Your Economic Model Is SO Five Minutes Ago

Russell Roberts at Cafe Hayek makes the excellent point that it's a bit odd that protectionists deride the theory of comparative advantage as obsolete because David Ricardo is, like, totally old but seem to have no problem with the still-mustier tradition of freaking out over trade deficits.

Comments

[Douglas Fletcher]

Look buddy my smart guy who was way smarter than me was smarter than your smart guy who was way smarter than you. So there.

[Wintermute]

Good links. They don't call it the dismal science for nothing.

[Wintermute]

It's going to be interesting. I don't remember Schumer from Ec 1, but it was a huge class. With a trace memory of the mystery of comparative advantage, I sought a quick fix at Wiki:

http://en.wikipedia.org/wiki/Comparative_advantage

So as our advantage in production declines, from rising domestic costs and mobility of capital and employment, so do our comparative advantage and gains from trade, no? And our strongest advantage now (leaving movies aside) is as a secure place for other countries to invest our trade deficit dollars.

Please correct me if I got this wrong; it's been a long time.

[MikeP]

And our strongest advantage now (leaving movies aside) is as a secure place for other countries to invest our trade deficit dollars.

I can't tell if you are being facetious, but, essentially, yes.

The notion of comparative advantage doesn't merely apply between national economies. It applies in all economic relationships -- even within a firm. In this case, US companies are importing the elements of their total production for which they have lower advantage and retaining at home those for which they have higher advantage.

The fact that recent developments have allowed the importing of higher valued productive efforts does not change the essentials in the slightest. In effect, US companies are leveraging the rest of the world's improving talents to make themselves and their American labor more productive. Of course the rest of the world will want to invest in that!

[Wintermute]

I wasn't being facetious; and I thank you for continuing one of the most important discussions we should be having.

So you are saying that as long as American-owned business entities (although domestic ownership as well is probably being diluted) can incorporate the work of foreign workers and investments into domestic profits, we suffer only dislocation employment? What happens when Indian code shops put out their own version of Windows, and any legal claims against them are not enforced?

Again, I am not being facetious. I hope for your further intelligent comment.

[kgsam]

What's really amazing is that the American workers manages to be so productive even with the incredible burden of government. If we canever manage to reduce that burden to a significant degree, the American worker will be the most competitive as well.

[anon2]

time inconsistency

[MikeP]

What happens when Indian code shops put out their own version of Windows, and any legal claims against them are not enforced?

Chinese CD stampers already do the same thing -- without code shops or any product team whatsoever. Yes, it's hard to deal with pirates through US and international IP law. But it's no reason to put up barriers to international trade.

And even if some Indian-made product violating Windows's IP protections bubbles to the top and gets acceptance and business from the growing industries outside the US, that too is not an argument for protectionism or against comparative advantage. It's merely a case of one nation's customs and laws on IP conflicting with another's.

I would presume that whatever reach the US government had to any operations of the offending company would be used to sanction said company and its customers and suppliers -- just as if the company were based in Texas. Ticking off the government of the largest economy in the world is probably not a good business model for any serious company, no matter where it is located.

[theCoach]

What's really amazing is that the American workers manage to be so productive even with the incredible burden of dealing with a chaotic healthcare system. If we canever manage to reduce that burden to a significant degree, the American worker will be the most competitive as well.

[Wintermute]

Perhaps I should have been more specific. Legal barriers can include non-compete agreements as well as IP monopolies. Those barriers aside in the long run, if we teach India to fish (write and market OS'es), we can't sell them (or their customers) as many fish, can we?

A related issue is before us: do we allow immigration of less income- and welfare-spoiled workers to lower our costs, or do we make adjustments otherwise?

[MikeP]

Wintermute,

The two issues you bring up exhibit the same misunderstanding of comparative advantage as that in the Schumer and Roberts article. An economy gets wealthier by moving its efforts up the ladder of productivity and allowing the rungs it leaves behind to be done by others, not by trying to hang on to the lower rungs by whatever means necessary. If both economies rise up the ladder, both economies benefit.

Once you teach a lower cost nation to fish, you can then buy their fish cheaper than you can produce fish yourself. You should be buying their fish and spending your productive efforts on something more valuable where you maintain a higher advantage. It may be shocking to think that writing operating systems would be, like fishing, a lower valued productive endeavor than something else you could be doing, but that may in fact be the case.

As to your immigration question, we should of course allow unrestricted migration simply as a matter of natural rights. And immigration does lower production costs as well as add the standard surplusses to the economy. But the goal of the United States economy should not be to figure out how to scrap around to lower the cost of fishing. It should be to figure out where the economy has greater advantage than it has in fishing and innovate that production with the talents available.