Comparative Advantage - Do you know what it is?

[RichardRay]

A long time ago a guy named David Ricardo developed an idea called Comparative Advantage. Is is the bedrock of my belief in free trade. It shows that free trade will ALWAYS provide more goods and services for everyone involved. I view Comparative Advantage as something like the law of gravity. If someone steps off a cliff, they are going to fall. If I don't like that I need to do something to prevent them stepping off, catch the fall or cushion the impact of landing; I can't repeal the law of gravity, no matter how much I might wish to.

The benefits of free trade require the infamous 'long run' perspective. Formally, the 'long run' is the decision framework required for capital (financial and human) to be reallocated. Letting the market run may get to a new equilibrium the most quickly and with the greatest eventual benefit, but it is likely to be very hard on some participants. There is a good argument for mitigating the transitional hardships at the cost of some of that efficiency.

Politically, all of this leads to my belief that protectionism is a serious form of imperialism in my opinion - we work to maintain our standard of living at the cost of benefit to others less wealthy than we are.

Anybody else give a hoot about this topic?

[Nederland]

1. Welcome to DU

I think you'll find DU less than friendly to free trade advocates, but I'm happy to have another minority join me :)

Comparative Advantage is a wonderful concept that is actually fairly easy to explain. The problem people have with it is the idea of things being better in the "long term" isn't always quick enough. There is some degree of truth to this objection, because as Keynes pointed out, in the long term, we're all dead.

[DemocratSinceBirth]

2. I Voted For Option Two....

Nations should produce what they produce best....

That being said we should have programs in place to assist and retrain workers who lose their jobs as a result of trade agreements...

America is the world's # 1 provider of food despite using < 5% of it's avbailable land for that purpose...


P.S. You mentioned the "long run".... Keynes said in the "long run we will all be dead."

[Gulf Coast J]

5. Same here

No need keep a couple million telephone operators in this country. But we should give them the tools to retrain and the temporary assistance to keep them from suffering too much.

[Warpy]

13. You're missing a bg part of the picture

Every nation on earth has benefited from free trade policies EXCEPT the USA, which has seen a loss of its manufacturing base, declining wages for working people, and a gradual loss of hope as wealth concentrates at the top and the rest of us (90%) continue to fall behind.

The culprit? I firmly believe it's the strong dollar policy, which has created a condition wherein imported goods are much cheaper than those produced domestically, something that runs counter to tradition and common sense.

That worker in Malaysia needs the same amount of calories, shelter, clothing and medical care that the worker in Dubuque does. However, the rate of exchange makes the Malaysian subsistence wage translate into very few dollars, not enough to provide a loaf of bread and jar of peanut butter a week in the US, minus shelter, clothing and medical care. Blaming the US worker for greed for wanting the same standard of living a Malaysian worker might have has been the usual call of corporations like Nike. The exalted position of the almighty dollar against the Malaysian currency is the real culprit.

Allowing the free trade ideal to play out while the dollar has remained strong has led to what we have today: no real manufacturing base, lots of low-paying service jobs, and a continuing rush of jobs offshore, extending now to the office jobs which have been the mainstay of suburbia.

[jody]

17. The unemployed can always join the US Foreign Legion and defend

oil facilities etc. arounf the world.

[RichardRay]

3. Refutation?

Someone voted that they don't agree with the idea and can refute it. I'd like to hear the argument they feel refutes it. I've heard that some of John Nash's work on equilibria modified Ricardo, but I've never seen it explained. Is that your basis?

[rucky]

4. Link to Info, please

I give a hoot, because protectionism seems to be just as short-sighted as this version of "free trade" that we have now.

[RichardRay]

12. Links to info on Comparative Advantage

Here's a good one to a clear explanation of Ricardo's basic concept of Comparative Advantage and some commentary to help getting across the rough parts:

http://internationalecon.com/v1.0/ch40/40c000.html

The full text of Ricardo's _On the Principles of Political Economy and Taxation_ is available at

http://www.systemics.com/docs/ricardo/principles.html#fn_10

[rogerashton]

6. The poll is loaded.

You need another option: "Comparative advantage, while important, is outweight by the influence of other forces, such as increasing returns to scale."

