How Do Beavers Make Steel?

David Friedman’s beautiful explanation of trade was made famous by Steven Landsburg in his chapter the Iowa Car Crop from The Armchair Economist.

David’s observation is that there are two technologies for producing automobiles in America.
One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody
knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw material from
which automobiles are constructed. You wait a few months until
wheat appears. Then you harvest the wheat, load it onto ships,
and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

I learned recently from Robert Allen’s Global Economic History that Friedman’s analysis was preceded by more than three hundred years by an unknown Micmac Indian who at the height of the fur trade observed:

In truth, my brother, the Beaver does everything to perfection. He makes for us kettles, axes, swords, knives and gives us drink and food without the trouble of cultivating the ground.

Comments

Sounds more like grain being sent from Vladivostok to Japan. In that case a grain carrier can come back with used Japanese taxis, old tires, and all sorts of interesting things.

It would be far better for America if we sent boatloads of wheat and got back boatloads of money. AND manufactured our own cars providing jobs for Americans. What the author has described is the enslaving and indebting of America.

Because money is delicious, and can be used for so many things around the house, right?

Yes.

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Is it your boatloads of wheat that's being sent overseas? If not, what business is it of yours where someone else's wheat goes? How is it that a combination of elected poseurs, lifetime bureaucrats and industry nabobs get to tell me or anyone else what we can do with "our" stuff? And this money that would return in those ships, what kind of money would it be? I don't think that I can buy a six-pack of Sierra Nevada with a handful of rubles, yen or renminbis. So where do those evil foreigners come up with the Yankee dollars we want?

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But what would that money be used for, if not buying things?

If we want to work for free, we can do that. Banning imports while increasing exports means literally that we get less for working. Because other countries consume what we produce, and we don't consume what they produce. It's a lose-lose for us.

It would be better to just pay people to dig pits and then fill them up again. 100% employment! And we would be richer than we would under your scheme.

Interesting question: If you wanted a full-employment last-ditch job that the government would offer everyone, what would be the most useful one for the economy?
- Ride stationary bike to generate electricity (I think this is my favorite for the 2nd health benefit)
- Pick up loose garbage
- Farm a pea-patch
- Pay people to read
???

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So they send us dollars that they get from the magic dollar unicorn?
Or maybe the dollars are just a means of exchange that have to flow in both directions for any exports to occur.

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As opposed to cars on an actual car carrier. Which is a fast ship on account of the high capital cost of cars. While a slow moving grain carrier is basically a rusty, horizontal silo.

I get that we’re talking “models” here but I thought the same as you.

Is there something wrong with models when you have to waive actual facts for them to be true even in their own “model land?”

Agreed. Might also be better if they said "For every 20 grain carriers, you get 1 ship back loaded with Toyotas."

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If we could make more cars here or more cheaply than we can get by trading grain (or whatever else) for them, then we would be doing it. Consumers are going to buy the least expensive cars they can find. The whole point of the trade barrier is that the domestic cars AREN'T cheaper, so consumers have to be forced to buy them.

In other words, why does it 30 grain carriers to get one shipment of Toyotas from America?

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I support your view.

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Why cars? Why not clothing, or stereos, or robots?
Or should we manufacture all those things here too?
How do you decide which things should be manufactured by Americans, so as to "provide jobs" ?

Obviously free-trade is a win-win....in a very simple model.

But once you move to more sophisticated models/real world then there are nasty strategic games to play and it's possible to get yourself into a low value-added equilibrium with a trade partner who realises most of the gains.

For example; "Your people make low-value added corn and mine will make high value-added cars, according to our Ricardian relative advantage; then we'll trade". This is good for us both right? Right? Well, no; it's socially optimal, but NOT necessarily Pareto optimal at a national level. This is a tragic realisation that seems to be beyond people like Caplan, etc.

The corn example is a particularly poignant one, because agriculture (like any primary resource extraction), no matter how productive, is seldom a good way to become really rich....

American's export a lot more high value added products than corn.
Cars aren't really the most high value added product anymore either.

