Wednesday , September 19 2018
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Mercantilist Myths Never Die

Summary:
Gary Morgan, a loyal Cafe Hayek patron, suggests that I reprise this ten-year-plus-old post: Paul Krugman circa 1996 understood the point of this letter (below) that I sent yesterday to the New York Times.  Paul Krugman circa 2007 apparently doesn’t: Opposed to free trade, David Raines asks “How can it be good for workers to be subjected to competition from low-wage countries?” (Letters, December 27).  This question reveals a common misunderstanding. Worker compensation in America is high because American workers are made highly productive by the great amounts of capital they work with.  (And by the way, America is rich in capital, in part, because she consistently runs capital-account surpluses – i.e., “trade deficits.”)  Where wages are low, it is because workers in those places

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Gary Morgan, a loyal Cafe Hayek patron, suggests that I reprise this ten-year-plus-old post:

Paul Krugman circa 1996 understood the point of this letter (below) that I sent yesterday to the New York Times.  Paul Krugman circa 2007 apparently doesn’t:

Opposed to free trade, David Raines asks “How can it be good for workers to be subjected to competition from low-wage countries?” (Letters, December 27).  This question reveals a common misunderstanding.

Worker compensation in America is high because American workers are made highly productive by the great amounts of capital they work with.  (And by the way, America is rich in capital, in part, because she consistently runs capital-account surpluses – i.e., “trade deficits.”)  Where wages are low, it is because workers in those places have little capital to work with and, therefore, are not very productive.

G.M. and Toyota continue to sell cars even though bicycles – a competing means of transportation, but one far less productive than cars – fetch much lower prices.  For the same reason, with free trade American workers will continue to sell their labor for high wages even though many workers abroad fetch much lower wages.

Sincerely,
Donald J. Boudreaux

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Don Boudreaux
He is a professor of economics at George Mason University in Fairfax, Virginia. Previously, he was president of the Foundation for Economic Education.

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