Increasing returns to scale means that the country (or company) that produces on the largest scale can produce more cheaply, driving out any competition. Actually, that can make the case from free trade even stronger, in cost-benefit terms -- but all of the benefits may go to one of the traders, so the idea that trade is mutually beneficial becomes much harder to sustain. Example: The production of rubber tires was heavily concentrated around Akron, Ohio -- but Akron has no natural comparative advantage in tire production. They don't grow rubber trees or drill for oil there. However, Akron got started first in tire production, built up a scale advantage, and other communities could not compete.

Increasing returns to scale make the issues much more complex. As I say, they strengthen the case that free trade has large positive net benefits, but at the same time they pose the threat that some communities, without scale advantages, cannot eve survive, let alone prosper.

As to Nash. I think the impression mentioned might come from the movie. In the words of the real John Nash (to my correspondent Yvan Kelly) "The movie is fiction and the game theory and economics in it are unreliable." But that's not quite clear. It was John von Neumann, not Nash, who challenged the "individualism" of conventional economics; Nash defended it. Nash's defense does seem to have been inspired by his study of comparative advantage at Carnegie.

However, Nash did also contribute work to bargaining theory, which might raise issues about the free-market distribution of gains from trade even in a case of pure comparative advantage.

The issue is not whether there are potential mutual gains from trade. There are, and everyone who knows the basics knows it. the issue is whether these gains can be realized, and equitably distributed, on the basis of unorganized individual initiative.

on edit --
By the way, on game theory, you COULD get my book,

Get
Dr. McCain's Game Theory Text from Amazon!
http://william-king.www.drexel.edu/top/prin/txt/trade/itrade1.html

I wish I could give an adequate reference on increasing returns to scale. Some VERY basic points are at

http://william-king.www.drexel.edu/top/prin/txt/Cost/cost14.html

Excerpts from Ricardo among others are at

http://william-king.www.drexel.edu/top/eco/excerpts/ecoframe.html

[RichardRay]

20. I bow in your general direction!!!!

Thanks for the input and the links! I'll review them directly. If I could modify the poll I would do so.

I had never been able to find any reference to Nash in reference to CA. It may have been something in reference to the movie...


(Maybe I can modify the poll. Can someone more experienced with the software here in DU tell me? Is it just like editing an other message?)

[sweetheart]

7. free trade

let capital, human and inorganic cross borders freely in open trade. Let each government apply public-goods-adjustment tarriffs for goods and market trades that impose public costs unfairly discounted in the markets and let there be a court/regulator with teeth to implement the objective-balance effectively and efficiently.

Riccardo's principal is brilliant, sadly the principal is perverted to mean US hegemony and empire... and then free trade means 2 things, US hegemony and US capitalism... and i don't advocate either of those as practiced. They have proven unregulated and destructive. So, though i am a free trade believer, not without "managed" trade across borders that fair trade objectives are achieved. Perhaps the WTO is the best way to achieve that, and i'm not so sure we should withdraw from the WTO, rather empower it to do its job well.

[goodhue]

8. Leontief paradox & other complications . . .

Blinded By Free Trade And Comparative Advantage Dogma
By Geepu Nah Tiepoh, The Perspective (Smyrna, Georgia),
Opinion, 26 July 2000

http://www.hartford-hwp.com/archives/34/058.html

<snip>

It is important for Greaves to realize that we do not need to be taught the virtues of comparative advantage and free trade, for it is common knowledge that nations must engage in some form of international exchange of goods, services, and capital investments. Therefore, what is being questioned is not the principle of international trade and investment as such, but the systemic inequalities underlying the global economic system as well as those ideological tools that are used to perpetuate them. Unfortunately, certain individuals have succumbed to these ideological stratagems and therefore find nothing wrong with the current system of international trade and investment. For them, the global economy is operating perfectly, as predicted by the neo-classical theories of comparative advantage and free trade. Such a conclusion is false, however. And while it is unworthy to be dragged into the ceaseless debates about the virtues of economic liberalism, there are few points that have to be made here to let our critic know that, contrary to his deep-seated convictions, the world trading system is not as smooth as predicted by the nineteenth-century theories of comparative advantage and free trade. It is important to make these points since his argument is that these theories are the true determinants of the pattern of international trade and therefore Liberia must conform to them. And afterwards, I will adapt the discussion to the specific issue of the appropriateness of rice self- sufficiency, since this is what Greaves is anxious to talk about.

