A possible counterargument

In my last post, I argued that China, with its high growth rate, has a comparative advantage in producing future goods and therefore should be running a trade deficit rather than a surplus. If there is a counterargument to be made, it would probably rest on the distinction between average productivity and marginal productivity. China’s average productivity is quite low compared to what it will be in the future. However, if the marginal factory worker in China is someone who otherwise would be sitting on a farm twiddling his thumbs, then, on the margin, productivity might be extremely high. In other words, if we demand a few more manufactured goods from China, and they take some otherwise useless person and put him to work in a factory, they have increased industrial production without giving anything up anything else (except the worker’s leisure). In that extreme case, if we ignore the worker’s foregone leisure, the marginal productivity would be infinite: the quantity produced goes up by some positive amount, while the total social cost of production goes up by zero. In that case, obviously, on the margin, China has a huge comparative advantage in producing present goods rather than future goods.

Something like this argument seems to be behind claims that China’s weak-yuan policy is useful to help “manage industrialization”. As a Keynesian, I’m vaguely sympathetic, but I think this argument misses some critical points. By most accounts, China is industrializing too quickly already. If there are really people sitting on farms twiddling their thumbs, surely the Chinese can come up with other useful things for them to do besides making toys for Americans. For example, how about training more of them to be doctors and nurses, or having them build new medical facilities, so that Chinese people can have better health care? Surely, if they put their mind to it, the Chinese government could think of a lot of domestic improvements that could be made by their newly available labor.

Essentially, China today is outsourcing its fiscal policy to American consumers. The communists have become so enamored of capitalism that they want to do everything the capitalist way. Traditional Keynesian fiscal policy is too socialist for them.