Saturday, May 7, 2016

Economic Efficiency and Outsourcing

I firmly believe that if a President were to enact protectionist laws to force American companies not to outsource jobs to Mexico or China, as seems to be the trend in the rhetoric from both the Republican and Democratic Presidential candidates, this would constitute theft of money from the Mexicans and the Chinese, and the American government does not have the right to engage is massive theft.
Let me explain why. I will present two examples to make my case. First, consider a scenario where there is a lot of coal that can be cheaply mined and burned for fuel to produce electricity, and it is also possible to build solar panel farms to harvest sunlight for electricity, but that would be much more expensive. Because the coal would be cheaper, the market, through the price system, is telling us that the coal would be more economically efficient than the solar, because the coal is cheaper relative to the solar. Now assume that the working class is forced, by law, to build the solar power plants, instead of mining for coal, to protect them. So, what has happened? If the coal would cost $5 million, and the solar would cost $20 million, the workers are now forced to do additional work to build the solar that they would not otherwise have had to do. What this really means is that $15 million worth of slave labor was forced onto them, in other words, $15 million worth of labor was stolen from them. $15 million is what the market valued the difference between coal and solar at, so this is the price of the amount of work that was needed additionally above what would have been needed for coal to get the solar, and that is the work that was done.
Aha! But, the liberal will say, the cost of medical care for coal miners with Black Lung, pollution harms from coal smoke poisoning the air and water, etc., made it worth it. But here we are toying with the thought experiment. In a libertarian utopia, a person has the right to sue to recover damages if violence is done to him, and poisoning is a type of violence--Rothbard conceded as much, at times. So the cost of medical lawsuits and pollution lawsuits, in a truly free market, would be factored into the $5 million that the marketplace priced the coal at. In other words, in a libertarian utopia all negative externalities are naturally internalized due to the functioning of the free market as well as a functional judicial system that enables legal recovery for harms.
So, no, there truly was $15 million of wealth that could have belonged to the people if they had been able to pay $5 million instead of $20 million for the same amount of electricity, and this was a loss to the people, felt most painfully by the working class and the poor, as the lack of money always is felt by them most poignantly. The law that forced people away from the economically efficient pattern of production that was based on the objectively existing set of available resources represents an amount of wealth stolen from the people who must pay a price over the efficient market price.
GOLD theory holds that money is an illusion and we must always look at the underlying value that the money represents, and ignore the money, to see what is going on. In the coal vs. solar example, there are really three things, coal, sunlight, and a bunch of resources, such as food and water to feed the workers who could mine coal or build solar panels. If the workers mine coal, it is more efficient--faster, for example--so a certain amount of food and water is consumed to do that. But if they build the solar power plant, it is more expensive--say, it takes more work and longer hours--so they must consume more food and water to build the solar power plant. That $15 million that is lost is actually $15 million worth of food and water that is consumed to build the solar plant and would not have been consumed to mine coal for the same amount of electricity as a result. It is this loss of wealth which is the result of economic inefficiency--the destruction of surplus, to use the economist's terminology.
By the way, the purpose of this example is not to debate coal vs. solar. They are hypothetical examples only. I could have said apples vs. oranges to make the same point.
Now, having established our theoretical framework, let’s look at outsourcing. Naturally, the American workers would compete with the Mexican workers and the Chinese workers, and the group who did the best work for the cheapest price would get the jobs. But, because of socialist economic policy, the American workers are not allowed to compete. Minimum wage laws prevent them from competing on price, and the various employment benefits that must be given to American workers makes it even more expensive. Factor in currency exchange rates, and the Mexicans and Chinese workers are far cheaper, perhaps charged $6/hour for work that, with all costs accounted for, American workers would demand $35/hour for. The American workers’ skill set is not worth an additional $29/hour.
These prices were not necessary, but because of bad laws they are forced into existence. The market, then, must deal with reality as it exists. So, after the bad laws take their effect, the pattern of resources available means that economic efficiency is for the Mexicans and Chinese to get the jobs. If, instead, more laws force the jobs to go to the Americans, then wealth is stolen from the Mexicans and Chinese, who had earned those jobs in fair competition against the Americans, and this wealth will then be stolen from the people who must buy more expensive products, as the sellers seek to recover their added expense relative to the added cost of paying their factory workers, by forcing the consumers to pay more for these products which were more expensive to manufacture. Again, the poor and working class are hit hardest by more expensive products, as well as the working class in China and Mexico, which lack the American welfare system to fall back on.
Obviously the solution to the plight of the American working class anger is to roll back the minimum wage and employment benefits laws, so they can compete in the global labor market and win, but the labor unions won’t hear of this, and the workers themselves are not educated enough about economics to see that it is in their long-term rational self-interest to take a lower wage in order to have jobs and avoid the total loss of all salary when their jobs are taken by foreign workers.
In this context, the Chinese and the Mexicans deserve those jobs, and any protectionism is theft, and will wreak havoc upon the delicate balancing act of economic efficiency in the interconnected and complex world of international trade. Of course, a trade war of embargoes and tariffs may result, and then access to cheaper resources in foreign countries is blocked, making things still more expensive, and so on. So, the poor, to buy something made in a factory, will pay $35 for something that should cost $6, so that the political parties can get the labor unions to line up votes. I’m sorry, but it’s true, and somebody had to say it, and I guess that someone just happens to be me.

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