7 ms·

Ricardo's Difficult Idea by Paul Krugman (1996)

23 points by force_reboot 10y ago

force_reboot 10y ago
I recently came across this article by Paul Krugman, which is different to his more recent writing (for one thing it is on his area of expertise, international trade). It's both a great exposition of mainstream economic thought on trade, and a discussion of why otherwise educated people reject these ideas. The story on MakerBot's relocation of its manufacturing to China was my immediate inspiration for posting this, but I think it's relevant to a lot of discussions on HN.
MrTonyD 10y ago
I think Krugman is both brilliant and blinded by his own brilliance. Krugman's focus on economic data blinds him to the second and third order consequences of worldwide trade. In particular, trade outside borders allows schemes for hiding income, evading taxes, harming particular groups of people, undermining governments, ignoring social values (eg. climate change, workplace safety, quality of life for workers, wages) and amassing fortunes for multi-billionaires who then create even more problems. If that weren't enough, there are still many "fuzzy" areas of economics, and I think that many of those areas are fuzzy precisely because they are so complex due to the "open systems" created by free trade (unlike "closed systems" which can be controlled by a nation's laws and monitored using modern Big Data techniques.) So, while Krugman is brilliant, he is also very flawed - dragged down by the very data that he understands so well. But isn't that always the case for technocrats?
- maxerickson 10y ago
  Do you think his assertion about the labor share of income providing information about the impact of trade is wrong or otherwise not a good measure?
  - MrTonyD 10y ago
    It is information...but if you read my original comment you will see that the benefit of such increased income is far outweighed by other considerations. As I recall, even Krugman himself described that gain as very small (small single digit percents), and potentially mistaken (depending on the average of small numbers across studies.) We, as a society, are paying huge prices for what may be a statistical anomaly.
    - maxerickson 10y ago
      He says as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades. The implication of that is that workers are receiving the benefits of trade and increasing productivity, and it doesn't read as ambiguous or potentially mistaken to me.
      - MrTonyD 10y ago
        I've been reading Krugman for decades. He has said a lot of things.
- SapphireSun 10y ago
  In the case of climate change, social values, etc, wouldn't you just apply a regulation to price in the cost of those values and comparative advantage still holds after adjustment?
  - MrTonyD 10y ago
    Regulation has a scope defined by governments. And when money can be moved easily outside any particular government, it becomes impossible to regulate. Just look at how Walmart moved cash to offshores to loan to themselves so that they could then claim that their profits were losses to loan payments - avoiding taxation and any incentives/disincentives done by our tax system. So the "trade" of offshores providing "services" is routinely used to evade any regulations - the Walmart example is just an extreme example of how even cash transactions can become something "gamed" by trade and used to undermine the autonomy of a society.
- Osiris30 10y ago
  I think Krugman was trying to make the case for why many smart people don't seem to understand how the theory of Comparative (as opposed to absolute) Advantage works. I don' think he was arguing that that theory is the be all and end all of trade policy. The theory is a abstract model of the world - it is a useful guide like all abstract models but does not capture the world in all its complexity. Both theoretically and practically, over the last 30 years, there is increasing evidence that Free Trade effects - like everything - depends on context and policies. Krugman himself writes alot about this on his blog. Can't search for everything right now - but here is an example from a few weeks ago: http://krugman.blogs.nytimes.com/2016/04/20/101-boosterism/ http://krugman.blogs.nytimes.com/2016/04/20/101-boosterism/ He has also been consistently lukewarm on the TPP trade deal exactly because of these issues: http://krugman.blogs.nytimes.com/2015/04/26/this-is-not-a-trade-agreement http://krugman.blogs.nytimes.com/2015/04/26/this-is-not-a-tr... "One thing that should be totally obvious, however, is that it’s off-point and insulting to offer an off-the-shelf lecture on how trade is good because of comparative advantage, and protectionists are dumb."
maxerickson 10y ago
What a horrifying exposition.
Sniffnoy 10y ago
I'm surprised this essay doesn't mention what I would be expect to be a big reason people don't get comparative advantage: Because it sounds similar to something simpler that people already know, so they conflate the two ideas. Because if you don't know what the law of comparative advantage actually says, it sounds kind of like, "If I am better at A than you are, and you are better than B I am, then we can benefit from trading which each other." Which is true, but also basically obvious; the law of comparative advantage is more general than that. There's a reason it's the law of comparative advantage and not absolute advantage! So I would expect that a lot of people are getting what it says mixed up, because it sounds like something they already know.
- deleted 10y ago
  [deleted]
- meric 10y ago
  Law of comparative advantage: "If my ability in A compared to my ability in B as a ratio is different to your ability in A compared to your ability to B as a ratio, then we can benefit from trading which each other."
SapphireSun 10y ago
