A car factory moves its operations to some third-world country, and
the employees are now angry and poor.

Politicians try to prevent such things, but many economists, it seems,
approve of such short-term unpleasantness, reasoning that Smith's
"invisible hand" will guide these newly freed-up factors of production
into things that that area of the country can do more efficiently.

In other words, although it may be initially painful, in the long run,
these downsizings will eventually benefit everybody because it will
allow the resources in question to now be employed where they have the
greatest comparative advantage.

I think this is, more or less, the version taught to undergrads.

Yet I'm suspicious about this. In short, my question is, what
guarantee is there that the industry (or industries) that all the
resources now head towards will maximize the country's utility as
capably as the lost business did? There's something really basic here
I don't understand.

By way of illustration, let's suppose that there is a country called
Eskimolania. Eskimolandia exports oil. They have oil under the ice.
For this reason, it's expensive to extract, but market prices of oil
are so high that it's worth the trouble most of the time.

As a result of this business, Eskimolandia enjoys a high standard of living.

The problem is the Saudis are killing them. The Saudis can sell much
more oil and at a lower opportunity cost, since for them it's so easy
to get out of the ground and there's pretty much nothing else they can
do.

Consequently the Saudis enjoy both an absolute and a comparative
advantage over the Eskimos, who consequently do not make scads of
money from their oil, but they do make enough, as I say, to enjoy a
high standard of living.

So let's say something happens: the Saudis get aggressive, or the
market jolts or something, and the oil wells and refineries in
Eskimolandia are shut down, and now the Eskimos are out of work.

But wait! It turns out the Eskimos have a comparative advantage in the
exporting of snow! Nobody can do this as well as they can; they've
virtually got the market cornered!

So all of the resources (Eskimo entrepreneurs, workers, investment
capital, etc.) now get into the ice industry, since they were driven
out of the oil industry.

And nobody does this business as well as they.

The part I don't understand is: even if the Eskimos enjoy a
comparative advantage with the production of snow, what guarantee is
there that their living standard will raise as high as it would have
if they had just kept on with the oil business?

It seems that just because you enjoy a comparative advantage at doing
something, doesn't mean that's the thing you should be doing...

Like I said, I don't get it.

---

Clarification of Question by gnossie-ga on 11 Feb 2005 08:58 PST

The thing that made me ask this was all the auto workers in, say,
Michigan, getting laid off.

If they look in an economics text, it'll say that ultimately, this is
all for the best.

But what if, years later, it turns out that for the residents of that
state the thing they had the next best comparative advantage with was
milking cows.  Obviously the living standard will go down.  This is
bad: how are things equalling out?

If so, it was right for politicians to have resorted to all sorts of
sneaky methods such as corporate welfare, tariffs, quotas, etc. since
losing the business would irretrievably, for them, lower the living
standard.

The "things will make up for it in the end" is bull.  I don't care
what half whit politician proclaims it- I agrue the other side. Lima
Ohio had railroads,  and was located on I75 half way between Dayton
and Columbus. We have Rhodes State College, Ohio State Campus and
Northwester Unvr. All right in town. A town of currently 40,000
people. At one time Lima was abundent with employment that paid well.
Lima had numerour manufactoring plants, and white collar jobs. In the
80's business began moving out, although the "vote in" people assured
us new business would move into Lima to replace the jobs that were
lost and the income that was falling rapidly- it never did. When
business had been replaced it was with smaller lower paying jobs and
never enough to make up for what was lost. BUT hey Lima had the
location, the assets, the trained work force, everything that should
have kept business here and continued to bring more.

Here are the some unemployment rates for Allen COunty Ohio, which Lima is in:


 Year                1999  2000  2001  2002  2003  2004  
 
Average Unemployment 4.7%  4.7%  5.1%  6.5%  7.0%  6.6% 1st half of the year 

This small town has even had national coverage mentioning unemployment
rates and loss of jobs:
http://quote.bloomberg.com/apps/news?pid=10000103&sid=apcE7pgwTt6o&refer=us
, "In Canton and Lima, unemployment was above 7 percent in February,
the last month for which complete estimates are available.

