Ricardo's Comparative Advantage After Two Centuries | Hacker News Reader

Ricardo's Comparative Advantage After Two Centuries

conversableeconomist.blogspot.com

41 pointsTomte28 comments

The example Ricardo gave for comparative advantage was Portuguese wine for English cloth.

More than two centuries later, Joan Robinson reexamined comparative advantage using Ricardo's original example. How had such trade affected the two economies - Portugal staying a more agricultural society, whereas in England, textiles served as one of the backbones for the country's industrialization. The analysis Robinson came up with should be obvious - both countries did not benefit by the trade of cloth for wine, it had been much more to England's advantage, and Portugal would have been better off staving off free trade and building up its textile and industrial base. The original example given for the benefits of comparative advantage for all parties turned out to itself be a fallacy.

> British worsteds, bays and serges being exported to Portugal – the ‘cloth’ from ‘England’ in Ricardo’s famous example – simply could not be paid for alone by the wine exports travelling in the other direction. Brazil, a Portuguese colony at the time, was responsible for a massive 40 per cent of the world’s new gold reserves in the eighteenth century (DeWitt 2002: 4). It was this that was used to settle the trade deficit resulting from the inadequacies of the wine trade.[0]

Simply put, the flaw in their argument is they treat Brazilian bullion not as a trade good but as some magical thing. Portugal was able to consume more English goods than their wine industry could supply because they were also able to dig gold out of the ground and use it to "settle the trade deficit".

Portugal chose to consume foreign goods instead of investing in domestic production and this is somehow England's fault?

[0]http://www.tandfonline.com/doi/pdf/10.1080/13563467.2016.121...

> Portugal chose to consume foreign goods instead of investing in domestic production and this is somehow England's fault?

Huh? It's Portugal's fault, they could have imposed a tax on imported cloth to change the domestic economic calculus to favor creation of a local textile industry.

That's not the argument they're making, they're saying that trade itself is responsible for Portugal's "misfortune".

Simplistic ricardian arguments for free trade ignore production dynamics over time, the asymmetry between the mobility of labor and capital, productivity infrastructure, global externalities such as ocean and atmospheric poisoning, asymmetries in labor and environmental standards, etc.

I think at this point everyone capable of doing so understands that international trade has benefits. I would prefer if the intellectual class in the west recognized and reflected on the costs that the middle and lower classes in the west, in particular, have paid for it.

> I would prefer if the intellectual class in the west recognized and reflected on the costs that the middle and lower classes in the west, in particular, have paid for it.

No, they should reflect on the fact that rich and powerful has united across the globe to enslave all innocent people without even giving them a chance to express their opposition.

> No, they should reflect on the fact that rich and powerful has united across the globe to enslave all innocent people without even giving them a chance to express their opposition.

I think this is going too far the other way. I appreciate the anger that this topic can generate, but it is always important to remember that markets have brought huge numbers of people out of poverty.

The best way that I can think of to deal with the problems of the market involves creating solidarity across class lines. That may require two very unpopular ideas: restricting trade across national borders so people don't cheat on that solidarity, and generating that solidarity via social identity, which is most often based on, everybody get their fainting couch ready, ethnicity and culture.

Yikes.

> I would prefer if the intellectual class in the west recognized and reflected on the costs that the middle and lower classes in the west, in particular, have paid for it. reply

Cry me a river. Those lower and middle classes in the west were built on the back of international trade, I mean back when said international trade was mostly from Western nations to more undeveloped ones (of which my country was then part of). One of the oldest (and most renowned) streets from the Eastern-European capital from where I'm writing this comment is named after the German city of Leipzig, which was providing most of the high-end merchandise back in the 1600s and the 1700s. There's a reason why the West has all the palaces, castles and other expensive stuff built from the 1400s up to the early 20th century, which expensive stuff mainly lacks from the rest of the world, and that reason is international trade. Asking us to stop international trade now that we've started to approach the West in terms of expensive stuff is pure hypocrisy (some would call it economic colonialism). Also, see Fernand Braudel's books, especially his "The Mediterranean and the Mediterranean World in the Age of Philip II" (https://en.wikipedia.org/wiki/Fernand_Braudel#La_Méditerrané...)

I know that is the standard history, I took economics at Berkeley and was taught all that. I simply don't believe that's the major factor. I think productive capacity and innovation are more important than international trade, beyond a certain scale.

I do cry for the middle class and lower classes in the west, and for the beset upon labor of the third world. It worries me greatly: my class lives very well, but friends and family that didn't win the IQ lottery are falling apart.

