Feenstra: Integration of Trade and Disintegration of Production in the Global Economy

RC Feenstra, Program on Pacific Rim Business and Development, and Davis University of California, “Integration of trade and disintegration of production in the global economy” (1998).

The author does a comparative analysis of different methods for measuring the amount of outsourcing to foreign destinations. Fennstra also argues that this outsourcing has increased steadily since the 1970s.

The author also explores globalization, with an eye towards the impact on wages of those who are arguably most vulnerable in an economy: those with low levels of skill. "In fact, I will argue that by allowing for trade in intermediate inputs, globalization has an impact on employment an wages that are observationally equivalent to the changes induced by technological innovation. The idea that globalization has a minor impact on wages relies on a conceptual model that allows only for trade in final goods, thereby downplaying or ignoring the outsourcing of production activities. The empirical evidence supports a much more prominent role for the optimal decisions of firms to allocate production worldwide, that in turn needs to be incorporated into our theoretical framework" (32).

"...outsourcing has a qualitatively similar effect on reducing the demand for unskilled relative to skilled labor within an industry as does skill-biased technological change" (41).

The author then explores some of the policy implications for the decreased demand of unskilled workers that arises out of an increased drive to outsource production.

"The world has become increasingly integrated through trade in the last several decades, and the structure of trade has shifted towards more outsourcing...I have suggested that to understand the implications of this change, we need to use a conceptual framework where firms allocate their production activities worldwide. While many details of this framework remain to be worked out...I would like to speculate on the type of results that it might yield...First, the globalization of production should bring with it gains from trade that are likely to be substantial...However, we must ask whether these efficiency gains bring costs in terms of the distribution of income" (47).

"If we want to move beyond the possibility of Pareto gains to making actual compensation, it appears that we should give serious consideration to wage subsidies for low-skilled workers" (48).

Cobb and Douglas: A Theory of Production

Cobb, C. W. and P. H. Douglas. (1928). A Theory of Production (Vol. 18, 139-165): JSTOR.

As society has gotten to a point where they can sufficiently measure labor and capital influences in an economy, it would be possible to examine how both of these interact to produce goods and services. Is it possible to determine the relative amounts of both labor and capital that are used in the production of goods?

First, it becomes important to outline the structure of the measurement of capital and land. We must remove land measurements from capital measurements because it does not directly aid in the production of manufactured goods or services. What should be measured is, “machinery, tools, and equipment and…factory buildings” (140).

Much energy and time is spent examining the current nature of fixed capital in the US in the late 19th century. Many questions arise as to the method for taking these measurements and the accuracy of those methods.

Methods for measuring the pool of labor engaged in manufacturing are then examined. It is clear that there are flaws with the approach used by Cobb and Douglas, and they are aware of the limitations. They also acknowledge that they do not take into consideration the “quality of laborers or…the intensity of their work” (149).

The authors then deploy their method to examine the relative impact of both labor and capital on production for a period in question. They find that three-fourths of what was produced can be attributed to labor, and the remainder to capital. Once again, this is relative to the time period (hence technologically relative) and also to the relative availability of labor and capital. However, “It is the purpose of this paper…not ot state results but to illustrate a method of attack” (156).

There is a point made at the end to show that this approach to understanding productivity is not firmly rooted in any ideology. “For while capital may be ‘productive,’ it does not follow that the capitalist always is” (164). Thus, one can be a communist or an individualist and still use this approach.