Marcel Wagner, a spokesman for the Allen Economic Development Council,
a business consortium in Lima, said the local economy has been slowed
by the loss of defense-industry jobs during the past decade. One of
its largest employers is a plant that produces M-1 battle tanks, owned
by General Dynamics Corp., where Bush will speak"


 Lima, OH Economy at a Glance
                                                       July        Aug
      Sept        Oct        Nov        Dec
                                                       2004       2004
      2004       2004       2004       2004
Labor Force Data
Civilian Labor Force (,1,)                             78.8       77.9
      76.5       77.9       77.2       76.4
Employment  (,1,)                                      73.4       73.4
      72.3       72.9       72.9       72.7
Unemployment (,1,)                                      5.4        4.5
       4.3        5.0        4.3        3.7
Unemployment Rate (,2,)                                 6.9        5.8
       5.6        6.4        5.6        4.9
Nonfarm Wage and Salary Employment
Total Nonfarm (,3,)                                    77.3       77.6
      78.0       78.3       78.5  78.9(,P,)
12-month % change -- Total Nonfarm                      1.0        0.0
       0.9        0.9        0.5   1.2(,P,)
Construction and Mining (,3,)                           3.6        3.6
       3.6        3.6        3.6   3.5(,P,)
12-month % change -- Construction and Mining           -5.3       -5.3
      -2.7       -2.7        0.0   2.9(,P,)
Manufacturing (,3,)                                    18.2       18.2
      18.3       18.5       18.7  18.6(,P,)
12-month % change -- Manufacturing                      6.4        3.4
       3.4        3.4        3.9   3.3(,P,)
Trade, Transportation, and Utilities (,3,)             14.7       14.7
      14.6       14.7       14.9  15.0(,P,)
12-month % change -- TTU                                1.4        0.0
      -0.7        0.0       -1.3  -0.7(,P,)
Information (,3,)                                       1.1        1.1
       1.1        1.1        1.1   1.1(,P,)
12-month % change -- Information                        0.0       10.0
      10.0        0.0        0.0   0.0(,P,)
Financial Activities (,3,)                              2.3        2.3
       2.3        2.3        2.3   2.3(,P,)
12-month % change -- Financial Activities               0.0        0.0
       0.0        0.0        0.0   0.0(,P,)
Professional & Business Services (,3,)                  5.7        5.8
       6.0        5.9        5.9   6.1(,P,)
12-month % change -- PBS                                1.8        1.8
       9.1        7.3        5.4  10.9(,P,)
Educational & Health Services (,3,)                    11.6       12.0
      12.2       12.2       12.2  12.2(,P,)
12-month % change -- EHS                                0.0       -0.8
       0.0        0.0       -0.8  -0.8(,P,)
Leisure & Hospitality (,3,)                             6.4        6.4
       6.3        6.1        5.9   6.0(,P,)
12-month % change -- Leisure & Hospitality              0.0        0.0
       3.3        1.7        0.0   1.7(,P,)
Other Services (,3,)                                    4.3        4.2
       4.2        4.2        4.2   4.3(,P,)
12-month % change -- Other Services                     0.0       -2.3
      -2.3        0.0        0.0   2.4(,P,)
Government (,3,)                                        9.4        9.3
       9.4        9.7        9.7   9.8(,P,)
12-month % change -- Government                        -4.1       -4.1
      -4.1       -3.0       -3.0  -3.9(,P,)

Footnotes:
(P) Preliminary
(1) Number of persons, in thousands, not seasonally adjusted
(2) In percent, not seasonally adjusted
(3) Number of jobs, in thousands, not seasonally adjusted

Data extracted on: February  9, 2005

Source     : U. S. Bureau of Labor Statistics
*see ftp://ftp.bls.gov/pub/economy/economy.oh_lima.txt for better reading

*********************** I think what the goverment is trying to pull
is conviencing us that big business moving out is an advanage to us,
and indeed it is- if you are one of the lucky multimillionaires that
own the companies. Other wise suck it up and begin your new career
training by learning how to say"would you like fries with that?"

The invisible hand isn't going to work overnight.  The world does seem
to be spinning much much faster now than it did when Smith was
around... I've heard it said that more changes in 1 day now than did
in 500 years not too long ago.

An instance of expecting overnight results would be Lrulrick's post...
Notice how this area she (i think i remember you being a she from
another post :) describes starts its downturn in 2001.  Then just 3
years later we see it starting to improve and it looks like (with a
bit of imagination) a bell curve.  I expect unemployment there to be
close to 5.5% in 2005 and 5% in 2006.  That would show a business
cycle of 5 years (not too far off from what economics professors might
teach).
Politicians and critics today will say that is horrible, but the fact
of the matter is that this is life.  The economy slows down and it
speeds back up.  It has been doing this for many decades.  I agree
that the downturn is painful and not appreciated by most people,
however it is bound to happen once in a while.

As far as your questions about jobs and a comparable advantage, both
for individuals and for groups there is THE best thing you can be
doing (what you are comparatively best at) and there is THE second
best thing...  Of course the second best thing won't pay quite as much
as the best, but if THE best thing decreases in value then THE second
best thing could become THE best thing and pay less than you made
before.