This essay inspired me to read about comparative advantage. I pulled up this wikipedia article: https://en.wikipedia.org/wiki/Comparative_advantage https://en.wikipedia.org/wiki/Comparative_advantage I have to say that I'm still a bit confused by it. In the example given, Portugal has an absolute advantage in cloth and wine. Let's say England's productivity was massively less than Portugal (say it took a 1M hours to produce cloth and 1.3M to produce wine), but Portugal takes 90 and 80 respectively. Wouldn't the world be flush with Portugal's product in both industries rather than only in wine? EDIT: This link was useful though I think I'm still unsure about the case I proposed. http://economics.fundamentalfinance.com/micro_comparative.php http://economics.fundamentalfinance.com/micro_comparative.ph...
- lambertsimnel 10y ago
  The suggestion is that the more productive country would convert all of its production to one commodity, leaving an opportunity for other commodities to other countries. This is a bit simplistic, as it assumes that production can be converted, that there no region of the country where a different industry is more productive, that producers have the relevant information, etc.
  - SapphireSun 10y ago
    Wikipedia had an interesting segment on the general case where there are more than two industries: "In both Ricardian and H–O models, the comparative advantage concept is formulated for 2 country, 2 commodity case. It can easily be extended to the 2 country, many commodity case or many country, 2 commodity case.[17][18] But in the case with many countries (more than 3 countries) and many commodities (more than 3 commodities), the notion of comparative advantage requires a substantially more complex formulation.[19]"
- nandemo 10y ago
  > Wouldn't the world be flush with Portugal's product in both industries rather than only in wine? In short, yes. But that's merely an extreme case, not an counterexample to the principle. Starting with the no-trade situation, Portugal producing 1M units of cloth and 1M units of wine, England producing only 10 units each. Note that "the world" is already flush with Portuguese products. If they start trading and want to keep the same total production of cloth, then England would produce only cloth (20 and odd units), and Portugal would produce a little less cloth (1M - England's production) and bit more wine.
carsongross 10y ago
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. This is ridiculous. It was ridiculous then, and it's even more ridiculous now. If there is anything that economists (even Marx!) agreed on, it was the benefits of international free trade. Hayek, Rothbard, Krugman, Mises, Keynes: all international free traders to a man. I would be surprised if one in ten readers of HN thinks international free trade can hurt an economy: it's a nearly universally assumed good amongst the intelligentsia. It has always been the populists and, usually silently while publicly encouraging it for others, the mercantilists who have demurred. I happen to think that the last twenty years have demonstrated that international free trade can be very detrimental to the majority of people in a particular economy, whatever theory might say, but the idea that this is a majority opinion amongst intelligent people (let us set aside the obvious response) is absurd.
- gumby 10y ago
  He's not talking about economists! He said intellectuals (as in public intellectuals, particularly on the left but not always so), implicitly those outside mainstream economics. He's certainly rejecting the "dissenting economists", but he's mainly taking about politicians and other public figures (the first figure he savages is Goldsmith, who was somewhat influential in the UK and France but not at all an economist.
- force_reboot 10y ago
  The article spends quite a bit of time citing intellectuals who argue against comparative advantage. As you say, all economists agree on free trade, but Krugman is talking about non-economists. And regarding HN, I would say a majority of comments in a recent article on MarkerBot outsourcing their production to China[0], are implicitly or explicitly against free trade. [0] https://news.ycombinator.com/item?id=11574215 https://news.ycombinator.com/item?id=11574215
- SixSigma 10y ago
  I'm one of your one in ten. So is Donald Trump. So are the leaders of the world's second largest economy, China. (I guess mentioning Trump is cause for a mass downvote. 10 posts in one go. WTG, GG)
SixSigma 10y ago
For a counter points Six Reasons for U.S. to Abandon Free-Trade Myth: Ian Fletcher http://www.bloomberg.com/news/articles/2010-10-26/six-reasons-for-u-s-to-drop-free-trade-myth-commentary-by-ian-fletcher http://www.bloomberg.com/news/articles/2010-10-26/six-reason... And http://www.freetradedoesntwork.com/ http://www.freetradedoesntwork.com/
jokoon 10y ago
I wonder if one can simplify comparative advantages by considering economies of scale. If countries specialize, it will always be beneficial thanks to economies of scale.
- dllthomas 10y ago
  There are sometimes diseconomies of scale.
darawk 10y ago
There are at least two serious criticisms of free trade that I can think of that are not addressed in this article: 1. Borrowing from Taleb's latest book, free trade encourages economic fragility. A country that specializes in textiles will be completely ruined when textile manufacturing is automated. Further, this level of specialization may crowd out other opportunities for growth and suppress the evolution of an economy towards even more productive exports by suppressing variability. 2. It is possible, as we are seeing in the US to some extent, that the comparative advantages that a country may have simply don't need to employ very many people. In the case of the United States, some of our biggest exports are tech and finance, and those industries simply cannot support massive employment on the scale necessary to give everyone a job. I'd be curious to hear any counter-arguments to these ideas.
- jimmytidey 10y ago
