Comparative advantage and when to blow up your island
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Even if automation removes the labor cost arbitrage factor, the market distortion due to other factors is unlikely to encourage a spurt in manufacturing unless the US also decides to intervene in markets.
Additionally, mask making in the US has very low comparative value. Us workers and business have much better products they to produce.
Dave Chappelle hit the nail on the head in one of his standup routines "I wanna wear Nikes, I don’t wanna make those things. Stop trying to give us Chinese jobs"
Absolute advantage is when you are best/cheapest at producing something. Comparative advantage is when you have the lowest opportunity cost to produce something. Others may be able to produce it cheaper but they have something more profitable to produce.
Example might be steel mills, USA probably can produce steel, but it is much more profitable to produce end products (machines, tools, cars). So USA could be the best at producing steel and machines, but it ends up producing machines giving China comparative advantage to produce steel (let's imagine they do not know how to produce machines in a cheap way).
It's quite a strange concept.
Advantages are not static; they're path-dependent and time-dependent variables, and treating them properly as such can really change the optimum strategy. The path dependence means that sometimes, instead of always maximally exploiting your existing advantages, you can make a short-term sacrifice to gradually create advantages that you didn't originally have.
Certifications take time, masks are simple, testing takes time.
This is a government problem, not a manufacturing problem.
There are two obvious problems above. First, 2 years, will we even need N95 masks in two years? Second, I said I'd make them, but I cannot promise I can make them cheaper than China can.
For many things, including probably making N95 masks, we can no longer just decide to make them now without reconstructing that entire logistical tail, all the myriad of small manufacturers, and train people with specialized know-how and the years of experience that only exist in the presence of a vibrant and active manufacturing ecosystem.
(and yes, our standards institute also was testing the resulting product)
Even the north koreans seem to have bought some machines, judging by their propaganda photos. https://news.ycombinator.com/item?id=23741907
As far as making cheaper than china, the following are old links for non-N95 masks, they may be stale:
Compare masks per month: https://www.reuters.com/article/us-health-coronavirus-autos-...
with masks per day: https://www.youtube.com/watch?v=_jWt-4YKBq4
Note too that I have no expertise in either building a business or designing mask making machines, so I'll need to hire people as experts in both of those which will take time. Probably my mask making machine experts will be experts in designing machines (engineers), but not masks and so they will have to learn what works and doesn't.
The fact that the US will always need steel helps ensure that they _will_ always be friends with China, so long as they also specialize in something that China needs.
Globalization is a part of it, but I don't think it's sufficient in itself to keep the peace.
Their inability to produce high octane gasoline was also instrumental in the defeat of the Luftwaffe, as it meant their aircraft could not perform up to the level of the Allied aircraft.
The Japanese in WW2 also failed to secure a supply of oil, with similar results.
The interesting thing about a future modern war, however, is that modern weapons are too expensive and take too long to produce, so it'll be fought with whatever is in stock and will be over before supply lines matter. I hope we never find out if that is true or not the hard way.
If all you have left to fight with is improvised weapons, then it continues with that.
I would argue that very expensive, complex machines are the Tiger tank mistake all over again. Mechanically unreliable because of the complexity, but when it worked it was completely unmatched. One Tiger tank defeated 50 Russian tanks in the battle of Kursk, if I remember correctly.
But the cheaper, mass produced tanks of the allies won out because they could be fielded in much greater numbers.
and see how well (or poorly) that work. Look at afganistan. Look at iraq. Insurgents continue to fight, and the usa just cannot completely win.
A war is won on ideology, not weapons.
The US cannot win those because it is unwilling to do what is necessary (indiscriminate killing) to win.
> A war is won on ideology, not weapons.
I don't see much evidence for that in the history of warfare. For example, during WW1, the fortunes of the armies ebbed and flowed with the ebb and flow of who had the technical advantage in the air war.
