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-- MarcRoitman - 07 Dec 2008
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< | The Effect of the Internet on the Labor Market and Free Trade | >
> | The Effect of the Internet on Free Trade | | | | |
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> | The basic principles of free trade that David Ricardo wrote about two centuries ago remain valid today. Nations, organizations, and individuals benefit by specializing in the tasks they do best and trading with others for the rest.1 However, the internet and its users have changed market relations in a permanent and meaningful way. Using the free software movement as a guide, it is clear that a different organization paradigm has emerged. Nevertheless, in a way, the basic concept of specializing and sharing is reinforced by the free software movement, with the common goals of efficiency and diffusion of innovation. | | | | |
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< | The basic principles of free trade that Adam Smith and David Ricardo wrote about two centuries ago remain valid today. Nations benefit by specializing in the tasks they do best and trading with other nations for the rest.1 Despite clear economic support for open markets, politicians continually engage in protectionist practices that heavily regulate trading and cause inefficiencies. | >
> | Communications technology and the Internet may be fundamentally changing the way economists look at free trade. Alan Blinder, a well-regarded proponent of free trade, admits that free trade economists may have to adjust their theories to account for technological innovation. He writes, “We used to think, roughly, that an item was tradable only if it could be put in a box and shipped. That's no longer true. Nowadays, a growing list of services can be zapped across international borders electronically. It's electrons that move, not boxes.”2 | | | | |
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< | One of the most common arguments made by politicians in the United States against free trade is that American wages will decrease because of the willingness of foreign workers to work for less, and as a corollary to this, that many jobs will be shipped overseas to where the costs of labor and production are lower. Most economists, proponents of free trade, would argue that this logic is economically unsound. In terms of wages, if there were only one industry and occupation in the world, then free trade would indeed cause American wages to decrease towards the level seen in other parts of the world. However, modern economies clearly consist of a diversity of employment opportunities. If Americans continue to work in industries where America has a comparative advantage, then wages will remain higher. Wage level depends fundamentally on productivity, and according to leading free trade economist Alan S. Blinder “as long as American workers remain more skilled and better educated, work with more capital, and use superior technology, they will continue to earn higher wages.”2 | >
> | But even a model that considers the transformational consequences of the movement to primacy for zero marginal cost goods3 does not grasp the full scope of how the internet society will affect the economy. | | | | |
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< | Communications technology and the Internet, however, may be fundamentally changing the way economists look at free trade. Blinder himself admits that free trade economists may have to adjust their theories. He writes, “We used to think, roughly, that an item was tradable only if it could be put in a box and shipped. That's no longer true. Nowadays, a growing list of services can be zapped across international borders electronically. It's electrons that move, not boxes.”3 | >
> | Free software is a category of good that does not fit into the current economic paradigm. For example, consider the basic definition of economics, found in the first chapter of any economics textbook: “Economics is the study of how society manages its scarce resources.” So, how does this basic definition account for free software? Free software is a non-scarce good. This is so because software can be shared easily, and the cost of making a new copy is negligible. The definition is inadequate to describe the new organizational model. | | | | |
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< | As the technology advances, more and more services will become deliverable electronically. The computer age has already changed the low end labor market in myriad ways. We are already familiar with voice-activated operators when we call any customer service help line. John Tanny adds, “Thanks to the proliferation of ATM machines, self-serve ticket kiosks at movie theaters, and the Internet, we now for the most part no longer deal with live human beings when we go to the bank, the movies or buy airline tickets.”4 And, as Blinder notes, it's not just low-skill labor markets that will see a decrease in labor demand. “It's also high-skill services such as radiology, architecture and engineering -- maybe even college teaching.”5 | >
> | In a traditional market economy, the cost of a good consists of the cost of the product itself plus the cost of movement. For example, a retail store selling widgets will determine how much to charge per widget by first determining their costs, which will include both the manufacturing cost as well as the cost of shipping the widgets from the manufacturer to the shop. It is easy to see how the cost of movement for software tends towards zero because, whether the software is free or proprietary, it can be transferred electronically at negligible cost. So, in a traditional market economy, the cost of software consists solely of the cost of production. | | | | |
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< | These fundamental changes to the labor market, however, do not justify an increase in protectionism. The argument that protectionist policies save American jobs in the long run is false. It is true that in the short-term economy, trade barriers will allow some Americans to keep their jobs. However, in the long run, it is unlikely that any jobs are saved. Protecting one American industry through barriers to trade will impose higher costs on other industries, resulting in a loss of jobs. Blinder cites two examples of this. In the 1980’s, quotas on semiconductor imports caused a huge increase in the price of memory chips, which in turn damaged the computer industry as a whole. The other example is the quota on steel importation, which requires car manufacturers in the United States to pay more for raw materials, which in turn makes them less competitive.6 And what is the cost of saving an American job in the short term? While the estimates differ widely across industries, the cost is always higher than the wages that would be paid to the protected worker. According to Blinder, "One study in the early 1990s estimated that U.S. consumers paid $1,285,000 annually for each job in the luggage industry that was preserved by barriers to imports, a sum that greatly exceeded the average earnings of a luggage worker. That same study estimated that restricting foreign imports cost $199,000 annually for each textile worker’s job that was saved, $1,044,000 for each softwood lumber job saved, and $1,376,000 for every job saved in the benzenoid chemical industry. Yes, $1,376,000 a year!"7 Blinder concludes that quite clearly, the costs exceed the benefits. | >
