Albania makes a lump of chocolate or a dumpling in 1 hour.
Italy makes 100 lumps of chocolate or 100 dumplings in an hour.
There is no need or advantage for either country to trade. Over time Albania might increase productivity to an Italian level, and then consider trade if the numbers work.
As Fred points out...in a 2-factor economy...it could be that there is no value to trade. However, the chances of this happening in a 4-factor economy (add Eggs and Frankfurters) are near zero, and in our economy with Millions of factors...we find that Albania and Italy actually trade Knives for Zithers....2 dimensions was for calculation.
Fred's next challenge:
An enterprising Italian off shores to Albania with Italian production methods. He pays Albania 2 dumplings an hour and he exports 98 dumplings an hour back to Italy. Albanian dumplingers have doubled their wages, and Italy has seemingly free dumplings, but Italian dumpling makers and the associated infrastructure are in shambles with former workers living out of dumpsters.
Sounds scary...but it doesn't work that way.
- Wages + Productivity track one another very well.
If the Albanians can make dumplings at the same rates the Italians can, they get paid awful close to the rates the Italians do. In real life, though, we find out that when moving the Italian system to Albania, we manage to increase the Albanian productivity to 4 dumplings per hour...but not more. However, that's still a rate of 4 dumplings per chocolate.
- Total production:
Albania was probably making 1000 dumplings and 1000 chocolate lumps a day, using 100 workers in each field.
Italy was making 100000 dumplings and 100000 chocolate lumps a day, using 100 workers in each field.
Once the tech transfer happens,
Albania ends up making 8000 dumplings a day using 200 workers, and no chocolate.
Italy ends up making 96000 dumplings and 104000 chocolate lumps (with 96 and 104 workers, respectively)
- Competition
We also have to remember that competition will drive the wages for Albanian dumplingers up. Because Eddie Entrepreneur will be followed VERY quickly by Erwin, Edwina, Eggbert, and Ellen. And the Edgar will try Italian Chocolatiering techniques as well.
- It sucks for the dumplingmakers.
If Eddie the Italian Entrepreneur invented a machine that converted 1 lump of chocolate into 2 dumplings...the dumplingmakers would hate it. And everyone who ate dumplings would benefit. Is that good or bad? Once Eddie has his machine, it seems as if dumplingmakers are in the same place as buggywhip makers...and need to change jobs. Too the heck bad if they don't like it. Their old job is unsustainable. If Eddie calls his machine the dumpling-o-matic...nobody blinks. If Eddie calls his machine Albania...everyone freaks.
If Bob the biologist made Cameras grow on trees...is that good or bad for the economy? It kills our camera industry, most likely...but it's an unequivocally good thing. Everyone gets a free camera, or 7. And Cameras start being used for things they weren't used for before: everyone photographs their meals...sets up home security cameras, etc. Net welfare goes up substantially, because cameras are cheaper. Do we worry about the jobs at Kodak? No...we treat it as something unpleasant for the folks who used to make cameras...and with all our newfound wealth, we can probably afford to collectively give them each $100,000 dollars of tuition to learn a new trade...and still come out ahead.
Wealth is fundamentally and deeply about consumption. Wealth increases when folks find ways to increase the total amount (or quality) of stuff created.
- Adaptation
Not all the dumplingmakers are living out of trash heaps. Denny Dumplingmaker noticed early that the Albanians were outcompeting him. So he quit making dumplings, and joined the Chocolatemakers. He's a junior chocolatemaker, and he used to be a senior dumplingmaker, but he's doing just fine. His cousin Dingus Dumplingmaker is the one living out of a trash heap, repeating endlessly "Damn Albanians" Maybe if he'd get off his bahocus, and be proactive, his life would improve.
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1 comment:
Heroically answered.
A key point here is adaptation. You are rare in that you embrace creative destruction, order from chaos. It is hard to sell the idea that freeing up the workforce in one area lets them maybe do something more productive elsewhere. It is also hard to sell the value of leisure time in these debates.
The tendency is to think in terms of finite resources--there is only so much to do, so much to have. We live in a cave and have only corn and clothes. If Og invents a machine that makes clothes from corn, the weavers are out of the loop and have to go to Og for sustenance, and now Og has political power over them and gets all the good women. Better to smash Og's machine.
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