Ricardo on Comparative Advantage: Handwaving Ahoy!

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8 mins read

Ricardo’s example: “To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth.”
Ricardo, and defenders of his theory, ignore or downplay a few flaws in this argument.
First, the existence of capital goods. England and Portugal have merrily been producing both goods since time immemorial. There are whole chains in place, equipment built and rebuilt, innovations, buyer and sellers, distribution processes, warehouses, transportation methods, etc.
By handwaving all that away, Ricardo et al. wave away the cost of transformation. It costs money to change manufacturing away from one thing to another. The capital investments need to be recouped at some level or the company behind it will become insolvent. Potentially more people will lose jobs than will be gained with the retooling. If the rewards are worth it, some will try it, but not all. The only way to ensure a transformation would to have the State dictate the change. Otherwise, people might change to the new process, or they might not.
What if we pretend these are new products, and the capital investments haven’t been made yet? The problem is worse, since we have no idea which country will be able to make what at what cost for which price.
Second, human desire. Not everyone wants to switch jobs. People aren’t rational, economic machines. People’s desires in what they want to produce and why are paramount and have more heft than a cold economical model. Yes, some will make the change, no doubt. Profits drive a lot of decisions but not all.
Third, international politics. If England and Portugal have a falling away and sever all ties because Portugal drummed the English in soccer, both countries will suffer more than if they had kept some of the production within their borders. The English won’t be drinking wine and the Portuguese will be walking around in old clothes wondering if they have to switch back to polyester.red-wine-bottle-vector
Fourth, interruptions of delivery. If the shipping routes between the countries stop and stop hard, say the Chunnel is shut down or the Channel is impassible for whatever reasons, like Poseidon has decided to make a come-back by declaring unending animosity against the English bulldog, it will be the same as point number three. Too many sober Englishmen and too many under-dressed Portuguese for anyone’s taste.
Fifth, technology doesn’t stand still, not with any human endeavor. Portugal might discover a better way to produce cloth, say by combining sheep and cotton trees. These mutants take only one man to make as much cloth as they import from England. Sorry, England, you lose the Portuguese cloth market.
Sixth, third parties. What if France can out produce in cloth and wine than either other country? England loses the Portuguese cloth market and Portugal loses the English wine market. Now retooling will have to happen and we’re back to the first point.
Seventh, national interests. Let’s say England’s brightest minds find a way to utilize wine in a critical piece of their defensive structure. British soldiers in all the armed forces are up to 100% more effective with a glass of wine each night. Portugal gets wind of this through their devious Portuguese spies. What do you think is going to happen?
Portugal’s exported wine prices will go up for the English. Anyone selling wine to England will jack up their prices. It will be a price war, trying to determine how much England will be willing to spend on wine.
England’s options aren’t many. She can pay the increased price and try to offset it somehow. She can do without the military advantage. Or, she can go back to producing wine herself, but at this point she’d be behind where she was before that decision to out-source wine production.
pericles-quoteThere’s a great example in history where one country tried this exact nonsense. Ancient Athens under Pericles had expanded its empire to encompass a wide range of land. They had out-sourced grain production from the poor soil around Athens to more fertile lands, assuming they would always have the means and ways to pay for the grain and get it home by using the power of their nigh-invincible navy.
And it worked up until it didn’t. The Peloponnesian War changed that. Once the Spartans figured out how to sail, one of their targets was the Hellespont, the source of grains for the Athenians. Athenian responded and sent all they could muster to defend Hellespont and defeated the Spartans.
Of course, Athens being Athens, they put to death six of their top naval commanders after a controversial trial concerning their conduct during a different naval battle with the Spartans. The commanders won the battle but lost their lives.
Lysander, a newer Spartan commander, directed another attack against the Hellespont. He not only won, he eliminated the Athenian fleet, and the Athenian grain fell into the hands of the Spartans.
The Spartans kept up their siege against the weakening Athens until, when running low on food and facing disease in 404 BC, they surrendered to Sparta.
This is not to say free trade is always bad, but there are some real problems that get swept aside in order to have tidy theories with nice graphs.

5 Comments

  1. Vox Day has a book called, “On the Question of Free Trade”, which touches on this very subject. It’s a transcript of a public debate between Dr. James D. Miller, Associate Professor of Economics at Smith College, and Vox. I haven’t read it yet, but it’s next on my reading list.