> | However, in the case of free software, in addition to the cost of transfer eventually becoming zero, the value of the good will also tend towards zero. To understand this, let us first examine proprietary software. Manufacturers of proprietary software will charge a fee for the right to use the software and will limit access to the software to only the individual who purchased it. Therefore, the value of proprietary software remains of some monetary amount, and proprietary software can be viewed as a traditional economic good. With free software, however, even if a user originally pays a fee to acquire the software, the value will eventually tend towards zero because the software can be freely transferred to any number of other users for free. | | | | |
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< | An analogy can be drawn here between the trade among nations and trade among states within the union. In terms of the economy, the United States can be considered in the same light as a free trade zone. In the United States, wages and production costs vary greatly from region to region. However, goods and services within the U.S. are able to freely cross state boundaries without tariffs or restriction. This free trade enables specialization and the laws of comparative advantage to apply within the United States, which helps to increase overall national prosperity. Blinder writes, “One reason why the United States did so much better economically than Europe for two centuries is that we had free movement of goods and services while the European countries ‘protected’ themselves from their neighbors.”8 | >
> | As technology advances, more and more services will become deliverable electronically. This will fundamentally alter the labor market. These elemental changes, however, do not justify an increase in protectionism or a shift away from free trade. The computer age has already changed the low end labor market in myriad ways. We are already familiar with voice-activated operators when we call any customer service help line. John Tanny adds, “Thanks to the proliferation of ATM machines, self-serve ticket kiosks at movie theaters, and the Internet, we now for the most part no longer deal with live human beings when we go to the bank, the movies or buy airline tickets.”4 And, as Blinder notes, it's not just low-skill labor markets that will see a decrease in labor demand. “It's also high-skill services such as radiology, architecture and engineering -- maybe even college teaching.”5 It is tempting to turn to protectionism in times of economic turmoil. As Blinder writes, “American workers will face a troublesome transition as tens of millions of old jobs are replaced by new ones. There will also be great political strains on the open trading system as millions of white-collar workers who thought their jobs were immune to foreign competition suddenly find that the game has changed.”6 However, for the benefit of the world economy in the long-term, the principles of free trade must win out. | | | | |
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< | It is tempting to turn to protectionism in times of economic turmoil. As Blinder writes, “American workers will face a troublesome transition as tens of millions of old jobs are replaced by new ones. There will also be great political strains on the open trading system as millions of white-collar workers who thought their jobs were immune to foreign competition suddenly find that the game has changed.”9 However, for the benefit of the world economy in the long-term, the principles of free trade must win out. | >
> | In fact, I would argue that the fundamental economic changes demanded by technological innovation and the free software movement justify an increase in free trade. In the free software community, a socioeconomic system exists in which the access to goods is freely granted given the users’ agreement to adhere to a set of rules that define the way in which the good can be used. | | | | |
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> | When one considers that the production capacity of free software tends upwards with no limit and that free software promises common access to goods which are not scarce because they can be easily shared, it is easy to see that a new economic model is possible. The free software movement provides a different approach to the primary dilemma of capitalism: the distribution of scarce resources. Through the dissemination of free software, manufacturers of products (whether they be electronic or tangible) can become more efficient and more innovative. This, in turn, would provide higher quality of products at lower costs, thus accomplishing what David Ricardo originally set out to do. | | | | |
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1. Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007. Newspaper online. Available from http://www.washingtonpost.com/wp-dyn/content/article/2007/05/04/AR2007050402555.html, accessed 7 December 2008.
2. Blinder, Alan S., “Free Trade,” The Concise Encyclopedia of Economics. Accessed online, 7 December 2008, from <http://www.econlib.org/library/Enc/FreeTrade.html>, 3. | | | | |
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< | 3. Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007. | >
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1 Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007. Newspaper online. Available from http://www.washingtonpost.com/wp-dyn/content/article/2007/05/04/AR2007050402555.html, accessed 7 December 2008. | | | | |
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< | 4. Tanny, John, “Free Trade and the Rattling of Alan Blinder.” Real Clear Markets, 28 November 2007. Newspaper online. Available from http://www.realclearmarkets.com/articles/2007/11/free_trade_and_the_rattling_of.html, accessed 7 December 2008. | >
> | 2 Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007. | | | | |
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< | 5. Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007. | >
> | 3 This is a quote from your comments on the 1st draft. I really couldn’t say it any better myself. Thanks for the phrasing! | | | | |
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< | 6. Blinder, Alan S., “Free Trade,” The Concise Encyclopedia of Economics, 5 | >
> | 4 Tanny, John, “Free Trade and the Rattling of Alan Blinder.” Real Clear Markets, 28 November 2007. Newspaper online. Available from http://www.realclearmarkets.com/articles/2007/11/free_trade_and_the_rattling_of.html, accessed 7 December 2008. | | | | |
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< | 7. Ibid, 4 | >
> | 5 Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007. | | | | |
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< | 8. Ibid, 7 | >
> | 6 Id. | | | | |
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< | 9. Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007. | | |
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