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> High labor costs in mature economies means those economies will tend to have a comparative advantage producing high-margin products even if their manufacturin

> High labor costs in mature economies means those economies will tend to have a comparative advantage producing high-margin products even if their manufacturing expertise is declining across the board relative to low-wage countries, and even without automation. This is Economics 101 Can you explain this in more detail?

wahern 8y ago
One of the most important, foundational concepts in economics is comparative advantage. See https://en.wikipedia.org/wiki/Comparative_advantage https://en.wikipedia.org/wiki/Comparative_advantage and https://www.investopedia.com/ask/answers/041615/how-do-factor-endowments-impact-countrys-comparative-advantage.asp https://www.investopedia.com/ask/answers/041615/how-do-facto... Comparative advantage says that even if Country X is better (e.g. more efficient, less costly) than Country Y at producing both Product A and Product B, if it's more better at producing A than B it can be more profitable to them (and everybody) to maximize their output of A and leave Country Y to produce B. In a relatively low wage country, it's possible (contingent on other factors) that the most profitable thing for that country to do is to maximize its output of the types of products that require large numbers of lower wage laborers and leave other countries to producing products that utilize higher wage labor even if the low wage country would be more efficient at producing all types of products, including those requiring highly skilled labor. Given the reality that the former types of product will tend to be low margin and the latter high margin (and, again, contingent on the exact numbers), it's entirely possible for manufacturing revenue in high wage countries to continue increasing even as the low wage country surpasses it in expertise and efficiency in producing all types of products. Again, this is all contingent on hard numbers, though FWIW in actuality this is often how things play out at a macro scale. My point is merely that the fact that manufacturing revenue is increasing in Country Y, alone, doesn't tell you much if anything about its efficiency and expertise of manufacturing either products A or B relative to Country X or even in absolute terms; and therefore it doesn't tell you much about the long-term viability and health of those industries. Factors exogenous to the specific skillset related to producing the product, such as labor costs, will often control which products a country makes, regardless of its absolute efficiency in making those specific products. The upshot is that future manufacturing revenue could be disrupted much faster than you might otherwise expect if it's controlled not by slowly changing, transparent factors (e.g. the generations it takes to build a highly skilled workforce, which may have happened without it being reflected in present market specializations) but by other factors that can change much faster (i.e. whichever factors provide the underlying comparative advantage, such as labor costs, exchange rates, or hidden or poorly understood factors).
- The_Amp_Walrus 8y ago
  That's really interesting, thanks. How would you describe the agenda / bias of the Mercatus centre? I've developed a pretty positive view of them based on what I've seen of Tyler Cowen, Alex Tabarrok and Robin Hanson.
  - wahern 8y ago
    As an alumnus of GMU Law School where the Mercatus Center was once located (maybe still?), I'm hesitant to disparage them. Without a doubt they have very intelligent researchers and students. But the pressure to publish--by both the school and the center's benefactors--is tremendous and, frankly, the research output I saw as a student (often pasted on the walls) never seemed to remotely justify the conclusions. I vividly remember one poster describing MRI scans (with a ridiculously small sample size, not that a large sample would have mattered) used to justify some sketchy hypothesis premised on some neurological/behavioral science that I'm pretty sure has since been debunked. Most of the research I encountered seemed of similar quality. I'm not a professional economist, but my undergraduate (International Politics) and graduate school (Law) programs heavily emphasized economics. The thing about economics, such as with the Principle of Comparative Advantage, is you can often draw whatever conclusions you'd prefer if you don't rigorously examine, empirically, the actual state of affairs. The parameters matter, and there are alot of them to pin down. That kind of rigorous examination is extremely difficult and expensive, and even huge, well-funded, well-staffed organizations like the World Bank and IMF have historically sucked at performing all but the simplest empirical studies to justify their policy arguments. It's a good bet that most institutions, such as the Mercatus Center, simply lack the resources to do the kind of empirical research necessary to justify their conclusions. So when I see these centers make concrete policy statements or recommendations, I'm always very skeptical. I used to work at a national security think tank on K Street. I see the Mercatus Center on the same continuum as K Street think tanks; perhaps more academically focused given where its based, but ultimately its work is both fundamentally limited by the inherent complexity of the research area, comparatively meager resources, and strongly tainted by its institutional biases. Importantly, neither the organization nor its researchers acquire funding or prestige by admitting as much; they get funding and prestige by publishing strong, sometimes radical claims based on methodological approaches preordained to provide the answers they sought. The value of something like the Mercatus Center is in how it chooses to apply basic economic principles. The arguments they make are often theoretically interesting. But, again, the dominate factors in reality are invariably empirical, not theoretical. So at the very least they provide me food for thought, keep me honest, and help me form my own constructive criticisms on issues; but I heavily discount their policy conclusions, just as I do most such organizations (but especially the Mercatus Center because, frankly, they aggressively pursue funding from a very particular subset of benefactors, such as the Koch brothers, which means they're incentivized more than many other organizations to publish results that align with those benefactors' worldview, if not the immediate financial interests of those benefactors).

