Comparative Advantage

Tag: Comparative Advantage

Does Free Trade Raise Prices?

Good question?  Seems like something that would make economists snort coffee through their collective noses, but according to today’s Wall Street Journal, the better part of the world holds a contrarian view:

Yikes!   That’s kind of depressing, though it dovetails nicely with my discussion of comparative advantage in ECON 300 tomorrow, along with Paul Krugman’s classic piece, “Ricardo’s Difficult Idea.”

My objective in this essay is to try to explain why intellectuals who are interested in economic issues so consistently balk at the concept of comparative advantage. Why do journalists who have a reputation as deep thinkers about world affairs begin squirming in their seats if you try to explain how trade can lead to mutually beneficial specialization? Why is it virtually impossible to get a discussion of comparative advantage, not only onto newspaper op-ed pages, but even into magazines that cheerfully publish long discussions of the work of Jacques Derrida? Why do policy wonks who will happily watch hundreds of hours of talking heads droning on about the global economy refuse to sit still for the ten minutes or so it takes to explain Ricardo?

All good questions, and I buy most of Krugman’s answers:

(ii) [C]omparative advantage is a harder concept than it seems, because like any scientific concept it is actually part of a dense web of linked ideas. A trained economist looks at the simple Ricardian model and sees a story that can be told in a few minutes; but in fact to tell that story so quickly one must presume that one’s audience understands a number of other stories involving how competitive markets work, what determines wages, how the balance of payments adds up, and so on.

(iii) [O]pposition to comparative advantage — like opposition to the theory of evolution — reflects the aversion of many intellectuals to an essentially mathematical way of understanding the world. Both comparative advantage and natural selection are ideas grounded, at base, in mathematical models — simple models that can be stated without actually writing down any equations, but mathematical models all the same.

My emphasis.  See you tomorrow.


Energy Independence: At What Cost?

Don Boudreaux at Cafe Hayek argues persuasively that energy independence and comparative advantage are not likely to be compatible for the U.S.  If we wish to specialize in energy production, it will be more expensive in terms of economic welfare than importation; thus, we must either accept a lower standard of living or import something else.  What makes energy so special that we should not trade for it?  Should we instead import more food, pharmaceuticals, or technology, for example.  In short, the doctrine of comparative advantage suggests that we specialize in things that we are particularly adept at producing and trade for other goods and services.

In his classroom talk in April, Yoram Bauman posed two questions

1.  Are you fearful that we will run out of energy (especially from carbon based sources)?

2.  Are you fearful that we will not run out of energy from carbon-based sources?

Higher prices can ensure that the first won’t happen but not the second.  Concerns raised by positive answers to the second question won’t be addressed until we have a price for carbon-based energy that is higher than for clean fuels.  Certainly, energy independence (i.e., no importation of carbon-based fuels) will lead to higher prices, but it also would be a very expensive way to achieve the result as the domestic price would have to rise enough to clear the domestic market.  It’s not clear, however, that this would be a price that internalizes the greenhouse gas effect.