The Product Cycle and Globalization
Dear Friends,
Oh where oh where has my little job gone?
Oh where oh where can it be?
Why it's gone to Asia, the land of the dawn,
Where labor is cheap, don't you see?
When I was in grad school over fifty years ago, the product cycle was a hot topic for economic history. This cycle is the way products are initiated in one country but then spread to the rest of the world. It stands at the basis of economic development.
Although the product cycle had begun centuries earlier, it is best to take the industrial revolution as our starting point. For reasons still debated, a slew of inventions and innovations began in England in the seventeenth century. At first they occurred in agriculture, England's principal product. As entrepreneurs found new ways to grow crops, they sought labor-saving devices to process them. The fly shuttle enabled one man to produce what previously had required two. The spinning jenny did the same for women. Major improvements in textile manufacture were a principal characteristic of the industrial revolution. New ways of breeding cattle, of working metal, and of extracting coal also led to a great increase in output.
As more inventions led to increased demand for labor, wages rose, neither linearly nor consistently, but upward over time. By 1830 Britain possessed a supply of skilled labor able to move from place to place quickly, as demand required. Scotland opened up as a new industrial center. To do all this, the British needed more and more capital (factories, machines, equipment, roads, canals, railroads, etc.) Since no other country could invest in England, the capital came mainly from indigenous saving; that is, the British produced more than they consumed, and the excess was capital. Ultimately, they spread the industrial revolution by exporting capital (investing abroad), to the United States and other countries. They built the railroads in Argentina.
With the Great Exposition of 1851, which proudly showed British products to the rest of the world, Britain had reached the apogee of her industrialization. Labor was cheaper on the continent, enabling the French and Germans to ape the British in industrial products and — with new railways and canals — in communication. A principal force was the growing freedom of trade. Previously France and Germany had been cut up with tolls. But now, regional boundaries gave way in France, and Germany became a single country (in 1871).
The guilds resisted. They attempted to monopolize their products, prevent their labor from moving and their goods from being produced in non-guild factories. But they could not resist the tide of globalization, and in the nineteenth century the guilds themselves withered away.
As the twentieth century advanced, industrial countries tended toward services as their principal products — financial, health, travel, restaurants, etc. — while manufacturing moved to the less developed countries (LDCs) of Asia, Africa, and Latin America.
Economists believe (I among them) that the productivity of labor is the principal force in economic development, wherever and whenever it occurs. Labor productivity is the amount of product one laborer can produce in a given period. Low productivity is the main reason for low wages in the less developed world. Take the entire gross domestic product of any LDC, divide it by the number of workers, and the result will be "sweatshop wages." No amount of protest, no amount of union activity, will change that.
LDCs do suffer from a vast gap in wealth — a few very rich and masses of poor people — but if all the wealth of the rich were divided evenly among the poor, the increase for each one would be piddling. The only way to increase wages significantly is to improve the productivity of labor. How is this done? By supplying more capital, more technical knowledge, and more jobs. These are fruits of the product cycle. The more the competition for jobs, the higher the wage.
In the course of my professional lifetime (since 1942), wages in Hong Kong, South Korea, Singapore, and Taiwan jumped from third-world levels to a par with Europe. Why? Once again, the product cycle. They copied the rest of the world just as Europe had copied Britain in the nineteenth century, and they opened their doors to trade, just as France and Germany did in that same century.
Today, the product cycle moves on. Now maquiladoras in Mexico are moving to China. "Mexico, known for low-wage plants that export goods to the United States, is fast being supplanted by China and its hundreds of millions of low-wage workers; job toll [in Mexico] is mounting rapidly as more and more plants scale back operations or close" (New York Times, 9/3/03).
What happens to jobs in the United States and Europe as manufacturing moves to the LDCs? At first we resist the change. Steelmakers, textile producers, and farmers insist on subsidies and tariff protection, just as the British guilds provided protection in the eighteenth century. But the change cannot be resisted forever. Today, design engineers, skilled machinists, information-technology experts, and even CEOs of their companies complain that their own jobs are moving to Bangalore (India) and Singapore. Some Friends have asked me how to reduce excessive emoluments for CEOs. Send their jobs to India, that's how.
For Americans there is much pain and dislocation, but those who lose their jobs are protected by unemployment insurance. They suffer greatly, but with increasing opportunities in new fields, eventually they will find new jobs. Workers in less developed countries may starve or turn to prostitution or slavery if no jobs are available. Can we not share our jobs with them, to prevent such a horrendous fate?
Or do we "share" them? Here we encounter the "lump of labor" fallacy — that there is a given amount of labor, and if one person has a job, another does not. History has shown this not to be so. Increasing output often increases employment.
Why? As incomes rose in continental Europe, the continentals bought more and more from Britain. Likewise, as incomes rise in the less developed world, the less developeds will buy more products from us. "Rising per capita incomes, the emergence of a middle class in countries such as China and Brazil, the integration of central Europe and Russia into the global economy, trade and investment reforms. All of these factors and more converged in the early 1990s to produce an incredible consumption boom in the developing nations" (The Globalist, online news, 10/17/03.).
But time is needed for all this to happen. There is still poverty at home and abject poverty abroad. It doesn't end all at once.
What about Mexico? Given proper government policies, there is no reason why Mexico cannot be another Hong Kong, Singapore, Taiwan, or South Korea.
What will the new cities of the United States and Europe look like as factories move out? Already they are becoming more genteel, with new shopping malls, tea houses, restaurants, and medical centers. More often, Americans are "eating out." As our population ages, we seek more travel and other goods for the elderly. (Robin's and my European cruise was populated by the elderly. Why not? We're elderly too.) Also, the aging population needs more medical attention. If we didn't insist on slowing that down through unwieldy reporting requirements, and malpractice lawsuits and the fear of them, our medical profession, including nurses and doctors, would expand enormously.
Why should the twenty-first century be any different from the others?
Sincerely your friend,
Jack Powelson
tqe.quaker.org |