  1a) Fragility - yep that's a fair point, however, you'd have to weigh the opportunity cost of not produce your most efficient good with the size of the predicted crash. I guess this is the notion of the Banana Republic. 1b) Crowding out - On conventional wisdom (if such a thing exists) this is not valid, the economy should automatically target production to whatever is most effective through the profit motive. However, some think that doesn't always work: this is the idea of 'lock-in' or 'path dependency'. As you say, maybe it's hard for a developing country to switch from the garment industry to more sophisticated manufacturing, and they get stuck on a particular course. You'd have to explain why that didn't happen in the West. 2) Comparative advantage says nothing about how many people will be employed. All it's saying is that the sum total of the value of goods will be greater. However, in theory, even if the US had very low employment rates, the few remaining high earners could redistribute that wealth and make everyone richer. Politics may come into play here!
  - darawk 10y ago
    1b) I think i'd say that it is both path-dependent and also the simple lack of variation (as in any evolving system) produces poorer results with respect to long-term innovation and sustainability. If I had to venture a guess as to why this didn't happen with the west, i'd say it's because we were first. It was easy for us to transition into new markets because there were no established players already doing it better - making a shitty car is a great business if everyone else is riding horses. 2. Ya, that's fair. But I think it's a pretty huge caveat to "free trade is good" to have to say "free trade is good on the whole, but harms poor, low skilled workers in the absence of concomitant and independent wealth distribution reforms (which are, here at least, politically untenable)". And it's strange to me that Krugman who I think is generally considered leftist wouldn't address this seemingly obvious shortcoming.
explanibrag 10y ago
I think free trade has benefited mankind hugely and is largely responsible for lifting China out of poverty. However, I don't find the standard model of comparative advantage to be a convincing argument in favour of free trade. The problem is that the basic model is heavily oversimplified, and more complex models get very complex very quickly. With a model, it's hard to be sure you've captured all the effects and calibrated it correctly (especially in a world with changing demographics and changing technology). I think most intelligent people hear the basic idea, and then come up with criticisms like the following: 1/ It appears to assume that comparative advantage is fixed. But couldn't a country deliberately specialise in something it's not innately good at, thus retraining its workers and eventually shifting its comparative advantage over time? 2/ All the textbook examples concentrate on manufacturing. It's not a giant leap to see the same effect in services, but I don't think it's completely clear-cut either. 3/ It assumes labour is immobile. Otherwise why wouldn't the specialist weavers from England move to France and the specialist masons from France move to England? 4/ How can a country know what its comparative advantages are? Comparative advantage is not observable in the real world, so producers have to resort to guesswork. How can we know they guess correctly? Now if you ditch some of the basic assumptions it's not at all clear how the conclusions change. So I think it's perfectly reasonable for laymen not to be convinced by the basic model.
- jimmytidey 10y ago
  I think you're right about these points, except they miss the surprising aspect of the theory. Imagine there were two countries in the world, say France and England, and France was better at making every kind of product. Most people would conclude that England would need to protect itself from France by limiting trade. Comparative advantage tells this is not true - England will always be richer if it trades, no mater how good France is at manufacturing. That is the key insight. Yes - England could train its weavers, or entice weavers from France, or develop wine growing regions, or focus on services. But no matter what it does, it will always benefit from trade. Comparative advantage isn't telling you about training, labour mobility, or the difference between goods and services. It's telling you about trade in general. Of course it's a model, but many economists find it compelling.
jimmytidey 10y ago
Comparative Advantage drives me insane. It's so widely misunderstood, or just unknown, and yet its crucial to understanding so many political decisions. I don't have a position on TTIP, but many of my friends do. Having a view on TTIP without understanding comparative advantage is like having a position on Israel without knowing that Palestine exists. It's not that you could be better informed - everyone could always be better informed - it's that you missed the crucial motivating factor that explains everyone's behaviour. Yet, comparative advantage is hard to explain and seems like some rhetoric thought up by evil, exploitative international capitalists. To me, the simplest explanation is that trade is always beneficial, because parties only agree to it when they both see advantage. I've thought about how I'd run a workshop to explain this. I'd divide up the group up into teams and issue a different selection of chocolates to each team. Then I'd ask everyone to swap, and ask each team to say if they were happier after the swapping. Unless the workshop is full of pathologically irrational people, everyone will be happier or at least as happy as before.
- explanibrag 10y ago
  "To me, the simplest explanation is that trade is always beneficial, because parties only agree to it when they both see advantage." That's true in an efficient-economic-agent sort of way, but do you really think it's true in the real world? Do you think actors (nations, companies, individuals) don't make errors of judgement?
  - jimmytidey 10y ago
    Yes, I think people make errors of judgement. I also think the 'path dependency' mentioned in another comment exists. I also think, as another poster mentioned, there are strategic reasons to ensure a balance of industries in your economy. I think the comparative advantage model remains a compelling starting point despite all this. But it doesn't matter what I think, the key thing is that many people who actually do make decisions use the comparative advantage model.

