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Home Publications Blogs Beat the Press Globalization: Developing Countries Sell Us Food, Clothes, and Cars and We Sell Them the Pythagorean Theorem

Globalization: Developing Countries Sell Us Food, Clothes, and Cars and We Sell Them the Pythagorean Theorem

Wednesday, 30 April 2014 10:42

That's sort of the story that Neil Irwin relayed in the NYT's Upshot section based on a new study from McKinsey Global Institute. The point is that the United States is increasingly dependent on exports of "knowledge-intensive goods and services."

This can be very problematic, since the knowledge is often easily separable from the actual goods and services. For example, the knowledge on how to produce the latest cancer drug is separable from the drug itself. The same applies to the knowledge needed to produce the latest iPhone or other nifty device.

In order for the United States to get paid for its knowledge-intensive goods and services it needs to impose rules, like patents and copyrights, that make it illegal to separate the knowledge from the goods and services. This is very problematic for fans of the market, since these government restrictions lead to prices that are far higher than would exist in a free market.

In the context of international trade, we are asking developing countries to charge their citizens these high prices so that they can send the money back to the United States. This may not be a viable long-run strategy. It both transfers money from the poor to the rich and leads to enormous economic inefficiency. And, in the case of prescription drugs, the higher prices will cost lives.


Note: Correction made, should have been "inefficient." 

Comments (7)Add Comment
written by JSeydl, April 30, 2014 11:19
It both transfers money from the poor to the rich and leads to enormous economic efficiency

written by ltr, April 30, 2014 11:47
"inefficiency" surely...

Really important comment.
written by medgeek, April 30, 2014 1:23
Yes, but did you know that President Garfield came up with an original proof of the Pythagorean theorem a few years before becoming president?
Knowledge Intensive Goods are Supposed to Lower - not Raise Unit Cost
written by Last Mover, April 30, 2014 4:32
Global trade in knowledge-intensive goods — airplanes, pharmaceuticals, advanced electronics — rose at a nearly 8 percent annual rate from 2002 to 2012, compared with 6 percent for both capital-intensive but lower-tech goods (like petroleum and agricultural products) and labor-intensive goods (like textiles and toys).

Since when are petroleum and textiles not knowledge intensive goods as well born of prior knowledge? What would trade flows look like if Baker's alternatives applied with much lower unit prices for the knowledge intensive component?

Every factor input has its marginal revenue product of value added in producing the product. But what it actually gets varies widely with how tight the factor market is.

Notice how Irwin frames the knowledge intensive sector as worthy of collecting its marginal revenue product in markets made artificially tight with intellectual property rights, in contrast with labor intensive markets designed to be slack that just produce "stuff" like textiles.

If innovation through knowledge intensive goods and services is considered so valuable to added value, why is the very mechanism that can infuse it into society the most - scale economies at low unit cost - routinely cut off by economic predators to redirect gains to themselves instead with obscene prices loaded with monopoly economic rent?
fed funding creates innovation
written by chris herbert, April 30, 2014 7:23
From what I read the primary driver of innovation in biotechnology and nanotechnology is taxpayer funded primary research. The drug companies aren't even making the laboratory breakthroughs!
Thks for correcting misinformation, beyond your good analyses & policy proposals
written by jaaaaayceeeee, April 30, 2014 9:01

Your tirelessness is appreciated. I could not navigate what passes for news in this country, without your reality-based checks. Don't know how you do it.
Some additional problems with the Knowledge-Intensive goods transfer
written by John Wright, April 30, 2014 10:04
In the electronics industry, the "next bench" syndrome is frequently mentioned.

When this is suggested, it implies a new idea arose because a designer was inspired by a problem he observed at the nearby "next bench".

With the USA sending manufacturing overseas, it is losing access to the "next bench" as profitable innovations in improved manufacturing processes will not be known to US designers.

And how will the USA enforce all the Patent/Copyright laws associated with the USA knowledge transfer?

Perhaps the next war will be over keeping the world safe for USA Intellectual Property laws.

Possibly the TPP is the first salvo in this war?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.