To begin with, it is worth remembering that Adam Smith, David Ricardo and their neo-classical successors invented their theories of free trade long after the British had established their industrial predominance. As noted by Theresa Hayter (1985), in the early days of British industrialization, industrialists sought and obtained ample protection for their 'infant' industries against foreign competition.

The British not only protected their own industries from foreign competition but also destroyed those of other countries. Thus, the fact that Portugal focused on wine production had nothing to do with the natural workings of comparative advantage. Such was imposed by the British government through the Methuen Treaty of 1703 (Hayter, 1985). Our critic seems not to also understand that the current pattern of international trade, in which most African countries are producers and traders of primary commodities, has less to do with the natural workings of the market. Part of this international division of labor and pattern of trade was established through the imposition of slavery, colonialism, and neo-colonial economic relations. Is he not aware of the colonial destruction of Africa's textile industries (Rodney, 1974), or is he blind to the rubber plantation history of our own country? These are relevant points to remember because individuals, like Greaves, are insisting on converting us to the false belief that nations have 'natural' destinies to produce and trade in different goods, and thus, for example, a country like Britain was naturally destined to produce industrial products, while Liberia was destined to trade in non-industrial products. They want us to believe, for example, that it is the natural destiny of Thailand, Vietnam and Louisiana to produce rice, while it is the destiny of Liberia to produce rubber, cocoa or coffee or some other crop.

The theory of comparative advantage, romanticized so much by our critic, and which is supposed to be the theoretical foundation of international trade, has long been contradicted by real-life global economic situations. For instance, the Heckscher-Ohlin Model, which is the expanded version of the original Ricardian theory of comparative advantage, was found to be incapable of explaining United States' pattern of trade. In his famous Leontief paradox, the 1973 Nobel Prize winner Wassily Leontief provided strong evidence that although the US was the more capital-abundant country (with higher capital-labor ratios), long before Western Europe and Japan started catching up, it was not exporting capital-intensive goods and importing labor-intensive goods. Such a finding was in sharp contrast to the comparative advantage theory that a country should produce and export those goods that are intensive in the factors with which the country is relatively well endowed. This empirical evidence is mentioned here to underline the widely known fact that most of the theories of comparative advantage and free trade, being so much romanticized, are not as absolutely realistic as some believe. If these theories were the true determinants of global economic realities, then there would be greater international economic welfare and harmony among nations. But this is not the case, except in Mr. Greaves' wonderland.

The Ricardian theory of comparative costs, or relative advantage, asserts that free trade makes countries to specialize in those economic sectors where they have a relative advantage. This specialization, in turn, leads to expansion of international trade, resulting in increased global economic welfare. But, as Yoichi (1992) correctly argued, what the enforcement of this theory has caused, at least in the last 30 years, cannot be regarded as greater international economic welfare. According to this theory, for example, Japan was supposed to specialize in those industries in which it enjoyed a relative advantage. The pursuit of this specialization, however, resulted in a chronic trade surplus between her and the United States, which has been the source of persisting economic and international friction between the two countries. The US transformed agriculture into an export industry, resulting in a worldwide surplus of farm products, which precipitated a grain war with the European Community. Moreover, this ceaseless pursuance of comparative advantage has led to the excessive availability to international trade of primary commodities, contributing to a worldwide destruction of the natural environment.


<snip>

[RichardRay]

23. Thanks!!

Between the linked material and the references it contains there's more than a few minutes worth of reading and cogitation. I will pursue it, though....

