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Maybe our economic policy should go deeper than 101-level economics then! Because comparative advantage is a dynamic quantity which changes over time, and while

Maybe our economic policy should go deeper than 101-level economics then! Because comparative advantage is a dynamic quantity which changes over time, and while some advantages (like geography) are fixed, others are built by investment. Here's a video [1] which explains why, in 1955, manufacturing household goods was cheaper to make in the US than in China (and why, at the time, they thought this manufacturing dominance was the thing that backed the US position as a global superpower). It's not because Americans worked more cheaply than Chinese workers, it's because American factories had a well-developed tool-and-die expertise, which meant that when anyone in the world wanted to make something, they were well-advised to travel the US to get it made. Econ 101's comparative advantage is true at an instantaneous point in time, which is a good start, but if perhaps it's just "knowing enough to be dangerous". Economic policymakers (and company leaders) would do well to think about comparative advantage as planning an optimal trajectory over time, which can mean sacrificing a short-term optimum in exchange for a long-term optimum, and if there even is a textbook solution for that, it's going to look less like a 101-level intersection of straight lines, and more like an iterative optimization over nonlinear differential equations. [1]: https://www.youtube.com/watch?v=QU6nsfoNWDI https://www.youtube.com/watch?v=QU6nsfoNWDI

mlyle 2y ago
I think you're missing the point of what I'm saying. The US has steadily moved away from those past competencies because there was more profit to be made elsewhere. And, sure, there are absolutely network effects with related goods and industries that have steepened that movement. If it was a win to change the allocation of resources when e.g. steelmaking was strong in the US, it's even more of a win after steelmaking withered. > and if there even is a textbook solution for that, It's not quite what you're saying, but the closest work I have read is 'Dynamic Optimization: The calculus of variations and optimal control in economics and management' by Kamien et al. It is all about estimating gradients and plotting trajectories in dynamical economic systems.
- mitthrowaway2 2y ago
  The feeling of misunderstanding is mutual! I agree that there was more profit to be made elsewhere. But I'm arguing that those profits were short-term profits which may well have come at long-term expense. If you follow the local gradient of profitability, you'll always find great short-term returns selling off your seed corn. Unlike what Econ 101 asserts about maximizing comparative advantage being the most profitable strategy, there is absolutely no guarantee that following a locally-optimal comparative-advantage strategy is globally optimal over a long-term window, where advantages are path-dependent. Manufacturing is the core example of path-dependent advantages, because (unlike what any econ 101 textbook teaches), marginal costs decline with increasing production quantity in the manufacturing sector. This means the more you make, the better you are at making more things!
  - 1123581321 2y ago
    The thing is there are also network effects, expertise building and marginal cost improvements to be built up in high value items and services. The United States was able to build a tremendous economy by building up those systems while continuing to benefit from its older manufacturing base for decades. The United States economy is far from perfect, but it hasn’t traded away a long-term asset for only short-term ones as you’re suggesting.
  - mlyle 2y ago
    > . Unlike what Econ 101 asserts about maximizing comparative advantage being the most profitable strategy, there is absolutely no guarantee that following a locally-optimal comparative-advantage strategy is globally optimal over a long-term window, I think there's little doubt that our change in allocation of resources has been advantageous versus staying an economy focused on primary metals and relatively simple manufacturing. Do you really feel otherwise? Of course, economic assessments and the behavior of markets generally assumes free choice by participants. So there's always: 1. Geopolitical risks: state leverage can turn a local absolute advantage in e.g. producing war materiel into other advantages. 2. Sure, we could back ourselves into a corner, ultimately, by not being able to provide a key part of the value chain by following that gradient. (Geopolitics can be related, too, in that states can gather together lots of small advantages and use them in coordinated ways against other states). So our state, of course, needs to focus on countering those actions of other parties. And maintaining some diversity beyond what is economically optimal can add resilience. (One point I make in class: our textbook pretty much says that price controls are always dumb... but that there are plenty of reasons that a country might desire to have a surplus of food or to not be dependent upon another country). The track record of those who would seek to centrally plan and optimize for some future outcome instead of following that profit gradient has been very poor. Not to say that it's never worked: but generally following the profit gradient has yielded better outcomes. > because of (unlike what any econ 101 textbook teaches), marginal costs decline with production quantity in the manufacturing sector. Unlike what any econ 101 teaches? Talking about LRATC, returns to scale, etc, is a big part of my unit 3. If you're not referring to that and instead e.g. Wright's law, that too is mentioned.
qwytw 2y ago
> it's because American factories had a well-developed tool-and-die expertise, which meant that when anyone in the world wanted to make something, they were well-advised to travel the US to get it made. Also because you couldn't offshore production to China or most other places even if you could provide all that due to various geopolitical, economic, social, institutional and other reasons.
- kragen 2y ago
  mostly container shipping didn't exist, but things like tool and die products cost enough per kilogram that even air shipping is economical, to say nothing of integrated circuits

