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OM in the News: “Comparative Advantage” and American Jobs

January 27, 2011

This is the first time I recall The Wall Street Journal (Jan.26,2011) treating the subject of the Theory of Comparative Advantage. We cover this topic in Supplement 11 as a means of justifying outsourcing. The theory basically states that each country should concentrate its energy and skills on the goods and services that it is more productive at than the rest of the world.

Matt Slaughter, a dean at the Tuck School at Dartmouth, points out that the last time the US had 11.7 million manufacturing  jobs (the number we have today) was in 1941. Should we have more?   He writes: “A competitive America does not mean competitive success for every American industry. Many voices argue that manufacturing is somehow special….But a key insight into the principle of comparative advantage…is that hard-working Americans are not going to excel at everything….It’s okay that Phil Mickelson is better off on the golf course and not painting his own house”.

“Imports do not represent failure”, Slaughter adds. ” They raise the standards of living”. Questions of whether we have a comparative advantage in emerging clean technologies “are best left to the markets”.

He suggests that for the US to be globally competitive, we must invest abroad as well as export there. Manufacturers of aircraft engines, elevators,  and earth movers, for example,  require after-sales maintenance and support that requires foreign investments on our part. More maintenance and repair of tractors in China and India mean more R&D jobs here. And more Wal-Marts and Red Lobsters  in those countries mean more logistics jobs in the US.

He concludes that “excessive government backing of particular companies and industries typically squanders taxpayer resources and stifles sustainable growth”.

Discussion questions:

1. Compare Slaughter’s comments to the ideas of Liveres in yesterday’s blog.

2. What is our comparative advantage in this country?

3. Where do services fit into this mix?

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