But unless I’m mistaken, you’re going overboard by pairing “more realistic assumptions” with outcomes that are bleak to the point of absurdity.
The point is that unlike what one commonly hears from the proponents of free trade, including many economists, comparative advantage by itself does not prove that everyone, or even a great majority, will end up better off—since it says absolutely nothing about how the wealth produced in the new equilibrium will be distributed. Moreover, when the spherical cow assumptions are relaxed in some arguably realistic ways, not even the conclusion that the total produced wealth will increase is certain.
Mind you, I am not making an argument against free trade here, but merely pointing out that the theory of comparative advantage is typically used as a nearly thought-free shibboleth, not a sound argument. It simply cannot prove what its fans commonly claim it does. To make a valid argument for a free-trade position on any realistic economic issue, much more is necessary.
That essay by Krugman you linked is a typical example. It sounds as if a mathematician complained that people are incapable of grasping the Pythagorean theorem, smugly scolding them for their lack of understanding, while casually assuming that it applies to every triangle, not just the right-angled ones.
Horses were property. They didn’t have property rights over anything, not even property rights over their own bodies to prevent a predatory species (humans) from using their body parts in more efficient ways when it suited us. Horses didn’t have the ability to negotiate or trade so they are not the kind of entities which are capable of personally leveraging comparative advantage. Moreover, they don’t have a deep and generic capacity to learn new skills the way humans do, so their “economic function” was fixed.
Horses are an extreme example that elucidates the basic problem. In the new equilibrium after the appearance of motor vehicles, most horses were no longer capable of earning their subsistence even by practicing their best comparative advantage. Even if they had been able to trade and negotiate, it wouldn’t have helped them at all, and if they had been protected by law from slaughter, it still means that they would have starved to death unless someone decided to keep them alive out of charity. Note that all this holds regardless of the fact that the total amount of wealth produced went up tremendously.
Of course, humans are more flexible than horses, and even the most unskilled human labor nowadays can earn more than subsistence in all but the most messed up parts of the world. But even if they can’t realistically fall below subsistence, this still doesn’t mean that large numbers of people can’t be badly hurt by losing their absolute advantage. Now, who would lose and gain what under various scenarios is a complex question, and it may be that free trade is brilliantly vindicated in practice—but again, this is a question that demands further argument, and a mere invocation of comparative advantage can’t even begin to answer it.
(Not to mention the issue of what will happen if machines start reaching human-level intelligence and other skills at some point. This would put increasing numbers of humans precisely in the position of horses. On this topic, one often hears awfully naive optimistic arguments based on comparative advantage.)
I’m not a trained economist, but the more I study this the more it looks to me like comparative advantage may be a good example of a “non-zero sum truth” that many people systematically misunderstand in a zero sum direction.
That may well be true for the general population. However, I’d say that among economists and many other elements of the intelligentsia, the prevailing bias is actually in the opposite direction—noticing that some important things actually are close to zero-sum under certain realistic assumptions will commonly provoke scorn instead of rational argument. And their opinions matter much more than what common folks believe.
I feel relatively comfortable deploying “knee-jerk invocations of ‘comparative advantage’ as a trump card” if that leads to URLs that have the kinds of evidence and reasoning I’m finding in an attempt to understand it better.
Well, here’s a fun URL for you then—“Reassessing the Theory of Comparative Advantage” by one R.E. Prasch: http://www.econ.tcu.edu/harvey/5443/prasch.pdf I don’t agree with everything in the paper, but it’s definitely a sobering look at the actual state of the comparative advantage arguments.
It took me about a week to find the minutes to read this and process it, but once I was done, it felt like one of those cases where there was some new and relevant things in it, but the new stuff wasn’t relevant and the relevant stuff wasn’t new.
To be clear, all I’m saying is “there’s is something to comparative advantage worth learning from which seems to bear out the more general ‘zero sum bias’ idea” and your position seems to be a much stronger (and due to over-reaching, false) claim that comparative advantage is some kind of silly intellectual fashion among pointy headed intellectuals that should never even be mentioned without heaping portions of warning and quibble on the side. As though a little dose would be poisonous rather than give people a taste for learning more, and the meal wouldn’t be that nutritious even by the end.
If this is the ground you’re defending, and that’s the ground I’m defending, I really think you’re simply wrong.
The core insight here is not whether free trade among many many people is always pareto efficient for every single member of the economy, but whether 2 individuals can gain via comparative advantage (which obviously they frequently can) and then whether N people can institute free trade among themselves in a way that is Kaldor-Hicks efficient.
