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Comparative Advantage

We teach “comparative advantage” as if it were a deterministic rule of the universe.

But it isn’t. Human creativity rules the universe, for better and for worse.

So, it’s time to recognize: Comparative advantage should be dropped as a central economic concept. We are all street porters, when you get right down to it.

My piece at the Freeman….

porter

UPDATE:  Very interesting comment from THE FREEMAN website… This is the sort of (relatively) gentle and entirely correct correction I have come to expect from Jacob Levy.  It’s never bad to have a mistake corrected, and I think Dr. Morales is correct here.

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Dear Prof. Munger,

The problem with comparative advantage is that mainstream economics has completely misunderstood what Ricardo actually meant to prove in the original numerical example in the Principles. The differences between Ricardo’s notion and the textbook version of comparative advantage can be appreciated here: https://scholar.google.at/cita…

Ricardo’s version is compatible with the division of labor (http://et.worldeconomicsassoci…. Moreover, his original propositions are as valid today as they were two hundred years ago.

Best,

Jorge Morales

  • IEIUNUS

    You write at the Freeman: “The country also exploits something called clustering in a way that the United States just can’t match.…”

    Why do you believe that to be the case?

  • Jerome Bigge

    There is always someone who is willing to “do it cheaper”. However the economic consequences of long term trade deficits eventually lead to national bankruptcy. A number of Latin American countries have gone through this situation and none have found the consequences pleasant. If you import more than you export, you are in truth like the person who continues to buy things on credit even if he is running up an unpaid balance in doing so.

    • M S

      Doesn’t that depend on the relative economic strength of the debtor and creditor? There’s that old saying: “If you owe the bank $10 million, the bank has you by the balls. If you owe the bank $100 billion, you have the bank by the balls.”

      • Jerome Bigge

        The US was the “creditor nation” to the Latin American “debtor nations”. The “threat” was “we won’t sell you anything if you don’t pay up…” Which was usually sufficient to force the debtor nations to do whatever they had to do to stop the US from cutting them off. Then the issue that no other “Western” nation would sell to them.

        • Les Kyle Nearhood

          The Latin American nations did not get into trouble because they imported too much, Gee wiz ! They got into trouble because they borrowed too much and their economies were hamstrung by either Marxist policies or Cronyist policies or both. It is impossible to have a trade deficit if you are not using either saved or borrowed money because you will have to obtain hard currency by your own exports.

          • Jerome Bigge

            The US government is also operating on “borrowed money”. We sell Treasury (notes, bonds, whatever) to China (currently second largest holder after Japan) to pay for our imports. We are also increasing dependent upon other countries for the electronics we use in our military. If we used “hard money” for our imports, we’d have to restrict what we import by a large percentage. Actually this is how “we used to do it”. How we grew our economy to become the wealthiest nation on Earth at one time. Unfortunately the Republican Party of today has forgotten what it once stood for. That is “small government” (very small by today’s standards) and minimum regulations upon small business. Today’s Republicans are “big government all the way”. They differ today from Democrats only in what they want government to do…
            For those interested, Pat Buchanan wrote “The Great Betrayal” some years back that goes into great detail regarding the eventual consequences of what we stopped doing back when the Republican Party was the “strong tariff” party back in the 19th Century and the earlier 20th Century prior to WW2. It was the Democrats who were the opposition in their support of “free trade”. The book is “interesting” and at least worth a visit to your public library.

          • Les Kyle Nearhood

            If you are telling me that the USA will face similar problems as the South and Central American nations because of similar spending, and cronyist policies then I agree. But free trade is not one of those problems. Managed trade may be.

    • j r

      If you import more than you export, you are in truth like the person who continues to buy things on credit even if he is running up an unpaid balance in doing so.

      Not necessarily. The current account is only one part of the balance of payments. The existence of current account deficits is less an important factor than how those deficits are financed. If the current account is financed with short-term borrowing and other flows likely to reverse in times of trouble, there is a problem. If it is financed with FDI and more robust financial flows, not so much.

      If your economy is strong enough that foreigners want to keep investing in it over the long term, then having a trade deficit is not that big of a concern.

  • j r

    I agree with you, but isn’t this all sort of old hat? New Trade Theory provides for a much expanded conception of comparative advantage that takes into account network affects and returns to scale. This is what Krugman got the Nobel for back when he was a practicing research economist.

  • jtlevy

    I quite like the Freeman piece, and the correction, and the thought about my own usual place in the division of labor. 😉

  • CJColucci

    The illustration of comparative advantage I learned was that Woodrow Wilson could type better and faster than the Presidential secretary — rather like your wife and her secretary.

  • Joseph R. Stromberg

    Ricardo basically ‘proved’ that if Englishmen control much of the wine production in Portugal as well as most of the handling and marketing, it may be advantageous to other Englishmen in England if they are allowed to bring that wine in without paying much of a tax.

    Portugal and England as separate entities hardly entered into it. But as Thomas Balogh always said, realistic cases are seldom found in international trade theory.

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