Wednesday, February 19, 2020

The Wuhan Coronavirus and the Law of Comparative Advantage

James Mill
Chick emails:
 Hello Robert!
Has the breakdown in global supply chains due to the Corona Virus
caused you to rethink your enthusiasm for Rothbard's Law of
Comparative Advantage? Would it not be better to be able get parts at
any price rather than not at all? Thank you!
Well, first, it is not Rothbard's law.

The concept of comparative advantage was developed centuries ago.

Indeed, Rothbard wrote in Classical Economics: An Austrian Perspective on the History of Economic Thought-Volume 2 :
Until recently, it has been universally believed by historians of economic thought that David Ricardo first set forth the law of comparative advantage in his Principles of Political Economy in 1817. Recent researches by Professor Thweatt, however, have demonstrated, not only that Ricardo did not originate this law, but that he did not understand and had little interest in the law, and that it played virtually no part in his system. Ricardo devoted only a few paragraphs to the law in his Principles, the discussion was meager, and it was unrelated to the rest of his work and to the rest of his discussion of international trade.

The discovery of the law of comparative advantage came considerably earlier. The problem of international trade sprang into public consciousness in Britain when Napoleon imposed his Berlin decrees in 1806, ordering the blockade of his enemy England from all trade with the continent of Europe. Immediately, young William Spence (1783–1860), an English Physiocrat and underconsumptionist who detested industry, published his Britain Independent of Commerce in 1807, advising Englishmen not to worry about the blockade, since only agriculture was economically important; and if English landlords would only spend all their incomes on consumption all would be well.

Spence's tract caused a storm of controversy, stimulating early works by two noteworthy British economists. One was James Mill, who critically reviewed Spence's work in the Eclectic Review for December 1807, and then expanded the article into his book, Commerce Defended, the following year. It was in rebuttal of Spence that Mill attacked underconsumptionist fallacies by bringing Say's law to England. The other work was the first book of young Robert Torrens (1780–1864), an Anglo-Irish officer in the Royal Marines, in his The Economists Refuted (1808).

It has long been held that Torrens first enunciated the law of comparative advantage, and that then, as Schumpeter phrased it, while Torrens "baptized the theorem," Ricardo "elaborated it and fought for it victoriously.

It turns out, however, that this standard viewpoint is wrong in both its crucial parts, i.e., Torrens did not baptize the law, and Ricardo scarcely elaborated or fought for it. For, first, James Mill had a far better presentation of the law — though scarcely a complete one — in his Commerce Defended than did Torrens later the same year. Moreover, in his treatment, Torrens, and not Mill, committed several egregious errors. First, he claimed that trade yields greater benefits to a nation that imports durable goods and necessities as against perishables or luxuries. Second, he claimed also that advantages of home trade are more permanent than those of foreign trade, and also that all advantages of domestic trade remain at home, whereas part of the advantages of foreign trade are siphoned off for the benefit of foreigners. And finally, following Smith, and anticipating Marx and Lenin, Torrens asserted that foreign trade, by extending the division of labor, creates a surplus over domestic requirements that must then be "vented" in foreign exports.

Six years later, James Mill led Robert Torrens again in presenting the rudiments of the law of comparative advantage. In the July 1814 issue of the Eclectic Review, Mill defended free trade against Malthus's support for the Corn Laws in his Observations. Mill pointed out that labor at home will, by engaging in foreign trade, procure more by buying imports than by producing all goods themselves. Mill's discussion was largely repeated by Torrens in his Essay on the External Corn Trade, published in February of the following year. Furthermore, in this work, Torrens explicitly hailed Mill's essay...

Once again, except for the three paragraphs on comparative advantage, Ricardo displays no interest in it, and he instead repeats the Ricardian system argument for repeal of the Corn Laws. Indeed, his discussion in the rest of the chapter on international trade is couched in terms of the Smithian theory of absolute advantage rather than of the comparative advantage found in Torrens and especially in Mill...Ricardo had no interest in the theory of comparative advantage, and never wrote about it except in this single passage in the Principles...

 Not only that: while Ricardo dropped the theory as soon as he enunciated it in the Principles, Mill fully developed the analysis of comparative advantage further, first in his article on "Colonies" for the Encyclopedia Britannica (1818), and then in his textbook, The Elements of Political Economy (1821). Once again, Robert Torrens tailed after Mill, repeating his discussion with no additional insights in 1827, in the fourth edition of his 1815 Essay on the External Corn Trade.[

Meanwhile, George Grote, a devoted Millian disciple, wrote in 1819 an important, unpublished essay setting forth the Millian view on comparative advantage.

And so, once again, James Mill, by the force of his mind as well as his personal charisma, was able to foist an original analysis of his own on to the "Ricardian system."
Secondly, the law states that trade will occur based on who has a comparative advantage. If a country can't produce a product for any reason, it certainly doesn't have a comparative advantage.

If you are suggesting that if parts were made here in the US, the current supply problem wouldn't have occurred, you are missing two points. First, trade is dynamic, not static. Trade will adjust to changes. This is pretty much the nature of the entire world. Change is the one constant.

Secondly, in the case of the Wuhan virus, the problem is in China, but it is a grave mistake to think that all problems will always develop outside the US. It might be the case that a crisis develops in the US where the only availability of a product is from outside the US.

The key to understanding the dynamic world is that markets adjust to the environment. To live as though all supplies lines can be adjusted for changes in global interruptions, natural disturbances, or just basic changes in demand, is living like a dead man.



  1. "If a country can't produce a product for any reason, it certainly doesn't have a comparative advantage."

    -- Of course countries don't produce anything, only individuals/firms do, and thus only individuals/firms can have a comparative advantage over rivals. I've always found it odd that, when a political border is involved, the concept of specialization by firms transmogrifies into countries competing as economic units.

  2. "The key to understanding the dynamic world is that markets adjust to the environment." This is such a narrow estimation and has a laughable impact on multinational complex economies of scale in a just in time environment that quickly leaves a zero product condition much quick now than any other business time in history!

    Blanket adjustment statements dont put products in the market when multi dependent sourcing relies on a monopoly driven supply chains. If there was real competition the market agility would apply as you outlined. But there is little or none RW. Just ask Hyundai who is shut down.