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Why Comparative Advantage Matters

Why Comparative Advantage Matters
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ContainerShip_teaser-300x129On the way to work, I was thinking about the outcome of the trade ruling on the 300% tariffs placed on buyers of Bombardier planes in the United States.  Three-hundred percent is also the tariff that buyers in Canada pay on some imported dairy products.  Prevailing public opinion, as reflected by the mainstream media, is the former is detrimental; the latter essential.  An example of cognitive dissonance?  Or is it a contemporary reincarnation of the mercantilist fallacy that exports are good and imports bad?

It is not possible to consume something that has not been first created: Production precedes consumption. Ricardo’s great insight about the beneficent outworking of comparative advantage and unhampered exchange is instructive. Specializing in producing what you are least bad at relative to everyone else and trading for the rest gives rise to a pattern of production over time and space that maximizes consumption opportunities and the greatest possible satisfaction of human wants.

Nobel laureate Paul Samuelson (1969) was once challenged by the mathematician Stanislaw Ulam to “name me one proposition in all of the social sciences which is both true and non-trivial.” The response: comparative advantage. “That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.  As the principle that underlies wealth creation is neither self-evident nor self-explanatory it must be re-stated often and clearly.

The gains from trade don’t arise from lines drawn in an atlas.  They stem from differences in opportunity costs.  As we each pursue own separate self-interests in satisfying others, we are each drawn to the production goods or services for which we have lowest opportunity cost relative to everyone else.  We then exchange our output with others for everything else we wish to consume.  Thus an expansion of the scope of consumption opportunities is predicated on an increase in the quantity and quality produced goods.  Tariffs stifle consumptive activities and throttle the ability of producers to exploit their particular comparative advantages.  Regardless of geographic location, people are made poorer; not wealthier.

  • https://jorgemoralesmeoqui.academia.edu/research Jorge Morales Meoqui

    Ricardo’s original insight had absolutelly nothing to in common with the notion of comparative advantage based on opportunity costs. If someone is interested in finding out what he originally stated, please read the following paper.
    https://ssrn.com/abstract=3095473

  • JdL

    I’m reasonably smart, but it took me a couple of tries to understand comparative advantage. Even without its benefits, I’d support unrestricted trade across political boundaries (assuming we need to have them at all), just because no one has the legitimate authority to forbid them.

    • Daniel Campos

      Good point. Not merely because it provides the least restrictions to prosperity, but because it is unethical to use force to get your way.

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