Also, the whole reason trade agreements exist is *because* thosec strategic games tend to get us stuck in a suboptimal equilibrium. It's essentially a prison's dilemma where we're both stuck in the "defect" state because neither side want's to lower it's trade barriers because the other side won't do the same thing. We need the trade agreement to get OUT of that situation. Both sides have to agree to recognize that mutually reducing tariffs is in both parties advantage, and stop trying to game the system to their advantage. Trump isn't doing that. His entire agenda is "The system must be rigged to favor American companies", and he doesn't seem to get that if you do that other countries will also do it. It's not about which country gets the best deal, it's about mutual recognition that universally lower trade barriers are to everyone's benefit.

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Hazel,

> it’s about mutual recognition that universally lower trade barriers are to everyone’s benefit.

Seriously, it seems to me that Trump has just noted that everyone else is gaming the system to get the majority of gains from trade and is declining to be the patsy in an iterated prisoners dilemma. Sorry, I mean "showing leadership" or whatever the polite term for taking a repeated sucker payoffs is. At the risk of repeating your game theory 101 instruction, iterated PD strategy is to clearly establish tit for tat and your own rational self interest. It is much better (for everyone) to appear a selfish rational bastard than an altruistic idealistic idiot who takes defection after defection.

The mistake is to think you maximise P(C,C) by acting nice. Appearances aren't important here. Credibility is.

Anyway, this is all level 1 stuff. In relation to the Corn-Cars problem, I'm a bit concerned you're not following the deeper game which you get with variable factors of production and relative advantage, with exchange rates and returns to scale. Here there are real opportunities to strategize to end up creating the high-value added products ("cars") whilst everyone else is stuck making low-value added product ("corn"). Sure, you trade freely, and social welfare is maximised, but you're at an equilibrium which greatly favours your domestic consumers over those of other nations.

Play with a few simple trade models with two nations, two normal goods which are complementary, different national costs of production, and assume one good is greater value added in terms of height of the demand curve to cost of production. How many equilibria are there? How do the gains from trade accumulate across the nations? Can you find one where it is better for one nation to be autarkic rather than specialise and trade like a good Ricardian?

I used to be a pure free trader, but realise there are serious medium-level theoretical issues here, and I'm not comfortable that the free-trade advocates are fairly addressing them.

Anyway, this is the level 1 game suitable for Op Ed writers and armchair economists. The level 2 game is when you put factors of production into the model and exchange

The game plays on a deeper level than the one you allude to.

Suppose country A has with x1 and x2.

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...and scrub the last 3 lines of reply as an edit fudge.

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But are externalities associated with using fossil fuels to power huge and efficient marine diesels for tankers (about one revolution of the propeller for every liter of fuel consumed; marine diesels have huge torque but very low rpms, about one per second is common) included? Arguably, if externalities associated with finite fossil fuels are accounted for, globalization does not pay for itself (speculative).

Bonus trivia: Scott Sumner likes beavers, or hates them, I forget which, he blogged on it once.

Beavers are a big problem in my low country home: they build dams that block drainage when we have storms (including hurricanes), causing flooding of nearby roads and buildings. As for trade, it reminds me of fishing. Has anyone ever noticed that when fishers (that's the gender neutral term for fishermen) launch their boat they immediately proceed to the farthest point on the lake, because they assume that the fishing must be better way the heck over there even though the fishing nearby may be better. If the boat launch were moved to the other side of the lake, the fishers would proceed to the side with the original boat ramp. Is the fishing on the other side of the globe any better than the fishing on our side?

I don't live in an area with beavers, and I understand they are considered a nuisance; but one night, sitting down with my supper, and finding that the Movies! network was showing "Hatari" yet again, I grudgingly turned to a PBS show about beavers. To my surprise, I watched the whole thing, fascinated. I urge you to look for it:

http://www.pbs.org/wnet/nature/leave-it-to-beavers-leave-it-to-beavers/8836/

Beavers may bring life to a dry place, and they are also nature's B&B keepers.

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The externalities is a good catch.

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By the way, I think both stories are charming, and externalities aside, true.

