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David Ricardo (1772…1823) was the English economist 
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who developed the free…trade theory of comparative advantage; which stipulates that 
if each nation specializes in the production of goods in which it has a comparative 
cost advantage and then trades with other nations for the goods in which they 
specialize; there will be an overall gain in trade; and overall income levels should 
rise in each trading country。 So if all these Indian techies were doing what was their 
comparative advantage and then turning around and using their income to buy all the 
products from America that are our comparative advantage…from Corning Glass to 
Microsoft Windows…both our countries would benefit; even if some individual Indians 
or Americans might have to shift jobs in the transition。 And one can see evidence 
of this mutual benefit in the sharp increase in exports and imports between the United 
States and India in recent years。 
But my eye kept looking at all these Indian zippies and telling me something else: 
〃Oh; my God; there are so many of them; and they all look so serious; so eager for 
work。 And they just keep coming; wave after wave。 How in the world can it possibly 
be good for my daughters and millions of other young Americans that these Indians 
can do the same jobs as they can for a fraction of the wages?〃 
When Ricardo was writing; goods were tradable; but for the most part knowledge work 
and services were not。 There was no undersea fiberoptic cable to make knowledge jobs 
tradable between America and India back then。 Just as I was getting worked up with 
worry; the Infosys spokeswoman accompanying me casually mentioned that last year 
Infosys India received 〃one million applications〃 from young Indians for nine 
thousand tech jobs。 
Have a nice day。 
I struggled over what to make of this scene。 I don't want to see any American lose 
his or her job to foreign competition or to technological innovation。 I sure wouldn't 
want to lose mine。 When you lose your job; the unemployment rate is not 5。2 percent; 
it's 100 percent。 Nobook about the flat world would be honest if it did not acknowledge 
such con… 
227 
cerns; or acknowledge that there is some debate among economists about whether Ricardo 
is still right。 
Having listened to the arguments on both sides; though; I come down where the great 
majority of economists come down…that Ricardo is still right and that more American 
individuals will be better off if we don't erect barriers to outsourcing; 
supply…chaining; and offshoring than if we do。 The simple message of this chapter 
is that even as the world gets flat; America as a whole will benefit more by sticking 
to the basic principles of free trade; as it always has; than by trying to erect walls。 
The main argument of the anti…outsourcing school is that in a flat world; not only 
are goods tradable; but many services have become trad…able as well。 Because of this 


change; America and other developed countries could be headed for an absolute decline; 
not just a relative one; in their economic power and living standards unless they 
move to formally protect certain jobs from foreign competition。 So many new players 
cannot enter the global economy…in service and knowledge fields now dominated by 
Americans; Europeans; and Japanese…without wages settling at a newer; lower 
equilibrium; this school argues。 
The main counterargument from free…trade/outsourcing advocates is that while there 
may be a transition phase in certain fields; during which wages are dampened; there 
is no reason to believe that this dip will be permanent or across the board; as long 
as the global pie keeps growing。 To suggest that it will be is to invoke the so…called 
lump of labor theory…the notion that there is a fixed lump of labor in the world 
and that once that lump is gobbled up; by either Americans or Indians or Japanese; 
there won't be any more jobs to go around。 If we have the biggest lump of labor now; 
and then Indians offer to do this same work for less; they will get a bigger piece 
of the lump; and we will have less; or so this argument goes。 
The main reason the lump of labor theory is wrong is that it is based on the assumption 
that everything that is going to be invented has been invented; and that therefore 
economic competition is a zero…sum game; a fight over a fixed lump。 This assumption 
misses the fact that although jobs are often lost in bulk…to outsourcing or 
offshoring…by big individ

ual companies; and this loss tends to make headlines; new jobs are also being created 
in fives; tens; and twenties by small companies that you can't see。 It often takes 
a leap of faith to believe that it is happening。 But it is happening。 If it were not; 
America's unemployment rate would be much higher today than 5 percent。 The reason 
it ishappening is that as lower…end service and manufacturing jobs move out of Europe; 
America; and Japan to India; China; and the former Soviet Empire; the global pie not 
only grows larger…because more people have more income to spend…it also grows more 
complex; as more new jobs; and new specialties; are created。 
Let me illustrate this with asimple example。 Imagine thatthere are only two countries 
in the world…America and China。 And imagine that the American economy has only 100 
people。 Of those 100 people; 80 are well…educated knowledge workers and 20 are 
less…educated low…skilled workers。 Now imagine that the world goes flat and America 
enters into a free…trade agreement with China; which has 1;000 people but is a less 
developed country。 So today China too has only 80 well…educated knowledge workers 
out of that 1;000; and it has 920 low…skilled workers。 Before America entered into 
its free…trade agreement with China; there were only 80 knowledge workers in its world。 
Now there are 160 in our two…country world。 The American knowledge workers feel like 
they have more competition; and they do。 But if you look at the prize they are going 
after; it is now a much expanded and more complex market。 It went from a market of 
100 people to a market of 1;100 people; with many more needs and wants。 So it should 
be win…win for both the American and Chinese knowledge workers。 
Sure; some of the knowledge workers in America may have to move horizontally into 
new knowledge jobs; because of the competition from China。 But with a market that 


big and complex; you can be sure that new knowledge jobs will open up at decent wages 
for anyone who keeps up his or her skills。 So do not worry about our knowledge workers 
or the Chinese knowledge workers。 They will both do fine with this bigger market。 
〃What do you mean; don't worry?〃 you ask。 〃How do we deal with the fact that those 
eighty knowledge workers from China will be willing 
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to work for so much less than the eighty knowledge workers from America? How will 
this difference get resolved?〃 
It won't happen overnight; so some American knowledge workers may be affected in the 
transition; but the effects will not be permanent。 Here; argues Stanford new economy 
specialist Paul Romer; is what you need to understand: The wages for the Chinese 
knowledge workers were so low because; although their skills were marketable globally 
like those of their American counterparts; they were trappedinside a stifled economy。 
Imagine how little a North Korean computer expert or brain surgeon is paid inside 
that huge prison of a nation! But as the Chinese economy opens up to the world and 
reforms; the wages of Chinese knowledge workers will rise up to American/world levels。 
Ours will not go down to the level of a stifled; walled…in economy。 You can already 
see this happening in Bangalore; where competition for Indian software writers is 
rapidly pushing up their wages toward American/European levels…after decades of 
languishing while the Indian economy was closed。 It is why Americans should be doing 
all they can to promote more and faster economic reform in India and China。 
Do worry; though; about the 20 low…skilled Americans; who now have to compete more 
directly with the 920 low…skilled Chinese。 One reason the 20 low…skilled Americans 

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