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October 26, 2006

Understanding Comparative Advantage

For those who still don't quite get the only non-trivial, non-obvious result in the social sciences, the 'except' of the tagline up above, try this explanation from Don Boudreaux.

October 26, 2006 in Economics | Permalink

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Comments

The problem with the illustration, as far as I can see, is that it assumes rational, perfect players. Which is about as realistic about human nature as socialism, quite frankly.

Posted by: Katherine | Oct 26, 2006 3:57:00 PM

Katherine:

Neither the principle nor the illustration make any assumption of any sort of what you call "rationality" on anyone's part. It (both the principle and the illustration) show anyone interested what they must do to maximize their "payoff" under the stated conditions. In life, people can choose to do otherwise than maximize such return on their effort; in such cases, everybody loses some material benefit but the one who has so chosen loses most (though they may achieve some other, non-market benefit.)

The world works, economically speaking, according to the principle. It is the foundation, not only of the possibility but of the actuality of peaceful, civilized existence. And it works perfectly whether people understand it or not.

The benefit to understanding the principle (by other than economists) is that it would put in more proper perspective the various policies recommended for adoption by governments. The principle makes one understand clearly that every intervention which interferes with the natural adjustment of comparative advantage (called "the market") cannot achieve the aims ostensibly desired by its promoters. Thus, if minimum wage laws actually cause a rise in anyone's wages, the achievement comes only at the expense of causing some to be unemployed. The fact that a farm might need a subsidy or an industry a tariff to stay afloat is the outcome of the fact that other pieces of land or other industrial producing areas have a comparative advantage in those fields. The subsidy or the tariff merely cause the production to be carried on at higher costs (to all) than otherwise.

Without an understanding of the principle of comparative advantage, people are suckers for every type of economic voodoo.

Posted by: gene berman | Oct 27, 2006 4:38:12 AM

Katherine:

"Comparative advantage" enables everyone to understand many things very easily--even without understanding the principle itself in any academic sense.

People want to use electricity and so need conductive wires. Just about the best conductor possible is silver. Its conductivity is greater than copper and it has the added advantage of not corroding as does copper. But people, even though recognizing these facts, wish silver conserved for other uses deemed more important and so, by their expression of prices for silver and things made therefrom, make it obvious to all that the nearly-as-good (and much less expensive) copper should be used in the preponderance of cases. You might own the piece of land which was the most favorable in the world for growing potatoes. But if you can make more money from the land by growing onions--that's what you will normally do, even though your particular land might only be "average" in onion suitability. In choosing work paying the most, one obeys the "will" of the market (consisting of everyone else). One needn't obey--the only compulsion involved is making less in the other pursuit and relying on another (non-market) satisfaction to "make up the difference."

Posted by: gene berman | Oct 27, 2006 5:27:02 AM