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A Note on Comparative Advantage

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Moggio, commenting on this post [2], asks for “a text that explains that the principle of comparative advantage still holds under ‘non standard’ assumptions.”

This principle is not an esoteric possibility, identified by clever economists, in search of applications in reality; it’s not something that requires any unusual set of conditions in order to operate.  It’s operation is nearly universal.  It permeates our reality. All that it requires is that, as between any two potential trading partners, the cost to one of them of producing (or, more generally, of trading away) at least some units of good X is less than is the cost to the other trading party of doing the same.

Critical to the point of comparative-advantage explanations is the recognition that costs are reckoned as values forgone by producing and trading.

I can walk faster than my secretary.  Yet on those occasions when I need a document hand delivered quickly somewhere on campus, I send her to deliver it.  The reason is that, although the amount of time that it would take me to deliver the document and to return to the office is less than the amount of time that my secretary requires to do the same task, the value of my time is greater than the value of her time.  That is, the value of the output that I would forgo producing were I to deliver the document myself is greater than is the value of the output that she forgoes producing when she delivers the document.

So I have a comparative disadvantage, relative to my secretary, at hand-delivering documents — meaning she has a comparative advantage over me at this task.  Because she can perform this valuable task at a cost lower than I can perform it, we both gain — I by paying her to relieve me of the cost of performing this task, and she by being paid an amount sufficient to compensate her for performing it.

Nothing in this account depends upon ‘perfect competition,’ ‘perfect’ knowledge, or anything particularly special.  The facts of reality that create this particular instance of comparative advantage between my secretary and me are ubiquitous; they create countless instances of comparative advantage across each office suite, across each town, across each country, and across the globe.