Imagine those Eskimos making oil.  They're rich and happy, but the
price of oil falls.  Now they can still make money making oil, but not
as much as before.  So they decide to make snow instead where they can
make more money now than they could making oil now (but less than they
made making oil before).  Their comparative advantage for snow is now
lower than it was for oil (but higher than it currently is for oil).

So you can see that their standard of living will decrease, but it
would decrease more if they continued to make oil.  There is a good
chance that many Eskimos will move away to find more money elsewhere. 
When they do this, there will be less snow production and the price of
snow will increase (since the supply of snow will decrease) and the
Eskimos will earn slightly more money (but still perhaps less than
they could with oil).  This simplifies the matter alot, but it's not
too far fetched.

Jack, Jack, Jack- why yes i am a she.

However I don't expect results overnight and the downturn from Lima
actually began in the 80's when some of it's biggest employers stepped
out. To list just a few: Sheller Globe, Clark Equipment, Excello,
Westing House, Warner and Swasey, DJG, Randal Bearing (shipped large
amount of jubs although they did not close). This was only the
beginning of the down turn- I could continue listing the companies
that have increasingly left Lima in order to "save money elsewhere" if
you would like from the end of the 80's till present day.

By the way the up curve that you seen was within the city limits for
the year- the first set of rates was for the entire county of Allen
which Lima is located in. I wont make you look up again to see them"

   Year                1999  2000  2001  2002  2003  2004  
 
Average Unemployment 4.7%  4.7%  5.1%  6.5%  7.0%  6.6% 1st half of the year 

Although at a quick glance it looks as if the rate dropped from 03
till 04, actually it only went back to the normal swing. 2003 was a
worse than normal year even for the area- in which people were
preparing for the closing of a prison, building trade jobs slowed to a
firm halt, and such.

I still say the professors and politians should lose their jobs to
some overseas el cheapos, use up the 26 or so weeks of unemployment
that the state gives and try to feed their families before telling the
rest of the real world that our standard of living is still better
than if the jobs had stayed here.

An increase in unemployment of around 2.5% is indeed regrettable for
the area as a whole and tragic for the individuals involved. Imagine
what it is like when an area goes from about 98% employment to
somewhere less than 20% as happened in many parts of the UK in the
late 1980?s to early 1990?s.The first five minutes of the film ?The
Full Monty?, was reality. We hadn?t built ships for years, we stopped
constructing high rise buildings, railways had been denationalised so
the trains we had were run into the ground to give the new owners a
return on their investment etc. so we didn?t need steel anymore and
the mills were closed. If we didn?t need steel we didn?t need coal
either. It was an expensive fuel which couldn?t be pumped in the same
way as oil or gas and it was difficult to get the sulphur out leading
to air pollution and acid rain, No more steel meant no more coking
ovens. Electricity generators had switched to alternative fuels.
Mining towns closed overnight.

Many small companies were encouraged to start up but they never
replaced what was lost and a good proportion of these fell in the
downward spiral of the economy bringing even more personal tragedy to
those involved. I met an Official Receiver once (that is a person who
closes a closes a company down when there is not enough money left in
the business for an accountant to do it) who told me that for each
telephone area, you could pick up the Yellow Pages every week and rip
a page out.

The solution was brilliant in its simplicity and still leaves me with
my mouth open when I think about it. The local civic authority built a
shopping centre, monumental in its scale with hundreds and hundreds of
shops. This provided medium term construction work. As each area fell
into the recession an even grander mall was built, dwarfing the ones
that had gone before. People who could no longer afford to pay for the
places where they lived were suddenly packing the shopping centres and
we were spending our way out of trouble. Even if we couldn?t afford
it, the retail therapy made us feel better for a while. We were buying
things that needed to be made.

The problem was, that we were too expensive, so manufacturers started
making or sourcing their goods in the third world. However we did
believe in a free economy, except where food was concerned, then we
believed in a highly regulated economy with production quotas.

The bridge I can?t seem to get over, is that if manufacturing is the
engine that drives the economy and everything else (financial
services; recreation, culture and the Arts) depend on this engine and
if our engine is broken and somebody else has the only other working
engine which they are keeping for themselves, how do our wheels keep
turning around, or are we just fooling ourselves by running with the
clutch pressed down?

Whatever the reason, the message is clear. If your big manufacturer
packs his bags and leaves town, then it?s time to open a shop.

