The Law of One Price

Why the law of one price astonishes people is astonishing to me.

BusinessWeek Online of Dec 3rd has a story about US programmers at overseas salaries. The story reports that someone came up with a novel solution to the problem of the off-shoring of US programming jobs. The “novel” solution is for employers in the US to bring the salaries of US programmers more in line with the costs of hiring an off-shore programmer. Now, I would have thought that anyone who has had even a nodding acquaintance with Econ 101 would have figured that as the most natural outcome of market integration. But I am mistaken. It appears that some people do get astonished when they see markets work.

US programmers cost approximately $80K per year. Contract programmers from India cost about $40K per year (although the programmer gets a lot less because the jobs are intermediated through firms that have to have piece of the action.) The market for programmers worldwide is not maximally inefficient — that is, it is not a fragmented market. So naturally, the law of one price is going to hold. In other words, Competition rulz.

Here is an excerpt from the tail end of that piece:

What if other companies begin taking the same approach — offering Indian-style wages to American workers? On the positive site, we could begin to solve our job-creation problems. But on the negative side, America’s standard of living would inevitably decline. There’s only one way to find out for sure how it all might shake out, and that is for other executives to replicate Jon’s experiment. The results could be quite interesting.

The implicit assumption in the question above is that GOD has decreed that the American standard of living is sacrosanct. The Americans must continue to consume a disproportionate share of the world’s resources and thus maintain their standard of living. Other people — Indians, for instance — should be content with a meagre share of the global resources. All the breast beating about the grave threat to the American standard of living is grotesque when one sees the pitiable living standards of a couple of billion humans who don’t happen to be Americans.

Author: Atanu Dey