I liked Noah Smith’s piece and I don’t mean to pick on him, but…

His recent coverage offered a simple means of testing my earlier claim that not one in fifty economists understands the Heckscher-Ohlin theorem (HOT).  Noah wrote:

No. 9. The Hecksher-Ohlin theorem

This is a theory about trade. It says that countries with more capital — industrialized countries such as the U.S. or Japan — will tend to make things that are more capital-intensive. And countries with more labor — such as India — will tend to make things that are more labor-intensive. That’s why the U.S. makes a lot of semiconductors (which require huge fabrication plants), and India makes a lot of clothes.

Admittedly, some of the problems in this may stem from the reality that Noah is writing for a largely non-academic audience.  Nonetheless here are a few points:

1. The HOT proposition is about exports being relatively capital- or labor-intensive, not about production per se.  Even for a popular audience, I think that substitution should have been easy enough.

2. In the HOT literature there is a tension between quantity of labor and quality of labor, or human capital.  Some researchers wish to consider the United States as a labor-intensive country for this reason, because in value terms, rather than “counting bodies” terms, we have a lot of talent.  That also might help explain Silicon Valley exports and also entertainment exports.  Indeed it has been known since Leontief that U.S. exports are relatively labor-intensive, not capital-intensive.

3. The HOT claim is about a country’s capital to labor ratio, so that India has “more labor” is not exactly right, rather India has a lot of labor relative to its supply of capital.  Again, this simplification may have been imposed on Noah by the medium, but I am not convinced that the notion of a ratio here is beyond those who read economics on Bloomberg.

4.  Here is a recent headline: “China just surpassed the U.S. in semiconductor manufacturing, and the trend is likely to continue.”  I say China and the U.S. don’t have the same strengths when it comes to factor endowments, yet they are both producing lots of semiconductors (NB: I don’t have data handy on Chinese semiconductor exports).   Probably semiconductors are a classic example of economies of scale, knowledge economies, and specialization.  In that case the Heckscher-Ohlin theorem ought not to apply and we move closer to the trade work of Paul Krugman and others.  HOT also assumes that all countries enjoy the same state of technical knowledge, which seems doubtful when it comes to semiconductors, and thus maybe relative factor endowments are not doing the work in this case.  It seems like semiconductors are an example deliberately chosen to stand as far apart from the Heckscher-Ohlin assumptions as possible.

Now Noah knows way more economics than most economists, and thus I continue to believe most economists don’t have such a clear sense of the Hechscker-Ohlin theorem.  There are so many tricks to HOT I wouldn’t be surprised if I slipped up somewhere myself in this post.


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