23 points by force_reboot 10y ago

I recently came across this article by Paul Krugman, which is different to his more recent writing (for one thing it is on his area of expertise, international trade). It's both a great exposition of mainstream economic thought on trade, and a discussion of why otherwise educated people reject these ideas. The story on MakerBot's relocation of its manufacturing to China was my immediate inspiration for posting this, but I think it's relevant to a lot of discussions on HN.

MrTonyD 10y ago

I think Krugman is both brilliant and blinded by his own brilliance. Krugman's focus on economic data blinds him to the second and third order consequences of worldwide trade. In particular, trade outside borders allows schemes for hiding income, evading taxes, harming particular groups of people, undermining governments, ignoring social values (eg. climate change, workplace safety, quality of life for workers, wages) and amassing fortunes for multi-billionaires who then create even more problems. If that weren't enough, there are still many "fuzzy" areas of economics, and I think that many of those areas are fuzzy precisely because they are so complex due to the "open systems" created by free trade (unlike "closed systems" which can be controlled by a nation's laws and monitored using modern Big Data techniques.) So, while Krugman is brilliant, he is also very flawed - dragged down by the very data that he understands so well. But isn't that always the case for technocrats?

maxerickson 10y ago
Do you think his assertion about the labor share of income providing information about the impact of trade is wrong or otherwise not a good measure?
- MrTonyD 10y ago
  It is information...but if you read my original comment you will see that the benefit of such increased income is far outweighed by other considerations. As I recall, even Krugman himself described that gain as very small (small single digit percents), and potentially mistaken (depending on the average of small numbers across studies.) We, as a society, are paying huge prices for what may be a statistical anomaly.
  - maxerickson 10y ago
    He says as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades. The implication of that is that workers are receiving the benefits of trade and increasing productivity, and it doesn't read as ambiguous or potentially mistaken to me.
    - MrTonyD 10y ago
      I've been reading Krugman for decades. He has said a lot of things.
SapphireSun 10y ago
In the case of climate change, social values, etc, wouldn't you just apply a regulation to price in the cost of those values and comparative advantage still holds after adjustment?
- MrTonyD 10y ago
  Regulation has a scope defined by governments. And when money can be moved easily outside any particular government, it becomes impossible to regulate. Just look at how Walmart moved cash to offshores to loan to themselves so that they could then claim that their profits were losses to loan payments - avoiding taxation and any incentives/disincentives done by our tax system. So the "trade" of offshores providing "services" is routinely used to evade any regulations - the Walmart example is just an extreme example of how even cash transactions can become something "gamed" by trade and used to undermine the autonomy of a society.
Osiris30 10y ago
I think Krugman was trying to make the case for why many smart people don't seem to understand how the theory of Comparative (as opposed to absolute) Advantage works. I don' think he was arguing that that theory is the be all and end all of trade policy. The theory is a abstract model of the world - it is a useful guide like all abstract models but does not capture the world in all its complexity. Both theoretically and practically, over the last 30 years, there is increasing evidence that Free Trade effects - like everything - depends on context and policies. Krugman himself writes alot about this on his blog. Can't search for everything right now - but here is an example from a few weeks ago: http://krugman.blogs.nytimes.com/2016/04/20/101-boosterism/ http://krugman.blogs.nytimes.com/2016/04/20/101-boosterism/ He has also been consistently lukewarm on the TPP trade deal exactly because of these issues: http://krugman.blogs.nytimes.com/2015/04/26/this-is-not-a-trade-agreement http://krugman.blogs.nytimes.com/2015/04/26/this-is-not-a-tr... "One thing that should be totally obvious, however, is that it’s off-point and insulting to offer an off-the-shelf lecture on how trade is good because of comparative advantage, and protectionists are dumb."