If something benefits 20 people a quite a bit, and it benefits them more than it hurts one person who wants to veto all of their ability to trade with each other (rather than trade with the one person), then I say that the one person should look at themselves in the mirror and feel guilty. They should train for a new job (and maybe should be given a kickback from the profits for retraining) and bring on the efficiency! :-)
It is obvious that sellers of anything would prefer that they have no competition in order to get nice fat profit margins. Someone competing with them will be bad for that seller but will almost always be good for the customers. If you give someone the political power to veto economic competition, nearly everyone will… but it would be good for all of us to agree to each refrain from this because in the end, we’re all someone’s customers :-)
Nearly all of the content in the paper you linked to was quibbles and carping and fear mongering. There was no clear and robust explanation of why comparative advantage was simply a crock of feces that no one should ever even link to.
The paper was full of claims that “it is possible that some union workers might be hurt” without paying any attention to whether other people were reaping enormous benefits in the meantime.
And, yes, it is also worth worrying about whether some country might lose the capacity to feed itself, or to produce tanks, or to fuel tanks, if it engages in trade and ends up having one of those industries shrink to near nonexistence within its borders… I mean, that does and should stimulate a little fear for “what if” scenarios where property rights fall away in at some point and warfare breaks out. People should be honest that someone might “turn predatory” if they end up in a strong military position after economic optimization increases the aggregate levels of wealth...
But the whole point of our back and forth, from the get go, has simply been that comparative advantage is (1) non-obvious, (2) strongly intellectually resisted by some people in a way that might imply some kind of general bias, and (3) worth at least linking to without any kind of worry that its a “mere shibboleth”.
Again, if you think this is weak concept that mostly has intellectual fashion to support it, please give me links to similarly fashionable concepts, because, I want to learn about them (and learn to apply them) even if you don’t :-P
To be clear, all I’m saying is “there’s is something to comparative advantage worth learning from which seems to bear out the more general ‘zero sum bias’ idea” and your position seems to be a much stronger (and due to over-reaching, false) claim that comparative advantage is some kind of silly intellectual fashion among pointy headed intellectuals that should never even be mentioned without heaping portions of warning and quibble on the side.
I actually don’t see how these claims are contradictory, and in fact, I’d say they are both true. Yes, comparative advantage is a non-trivial insight that has something useful to say about certain situations that occur in the real world. However, at the same time, it is used in an entirely wrong-headed way by many intellectuals, as a supposedly conclusive argument for things that it simply does not imply. At worst, and sadly quite often, it is thrown around as an entirely empty-headed ideological shibboleth. The typical mention of comparative advantage you’ll see in practice, even by economists, barely rises above the level of “Brawndo’s got electrolytes!”
After all, what does the principle of comparative advantage say? It’s equivalent to the simple mathematical observation that if a1, a2, b1, and b2 are positive real numbers such that a1/a2 < b1/b2, then for any positive d1,d2 such that b2/a2 < d1/d2 < b1/a1, we’ll have d2b1 > d1a1 and d1a2 > d2b2, and this is also true in the special case when a1 > b1 and a2 > b2. (In the standard Ricardian example, the a’s and b’s are the coefficients of proportion between labor and production for each good in each country, under the assumption that production is a linear function of labor put into it, and d’s are the amounts of labor that shift between the goods in each country when trade emerges.)
Now, as I said, there really is some non-trivial insight to be gathered here. But if you believe that this simple piece of math is enough to model what actually happens when trade is liberalized or some other bearer of absolute advantage appears on the market, always and in all possible circumstances, and if you don’t see various critical unrealistic assumptions and all the numerous relevant variables that don’t even get considered by the model, then with all due respect, I can only conclude that you haven’t thought about it much.
Nearly all of the content in the paper you linked to was quibbles and carping and fear mongering. There was no clear and robust explanation of why comparative advantage was simply a crock of feces that no one should ever even link to.
Imagine an engineer designing a house, and using the Pythagorean theorem several times in the statics calculations. When some people ask him whether he’s really sure that the triangles in question are right-angled, and point out that some of them look suspiciously obtuse or acute, he brushes this off as “quibbles”—and when they point out that the roof might collapse on their heads if he makes a mistake, he accuses them of “fear-mongering.” I think this is a fair analogy for your above comment.
Prasch’s paper clearly enumerates several assumptions that are an essential part of the theory of comparative advantage, and questions whether they hold in reality. Some of these criticisms may well be flawed, and in fact I’d say some of them indeed are. But if only some of them are correct, it is enough to make the theory inapplicable in at least some real-world situations. When a theory that is supposed to provide real-world guidance is criticized, the critics don’t need to provide robust and systematic alternatives. What you call “quibbles” are more than enough.
