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mwengler comments on Comparative and absolute advantage in AI - Less Wrong Discussion

18 Post author: Stuart_Armstrong 16 July 2013 09:52AM

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Comment author: mwengler 17 July 2013 01:59:29PM * 1 point [-]

A US hour of labor produces 9 times the tradable value of a Chinese hour of labor.. Absolute advantage would mea that there is NOTHING that China could produce with fewer labor hours than the US could produce. In fact, as you suggest, there is probably something. Things like Chinese art. Chinese tourism. Perhaps even a few special gourmet Chinese items of food.

But how much does the existence of these items change the big picture? In terms of labor hours, we outproduce the Chinese on the stuff we sell them by on average a little more than a factor of 9 while we outproduce them on the stuff they sell us by some factor much greater than 1, but less than 9. Would some collection of highly unique products that comprise way under 10%, possibly under 1% of the total economic value traded really change anything?

I don't think so. I think absolute advantage framed as "everything" is an oversimplification of the concept that really matters, which is overwhelming superiority in the hours required to produce stuff.

Do you actually disagree with this idea?

Absolute advantage meaning literally everything would mean China would have NOTHING we would buy from China. In fact, with thousands of items that could be traded

Comment author: [deleted] 17 July 2013 02:01:27PM 0 points [-]

Your link is broken. You need to escape the underscores as "\ _" (without the space).

Comment author: mwengler 17 July 2013 02:50:56PM 0 points [-]

Thanks. Couldn't fix it by escaping underscores ,instead I made it a hyperlink and escaped the right parenthesis which is part of the link.

Comment author: [deleted] 17 July 2013 04:12:43PM 0 points [-]

Oh, that's weird. It's always worked in the past. Or my memory is foggy. Sorry.

Comment author: arundelo 17 July 2013 04:50:42PM 0 points [-]

The code that turns things that start with "http colon slash slash" into clickable links doesn't treat Markdown characters like the underscore and the backslash specially. (This is probably meant to be convenient, but I consider it a bug.) It also does not allow close parens in links, which is what messed up the first version of mwengler's link.

Comment author: ygert comment score below threshold [+] (10 children)

Comment author: mwengler 18 July 2013 04:41:18PM 2 points [-]

Look, China is better at making electronic widgets or whatever, as evidenced by Chinese factories churning out hundreds of thousands of them a day and selling them for dirt cheap. If you need to go and buy a widget, you buy one from China, simply because the Chinese one is often cheaper and better than an equivalent US item. Thus, I'd say China has an advantage when it comes to widgets.

You are COMPLETELY missing the point of comparative advantage and international trade.

It takes China many more labor hours to make an iPhone than it would take US. The reasons for this are complex, but the message is simple. If Chinese worker hours cost the same as US worker hours, iPhones would be made more cheaply in the US, and with at least as high quality I might add.

The reason it is cheaper to buy an iPhone from China than to build it in the US is precisely because of what Ricardo noticed about comparitive advantage. If it takes China 3X the hours to build an iPhone as US, and it takes China 5X the hours to build a 747 as the US, then China will trade iPhones for 747's, and their exchange rate with us will push towards their wage being about 1/4 of ours per hour. When your wage rate sinks to 1/4 of your trading partner's, this is NOT an indication that you are better at high wage things, it is an indication that you are worse overall by a significant margin at employing your wage hours.

Eventually China may build up the capital (including the legal infrastructure and governmental systems which are a form of capital) so that their labor produces around what US labor produces. At that point, their COMPARITIVE advantage will not lie in things where their cheap labor can be substituted econand omically for US automation, and trade between China and US will look more like trade between US and Japan or US and Europe.

Comment author: ygert 21 July 2013 02:51:39AM 0 points [-]

You know what? You're right about this for the most part. My mind went off on a bit of the wrong tack, and I started twisting up in circles. I apologize.

I will, however, try to salvage what I was saying, as I believe that some parts of it are applicable, if you see the situation through a certain lens. If you see the unit involved as the country, corporation, or other large unit, and not the individual, my point starts holding a lot more water. If it takes China 3X the hours to build an iPhone as the US, but Chinese per-hour salaries are a sixth of american salaries, then it is fair to say China is twice as good as the US at making iPhones, is it not?

