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McCloskey on Comparative Advantage

Here’s Deirdre McCloskey on comparative advantage.  A slice:

People who think they understand comparative advantage, and also think that economists are anyway a passel of pretentious fools, say silly things about Ricardo and his principle of comparative advantage.  For example, Sir James Goldsmith did: “According to Ricardo,” he wrote with brisk assurance, “each nation should specialize in those activities in which it excels” (The Trap, quoted in Paul Krugman, “Ricardo’s Difficult Idea”).  No, Sir James.  Each nation—or each member of the household or each member of a sports team–should specialize in those activities in which it gives up the least of activity X in doing activity Y.  Afterwards the household or nation should embark on trade.  By the principle of cooperation and then trade, each will have more cloth and wine than if it had manufactured both for itself behind tariff walls.

DBx: Another assertion that protectionists often make about comparative advantage is that it rests on the assumption that capital is not mobile across national boundaries.  Such an assumption – which was indeed made by David Ricardo in that part of his book in which he explained comparative advantage – merely makes explaining the logic of comparative advantage easier by assuming away one factor that can cause the particular international pattern of comparative advantage to change.  As Deirdre explains in her essay, comparative advantage exists in all instances in which individuals specialize and trade.  When it comes to teaching principles of economics, I have a comparative advantage over my next-door neighbor no less than over an orthopedic surgeon in Olso.  And this comparative advantage makes it worthwhile for my neighbor to pay me to teach his daughter economics no less than it makes it worthwhile for the orthopedic surgeon in Oslo to pay me to teach her son economics.  The fact that capital is much more mobile between my house and that of my neighbor next door than it is between my house and that of the orthopedic surgeon in Oslo does nothing to eliminate comparative advantage as an economic fact that makes it profitable for my neighbor and me each to specialize in what we each do best and to trade with each other.

Asserting that comparative advantage “breaks down” or “doesn’t work” when capital is mobile across international boundaries is a sure sign of failure to grasp the meaning and logic of comparative advantage. People who make this argument present the superficial appearance of being highly informed.  But in reality, the very fact that they make this argument is sufficient proof that they don’t understand comparative advantage.