Wednesday, March 08, 2006

An Error, but also an Interesting Idea

From Kingsport Times-News ('time well spent'):

Minimum wage hike won’t fix poverty”

“As Adam Smith observed in "Wealth of Nations," each country has a comparative advantage over others in one respect or another. For much of the Third World, that advantage is clearly low-cost labor. That being the case, it is clearly counterproductive to raise threshold wages in this country when cheaper labor overseas already is capturing those jobs.”

Students of economics often stumble over the differences between Absolute Advantage and Comparative Advantage; graduates in time often conflate the two quite separate concepts. Adam Smith wrote about absolute not comparative advantage. Comparative advantage was developed by Robert Torrens (1815) and defined rigorously by David Ricardo (1817: Principles of Political Economy and Taxation).

Smith did not ‘observe in "Wealth of Nations," each country has a comparative advantage over others in one respect or another”. The author of the unsigned article in Kingsport Times-News not only misattributed authorship of the theory of comparative advantage to Adam Smith, but also actually describes the theory of Absolute Advantage, which should be attributed to Smith’s ‘observation’.

That Third World countries have lower labour costs might indicate Absolute Advantage, but not necessarily a Comparative Advantage. It is possible for Country A to have higher productivity in two products X and Y than Country B in its production of Y, but by trading with Country B for product Y, Country A can divert the capital and labour it would otherwise use to produce Y to its production of X instead, and pay for its imports of Y from Country B with its exports of X to Country B.

A century ago, the American workplace resembled in many respects that found today in Third World nations. Through the formation of unions and the political exposure of particularly egregious working conditions, progress was slowly made.

Wages rose, the workweek and workday were reduced, child labor was outlawed, and safety provisions were mandated on the state and federal levels. All of these advances can be realized abroad, just as they have been in America. In fact, if unions, which have largely accomplished their goals in the American workplace, are looking for a way to increase their membership, they could do worse than by attempting to organize overseas

An ingenious suggestion! There may a problem of financing such US-sponsored trade unions at US Union officials salaries and pensions from the subscriptions of very poor workers wages. But still worth thinking about.

In this respect it should be noted that it wasn’t just or even mainly the trade unions that tackled the problems of child labour, the length of the working day, holidays, pensions and safety provisions. All these were legislated for by British Parliaments from the early 19th century (i.e., under Tory and Liberal governments – before the Labour Party was formed by the Trade Unions in 1900. Also Labour did not come to power until 1924 and then only briefly in a minority government).

Read the article at


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