Friday, March 11, 2011

Cake! And Eat it Too!

. Friday, March 11, 2011

Clyde Prestowitz is again propagating nonsense about trade. Having been spectacularly wrong the first time, he returns for a second effort. This time he wants to explain why the US doesn't produce iphones. His explanation seems to miss the point of trade entirely, which is that the US consumes far more iphones (and for one whole lot less money) than it would if it did produce them at home. On the other hand, Prestowitz seems to think that the US doesn't have a production possibility frontier (PPF). This is the only reason I can think of for why he fails to consider what the US would stop producing in order that it might begin to produce iphones.

On the third hand, Prestowitz seems to miss entirely that what the US does (and it does it quite well, thank you) is invent iphones. And even given his silly economies of scale argument (the US doesn't produce iphones because of EU subsidies to Airbus?), he doesn't seem to understand where value lies. In the interest of clarity, let me repeat: the US INVENTS iphones. The iphone is a monopoloy. Monopolies generate rents. The US thus captures rents from inventing stuff that consumers are desperate to buy (the ipad sold 4.5 million units in its first 3 months). It maximizes those rents by making the actual products as cheaply as possible. Hence, it manufactures iphones in Asia. This division of labor makes the US rich (it is also a pretty good arrangement for highly populous and very poor Asian countries).

Prestowitz must be blogging on a legal pad because I don't know how else one could believe that the value of high tech products lies in their manufacture. If he really believes that the US would be wealthier if it let China invent stuff and we did the manufacturing why isn't he moving to China to make a fortune in manufacturing rather than staying here and inventing stupid arguments about trade? I don't think he believes this. But then he must want us to both invent iphones and manufacture them, which suggests that he thinks we don't face a PPF. Which is just silly.

As much as Clyde might refuse to admit it, the US, like any society, can't do everything. It has to choose. We have chosen higher value-added activities and thus allowed lower-value added manufacturing activities to migrate to Asia (where they have enriched Asians). On the aggregate, this seems to be the right choice for us and for Asia. I don't know why this is so difficult for people to accept.


Emmanuel said...

While it is indeed hard to know what Prestowitz is getting at since he veers off in many directions, some of the ideas he presents appear in Ha-Joon Chang's new book 23 Things They Don't Tell You About Capitalism. He's one of the biggest boosters of state-directed development.

Since you aren't that big a reader of left-leaning IPE, one of the favourite points made by Chang and others goes like this: insofar as service-oriented economies are more likely to run external imbalances, they are prone to BOP disruptions. Even in America I'm sure you have those glamourizing industry, right?

What's more, Chang claims that, contrary to economist's claims of a "Great Moderation," lower interest rates have in recent decades been accompanied by more BOP crises.

Thomas Oatley said...

It is not that I am unfamiliar with the argument about state-led development, Emmanuel, it is that I think the argument is nonsense.

I am not familiar with the Chang argument re balance of payments problems in service oriented economies. This seems to confuse a microeconomic characteristic with a macroeconomic problem. A country does not have external imbalances because of what it produces, but because of how much it spends relative to it is income. I know you know that....

Emmanuel said...

OK, no big issues here. But do read Chang's book for it's a real compendium of such ideas.

Also, Prestowitz fails to differentiate between Asian economies in relation to capturing higher value-added activities. Japan and South Korea have managed this feat with world-famous brands and indigenous know-how, but the Chinese have yet to establish a single world-recognized brand.

As the marketing guy, I felt obliged to point this out!

Cake! And Eat it Too!

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