wahern 8y ago

One of the most important, foundational concepts in economics is comparative advantage. See https://en.wikipedia.org/wiki/Comparative_advantage https://en.wikipedia.org/wiki/Comparative_advantage and https://www.investopedia.com/ask/answers/041615/how-do-factor-endowments-impact-countrys-comparative-advantage.asp https://www.investopedia.com/ask/answers/041615/how-do-facto... Comparative advantage says that even if Country X is better (e.g. more efficient, less costly) than Country Y at producing both Product A and Product B, if it's more better at producing A than B it can be more profitable to them (and everybody) to maximize their output of A and leave Country Y to produce B. In a relatively low wage country, it's possible (contingent on other factors) that the most profitable thing for that country to do is to maximize its output of the types of products that require large numbers of lower wage laborers and leave other countries to producing products that utilize higher wage labor even if the low wage country would be more efficient at producing all types of products, including those requiring highly skilled labor. Given the reality that the former types of product will tend to be low margin and the latter high margin (and, again, contingent on the exact numbers), it's entirely possible for manufacturing revenue in high wage countries to continue increasing even as the low wage country surpasses it in expertise and efficiency in producing all types of products. Again, this is all contingent on hard numbers, though FWIW in actuality this is often how things play out at a macro scale. My point is merely that the fact that manufacturing revenue is increasing in Country Y, alone, doesn't tell you much if anything about its efficiency and expertise of manufacturing either products A or B relative to Country X or even in absolute terms; and therefore it doesn't tell you much about the long-term viability and health of those industries. Factors exogenous to the specific skillset related to producing the product, such as labor costs, will often control which products a country makes, regardless of its absolute efficiency in making those specific products. The upshot is that future manufacturing revenue could be disrupted much faster than you might otherwise expect if it's controlled not by slowly changing, transparent factors (e.g. the generations it takes to build a highly skilled workforce, which may have happened without it being reflected in present market specializations) but by other factors that can change much faster (i.e. whichever factors provide the underlying comparative advantage, such as labor costs, exchange rates, or hidden or poorly understood factors).

The_Amp_Walrus 8y ago
That's really interesting, thanks. How would you describe the agenda / bias of the Mercatus centre? I've developed a pretty positive view of them based on what I've seen of Tyler Cowen, Alex Tabarrok and Robin Hanson.
- wahern 8y ago
  As an alumnus of GMU Law School where the Mercatus Center was once located (maybe still?), I'm hesitant to disparage them. Without a doubt they have very intelligent researchers and students. But the pressure to publish--by both the school and the center's benefactors--is tremendous and, frankly, the research output I saw as a student (often pasted on the walls) never seemed to remotely justify the conclusions. I vividly remember one poster describing MRI scans (with a ridiculously small sample size, not that a large sample would have mattered) used to justify some sketchy hypothesis premised on some neurological/behavioral science that I'm pretty sure has since been debunked. Most of the research I encountered seemed of similar quality. I'm not a professional economist, but my undergraduate (International Politics) and graduate school (Law) programs heavily emphasized economics. The thing about economics, such as with the Principle of Comparative Advantage, is you can often draw whatever conclusions you'd prefer if you don't rigorously examine, empirically, the actual state of affairs. The parameters matter, and there are alot of them to pin down. That kind of rigorous examination is extremely difficult and expensive, and even huge, well-funded, well-staffed organizations like the World Bank and IMF have historically sucked at performing all but the simplest empirical studies to justify their policy arguments. It's a good bet that most institutions, such as the Mercatus Center, simply lack the resources to do the kind of empirical research necessary to justify their conclusions. So when I see these centers make concrete policy statements or recommendations, I'm always very skeptical. I used to work at a national security think tank on K Street. I see the Mercatus Center on the same continuum as K Street think tanks; perhaps more academically focused given where its based, but ultimately its work is both fundamentally limited by the inherent complexity of the research area, comparatively meager resources, and strongly tainted by its institutional biases. Importantly, neither the organization nor its researchers acquire funding or prestige by admitting as much; they get funding and prestige by publishing strong, sometimes radical claims based on methodological approaches preordained to provide the answers they sought. The value of something like the Mercatus Center is in how it chooses to apply basic economic principles. The arguments they make are often theoretically interesting. But, again, the dominate factors in reality are invariably empirical, not theoretical. So at the very least they provide me food for thought, keep me honest, and help me form my own constructive criticisms on issues; but I heavily discount their policy conclusions, just as I do most such organizations (but especially the Mercatus Center because, frankly, they aggressively pursue funding from a very particular subset of benefactors, such as the Koch brothers, which means they're incentivized more than many other organizations to publish results that align with those benefactors' worldview, if not the immediate financial interests of those benefactors).