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The Nation That Lost Its Jobs, But Got Them Back

Mises Daily: Thursday, November 20, 2003 by

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Once upon a time, there were two hippies, Jerry and Sarah. Tired of the rat race of modern life, they found a deserted valley in a remote region of the world. They moved there, with their four children. They declared that the area was now the independent kingdom of Lost Valley and seceded from the surrounding nation. Amazingly, it let them go.

The family lived a harsh life at the margin of subsistence. Everything that they needed, besides the few tools and amenities they brought in with them, they had to produce themselves. Having shovels, rakes, wheelbarrows, quality seeds, and so on made their life a good bit easier than it would have been otherwise, but it was hardly comfortable. Things did ease a bit as the children grew and did more work.

One winter, their youngest son fell sick. Unable to leave Lost Valley on foot or to bring treatment for him into the valley, they watched in sorrow as he died of a treatable illness.

Yet they stayed in the valley, wanting to make a go of the life they had chosen. And their life did have its pleasures. The valley was wild and beautiful. The family members were all very close to each other. And though they had little spare time, they enjoyed what leisure they had. For example, when work was done for the day, Jerry would spend the evening making charming little woodcarvings. As the years passed he became quite skilled at doing this.

A Visitor to the Valley

After the family had been in Lost Valley for many years, a hiker happened by. Jerry was sitting outside his cabin carving when the hiker emerged from the woods. He introduced himself as David. After an exchange of pleasantries, David remarked on how much he admired Jerry's woodwork. He asked Jerry if he had any similar carvings.

Jerry took him into the cabin and showed him a shelf with several hundred of the little pieces. David asked if he could buy a dozen of them. He offered a good price, but Jerry and Sarah had no use for money. So David suggested he simply leave them some as a sign of his good faith, promising to return later with other goods that they could use.

When David returned in a month, he had two more fellows with him. They were all carrying heavy packs filled with seeds, new tools, medicine kits, silverware, clothing, soap, and other household goods. The man told Jerry he'd like to take one hundred more of the carvings.

Jerry was happy to sell his carvings to David. The new goods made his family's life significantly easier. Employing them to boost their productivity, the rest of Jerry's family could raise enough food for all of them, leaving him more time to work on his art. The more he specialized in that one task the more his skill improved.

David and his two friends returned in the winter, riding three snowmobiles that were full of goods. Besides staples, they also brought a computer and a satellite dish. They taught Jerry how to retrieve e-mail, and told him they would send him custom orders.

In the spring they arrived again. Jerry's carvings were a fantastic success. David asked Jerry if they could cut a road in to his cabin, to facilitate their trade. He noted that since Lost Valley was Jerry and Sarah's sovereign country, they would have complete control over who could use the road.

Jerry said yes, and soon he was making monthly deliveries, in exchange for more supplies. The family now had enough free time that the children could concentrate on their education. David and his friends had brought another computer, and the kids used it to surf the Internet, learning more about the outside world. Soon, they created a website advertising Jerry's statues.

Orders flooded in. The next time David arrived, Jerry told him he wanted to set up his own company, using David as his distributor and as a marketing consultant. David was happy to oblige. Sarah became interested in the details of fulfilling orders. She also began keeping books for the company, an activity that made sense now that they were using money.

Within a few years, there was a thriving business in the woodcarvings located just over the mountains from Jerry and Sarah's valley. It included sales, marketing, and distribution departments. There was also a manufacturing division producing copies of Jerry's work, since many people liked it but could not afford originals. Sarah was the CEO of the company, traveling out of the valley three days a week to work on site. The children, who no longer had to work, were thinking of heading off to college soon. The oldest, Jerry Jr., seemed to have his father's artistic streak, and was showing tremendous promise as a painter.

The original rustic cabin had been expanded several times. The family now had three wood stoves, which they fed with logs split with their gas-powered wood splitter, an electric generator, a hot tub, and a deck with a view of the mountains. Everyone had his own bedroom. If someone in the family got sick, they could afford to have a doctor flown in to treat him.

Disaster Narrowly Averted

However, they were altogether too complacent. Unbeknownst to them, Lost Valley was on the verge of disaster. Luckily another hiker was about to wander into it.

His name was Professor Mercantilio, and he taught labor studies at a major university. When Jerry met him on a trail near the cabin, he was immediately impressed by the man's erudition and his concern for the well-being of his fellow man. He invited the professor back to the cabin for lunch.

While they ate, Jerry told Mercantilio the story of his family's sojourn in the woods. As he described the events of the last few years, his guest's countenance darkened, although more in sorrow than in anger. When Jerry had finished, Mercantilio looked at him gravely and said, "I've just arrived in the nick of time."

"How's that?" Jerry asked him, puzzled.

"Don't you understand? Your country's economy is on the verge of collapse. You've been exporting all of your jobs to other nations!"

"Huh? What do you mean?"

"Just think back to before you met this David and the other foreigners who beguiled you into shipping your nation's jobs overseas."

