The Premise That Killed Comparative Advantage

The consumer economy comes at a price.

Introduction

All markets exist for the sole purpose of supporting consumption. Workers work to produce goods that can be either consumed or exchanged for other consumables. If a worker wants more, he must work harder, or longer, or smarter. In a free market, the worker gets no breaks.

This fact may seem harsh, but people must understand that in order to make the worker's life easier the consumer (also the worker) must pay a price. In a competitive environment, that price generally means risking the loss of comparative advantage.

In previous newsletters I have discussed the false premise that work has priority over consumption. I have also described the concept of comparative advantage, which provides room for all people to find a job in any economy. In this newsletter, I will describe how business practices and government interference have led to the loss of competitive advantage for industries operating in the United States.

After World War II, the United States had a comparative advantage in nearly every industry. The productive capacity of industries in the United States was superior to all of those that had been devastated by the war. This attitude, however, led to a certain level of complacency about the benefit of hard work.

By acting on the false premise that "work" has priority over "consumption," those same industries lost that comparative advantage. The same philosophy that caused U.S. producers to become non-competitive then led to what we call trade "deficits."

In this newsletter, I will describe business practices and government intervention that have led to our loss of comparative advantage.

Business Practices

Wages & Salaries vs. Output Measures

Paying for the amount of time spent rather than the amount produced creates a natural motivation to be less productive, to spend more time to produce the same result.

Various Forms of "Leave" - Sick, Paternity/Maturity

Providing more time off for various events ( e.g. Sick Leave, Paternity or Maturity Leave, etc.) rewards workers for producing less and taking more time off.

Break Times

Various breaks during the work day may reduce the amount of production. (Studies have shown that breaks can increase productivity, but we need to raise the question. The fact remains that work does not get done during a break.)

Unions

Unions, with the support of the government, frequently strike with the purpose of getting more pay for the same or less work. Does this help consumers?

I do not advocate "sweatshops," but we must acknowledge business practices that reduce productivity and harm consumers.

Government Intervention

Government rules and spending do more to retard the productivity and reduce the competitive advantage of businesses. Legislators display a false concern for workers. Phases like fighting for high-paying jobs reveal their real concern. Politicians realize that consumers outnumber workers, so they want people to have more consumption with less work. By favoring more pay for less work, they strike a blow against comparative advantage.

Let's look at three main areas in which government action works in favor of more consumption for less work: regulation, "spending," and inflation.

Regulation

Government imposes many regulations on businesses that add nothing of benefit for consumers.

Minimum Wage

No one can set wage levels without interfering with the free exchange of work for money. Minimum wage laws do not raise pay; they outlaw hard work for low pay. These regulations close the door to ambitious workers willing to take a low-paying job to demonstrate their skills.

Overtime Pay

Increased pay for overtime makes no economic sense. The productivity of workers does not increase after they have worked for 8 hours.

Mandated overtime pay can 1) encourage workers to slow work to increase hours and 2) force companies to pay more for the same rate of production.

Safety and Health Regulations

Generalized safety and health regulations (e.g., OSHA) impose unnecessary costs, e.g.:

1) treating special causes as common causes - implementing protocols where not needed. (If giving eyeglasses to one worker to reduce that worker's errors, why not give the same eyeglasses to all workers.)

2) paying non-producers to enforce regulations. People who get paid to enforce regulations produce nothing of benefit to consumers.

Spending

The government uses the word "spending" to disguise the real meaning of what they do that does nothing for consumers and reduces comparative advantage.

Education

Based on the generalized assumption that "educated people earn more." People who want to consume more by working less go to school.

Social Security

Social Security, a big Ponzi scheme, transfers earnings from producers to consumers (more consumption for less production.) The "Social Security Trust Fund" buys only treasury securities, an accounting trick that hides the transfer of money from a group of workers to a group of non-workers.

(Full disclosure: I receive Social Security payments. If you read and learn from this newsletter, I have earned part of the money the government took from you.)

"Healthcare"

Medicare, etc., rewards unhealthy non-producers at the expense of healthy producers. If you really believe that a government-run system does well, just examine the rise in "healthcare" costs.

Welfare

"Welfare," again, pays people who do not work to consume. Misguided concerns.

Monetary Inflation

Monetary expansion pays a large portion of what government "spends." Monetary expansion creates buying power from nothing. Nobody worked for that money. Nobody sold anything to acquire that money.

Government "spending paid for by monetary expansion amounts to "counterfeiting" legalized. It turns those who receive that new money into unknowing thieves.

Buyers who trade using an inflated currency indirectly export inflation, which ultimately harms comparative advantage.

Without exception, the analysis of any economic activity should include the question, "What role does monetary inflation play?"

Conclusion

Business policies and government actions have turned us into a nation of consumers. We don't reward hard work and sacrifice; we reward spending and consumption. By doing so the comparative advantage of businesses in the U.S. did not get taken from those businesses by foreign businesses. We gave it away.

I need to repeat that I do not advocate an economy based on workers suffering. I just want people to realize the cost of an economy based on consumption not earned by hard work.