If something benefits 20 people a quite a bit, and it benefits them more than it hurts one person who wants to veto all of their ability to trade with each other (rather than trade with the one person), then I say that the one person should look at themselves in the mirror and feel guilty. They should train for a new job (and maybe should be given a kickback from the profits for retraining) and bring on the efficiency! :-)
You seem to be falling into what I like to call the neoliberal fallacy. You are speaking as if we were one step away from a global economic-textbook-model libertarian utopia, with only those pesky trade barriers separating us from it. Yeah, if we were in such a position, I’d also say, to hell with them. But in reality, the situation is far more complex in many ways that even the most sophisticated economic models, let alone simplistic comparative-advantage arguments, are utterly incapable of taking into account. Therefore, some humility and recognition of the law of unintended consequences would definitely be in order.
And to underly the other crucial point again: even if the assumptions of the comparative advantage theory are true, and the trade will lead to a Kaldor-Hicks improvement, this can still mean that 19 out of 20 people get screwed over in any given country. To show that this won’t happen, you cannot just invoke comparative advantage.
JenniferRM:
The point is that unlike what one commonly hears from the proponents of free trade, including many economists, comparative advantage by itself does not prove that everyone, or even a great majority, will end up better off—since it says absolutely nothing about how the wealth produced in the new equilibrium will be distributed. Moreover, when the spherical cow assumptions are relaxed in some arguably realistic ways, not even the conclusion that the total produced wealth will increase is certain.
Mind you, I am not making an argument against free trade here, but merely pointing out that the theory of comparative advantage is typically used as a nearly thought-free shibboleth, not a sound argument. It simply cannot prove what its fans commonly claim it does. To make a valid argument for a free-trade position on any realistic economic issue, much more is necessary.
That essay by Krugman you linked is a typical example. It sounds as if a mathematician complained that people are incapable of grasping the Pythagorean theorem, smugly scolding them for their lack of understanding, while casually assuming that it applies to every triangle, not just the right-angled ones.
Horses are an extreme example that elucidates the basic problem. In the new equilibrium after the appearance of motor vehicles, most horses were no longer capable of earning their subsistence even by practicing their best comparative advantage. Even if they had been able to trade and negotiate, it wouldn’t have helped them at all, and if they had been protected by law from slaughter, it still means that they would have starved to death unless someone decided to keep them alive out of charity. Note that all this holds regardless of the fact that the total amount of wealth produced went up tremendously.
Of course, humans are more flexible than horses, and even the most unskilled human labor nowadays can earn more than subsistence in all but the most messed up parts of the world. But even if they can’t realistically fall below subsistence, this still doesn’t mean that large numbers of people can’t be badly hurt by losing their absolute advantage. Now, who would lose and gain what under various scenarios is a complex question, and it may be that free trade is brilliantly vindicated in practice—but again, this is a question that demands further argument, and a mere invocation of comparative advantage can’t even begin to answer it.
(Not to mention the issue of what will happen if machines start reaching human-level intelligence and other skills at some point. This would put increasing numbers of humans precisely in the position of horses. On this topic, one often hears awfully naive optimistic arguments based on comparative advantage.)
That may well be true for the general population. However, I’d say that among economists and many other elements of the intelligentsia, the prevailing bias is actually in the opposite direction—noticing that some important things actually are close to zero-sum under certain realistic assumptions will commonly provoke scorn instead of rational argument. And their opinions matter much more than what common folks believe.
Well, here’s a fun URL for you then—“Reassessing the Theory of Comparative Advantage” by one R.E. Prasch:
http://www.econ.tcu.edu/harvey/5443/prasch.pdf
I don’t agree with everything in the paper, but it’s definitely a sobering look at the actual state of the comparative advantage arguments.
It took me about a week to find the minutes to read this and process it, but once I was done, it felt like one of those cases where there was some new and relevant things in it, but the new stuff wasn’t relevant and the relevant stuff wasn’t new.
To be clear, all I’m saying is “there’s is something to comparative advantage worth learning from which seems to bear out the more general ‘zero sum bias’ idea” and your position seems to be a much stronger (and due to over-reaching, false) claim that comparative advantage is some kind of silly intellectual fashion among pointy headed intellectuals that should never even be mentioned without heaping portions of warning and quibble on the side. As though a little dose would be poisonous rather than give people a taste for learning more, and the meal wouldn’t be that nutritious even by the end.
If this is the ground you’re defending, and that’s the ground I’m defending, I really think you’re simply wrong.
The core insight here is not whether free trade among many many people is always pareto efficient for every single member of the economy, but whether 2 individuals can gain via comparative advantage (which obviously they frequently can) and then whether N people can institute free trade among themselves in a way that is Kaldor-Hicks efficient.