Gnossie-

A 20,000 foot answer is that Smith's invisible hand is working exactly
as it always has, only in this case, the invisible hand is working
AGAINST the people of your town. This is broadly the case for the
United States since globalization really kicked into high gear. US
households enjoy very high wages and standards of living relative to
most of the rest of the world. This was sustainable when capital and
labor couldn't flow between countries to equalize returns. Now that
capital and labor barriers have fallen, returns will equalize. (Even
if workers can't move freely, the work can 'move' to them through
imports/exports). As returns to labor (ie, wages) fall, it will hurt.

In many cases, wages would have to fall so far in the US for a firm to
compete that it is politically easier to move the work offshore.

So it would make life in your town better off if the politicians WERE
able to stop globalization, but they're not.

Economic theories are highly stylized.

Consider your example:

There are two (and only two) trading partners. The Saudis and the Eskimos.
Both trading partners consume and produce only two goods. Snow and Oil.

The Saudis produce Oil cheaply, and Snow is expensive to produce.
(ignore what 'expensive' means - it would complicate matters)

The Eskimos just churn out Snow, but Oil is some hassle to produce.

If the Saudis and the Eskimos got their act together and traded, then
the Eskimos could /import/ Oil in return for Snow.

A nice little case of everyone being better off.

Reality is different.

What we are now seeing is a flight of 'manufacturers' from high labour
cost areas to low labour cost areas.
Rather ironic as 'manufacturing' is now tending to need more machinery
and less labour.

Even so the cost of /labour/ in China in US$ is so much less than that
in the USA or the UK that it is hard to resist migrating production -
and if one does not 'migrate production' one will be seriously
undercut on price - and die anyway.

"The part I don't understand is: even if the Eskimos enjoy a
comparative advantage with the production of snow, what guarantee is
there that their living standard will raise as high as it would have
if they had just kept on with the oil business?"

Because that's what it means, indirectly.  Your question is a bit of a
circle.  Obviously a gallon of snow is not worth as much as a gallon
of oil, so you can't measure comparative advantage strictly by
quantity.  What it means is, whatever the equivalent quantity, the
Eskimos are comparatively better at making snow than drilling oil, not
able to produce 10% more gallons or whatever you may have had in mind.
 If they are better at shipping snow, that realistically means they
can make more money by selling snow than by selling oil (because
converting to money gives us an equal comparrison at a point in time,
otherwise you have to figure out how much snow someone wants compared
to how much oil).

The whole point is, in their own little world, Eskimos are NOT GOOD AT
PUMPING OIL, and that's why snow is the comparative advantage.  If
this is so, Eskimos don't WANT to pump oil in general, with the
exception being the Eskimos who currently have no other skills and
would rather not get fired, go back to school, and apply for new jobs.
 But as a group, they are wasting resources pumping oil because they
get so much more in return by packing snow.  But they do need oil for
themselves, and that's why they are pumping it.  If they only wanted
to export oil, they wouldn't be doing it if they were so much worse
than the saudis (in reality they would anyway because the supply of
oil is limited, but let's pretend it's more of a buyer's market).

They fix this by importing Saudi oil.  When they import Saudi oil to
meet their needs, they can devote their resources to packing snow in
boxes.  The standard of living goes up because they have more snow
available (assuming they wanted it, but you made up this example :) ).
 They also have more snow to sell, and thus more money to spend.  They
can have more stuff in general, and that's what the standard of living
is.

If this doesn't happen (ie, the standard of living does not go up
overall), you were probably wrong about them having a comparative
advantage.  A possible complicating factor would be a lack of demand
for the excess production, but that's why my conversion to money still
works.  If they don't have a higher total value of SELLABLE product,
they didn't have a comparative advantage.  In that case, they had a
comparative advantage in selling oil, even if the Saudis did it
better.


"It seems that just because you enjoy a comparative advantage at doing
something, doesn't mean that's the thing you should be doing..."

But that's what it means.  I think the chosen example (shipping snow)
is tainting all of this and maybe you are having trouble truly
imagining that anyone could have a comparative advantage in packing
snow into boxes.  In reality, even the most inept person would have an
advantage in pumping oil over selling snow.  And that is why, no
matter how good the Saudis are, the Eskimos would still probably have
a comparative advantage in pumping oil.

But this doesn't mean bad things can't still happen.  If two countries
open their borders entirely, they become a single market (less various
obstacles like different currencies, etc).  Overall, a larger market
is going to do better for all on average.  But that applies to BOTH
countries.  One country or group can lose temporarily.  In the worst
case, they may have to wait for the other country to "catch up," and
that can take a lot longer than it takes to lose your job.  But note
that this shock upon opening borders was probably caused by the fact
that they were intentionally sealed off in the beginning.  Otherwise
the countries would have grown and modified their production gradually
to benefit all without sudden shock that causes massive unemployment.