RWER issue 55: Ian Fletcher
Dubious assumptions of the theory of comparative advantage
Ian Fletcher [U.S Business and Industry Council, USA]
The theory of comparative advantage is the core of the case for free trade. However, contrary to orthodox myth, this theory is crippled by the dubious assumptions upon which it depends.
Review of the theory
To understand comparative advantage, it is best to start with its simpler cousin absolute advantage. The concept of absolute advantage simply says that if some foreign nation is a more efficient producer of some product than we are, then free trade will cause us to import that product from them, and that this is good for both nations. It is good for us because we get the product for less money than it would have cost us to make it ourselves. It is good for the foreign nation because it gets a market for its goods. And it is good for the world economy as a whole because it causes production to come from the most efficient producer, maximizing world output.
Absolute advantage is thus a set of fairly obvious ideas. It is, unfortunately, also false. Under free trade, nations observably imports products of which they are the most efficient producer—which makes absolutely no sense by the standard of absolute advantage. This is why one must analyze trade in terms of not absolute but comparative advantage. Boiled down to its essence, the often-misunderstood theory simply says this:
Nations trade for the same reasons people do.
And the whole theory can be cracked open with one simple question:
Why don’t pro football players mow their own lawns?
Why should this even be a question? Because the average footballer can al-most certainly mow his lawn more efficiently than the average professional lawn mower. The average footballer is, after all, presumably stronger and more agile than the mediocre workforce attracted to a badly paid job like mowing lawns. Yet nobody finds it strange that he would “import” lawn-mowing services from a less efficient “producer.” Why? Obviously, because he has better things to do with his time.
The theory says that it is advantageous for America, for example, to import some goods simply in order to free up its workforce to produce more-valuable goods instead. We, as a nation, have better things to do with our time than produce these less valuable goods. And, just as with the football player and the lawn mower, it doesn’t matter whether we are more efficient at producing them, or the country we import them from is. As a result, it is sometimes advantageous for us to import goods from less efficient nations.
This logic doesn’t only apply to our time, that is our man-hours of labor, either. It also applies to land, capital, technology, and every other finite resource used to produce goods. So the theory of comparative advantage says that if we could produce something more valuable with the resources we currently use to produce some product, then we should import that product, free up those resources, and produce that more valuable thing instead.
The whole of this paper may be downloaded at: http://www.paecon.net/PAEReview/issue55/Fletcher55.pdf