturing is that it tends to be more capital intensive. This gives unions more bargaining power (strikes are more expensive with idle plant). The wage gains also drive increased productivity.

OK: Short version: Technology double productivity, costs $5/hr. If wages are $1/hr you don't do it, if wages are $10/hr you do. Higher wages increases investment and productivity.

The resource sector is at least as capital-intensive as the manufacturing sector, and why would we prefer sectors that are more dependent on physical capital than on human capital?

Plus, if technology doubles productivity, that can mean prices halve, or wages double. You gotta think general equilibrium.


Suppose there are two sectors: a "good sector" and a "bad sector". (Dream up whatever sophisticated theory you like about why one sector is good and the other bad, just make sure you use lots of buzzwords). Every country piles into the good sector, and runs away from the bad sector. So prices fall in the good sector, and rise in the bad sector. So the good sector is no longer good, and the bad sector is no longer bad. OK, so that strategy failed. What should we do? Find the sector we are *relatively* better at, so it's harder for other countries to pile in. Umm. That's comparative advantage.

Suppose there are two sectors: a "good sector" and a "bad sector". (Dream up whatever sophisticated theory you like about why one sector is good and the other bad, just make sure you use lots of buzzwords).

The symbiosis created when a booming frontier town engulfs a generation of male highschool graduates, and entrains a culture of boozin', fightin', and whorin', maintains a high average standard of living, while maximizing comparative advantage, is the best economic strategy for the short term, well, until at least the manic pace of building stops.

Here's an economics question. Say it costs industry $5 /barrel to clean up the oil sands (water,air pollution, emissions) and the output is forecast to grow to 3 million/day. So, roughly $5 billion/yr.

Do you:

a) Invest in R&D, bite the bullet, and fix the problem , thereby maintaining your comparative advantage (security of supply to friendly countries)

b) Spend a bunch of money on pr, spin doctors, talking heads, doomsdayers and engage politicians to "market" your story in order to maintain status quo? It's cheaper.

Which is the best allocation of resources?

In related news:
Alberta’s water watchdog under tighter scrutiny over oil sands

Prentice, saying he’s ‘disgusted’ by images of deformed fish from the Athabasca River, will review agency overseeing province’s water quality


Nick Rowe, if the "good" industry yields positive externalities (including industry-wide development, which I take to be Paul Friesen's point) and the "bad" industry yields negative externalities (including environmental damage and socially wasteful rent seeking), then the "good" industry should be subsidized and the "bad" industry should be curtailed, regardless of what happens in the broader market. If the "bad" industry exports and the "good" industry competes with imports, then protectionism could be an effective policy to achieve the former goal.

Unfortunately, choosing policies correctly requires unrealistically good governance. In the real world, the oil sands industry does not have a monopoly on lobbying, or hiring PR and spin doctors. Every industry would love to convince politicians and taxpayers that they are "good" and the other guys are "bad". And these wasteful efforts will increase as government involvement in industrial policy becomes more extensive.

In the real world, the oil sands industry does not have a monopoly on lobbying, or hiring PR and spin doctors.

You've obviously never lived in Alberta. However, this pr battle is taking place in the US - so your general point holds. And the Alberta gov't, as owners of the resource, and a significant royalty recipient, has a stake in the outcome.

Stephen
"The resource sector is at least as capital-intensive as the manufacturing sector, and why would we prefer sectors that are more dependent on physical capital than on human capital?"

The resource sector is dependent on the manufacturing sector for both demand and technological innovation, is it not? Why would we want to forgo our influence on demand and development of technology? Besides we've seen what happens when the best minds go from engineering and physics to finance because of employment opportunities. But that turned out to be no big deal right?


And as an aside to Nick,

Resource sector comparative advantage always seems to be the ability to use "slave" labour or exploit asymmetries of information between farmers, local governments or suppliers, and I'm not sure that's in the spirit of the comparative advantage philosophy.

The service sector has a place in the economy, for sure, it is useful for distributing capital within an economy and ensuring that the economy gets as close to full employment as possible; however, the service sector doesn't generate capital itself (there are only semantic arguments that it does), that's what the resource (poorly) and manufacturing (well) sectors do.... your argument essentially states that we can export Starbucks coffee as a substitute for cars. (With a stunned look on my face) Oh boy, that's a dangerously bad idea. A brand is a lot different than a technology, it is way more fragile. You can brew a tasty coffee at your house at a tenth of the cost of what you can get it for at Starbucks, but I doubt you could even build a vehicle in your garage regardless of the cost. If you can't see the intrinsic difference between barristas and engineers and the consequence of replacing the applied science departments with sales and marketing departments at Universities and Colleges then we don't have any common ground for a discussion.

