And surely in order to leverage comparative advantage, an economy would need to know how good they would be at producing every possible good.
There are good reasons to trade, but comparative advantage doesn’t feel like the correct theoretical underpinning to me.
The invisible hand of the market will let you know what aspect of your output is most valuable for others.
The benefit of this invisible hand is that the "economy" as a whole does not need to know how good they are at producing everything. People just need to know if what they are producing now is more valuable than the next best alternative. Everything else will be sorted out with market forces.
In university lectures we were given the famous argument about olive oil from Greece and that it would never make sense to do our own olive oil because we both lack the natural resources (unique soil + sunshine) which allow olive trees to grow easily and we'd also have much better yields growing other things on the fields.
So to me, both opportunity cost and comparative advantage are really basic building blocks of economic understanding and I'm a bit dumbfounded that someone wouldn't understand these concepts.
We don't have pure free market economies. Neither in China nor in the USA nor anywhere else. The see big monopolistic companies dominating most markets. We see an closer interlink between state and private corporations.
Even just with the currency manipulation that China engages in, things get screwed a lot. Or the special status the US has with the dollar. Real world is more complicated.
But even if we assume free markets, you misunderstood what the previous poster said. The problem with Ricardo's comparative advantages is that is assumes fixed advantages. It is like optimizing for a local optimum. You might be super inefficient in producing X because you have never done it but if you actually invested in learning how to produce X you might discover that you are really good at it and the comparative advantages would go in your favor.
I do still believe that trading with each others can lead to more net wealth in most cases and obviously full autarky is not realistic these days but like anything in economics, it shouldn't be taken as a dogma.
In my opinion it's intrinsically valuable to have a diverse regional economy. Culture and economy are fundamentally inseparable, imagine a society where everyone is doing the same thing because of "comparative advantage" making them 10% more efficient than the other country... What poverty!
Frankly, no, sweatshops are not important to the cultural fabric of a country.
The US has problems with housing affordability, with medical costs, and with service sector costs emerging from Baumol's cost disease, which are all things that will get worse with tariffs, ranging from higher construction costs, to higher pharmaceutical prices, to less service employees making the cost disease worse.
It's also untrue that comparative advantage only benefits capital. Consumers are hurt by higher prices and less job opportunities driving down demand on the labor market. This worldview of a zero sum contest between capital and labor is a populist fiction.
An entire generation has grown up without assembly lines so it is easy to mystify it. People in Vietnam don't enjoy making Nikes but it is better than what came before: subsistence farming. But the Vietnamese factory worker trying to send their kids to university too.
Like the stereotypical kid who grew up rich not understanding the value of hard work maybe the inevitable result of easy and safe living is a blind spot so big we're doomed to fall back down as a society and start over again and again.
https://fred.stlouisfed.org/series/manemp
Lots of people remember the 80s and 90s being better times with quality manufacturing employment without romanticizing the past. To this day multiples of the “information” sector are employed in US manufacturing.
I’m actually not even sure what specific labor law changes you could blame that on. Clinton was running the show in the 90s, and I don’t recall any big union busting under Bush, whatever else might be said of him.
I mean, they can, if you put up trade barriers or introduce capital controls. It's not a coincidence that after capital controls were removed, basically any manufacturing that could, fled America. And I (and my family) in Ireland were massive, massive beneficiaries of this!
Like, you can definitely make the argument that globalisation has benefited the world overall, while being bad for a bunch of people in the developed countries. And it's not a bad argument.
But unfortunately for all of the people who think globalisation is great, the votes of all the people who disagree count just as much as yours, and it looks like they're willing to vote for anyone who even hints at promising to fix this.
> Clinton was running the show in the 90s,
He introduced NAFTA, which made it profitable for much US manufacturing to move to Canada/Mexico. Bush let China into the WTO (or was that Clinton too?).
so yeah even with a 'non-existent' manufacturing sector it has been able to provide more jobs than so called technology industry.
> Frankly, no, sweatshops are not important to the cultural fabric of a country.
And that's not a strawman?
If we are going to wade into the deep waters of international trade, then you can’t look only at america or American workers without getting blind sided constantly.
At the depth you are talking - globalization has created more nations than anything else.
The undermining of democracy came with increased deregulation and increased lobbying and wealth concentration.
We have problems with housing affordability because asset values inflate inverse to the devaluation of the dollar. The dollar is deflating because a service economy is not as sustainable as a manufacturing economy. This is particularly pronounced when we all see the labor value of intelligent workers decreasing at a precipitous rate due to AI.
You're right; humans will be as uninvolved as possible in the next domestic sweat shop lines. Astute observation!
My understanding is that due to human nature wars mostly start due to religious or extremist views of individuals leading a nation. Such a risk of your trade partner invading you because they don't like your skin color can be hardly formalized in an economic theory (maybe there exists one already, idk).