Do you find that this material contradicts Ricardo categorically, or does it require modification at some basic level? Can the information provided be used to design and direct policies that would make the process more equitable?

[IronLionZion]

9. Free trade helps everyone on an absolute scale

but hurts the third world (labor intensive) on a comparative scale. While everyone gets wealthier, the First world (capital intensive) gets much, much wealthier so the gap actually widens.

I love Free trade and capitalism, but it must be regulated. Cheap goods are nice but American jobs should not go overseas to produce them. Currencies are also a big player in this because US companies can pay shit to foreign workers and they can still live the high life. An example is India. 1 dollar = 50 rupees, but 50 rupees will buy a hell of a lot more than 1 dollar will.

[redqueen]

10. Empower the WTO?

This is a ridiculously laughable thread.

Seemingly people need to have reality explained in terms they like, rather than just look around the world and observe reality as it is.

Read the information at these sites, then come back and tell me if you really think a few tweaks to the WTO or NAFTA will change anything.


http://www.globalternatives.nl/site/voorstudie/docs/doc955120111.doc

The Agreements and dispute settlements at the WTO make clear that free trade is given higher priority than the welfare of citizens, consumers or the environment. But liberalisation goes further, ensuring that every aspect of society is organised in a way which promotes the pursuit of corporate profit. Governments are no longer expected to govern in the interests of their citizens, their prime task is the pursuit of free market economic growth.

We are witnessing Corporatisation of the global economy where societies are rearranged to further the pursuit of profit. Governments should make rules for corporations. Instead, increasingly corporations are dictating the rules to governments. The challenge is to reverse this. Economic activity should serve the needs of the community.


http://www.thirdworldtraveler.com/Transnational_corps/TransnationalCorps.html

We are witnessing an unprecedented transfer of power from people and their governments to global institutions whose allegiance is to abstract free-market principle, and whose favored citizens are soulless corporate entities that have the power to shape and break nations." Joel Bleifuss, In These Times magazine


http://www.ethicalconsumer.org/magazine/features/wto.htm

As ethical consumers, many of us have been trying to protect people, animals and the environment by buying eco-labelled or cruelty-free or fairly traded products. But there is evidence that the most important player in the global trade arena, the World Trade Organisation (WTO), could be looking to obstruct the further development of ethical purchasing in its attempts to protect the interests of multinational corporations.

By the time you read this article, critical decisions will have been taken in Seattle that will determine the shape of the world economy well into the new Millennium. There's a chance that rich country trade ministers may have come to their senses and pulled the brake on the runaway WTO. Or, heavily influenced by the interests of big business, they may have stoked the engines of free trade, further fuelling multinational companies as they bulldoze over the interests of some of the world's poorest people and over our rights as consumers.

The real winners

"If anyone was in any doubt as to the true nature of the WTO, its actions in the years since it was created paint a depressingly clear picture. As feared, in every single case brought before it to date, the WTO has ruled in favour of corporate interest, striking down national and sub-national legislation protecting the environment and public health at every turn."
Simon Retallack, The Ecologist July/Aug 1997

[IronLionZion]

11. Free trade helps everyone on an absolute scale

but hurts the third world (labor intensive) on a comparative scale. While everyone gets wealthier, the First world (capital intensive) gets much, much wealthier so the gap actually widens.

I love Free trade and capitalism, but it must be regulated. Cheap goods are nice but American jobs should not go overseas to produce them. Currencies are also a big player in this because US companies can pay shit to foreign workers and they can still live the high life. An example is India. 1 dollar = 50 rupees, but 50 rupees will buy a hell of a lot more than 1 dollar will.

[jody]

14. Comparative advantage is being used by multinational coporations

to abuse workers of every country. That is particularly true when only one super power exists to protect the global assets of multinational corporations in pursuit of wealth for a few at the expense of misery for the working masses.

One half percent of Americans own some 42% of our financial wealth. With continued progress toward reducing taxes on estates, capital gains, dividends, and corporations, they could own nearly all our financial wealth by the end of this century.