maxerickson 10y ago

What a horrifying exposition.

Sniffnoy 10y ago

I'm surprised this essay doesn't mention what I would be expect to be a big reason people don't get comparative advantage: Because it sounds similar to something simpler that people already know, so they conflate the two ideas. Because if you don't know what the law of comparative advantage actually says, it sounds kind of like, "If I am better at A than you are, and you are better than B I am, then we can benefit from trading which each other." Which is true, but also basically obvious; the law of comparative advantage is more general than that. There's a reason it's the law of comparative advantage and not absolute advantage! So I would expect that a lot of people are getting what it says mixed up, because it sounds like something they already know.

deleted 10y ago
[deleted]
meric 10y ago
Law of comparative advantage: "If my ability in A compared to my ability in B as a ratio is different to your ability in A compared to your ability to B as a ratio, then we can benefit from trading which each other."

SapphireSun 10y ago

This essay inspired me to read about comparative advantage. I pulled up this wikipedia article: https://en.wikipedia.org/wiki/Comparative_advantage https://en.wikipedia.org/wiki/Comparative_advantage I have to say that I'm still a bit confused by it. In the example given, Portugal has an absolute advantage in cloth and wine. Let's say England's productivity was massively less than Portugal (say it took a 1M hours to produce cloth and 1.3M to produce wine), but Portugal takes 90 and 80 respectively. Wouldn't the world be flush with Portugal's product in both industries rather than only in wine? EDIT: This link was useful though I think I'm still unsure about the case I proposed. http://economics.fundamentalfinance.com/micro_comparative.php http://economics.fundamentalfinance.com/micro_comparative.ph...

lambertsimnel 10y ago
The suggestion is that the more productive country would convert all of its production to one commodity, leaving an opportunity for other commodities to other countries. This is a bit simplistic, as it assumes that production can be converted, that there no region of the country where a different industry is more productive, that producers have the relevant information, etc.
- SapphireSun 10y ago
  Wikipedia had an interesting segment on the general case where there are more than two industries: "In both Ricardian and H–O models, the comparative advantage concept is formulated for 2 country, 2 commodity case. It can easily be extended to the 2 country, many commodity case or many country, 2 commodity case.[17][18] But in the case with many countries (more than 3 countries) and many commodities (more than 3 commodities), the notion of comparative advantage requires a substantially more complex formulation.[19]"
nandemo 10y ago
> Wouldn't the world be flush with Portugal's product in both industries rather than only in wine? In short, yes. But that's merely an extreme case, not an counterexample to the principle. Starting with the no-trade situation, Portugal producing 1M units of cloth and 1M units of wine, England producing only 10 units each. Note that "the world" is already flush with Portuguese products. If they start trading and want to keep the same total production of cloth, then England would produce only cloth (20 and odd units), and Portugal would produce a little less cloth (1M - England's production) and bit more wine.