  2. First, the existence of capital goods. England and Portugal have merrily been producing both goods since time immemorial.
    Because comparative advantage goes all the way down to the business and often times to the individual. The doctor is probably a better receptionist than the receptionist he hired to run the front desk, but he’s a better doctor than a receptionist and the receptionist is a better receptionist than doctor, so the doctor spends all his time doing doctor work and zero time as a receptionist, while the receptionist spends all her time being a receptionist and zero time as a doctor. The arrangement works out for the advantage of everyone.
    Potentially more people will lose jobs than will be gained with the retooling.
    And potentially, an alien crash landed on a Kansas farm who will grow up to be faster than a speeding bullet. For someone who complains about handwavy arguments, writing “potentially X could happen”, then continue your argument as if X does and did happen is called assuming your conclusion.
    The only way to ensure a transformation would to have the State dictate the change.
    False. Comparative advantage simply means that if X is the most valuable skill you have, you will add the most value to an economy by pursuing X. By definition, if X is the most valuable skill you have, but you do Y, then, since it’s of less value than X, if you pursue a career employing Y you add less value to an economy and will earn less in the long run. There’s nothing wrong with doing this. However, by the immutable laws of first grade math if X is greater than Y, then X*a is greater than Y*a for any positive number a.
    What if we pretend these are new products, and the capital investments haven’t been made yet? The problem is worse, since we have no idea which country will be able to make what at what cost for which price.
    By this “logic”, capital investments to develop new technologies, markets, etc. will never be made. You are simply employing the economic version of Zeno’s paradox. And, like Zeno misunderstood the nature of the real numbers, you don’t understand capital investments.
    Second, human desire. Not everyone wants to switch jobs.
    See? You don’t understand what comparative advantage actually means. Of course, as I said above, if you prefer to do Y, instead of X, that’s fine. Comparative advantage simply says that if the most valuable skill you have is X, then to add the most value to an economy, thus maximize your efforts at improving your fellow man’s lives’, you should do X. It’s fine if you prefer to do Y, but that, literally, has nothing to do with comparative advantage. Your complain is like someone telling you that if you drop a ball on earth it will accelerate towards earth at 10 meters per second squared, then you respond “That can’t be right because it doesn’t take into account at what point water boils”. It’s a non-sequitur.
    The other important aspect of choosing a career employing skill Y is that you purposefully chose to make less money, so don’t complain in the future about not having enough money to afford the life you wanted.
    People aren’t rational
    If you don’t like doing X, despite it being the most valuable skill you have, it’s perfectly rational to choose to do Y if you greatly prefer doing Y. By definition, this means you personally value doing Y more than the income you lose by not doing X. People generally are rational the their pursuits of happiness as they define happiness. People often see others doing things they wouldn’t do, so conclude, as you are, that those actions must be irrational. This is simply a fundamental denial of the reality that people are different and have different preferences.
    If England and Portugal have a falling away and sever all ties because Portugal drummed the English in soccer, both countries will suffer more than if they had kept some of the production within their borders. The English won’t be drinking wine and the Portuguese will be walking around in old clothes wondering if they have to switch back to polyester.
    Since the value of a product directly depends on the demand, the values of products change under these circumstances. You’ve merely changed the parameters of the economic system, which may change the comparative advantages. Take the example I gave above with the doctor and receptionist. Your above argument is equivalent to me telling you that when the receptionist was 18, she was a better receptionist and doctor, then you saying that can’t be right, since she’s now 30 and after having completed college, medical school, and her residence, so now she’s a much better doctor than receptionist.
    And you carry on the above fallacy into your fourth and fifth points.
    For your sixth and seventh points, you commit the same fallacy you committed in your second point. Note your seventh point is not an economic point, so pretending that an economic theorem must be wrong because it’s not applicable to the case you’re considering is deeply dishonest.

    • “Potentially more people will lose jobs than will be gained with the retooling.
      And potentially, an alien crash landed on a Kansas farm who will grow up to be faster than a speeding bullet.”
      A non sequitur isn’t a valid response. I said potentially because every business is going to be different. And since I applied the modifier to what I was actually discussing instead of engaging in some sort of Superman fetish, I’m not sure you’re reading what’s actually been written.
      “Deeply dishonest”
      Hold up there, chum
      “People aren’t rational”
      That wasn’t my full quote.
      Pull that shit again and I’ll spam your comments.

  3. “Censorship is always the course of action by those insecure in their arguments.” Which wasn’t anything to do with why I was pissed.
    I warned him, and he pulled the same shit.
    Ken’s spammed.

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