This is Part III of my special on How to Solve the Trade Deficit. If you missed the earlier parts, you can read Part I or Part II first.
How to Solve the Trade Deficit – Knowledge Workers vs. Manual Workers
In many ways, your question about the trade deficit has very little to do with global trade policies and everything to do with the rise of the “knowledge worker” class that Peter Drucker predicted in 1959.
What Is a Knowledge Worker?
A knowledge worker is someone who has a set of skills that cannot be easily replicated or automated. A heart surgeon, a nurse, a nuclear engineer, a chemist, and a lawyer are examples of knowledge workers. No matter who employs them, they are, for all intents and purposes, their own business.
Take someone who creates video games as an example of a knowledge worker. Based upon the skills he or she has, they probably think of themselves less as an "EA Games" person or a "Square Enix" person and more as a "video game" person. They are their own business. Their skills are portable. They can work for someone else, work for themselves by freelancing, or raise money and start their own company. If they can create an iPad or iPhone game and sell 100,000 copies for a $4 profit each after Apple's cut, they earn the $400,000. Knowledge workers own their own means of production, which is the information and skills they have acquired through years of work, training, schooling and / or experience.
Every Advance In Technology Helps Further Destroy the Manual Worker
Software and automation are making it possible for machines to increase productivity so significantly that menial jobs will cease to exist at some point. For example, there are chemists that have created materials for subways that are capable of literally eating germs so the walls would never need to be cleaned. That means a much more pleasant subway experience but far fewer janitorial jobs. Robotics technology exists that would make it entirely possible for shopping carts to push themselves in from the parking lot, doing away with low-level retail jobs. Huge data servers at major banks can now do the work that would have taken thousands of bank clerks a century ago.
Self-checkout systems are another example of how productivity rises due to technology are making manual workers unnecessary. A machine can work 24 hours a day, 7 days a week, 365 days a year, and will never ask for a raise or a coffee break. This means less jobs, but on a macro scale, it frees up human labor and brain power for more important industries such as health care and technology if - and this is a big if - we don't let governments and unions force us to keep these now-unnecessary positions for the sake of maintaining the status quo.
Regardless of whether or not global trade existed, these forces are constantly warring against the lowest skill jobs in the economy. In many ways, that is good because if that weren’t true, we would all still be living on farms we managed ourselves with many of us starving to death each winter. It was the tractor and farm machinery that allowed us to increase crop yields to the point that 99% of farmers went out of business (and into other industries).
Every technological advancement that improves human life also kills a job and frees up society’s mental assets to focus elsewhere. Take the lowly blender. Think about how much longer it took to prepare certain recipes before it was created. Between it, better stoves, microwaves, cooking tools and training, it takes fewer people in a restaurant to produce food than it did a century ago. Those people are now free to try and become doctors, scientists, geologists, engineers, or professors.
Normally, this is good. When it becomes bad is when you have the mindset of people who take their emotional value from their work. They are an auto worker or they are a steelworker. Then, instead of “going west” like our ancestors did to pioneer new fields and retrain themselves, they dig in and become hateful, spiteful and useless to society. Sometimes, these people devolve into a neo-Luddite nutcases.
In fact, Drucker wrote, “The manual workers in the developed countries today have little self-respect. This inevitably makes them bitter, suspicious, distrustful of themselves, as well as of organization and management, and resentful.” Drucker goes on to say that the reason manual workers are watching their standard of living collapse is because they have yet to realize the real class warfare is not between the poor and the rich, but between the manual workers and the knowledge workers. That is the real story that no one has figured out, yet.
Let me give you an example of what that means …
The Pillow Factory Worker vs. The Software Designer
Every $1 Wal-Mart saves a computer programmer on his pillows is $1 less for a domestic worker. But that $1 didn't disappear. The computer programmer now has more money to spend on food, clothing, electronics, video games, cologne, suits, cars, or investments. This is why you are seeing a widening gap between knowledge workers and manual workers. A teenager today can make $100,000 from blogs he runs from his bedroom but pay a lower price than ever for gasoline and toilet paper on an inflation-adjusted basis.
One day, Wal-Mart informs Great American Pillows, Inc. that it can buy pillows from The Guatemalan Pillow Factory, Ltd. for only $2 wholesale instead of the $5 they are currently paying. That $3 savings will go directly to the billions of people who shop at Wal-Mart stores each year, in keeping with the company’s business model that requires passing savings on to the end customer. Unfortunately, Great American Pillows just can’t match that cost level and so it closes its doors and goes bankrupt.
Now, someone in Guatemala has your job but he can actually feed his family. You and your spouse are unemployed and there is no way you can earn $100,000 with only a high school diploma. But the real “transfer of wealth” is that everyone else in your home country can now buy pillows for cheaper. Every dollar they save is another dollar sitting in their bank account to be spent on something else.