mlyle 2y ago

I think you're missing the point of what I'm saying. The US has steadily moved away from those past competencies because there was more profit to be made elsewhere. And, sure, there are absolutely network effects with related goods and industries that have steepened that movement. If it was a win to change the allocation of resources when e.g. steelmaking was strong in the US, it's even more of a win after steelmaking withered. > and if there even is a textbook solution for that, It's not quite what you're saying, but the closest work I have read is 'Dynamic Optimization: The calculus of variations and optimal control in economics and management' by Kamien et al. It is all about estimating gradients and plotting trajectories in dynamical economic systems.

mitthrowaway2 2y ago
The feeling of misunderstanding is mutual! I agree that there was more profit to be made elsewhere. But I'm arguing that those profits were short-term profits which may well have come at long-term expense. If you follow the local gradient of profitability, you'll always find great short-term returns selling off your seed corn. Unlike what Econ 101 asserts about maximizing comparative advantage being the most profitable strategy, there is absolutely no guarantee that following a locally-optimal comparative-advantage strategy is globally optimal over a long-term window, where advantages are path-dependent. Manufacturing is the core example of path-dependent advantages, because (unlike what any econ 101 textbook teaches), marginal costs decline with increasing production quantity in the manufacturing sector. This means the more you make, the better you are at making more things!
- 1123581321 2y ago
  The thing is there are also network effects, expertise building and marginal cost improvements to be built up in high value items and services. The United States was able to build a tremendous economy by building up those systems while continuing to benefit from its older manufacturing base for decades. The United States economy is far from perfect, but it hasn’t traded away a long-term asset for only short-term ones as you’re suggesting.
- mlyle 2y ago
  > . Unlike what Econ 101 asserts about maximizing comparative advantage being the most profitable strategy, there is absolutely no guarantee that following a locally-optimal comparative-advantage strategy is globally optimal over a long-term window, I think there's little doubt that our change in allocation of resources has been advantageous versus staying an economy focused on primary metals and relatively simple manufacturing. Do you really feel otherwise? Of course, economic assessments and the behavior of markets generally assumes free choice by participants. So there's always: 1. Geopolitical risks: state leverage can turn a local absolute advantage in e.g. producing war materiel into other advantages. 2. Sure, we could back ourselves into a corner, ultimately, by not being able to provide a key part of the value chain by following that gradient. (Geopolitics can be related, too, in that states can gather together lots of small advantages and use them in coordinated ways against other states). So our state, of course, needs to focus on countering those actions of other parties. And maintaining some diversity beyond what is economically optimal can add resilience. (One point I make in class: our textbook pretty much says that price controls are always dumb... but that there are plenty of reasons that a country might desire to have a surplus of food or to not be dependent upon another country). The track record of those who would seek to centrally plan and optimize for some future outcome instead of following that profit gradient has been very poor. Not to say that it's never worked: but generally following the profit gradient has yielded better outcomes. > because of (unlike what any econ 101 textbook teaches), marginal costs decline with production quantity in the manufacturing sector. Unlike what any econ 101 teaches? Talking about LRATC, returns to scale, etc, is a big part of my unit 3. If you're not referring to that and instead e.g. Wright's law, that too is mentioned.

qwytw 2y ago

> it's because American factories had a well-developed tool-and-die expertise, which meant that when anyone in the world wanted to make something, they were well-advised to travel the US to get it made. Also because you couldn't offshore production to China or most other places even if you could provide all that due to various geopolitical, economic, social, institutional and other reasons.

kragen 2y ago
mostly container shipping didn't exist, but things like tool and die products cost enough per kilogram that even air shipping is economical, to say nothing of integrated circuits