William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

Alan Reynolds is a Senior Fellow at the libertarian Cato Institute. Before that he was director of economic research at the Hudson Institute and vice president and chief economist at both Polyconomics and the First National Bank of Chicago. His career in political economy goes back to working with Alan Greenspan on President Ronald Reagan's transition team in 1981. He became known as one of the early "supply-siders," who believe tax cuts can solve virtually any problem, even if they produce large budget deficits.

With such an illustrious career, one would think he would know one of the basic concepts of economics, income elasticity. It is one of the building blocks of theory taught in every introductory course. Yet, in a column published February 1 in The Washington Times, Reynolds ignores this concept and makes a false analogy in support of his view that nothing needs to be done about the declining U.S. manufacturing sector.

Income elasticity is a measurement of how much a consumer's demand for a product changes when his income changes. Economics assumes that people's desires for goods and services are unlimited, but their ability to actually satisfy these desires is limited by their incomes. So choices have to be made. As incomes rises, people can acquire more items, but what will they choose? Necessities come first, including food, then consumers move on to more discretionary or luxury items.

This means that the demand for food has low income elasticity, while manufactured goods have high elasticity. In non-technical terms, this means our bellies get full long before we tire of new gadgets and products to fill our ever larger homes and garages. The demand for agricultural goods is limited by nature -- we can only eat so much, while other desires remain unlimited. Even the super-rich want more: multiple mansions, fleets of cars, private planes, massive entertainment centers, and walk-in closets filled to the rafters. But they don't eat ten meals a day.

Reynolds runs afoul of this basic economic theorem when he tries to draw an analogy between the decline in farm and factory employment. Here is what he writes:

In 1890, farming still accounted for nearly 43 percent of all U.S. jobs. But farm jobs had dropped to 17 percent of employment by 1940 and to 1.7 percent by 1960. Today, farm employment seems so insignificant that we only bother to report nonfarm employment. Yet the fact that millions of farm jobs have been lost to modern farm machinery and chemicals certainly does not prove U.S. farming is disappearing or uncompetitive.

Production workers in manufacturing likewise accounted for 26 percent of U.S. nonfarm employment in 1952, 18 percent in 1972, 11 percent in 1992, and 8 percent in 2002. Yet the fact that millions of manufacturing jobs have been lost to robots and computers certainly does not prove U.S. manufacturing is disappearing or uncompetitive.

The parallel construction of the above two paragraphs implies that the sectors of agriculture and manufacturing are subject to the same process in experiencing employment decline. But nothing could be further from the truth. The two sectors are so obviously different that one is struck by his intellectual deception.

In a limited market, increased productivity does mean that fewer people are needed to meet demand. That is why farm labor has declined over time. We have not, however, lost our ability to feed ourselves in this process. We have a trade surplus in agriculture and are mainly worried about what to do with the extra annual output that cannot find a market either at home or overseas. Billions are spent every year paying farmers not to plant crops.

This is not the case in manufacturing. The primary cause of factory job losses is not increased productivity, it is the flood of imports that have come into the United States and displaced domestic production. Last year, over $1 trillion worth of foreign manufactured goods came into the country to satisfy growing American demand. We have lost our ability to provide for our needs from our own industry, which is why we have a $500 billion trade deficit.

Between 1994 and 2002 -- the beginning of the new era of the "globalization of the American economy," which is essentially based on the movement of American production overseas, as well as the outsourcing of services, manufacturing imports increased by 72.9%. In those sectors which the government classifies as Ahigh technology," the increase was even more at 97.3%. American consumer demand is far from saturated, it is just being satisfied by foreign production.

In our growing consumer market, higher manufacturing productivity should be generating higher incomes -- as workers become more valuable, and more jobs -- as U.S. firms become more competitive. But that is not what we are seeing. The reason: the market for American-made goods is being limited, not by nature, but by the aggressive, anti-competitive trade policies of foreign rivals. Reynolds not only chooses to ignore this fact, but uses his false analogy to cover it up.

The field of political economy was founded in England in the 18th century to study how best to maximize the realm's economic power, which was the basis of the British Empire’s international preeminence. Reynolds, like so many others, has abandoned political economy to become a libertarian philosopher instead. In this airy system of beliefs and just plain myths -- which runs counter to all of recorded history, the needs of one's own nation-state are of dubious legitimacy compared to the efficient operation of international markets, the luster of transnational corporations, and the commercial ambitions of foreign states. To Reynolds, "free trade" is a matter of spiritual belief, whose dictates are to be followed regardless of their practical consequences to society.

As the old joke goes, "How many libertarians does it take to change a light bulb?" The answer is, "None, they just sit in the dark and wait for the invisible hand to do if for them." But as the "invisible hand" turns off the lights in one factory after another in America, the intellectually dishonest Reynolds has the temerity to deny that it is dark at all.

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