Thursday, January 12, 2017

Smashing Comparative Advantage Deniers

A Don Boudreaux letter to First Things:
Robert P. Cummins rightly calls for tax and regulatory relief (“My Orange Juice Came from Brazil,” Jan. 5).  But his essay is severely marred by his lengthy discussion of comparative advantage.  According to Mr. Cummins, comparative advantage is now “obsolete,” it having been “erased” by globalization and technological innovation.  Mr. Cummins’s is deeply mistaken.
If comparative advantage didn’t exist – exist either naturally or (as Adam Smith would have it) as the result of specialization itself – there would be no trade, including none of the trade that Mr. Cummins today finds to be both prevalent and worrisome.  Without comparative advantage, no one would benefit from buying any goods or services from others, or from producing any goods or services for sale to others.  Each individual would be self-sufficient.  Society as we know it would not exist.
The reason is that the absence of comparative advantage means that each individual confronts the same cost of producing each and every good or services as is confronted by every other individual.  In the (barely imaginable) world of no comparative advantage, I could grow the corn that I eat just as efficiently as could anyone else.  Ditto for weaving the cloth that I wear, building the automobiles that I drive, transporting myself to Paris, and performing surgery on myself.  And what would be true for me would be true for every other person.  Only in such a bizarre world would there be no comparative advantage and, hence, no trade.
Put differently, the only economic reason for trade is that each of us produces some goods or services at costs lower than the costs that our trading partners would incur to produce those same goods or services.  That is, each of us has a comparative advantage in supplying the goods or services that we sell to others, and a comparative disadvantage in supplying each of the many goods and services that we buy from others.  Therefore, because we humans continue to specialize and trade – and especially because global trade today is so vast and growing (as Mr. Cummins’s himself admits) – comparative advantage has not been “erased” or made “obsolete.”  Quite the contrary.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030
The above originally appeared at Cafe Hayek


  1. This smashes nothing. He bandies the term around as if it were axiomatically good.

    The term "comparative advantage" has actual meaning, and the assertions it makes can be analyzed. This is not an analysis. It is rather a love paean.

    1. A love paean would be very appropriate for a principle that has fed and clothed millions and helped ease humanity out of the dark ages.

  2. I agree with the thrust of this column but must quibble with one assertion.

    "The reason is that the absence of comparative advantage means that each individual confronts the same cost of producing each and every good or services as is confronted by every other individual. "

    Not true! If Alice is twice as fast as Bob at everything, comparative advantage does not exist. Comparative advantage exists when and only when there is a DIFFERENCE in the ratio of costs between two items and two producers.

    1. Comparative advantage still works in your scenario.

      Time is limited and there are other opportunity costs / productivity considerations for Alice. She will still trade with Bob even though it cost more than doing it herself because the time / expense she saves can be put to more productive activities.

      For example, I can clean my house at $1/hr, however I make $20/hr doing something else. I can pay a maid $10/hr to clean my house and still profit $9/hr in comparison to cleaning my house myself.

  3. I really don't even understand the point the previous two posters were trying to make (other than to disagree without evidence or substance).

    By the way JDL, if Alice is twice as fast, guess what her employer has to pay her for the same output as Bob assuming they are paid the same. They can pay her more and still be more efficient and profitable. No comparative advantage? What about the time value of money?

  4. What about comparative advantage caused by government regulation? Take country A and country B. Both are equal in all respects, but country A has heavy taxation and burdensome regulations. Which country has the comparative advantage, country A or country B?

    1. Country B. Is this a trick question?

    2. Not a trick question.

      The US has a competitive disadvantage based on the many bad trade deals that it made, in addition to burdensome regulations and taxes. Trump is trying to fix this.

    3. Trying to fix "bad trade deals" by imposing tariffs isn't the solution.

    4. Trump is proposing to INCREASE government intervention in trade.

      And by what mechanic are the "bad trade deals" perpetuating competitive disadvantages for American firms? Surely they don't do so to the extent that effectively banning them from trading with China would.

  5. Comparative advantage can only be determined when all the factors are seen. In the decision making process those making the decisions tend to go on a few seens and miss numerous unseens. One of those unseens is having experienced staff quit because they don't want to spend a 1/4 of the year in Elbonia for the same salary they were paid before relocating the manufacturing plant. The replacements are either not as efficient or demand greater compensation to spend so much time in Elbonia. But those costs and others will rarely and possibly never be captured as part of the comparative advantage.

    This discussion reminds me of a business owner I talked to. He had two prices, a low price per hour to have a crew do the work by hand and a higher price per hour to do the work with machines. Why? to recoup the costs of the machines of course. So some of his customers (other businesses) would choose to have the work be done by hand because of the lower price per hour. Of course it took more hours to do it by hand so the price per job was higher. It's amazing how the most simple factors can be missed by some people. If they are missing the simple ones, how many difficult ones are missed? Especially decision making executives with 30,000 ft knowledge.

    It is realizing the unseen which has brought some manufacturing back to the USA.