Transcript Economics of Progress

s U.S. Manufacturing in Decline?
Pop wisdom says Yes
some evidence....
But these facts do not mean that
American manufacturing output
is declining absolutely or perperson....
Real Per-Capita
Manufacturing
Output in America
1970: $7,569 (2011 dollars)
2008: $11,687 (2011 dollars)
This happy trend is the result of
teadily and dramatically improvin
productivity......
But would America’s manufacturing
sector be even larger if low-wage
foreign countries weren’t
becoming so dominant in
manufacturing?
Adam Smith:
An Inquiry Into the Nature and CAUSES of the
Wealth of Nations
***
-
Division of Labour
• By dividing labor, output in an 18thcentury pin factory from from about 10
pins per worker per day to 4,800 pins
per worker per day
WOW!
Why?
• 1.
specialized workers don’t waste time
moving from task to task
Why?
• 1.
specialized workers don’t waste time
moving from task to task
• 2.
specialized workers hone their skills
Why?
• 1.
specialized workers don’t waste time
moving from task to task
• 2.
• 3.
specialized workers hone their skills
specialization more readily suggests
practical means of mechanization
Specialization is the
Key
• But specialization is the key for one
other reason in addition to the three
identified by Adam Smith
David Ricardo
Vacations in Bath
• ... and reads The Wealth of Nations
Principle of
Comparative
Advantage
• familiar (to economists) two-person,
two-good ‘model’
Alone on an Island
------
DON
TOM
FISH
50
200
BANANAS
50
100
Maximum Amounts Possible to Produce
Good Not to be Dependent
Upon Others?
****
DON
TOM
FISH
25
100
BANANAS
25
50
Amounts Produced AND Consumed
Let’s Trade
Tom offers to give me 37 fish if I give him 25 bananas
Let’s Trade
Some more simplifying assumptions:
1. Don’s fish and bananas are identical to Tom’s
2. Don and Tom are trustworthy
3. Don and Tom each want, with trade, to continue to
consume the same number of bananas that each
consumed without trade (that is, 25 bananas for Don
and 50 bananas for Tom)
Specialization...
***
DON
TOM
FISH
0
150
BANANAS
50
25
Amounts Produced with Trade
Amounts consumed
with trade....
****
DON
FISH
BANANAS (50-25) = 25
TOM
****
DON
TOM
(50-25) =
25
(25 + 25) =
50
FISH
BANANAS
****
DON
FISH
(0+37) =
37
BANANAS
(50-25) =
25
TOM
(25+25) =
50
****
DON
TOM
FISH
(0+37) =
37
(150-37) =
113
BANANAS
(50-25) =
25
(25+25) =
50
DonTomania is Wealthier by 25 fish!
With trade, each of us can
consume more than each of us
can produce!
With trade, each of us can
consume MORE than each of
us can produce!
A Parlor Trick?
Not at all.
Ask: What does It Cost me to produce a fish? A
banana?
Then ask: What does it cost Tom to produce a fish? A
banana?
If those costs are different, then there is the potential
for mutual gains from trade
Tapping Into Each Other’s Talents:
Our ProductionCosts Per Unit
****
DON
TOM
FISH
1 banana
1/2 banana
BANANA
1 fish
2 fish
Don is the lower-cost
bananaerererer...
Tom is the lower-cost fisherman
Trade enables each of us to tap
into the better talents of the
other
Don wants fish and bananas and can produce his own
fish at a cost of 1 banana. Because Tom also wants
bananas yet can produce his own only at a cost of 2
fish, Tom figures out that, (1) because he (Tom) can
produce a fish at a cost of 1/2 banana; (2) that Don
wants fish; and that (3) Don’s cost of catching his own
fish is 1 banana per fish Tom realizes that he (Tom) can enable Don to
profitably “produce” his (Don’) own fish by him (Don)
first gathering bananas (at a cost of 1 fish per banana)
and then trading each of those bananas to Tom in
exchange for more than one fish (say, 1.5 fish per
banana).
The result of Don getting from Tom
1.5 fish for each banana that Don
produces and exchanges is that
each fish that Don “produces” in
this way cost him only 2/3rds (or
0.67ths) of a banana.
Any ratio of exchange (“price”) of fish for bananas that
has fish fetching at least slightly more than 1/2 banana
yet no more than 1 banana is mutually advantageous.
The reason is that Tom’s cost of producing each fish is
1/2 of a banana, and Don can produce his own fish at
a cost of 1 banana
Smith and Ricardo
Together
****
DON
TOM
FISH
50
300
BANANAS
50
100
Tom’s Concentration on fishing makes him a better
fisherman
But Tom’s becoming a better fisherman makes
him a worse bananaerererer....
That is, each banana now costs Tom 3 fish to produce
rather than 2 fish
And Tom’s becoming a better fisherman also makes
me a relatively better bananaerererer....
That is, whereas before I could produce bananas
at 1/2 the cost that Tom incurred to produce
bananas,
Now I can produce bananas at 1/3 the cost that Tom
incurs to produce bananas.