The Inescapable Principle of Comparative Advantage

Economists have long been accused of paying too little attention to reality and too much to models. The accusation is sometimes just. But critics are often guilty of an equally harmful sin: neglecting the truths of economic thought.

The centerpiece of Dyer’s discussion is David Ricardo. In Chapter 7 of his Principles of Political Economy and Taxation, Ricardo exposited the principle of comparative advantage with a discussion of England and Portugal. If England trades cloth with Portugal for wine instead of producing wine itself, it receives wine at a lower cost than if it produced it domestically. If Portugal trades wine with England for cloth, it receives cloth at a lower cost than if it produced it domestically. With exchange and specialization, the amounts of wine and cloth available in both countries will increase.

Ricardo’s analysis, according to Dyer, is fundamentally flawed because it neglects the historical complexities of English-Portuguese trade relations and the political economy of imperialism more broadly. He quotes Matthew Watson of Warwick University to make the point: Ricardo’s theory is “a mathematical façade behind which the actual historical relations of production of the real England and Portugal are deliberately taken out of the equation.” The relations are “explicitly oppressive social relations of production based on slave labor and the imperial policing of national hierarchies.” For Dyer and Watson, Ricardo’s ignorance—or neglect—of political complexities and moral atrocities discredits not only his analysis but that of the many economists, from Paul Samuelson to Gregory Mankiw, who have followed him down his misguided, historically-illiterate path.

I know little about English-Portuguese trade relations in the eighteenth and nineteenth centuries. The complexities of those relations may have been overlooked by Ricardo in his political commentary. I don’t know. But I do know that the complexities have no impact on the analytical content of the principle of comparative advantage. And this principle needs to be reckoned with, irrespective of one’s political persuasions.

The principle of comparative advantage as it has come to be taught in standard economics courses is less grandiose than its critics think. It is not a full-fledged description of how international trade works in practice. It is not a theory of international relations. It is not a comprehensive political program. It is not even a policy position. It is, in fact, an explanation of why two people–or two countries–might choose to trade, even though it looks like they have no reason to do so. And it uses only simple arithmetic!

Suppose David needs to fix his car. He could do the job himself in three hours. He earns $50 per hour at his accounting job, so fixing the car will cost him $150 in forgone income. Suppose his neighbor’s college-aged son, Adam, offers to fix the car for David. Adam says it will take him five hours. Adam earns $20 per hour working at a local coffeeshop, so David would have to pay him at least $100 for the job. Adam has a comparative advantage in fixing David’s car, even though he is a slower mechanic, because he gives up less in dollar terms ($100) than David ($150) to complete the same job. If David chooses to hire Adam, he can fix his car at a lower cost than if he did the job himself. If Adam chooses to take the job, he can earn more than he would working at the coffeeshop. If David devotes his time to his accounting job and hires Adam to fix his car, both enjoy higher incomes.

The principle of comparative advantage doesn’t tell us everything we might like to know about David and Adam’s situation. It doesn’t tell us how David acquired his car. It doesn’t tell us whether David likes fixing his car himself, just the fun of it. It doesn’t tell us if Adam’s father mistreats him, or what the working conditions are like in the garage—or the coffeeshop. It doesn’t tell us anything about David’s son, who might like to learn to work on cars but doesn’t seem to have the knack for it. It doesn’t tell us about the personal dynamics and history between David’s family and Adam’s family.

Some of these details would obviously be relevant for the ethics of it all. But the details are simply not relevant for the principle of comparative advantage. That principle informs us, as a matter of arithmetic, that David can increase his income if he hires Adam to fix his car instead of fixing it himself, even though Adam is a less skilled mechanic, and that Adam also gains from the situation.

What Dyer is really rejecting when he claims to be rejecting the principle of comparative advantage is the inference from the principle to the conclusion that free trade serves the common social good. Ricardo expressed that inference this way:

• Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole.

The rejection of Ricardo’s logic in the statement flows from moral convictions about historical injustices, perceptions of continuing power imbalances, and more. Dyer writes: “All major economic powers—Britain, Germany, and yes the USA, and China-rose to their position while protecting their industries with high tariffs.”

Moral convictions, power dynamics, and so on should impact how we think about trade policy in practice. Certain convictions and claims might incline us towards or against trade liberalization and the historical Ricardian policy position. But they in fact take nothing away from the analytical principle of comparative advantage.

Jubilantly declaring the second death of Ricardo, as Peter Navarro did in 2019, has no bearing on the enduring truths Ricardo uncovered in parts of his analysis. Claiming that trade is complex in practice cannot change the fact that every choice has a cost; the cost is always an opportunity forgone; we each increase our productive output and the output of others by specializing in the activities that cost us the least and exchanging. This is logic and arithmetic.

One might conclude that there are good reasons for protectionism (I don’t). But arguments for protectionism or a “genuinely progressive economics,” to be serious, have to take the principle of comparative advantage seriously, just as they have to take arithmetic seriously. That means admitting that there will absolutely be clear costs—material benefits forgone—by restricting trade. Historical and political complexities change that fact no more than they change the fact that water runs downhill.