The validity, applicability, and explanatory power of the principle of comparative advantage no more disappears because of capital mobility than does the validity, applicability, and explanatory power of the law of gravity disappear because of the flight of airplanes. But some people, such as Thomas Palley, disagree. Here’s a letter that I sent to Mr. Palley in response to his post (which I first encountered when he sent it out to an e-mail list).
Dear Mr. Palley:
Thanks
for including me on your distribution list. But I dispute your claim
that the principle of comparative advantage applies only when capital
is immobile. You mistake an assumption typically made to render the
explanation of comparative advantage clearer as being a condition
necessary for the principle to hold in reality.
Like other
real-world happenings, capital mobility does indeed change the specific
pattern of comparative advantage. It does not, however, nullify the
principle. If it does – if, as you assert, capital mobility makes
comparative advantage "obsolete” – then the principle of comparative
advantage would be useless for explaining the pattern of specialization
and trade within national or local economies, where capital has long
been mobile.
Of course, comparative advantage has always helped
to determine the pattern of specialization and trade between Brooklyn
and Queens no less than it has always helped to determine the pattern
of trade between America and other countries. And this helpfulness
does not diminish as capital mobility increases.
Sincerely,
Donald J. Boudreaux
Jonathan Dingel at Trade Diversion also challenges Mr. Palley.
