IN AUGUST 1960 Wolfgang Stolper, an American economist
working for Nigeria’s development ministry, embarked on a tour of the country’s
poor northern region, a land of “dirt and dignity”, long ruled by conservative
emirs and “second-rate British civil servants who didn’t like business”.
In this bleak commercial landscape one strange flower
bloomed: Kaduna Textile Mills, built by a Lancashire firm a few years before,
employed 1,400 people paid as little as £4.80 ($6.36) a day in today’s prices.
And yet it required a 90% tariff to compete.
Skilled labour was scarce: the mill had found only six
northerners worth training as foremen (three failed, two were “so-so”, one was
“superb”). Some employees walked ten miles to work, others carried the hopes of
mendicant relatives on their backs. Many quit, adding to the cost of finding
and training replacements. Those who stayed were often too tired, inexperienced
or ill-educated to maintain the machines properly. “African labour is the worst
paid and most expensive in the world,” Stolper complained.
He
concluded that Nigeria was not yet ready for large-scale industry. “Any industry which required high duties
impoverished the country and wasn’t worth having,” he believed. This was not a
popular view among his fellow planners. But Stolper’s
ideas carried unusual weight. He was a successful schmoozer, able to drink like
a fish. He liked “getting his hands dirty” in empirical work. And his trump
card, which won him the respect of friends and the ear of superiors, was the
“Stolper-Samuelson theorem” that bore his name.
The theorem was set out
20 years earlier in a seminal paper, co-authored by Paul Samuelson, one of the
most celebrated thinkers in the discipline. It shed new light on an old
subject: the relationship between tariffs and wages. Its fame and influence
were pervasive and persistent, preceding Stolper to Nigeria and outlasting his
death, in 2002, at the age of 89. Even today, the theorem is shaping debates on
trade agreements like the Trans-Pacific Partnership (TPP) between America and
11 other Pacific-rim countries.
The paper was
“remarkable”, according to Alan Deardorff of the University of Michigan, partly
because it proved something seemingly obvious to non-economists: free trade
with low-wage nations could hurt workers in a high-wage country. This
commonsensical complaint had traditionally cut little ice with economists. They
pointed out that poorly paid labour is not necessarily cheap, because low wages
often reflect poor productivity—as Kaduna Textile Mills showed. The
Stolper-Samuelson theorem, however, found “an iota of possible truth” (as
Samuelson put it later) in the hoary argument that workers in rich countries
needed protection from “pauper labour” paid a pittance elsewhere.
To understand why the
theorem made a splash, it helps to understand the pool of received wisdom it
disturbed. Economists had always known that tariffs helped the industries
sheltered by them. But they were equally adamant that free trade benefited
countries as a whole. David Ricardo showed in 1817 that a country could benefit
from trade even if it did everything better than its neighbours. A country that
is better at everything will still be “most better”, so to speak, at something.
It should concentrate on that, Ricardo showed, importing what its neighbours do
“least worse”.
If bad grammar is not
enough to make the point, an old analogy might. Suppose that the best lawyer in
town is also the best typist. He takes only ten minutes to type a document that
his secretary finishes in 20. In that sense, typing costs him less. But in the
time he spent typing he could have been lawyering. And he could have done
vastly more legal work than his secretary could do, even in twice the time. In
that sense typing costs him far more. It thus pays the fast-typing lawyer to
specialise in legal work and “import” typing.
In Ricardo’s model, the
same industry can require more labour in one country than in another. Such
differences in labour requirements are one motivation for trade. Another is
differences in labour supplies. In some nations, such as America, labour is
scarce relative to the amount of land, capital or education the country has
accumulated. In others the reverse is true. Countries differ in their mix of
labour, land, capital, skill and other “factors of production”. In the 1920s
and 1930s Eli Heckscher and his student, Bertil Ohlin, pioneered a model of
trade driven by these differences.
In their model, trade
allowed countries like America to economise on labour, by concentrating on
capital-intensive activities that made little use of it. Industries that
required large amounts of elbow grease could be left to foreigners. In this
way, trade alleviated labour scarcity.
That was good for the
country, but was it good for workers? Scarcity is a source of value. If trade
eased workers’ rarity value, it would also erode their bargaining power. It was
quite possible that free trade might reduce workers’ share of the national
income. But since trade would also enlarge that income, it should still leave
workers better off, most economists felt. Moreover, even if foreign competition
depressed “nominal” wages, it would also reduce the price of importable goods.
Depending on their consumption patterns, workers’ purchasing power might then
increase, even if their wages fell.
Working hypothesis
There were other grounds
for optimism. Labour, unlike oil, arable land, blast furnaces and many other
productive resources, is required in every industry. Thus no matter how a
country’s industrial mix evolves, labour will always be in demand. Over time, labour
is also versatile and adaptable. If trade allows one industry to expand and
obliges another to contract, new workers will simply migrate towards the sunlit
industrial uplands and turn their backs on the sunset sectors. “In the long run
the working class as a whole has nothing to fear from international trade,”
concluded Gottfried Haberler, an Austrian economist, in 1936.