Jerry nodded slowly, but, frankly, he still did not quite getting the professor's drift. Mercantilio sensed this and explained further.

"Didn't you once have dozens of different jobs performed in this valley? Farmer, weaver, carpenter, soap maker, cook, lumberjack, butter manufacturer, herder, shoemaker, hunter, fisherman, butcher, and more?"

"Well . . . sure. We sure did."

"And where have those jobs gone?"

This was a perplexing question. Just where had they gone, Jerry wondered.

The professor told him:

"To foreigners! They're all still being done, just not within this valley any more. Why today, you are down to your last two jobs—company director and sculptor. Tell me, how can an economy thrive with only two jobs in it, without any manufacturing or agricultural base?"

Jerry said, "Gee, I don't know. But we seem to be doing OK!"

"Trust me, that's just an illusion. Your economy is being hollowed out. Your percentage of your agricultural consumption that you import has soared from 0% to 98% over the last five years. Your imports of manufactured products have gone from 2% to 99% of total consumption over the same time period. Apparel imports have gone from 1% to 97%. Obviously, this trend can't continue. Without any production, how will you pay for your imports? Your economic role as consumers is undermining your role as producers."

Jerry thought these remarks over. It was strange to think that his family's newfound prosperity was merely an illusion. But he knew little about economics, and, after all, this was the area Professor Mercantilio had studied for many years. He must know what he was talking about.

"Well," Jerry asked, "how do we fix the problem?"

"It's not going to be easy," the professor confessed. "Initially, it will require some sacrifice: your level of consumption will have to drop for a while. But better some sacrifice now than a complete economic collapse later. In the long run, your economy will be much healthier for it."

The Professor's Program

Over the next several days, Professor Mercantilio developed some sophisticated mathematical models of Lost Valley's economy, and worked out a program of import substitution that would get it back on its feet again. The labor and manufacturing sectors, the heart of any flourishing economy, would be revitalized. It would mean less attention to management and design activities, but these, after all, are only the icing on the economic cake.

Jerry and Sarah agreed to implement the professor's program. Mercantilio returned to his university, and the residents of Lost Valley returned to jobs they had neglected for too long. They weeded and tilled the vegetable garden, cleaned their hunting rifles, and took the old sewing machine out of the attic. The children's study time was cut and they resumed many of their old chores. Sarah had much less time to devote to running their company, and Jerry could not spend as much time creating carvings, but Mercantilio had convinced them it would be worth it.

On his summer vacation a year later, Mercantilio came back to Lost Valley. The nation had become more self-sufficient, producing a far greater percentage of its own food and manufactured goods. But there was a serious difficulty: the kids were still buying the better-quality, imported food, clothing, and cosmetics. As a result, much of the domestic production was going to waste.

Mercantilio analyzed the situation for Jerry. "You see," he said, "it's low-wage foreign workers that are your problem. You and Sarah have each been making several hundred thousand dollars a year. How can you expect to compete with farm workers paid a mere $12 an hour? They have an unfair advantage."

"So what should we do?"

"If you can't get foreign governments to sign trade pacts guaranteeing their nation's workers incomes of at least several hundred thousand dollars per year, you'll just have to impose a tariff, raising the price of their products to the level of yours. That will ensure trade that is not only free, but fair as well."

So Jerry and Sarah imposed high tariffs on most foreign goods. Left with little choice, the kids turned to the domestic products they had previously disdained. With fewer imported tools to aid the family members in their work, it took more and more time for them to produce the necessities of life.

A year later, the company selling Jerry's woodcarvings went into bankruptcy and was purchased for a song by Warren Buffett. Soon enough, the money Jerry and Sarah had received from the sale was gone. The road into Lost Valley gradually became impassable. Jerry and Sarah's SUV broke down, and they had no idea how to repair it. Over time, the house began to fall apart, the hot tub stopped working, and the computers became useless. The children abandoned their plans to attend college. Jerry Jr. stopped painting, as he had no time for it. Anyway, the family could no longer afford paint or canvas for him. One day, while cutting wood, Jerry Sr. lopped off a finger from his right hand with an errant axe blow. He could no longer carve wood as he used to, and he lost his interest in the art.

Eventually, the medicine kits were empty. Doctors could no longer reach Lost Valley by road and Jerry and Sarah could not afford to fly them in. When their daughter caught pneumonia, there was little they could do but watch in sorrow as her condition worsened and she eventually died.

The above information, up to the time of Professor Mercantilio's second visit to the valley, is largely drawn from his groundbreaking paper, "The Disappearance of Work in the Late Capitalist Economy: The Case of Lost Valley," published in Sociological Perspectives on Labor Rights, Vol. XII, No. 3. Just last year, Professor Mercantilio returned to the valley to perform some econometric studies to help determine the success of his program. Unfortunately, we can't report on the outcome of this most recent visit, as he has not been heard from since.

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Gene Callahan is author of Economics for Real People. Send him  MAIL, and see his Mises.org  Daily Articles Archive.