So role of industrial policy would be to ensure that a certain balance is kept with regards to creating dependencies to other nations, which could be abused in case of war.
Famous negative examples of failed industrial policy for Germany would be the dependence on gas mostly from russia and the dependence on oil mostly from middle east.
Another example would be the agricultural subsidies to ensure all citizens can be fed even when other nations would not export any food. A current example in Germany would be the production of "German steel" using fossil energy instead of production of CO2-neutral swedish steel. As Germany is part of EU, this is a conflicting view: We can't on one side ask for more trade and integration of supply chains between democratic EU countries, but on the other side assume that Sweden will deny steel exports to us when we'd need it.
Producing steel in Germany with fossil energy instead of doing it in Sweden with hydroelectric power is both more expensive and has more negative externalities (CO2 emissions due to use of fossil fuels). Therefore such industrial policy reduces welfare that would otherwise be available for German people.
Comparative advantage is an emergent property of trade that occurs naturally, it is the default state of being and can only be undermined by government policy.
You benefit from comparative advantage when you buy bread from the bakery instead of spending 2 hours a day baking your own bread.
Imagine how much poorer you'd be if the government put a large tax on you buying bread to force you to bake it yourself, in the name of self-sufficiency.
That's what's happening with these blanket tariffs, instead of targeting only critical defense manufacturing, Trump also wants t-shirt sweatshops to magically come back to the US despite only 4% unemployment. It's rank foolishness.
It's mostly not that complicated. Ecuador is better at bananas, the US is better at software so they trade. And similar stuff.
My favorite example is from an economics class quite a few years ago now. Michael Jordon is super efficient at making money playing basketball (told you it was a while ago). But he's also pretty good at mowing his lawn, since he's tall and athletic. But since he's way better at playing basketball, it makes sense for him to focus on basketball and paying some kid to mow his lawn, even though the kid is way less efficient at mowing lawns.
The US is way more advanced than Ecuador, and could presumably develop some hyper efficient banana greenhouse using genetic engineering and AI or whatever. But Ecuador is still pretty good at growing bananas and the US is much better at developing software, so buying bananas from Ecuador and putting the AI greenhouse resources into developing software instead makes way more sense.
Maybe I'm not getting what you're saying, but I don't think so. The point of comparative advantage is that even if country A is better at making guns and butter than B, A is better off only making guns or butter and trading to B for the other.
A key assumption being: "Factors of production are fully employed in both the countries. ... The theory assumes full employment. However, every economy has an existence of underemployment."
Another key assumption is "The labor cost determines the price of the two commodities. ... The theory only considers labor costs and neglects all non-labor costs involved in the production of the commodities."
One assumption not listed there is an implicit assumption as in much of economics of infinite demand for anything and no law of diminishing-to-negative returns when considering the environmental and psychological costs of consumption.
So, if you have unemployment in the producer country like China (meaning, there is no reason for them to limit their production) along with a significant capital investment in production infrastructure (like in the Shenzhen region for electronics), and you have limited demand in the consumer country like the USA (meaning, only so much can be sold there at any specific time), then the country which can produce stuff more cheaply will just flood the market of the other country for all goods in question -- even if the consumer country could in theory produce one of the goods at higher costs (or lower quality). Of course, there may eventually be macroeconomic issues like balance of trade issues and countries unable to pay for more goods (which the USA has avoided to date because the US dollar is the refactor global currency backed by the USA's global policing role for decades as a defacto empire). But even if labor in the consumer country like the USA is free, given realistically a lot of cost related to equipment and energy (and increasingly AI and robotics) and more nebulous things like supply chain integration and a can-do attitude, the consumer country may not be able to compete on price and quality of finished products from the more materially productive economy.
Tangential, but "Humans Need Not Apply" makes a good argument when they suggest that horses are essentially obsolete in modern industry (in the same way people may be soon). It's not that you sometimes use horses to any great degree in modern manufacturing (whereas before they pulled carts and turned machines) -- it is that for almost any industrial task horses are more trouble than they are worth now in terms of cost and reliability compared to electric motors or diesel engines and so on.
An economic theory like "Comparative Advantage" that entirely emphasizes labor costs is increasingly obsolete if human labor is less and less a major factor of production. The theory assumes a country will always have people doing something productive, but that is like saying we should bring horses back into factories when robots are generally more reliable. If people are not skillful with access to tools and capital and don't have a can-do attitude, then they will just suffer economically (unless protected somehow) No doubt there are special cases where horses are still useful in production or transport like how mules were used recently to get supplies into hurricane damaged North Carolina, but they are rare as long as the modern industrial system and its surrounding infrastructure functions well. Similarly, there may still be human roles in production, but they will continue to diminish. In 2010, I put together some options for dealing with this situation, available here: https://pdfernhout.net/beyond-a-jobless-recovery-knol.html