Wednesday, November 2, 2011

The invisible hand packs a wallop

Maybe they teach things differently today, but when I took my first-year economics course back in 1980, the presentation began with the assumption of perfect markets, in which information is immediately available to all, there are no barriers to entry, and prices therefore fluctuate instantaneously. (One of the ramifications of this - the fact that no one makes a profit - is conveniently ignored by politicians who worship Adam Smith.)

As time goes on, you realize that there are imperfections in markets. Cartels, regulations, politics, and general business secrecy all play their role in creating a real market that is often stagnant.

But the classical model can be valuable, because there are times when free markets actually free up a little bit.

Take the labor markets of the U.S. vs. the third world. Because labor is relatively expensive in the U.S. vs. Mexico or China, we find that a lot of jobs formerly performed here are now performed elsewhere.

But sometimes things can change:

Manufacturing wages in China continue to increase at 15-20% per year on average, and have actually increased by a whopping 300% for Taphandles since it opened a Chinese factory in 2006. In contrast, manufacturing wages in the U.S. have remained relatively flat, or have even decreased in some industries that have adopted a two-tier wage structure.

For this and other economic reasons, Taphandles has shifted its manufacturing operations from China to the United States.

This may not become a huge trend, but as wages naturally increase in China as labor becomes more valued there, offshore exercises in China will become less attractive.

Now Bangladesh, on the other hand...

(H/T Jim Ulvog's Outrun Change.)
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