@Anon, thanks. A good source on economics and tech is Vaclav Smil, who writes about one book a year on this topic. I finished his book on diesel engines as the engine for globalization (diesel engines are very efficient and reliable when huge, as in the size of a house and producing 100k horsepower, not so much, though better than gasoline, in small engines like for cars). Rayward is right about fishing: many big fish congregate around the dock, where people are, so they can feed on scraps, and they get smart over the years to avoid artificial lures. We built a small pond in the Philippines so I'm getting to be a real authority on fishes, especially the koi carp which grow to two meters and live to be 150 years old.

Re externalities: solar energy, on a EROEI basis (net energy after inputs and outputs accounted for), pays for itself if externalities like finite fossil fuel supplies are accounted for, however, it does not pay very well in the conventional analysis which assumes several hundred more years of fossil fuels (especially coal, which btw is a suspect statistic). Most economists of the Simon Kuznet type assume the latter calculation, hence solar energy is not really economical without further gains in efficiency which are not really on the horizon (principally battery storage).

Bonus trivia: Rudolf Christian Karl Diesel committed suicide in dire financial straits (conspiracy theorists think he was murdered but that's unlikely) despite having invented the widely popular diesel. Part of his problem was he thought diesels were best as small motors to replace electric motors, when in fact the exact opposite is true; diesels work best when huge, and electric motors have become the engine of choice for small motors as they are reliable and not polluting in close quarters. Another example of how invention does not pay, and society does not really help inventors that much, just ask your average economist what they think of patents and typically they mention monopoly and inevitable invention (i.e., inventors invent for free for fun, or for a pat on the back, as has been said on this site).

all those words

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Our Trivia: my girlfriend has literally fished with hand grenades. Her brother threw it though. She helped collect the fish. (It worked!)

One of the things you do when you grow up in a war.

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Gasoline/petrol powered combustion engines "are not polluting in close quarters". ... and energy is free, too!

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A fully loaded slow steaming Triple E container ship burns about 1 gallon of bunker fuel per day per TEU. China to Rotterdam in 23 days is 23 gallons for a TEU or 46 gallons per FEU. OTR trucking achieves (at best) 7mpg, so hauling an FEU 320 miles inland takes as much fuel as the entire ocean transit.

If you live in Seattle, a typical OTR delivery from Jesusland will emit more CO2 than a container delivered from Shanghai.

@clamence- yes,good stuff. Recall back before steam engine railroads it took as much energy per unit mass to move stuff 30 miles inland by ox cart as it did to transport, via a wind driven clipper ship, the same stuff across the Atlantic ocean. Water transport is one reason all successful civilizations (and I'm not counting the Mongols as civilization) lived near water. Not counting the Incas either. Nor the Mayas. Or Aztecs. Or American Indians in the plains. Or Congo people. Or Aborigines, or South American Indians pace those near the Amazon. But I think you see my point.

Bonus trivia: Cyprus and Australia were colonized in the neolithic era by people in rafts traveling at least 100+ nautical miles, even allowing for lower sea levels back then. Pretty amazing seamanship, since a primitive Kon-Tiki type raft (which BTW the sea-wise sophisticated Polynesians certainly did not use) only travels at ocean current speeds, about 3 mph. That's 30 plus hours in open seas, and if the horizon at water level is only about 5 miles distant, it means traveling for over a day without sighting land. Scary! Just ask today's Med migrants or the Cuban boat people...

I tied myself to my chair this morning and listened to the Niall Ferguson interview of Peter Thiel and Reid Hoffman. Ferguson did not disappoint: he had nothing to add to the conversation. As for Thiel and Hoffman, they made two observations worth repeating: one, the concentration of like-minded people is not a good thing (duh!), and two, China companies will soon bring their technology to America, and when they do, oh, my! In the meantime, even less than average Americans are investing in Bitcoin. https://www.washingtonpost.com/business/economy/bitcoin-is-my-potential-pension-what-is-driving-people-in-kentucky-to-join-the-craze/2018/02/03/aaaea3be-05dc-11e8-b48c-b07fea957bd5_story.html Did I mention that Thiel is an investor in a Bitcoin mining company.

