Quotation of the Day…

by Don Boudreaux on January 25, 2019

in Myths and Fallacies, Trade

… is from Paul Krugman’s insightful 1996 essay “Ricardo’s Difficult Idea”:

I believe that much of the ineffectiveness of economists in public debate comes from their false supposition that intelligent people who read and even write about world trade must grasp the idea of comparative advantage. With very few exceptions, they don’t – and they don’t even want to hear about it.

DBx: Yep. Comparative advantage – simultaneously counter-intuitive and undeniably universally descriptive of reality – is typically ignored in public and political discussions of trade.

Even worse, however, than those who discuss trade while ignoring the principle of comparative advantage are those who announce their understanding of this principle and then prove, through their words, that their announcement is mistaken. One certain sign of failure to understand the principle of comparative advantage is the proclamation – frequently issued – that this principle doesn’t apply to today’s world.

Comparative advantage will stop applying to human reality only when each producing entity – however reckoned: individual, firm, region, country – must diminish its production of apples in order to produce an extra banana by the same amount as does each and every other producing entity were that other producing entity to produce an extra banana…. And only when each producing entity must diminish its production of bananas in order to produce an extra cantaloupe by the same amount as does each and every other producing entity were that other producing entity to produce an extra cantaloupe…. And only when each producing entity must diminish its production of cantaloupes in order to produce an extra chair by the same amount as does each and every other producing entity were that other producing entity to produce an extra chair…. And only when each producing entity must diminish its production of chairs in order to produce an extra performance of The Nutcracker by the same amount as does each and every other producing entity were that other producing entity to produce an extra performance of The Nutcracker…. And only when each producing entity [continue this sequence until literally every conceivable good and and service is included].

Sometimes what critics of free trade actually mean when they say that the principle of comparative advantage ‘no longer applies’ or that it ‘doesn’t apply to trade between country A and countries B and C’ is either that (1) trade according to patterns of comparative advantage doesn’t always unambiguously improve the net welfare of the people of the country in question, or (2) government interference in the market changes the patterns of comparative advantages from what these would be absent government interference in the market.

Regarding (1): Such claims are always, at their foundation, claims by the critic of free trade that he or she knows that if the people of the home country had a different set of comparative advantages than they have, or are predicted to have, under free trade, the people of the home country would be even more prosperous than they will be under free trade. That one can offer a set of assumptions under which such claims are true is undeniable: offering such a set of assumptions is child’s play. But all such claims by any critic of free trade differ in no way from the claim by that critic that you, as an individual, would be more prosperous if you were to be forced to learn the skills of, and to work in, an occupation different from the one you currently work in.

Who can doubt it? If, for example, someone had coerced me 40 years ago away from studying economics and toward acquiring skills that would have enabled me instead to be a successful hedge-fund manager, my monetary income would today be multiples of what my actually monetary income is today. But to take seriously such arguments by critics of free trade is to grant that these critics possess a miraculous power both to predict what the home-country’s set of comparative advantages will be over time with free trade and not only to know what a better set of comparative advantages is for the people of the home country, but also how to obstruct the people’s commerce in order to achieve this better set of comparative advantages.

If you are confident that intellectuals and state officials have the power to successfully centrally plan economies, then you might be comfortable with this kind of criticism of free trade. Otherwise, your skepticism is warranted.

Regarding (2): Contrary to how comparative advantage is sometimes explained in simple introductory lectures or essays, in reality the pattern of comparative advantage is largely an artifact of a vast array of human decisions, past and present – many, but not all, of which are made by governments. There is no ‘natural’ or ‘correct’ pattern of comparative advantage if by ‘natural’ or ‘correct’ is meant a pattern not influenced by conscious human choice.

When I chose to get a PhD in economics I chose to change my comparative advantage from what it would have been otherwise. When the government of Hong Kong several decades ago chose to keep Hong Kong’s trade with other countries free, one effect was a change in the comparative advantages that producers in Hong Kong came to have. When the United States government chose to purchase the kinds and quantities of military weaponry that it purchased during the Cold War, one consequence was a change in the comparative advantage of some American producers.

Whenever any government raises or lowers marginal tax rates – increases or decreases regulatory burdens – subsidizes or taxes this productive activity, or subsidizes or taxes that consumption activity – builds more infrastructure – pours more taxpayer money into education, housing, health-care, or dog-catching – raises or lowers tariffs – whenever any government does anything one consequences is to set in motion forces that cause the pattern of comparative advantage to differ from what that pattern would be absent that government action.

And so to point, as a reason to restrict trade in the home country, to the fact that some foreign government undertook some activity (or failed to undertake some activity) the result of which was to ‘alter’ the pattern of comparative advantage is, in essence, to assert that the very existence of a foreign government is justification enough for the home-country government to obstruct its citizens’ freedom to trade. If for no reason other than that they are not anarcho-capitalists – for only anarchy-capitalists view all government activities as illegitimate – protectionists’ attempts to justify protectionism on these grounds should be rejected out-of-hand.

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