The Ricardian trade model was far more relevant in Ricardo's day than it is now. Then, it made sense to regard comparative advantage in producing goods like wine or cheese as God-given, determined by climate and soil. Such goods made up a large part of any economy then. And Ricardo's point that it made more sense for England to obtain wine by trading cheese for it (I think his example was something like that) made perfect sense.

Today, we are far richer, and agricultural goods and raw materials are just footnotes in the national outputs of most rich countries. We have to think about comparative advantage in various manufactured goods. But what determines these comparative advantages? It no longer makes any sense to see them as God-given. Comparative advantage in producing cars, for instance, comes from producing cars, plus from producing other manufactured goods, plus from investing in education and infrastructure. We have to grow our own comparative advantages.

Of course, if everyone tries to jump into the same hot field at the same time (biotechnology, green energy, etc.), some are likely to wind up as losers. But we shouldn't think about comparative advantage in a fatalistic way, as something that can't be changed and that we should never try to change.

Paul, this would have been a stronger point some twenty years ago, when the strategic trade literature was still relatively fresh. Yes, it is possible to imagine conditions where there are gains from playing these games. But from what I gather after twenty years of work on this subject, these conditions rarely seem to hold in the data. Even Paul Krugman - whose Nobel was partly based on his work on this topic - doesn't seem to think that this idea is a useful guide to policy.

Rick, someday I'll do a post on the idea that the manufacturing sector is somehow more important than the others. But in the meantime, you can read Jagdish Bhagwati's "The Manufacturing Fallacy."

But from what I gather after twenty years of work on this subject, these conditions rarely seem to hold in the data.

I wonder what role huge supertankers/cargo ships/automated/efficient shipping terminals have played over that past 20 yrs. Throw a wrench in that works (say very high carbon tax or spike in fuel cost) and the economics of shipping off raw materials and importing finished goods from low wage countries may reverse, or at least make the pull not as strong.

I recommend in particular reading the comments to "The Manufacturing Fallacy". The entire argument depends on the editing out of class and "cui bono". It's malpractice.

Stephen,

Thanks for the article, but it has left me feeling a bit confused. How is the Pringles factory not considered to be a manufacturing plant? And aren't the processes used in making potato chips also technical?

It's a separate point: the claim that working in a high-tech sector somehow makes you a better person.

With respect to unionization resource industries are similar to manufacturing.

Part of the problem there is that profitability is much less dependent on productivity and more on price swings. So there is less effort put into productivity, until prices become marginal, and then the crunch hits (see Westray).

It's a separate point: the claim that working in a high-tech sector somehow makes you a better person.

That's lame. Taking thhe bottom line worker, the one who inserts the ic chips for soldering...

What about the ones that designed the circuit boards, the ones that programmed the circuits, the one that thought of the application, the marketing geniuses.

It's like going to RIM, ignoring everybody from Balsillie/Lazaridis down, and focusing on the new immigrant who arrives on the bus, and puts the smart phone in the shipping box.

Who cares about the high tech sector?.... Manufacturing is manufacturing.
Economy = Resources/Agriculture + Manufacturing + retail sales (and maybe transportation), you can substitute out (import) manufacturing and substitute in (export) more retail sales in theory, but it is a potentially dangerous idea. Follow the value chains and you'll see that most of the value added in retail sales is due to marketing and branding (asymmetries of information); it has very little to do with quality. Once people in "other" countries where we export retail sales through brand names understand that brands are inherently valueless, why wouldn't they just substitute there own retail sales.... business is a lot easier to do than engineering. A lot of engineers go get there M.BA. not a lot of "Business" people go back and get there P.Eng.

Its a poor argument... Specific manufacturing is not important, but manufacturing in general is.

Rick, I agree with you about the difficulty ratio of of MBA/PEng, but look at the incentives before you lock down the case.

The comments to this entry are closed.

Search this site

  • Google

    WWW
    worthwhile.typepad.com
Blog powered by Typepad