American worker might produce twice as much per hour as a Mexican worker but is paid ten times as much. In Taiwan for example, strikes are illegal. In South Korea unions cannot be organized without government permission. To all intents and purposes South Africa uses slave labor. Many developing nations have no minimum wage, maximum hours or environmental legislation. As economist Howard Wachtel notes, “ Differences in product cost...that are due to totalitarian political institutions or re s tr ic t ion s on econom ic rights reflect no natural or entrepreneurial advantage... Free trade has nothing to do with incomparable political- economic institutions that protect individual rights in one country and deny them in another.” The price of goods in developed countries is also highly dependent on subsidies. For example, we decided early on that government should build the transportation systems of the country. The public, directly or indirectly, built our railroads, canals, ports, highways and airports. Heavy trucks do not pay taxes sufficient to cover the damage they do to roads. We provide water to California farmers at as little as five percent of the going market rate. We provide huge direct subsidies to corporate farmers. And we allow the costs of agricultural pollution to be picked up by the society as a whole. And as an outcome of all this, we discover it ischeapertogrowatomatoin California and ship it to Minnesota or Massachusetts. We are told it is a result of California’s climatic advanFree trade is the religion o f our age. tages. But if we withdrew all our subsidies it may very well be cheaper to raise produce near the point of sale. Prices don’t provide accurate signals between nations nor do they provide accurate signals within nations. We tend to confuse price and cost. Price is what an individual pays, cost is what the community as a whole pays. For most of our economic programs there is an enormous disparity between the price of a product or service to an individual and the cost of that same product or service to the society as a whole. When the utility company wanted to send electricity across someone’s property and that someone declined the honor we gave the private utility governmental authority to seize the land needed. This is exactly what happened in Western Minnesota in the late 1970s. We argued that bigger power plants produced electricity cheaper than smaller ones and therefore it was in the public interest to build these power lines. If we had allowed landowners to refuse to sell, the price of electricity would be higher today but it would more accurately reflect the cost of that power. Today sky-high transmission towers carry as much as 745,000 volts o f e le c tr ic ity . Recent sc ien t if ic studies have found that children living near transmission lines have twice the incidence of cancer as chil- cren living elsewhere. If this new medical evidence leads to a number of lawsuits on behalf of people living near power lines, then utilities may soon find it cheaper to dispense with transmission lines and build power plants at the user’s site. If this happens then the price of electricity will better reflect its cost. Another example: We allow planes to awaken us in the night or make our children cry while eliminating the authority of communities to regulate flights and noise because we consider the benefit of unrestricted air transportation to outweigh any damage to our health and sanity. By The Undersecretary o f the Treasury proposes creating 5 to 10 giant U.S. banks, one survey, some 4 million people in the United States suffer physical damage due to airport noise. If communities were given the authority to control noise levels by planes, as they already control noise levels from radios and motorcycles, the price of a plane t icke t would s ign if ican t ly increase—that is, it would become more in line with its actual cost to society.' It is often hard to quantify social costs. But that doesn’t mean they are not sign ificant. Remember urban renewal? In the 1950s and 1960s we levelled inner city neighborhoods to assemble sufficient land area to rebuild downtowns. Skyscrapers and shopping malls arose, the property tax base expanded and we considered it a job well done. Later sociologists and economists and planners discovered that the seedy areas we destroyed were not fragmented, violence-prone slums but more often were cohesive ethnic communities where generations had grown up and worked, where families went to school and played. If we were to put a dollar figure on the destruction of homes, the pain of broken lives, and the expense of relocation and re-creation of community life we may find that the city as a whole actually lost money in the urban renewal process. If we had used a full cost accounting system we never would have undertaken urban renewal, even as pretty as our skylines now appear. It is not just urban areas that have suffered from our refusal to understand and count the social costs of certain kinds of development. In 1944 Walter Goldschmidt, working under contract with the Department of Agriculture, compared the economic and social characteristics of two rural California communities that were alike in most respects except one. Dinuba was surrounded by family farms; Arvin, by corporate farms. Goldschmidt found that Dinuba was more stable, had a higher standard of living, more small businesses, higher retail sales, better schools and other community facilities and a higher degree of citizen participation in local affairs. The USDA invoked a clause in his contract forbidding him to discuss his findings. The study was not made public