Volume 3, Number 87 TQE Home 1 November 2003

The Product Cycle and Globalization

Dear Friends,

Oh where oh where has my little job gone?
Oh where oh where can it be?
Why it's gone to Asia, the land of the dawn,
Where labor is cheap, don't you see?

When I was in grad school over fifty years ago, the product cycle was a hot topic for economic history. This cycle is the way products are initiated in one country but then spread to the rest of the world. It stands at the basis of economic development.

Although the product cycle had begun centuries earlier, it is best to take the industrial revolution as our starting point. For reasons still debated, a slew of inventions and innovations began in England in the seventeenth century. At first they occurred in agriculture, England's principal product. As entrepreneurs found new ways to grow crops, they sought labor-saving devices to process them. The fly shuttle enabled one man to produce what previously had required two. The spinning jenny did the same for women. Major improvements in textile manufacture were a principal characteristic of the industrial revolution. New ways of breeding cattle, of working metal, and of extracting coal also led to a great increase in output.

As more inventions led to increased demand for labor, wages rose, neither linearly nor consistently, but upward over time. By 1830 Britain possessed a supply of skilled labor able to move from place to place quickly, as demand required. Scotland opened up as a new industrial center. To do all this, the British needed more and more capital (factories, machines, equipment, roads, canals, railroads, etc.) Since no other country could invest in England, the capital came mainly from indigenous saving; that is, the British produced more than they consumed, and the excess was capital. Ultimately, they spread the industrial revolution by exporting capital (investing abroad), to the United States and other countries. They built the railroads in Argentina.

With the Great Exposition of 1851, which proudly showed British products to the rest of the world, Britain had reached the apogee of her industrialization. Labor was cheaper on the continent, enabling the French and Germans to ape the British in industrial products and — with new railways and canals — in communication. A principal force was the growing freedom of trade. Previously France and Germany had been cut up with tolls. But now, regional boundaries gave way in France, and Germany became a single country (in 1871).

The guilds resisted. They attempted to monopolize their products, prevent their labor from moving and their goods from being produced in non-guild factories. But they could not resist the tide of globalization, and in the nineteenth century the guilds themselves withered away.

As the twentieth century advanced, industrial countries tended toward services as their principal products — financial, health, travel, restaurants, etc. — while manufacturing moved to the less developed countries (LDCs) of Asia, Africa, and Latin America.

Economists believe (I among them) that the productivity of labor is the principal force in economic development, wherever and whenever it occurs. Labor productivity is the amount of product one laborer can produce in a given period. Low productivity is the main reason for low wages in the less developed world. Take the entire gross domestic product of any LDC, divide it by the number of workers, and the result will be "sweatshop wages." No amount of protest, no amount of union activity, will change that.

LDCs do suffer from a vast gap in wealth — a few very rich and masses of poor people — but if all the wealth of the rich were divided evenly among the poor, the increase for each one would be piddling. The only way to increase wages significantly is to improve the productivity of labor. How is this done? By supplying more capital, more technical knowledge, and more jobs. These are fruits of the product cycle. The more the competition for jobs, the higher the wage.

In the course of my professional lifetime (since 1942), wages in Hong Kong, South Korea, Singapore, and Taiwan jumped from third-world levels to a par with Europe. Why? Once again, the product cycle. They copied the rest of the world just as Europe had copied Britain in the nineteenth century, and they opened their doors to trade, just as France and Germany did in that same century.

Today, the product cycle moves on. Now maquiladoras in Mexico are moving to China. "Mexico, known for low-wage plants that export goods to the United States, is fast being supplanted by China and its hundreds of millions of low-wage workers; job toll [in Mexico] is mounting rapidly as more and more plants scale back operations or close" (New York Times, 9/3/03).

What happens to jobs in the United States and Europe as manufacturing moves to the LDCs? At first we resist the change. Steelmakers, textile producers, and farmers insist on subsidies and tariff protection, just as the British guilds provided protection in the eighteenth century. But the change cannot be resisted forever. Today, design engineers, skilled machinists, information-technology experts, and even CEOs of their companies complain that their own jobs are moving to Bangalore (India) and Singapore. Some Friends have asked me how to reduce excessive emoluments for CEOs. Send their jobs to India, that's how.

For Americans there is much pain and dislocation, but those who lose their jobs are protected by unemployment insurance. They suffer greatly, but with increasing opportunities in new fields, eventually they will find new jobs. Workers in less developed countries may starve or turn to prostitution or slavery if no jobs are available. Can we not share our jobs with them, to prevent such a horrendous fate?

Or do we "share" them?  Here we encounter the "lump of labor" fallacy — that there is a given amount of labor, and if one person has a job, another does not. History has shown this not to be so. Increasing output often increases employment.

Why? As incomes rose in continental Europe, the continentals bought more and more from Britain. Likewise, as incomes rise in the less developed world, the less developeds will buy more products from us. "Rising per capita incomes, the emergence of a middle class in countries such as China and Brazil, the integration of central Europe and Russia into the global economy, trade and investment reforms. All of these factors and more converged in the early 1990s to produce an incredible consumption boom in the developing nations" (The Globalist, online news, 10/17/03.).

