Dubious Assumption #7: Trade does not induce adverse productivity growth abroad.

[tangent4ronpaul]

When we trade with a foreign nation, this will generally build up that nation's industries, i.e. raise its productivity in them. Now it would be nice to assume that this productivity growth in our trading partners can only make them ever more efficient at supplying the things we want, and we will just get ever cheaper foreign goods in exchange for our own exports, right?

Wrong. Consider our present trade with China. Despite all the problems this trade causes us, we do get compensation in the form of some very cheap goods, thanks mainly to China's very cheap labor. The same goes for other poor countries we import from. But labor is cheap in poor countries because it has poor alternative employment opportunities. What if these opportunities improve? Then this labor may cease to be so cheap, and our supply of cheap goods may dry up.

This is actually what happened in Japan from the 1960s to the 1980s, as Japan's economy transitioned from primitive to sophisticated manufacturing and the cheap merchandise readers over 40 will remember (the same things stamped "Made in China" today) disappeared from America's stores. Did this reduce the pressure of cheap Japanese labor on American workers? It did. But it also deprived us of some very cheap goods we used to get.

And it's not like Japan stopped pressing us, either, as it moved upmarket and started competing in more sophisticated industries.

Oops!

When Nobel laureate Paul Samuelson -- author of the best-selling economics textbook in history -- reminded economists of this problem in a (quite accessible) 2004 article, he drew scandalized gasps from one end of the discipline to the other. But nobody was able to explain why he was wrong.

They still haven't.

http://www.ronpaulforums.com/showthr...92#post3202492

[axiomata]

Paul Samuelson, the man singly responsible for the sorry state of economic thinking in America today.

Yes, it was just horrible when Japan went from making cheap plastic goods to quality consumer electronics. And now China makes cheap plastic goods. Perhaps one day too China will not be full of billions of starving people and they will stop making cheap plastic goods and move on up. Maybe then Africa could pick up the slack and pull billions out of poverty. Woe is me!

[heavenlyboy34]

When we trade with a foreign nation, this will generally build up that nation's industries, i.e. raise its productivity in them. Now it would be nice to assume that this productivity growth in our trading partners can only make them ever more efficient at supplying the things we want, and we will just get ever cheaper foreign goods in exchange for our own exports, right?

Wrong. Consider our present trade with China. Despite all the problems this trade causes us, we do get compensation in the form of some very cheap goods, thanks mainly to China's very cheap labor. The same goes for other poor countries we import from. But labor is cheap in poor countries because it has poor alternative employment opportunities. What if these opportunities improve? Then this labor may cease to be so cheap, and our supply of cheap goods may dry up.

This is actually what happened in Japan from the 1960s to the 1980s, as Japan's economy transitioned from primitive to sophisticated manufacturing and the cheap merchandise readers over 40 will remember (the same things stamped "Made in China" today) disappeared from America's stores. Did this reduce the pressure of cheap Japanese labor on American workers? It did. But it also deprived us of some very cheap goods we used to get.

And it's not like Japan stopped pressing us, either, as it moved upmarket and started competing in more sophisticated industries.

Oops!

When Nobel laureate Paul Samuelson -- author of the best-selling economics textbook in history -- reminded economists of this problem in a (quite accessible) 2004 article, he drew scandalized gasps from one end of the discipline to the other. But nobody was able to explain why he was wrong.

They still haven't.

http://www.ronpaulforums.com/showthr...92#post3202492

edit: better yet, I found Murray Rothbard's critique of Samuelson's book. Enjoy!