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."