No. No. No. Once more class, we do NOT have to export to produce wealth.
Submitted by: John Warner on Dec 08, 2009 at 1:09 am
Tagged with: Economic Development
Source: Swamp Fox
I recently was at a reception, and someone noted how big the health care industry is. "Too bad," he said, "becuase health care produces no wealth." "How's that?" I asked. "Wealth is only created when something manufactured is exported."
Sighhhhh.... This is the myth that will not die.
Plato created a thought experiment. Three people who live in a city need food, shelter and clothing to survive. Each person can spend each day meeting his daily needs. But if one will be the farmer, she will develop specialized skills, that is she will become educated, and her productivity will improve to the point that perhaps she can produce four units of food instead of three. And if one will be the tailor, his productivity will grow and he can produce four units of clothes instead of three. And if the last will be the builder, his specialized skills will allow him to build four units of housing instead of three. If these people trade with each other, each has his individual needs met, and each has a unit left over, which is wealth.
Fortunately for the Athenians, they did not need to trade with the Spartans to create wealth. The Athenians created wealth trading with each other. The ultimately proof is that the people on the Earth create wealth trading with each other, and not exporting to Martians.
All free trade creates wealth. Why? Our farmer has four units of food and no clothing. The marginal value of one unit of clothing to the farmer is much higher that the fourth unit of food. So the farmer trades a unit of food for a unit of clothing, and marginal value to the farmer has increased; the farmer became wealthier. The tailor, who now has one unit of food and three units of clothing, is also wealthier. Free trade is not a zero sum game, both sides benefit and grow wealthier, or trading won't occur.
The wealth of a farmer who lives in Greenville will increase if she trades with a tailor who also lives in Greenville... or if she trades with a tailor who lives in Anderson. (It doesn't matter that they live in different cities, ignoring transportation costs)... or if she trades with a tailor who lives in Brownsville, Texas, (even though they live in different states)... or if she drives her truck a few hundred feet across the bridge spanning the Rio Grande River and trades with a tailor who lives in Matamoros, Mexico (even though they live in different countries.) Wealth is not created by exporting across an imaginary boundry. Wealth is created by free trade, regardless of where the other person lives.
Why does any of this matter?
I recently was in a meeting about creating a knowledge based economic development strategy for Anderson. Those in Anderson noted that the largest employer in the community is AnMed Health. If we work with AnMed to create an ecosystem of increasingly specialized academic centers and small and medium sized vendors around it, each entity in the ecosystem will become more productive. When these entities in Anderson trade with each other, wealth is created, and none of them have to trade with anyone in Greenville to create wealth.
Now if the Anderson health care ecosystem as a whole develops a specialization, say heart surgery, so strong that it begins to attract customers who live in Greenville, then the folks in Anderson will become even more wealthy than they can become only trading with themselves. But the people in Greenville are not poorer because they trade with the people in Anderson. Free trade do not occur unless marginal value increases for both sides, that is both sides become wealthier.
So a knowledge-based economic development strategy of creating increasingly specialized clusters of firms creates wealth whether the community exports or not.
Class dismissed.
| Organizations | Swamp Fox |
|---|---|
| Source | Swamp Fox |
| Submitter | John Warner |
| Tags | Economic Development |
Logan, nothing you wrote disagrees with anything I said. Free trade creates wealth, whether it is with your next door neighbor or someone on the other side of the world. I noted that folks in Anderson would be better off if they traded with folks in Greenville rather than just trading among only folks in Anderson.
The point the person I talked with at the reception made was that hospitals did not create wealth because they did not export across an imaginary political boundary on a map. It is wrong to suggest that trade with someone in Brownsville TX does not create wealth, but it does somehow magically if you drive your goods across the river to Matamoros, MX.
Class is over, but I'm willing to stay after school and help you study :-)
Glad we're on the same page John!
I do worry that when I go to economic development meetings like the recent one hosted by Upstate Together, the focus seems to end up on getting more kids to earn college degrees to increase productive capacity. While training (note I said training which includes technical training as I think we have to accept that college does not make sense for everyone) is very important, the solution to that is not going to come quickly.
In parallel we have to make sure we create the opportunities for these kids once they graduate their training which will make the most of each individual's potential. If we do not, the talent will just move elsewhere.
We need all types of people to make a strong community, but I am sure you will agree that there is a balance that makes sense between the number of service providers that sell their services within the state (doctors, lawyers, accountants, etc.) and the number of businesses that generate income from outside the state.
We cannot afford to "over specialize" in internally-focused service industries.
Interesting points John. While I agree that wealth can be created in S.C. through individuals and companies within the state becoming more productive and trading with one another, far more significant wealth for S.C. will be created through exporting more goods and services.
My understanding of ancient Athens is that, while it did create wealth by trading amongst its citizens, it could not have survived without maritime trade with foreigners. Athens had a huge need to import wheat (survival depended on it) and luckily it had commodities like olive oil and wine that its trading partners wanted and wanted badly, enabling (at least some) Athenians to accumulate significant wealth.
What if Athens, which relied on the importation of food, could produce nothing for export? It would have scraped by on grapes and olive oil or simply starved to death.
You only have to look at some of the mill towns around S.C. to see that many places are struggling to find industries to replace textiles which once brought in wealth, largely from outside the state. These towns now import more than they export and they are starving. Can their experience not be applied to the state as a whole?
Increasing specialization in higher tech industries relies on global trade and this means exports as well as imports. It is no good being a biotech company in a cluster in SC if the only market for your products is inside the state. For starters, you will probably not be able to raise the investment needed to survive because the upside potential is limited. Second, even if you do survive, the wealth you generate for yourself, your employees and the state will be limited when compared to a biotech company that can export its products and services around the world.
Take a look around at what you buy on a weekly basis, I don’t believe productivity improvements and increasing internal economic activity are enough to balance these out. In this modern world of increasing specialization and global trade, it is not enough for S.C. to rely on internal productivity improvements to generate the economic development and increased wealth we want - we need to attract and grow more companies that export. To say otherwise is to cut off one leg before even starting the race.
Class is still in session!