An exchange on exchange....

I have a friend who sends me lots of emails - some very funny and some very topical. This is an exchange that began yesterday about economics.

On Jan 26, 2008, at 2:16 AM, Sue ********* wrote:

Subject: Made in America
Joe Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6am. While his coffeepot(MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). He put on a dress shirt (MADE IN SRI LANKA), designer jeans(MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA). After cooking his breakfast in his new electric skillet(MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. After setting his watch (MADE IN TAIWAN) to the radio (MADE IN INDIA) he got in his car (MADE IN GERMANY) filled it with GAS (fromSaudi Arabia) and continued his search for a good paying AMERICAN JOB. At the end of yet another discouraging and fruitless day checking his Computer (Made In Malaysia) (with tech support in INDIA), Joe decided to relax for a while. He put on his sandals (MADE IN BRAZIL) poured himself a glass of wine (MADE IN FRANCE) and turned on his TV (MADE IN INDONESIA), and then wondered why he can't find a good paying job in..AMERICA....

Here is my reply ----
Sue -
I must take issue with this one. Indeed all of those products are made somewhere else - but the fundamental reality today is that most all of those products that Joe Smith used have one of two characteristics - a physical and an intellectual one. On the one hand - the designer jeans (Made in Singapore - actually probably not at this point because Singapore's textile industry has probably moved) were probably designed in California. Forty years ago New York was the fashion capitol of the world - now about a quarter of all fashion design is done in California. The real value in those jeans is not in the cloth and zipper but in the design. That is ditto for the car and watch and TV. The products have a physical value (the cloth or the computer chips or the engines) and the intellectual component (the idea that make the jeans look good and the car go fast).

Think about one product the story does not mention,"Joe Smith" talking on his iPhone. The iPhone is constructed in China, made of parts from all over the world. It now costs about $400 - but the component parts of the device are worth only about $100. The real value of the phone is in its technology. A good confirmation of that idea is whether you can tell me what Apple does and what Foxcon does. (Foxcon is one of the assemblers of the iPhone). In an NYT article in June of last year Hal Varian explained in detail how the iPod value chain works - it is complex

Finally, and this is the most important part. When you ate your breakfast this morning did you only eat cereal, milk and fruit grown in Placerville? Of course not. Was it only from California? Probably, of course not. Did it hurt you to not consume only locally grown food? Ultimately, there are two concepts here - comparative advantage and division of labor. In economics a key concept suggests that even if I can grow better apples and oranges than you can - if you can grow pretty good apples and by having me quit growing them we will get superb oranges - then it is better for me to specialize in what I do best (comparative advantage) and it will always be better to assure that each of us is not forced to do everything. Think of how very poor Joe Smith would be if he grew all his own food and made all his own products and clothing.

Economics starts from one of two premises either the notion of scarcity or the notion of mutual benefits from exchange. My brand of economics begins from that second premise. In my opinion it is a lot more relevant to think about the ideas that drive markets. Does that mean we should not produce anything physical - no of course not. But I certainly did not worry that I was able to have raspberries from Chile this morning for breakfast. Jose (the Chilean farmer who grew them) is better off because he has a wider market for his product and I am better off because I can have a fruit that I associate with summer in the middle of the winter. It sure takes away my winter blues and both of us are better off by a lot.
DrTaxSacto

I'm worried in this election cycle that a good many people are convinced by the nonsense of the story about "Joe Smith" and don't bother to think about the great things that come to us from more vigorous exchange. In the late 1950s Leonard Reed wrote something called I,Pencil which describes the trail of production that a pencil takes. The miracle of market coordination is something we should all appreciate. The Joe Smith story is typical of the mentality of commentators like Lou Dobbs who try to portray some market knowledge but rely on xenophobic nonsense of one market. It is too bad that more people don't question those absurd assumptions.