Lately a lot of people have been talking about Paul Samuelson’s Journal of Economic Perspectives article on globalization and free trade. The actual paper is available here through MIT.
What’s funny is that (a) this paper has NOTHING to do with outsourcing--i.e. despite his verbal analysis, Samuelson’s model doesn’t even deal with outsourcing, let alone does it show that it can hurt the US; and (b) what Samuelson DOES show--namely that improved skills among foreigners can make the US poorer--was demonstrated back in the 1950s! (For a superb analysis see here.)
Briefly, what Samuelson does is start out with an initial two-good, two-country situation that allows for comparative advantage and thus gains from specialization and trade. In terms of my example from a recent Mises.org article, suppose the US worker can make either 100 DVDs or 10 radios in a day, while a Somali worker can make either 20 DVDs or 4 radios in a day. Although the US worker is better in both lines, he has the comparative advantage in DVD production, because 100/20 > 10/4. Thus the US specializes in DVDs and the Somalis specialize in radios, and both countries get the other good on better terms than could be obtained in autarky.
But now suppose that the Somalis become better at producing DVDs (perhaps because they are not crippled with a “public” educational system), and that the average Somali worker can now make 40 DVDs in a day (as opposed to the original 20). If the other numbers are the same, this completely eliminates the gains from trade. That is, although the US still has the absolute advantage in both lines, there is no longer any comparative advantage, because 100/40 = 10/4. Hence the US and Somalia will revert to autarky. Somalia is not injured by the improvements in its workforce; for a given amount of labor hours, it still has the same PPF in terms of DVDs and radios as it did in the first scenario (with trade). But the US is clearly hurt; it must revert to the original autarky PPF. It’s as if Somalia disappeared from the face of the earth.
Hence, we have just seen how it’s theoretically possible that when a foreign country gains skills in something for which the US held a comparative advantage, the US can become poorer on net. (I.e. we are really considering all the long-run effects; we’re not just focusing on one segment of the US population.) But notice that THIS HAS NOTHING TO DO WITH OUTSOURCING, NOR DOES IT AT ALL SHOW THAT “FREE TRADE” IS A BAD POLICY.