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+1

The global shipping costs are so small relative to the value of goods moved as to be negligible. That 23 gallons of fuel will deliver up to 20 tons of goods from Shanghai to Rotterdam. Or about 12 Toyotas. Let's be conservative and say only 6 Toyotas.

Those Toyotas are priced from $25k, so about $150k of goods. The diesel is $3 a gallon, so about $78 of diesel.

At which point we can stop obsessing about the fuel component of the maritime transport costs. It's completely negligible.

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Rhubarb, I'm afraid.

The energy/fuel consumed to move products around the globe is negligible compared to the embedded energy costs in their creation (or use). We are talking a few dollars per thousand-ton-km. Marine diesel is really efficient!

Almost none of the price of that shiny Chinese Blu-ray player In Walmart is the costs of getting it to you.

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One could learn a lot from the beaver. As "nature's engineers" they don't bother attempting to build high-rise beaver lodges, instead constructing semi-subterranean homes that are sturdy, virtually impenetrable, and energy efficient, something current humans have yet to figure out.

I don’t wish to live underwater in a dark cave. It’s not good for my shiny pelt.

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So in a Green Utopia we live in the dark and eat raw fish?

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You can glean many economic lessons from the Indian trade. Different conceptions of property ownership, using an inherently valueless object as currency, tragedy of the "commons," comparative advantage. It was a relationship that did not go well for the Indians, or for the beaver.

This quote has been well known to historians of America for decades. Do you ever read a history book not written by someone with a phd in economics?

The vast majority of trade with Amerindians was perfectly peaceful and forthright, and understood as trade by both sides. If you think about it, the Amerindians probably realised most of the gains from such trade: they gained access to valuable goods they COULD NOT PRODUCE at any price.

How much would our civilisation trade for access to goods produced one thousand years in the future?

"How much would our civilisation trade for access to goods produced one thousand years in the future?"

For that matter, what would be the selling price of the cheapest iPhone 30 years ago?

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Indeed, the goods Indians obtained in the peltries trade were so valuable to them that over time they mostly abandoned the horticultural and hunting and gathering ways of life that had sustained the tribes before contact with Europeans. With the guns and steel they acquired they became pawns of the European empires as each sought to gain economic and territorial advantage over the other.

Believe me, I don't have rose-colored glasses when it comes to the American Indians or their relations with Europeans. But just because something happened peacefully (though certainly not always, but anyway) does not mean that it did not have pernicious effects. And just because someone was willing to pay a high price for something at one point in time does not mean that "good" was a good thing. I might pay a great deal for future technology, but the price may not reflect the actual or eventual cost.

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>With the guns and steel they acquired they became pawns of the European empires as each sought to gain economic and territorial advantage over the other.

Your reply is mostly fair, and the NE tribes did become pawns. But seriously, the Amerindians warred constantly with each other at a low level for territorial advantage before the Europeans came along. The Europeans were probably the more "peaceful" civ on a serious killings per population year metric.

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Odd how that works. Now these brilliant economists are living on reserves with 80% opioid addiction rates.

+1

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Yeah it's a pretty glaring omission. The only reason we ship the materials overseas is because for a number of reasons it's mysteriously cheaper to load them on a carbon-belching container ship to the other side of the world, pay a different labor pool to process them, and have products chugged back. There's also the part about monetary policy but oh well.

I think the results are in: you can pay your welfare at the cash register or you can pay it via government transfer payments.

Another glaring omission is that the fields, the seed and the resulting production belongs to something like 2% of the population or whatever the farm worker numbers are today. So they harvest the grain. To sell requires transportation, so a bunch of other people do that. All those people buy the Toyotas. So what is that? 15% of the working population? What about the other 85%? What do they do? The farmer won't plant a second year if roving bands burn his crop, steal his tractors and kill his workers.

Maybe there aren't very many women economists because they look at the field, read this nonsense, and decide to do something productive with their lives.

@derek - Google post-scarcity economics, aka "Star Trek economics". In the near future, you won't have to work derek, nor join a roving band to find sustinance. Big Brother's charity will sustain you and yours.

Bonus trivia: me and mine are in the 1%

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Just a correction, transport costs are really quite negligible in this problem. Don't get hung up on the shipping.

