2-2008 From the Editor
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Gomory: Thumbs Down to Smith's Invisible Hand
By Tim Triplett, Editor-in-Chief

I’ve always tried to listen dispassionately and objectively to all the scary talk about unfair trade and the loss of American jobs. I’ve always taken with a grain of salt all the doomsday predictions of America’s decline as the world’s economic powerhouse. After all, I thought, we’ll always have Adam Smith’s “invisible hand” propping us up, right?

Not so, says Dr. Ralph Gomory, revered mathematician, longtime head of science and technology at IBM and former president of the Alfred P. Sloan Foundation. Gomory quickly burst the “globalization’s good” bubble for me and a crowd of service center executives at MSCI’s Tubular Division Conference last month. “There’s a difference between the much-talked-about benefits of free trade and the less-clear effects of globalization,” he pointed out.

As Smith postulated in “The Wealth of Nations” way back in 1776, “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” In other words, as individuals strive to improve their own lot in life, they raise society, as well.

Of course, 200-some years ago, Mr. Smith could not have envisioned a world where communication is instantaneous, delivery is overnight and corporations can open factories across the ocean more cheaply than they can down the block.

According to conventional economic wisdom, the offshoring of American manufacturing is all just part of free trade. True to the theory of comparative advantage, countries perform those tasks they can do best, and trade for other goods and services. Thus while America may lose unskilled jobs to low-wage workers in Asia, we will replace them over time with higher-paid, higher-value jobs here. Though the displaced industries will feel some pain in the short term, consumers will benefit from cheaper imported goods, and America will be better off in the long run.

To the contrary, said Gomory: “The connection between corporate profits and GDP is good if both are in the same country, but offshoring of manufacturing operations puts profit in one country and GDP in another. With globalization, the interests of companies and countries can diverge.”

Free trade is mutually beneficial assuming the countries’ capabilities remain largely fixed (as they did in the agrarian societies of 1776). The development of an underdeveloped country is good for the home country, but only up to a certain point, after which the trading partners become competitors.

“The U.S. needs an economic strategy suited to a globalized world—a strategy that aligns corporate and country goals,” said Gomory. Government should use its policymaking powers to devise incentives for corporations to create high-value jobs at home. For example, the U.S. might differentiate the corporate tax rate, rewarding companies that maintain manufacturing/export operations here and pay workers well, while punishing heavy importers that pay low wages, such as discount retailers.
Clearly, as technology spreads to all parts of the globe, and the lines of comparative advantage blur, the U.S. can no longer count on good-old-fashioned American entrepreneurship and know-how to maintain its leadership position. As Gomory noted, “America became a rich country not primarily because of better education, but because our workers dug ditches with backhoes when many others were using shovels. Now you are just as likely to have a Chinese worker with the same backhoe as an American.”




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Friday, October 31, 2014