Pauper and Sweatshop Fallacies

[alice wellintown]

But this expectation is utterly disappointed. What is different,
according to Goldsmith, is that there are all these countries out
there that pay wages that are much lower than those in the West -- and
that, he claims, makes Ricardo's idea invalid. That's all there is to
his argument; there is no hint of any more subtle content. In short,
he offers us no more than the classic "pauper labor" fallacy, the
fallacy that Ricardo dealt with when he first stated the idea, and
which is a staple of even first-year courses in economics. In fact,
one never teaches the Ricardian model without emphasizing precisely
the way that model refutes the claim that competition from low-wage
countries is necessarily a bad thing, that it shows how trade can be
mutually beneficial regardless of differences in wage rates. The point
is not that low-wage competition never poses a problem. Rather, what
is significant is that despite ostentatiously citing Ricardo,
Goldsmith completely misses one of the essential lessons of his
argument.

"Many advocates of free trade claim that higher productivity growth in
the United States will offset pressure on wages caused by the global
sweatshop economy, but the appealing theory falls victim to an
unpleasant fact. Productivity has been going up, without resulting
wage gains for American workers. Between 1977 and 1992, the average
productivity of American workers increased by more than 30 percent,
while the average real wage fell by 13 percent. The logic is
inescapable. No matter how much productivity increases, wages will
fall if there is an abundance of workers competing for a scarcity of
jobs -- an abundance of the sort created by the globalization of the
labor pool for US-based corporations." (Lind 1994: )

What is so remarkable about this passage? It is certainly a very
abrupt, confident rejection of the case for free trade; it is also
noticeable that the passage could almost have come out of a campaign
speech by Patrick Buchanan. But the really striking thing, if you are
an economist with any familiarity with this area, is that when Lind
writes about how the beautiful theory of free trade is refuted by an
unpleasant fact, the fact he cites is completely untrue.

http://web.mit.edu/krugman/www/ricardo.htm