for almost 30 years. Meanwhile the USDA continued to promote research that rapidly transformed the Dinubas of our country into Arvins. The farm crisis we now suffer is the result of this process. How should we deal with this price versus cost dilemma as a society? In most cases we can protect our way of life from encroachment by the global economy, achieve important social and economic goals, and pay about the same price for our goods and services. In some cases we must pay more, but we should remember the higher prices may be offset by the decline in overall costs. Consider the proposed Save the Family Farm legislation, drafted by farmers and introduced in Congress by Iowa Senator Tom Harkin. It proposes that farmers limit production of farm goods nationwide at the same time as the nation establishes a minimum price for farm goods that is sufficient to cover operating and capital costs and provide farm families an adequate living. The law’s sponsors estimate such a program would increase the cost of agricultural products in the stores by three to five percent. But this would be more than offset by dramatically reduced public tax expenditures spent on farm subsidies. And this doesn’t take into consideration the benefits of a stable rural America— including the reduced incidence of family violence and the influx of jobless rural emigrants into already suffering urban areas and the resulting increased expenditures for medical bills, food stamps, welfare. Economists like to talk about “ externalities.” The costs of job dislocation, rising family violence, community breakdown, environmental damage, cultural collapse are all considered “ external.” External to what, one might ask? The theory of comparative advantage itself is fast losing its credibility. Time was when technology spread slowly. In northern Italy 300 years ago, stealing or disclosing the secrets of silk-spinning machinery was a crime punishable by death. At the beginning of the industrial revolution Britain protected its supremacy in textile manufacturing by banning both exports of machines and emigration of men who knew how to build and run them. A young British apprentice, Samuel Slater, brought the industrial revolution to the U.S. by memorizing the design of the spinning frame and migrating here in 1789. Today, technology transfer is simple. According to Dataquest, a market research firm, it takes only three weeks after a new U.S.-made product is introduced before it is copied, manufactured, and shipped back to the U.S. from Asia. So much for comparative advantage. Nations and communities still differ on their inventive capacity and managerial and organizational efficiency. These, however, are the kinds of “ products” that are most easily transferred via commun ications lines. For example, Japanese-run factories in the United States achieve productivity and quality levels approaching those in Japan. It is not the American worker but the American manager who is uncompetitive. A better way of doing things should continue to be imported from abroad. But that need not mean abandoning a nation’s own productive capacity. For example, Du Pont holds the patent for the plastic called PET that is used to make more than 5 billion bottles worldwide. But it does not manufacture the bottles, nor the resin from which they are made nor even the machines for making them. Instead it licenses the technology. Such licensing of patented knowledge and management te chn iqu e s may well become the basis for much of world trade in the future. We are able to import a better idea from the other side of the world. And we should pay for the privilege of using it. The costs to society of doing so are small. Especially when compared to the high qualitative and quantita tive cos ts ’ to society of importing products and materials. Which brings us to the issue of scale. There is no question that when I move production out of my basement and into a factory the cost per item produced dramatically declines. But when the factory increases its output a hundredfold, production costs don’t tend to decline much further. The vast majority of the cost decreases are captured at fairly modest production levels. In agriculture, for example, the USDA studied the efficiency of farms and concluded, “ Above about $40- 50,000 in gross sales—the size that is at the bottom of the end of medium sized sales category—there are no g rea ter e f f ic ie n c ie s of s ca le .” Another USDA report agreed, “ Medium sized family farms are as efficient as the large farms.” Harvard P ro fe sso r Joseph Bain’s pioneering investigations in the 1950s found the minimum efficient factory was often far smaller than believed. And the factory could be significantly reduced in size without bringing about major price increases. In other words, we might be able to produce shoes for a region rather than for the nation at about the same price per shoe. And if we withFree trade separates the producerfrom the consumer, thefarmerfrom the kitchen, the dump site from the garbage can, and inevitably, the government from the citizenry. drew government subsidies to the transportation system then locally produced and marketed shoes might ac tua lly be cheaper than those brought in from abroad. Modern te chno lo g y makes smaller production plants possible. For example, traditional float glass plants produce 500-600 tons of glass daily and cost $100 million to build. New mini plants can produce about 250 tons per day for $40-50 million, the same cost per ton making glass for more localized customers. 30 Clinton St. Quarterly—Spring, 1988
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