carsongross 10y ago

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. This is ridiculous. It was ridiculous then, and it's even more ridiculous now. If there is anything that economists (even Marx!) agreed on, it was the benefits of international free trade. Hayek, Rothbard, Krugman, Mises, Keynes: all international free traders to a man. I would be surprised if one in ten readers of HN thinks international free trade can hurt an economy: it's a nearly universally assumed good amongst the intelligentsia. It has always been the populists and, usually silently while publicly encouraging it for others, the mercantilists who have demurred. I happen to think that the last twenty years have demonstrated that international free trade can be very detrimental to the majority of people in a particular economy, whatever theory might say, but the idea that this is a majority opinion amongst intelligent people (let us set aside the obvious response) is absurd.

gumby 10y ago
He's not talking about economists! He said intellectuals (as in public intellectuals, particularly on the left but not always so), implicitly those outside mainstream economics. He's certainly rejecting the "dissenting economists", but he's mainly taking about politicians and other public figures (the first figure he savages is Goldsmith, who was somewhat influential in the UK and France but not at all an economist.
force_reboot 10y ago
The article spends quite a bit of time citing intellectuals who argue against comparative advantage. As you say, all economists agree on free trade, but Krugman is talking about non-economists. And regarding HN, I would say a majority of comments in a recent article on MarkerBot outsourcing their production to China[0], are implicitly or explicitly against free trade. [0] https://news.ycombinator.com/item?id=11574215 https://news.ycombinator.com/item?id=11574215
SixSigma 10y ago
I'm one of your one in ten. So is Donald Trump. So are the leaders of the world's second largest economy, China. (I guess mentioning Trump is cause for a mass downvote. 10 posts in one go. WTG, GG)

SixSigma 10y ago

For a counter points Six Reasons for U.S. to Abandon Free-Trade Myth: Ian Fletcher http://www.bloomberg.com/news/articles/2010-10-26/six-reasons-for-u-s-to-drop-free-trade-myth-commentary-by-ian-fletcher http://www.bloomberg.com/news/articles/2010-10-26/six-reason... And http://www.freetradedoesntwork.com/ http://www.freetradedoesntwork.com/

jokoon 10y ago

I wonder if one can simplify comparative advantages by considering economies of scale. If countries specialize, it will always be beneficial thanks to economies of scale.

dllthomas 10y ago
There are sometimes diseconomies of scale.

darawk 10y ago

There are at least two serious criticisms of free trade that I can think of that are not addressed in this article: 1. Borrowing from Taleb's latest book, free trade encourages economic fragility. A country that specializes in textiles will be completely ruined when textile manufacturing is automated. Further, this level of specialization may crowd out other opportunities for growth and suppress the evolution of an economy towards even more productive exports by suppressing variability. 2. It is possible, as we are seeing in the US to some extent, that the comparative advantages that a country may have simply don't need to employ very many people. In the case of the United States, some of our biggest exports are tech and finance, and those industries simply cannot support massive employment on the scale necessary to give everyone a job. I'd be curious to hear any counter-arguments to these ideas.

jimmytidey 10y ago
1a) Fragility - yep that's a fair point, however, you'd have to weigh the opportunity cost of not produce your most efficient good with the size of the predicted crash. I guess this is the notion of the Banana Republic. 1b) Crowding out - On conventional wisdom (if such a thing exists) this is not valid, the economy should automatically target production to whatever is most effective through the profit motive. However, some think that doesn't always work: this is the idea of 'lock-in' or 'path dependency'. As you say, maybe it's hard for a developing country to switch from the garment industry to more sophisticated manufacturing, and they get stuck on a particular course. You'd have to explain why that didn't happen in the West. 2) Comparative advantage says nothing about how many people will be employed. All it's saying is that the sum total of the value of goods will be greater. However, in theory, even if the US had very low employment rates, the few remaining high earners could redistribute that wealth and make everyone richer. Politics may come into play here!
- darawk 10y ago
  1b) I think i'd say that it is both path-dependent and also the simple lack of variation (as in any evolving system) produces poorer results with respect to long-term innovation and sustainability. If I had to venture a guess as to why this didn't happen with the west, i'd say it's because we were first. It was easy for us to transition into new markets because there were no established players already doing it better - making a shitty car is a great business if everyone else is riding horses. 2. Ya, that's fair. But I think it's a pretty huge caveat to "free trade is good" to have to say "free trade is good on the whole, but harms poor, low skilled workers in the absence of concomitant and independent wealth distribution reforms (which are, here at least, politically untenable)". And it's strange to me that Krugman who I think is generally considered leftist wouldn't address this seemingly obvious shortcoming.