In other words, a 22-year-old software designer making $70,000 per year working from his house by creating solutions for businesses now gets to keep more of his paycheck. He benefits in a very real way, as do millions of other Americans as well as the folks in Latin America. It just sucks for you, the former pillow maker.
In other words, the $100,000 salary you and your spouse made didn’t disappear. It is now being split by all American consumers and the Guatemalan work force.
It may be hard to understand because people are genetically wired to notice concentration; you don’t realize you are saving $3 on a pillow, but you do see the line of unemployed pillow makers outside the government benefits office. This is why research firms such as Global Insight have shown that the mere existence of Wal-Mart results in the average American family saving $2,500 per year on groceries and other items yet none of us seem to appreciate it because it comes $3 here and $1.20 there, not in one big check. This is another example of the psychology of human misjudgment Charlie Munger tells us to avoid.
It Comes Down to Knowledge Workers vs. Manual Workers – Not Just Americans. vs. Foreigners
Think about the implications of the last paragraph.
Put simply: We could, theoretically, save the auto jobs, the steel jobs, and the pillow jobs, protecting them from free market forces. But if the average American family is saving $2,500 per year from Wal-Mart importing low inflation (which is what it is really doing), prices would have to rise again so that each American family would have, on average, $2,500 less per year.
Inevitably, the rise of the knowledge worker is going to result in a one-world economy because people think of themselves as a "doctor" or a "programmer" and emphasize with others like them more than they necessarily do with someone who happens to be an American. In other words, a well-heeled American executive is going to be more comfortable in a room with comparably situated Australian, German and Chinese executives than he would a room of fellow Americans who happend to be auto workers. Just like our ancestors united from individual tribes to villages, to counties, to states, to governments, we will, at some point, unite as a global economic unit. In many ways, it has already happened. We couldn't afford for South Korea to be destroyed in war, for example, because it is a strategic economic partner for our technology industries.
In effect, throwing up large trade tariffs would form a type of transfer tax that moved money from knowledge workers to manual workers. We would be taking money out of the pockets of the software designer, retirees and doctors and putting it into the paycheck of manual workers because we felt they were entitled to earn a certain wage from a certain type of labor.
As social policy, we may decide collectively that is fine (that is the nature of a Constitutional Republic with democratic underpinnings). But it also means it isn’t as simple as Guatemalan workers vs. American workers. It is also American manual workers versus American knowledge workers because if we save the steel worker jobs, the nurses and lawyers are going to pay more for pillows. There is no getting around that. It means they will have less money to spend on other goods and services.
Economically, the results are comparable to taxing someone who is employed to provide welfare entitlements for someone who refuses to work.
This basic economic force is going to inevitably lead to a one-world economy because the knowledge worker is going to be interested in what is best for his family. He probably isn’t going to care that someone in Guatemala is making more money at your expense. Why should he prefer you just because you are American? This will lead to a global class of knowledge workers and a global class of manual workers. People will identify more with where they fall in the economic system as a global citizen than their nationality.
The Rising Gap Between the Rich and the Poor
On the flip side of the coin, the transfer of money from manual workers to knowledge workers as a result of technology, automation and global trade working together in a powerful trinity is partly responsible for the rising gap between the rich and the poor (the other major cause has to do with the move to defined contribution retirement accounts instead of defined benefit retirement accounts but that would require a few thousand word essay and is far beyond the scope of this article).
As a society, this over-reliance upon the rich for economic growth can be disastrous because it results in far quicker swings between expansion and contraction compared to a system where money is more widely distributed. In fact, a strong middle class is, in many ways, the best system even for the rich because it provides them an insurance policy against a French Revolution style uprising (after all, most people don’t want palaces, they want to enjoy friends and family, good food, travel, and be entertained; there is nothing wrong with this).
Continue to How to Solve the Trade Deficit – Part IV …
Related posts:
- How to Solve the Trade Deficit – A Five-Part Essay on the American Trade Imbalance
- How to Solve the Trade Deficit – Part V
- How to Solve the Trade Deficit – Part IV
- How to Solve the Trade Deficit – Part II
- How to Solve the Trade Deficit – Part I
- A Reader Question About the Trade Deficit
- Free Trade Isn’t Always Fair Trade
- Occupy Wall Street Part II: What Is Money? Do Liberal Arts Suffer at the Hands of a Capitalist System?
- The Secret Most of the “Occupy Wall Street” Folks Haven’t Realized Is the Struggle Is Not Between the Rich and Poor
- My Thoughts on New Jersey Governor Chris Christie on Solving the New Jersey Budget Deficit
I'm a private investor who loves architecture, furniture, clothes, history, philosophy, books, cooking, and music as much as I do finance. 
