A Yale Historian on Comparative Advantage
I was reading a piece by Paul Kennedy entitled "The Threat of Modernization". By the way, he is a J. Richardson Dilworth Professor of British History at Yale. According to Wikipedia, he is "also the Director of International Security Studies". Also, "along with John Lewis Gaddis and Charles Hill, teaches the Studies in Grand Strategy course there". So this guy is a super smart guy. Heck, he was also a Visiting Fellow at the Institute for Advanced Study at Princeton. And I came across this beautiful argument in his piece:
"What if there is nothing you can produce more cheaply or efficiently than anywhere else, except by constantly cutting labor costs?"
It was kind of amazing that the article seems to confuse the concpets of absolute advantage and comparative advantage. Kennedy seems to believe that gains for trade are only possible if your country produces at least one good better than other nations. But if you produce nothing better than your trading partner, according to him, you are in trouble.
Consider the following scenario in which the US has an absolute advantage over France in all industries. Say it is a 2 industry world - we make hot dogs and buns. (This is a very trivial example, and it certainly makes a lot of assumptions that I should not be making, but I'm just trying to illuminate the concept.) In America, it takes 2 hours per worker to make a hot dog. It takes 1 hour per worker to make a bun. In France, it takes 3 hours per worker to make a hot dog. It takes 6 hours per worker to make a bun. So clearly, France sucks at both. Also, let us imagine that a hot dog and a bun are tradeable. So the exchange ratio is 1:1. This simplifies the numbers a bit.
Notice, if the US spends an hour, it can make 1/2 a hot dog or 1 bun. Now if it spent an hour and made 1 bun, it could effectively trade for 1 hot dog. Meanwhile, instead of spending 1 hr to make 1/6 of a bun, France can make 1/3 of a hot dog and trade this for 1/3 of a bun. So both stand to benefit.
Anyway, the point is, the idea of comparative advantage is rather elementary and powerful, and yet forgotten by many (intelligent) social commentators. In fact, mathematician Stanislaw Ulam challenged Paul A. Samuelson (Nobel prize winner in economics) to name a theory in social science that is both true and non-trivial. Samuelson, after considering it for several years, responds,
"That it is logically true need not be argued before a mathematician; that it is non-trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."
It is always very interesting how, in inter-disciplinary matters, specialists in one field miss even the simplest of concepts in the other, regardless of how brilliant they may be. Of course, that makes those who transcend the boundaries of their fields all the more impressive.
"What if there is nothing you can produce more cheaply or efficiently than anywhere else, except by constantly cutting labor costs?"
It was kind of amazing that the article seems to confuse the concpets of absolute advantage and comparative advantage. Kennedy seems to believe that gains for trade are only possible if your country produces at least one good better than other nations. But if you produce nothing better than your trading partner, according to him, you are in trouble.
Consider the following scenario in which the US has an absolute advantage over France in all industries. Say it is a 2 industry world - we make hot dogs and buns. (This is a very trivial example, and it certainly makes a lot of assumptions that I should not be making, but I'm just trying to illuminate the concept.) In America, it takes 2 hours per worker to make a hot dog. It takes 1 hour per worker to make a bun. In France, it takes 3 hours per worker to make a hot dog. It takes 6 hours per worker to make a bun. So clearly, France sucks at both. Also, let us imagine that a hot dog and a bun are tradeable. So the exchange ratio is 1:1. This simplifies the numbers a bit.
Notice, if the US spends an hour, it can make 1/2 a hot dog or 1 bun. Now if it spent an hour and made 1 bun, it could effectively trade for 1 hot dog. Meanwhile, instead of spending 1 hr to make 1/6 of a bun, France can make 1/3 of a hot dog and trade this for 1/3 of a bun. So both stand to benefit.
Anyway, the point is, the idea of comparative advantage is rather elementary and powerful, and yet forgotten by many (intelligent) social commentators. In fact, mathematician Stanislaw Ulam challenged Paul A. Samuelson (Nobel prize winner in economics) to name a theory in social science that is both true and non-trivial. Samuelson, after considering it for several years, responds,
"That it is logically true need not be argued before a mathematician; that it is non-trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."
It is always very interesting how, in inter-disciplinary matters, specialists in one field miss even the simplest of concepts in the other, regardless of how brilliant they may be. Of course, that makes those who transcend the boundaries of their fields all the more impressive.
posted by arun at 1:00 AM
4 Comments:
I don't get it.
econ 001. back to the basics.
Yea, interdisciplinary, but even the ability to be able to jump into a new field to grasp the major concepts while adding to the field is definitely to be respected.
while i'm personally pro-free trade, I can understand a lot of concern about the "fair trade" issue -- one thing that I've always been stunned at however, is how little people seem to understand something as simple as comparative advantage...
its the same reason Bill Gates probably doesn't do all of his typing -- it make more sense for him to get a secretary to do shit, even if he is better at it than she is, because of the opportunity cost... when phrased that way, more people tend to understand
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