Division of Labor

Do cheap goods from China hurt our economy?

Do Japanese cars with higher quality and lower cost hurt our economy?

Is Detroit dead because of foreign auto makers?

The answer is no ! This is a difficult concept to explain. It's called the "division of labor" and it's the real reason Americans are rich in comparison to many countries. Let me explain it.

Pretend for a moment there were two different technologies for building cars. The first is the way you know, Detroit builds them in their plants. The second is farmers from Kansas put X amount of grain onto a boat and send it to a magical island called Japan.

On this island the X amount of grain magically turns into a car and returns to Kansas. So the farmer actually makes cars by growing grain (just pretend with me).

Now let's say 1 auto worker in Detroit can build 1 car in 1 day. In Kansas, 1 farmer can produce enough grain (2X) in 1 day to make 2 cars. Which process would be be smarter to use? Which process would make Americans more wealthy?

The fact that we get a TV from China that takes less of your labor to buy makes you able to buy more scarce goods with your same money. Should you hope to spend your same money to get less goods?

You say- but what about the jobs? They are stealing our jobs.

This is a wives tale. We can all work and produce. Since the car sales do not decrease, the auto producer from Detroit is assimilated to other industries. Yes, that auto worker may be making less money, but it is at the expense of making all Americans (including himself) richer by being able to spend less income on the same goods.

So while a few people must find other jobs (maybe with less income, maybe not), all Americans are richer because they can spend less money on the same car. So there is now a car in your driveway and more money in your pocket.

The fact that it comes from Japan or China is irrelevant.

The free market has no borders when it comes to the division of labor (letting who can make something the most efficiently make it). Borders do not matter.

Do you ever say- don't buy from outside Massachusetts?

Why stop there? Wouldn't you be better off not buying anything from anyone outside your family? Only purchase from your family members!

You can see how absurd this is, because if you insisted, you would only buy a TV from your Uncle, yes you would employ your uncle but it would likely take him a year to make it and cost you $100,000.00

The division of labor is how the free market makes us all rich. Whoever figures out how to make something cheaper ends up making everyone more wealthy. Because the rest of us get more for less.

Where someone draws borders, it has nothing to do with economics.

--Written by Jim Fisher