Comparative advantage

Arnold Kling(link to EconLog)”:http://econlog.econlib.org/archives/000189.html asks how to explain com­par­a­tive advan­tage so that a jour­nal­ist under­stands it. Well, its per­fect­ly pos­si­ble. After all, the idea was put into cir­cu­la­tion by a “stockbroker”:http://www.econlib.org/library/Enc/bios/Ricardo.html so it should be pos­si­ble to explain it to any prac­ti­cal per­son. Of course, that may exclude many aca­d­e­m­ic econ­o­mists…
I’ve long believed that there are only two pre­req­ui­sites for a good under­stand­ing of trade the­o­ry: a rea­son­able grasp of how the nation­al accounts are put togeth­er and a good ground­ing in the con­cept of oppor­tu­ni­ty cost. Unfor­tu­nate­ly, most ‘fresh­man’ econ­o­mists have no idea about the first, and even some tenured pro­fes­sors seem to have a rather weak under­stand­ing of the sec­ond (maybe that’s why they’re tenured?). Jour­nal­ists, and even bach­e­lors of eco­nom­ics, can pret­ty read­i­ly under­stand from house­hold behav­ior that it makes a lot of sense to buy what you can­not pro­duce at as low a cost in terms of per­son­al effort or con­ve­nience for your­self. Who bakes their own bread any­more except for fun? They cer­tain­ly get the idea that the only way you are going to be able to afford to buy is to sell first what you pro­duce at low cost to you, giv­en your own tal­ents, endow­ments etc. Its called, doing what you do best. In fact, its a pret­ty short step from this every-day stuff to the sur­pris­ing rev­e­la­tions of com­par­a­tive advan­tage: for exam­ple * that we export so we can import (imports are the prize of trade, not the price)
* that it doesn’t mat­ter if you are smarter, rich­er or bet­ter look­ing than I am; we can prob­a­bly do a deal that makes us both bet­ter off by trad­ing what we indi­vid­u­al­ly do at least cost (mon­ey, con­ve­nience) for what the oth­er does at his own low­er cost (mon­ey, con­ve­nience) The clinch­er, I usu­al­ly use is the sto­ry about the busy lawyer and her sec­re­tary. The $200/hour lawyer types faster and more accu­rate­ly than her $25/hour sec­re­tary. When the pres­sure is on, she some­times won­ders if she should per­sist with her sec­re­tary or do the work her­self. In all my work with stu­dents, busi­ness peo­ple and even jour­nal­ists in Aus­tralia and in my work for the UN in two dozen coun­tries, I’ve nev­er met any­one who didn’t get the point of that sto­ry. The real buzz of com­par­a­tive advan­tage is watch­ing peo­ple dis­cov­er how pow­er­ful a sim­ple idea can be. The prob­lem, I find, is that many peo­ple assume the idea doesn’t scale. They are afraid to apply the same analy­sis to glob­al exchange. If you say: “Now, sup­pose we are talk­ing about a deal between a rich coun­try and a poor coun­try; do you think that the same rule applies?”… they fre­quent­ly get cold feet. Sud­den­ly, imports become a threat and (biz­zare­ly) exports become the pur­pose of trade.

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