Stolper was not so sure.
He felt that Ohlin’s model disagreed with Haberler even if Ohlin himself was
less clear-cut. Stolper shared his doubts with Samuelson, his young Harvard
colleague. “Work it out, Wolfie,” Samuelson urged.
The pair worked it out
first with a simple example: a small economy blessed with abundant capital (or
land), but scarce labour, making watches and wheat. Subsequent economists have
clarified the intuition underlying their model. In one telling, watchmaking
(which is labour-intensive) benefits from a 10% tariff. When the tariff is
repealed, watch prices fall by a similar amount. The industry, which can no
longer break even, begins to lay off workers and vacate land. When the dust
settles, what happens to wages and land rents? A layman might assume that both
fall by 10%, returning the watchmakers to profit. A clever layman might guess
instead that rents will fall by less than wages, because the shrinkage of
watchmaking releases more labour than land.
Both would be wrong,
because both ignore what is going on in the rest of the economy. In particular,
wheat prices have not fallen. Thus if wages and rents both decrease, wheat
growers will become unusually profitable and expand. Since they require more
land than labour, their expansion puts more upward pressure on rents than on
wages. At the same time, the watch industry’s contraction puts more downward
pressure on wages than on rents. In the push and pull between the two
industries, wages fall disproportionately—by more than 10%—while rents,
paradoxically, rise a little.
This combination of
slightly pricier land and much cheaper labour restores the modus vivendi
between the two industries, halting the watchmakers’ contraction and the
wheat-farmers’ expansion. Because the farmers need more land than labour,
slightly higher rents deter them as forcefully as much lower wages attract
them. The combination also restores the profits of the watchmakers, because the
much cheaper labour helps them more than the slightly pricier land hurts them.
The upshot is that wages
have fallen by more than watch prices, and rents have actually risen. It
follows that workers are unambiguously worse off. Their versatility will not
save them. Nor does it matter what mix of watches and wheat they buy.
Stolper, Samuelson and
their successors subsequently extended the theorem to more complicated cases,
albeit with some loss of crispness. One popular variation is to split labour
into two—skilled and unskilled. That kind of distinction helps shed light on
what Stolper later witnessed in Nigeria, where educated workers were
vanishingly rare. With a 90% tariff, Kaduna Textile Mills could afford to train
local foremen and hire technicians. Without it, Nigeria would probably have
imported textiles from Lancashire instead. Free trade would thus have hurt the
“scarce” factor.
In rich countries,
skilled workers are abundant by international standards and unskilled workers
are scarce. As globalisation has advanced, college-educated workers have
enjoyed faster wage gains than their less educated countrymen, many of whom
have suffered stagnant real earnings. On the face of it, this wage pattern is
consistent with the Stolper-Samuelson theorem. Globalisation has hurt the
scarce “factor” (unskilled labour) and helped the abundant one.
But look closer and
puzzles remain. The theorem is unable to explain why skilled workers have
prospered even in developing countries, where they are not abundant. Its
assumption that every country makes everything—both watches and wheat—may also
overstate trade’s dangers. In reality, countries will import some things they
no longer produce and others they never made. Imports cannot hurt a local
industry that never existed (nor keep hurting an industry that is already
dead).
Some of the theorem’s other premises are also questionable.
Its assumption that workers will move from one industry to another can blind it
to the true source of their hardship. Chinese imports have not squeezed
American manufacturing workers into less labour-intensive industries; they have
squeezed them out of the labour force altogether, according to David Autor of
the Massachusetts Institute of Technology and his co-authors. The “China
shock”, they point out, was concentrated in a few hard-hit manufacturing
localities from which workers struggled to escape. Thanks to globalisation,
goods now move easily across borders. But workers move uneasily even within
them.
Grain men
Acclaim for the Stolper-Samuelson theorem was not instant or
universal. The original paper was rejected by the American
Economic Review, whose editors described it as “a very narrow
study in formal theory”. Even Samuelson’s own textbook handled the proposition
gingerly. After acknowledging that free trade could leave American workers
worse off, he added a health warning: “Although admitting this as a slight
theoretical possibility, most economists are still inclined to think that its
grain of truth is outweighed by other, more realistic considerations,” he
wrote.
What did Stolper think? A veteran of economic practice as
well as principles, he was not a slave to formalism or blind to “realistic
considerations”. Indeed, in Nigeria, Stolper discovered that he could “suspend
theory” more easily than some of his politically minded colleagues (perhaps
because theory was revealed to them, but written by him).
He was nonetheless sure that his paper was worth the fuss.
He said he would give his left eye to produce another one like it. By the
paper’s 50th anniversary, he had indeed lost the use of that eye, he pointed
out wistfully. The other side of the bargain was, however, left unfulfilled: he
never did write another paper as good. Not many people have.
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