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The only thing you need for comparative advantage to work - the ONLY thing - is that countries have different levels of productivity at producing different things. That's it.

All the talk about labor and capital mobility is really beside the point. Sure, if the global economy were totally frictionless, AND every country had the same technological and organizational capabilities AND the same equally efficient institutions, then everybody would be equally efficient at producing everything and there would be no comparative advantage.

So comparative advantage IS a benefit from open trade that is still relevant to today's world and will continue to be relevant as long as countries are relatively better at producing some things than others. This does not mean that there are not offsetting costs (like downward pressure on the wages of unskilled workers in rich countries, for example) from our current global trade regime (there are) or that many (most?) economists until very recently have tended to ignore or minimize those costs (they have).

The trick is to develop a global trade regime that gives us the benefits of comparative advantage with far less of the costs that the current system generates.

by TGeraghty on Mon Jun 12th, 2006 at 11:37:11 PM EST
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I know these sorts of comments get many people angry, but I think that the energy that people here put into trying to refute the theory of comparative advantage is misguided and could be put to better use -- again, by making a broader accounting of the total costs and benefits, and their distribution, of our current trade system, and by suggesting ways to reform that system to maximize the net benefits while ensuring a fairer distribution.
by TGeraghty on Mon Jun 12th, 2006 at 11:44:02 PM EST
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Refute might not be the right word. Understand what is going on and how reliable it is: present a subject as mathematical and we're going to do that.

However, both Drew and you seem to have decided it's better to abandon the mathematics and rely on common sense.

by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 02:33:45 AM EST
[ Parent ]
Thank you.

Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
by Drew J Jones (myfriends@thisispancakes.com) on Tue Jun 13th, 2006 at 12:19:24 AM EST
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Again, there are no mathematics underpinning it then? Free trade always make everything better?
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 02:28:33 AM EST
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Free trade isn't necessarily the best way to handle trade.  It's simply a matter of free trade being better than the other ideas we have so far.  Krugman once pointed out, in one of his books, that even if we were capable of developing a system that would work better, it would be a pointless exercise, because it would be too difficult to build in the real world.  A great deal changes, obviously, when politicians get involved.

Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
by Drew J Jones (myfriends@thisispancakes.com) on Tue Jun 13th, 2006 at 09:34:10 AM EST
[ Parent ]
Also, labour outsourcing is not free trade. Direct foreign investment is not free trade. And free trade doesn't mean unregulated trade.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Tue Jun 13th, 2006 at 09:36:01 AM EST
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Sure, it's easy to theoretically show in a simple two-country model that moving from a world of no trade to one where countries trade, you can potentially make everyone better off. And you can extend that to many countries, tariff cuts, etc, and all you really need is the different productivities for producing different goods and services. There is math underpinning that, but it's all abstract and necessarily leaves out important features of the real world.

Like the "infant industry" story - what if that tariff allows a temporarily inefficient industry to achieve scale economies and efficiency gains that allows it to compete on global markets? If you remove the tariff too soon, you may lose the industry and good-paying jobs. But as long as you have the tariff, consumers pay more for the good in question. The devil is in the details here.

Or like the other stuff people have mentioned here - the global labor arbitrage for example. Again, it's a question of balancing potential gains from specialization against other costs, which I admit economists are not always clear about.

Also, one of the problems with economic policy analysis is that distributional considerations are usually ignored. As long as a given policy change (net) results in enough increased output to potentially compensate those who lose from the policy change, economists will usually say that the policy change should happen, even if all the benefits went to Bill Gates and all the costs were imposed on everyone else.

So, no, "free trade" (and of course there is the problem that "free trade" has become such a politically loaded term that it doesn't mean the same thing to different people) in the sense of moving in the general direction of more openness by reducing tariffs and other trade barriers (my definition of "free trade") doesn't always make things better for everyone, but that's different than saying comparative advantage doesn't permit overall increases in output and income (which could and should then be used to compensate those who bear the costs through jobs programs, investments in education and training, and a generous welfare state).

by TGeraghty on Tue Jun 13th, 2006 at 02:15:31 PM EST
[ Parent ]
Also, one of the problems with economic policy analysis is that distributional considerations are usually ignored. As long as a given policy change (net) results in enough increased output to potentially compensate those who lose from the policy change, economists will usually say that the policy change should happen, even if all the benefits went to Bill Gates and all the costs were imposed on everyone else.
And Kaldor-Hicks optimality has been invented for the express purpose of assuaging their conscience about ignoring (re)distribution issues.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed Jun 14th, 2006 at 07:13:47 AM EST
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Oh, come on, Miguel.  Hicks invented the IS/LM model, and Kaldor was an advisor to Labour governments.  Both taught at Cambridge, which had an economics department that wasn't exactly known for militant libertarian leanings.  Do you really believe they were enemies of redistribution?

Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
by Drew J Jones (myfriends@thisispancakes.com) on Wed Jun 14th, 2006 at 12:54:02 PM EST
[ Parent ]
I don't know what they believed. I do know that arguing that "in principle" compensation is as good as "actual" compensation completely obviates the need for a redistribution policy.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed Jun 14th, 2006 at 01:00:45 PM EST
[ Parent ]
I wonder (because I haven't checked) if you're fallen into the trap set by economic ideologues who misapply the mathematical models to justify their position, in the way that the free-marketeers seem to rely on arguments about market efficiency that really aren't supportable to support their plunder and concentrate policies.

Mathematical models do not have moral content: it's the polemic constructed around the models that does.

by Colman (colman at eurotrib.com) on Wed Jun 14th, 2006 at 01:11:32 PM EST
[ Parent ]
Possibly. I also found this (my emphasis):
Within the same context, a Kaldor-Hicks improvement is defined as a change that is either a Pareto improvement or such that:
  • the "winners" from the change would be able to compensate the "losers" and still be better off (Kaldor criterion); and
  • the "losers" could not afford to bribe the "winners" to prevent the change (Hicks criterion).
Crucially, the compensation or bribe elements of the test for a Kaldor-Hicks improvement is a hypothetical one: the change is considered an improvement if the assessed winners' gain is greater than the assessed losers' loss, regardless of whether the change when implemented would actually involve the payment of any compensation.
It is definitely an improvement on Pareto to consider the possibility of side payments, as long as they actually take place, wwhich is "crucially" not the case in Kaldor-Hicks optimality.

Often Pareto optimality is an impairment to taking any action (see the effects of unanimous decision making in teh EU council, for instance), but then sometimes people just say "but see, it's not Pareto optimal but it is Kaldor-Hicks optimal, so it's ok, we can ignore the losers".

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper

by Migeru (migeru at eurotrib dot com) on Wed Jun 14th, 2006 at 01:17:50 PM EST
[ Parent ]
And, further to the above comment, as you know the IS/LM model was the original Keynesian model that served as the intellectual foundation for programs designed to put money in the hands of those hurt by economic downturns -- otherwise known as a form of redistribution.  That's hardly a point endorsing your above attack.

Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
by Drew J Jones (myfriends@thisispancakes.com) on Wed Jun 14th, 2006 at 12:59:51 PM EST
[ Parent ]
That's not the way I've seen it used, but maybe there was a misrepresentation or misunderstanding involved.

guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Wed Jun 14th, 2006 at 01:02:34 PM EST
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I note neither of you saw fit to reply to this comment upthread.
by Colman (colman at eurotrib.com) on Tue Jun 13th, 2006 at 02:31:50 AM EST
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I didn't see that comment, honestly.  My initial look at the thread was only a quick one.  Part of my response will be in a reply to Migeru below, because I think he brought up an important point that requires a much longer discussion.  Perhaps a diary.  Inevitably the real world will be too complex for the basic point I made.

I think the author you quote made a decent overall point.  His last sentence is wrong, in my opinion.  When China opened its doors to trade, for example, the result was reasonably predictable.  Jobs that didn't require a highly-skilled worker went to a country with a large pool of unskilled labor -- that large pool translating to lower costs.  Ricardo was simply taking Smith's division of labor a step forward to build a trade theory at a time when economists were at war against mercantilism.

Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin

by Drew J Jones (myfriends@thisispancakes.com) on Tue Jun 13th, 2006 at 09:25:53 AM EST
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I am generally in agreement with what he said.

The point about "full employment of resources" is also key. In a world of global industrial overcapacity, industry location can have huge impacts on employment and wage structures, as people living in the US "rustbelt" well know.

by TGeraghty on Tue Jun 13th, 2006 at 02:18:04 PM EST
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