A few months ago there was an economic analysis piece in The Independent celebrating the UK's thriving "unskilled service job market". I couldn't quite figure out whether that was tongue-in-cheek or not, but if that is the UK's comparative advantage (aside from financial services jobs) we have a problem. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
Another question about comparative advantage is that it seems it was developed in a world where labour didn't move that much.
The experience in the coalfields of the UK is that comparative advantage is a nonsense. There is nothing that the people in these areas can actually provide that is of value to the people who have the money. (Well, not nothing, but allow me generalisation for now, we can do subtleties in a diary later. ) As a result what has happened is part depopulation and part economic depression. (I think this pattern can also be seen in Eastern Germany.)
Now the free marketeers say "so what, that's how the market works!"
But, of course, there are two concerns:
a) All this movement comes out of environmental abuse (c.f. rdf's water diary, mine and DeAnander's comments.)
b) If the pattern is repeated on a larger scale, we are basically saying comparative advantage doesn't work, there's only competitive advantage and we'll all have to move to those areas that have it, or just sit in broken economies. Trouble is, it's not feasible to move that many people around, it barely works on the UK scale...
c) This is localised Great Depression all over again, our economy is wasting the potential productivity of tonnes of people. But here I guess I slip into a Keynesian quagmire.
But I think the point is that when Comparative Advantage was developed, capital could not move in pursuit of cheap labour either. Ricardo's example or wine and wool trade between Portugal and England is a case in point. If the capital from the least efficient country could flee to the more efficient country and make a profit there, what would be the point of having the least efficient country produce anything? Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
Migeru asks the question about comparative advantage and free movement of capital. Can anyone explain the answer to me?
Right now, it looks like comparative advantage is a busted flush.
I think a big part of the problem is that the developed world is so far ahead of the developing world that the principle of comparative advantage can't hold for the time being. However, if all countries were all equally wealthy, I think it's safe to say that it would hold.
The principle doesn't account for the "catching-up" effect. It's not that the idea of comparative advantage is incorrect. Not at all. It's illustrated all the time. It's just that it's incomplete as we typically discuss it. WHEEEEEEEEEEEEEEEEEEEEE!
a) Oversupply of cheap labour, thus demand for goods is lower than supply. (Possibly also due to factors like Chinese prison camp slave labour and the like...)
b) Capital is free to move to sites of cheap labour, so there is no investment in the higher labour areas.
Is that what you are saying?
From a more political standpoint, I think we should be looking for unionization of service-sector employees more and more in the near future. That will enable them to secure stronger wages increases. And their employers will be able to pay it, because, hey, they make big profits from cheap manufacturing. WHEEEEEEEEEEEEEEEEEEEEE!
By 'efficient' read cost-efficient. My point is that China is more efficient (in terms of return on capital) than the UK because of labout costs, and so the UK is losing its entire manufacturing economy to China and replacing it with UK capitalists who own Chinese production facilities and UK service workers catering to the capitalists.
Here 'UK' stands from developed countries, and 'China' stands for emerging economies, with both agricultural and industrial production being outsourced. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