If they don't want anything from their trading partners, the output of those industries can just as easily be directed to their own population.
tomorrow, China may learn to specialize in that something.
It is never a good strategy to depend on the weakness of others for the long term.
After all, a) humankind developed steel mills in the absence of any steel mills at all, and b) multiple countries have developed much more complicated things in secrecy from each other (like atomic weapons and orbital rockets and radar), so it seems like it should be doable.
It's to your advantage to give up your skills if the cost of regaining them if you need to is smaller than the comparative advantage of having China make steel for you in the meantime.
Geopolitical considerations may mean there's a business advantage to having it made in China as opposed to elsewhere, but as we've seen with the US pandemic response, there are sectors where it's just plain stupid to believe that expertise can be summoned up as needed, and that it's somehow cheaper not to pay for it in the interim. Government isn't a household, and you can't restart having expertise like canceling Netflix for a few months.
you'd imagine they, upon acquiring said expertise, would write it down so that it is permanently available to others. What happens to the expertise if the person with it dies in an accident or old age?
Some of it is trade secrets and so when the company is wound down it's sold as IP to another place.
Some expertise is contextual to the actual build of the equipment. Having a manual that said replace this O-ring every week in a blower or you'll suffer failures may not actually be expert knowledge anymore, It could be all that is stopping you from losing a million dollar piece of equipment or it could be what's causing you to lose productivity for an hour every week in a pagan ritual to the sacred maintenance document.
Being an expert and being able to chronicle that expertise are not just separate skills they're separate tasks. They might not know what is worth highlighting or they might prefer to read a book than to take on the extra task of writing it down.
The Economics jargon is "real option value". When you have engineers making widgets of type A, it's easy to get them to make types B, C, and D should the need arise. This potential to do other things has real value even if in fact you never do them.
Real option value should always be evaluated when choosing a course of action, but since it's about non-existent things, it's usually skipped. (Edit: calling it "real" must be economist humor.)
Ricardo didn't know about, or chose to ignore, real option value. In the classic England = cloth, Portugal = wine trade, Portugal would be better off making cloth because of real option value.
These toy examples are useful as an introduction but basically irrelevant to modern political debates around economics, we need to move past discussing trade like we do in "Econ 101."
Now apply that to dozens of other concepts in other fields. Same situation. It's depressing.
Another economic topic would perhaps be marginalism, so we don't keep getting flooded with "but why is water cheaper than diamonds, it must be injustice/bad values/conspiracy".
And perhaps some kind of history of thought on value, so we don't get the simple version of labour theory, or the Fisher-Price version of utility theory again and again.
Perhaps I sound like a snob, but I find a lot of economic discussions are derailed by having to clear up confusions that appear repeatedly.
The fact that it holds when there are three or more options but not for two options just doesn't sit right with me.
See the Gibbard-Satterthwaite theorem.
Pretty much the only scheme that avoids this is "choose a voter at random and elect the candidate they like best".
Which isn't a very important consideration compared to other attributes of election methods. Usually, coordination and signalling problems make tactical voting inadvisable. But even when tactical voting does work, it's not necessarily a problem.
The source of all of Arrow's nonsense is treating an election as a very large opinion poll on a single candidate. Of course pollsters hate liars, so everyone who takes Arrow seriously tries to eliminate tactical voting.
However, that's the completely wrong model. An election is an opportunity for a citizen to use their equal political weight to try to steer the polity. If some citizens managed to be smart and use their political weight smartly good for them. So what if their vote wasn't their true preference?
Tactical voting is only a problem when the election method allows a minority to win frequently - because political weight isn't really equal in that case - but one can imagine methods where tactical voting can happen yet the winning candidate always ends up with a majority (e.g. France's 2-stage Presidential elections). In those cases, tactical voting is not a problem to be eliminated.
And at this point we learn how many people's true preference is to vote themselves as president!
Once IIA is relaxed to a sane axiom [read: abolished almost entirely], there are multiple methods that work like versions of STV. Besides, Arrow never applied to ordinal voting methods like Approval (which is OK) or Range (which I strongly dislike for other reasons).
