Okay, as I understand it, according to neoclassical economic theory, when something affects the economy by reducing the demand for labor without reducing production (e.g. a technical innovation that makes production cheaper, or a sudden influx of imported goods which are cheaper than their domestic counterparts), wage earners within the affected industries will naturally begin to suffer higher rates of unemployment than they previously did.
However, according to neoclassical economics, the market will ultimately correct itself, because the abundance of cheap labor will lead people to invest capital into new forms of production which will have become profitable because of the new availability of that cheap labor. Seeing as how the greater productivity introduced by innovation or whatever has increased the market’s total amount of capital rather than reduce or leave it static, the new industries that are created based upon the advantage of cheap labor will have a great-enough market to ultimately expand to a point where the demand for labor will return to where it was before the innovation was made.
Now, the rest of my post is going to proceed on the assumption that my above statement is a correct statement of economic theory.
In regard to the current practice of “globalizing” third world countries, wouldn’t dropping trade barriers, while simultaneously introducing foreign-owned industrial jobs and preventing the crossing of borders prevent that country’s market from correcting itself?
As I understand it, those factors would create a situation like this:
First, trade barriers are dropped, leading to a flood of American agricultural products which can be sold more cheaply than domestic agricultural products, causing the farmers of this country (which had previously be agrarian based) to suffer massive unemployment. They then look for new jobs.
Second, at roughly the same time trade barriers were dropped, industry began moving manufacturing jobs into this country, precisely because the labor is so cheap. Since these new jobs are provided by a foreign-owned company, which already owns the goods that are produced, and the cost of labor is so low, the majority of the production value gets siphoned into the country from which the industry is owned.
(an alternate scenario is that the unemployed labor force will switch their farming capacity to a product in which they have comparative advantage like coffee or bananas; however, historically, it seems that foreign countries like United Fruit managed to buy-up the farmers land in the interim time of economic crisis, causing production siphoning that’s more or less the same as what’s occurring with manufacturing jobs).
Therefore, with the influx of both goods and foreign-owned capital, it seems like the only way this hypothetical country’s economy could adjust would be for its labor force to look for jobs in other countries. However, their ability to do so is highly restricted by a separate set of immigration laws. As long as they are prevented from doing so, their country and it’s populace will be locked in a system of providing cheap labor to the richer foreign country.
This is how I understand the current state of the so-called global free market (which does not appear to be a free market at all) to be working. Please correct me if I am wrong.