Brett Rants

Ricardo's Comparative Advantage

I first heard Ricardo's theory in Grade School.
It never sat right with me.


I've been reading economics, as you may have surmised from my last rant, so no great surprise I disagree with some of the things I've read...

Ricardo came up with this idea that trade is a good thing. That is to say, if one person (or country) is more efficient producing a certain item, and another, a different, the two will both gain from trade. I'm sure I could spend a whole bunch of words trying to explain the basics (and detail the specifics of the edge cases), but perhaps a few simple tables will suffice instead. (If not, there's always Wiki.)


Standard situation.
 A   B 
+ -
- +
A better at thing 1.
B better at thing 2.
Obviously, they should trade things.


It only really gets interesting if


A is Better all around.
 A   B 
+ -
+ -
Here, the logic is,
B is probably 'comparatively better' at
one thing or the other
(not better than A, just better internally)
and so, is better off trading,
the thing it is 'comparatively better' at
for the other.


OR


Both are Equal.
 A   B 
= =
= =
In which case,
they both would be better off
if one specialized in producing
the one thing,
and the other,
the other.


Got that?

Basic ECON 101.
Trade is ALWAYS good.

Nothing new in all that.


But this is where Ricardo's Comparative Advantage doesn't hold.

There are side effects. There are always side effects.

Suppose Tina is a typist and she needs lawyering work done (by Larry, of course). Now, in the Ricardian World, they should trade. Even though typists get paid something like $10/hr and lawyers $100/hr, they're both better off because of comparitive advantage. But not if one looks at side effects.

If Tina hires Larry, she will never learn law. She will pass up the opportunity to learn a bit of law, do a bit of lawyering, and be forever condemning herself to a life of typing. So, she looses in the long term. Short term gain. Long term loss. If I have learned anything from investing in the stock market, it's go for the long term. (So, got that? The real cost Tina pays in hiring someone else (outsourcing for her legal needs) is to remain forever ignorant of the law and therefor dependent on an external source for all things lawyerly.)

On the other hand, it may look like Larry gets a good deal. Typing sucks. It's meanial. And literally, he's such a bad typist, he'd loose all sorts of big lawyer bucks doing just the slightest bit of typing. But lawyers are scum. Larry didn't realize this when he went to law school. He had grand ideals, great goals. But day after day, he deals with other lawyers, who (as I may have mentioned) are scum and he doesn't want to be associated with them. What he wants to be NOW is a computer programmer. Yeah. $100/hr sounded like big bucks back in college, but a skilled coder makes twice that. So 'F' lawyering. He's going to code. Only problem is, coding means typing. And as I may have mentioned somewhere before (right around where I said something about how lawyers are scum, if I remember correctly), Larry sucks at typing. He needs to practice. And that means, Larry is better off NOT hiring Tina and doing his own freaking typing.

And pretty much, that's where Comparative Advantage falls apart. Oh, sure. It often makes sense to trade. But on the other hand, what one is so often trading away is one's future. Yeah, I'm talking to you, Third World Countries, selling your raw products instead of finished goods.




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Yeah, and I'm talking to you America,
giving your youth crap jobs,
and then wondering
why pride in workmanship
has all but disappeared.

Side effects, my friend.
Side effects.



© copyright 2015 Brett Paufler
Brett@Paufler.net