But time is needed for all this to happen. There is still poverty at home and abject poverty abroad. It doesn't end all at once.

What about Mexico? Given proper government policies, there is no reason why Mexico cannot be another Hong Kong, Singapore, Taiwan, or South Korea.

What will the new cities of the United States and Europe look like as factories move out? Already they are becoming more genteel, with new shopping malls, tea houses, restaurants, and medical centers. More often, Americans are "eating out." As our population ages, we seek more travel and other goods for the elderly. (Robin's and my European cruise was populated by the elderly. Why not? We're elderly too.) Also, the aging population needs more medical attention. If we didn't insist on slowing that down through unwieldy reporting requirements, and malpractice lawsuits and the fear of them, our medical profession, including nurses and doctors, would expand enormously.

Why should the twenty-first century be any different from the others?

Sincerely your friend,

Jack Powelson

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Readers' Comments

That is one of the finest, most concise explanations of what's happening globally I've ever read. Thanks for taking the time to share it.  I know I'll pass it on.

— Dave Baerwalde, Catholic, Kalamazoo (MI)

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Your response to the loss of lower tech jobs mentions "pain and dislocation" and "eventually they will find new jobs" but not the more interesting and higher paying jobs that increase in advanced economies — or that most workers in the US are highly skilled by world standards and able to save for the transition to better jobs.

— Jerry Van Sickle, Boulder (CO).

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Your comments on the product cycle are right on the mark. They are painful for those segments of the population affected but they happen nevertheless. Too bad this article isn't in newspapers across the country.

— David Cox, Episcopalian, Scottsdale (AZ).

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Jerry Frost, former curator of the Friends Library at Swarthmore College and history professor there, gave a lecture at Pendle Hill a couple of years ago in which he reminded us that mid-19th century British Quakers based their peace testimony on free trade, believing that with greater trade, the world would learn to bridge its differences. He claimed they got a bunch of Anglicans to front for them so they wouldn't look too radical.

And on the other hand, if we could lower the wages of CEOs by shipping their jobs overseas, what would happen if the jobs of free-market economists and think-tank pundits were similarly outsourced? Would we still be hearing the praises of  job displacement and cheerfully patting fired workers on the head saying, don't worry, surely you can find another job eventually?

On your last missive, my Bolivian friend sent a follow-up rant about our drug policies saying that the illegal drug trade was the only foreign investment program that he could see put real money in the hands of poor people. He maintains that most of the world's anti-poverty program funds end up in Miami bank accounts of the privileged elite.

— Signe Wilkinson, Chestnut Hill (PA) Friends Meeting

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You still do not address the ethical issue of sweat shops. I am an endangered species, a Quaker business executive. I have found in my 68 years in business that people prefer to do business with ethical companies. We both sell (very little) and purchase a little from China. We monitor whom we do business with. They must pay a living wage for that area (not equal to the U. S.), they must have a worker safety program, and they must not employ children. I am for globalization.  I think done right it can encourage world peace.

— Lee B. Thomas, Jr., Friends Meeting of Louisville (KY).

Note: The ethics to which you refer are American ethics, not those of the less developed world. It is OK to encourage sweatshop laborers to unionize and bargain, which they will do in the ethical context of a country with labor productivity much less than ours. However, many LDC families would starve without child labor. Once you refuse to buy from firms that do not live up to your ethics, you may push workers on to prostitution and sex slavery, as I mentioned in TQE #87. — Jack

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Your theoretical economic talk is all fine and well, but for me one of the realities of present day world economics is that the economic distance between the "relatively few" wealthy and the large masses of the poor is becoming greater all the time. How do we make these very wealthy individuals more socially conscious so that they do not feel they have a right to hoard more and more of the world's wealth?  In the US, for example, the income gap between CEOs and the average worker keeps on growing. Is that fair and just? According to your argument, if the US worker is so efficient as a laborer, shouldn't she/he share in more of the profits? And why must a company always seek out the lowest paid worker worldwide to produce the product of the company? Isn't there some moral obligation other than to the owners or shareholders of the company?

— Ken Woerthwein, Harrisburg (PA) Friends Meeting.

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A wonderful summary of labor markets. I am a firm believer that the faster we can implement the move of low wage industrial jobs to LDCs the better. The essense of your discussion is the "lump of labor" prejudice, a misguided belief that is exacerbated by another myth: that a "job" is something that mostly gets "lost".

— Christopher Viavant, Salt Lake City (UT) Meeting.

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Everett Hagen, economic historian, demonstrated that 80% of the innovators that brought about the industrial revolution in England came from members of dissident religious groups, not Church of England. This innovative class came from a minority population, Quakers, etc.

You comment of the source of wealth for industrial development. It seems to me that you neglect the enormous wealth brought into England from its exploitation of colonial peoples, not to mention the slave trade, the indigo trade and the opium trade. Did not this wealth create the great estates? You would know better than I.

— Howard Baumgartel, Oread Friends Meeting, Lawrence (KS),

Note: Some economists, including Quakers Kenneth Boulding and Tapan Mukerjee, have written that European colonialism was actually a losing venture. It cost more than it yielded, and that is why it was ended. — Jack