Should I be in favor of cronyism?
I actually take the other side despite getting paid by them. These companies/Management made terrible decisions and continue to make terrible decisions. Instead of selling and replacing managers we are burdened with zombie companies.
(Off the top of my head, a few for me are in-group/out-group behavior, path dependence, sunk cost fallacy, fundamental attribution error, and externalities.)
The point is, the ball is in the court of corporations and the wealthy. Money in politics will work for them until it doesn't. No amount of donations, ear whispering, and cocktail parties can avert popular rage. Trump supporters are only a taste of what may be coming, because Trump was easy on the rich (of course). There's no guarantee that the next populist president will be as nice to the rich. There's no guarantee that the next populist president won't be more capricious on free trade. The underlying ailments that gave rise to populism must be addressed as soon as possible. Critically, free trade is not the problem. The problem, like I said, is that the rich capture too much of the surplus from trade. More of that surplus should be going to education, bullet trains, research, socialized healthcare, etc...and it's not.
* The infant industry argument. The analysis in TFA assumes comparative advantage is fixed: in reality advantage shifts all the time. Fifty years ago China had a comparative advantage in farming and not much else.
* Measuring comparative advantage: in order to make a good policy recommendation, we don't just know what each country does produce, we need to know how much each country could produce under a huge range of scenarios. Does anyone honestly know how much value a given country could produce if it decided to shift its entire economy in a new direction?
* Mobility of labour: instead of trading with other countries, why not just allow their workers to work in your country and reap the benefits at home? (I recognise that some advantages don't come directly from labour, but we do see this happen in low-skilled jobs). Even Ricardo recognised that labour mobility hurt his argument.
For what it's worth, I'm not saying that trade doesn't usually benefit both parties: I'm saying that _this argument_ isn't the smoking gun that demonstrates that fact.
One of the early game theory papers considers two people with radios, parachuted onto a grid, who must rendezvous. It derives a theoretical strategy: broadcast one's location, then destroy one's radio, forcing the other player to do all the walking.
Bonus clip: https://www.youtube.com/watch?v=2yfXgu37iyI
@ 3:42 whew, still there: https://www.bbc.co.uk/sounds/play/live:bbc_radio_fourfm all OK, Boomers!
@ 3:55 unlike the House of Windsor during '14-'18, Kongo-Müller didn't bother to change his name: https://news.ycombinator.com/item?id=24423024 (esp. 53:40-56:15)
Those who prefer their skulls virtual are advised to avoid 30:10-33:30 and instead regard https://www.youtube.com/watch?v=hn1VxaMEjRU&t=57
Imagine criticizing an empirical result on the basis that simulations don't support it. In other sciences, it's the other way around - if the simulation differs from the experiment, it's the simulation that's considered faulty.
I guess economists think their simulations are so perfect and complete, such good representations of a system as complicated as human behavior and society, that any result disagreing with those simulations must be due to experimental error.
Edit as reply to the question of whether Japan, Korea, Taiwan, China reached their status "without utilizing free trade":
They utilized trade, but not completely free, unrestricted trade. I'm sure we're all aware of China's historic and current protectionist policies. Western countries also used and still use various "protectionist" policies (e.g. corn subsidies in the US), they just try to be subtle about it. That's what was meant by "neoliberal trading rules".
If you open your markets without restriction, before you have a developed industry your industry will die.
Of course, once your industry it's developed, your best strategy is to be a champion of free trade.
(1) - https://ips-dc.org/kicking_away_the_ladder_the_real_history_...
So empirical evidence vs simulation is somewhat Hobson's choice.
Now perhaps those countries would have succeeded even more without protectionism. Do you go with something proven to work for your country, or experiment with an alternative with a worse track record?