In the "long run", if a government of the people, by the people, and for the people doesn't survive the short run, there won't be a long run.

[TreasonousBastard]

15. Like everything else in economics...

it works except when it doesn't.

Equilibirium never actually exists-- it's more chaos, or Brownian motion. Everything gravitates toward equilibrium, then falls off in random directions. Kind of like dealing with the maximum height of a sandpile.

Aside from natural resources, just what advantages do countries or regions have? Most of them involve capital and labor flows. China has cheap labor, and recently is receiving the capital it needs to exploit that labor. This, too, will change eventually, as it has changed in other areas.

That's the fundamental problem with modern applications of comparative advantage. Back in Ricardo's time, resources were largely the key. He knew about the Green Revolution, but may not have properly appreciated how widespread the Industrial Revolution would become. Most of the world's economies were still primarily agricultural.

You didn't find gold or sugar cane in England, so it was pretty obvious that things like that were imported. It was cheaper to make rum in the colonies, so that was imported. Even back then, though, there were deliberate distortions forced on the markets. Britain refused to export its manufacturing technology and played with colonial money to keep the colonies as primarily a supplier of raw materials and customers of its finished goods.

These distortions are just as easy to force on markets today as they were back then, and they just take different forms. Since capital and raw materials flow incredibly easily now, the only real advantage anyone has is labor. Keep wages low and you have an advantage. OK, you can't efficiently grow sugar cane in Siberia, but that's no longer the question. Even with agriculture, though, there are induced distortions, like Viet Nam's insistance on growing all that excess lousy coffee.

And, there are all those subsidies every nation is so fond of. Subsidies are much cleaner than tariffs when dealing with the competition.

There really isn't any way to stop this, and perhaps some time in a fantasized future labor will approach a worldwide equilibrium. For the time being, though, displaced labor is a serious problem worldwide. Taking some of that subsidy money and throwing it at labor in other ways might be a good idea, but that takes more international will than anyone's showing.

Capital can usually take care of itself.

[jody]

16. Amen "Capital can usually take care of itself." eom

[Cocoa]

18. the real debate lies elsewhere

As far as I can tell, serious opponents of free trade such as Bernie Sanders don't dispute the theory, they dispute the implementation and the effects.

NAFTA has been in effect for 10 years, what have the real-world effects been. Isn't that what the discussion should be about?

[wuushew]

19. Do you disagree with the Canadian half of NAFTA?

Mexico was only tacked on after US and Canada had negotiated an agreement between themselves. I hope you don't support the higher tarriffs Bush slapped on Canadian lumber and paper products. In my opinion tarriffs should only be used when the products are extremely labor intensive in relation to their value such as the production of automobiles or textiles. Surely there is an international market for Canadian raw material or Mexican oil.

[Cocoa]

21. not necessarily

what is the relationship b/w NAFTA and the lumber tariffs, did they violate NAFTA, did Candada sue, how was it decided?

[WhoCountsTheVotes]

22. RED HERRING

In econ textbooks, the comparative advantage examples are about climates that can grow some kind of food better than other places - that's great. The issue that matters right now is the fact that people will work for cheap in third-world countries.

China has a comparative advantage because they are allowed to beat their workers when they get out of line. Any corporation taking advantage of that deserves the be dechartered for collaborating with dictators.

China being allowed to beat their workers is not like the law of gravity, it's a human choice to do business with them.

[redqueen]

24. Well put!

:toast:

[wuushew]

26. Wasn't the Cancun round of WTO talks about agriculture?

Hardly a red herring

I don't see how Democrats are any better when Landrieu wins in LA by courting the power of big sugar.

[JanMichael]

25. I suppose this is a mildly worded support of the FTAA?

If so I disagree completely with the idea that "Free" Trade is a panacea ie. a "Rising Tide Lifts All" concept.

The WTO and World Bank armtwist Privatisation of all things Public and demand opening of borders to MSNBCCRAP.

ALL "Players" are not all represented in this hih stakes game and nobody is held Accountable for their pillaging of weaker countries and companies.