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knowledge workers does not necessarily lead to a decrease in their pay the way it

does with low-skilled workers. From the 1960s to the 1980s, the supply of

college-educated workers grew dramatically, and yet their wages grew even faster.

Because as the pie grew in size and complexity, so too did people's wants, and this

increased the demand for people able to do complex work and specialized tasks.

Romer explains this in part by the fact that "there is a difference between idea-based

goods and physical goods." If you are a knowledge worker making and selling some kind

of idea-based product-consulting or financial services or music or software or

marketing or design or new drugs-the bigger the market is, the more people there are

out there to whom you can sell your product. And the bigger the market, the more new

specialties and niches it will create. If you come up with the next Windows or Viagra,

you can potentially sell one to everyone in the world. So idea-based workers do well

in globalization, and fortunately America as a whole has more idea-driven workers

than any country in the world.

But if you are selling manual labor-or a piece of lumber or a slab of steel-the value

of what you have to sell does not necessarily increase when the market expands, and

it may decrease, argues Romer. There are only so many factories that will buy your

manual labor, and there are many more people selling it. What the manual laborer has

to sell can be bought by only one factory or one consumer at a time, explains Romer,

while what the software writer or drug inventor has to sell -idea-based products-can

be sold to everyone in the global market at once.

That is why America, as a whole, will do fine in a flat world with free trade-provided

it continues to churn out knowledge workers who are able to produce idea-based goods

that can be sold globally and who are able to fill the knowledge jobs that will be

created as we not only expand the global economy but connect all the knowledge pools

in the world. There may be a limit to the number of good factory jobs in the world,

but there is no limit to the number of idea-generated jobs in the world.

If we go from a world in which there were fifteen drug companies and fifteen software

companies in America (thirty in all) and two drug companies and two software companies

in China (four in all) to a world

in which there are thirty drug and software companies in America and thirty drug and

software companies in China, it is going to mean more innovation, more cures, more

new products, more niches to specialize in, and many more people with higher incomes

to buy those products.

"The pie keeps growing because things that look like wants today are needs tomorrow,"

argued Marc Andreessen, the Netscape cofounder, who helped to ignite a whole new

industry, e-commerce, that now employs millions of specialists around the world,

specialists whose jobs weren't even imagined when Bill Clinton became president. I

like going to coffee shops occasionally, but now that Starbucks is here, I need my

coffee, and that new need has spawned a whole new industry. I always wanted to be

able to search for things, but once Google was created, I must have my search engine.

So a whole new industry has been built up around search, and Google is hiring math

Ph.D.'s by the bushel-before Yahoo! or Microsoft hires them. People are always

assuming that everything that is going to be invented must have been invented already.

But it hasn't

"If you believe human wants and needs are infinite," said Andreeseen, "then there

are infinite industries to be created, infinitebusinesses to be started, andinfinite

jobs to be done, and the only limiting factor is human imagination. The world is

flattening and rising at the same time. And I think the evidence is overwhelmingly

clear: If you look over the sweep of history, every time we had more trade, more

communications, we had a big upswing in economic activity and standard of living."

America integrated a broken Europe and Japan into the global economy after World War

II, with both Europe and Japan every year upgrading their manufacturing, knowledge,

and service skills, often importing and sometimes stealing ideas and equipment from

the United States, just as America did from Britain in the late 1770s. Yet in the

sixty years since World War II, our standard of living has increased every decade,

and our unemployment rate-even with all the outcry about outsourcing-stands at only

a little above 5 percent, roughly half that of the most developed countries in Western

Europe.

"We just started a company that created 180 new jobs in the middle of a recession,"

said Andreessen, whose company, Opsware, uses au232

tomation and software to replace human beings in the operation of huge server farms

in remotelocations. Byautomating these jobs, Opsware enables companies to save money

and free up talented brainpower from relatively mundane tasks to start new businesses

in other areas. You should be afraid of free markets, argued Andreessen, only if you

believe that you will never need new medicines, new work flow software, new industries,

new forms of entertainment, new coffeehouses.

"Yes," he concluded, "it takes a leap of faith, based on economics, to say there will

be new things to do." But there always have been new jobs to do, and there is no

fundamental reason to believe the future will be different. Some 150 years ago, 90

percent of Americans worked in agriculture and related fields. Today, it's only 3

or 4 percent. What if the government had decided to protect and subsidize all those

agricultural jobs and not embrace industrialization and then computerization? Would

America as a whole really be better off today? Hardly.

As noted, it is true that as Indians or Chinese move up the value chain and start

producing more knowledge-intensive goods-the sorts of things Americans have been

specializing in-our comparative advantage in some of these areas will diminish,

explains Jagdish Bhagwati, the Columbia University expert on free trade. There will

be a downward pressure on wages in certain fields, and some of the jobs in those fields

may permanently migrate abroad. That is why some knowledge workers will have to move

horizontally. But the growing pie will surely create new specialties for them to fill

that are impossible to predict right now.

For instance, there was a time when America's semiconductor industry dominated the

world, but then companies from other countries came along and gobbled up the low end

of the market. Some even moved into the higher end. American companies were then forced

to find newer, deeper specialties in the expanded market. If that weren't happening,

Intel would be out of business today. Instead, it is thriving. Paul Otellini, Intel's

president, told The Economist (May 8, 2003) that as chips become good enough for

certain applications, new applications pop up that demand more powerful and more

complex chips, which are Intel's specialty.

