Whenever I teach a seminar on Adam Smith’s Wealth of Nations I get the sense that Adam Smith might well have stumbled upon the principle of comparative advantage before this principle was ‘officially’ discovered by David Ricardo (or unofficially by James Mill or Robert Torrens). The provocative passage in Smith is this one (from Book IV, Chapter 2):
What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.
David Henderson, too, when reading this passage wonders if Smith understood comparative advantage. It’s possible, but I think not. Here’s a comment (slightly modified) that I left at David’s EconLog post:
Comparative advantage is indeed about, and only about, opportunity cost – specifically, one economic entity’s cost of producing different outputs compared to the costs borne by other economic entities of producing those same outputs. So when Adam Smith referred to a lower-cost (“cheaper”) supplier, he necessarily referred to a producer with a comparative advantage at producing the output(s) in question.
The question is: Is such a reference enough to credit the Great Scot with having stumbled upon the principle of comparative advantage? What, exactly, did Smith mean by “cheaper”?
The world has no greater admirer of Adam Smith than me, but I don’t believe there’s enough evidence to support the claim that Smith ‘got’ comparative advantage.
What Ricardo (or James Mill or Robert Torrens) ‘got’ is the fact that cost is correctly measured in foregone outputs and not in inputs. The absolute amount of labor that Bob spends to produce a banana compared to the absolute amount of labor that Ann spends to produce a banana is economically irrelevant; what matters is how many fish Bob does not produce when he produces a banana compared to how many fish Ann does not produce when she produces a banana. The economic entity that gives up fewer fish to produce a banana is the entity that has a comparative advantage, over the other entity, at producing bananas.
The difference between reckoning costs in foregone outputs as opposed to the amounts of inputs used is subtle. I concede that, now that we know about comparative advantage, it’s possible to read the above-quoted passage from Smith and conclude that, by gosh!, he did get it. And I don’t rule out this possibility. Because comparative advantage is sheer common sense once it’s grasped – indeed, it’s simply arithmetic – perhaps Smith, brilliant as he was, thought it pointless to elaborate on what he meant by “cheaper.” But it’s nevertheless at least unclear to me that by “cheaper” Smith was thinking of foregone outputs rather than of inputs used.
