Is 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 per-person....

Real Per-Capita Manufacturing

Output in America1970: $7,569 (2011 dollars)

2008: $11,687 (2011 dollars)

This happy trend is the result ofsteadily and dramatically improving

productivity......

But would America’s manufacturing

sector be even larger if low-wage

foreign countries weren’tbecoming so dominant in

manufacturing?

Adam Smith:An Inquiry Into the Nature and CAUSES of the

Wealth of Nations

Division of Labour***

-

Division of Labour

•By dividing labor, output in an 18th-century 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. specialized workers hone their skills

•3. 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 TradeSome 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 TOM

FISH

BANANAS(50-25) =

25

**** DON TOM

FISH

BANANAS(50-25) =

25(25 + 25)

= 50

**** DON TOM

FISH(0+37) =

37

BANANAS(50-25) =

25(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 makeshim a worse bananaerererer....

That is, each banana now costs Tom 3 fish to producerather than 2 fish

And Tom’s becoming a better fisherman also makesme a relatively better bananaerererer....

That is, whereas before I could produce bananasat 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.