Comment author: mwengler 21 July 2013 05:13:32AM * 0 points [-]

then it is fair to say China is twice as good as the US at making iPhones, is it not?

No it is not, and here is why. The reason China has 1/6 the salary is because average productivity of the chinese hour is 1/6 average productivity of the American hour. There are multiple effects "on the margin" that all conspire to keep this true. Essentially if the Chinese hour was on average worth 1/5 of an american hour, but only cost 1/6 of an american hour, more and more businesses would move to china to exploit this cost advantage, until demand for chinese hours pushed their price up to 1/5 of the price for an American hour.

So lower prevailing wage is not some sort of national resource, it is a statement that the resource is on average less productive.

However it does mean that the jobs that will differentially go to China are ones generally where more labor is particularly helpful in getting the job done, labor intensive jobs.

Essentially, a lower prevailing wage in one place vs another is a measure of the absolute productivity difference between the two places. All the feedback forces in economics conspire to make this so.

Having said that, a country with a less productive work force will find it has a comparative advantage at making the things it can make with labor. In the case of assembling things on assembly lines, Chinese workers do (at least) as well as American workers. In terms of making movies, or building new technologies from scratch, American workers seem to do a lot better than Chinese workers (in Hollywood and Silicon Valley). So we wind up with a lot of manufactured goods from China being traded for movies and high tech from the US.

Comment author: ygert 26 July 2013 03:43:07AM 0 points [-]

What you say is partly, or even mostly true. But you should not neglect the simple fact that the cost of living can vary vastly. There are places in the world where, say, $10 a day is a respectable sum, and one who earns that much has all the necessities of life plus some left over. This is more true in Africa then it is in China, but the point can still potentially carry, if the exact figures line up. Someone in China may earn a fraction of what the equivalent person does in the US, but may have a similar salary in purchasing power adjusted terms.

Comment author: mwengler 26 July 2013 03:07:13PM 1 point [-]

Someone in China may earn a fraction of what the equivalent person does in the US, but may have a similar salary in purchasing power adjusted terms.

Considering only goods that are neither imported nor exported, this could in principle happen, although I doubt it ever gets as far as equality. But considering goods that are either imported or exported, the worker with the lower wage will always have a much lower purchasing power. This is because the market for these goods is international so the tendency is for these to cost the same in international terms in both locations, so the guy with $100/day can buy more of them than the guy with $10/day.

Comment author: [deleted] 18 July 2013 03:12:29PM * 1 point [-]

If you need to go and buy a widget, you buy one from China, simply because the Chinese one is often cheaper and better than an equivalent US item.

So, there's a decent amount of business advice columnists explaining how to best avoid getting screwed from sourcing your parts in China; for example, this general laundry list, and more specifically this. Of their "top ten" list of importer mistakes, seven are about low quality results.

If quality standards are so difficult to enforce, is it reasonable to say that the Chinese-sourced version of a widget is better?

Comment author: gwern 18 July 2013 03:59:31PM 0 points [-]

If quality standards are so difficult to enforce, is it reasonable to say that the Chinese-sourced version of a widget is better?

Yes, because they're still doing it. Revealed preferences say that, even in taking into account all the downsides of doing business in China such as your laundry list there, doing business in China is still overall more profitable.

Comment author: Stuart_Armstrong 19 July 2013 07:54:24AM 0 points [-]

I agree with your point, but the revealed preferences argument is very weak with rationally uniformed customers at the final end of the chain.

Comment author: [deleted] 18 July 2013 05:49:54PM 0 points [-]

I'm not arguing it isn't profitable. The claim was "cheaper and better", and my argument was "not better."

Comment author: gwern 18 July 2013 06:00:04PM -1 points [-]

If the more expensive 'better' isn't worth paying for, then it's not better.

Comment author: [deleted] 13 June 2014 08:29:59AM -1 points [-]

Francis Bacon (1561-1626) is known for the scientific method, which was a key factor in the scientific revolution. Bacon stated that the technologies that distinguished Europe of his day from the Middle Ages were paper and printing, gunpowder and the magnetic compass, known as the Four great inventions. The Four great inventions important to the development of Europe were of Chinese origin.[6] Other Chinese inventions included the horse collar, cast iron, an improved plow and the seed drill.

mwengler comments on Comparative and absolute advantage in AI - Less Wrong Discussion

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