I just thought maybe I should have explained a little about Absolute and Comparative advantage.
So for those who are not clear and would like to know here is a quick and simple version.
Imagine a world where your country and mine both make nails and hammers. I am great at nails not so good at hammers. You are the other way around.
One situation is our two countries make both and use what we make. Result – neither of us has a very good tool kit. Free Trade says we should both quite making what we’re no good at and concentrate on what we do well. We should then buy from each other a good quality tool Result – we both have a good tool kit and have started lucrative trades. This is free trade using Absolute Advantage.
Comparative Advantage take this a little bit further. Imagine I am really good nails and also fairly good at hammers, while you are not so good as me at either. You would appear to be stuffed. Comparative advantage theory, however, says I will do best for myself if I give up doing what I am not quite so good at (even though I am good at it) and concentrate on what I do best. Not only will I put all my energies into what I do best but I will leave open to you the chance to do well at what I have given up. Result we both do well and trade expands.
All sounds so fabbily dabbily doesn’t it? And it is ‘in theory’.
However, the theory glosses over a few things. Even in absolute advantage which is the most intuitive, there are problems. First, in the real world when I stop making hammers all those people lose their jobs. They put a drain on revenue and in the market place they will provide a ready pool of unemployed that employers will use to force lower wages on the nail makers. This kind of grubby detail of real world wage pressure doesn’t exist in the ideal world.
This is just one problem. Another is that making better is not as attractive as making cheaper. If it was there would be no Pound Stores. Making cheap rather than better is helped if a nation relaxes any pesky health and safety, quality control or environmental ‘red tape’.
I can now be ‘good at what I do’, and undercut even your good tools with my shoddy but REALLY cheap ones. Of course eventually people will notice and ‘in theory’ should go back to the better local brand because it is the ‘rational choice’ to do so. Sadly, in the real world again, my shabby tat will have bankrupted your quality company long before people think about switching back. Your workforce will have taken to drink, their children to drugs and the local schools will have been torched. Doesn’t happen in the theory of course.
In the theory none of the real world problems happen. Because theoretically workers in nails transfer perfectly and costlessly to new jobs in hammers there is no adverse effect on wages, taxes and employment. Believers ignore the real problems and stick with the cleanliness of the theory. Especially because they personally will likely not have experienced the reality of being in an industry that collapses.
Zealots like the IMF will force countries to open their trade to foreign goods by removing the tariffs which protect local hammer production. And do so in the name of Free Market theory.
In theory the locals should cheer as they can now buy better foreign hammers. And will be liberated to ‘do what they do best’ and with the profits from this local excellence, buy more hammers! Only, unseen by the theoreticians, the flood of foreign hammers will collapse your employment, your government will cut investment, while I will expand easy credit to my industry as a matter of central bank policy, and allow them to dump even more, really poor quality goods on your market. In the name of national competitiveness.
Free market theoreticians will lament this terrible distortion of the truly free market and set up international organizations where nations will be more than happy to fritter away decades pretending to give a damn. All the while making the actual free market works as we know it does in reality.
If things go ‘well’ and your economy collapses and takes your worker’s wages down with it, I might then start to off-shore jobs from my workforce to yours. Produce my goods even cheaper and sell the stuff back to my own former employees. They will be earning less, of course, now doing a service job flipping burgers for my family and friends. But the central bank will off-set the decrease in wages by opening easy credit for the banks. They will use this easy money to lend to people who want to buy houses but who never had enough for a deposit. No problem! Have you seen our 100% nothing down deal?
They will buy and rejoice. Others like them will too. House prices will go up. Everyone will marvel and then rejoice. I will ask the new house owners if they have thought about withdrawing a little, or a lot, of equity from the house which is appreciating in value. They will rejoice some more. They will take a loan based on their house value and use the cash to buy stuff. All the cash and stuff they now own will distract them from the fact that they are earning less than they used to. If they do think about it, it will just seem to be ‘a miracle of free trade’.
The stuff they are filling up their lives with, I will have imported from my factories in the country where everyone works for nothing. And I will rejoice at the huge profits I am making and the total lack of stupid worries like health insurance for my workers or pensions for them or any of the costly stuff I used to have to worry about when I employed people in my own country.
It is a god damned miracle of the free market.
From that last paragraph, it would appear that you have morphed into James Dyson!
Ouch!
How do we decide what a fair or reasonable wage is? (I don't know the answer to this by the way).
If our level of consumption is unsustainably high, (and I've no idea whether the UK's is although I suspect it might be given the levels of consumption of 'luxury' items I see around me), then is an increase in debt the only cause or has income become unsustainably high too?
In that case, the prevailing economic forces determine how the balloon will pop, but not if.
Interesting stuff about the relative cost of workers' welfare though. There needs to be some form of welfare-offsetting, comparable to carbon-offsetting perhaps.