Capital (esp energy) costs of manufacture and labour costs dominate the system, with secondary monetary and tariff effects.

+1

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"eastward into the Pacific Ocean"?

If you use the Panama Canal, yes. Not sure what route you'd take from Iowa to Japan.

I would first try to sail to West to find a new path to the Indies.

The question is whether you would first ship the wheat to Houston or to the west coast. If it's Houston, it would go through the Panama Canal, which would in fact take you "eastward into the Pacific Ocean." To be sure, you'd turn to the west after that, but the Pacific end of the canal is east of the Caribbean end.

But wouldn't it be more profitable take the wheat to the Inies and exchange it for spices, circumventing the Moslem control of the usual trade route and proving Earth is round?
https://www.youtube.com/watch?v=FgqW_hgpuEI

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And claim new lands for the Glory of God and the Kingdom of Portugal!

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Intermodal.

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I love stories like this. I've never seen any need to believe them, mind. Though I prefer them not to be as completely implausible as the risible Chief Seattle piffle.

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These days the Toyotas come from Alabama

Only because of tariffs and domestic content requirements.

+1, of course practicing law has significant domestic content requirements also.

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How the Steel Was Tempered Nicolai Ostrovski

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The problem with the analogy is that there is an international market for grains, the supply of grains is growing from other countries as they industrialize their agriculture, and agriculture employs few people, meaning that there will be no one to purchase the car.

By the way: you can do both: produce grain and make cars.

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So when those foreign cars get too expensive to purchase, we can start making them with all that cheap unemployed domestic labor.

Hazel,

I think Bill's point is that your margins in agriculture are not secure as other countries compete more and more. And you can't easily expand it at the margin without lowering your already poor productivity. Agriculture is NOT a way to get rich. Look at typical salaries:

Farm worker salaries in the US are ~$12 an hour.

Autoworker salaries in the US are ~$25+ an hour

Worker productivity is closely coupled to these costs, and things are different at the margin obviously. But a nation of farmers is simply going to be poorer than a nation of auto-workers, and that is not going to change in the future.

Nobody said it was. America is hardly a backward agricultural economy. We export lots of high value added products other than cars.

My point is that the argument that if everyone is unemployed nobody will be able to afford the cheap imports makes no sense. If people can't afford to buy the foreign produced goods, it becomes efficient to produce them domestically. If it is cheaper to buy foreign imports, then it's cheaper to buy foreign imports. The market isn't going to get into a state where we voluntarily purchasing products that nobody can afford., unless we're talking about flying cars or something that nobody can afford anyway. There is no path from here to there.

Fair enough.

But remember that buying the cheap imports doesn't necessarily maximise national welfare if it destroys local high-value added jobs in favour of a slightly-more-competitive international competitor (and your workers go off to work in low-value added industries instead, or become unemployed). Basically your consumer gains can be smaller than your losses from the reduction in national productivity. Sure, its socially optimal, but the benefits of trade accrue not only relatively but absolutely to the other party.

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Reading this over, it seems you are wasting your time, Alastair. Hazel ain’t willing to listen.

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I love what you do here. Thanks.

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How did that work out for the Native Americans .... and the beaver

I was about to say. That's a quote that Friedrich List would've loved.

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The Beaver stopped working for reasons which remain unclear. Probably unionisation.

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Grain example: A
Beaver example: D

Aggregate grade: B-/C+

Which is kinda an A+.

You and your coarse Brazilian grading.

You may be mistaking me for another person. And, unfortunately, America has become the promissed land of participation trophies and grade inflation.

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"Protecting domestic producers from foreign competition" is a buguaboo for academic economists who personally benefit both from enjoying employment in a tax exempt industry that is largely financed by heavy taxes upon domestic producers, and, from avoiding taxes upon their own consumption by enjoying foreign goods imported subject to comparatively low tarriffs. Tyler, for example, opposed reductions in the very high tax rates for US businesses but endorses low tarrifs for goods produced in low tax countries. Then, to cap things off, argues we need more government spending on higher education because the stupid working class can't keep up with changing times. When talking about trade, what we are talking about is differential tax rates and the elite's simple minded bigotry and hostility to working class Americans.

