Comparative Disadvantage

By Gus Tyler

Published February 17, 2006, issue of February 17, 2006.
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In German, the word Volkswagen means “people’s wagon.” For many years, it was exactly that. It was a car aimed at serving popular needs, produced by a company that worked very closely with German autoworkers’ unions. However, despite its historic concern for consumers and workers, Volkswagen this month announced plans to cut some 20,000 jobs in the next three years. It offered three reasons: It is losing its market share in Germany and America and is being undercut by low-wage cars made in China.

Continuing a long tradition of workplace amity, Volkswagen aims to reach its targets through negotiations with the union. The company will not start laying off workers until 2011. The union, in turn, is accepting a freeze on wages until then.

What is happening now in Germany was, in essence, foretold by an unheralded British thinker named David Ricardo, a contemporary of Adam Smith. The latter’s economic classic, “The Wealth of Nations,” was written in 1776, the same year as our own Declaration of Independence. Ricardo, who is the son of a Sephardic Jewish banking family that had fled the Spanish Inquisition, is credited with authoring the theory of comparative advantage. He taught that every nation is blessed with what it can produce best and so it should exchange that product for those produced by other countries. His favorite examples were Portugal and England: Portugal raised grapes and produced wine; England produced fine textiles. Therefore, England and Portugal served their own best interests by exchanging with each other the products they were most fit to produce.

But, being Jewish, Ricardo had the traditional impulse to question his own beliefs. What would happen, he asked himself, if a British merchant were to open a factory in Portugal and employ its cheap labor to manufacture textiles? His answer was that it would wreck the British textile industry.

But not to worry, he quickly added. What savvy merchant would open a plant in a country where he did not know the language, the law or local customs, and where he could not be present personally to oversee the operation?

What, indeed. Since World War II, that scenario — now called outsourcing — has become a global norm. A quadruple revolution in telecommunications, transportation, material handling and computer analysis has it both possible and compelling to ship manufacturing overseas, wrecking industry in high-wage countries. Volkswagen workers are paying the price.

There are solutions. We’ll look at them in a future column. Stay tuned.

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