If something benefits 20 people a quite a bit, and it benefits them more than it hurts one person who wants to veto all of their ability to trade with each other (rather than trade with the one person), then I say that the one person should look at themselves in the mirror and feel guilty. They should train for a new job (and maybe should be given a kickback from the profits for retraining) and bring on the efficiency! :-)
It is obvious that sellers of anything would prefer that they have no competition in order to get nice fat profit margins. Someone competing with them will be bad for that seller but will almost always be good for the customers. If you give someone the political power to veto economic competition, nearly everyone will… but it would be good for all of us to agree to each refrain from this because in the end, we’re all someone’s customers :-)
Nearly all of the content in the paper you linked to was quibbles and carping and fear mongering. There was no clear and robust explanation of why comparative advantage was simply a crock of feces that no one should ever even link to.
The paper was full of claims that “it is possible that some union workers might be hurt” without paying any attention to whether other people were reaping enormous benefits in the meantime.
And, yes, it is also worth worrying about whether some country might lose the capacity to feed itself, or to produce tanks, or to fuel tanks, if it engages in trade and ends up having one of those industries shrink to near nonexistence within its borders… I mean, that does and should stimulate a little fear for “what if” scenarios where property rights fall away in at some point and warfare breaks out. People should be honest that someone might “turn predatory” if they end up in a strong military position after economic optimization increases the aggregate levels of wealth...
But the whole point of our back and forth, from the get go, has simply been that comparative advantage is (1) non-obvious, (2) strongly intellectually resisted by some people in a way that might imply some kind of general bias, and (3) worth at least linking to without any kind of worry that its a “mere shibboleth”.
Again, if you think this is weak concept that mostly has intellectual fashion to support it, please give me links to similarly fashionable concepts, because, I want to learn about them (and learn to apply them) even if you don’t :-P
JenniferRM:
I actually don’t see how these claims are contradictory, and in fact, I’d say they are both true. Yes, comparative advantage is a non-trivial insight that has something useful to say about certain situations that occur in the real world. However, at the same time, it is used in an entirely wrong-headed way by many intellectuals, as a supposedly conclusive argument for things that it simply does not imply. At worst, and sadly quite often, it is thrown around as an entirely empty-headed ideological shibboleth. The typical mention of comparative advantage you’ll see in practice, even by economists, barely rises above the level of “Brawndo’s got electrolytes!”
After all, what does the principle of comparative advantage say? It’s equivalent to the simple mathematical observation that if a1, a2, b1, and b2 are positive real numbers such that a1/a2 < b1/b2, then for any positive d1,d2 such that b2/a2 < d1/d2 < b1/a1, we’ll have d2b1 > d1a1 and d1a2 > d2b2, and this is also true in the special case when a1 > b1 and a2 > b2. (In the standard Ricardian example, the a’s and b’s are the coefficients of proportion between labor and production for each good in each country, under the assumption that production is a linear function of labor put into it, and d’s are the amounts of labor that shift between the goods in each country when trade emerges.)
Now, as I said, there really is some non-trivial insight to be gathered here. But if you believe that this simple piece of math is enough to model what actually happens when trade is liberalized or some other bearer of absolute advantage appears on the market, always and in all possible circumstances, and if you don’t see various critical unrealistic assumptions and all the numerous relevant variables that don’t even get considered by the model, then with all due respect, I can only conclude that you haven’t thought about it much.
Imagine an engineer designing a house, and using the Pythagorean theorem several times in the statics calculations. When some people ask him whether he’s really sure that the triangles in question are right-angled, and point out that some of them look suspiciously obtuse or acute, he brushes this off as “quibbles”—and when they point out that the roof might collapse on their heads if he makes a mistake, he accuses them of “fear-mongering.” I think this is a fair analogy for your above comment.
Prasch’s paper clearly enumerates several assumptions that are an essential part of the theory of comparative advantage, and questions whether they hold in reality. Some of these criticisms may well be flawed, and in fact I’d say some of them indeed are. But if only some of them are correct, it is enough to make the theory inapplicable in at least some real-world situations. When a theory that is supposed to provide real-world guidance is criticized, the critics don’t need to provide robust and systematic alternatives. What you call “quibbles” are more than enough.
You seem to be falling into what I like to call the neoliberal fallacy. You are speaking as if we were one step away from a global economic-textbook-model libertarian utopia, with only those pesky trade barriers separating us from it. Yeah, if we were in such a position, I’d also say, to hell with them. But in reality, the situation is far more complex in many ways that even the most sophisticated economic models, let alone simplistic comparative-advantage arguments, are utterly incapable of taking into account. Therefore, some humility and recognition of the law of unintended consequences would definitely be in order.
And to underly the other crucial point again: even if the assumptions of the comparative advantage theory are true, and the trade will lead to a Kaldor-Hicks improvement, this can still mean that 19 out of 20 people get screwed over in any given country. To show that this won’t happen, you cannot just invoke comparative advantage.