US Manufacturing Base and the Law of Comparative Advantage

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Stanley Pinchak replied on Wed, Nov 26 2008 1:43 PM

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This is an interesting topic.  While wages and taxes are higher here, there is some offset to this due to reduced distribution costs.  It is sad that the government economists and politicians don't realize how their inflationary policies and taxes on capital have led to the departure of these capital intensive industries in the first place.  It was highly wasteful that the capital and infrastructure here was abandoned when these firms moved overseas, but it made economic sense in light of the political considerations of the time.  Hulsmann and others would posit that this is a just a case of a government induced error cycle (though perhaps not repetitive like the monetary induced business cycle).  The misallocation of resources in the form of American factories is directly related to the unanticipated intervention of the state.  Now that these resources have depreciated and are in such a dilapidated state, it is much more difficult for American firms to compete with foreign firms as you note.  However, this advantage of the foreign firms is also the result of governmental interference in the market and much of it represents a misallocation of capital as well, yet to be discovered.  On the blog page, contributors have mentioned the excessive manufacturing capabilities that developing nations, including China, have constructed.  Prudent businessmen often over size their production facilities in anticipation of increased future demand, but the poor entrepreneur allocates more resources to capacity , beyond the needs satisfied by the durable good during its useful life.  The actions of government can only make it more likely that businessmen will make mistakes in capital allocation, both here and abroad.