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Here’s a letter to someone who does not like my latest column at AIER:
Mr. C__:
In response to my latest AIER column [2] on comparative advantage you allege that I “ignore all the strict qualifications, conditions & assumptions needed for comparative advantage to work.”
With respect, I do no such thing. The reason I do no such thing is that the “qualifications, conditions & assumptions needed for comparative advantage to work” are anything but strict. Comparative advantage is simply applied arithmetic.
If when Ann produces fish she sacrifices less of other valuable outputs than does Bob when he produces fish, Ann has a comparative advantage over Bob at producing fish [3]. Ann can therefore produce fish at a cost lower than can Bob, making it beneficial for Bob to buy fish from Ann at a price at which it is beneficial for Ann to sell fish to Bob. (Extra credit if you can figure out why, if Ann has a comparative advantage over Bob at producing fish, Bob necessarily has a comparative advantage over Ann at producing some other good or service.)
It follows that if we Americans have a comparative advantage over the people of, say, Mexico at producing goods X, Y, and Z, then the people of Mexico have a comparative advantage over us at producing some other goods, say, A and B. Americans and Mexicans can thus trade with each other to the benefit of both.
The only ‘qualification, condition, or assumption’ in play here is the arithmetical one that the people of one country can produce some goods at lower costs, and some other goods at higher costs, than are the costs incurred by people of other countries to produce those same goods and services.
In reality, of course, both intranational and international patterns of comparative advantages change as individuals and countries develop. Also in reality, governments frequently obstruct their citizens’ ability to specialize according to their comparative advantages and to trade freely with foreigners. No one denies these realities. Yet as long as we Americans can produce some goods or services at costs lower than are the prices that foreigners must pay to non-American suppliers of these goods or services – a condition that will in practice always hold – then we Americans will have a comparative advantage that makes it beneficial for us to trade with foreigners.
None of the conditions that protectionists commonly assert to be necessary for comparative advantage to ‘work’ [4] are in fact necessary. Not perfect knowledge. Not the absence of trade barriers abroad. Not the inability of capital to be invested abroad [5]. Not the ability of resources to be quickly reallocated internally. Not the absence of so-called “trade imbalances.” Not international similarity of regulatory burdens. Not international similarity of tax bases and rates. Not decreasing returns to scale or the absence of externalities. Not the absence of “income effects.” Not compensation of trade’s so-called ‘losers.’ [6] Not anything. Because differences in the costs of producing different goods and services will exist whether or not any or all of these conditions hold, comparative advantage will always exist. And where there is comparative advantage, there is the possibility of mutually advantageous trade.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030