To Get Ricardo’s Comparative Advantage Entirely Wrong

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It is entirely true that David Ricardo illustrated comparative advantage using nations and national economies. England making cloth and Portugal making wine. But to think that the idea really refers to nations or national economies to to misunderstand, to get the idea entirely wrong in fact.

But varied protectionists still manage to do so:

If you want to stump a free trader economist, ask him or her what exactly a big, continental-sized economy like the USA’s ought to specialize in.

There are a number of answers to this, one obvious one being that what to specialise in is emergent from economic activity, not an input into the system.

But the far more important one is that there is no such thing as “a big, continental sized economy like the USA’s”. That is a reificiation and an incorrect one. The correct understanding is that there are a number of economic actors – some 360 million actually – who partake of varied economic activities within the continent sized borders of the United States. Many of them also, obviously enough, partaking in economic activity which crosses said borders.

The question what should the reification specialise in is a nonsense for the reification is not an economic actor. What we want to know is what should the economic actors specialise in?

This being logical for specialisation is an economic action and thus something that must be done by economic actors.

We can even explain this without reference to Ricardo or comparative advantage at all. Pure Adam Smith – increased wealth comes from the division and specialisation of labour and trade in the resultant greater production. OK. Now we’ve agreed that we should specialise and trade. That is, we people, we economic actors. Great – the relevance of the geographic location of those we specialise and trade with is what? Quite so, absent the usual calculations of transport costs their location is an irrelevance.

Or, to put it as simply as is possible, the economic argument in favour of trade is that “we all do the things we’re least bad at and swap the results”. Note that there’s nothing about geography or nations in that at all.

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Spike
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Spike

And the boots on the ground of this bad idea (picking a thing for the US economy to specialize in) is the delusion, from Trump’s tariffs to ex-Speaker Paul Ryan’s desire to essentially foist a VAT on us, that in this era of web pages we must revitalize the manufacturing sector. Farming is likewise a tiny fraction of its former size, but likewise produces more goods.

Leo Savantt
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Leo Savantt

Surely the USA, or more accurately it’s populous, does specialise. Or don’t PC’s, operating systems, online platforms and microprocessors count as specialisation in IT?

Esteban
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Esteban

perhaps the biggest flaw in their thinking(?) is that they assume that someone should or must provide direction to the economy or people. As opposed to allowing free people to make their own choices and living with the results, which it turns out, have been proven far superior to a planned economy

Gavin Longmuir
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Gavin Longmuir

“Free Trade” is rather similar to the Anthropogenic Global Warming scam — a smidgen of truth pushed by zealots far beyond its limits. Yes, prosperity depends on specialization, which in turn requires trade. Note the implication — everyone is busy all the time doing what he does best, and production is maximized. Now look at reality — the denizens of Scunthorpe sitting on the dole producing nothing, while the UK imports its steel from China or Germany. Is economic production really being maximized? Hmmm! There are obviously more aspects to this “Free Trade” thing than are captured in the economists’… Read more »

Jim
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Jim

“Or, to put it as simply as is possible, the economic argument in favour of trade is that “we all do the things we’re least bad at and swap the results”. Note that there’s nothing about geography or nations in that at all.” Apart from the fact that the reason some countries are ‘better’ at doing X or Y is entirely down the the imposition of legislative costs on one side that the other does not have. There is no ‘free trade’ when a factory in the US has to dispose of its waste in complicated and expensive ways, but… Read more »

jgh
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jgh

No, the conclusions still apply. The costly regulations are just another input costs that is summed as a negative into the “what I’m good at” part of the equation, just as positives are summed into that “what I’m good at”, such as education, literacy, a common language.

Gavin Longmuir
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Gavin Longmuir

Let’s stipulate that true (almost never seen) “Free Trade” would maximize total global economic production — which would be good. We still have to recognize that in the real world the distribution of the benefits of “Free Trade” within a country matter. When the bond trader in the City of London lives high on the hog with cheap imported goods while the resident of Scunthorpe sits unhappily on the dole, it is no surprise that many people come to see the supposed benefits of “Free Trade” as a lie.

Chester Draws
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Chester Draws

Yet the Scunthorpe resident on the dole still has a better lifestyle than the person producing the steel in China! (Don’t think just about wages, they also have better health care, roads, internet access etc.) That is because if we allow free trade we become much richer, in aggregate. We can then choose to redistribute the money so that the bond trader has to give some to those less fortunate. But in the end even the person on the dole does better. Social Democracy is the privilege of the wealthy countries, not the poor. The worst solution is to “fix”… Read more »

Gavin Longmuir
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Gavin Longmuir

Chester — talking about everyone earning a similar amount is a straw man. The real issue is that the world is a much more complicated place than economists’ over-simplified little equations would suggest. We have to consider the human aspects as well as the theoretical aspects. A society can be richer “in aggregate” and be a much worse, much less stable place. To some extent, unbalanced “Free Trade” is analogous to the Tragedy of the Commons. For each individual business, it makes sense to offshore the manufacturing to China and the coding to India; but the overall effect when many… Read more »

JdL
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JdL

Well stated.

jgh
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jgh

Something that has to go hand in hand with trading that which you have best advantage at is that somebody must be willing to pay you for it.

I’d love to be paid for what I’m good at and enjoy doing, unfortunately, nobody is prepared to pay me to do it. So I cascade down through moderately good, average, passable, until I get to people prepared to pay me to do what I’m barely competent at and I continuously worry that somebody will find me out.