"Dumping, in economics, is a kind of injuring pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price below the normal price with an injuring effect. The objective of dumping is to increase market share in a foreign market by driving out competition and thereby create a monopoly situation where the exporter will be able to unilaterally dictate price and quality of the product."
How would it work in this example?
The other guy would sell you coconuts and bananas well below the Zone of Possible Agreement (ZOPA), and you would be so glad to buy everything from them -- destroying your industry.
A few years go by, and they raise their prices above the ZOPA -- and you have no option because it would cost you a lot to rebuild your industry from scratch.
If you try to produce bananas, they drop the price of bananas; and make profit from coconuts. If you try to produce coconuts, they drop the price of coconuts, and make profit from bananas. (You need coconuts and bananas!)
That's what happens in real world -- developing countries export iron for $100/ton (2,200 pounds) and buy high value-added products (phones, tablets, computers) for $500/unit.
Rich countries use the profit they make from high value-added products and services to subsidize their farmers, pushing the price of food down. For instance, wheat costs $188.75 per metric ton, less than $0.20 per kg ($0.10 per pound).
Without subsidies, the farming industry would be decimated from rich countries, and prices would go up.
So, "free market" is an abstraction that doesn't exist in the real world -- and you can see it in this idealized model of two islands.
Why did Hershey's chocolate close the factory not too far from where I grew up, and move the manufacturing to Mexico? Well, labor is cheap there because there are no unions, few health and safety regulations, few workers' rights groups. That makes it much cheaper to operate.
Why can China manufacture clothing cheaply? Well, they have hundreds of thousands of Uighur prisoners being 're-educated' via forced labor.
And while I don't disagree that for some countries that are trying to move up in development, so-called 'sweat shops' can represent a stepping stone forward (2 generations ago, South Korea had plenty of them), the question is how long that's an acceptable excuse?
In my opinion, we need trade rules that explicitly tax and tariff those countries who are only finding comparative advantages through exploitation and unethical activity.
The money could also be explicitly put into human rights campaigns.
The US and Europe have this situation too, where some European countries have decent parental leave and overtime rules, non employer subsidized healthcare, and lack of employer dependent H1B workers.
Even within the US, you have states like CA offering paid parental leave, paid sick leave, environmental protections, non compete bans, and eliminating tipped minimum wages versus most of the other states trying to compete with cheap labor and not offering any job protections to people.
It’s 2020 and Ohio doesn’t even require employers to pay out accrued PTO.
Employers also do not need to be responsible for people's decision to have children. Parental leave can be paid for by the government. However, in the current economic system, retaining one's ability to earn income may need to be protected by the state and involve employers having to do something. Maybe with a universal basic income, employers can be completely left out of the equation.
In short, we are better off for not having Hershey's in the US. Mexico gets better wages (more competition) and out people are freed from making candybars and can move to more productive uses of our people.
Even if the candy company folds in 5 years, part of "them" is probably still ahead - the management team "them" experiences gains through short-term incentives for performance while the ownership part of "them" suffers losses.
In some cases, those owners aren't fat-cat capitalists - they're workers' pensions and retirements funds.
In these cases, "we" didn't end up being better off by the company moving to Mexico.
Also, the claim that this type of relocation "frees" local labor from the toil of candybar-making to focus on real value creation is a stretch. More likely, they're now free to compete in a smaller labor market and superficially one would expect that to drive wages down (since the demand for jobs hasn't changed and the supply has of them has gone down).
> ...freed from making candybars and can move to more productive uses of our people
relies on the presumption that there is sufficient local demand for laborers (who may not necessarily have any experience that doesn't involve the manufacture or distribution of chocolate) in positions of increased productivity.
The decaying socioeconomic situation for wide swaths of the rural US suggests that this was not the case.
US rural areas face a very different issue: high wages relative to other countries (shared with cities), but with the population density advantages of cities. I don't need to look to tell you Hersey didn't move to a rural area of mexico they moved to a city of some sort. They don't need the largest city, but a small town cannot supply their labor needs.