Yes. It's funny how those government wheat subsidies are always forgotten. As for the Micmac's, as Alan Weisman pointed out in his book "The World Without Us," untended by man, wheat will disappear in a matter of years. Still, somewhere in there is a point I agree with.

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...And that's the story of how the Micmac's became a world power.

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"In truth, my brother, the Beaver does everything to perfection. He makes for us kettles, axes, swords, knives and gives us drink and food without the trouble of cultivating the ground."

In other words, the beaver does all the work so the Micmac don't need to work.

Milton Friedman made effectively the same point when Korea was building new steel plants with capacity greater than global steel consumption: Koreans make all the steel so US steel workers no longer need to work.

Milton Friedman led the way is convincing economists that money is not a proxy for work, but that money replaces work. Print money and you no longer need to work. Free lunch economics. Inflate the price of assets others created, and you create money, so you no longer need to work to produce assets. And inflating asset prices is best accomplished by not paying workers to build assets.

This is the counter to Keynes who called for government ensuring workers are paid to build assets until the assets are barely worth the costs of building the assets over the life of the assets.

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How's the effort to open up the Japanese rice market going? I stopped paying attention about a decade ago.

On free trade for America, sure, it isn't a problem if America is drained of its dollars, as America can just print more dollars. But one should hope no one in third world countries believes in this nonsense.

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Trade and commerce aren't the same thing as technology. It's precisely this misconception of technology held by economists, policy makers, and elites that has led to the decline of American technology and manufacturing capacity. It's this misunderstanding that allows them to believe that they are solving technological and technical problems by throwing more labor at the problems, which is the exact opposite of the case.

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"First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them."

We send our inflation eastward too. It works great until it doesn't.

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I was so sure the answer was going to be "blast furnaces".

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Actually, beavers do not make steel. Gays do.
https://www.youtube.com/watch?v=yfgs9FRD25M

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"Friedman’s analysis was preceded by more than three hundred years by an unknown Micmac Indian who"

As you can see from following your link, it looks as though the 1680 Micmac Indian version of the anecdote that you quote was plagiarized from a 1634 version that attributes essentially the same statement to a member of a different tribe.

So more than three hundred and fifty years.

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In a similar vein, I like to say that laziness is the mother of invention.
The Native Americans invented canoes cause they were too lazy to hike.

Narrator: Hazel Meade doesn't work.

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I read this to my mom. Her comment was: "don't the ships go westward?"

Every sentence in the quoted paragraph contains a clue that the details don't matter.

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If you send wheat to Japan and get Toyotas back, that means that there is someone in Japan who gains because wheat is more valuable to him than Toyotas. You could instead find someone in America who finds wheat to be more valuable than cars and send the wheat to him instead; that way the gain would go to an American.

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I don't understand the beaver part.

Beaver pelts were a luxury good for Europeans. So there was a vast and profitable trade in sending Beaver pelts to Europe in exchange for finished goods, whiskey, fire arms, knives, jewelry, etc.

Of course, at the end of the day, the beaver population was decimated and the Indian's (never developing an industry of their own) were herded onto reservations and are largely impoverished to this day.

Alex Tabborrak completely missed the irony in his homily.

Obviously, America is in severe danger of becoming an agricultural economy incapable of producing cars.

Actually, I think the approaching robot / automation wave will render most of these trade topic discussions obsolete. If hard manufactured goods can be produced independently of labor costs, then the whole labor versus capital paradigm of manufacturing is drastically different. The high cost of labor is a competitive disadvantage for the US. Robots will lower the percentage of labor required to make most hard goods. Things will change.

US has an advantage in cost of capital. But not so much in energy.

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"But not so much in energy."

Outside of the Pacific coast, the US price for industrial electricity is around $0.07/kwh. That's one of the lowest unsubsidized costs in the world. China is officially lower, but that's partially due to subsidization of capital costs and partially due to a large amount of cheap coal plants with little environmental controls.

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Fair point; I was using California as an inappropriate datum.

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