explanibrag 10y ago

I think free trade has benefited mankind hugely and is largely responsible for lifting China out of poverty. However, I don't find the standard model of comparative advantage to be a convincing argument in favour of free trade. The problem is that the basic model is heavily oversimplified, and more complex models get very complex very quickly. With a model, it's hard to be sure you've captured all the effects and calibrated it correctly (especially in a world with changing demographics and changing technology). I think most intelligent people hear the basic idea, and then come up with criticisms like the following: 1/ It appears to assume that comparative advantage is fixed. But couldn't a country deliberately specialise in something it's not innately good at, thus retraining its workers and eventually shifting its comparative advantage over time? 2/ All the textbook examples concentrate on manufacturing. It's not a giant leap to see the same effect in services, but I don't think it's completely clear-cut either. 3/ It assumes labour is immobile. Otherwise why wouldn't the specialist weavers from England move to France and the specialist masons from France move to England? 4/ How can a country know what its comparative advantages are? Comparative advantage is not observable in the real world, so producers have to resort to guesswork. How can we know they guess correctly? Now if you ditch some of the basic assumptions it's not at all clear how the conclusions change. So I think it's perfectly reasonable for laymen not to be convinced by the basic model.

jimmytidey 10y ago
I think you're right about these points, except they miss the surprising aspect of the theory. Imagine there were two countries in the world, say France and England, and France was better at making every kind of product. Most people would conclude that England would need to protect itself from France by limiting trade. Comparative advantage tells this is not true - England will always be richer if it trades, no mater how good France is at manufacturing. That is the key insight. Yes - England could train its weavers, or entice weavers from France, or develop wine growing regions, or focus on services. But no matter what it does, it will always benefit from trade. Comparative advantage isn't telling you about training, labour mobility, or the difference between goods and services. It's telling you about trade in general. Of course it's a model, but many economists find it compelling.

jimmytidey 10y ago

Comparative Advantage drives me insane. It's so widely misunderstood, or just unknown, and yet its crucial to understanding so many political decisions. I don't have a position on TTIP, but many of my friends do. Having a view on TTIP without understanding comparative advantage is like having a position on Israel without knowing that Palestine exists. It's not that you could be better informed - everyone could always be better informed - it's that you missed the crucial motivating factor that explains everyone's behaviour. Yet, comparative advantage is hard to explain and seems like some rhetoric thought up by evil, exploitative international capitalists. To me, the simplest explanation is that trade is always beneficial, because parties only agree to it when they both see advantage. I've thought about how I'd run a workshop to explain this. I'd divide up the group up into teams and issue a different selection of chocolates to each team. Then I'd ask everyone to swap, and ask each team to say if they were happier after the swapping. Unless the workshop is full of pathologically irrational people, everyone will be happier or at least as happy as before.

explanibrag 10y ago
"To me, the simplest explanation is that trade is always beneficial, because parties only agree to it when they both see advantage." That's true in an efficient-economic-agent sort of way, but do you really think it's true in the real world? Do you think actors (nations, companies, individuals) don't make errors of judgement?
- jimmytidey 10y ago
  Yes, I think people make errors of judgement. I also think the 'path dependency' mentioned in another comment exists. I also think, as another poster mentioned, there are strategic reasons to ensure a balance of industries in your economy. I think the comparative advantage model remains a compelling starting point despite all this. But it doesn't matter what I think, the key thing is that many people who actually do make decisions use the comparative advantage model.