Xinjiang makes up only a tiny part of the Chinese economy, anyways. Xinjiang has 22 million people and exports barely $17 billion of goods per year. Guangdong has 113 million people and exports $440 billion of goods per year.
> In my opinion, we need trade rules that explicitly tax and tariff those countries who are only finding comparative advantages through exploitation and unethical activity.
That policy would lead to tariffs against most poor countries. I could imagine some unintended consequences there.
1. https://oec.world/en/visualize/tree_map/hs92/export/chn/all/...
2. https://oec.world/en/visualize/tree_map/hs92/export/chn/all/...
This is complete nonsense. I hate CCP as much as anyone outside it but let's be real for a second: China became a manufacturing center way before the islamic terror attacks (like the Kunming attack of 2014) incitated them to take action against that ideology in East Turkestan.
You can be worse than every country on earth at making X, but still have a comparative advantage in making it.
>And while I don't disagree that for some countries that are trying to move up in development, so-called 'sweat shops' can represent a stepping stone forward (2 generations ago, South Korea had plenty of them), the question is how long that's an acceptable excuse?
Understanding comparative advantage helps answer this question. Sweat shops should not be banned by the exporting country as long as it provides a comparative advantage to workers. That is to say, if sweat shops are better than the next best option, they should be allowed. Once better jobs exist for workers, sweatshops should be disallowed. Otherwise, banning them doesn't make replacement jobs, it just pushes workers into worse options.
Changes can also be made on the buyers side to not import products made in sweatshops. This could have positive or negative effects on workers in the exporting country. If the manufacturing country still has an absolute advantage in shirt making after the import ban on sweatshop goods, their people will be better off. If the absolute advantage now goes to another country, the workers will be worse off.
why do they need to be disallowed, if workers are given the freedom to pick their best option?
This is a horrible perspective. Exploiting another person's need to survive in order to gain unlimited labour is akin to slavery.
Serious question: Is there an ethics course for popular economics?
This sounds like the cornerstone of Trump's trade policy. "Give me what I want, or I will end all trade between us."
In theory, it works. In practice, you end up with a Dr Strangelove dystopian outcome.
The article rules those out by presenting scenarios in which there is always some advantage to trade. In any such scenario, neither party has any incentive to blow up the bridge, since there is always some way for each party to improve their situation by using the bridge to trade, compared to what their situation would be if the bridge did not exist.
In the real world, there are cases where there is no advantage to trade, usually because one or more of the "complexities" described in section III of the article applies. The obvious one, of course, is "there might be more than two people"--in the real world, there are always more than two parties with whom potential trades can be made (this is true even if we consider the "parties" to be nations instead of individuals), and as the article notes, in that case there can be scenarios where at least one party will gain nothing from trade.
IE think about the modal logic intersected with the game theory, no one will believe that you will blow up your own island, but they may believe that you will blow up the bridge.
If you are the only possible party the other party can trade with, then blowing up the bridge and blowing up your own island are, as far as the other party is concerned, equivalent, yes. So if there is any benefit to the other party in trading with you, they have an incentive to have that trade available to them, and hence to do whatever it takes to have you not blow up either your own island or the bridge.
However, if there are any other parties besides you that can be traded with, that is no longer the case, because you not being there just means they go trade with someone else.
Another thing to note is that the article's assumption of non-violence, which basically means neither party will do anything to harm anything that isn't their own property, also rules out blowing up the bridge, since the bridge, by hypothesis, is not the property of either party. A better analogy to withholding trade in the article's scenario would be something like building an impenetrable wall at your end of the bridge.
Ah, yes, you're right. I was only looking at the payoff for the other party. You're correct that for the party that is making the threat, they're much better off after blowing up the bridge or building a wall than they are after blowing up their own island, so the former is a much more credible threat. I think the "modal logic" thing confused me because I don't really see how modal logic in particular is involved here; but game theory certainly is, yes.