Is U.S. Manufacturing in Decline? Pop wisdom says Yes some evidence....

But these facts do not mean that American manufacturing output is declining absolutely or per- person....

Real Per-Capita Manufacturing Output in America 1970: $7,569 (2011 dollars) 2008: $11,687 (2011 dollars)

This happy trend is the result of steadily and dramatically improving productivity......

But would America’s manufacturing sector be even larger if low-wage foreign countries weren’t becoming so dominant in manufacturing?

Adam Smith: An Inquiry Into the Nature and CAUSES of the Wealth of Nations

Division of Labour *** -

Division of Labour By dividing labor, output in an 18th- century pin factory from from about 10 pins per worker per day to 4,800 pins per worker per day

WOW!

Why? 1. specialized workers don’t waste time moving from task to task

Why? 1. specialized workers don’t waste time moving from task to task 2. specialized workers hone their skills

Why? 1. specialized workers don’t waste time moving from task to task 2. specialized workers hone their skills 3. specialization more readily suggests practical means of mechanization

Specialization is the Key But specialization is the key for one other reason in addition to the three identified by Adam Smith

David Ricardo Vacations in Bath... and reads The Wealth of Nations

Principle of Comparative Advantage familiar (to economists) two-person, two-good ‘model’

Alone on an Island DONTOM FISH50200 BANANAS50100 Maximum Amounts Possible to Produce

Good Not to be Dependent Upon Others? ****DONTOM FISH25100 BANANAS2550 Amounts Produced AND Consumed

Let’s Trade Tom offers to give me 37 fish if I give him 25 bananas

Let’s Trade Some more simplifying assumptions: 1. Don’s fish and bananas are identical to Tom’s 2. Don and Tom are trustworthy 3. Don and Tom each want, with trade, to continue to consume the same number of bananas that each consumed without trade (that is, 25 bananas for Don and 50 bananas for Tom)

Specialization... ***DONTOM FISH0150 BANANAS5025 Amounts Produced with Trade

Amounts consumed with trade....

****DONTOM FISH BANANAS(50-25) = 25

****DONTOM FISH BANANAS (50-25) = 25 ( ) = 50

****DONTOM FISH (0+37) = 37 BANANAS (50-25) = 25 (25+25) = 50

****DONTOM FISH (0+37) = 37 (150-37) = 113 BANANAS (50-25) = 25 (25+25) = 50 DonTomania is Wealthier by 25 fish!

With trade, each of us can consume more than each of us can produce!

With trade, each of us can consume MORE than each of us can produce!

A Parlor Trick? Not at all. Ask: What does It Cost me to produce a fish? A banana? Then ask: What does it cost Tom to produce a fish? A banana? If those costs are different, then there is the potential for mutual gains from trade

Tapping Into Each Other’s Talents: Our ProductionCosts Per Unit ****DONTOM FISH1 banana1/2 banana BANANA1 fish2 fish Don is the lower-cost bananaerererer... Tom is the lower-cost fisherman

Trade enables each of us to tap into the better talents of the other

Don wants fish and bananas and can produce his own fish at a cost of 1 banana. Because Tom also wants bananas yet can produce his own only at a cost of 2 fish, Tom figures out that, (1) because he (Tom) can produce a fish at a cost of 1/2 banana; (2) that Don wants fish; and that (3) Don’s cost of catching his own fish is 1 banana per fish - Tom realizes that he (Tom) can enable Don to profitably “produce” his (Don’) own fish by him (Don) first gathering bananas (at a cost of 1 fish per banana) and then trading each of those bananas to Tom in exchange for more than one fish (say, 1.5 fish per banana).

The result of Don getting from Tom 1.5 fish for each banana that Don produces and exchanges is that each fish that Don “produces” in this way cost him only 2/3rds (or 0.67ths) of a banana.

Any ratio of exchange (“price”) of fish for bananas that has fish fetching at least slightly more than 1/2 banana yet no more than 1 banana is mutually advantageous. The reason is that Tom’s cost of producing each fish is 1/2 of a banana, and Don can produce his own fish at a cost of 1 banana

Smith and Ricardo Together ****DONTOM FISH50300 BANANAS50100 Tom’s Concentration on fishing makes him a better fisherman

But Tom’s becoming a better fisherman makes him a worse bananaerererer.... That is, each banana now costs Tom 3 fish to produce rather than 2 fish

And Tom’s becoming a better fisherman also makes me a relatively better bananaerererer.... That is, whereas before I could produce bananas at 1/2 the cost that Tom incurred to produce bananas, Now I can produce bananas at 1/3 the cost that Tom incurs to produce bananas.