4 ms·
(Retracted) The theory of comparative advantage assumes that capital cannot move between countries. That's the key assumption, without it the theory falls comp
by cousin_it 9y ago
(Retracted)
The theory of comparative advantage assumes that capital cannot move between countries. That's the key assumption, without it the theory falls completely. And in the modern world it's very far from true. I'm reminded of John von Neumann's remark about physicists studying "dry water" (a mathematical model of water that assumes zero viscosity but is oh so beautiful).
- eej71 9y agoWhat is it about the migratory nature of capital that undermines the argument?
- UncleEntity 9y agoNot sure what you mean by this. To cite the classic example: If they moved all the sheep from England to France then France would have absolute advantage over wine and wool production and England would just become a nation of "Several Species of Small Furry Animals Gathered Together in a Cave and Grooving with a Pict"?
- Eliezer 9y agoI would ordinarily just ignore this, but I know you and you've said a sensible thing that one time, so what do you mean by this?
- cousin_it 9y agoRetracted, thanks for making me look at this more closely! My comment referred to paragraphs 7.17-7.19 here http://www.econlib.org/library/Ricardo/ricP2a.html http://www.econlib.org/library/Ricardo/ricP2a.html but now I see the assumption doesn't need to be as strong, and attacking it isn't fruitful anyway. The right way to test the theory of comparative advantage is to look at real world patterns of imports and exports, and it seems like the theory accounts for at least a significant part of these patterns.