Nicely put. I’d rephrase part of your last sentence:

IQ + opportunity lottery

'The west' being US, I imagine? The Nordics and western Europe have a more equal society with a much larger part of society getting by comfortably than the US. Perusing HN I am often amazed at the implicit cultural differences within the west. How your employer treats you (US: at will employment, more like tenure in many western European countries), how we view (access to) healthcare and -insurance, heck a hundred things that make our day to day way of looking at the world vastly different.

Plenty of big palaces and castles in China and Japan too, for what it's worth.

> In the case of politicians opposed to international trade, the arguments put forward vary a lot, from the subtle to the grotesque, but all have in common the deflection of responsibility for domestic policy failures to external forces as the cause of those failures.

I would propose that 99.99% of "the costs that the middle and lower classes in the west, in particular, have paid for it" are a direct result of various domestic (social engineering) policies and have very little to do with international trade aside from being a convenient boogeyman to blame for the unintended consequences of these policies.

Is it any wonder there is high unemployment in somewhere like France (as an example, not to pick on the French) with a 32hr work week and being almost impossible to fire underperforming workers?

Intellectuals have never claimed that free trade is pareto optimal.

It's better to have free trade and compensate for the cost losing people other ways than limiting trade.

I have a longtime bookmark which I frequently return to and reread which is about Ricardo, comparative advantage and its legacy. An essay by Paul Krugman called Ricardo's Difficult Idea. [0] I think it might make for a good companion reading piece for this blog post.

[0] http://web.mit.edu/krugman/www/ricardo.htm

Krugmans own work in The New Trade Theory adds some missing pieces in the trade theory.

http://marginalrevolution.com/marginalrevolution/2008/10/wha...

https://krugman.blogs.nytimes.com/2008/10/15/about-the-work/

Funny thing about this comparative advantage thing. The example Ricardo gives is 2 countries and 2 products. What do we find when we consider n countries and m products? Does every country have a productive place in a competitive world?

Of course, if we can apply comparative advantage to n countries and m products, we can also apply it to n people and m products. Does each person have a productive place when n is 7 billion? If we cannot show that, then the 2 country example is not relevant to our world either.

Every country has a production frontier. Trade can only improve that frontier.

There's a completely different question you are raising of whether there are zero marginal product workers. One could ask if people are made ZMP by trade. Of course, there have always been ZMP workers (an extreme example might be someone who is quadripelegic and has mental health issues), but trade could still be a factor in increasing their number. I would say with a cursory empirical look, in the cases where one could make the argument (e.g., high unemployment countries in Europe), it looks a lot more like this is caused by poor local policies rather than by trade.

In general, the model is focused on production not full employment (which there are different models for), and it's not clear to me why we would optimize on a single KPI here.

(Retracted)

The theory of comparative advantage assumes that capital cannot move between countries. That's the key assumption, without it the theory falls completely. And in the modern world it's very far from true. I'm reminded of John von Neumann's remark about physicists studying "dry water" (a mathematical model of water that assumes zero viscosity but is oh so beautiful).

What is it about the migratory nature of capital that undermines the argument?

Not sure what you mean by this.

To cite the classic example: If they moved all the sheep from England to France then France would have absolute advantage over wine and wool production and England would just become a nation of "Several Species of Small Furry Animals Gathered Together in a Cave and Grooving with a Pict"?

I would ordinarily just ignore this, but I know you and you've said a sensible thing that one time, so what do you mean by this?

Retracted, thanks for making me look at this more closely!

My comment referred to paragraphs 7.17-7.19 here http://www.econlib.org/library/Ricardo/ricP2a.html but now I see the assumption doesn't need to be as strong, and attacking it isn't fruitful anyway. The right way to test the theory of comparative advantage is to look at real world patterns of imports and exports, and it seems like the theory accounts for at least a significant part of these patterns.

A case against the concept of comparative advantage:

https://americanaffairsjournal.org/2017/08/ricardos-vice-vir...

> This is a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry, and the crucial machines in one industry cannot simply “move” to another without loss of productivity.

> In fact, the relative mobility which Ricardo assumed for his ubiquitous concept of “capital” is the opposite of what applies to machinery. Machinery designed for one industry simply cannot move to any other, even in the same country; but machinery in one industry can (and frequently is) shipped between countries.

Yet if one doesn't make a distinction between "monetary capital" and "physical capital" this whole argument falls apart. Reallocation of malinvested capital is the cornerstone of a market economy and leads to a more overall efficient system. If someone makes a bad bet and fails in their entrepreneurial endeavor their "capital" will be liquidated and used in a (hopefully) more efficient manner.

But they clearly are distinct forms of capital.

Unfortunately not distinct enough to base your whole argument upon...

My theory is if one can demonstrate how the distinction between "monetary capital" and "physical capital" doesn't cause other parts of the economy theory to become false then the underlying argument is probably false.

And one can safely assume that anyone who quotes Schumpeter is probably wrong.

Are you an economist?

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