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Once Google starts offering video searches, for instance, there will be demand for

new machines and the chips that power them, of which no one was even dreaming five

years ago. This process takes time to unfold. But it will, argued Bhagwati, because

what is happening in services today is the same thing that happened in manufacturing

as trade barriers were lowered. In manufacturing, said Bhagwati, as the global market

expanded and more and more players came onto the field, you saw greater and greater

"intraindustry trade, with more and more specialization," and as we move into the

knowledge economy, you are now seeing more and more intraservice trade, with more

and more specialization.

Don't be surprised if your son or daughter graduates from college and calls you one

day and says he or she is going to be a "search engine optimizer."

A what?

A slew of firms has started up around Google, Yahoo!, and Microsoft to help retailers

strategize on how to improve their rankings, and increase the number of click-throughs

to their Web sites, on these major search engines. It can mean millions of dollars

in extra profits if, when someone searches for "video camera," your company's product

comes up first, because the people who click through to your Web site are those most

likely to buy from you. What these search engine optimizers (SEOs as they are called

in the trade) do is constantly study the algorithms being used by the major search

engines andthen design marketing and Web strategies that will push you up the rankings.

The business involves a combination of math and marketing-a whole new specialty

created entirely by the flattening of the world.

And always remember: The Indians and Chinese are not racing us to the bottom. They

are racing us to the top-and that is agoodthing! They wanthigher standards ofliving,

not sweatshops; they want brand names, not junk; they want to trade their motor

scooters for cars and their pens and pencils for computers. And the more they do that,

the higher they climb, the more room is created at the top-because the more they have,

the more they spend, the more diverse product markets become, and the more niches

for specialization are created as well.

Look at what is happening already: As American companies send knowledge work to India,

Indian companies are turning around and using their earnings and insights to start

inventing new products that poorer Indians can use to lift themselves out of poverty

into the middle class, where they will surely become consumers of American products.

BusinessWeek cited the Tata Motors factory, near Pune, south of Mumbai, "where a group

of young designers, technicians, and marketers pore over drawings and examine samples

of steel and composite plastics. By early next year, they plan to design a prototype

for Tata Group's most ambitious project yet: a compact car that will sell for $2,200.

The company hopes the car will beat out Suzuki's $5,000 Maruti compact to become

India's cheapest car-and an export model for the rest of the developing world. 'This

is the need of the day in India-a people's car,' says Ratan Tata, chairman of the

$12.5 billion Tata Group. Indians are increasingly demanding better products and

services at an affordable cost. Strong economic growth this year will only enlarge

that demand. The phrase 'Made in India' may come to represent low-cost innovation

in the new global economy" (October 11, 2004).

Raghuram Rajan, the director of research for the International Monetary Fund, sits

on the board of a company that puts Indian students to work tutoring students in

Singapore. The students, from the Indian Institute of Technology in Madras, go online

to help students in Singapore, from grades six to twelve, on their math homework.

They also help teachers in Singapore develop lesson plans and prepare PowerPoint

presentations or other jazzy ways for them to teach math. The company, called

Heymath.com, is paid for by the schools in Singapore. Cambridge University in England

is also part of this equation, providing the overall quality controls and certifying

the lesson plans and teaching methods.

"Everyone wins," saysRajan. "The company is run by two Indians who worked for Citibank

and CSFB in London and came back to India to start this business. . . Cambridge

University is making money from a company that has created a whole new niche. The

Indian students are making pocket money. And the Singapore students are learning

better." Meanwhile, the underlying software is probably being provided by Microsoft

and the chips by Intel, and the enriched Indian students are

probably buying cheap personal computers from Apple, Dell, or HP. But you can't really

see any of this. "The pie grew, but no one saw it," said Rajan.

An essay in the McKinsey Quarterly, "Beyond Cheap Labor: Lessons for Developing

Economies" (January 2005), offers a nice example of this: "In northern Italy's textile

and apparel industry . . . the majority of garment production has moved to lower-cost

locations, but employment remains stable because companies have put more resources

into tasks such as designing clothes and coordinating global production networks."

It is so easy to demonize free markets-and the freedom to outsource and

offshore-because it is so much easier to see people being laid off than being hired.

But occasionally a newspaper tries to dig deep into the issue. My hometown paper,

the Minneapolis Star Tribune, did just that. It looked at exactly how the Minnesota

economy was being affected by the flattening of the world, actually daring to run

an article on September 5, 2004, headlined, "Offshore Jobs Bring Gains at Home." The

article, date-lined Wuxi, China, began like this: "Outside the air is dank, dusty

and hot as tropical fever. Inside, in an environment that's dry, spotless and cool,

hundreds of former farm laborers covered head to toe in suits looking like something

out of NASA are performing work for Bloomington-based Donaldson Co. Inc.... In

Donaldson's case, the company has twice as many workers in China-2,500-as the 1,100

it has in Bloomington. The Chinese operation not only has allowed Donaldson to keep

making a product it no longer could make at a profit in the United States, it also

has helped boost the company's Minnesota employment, up by 400 people since 1990.

Donaldson's highly paid engineers, chemists and designers in Minnesota spend their

days designing updated filters that the Chinese plant will make for use in computers,

MP3 players and digital video recorders. The falling disk-drive prices made possible

by Chinese production are feeding demand for the gadgets. 'If we didn't follow [the

trend], we'd be out of business,' said David Timm, general manager of Donaldson's

disk-drive and microelectronics unit. In Minnesota, Global Insight estimates that