Nobel laureate Paul Samuelson was once challenged by the mathematician Stanislaw Ulam to ‘name me one proposition in all of the social sciences which is both true and non-trivial’. It was several years later that Samuelson thought of the principle of comparative advantage. ‘ That this idea is logically true need not be argued before a mathematician; that it is not 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’.
Samuelson was his customary insightful self. So few people appreciate correctly the principle that it is not absolute advantage that determines how people trade – the absolute cost of producing corn in Australia compared to the cost of producing corn it in Japan - but relative or comparative advantage. Producing something always has an opportunity cost in terms of other things that might be produced using the same resources. Australia will tend to export corn and import cars from Japan if it is cheaper to produce corn in Australia (in car production foregone here) than it is in Japan. If to produce a tonne of wheat here means foregoing 0.1 of a car here but in Japan producing a tonne of corn means foregoing 0.2 cars then Australia should export corn and import cars.
Even the great Adam Smith did not twig exactly to this basic insight. It took the brilliance of David Ricardo to show that even if one country took less labour time to produce all the goods that it produced that it could still profitably trade with other countries and import goods that other countries could produce relatively more cheaply. As Samuelson suggests – true and non-trivial.
Students in trade theory units are taught this principle by asking them to respond to the following question. Bill Gates is a wizard at developing saleable operating systems for PCs. He is also an expert typist and can type more accurately and at greater speed than his secretary. Should Bill Gates do his own typing? That he should not illustrates succinctly the principle of comparative advantage.
Even today it is a hard argument to show that countries are not giving anything away when they shift to freer trade. Agreeing to freer trade is conventionally seen to require some kind of compensation for giving another country the right to sell goods more cheaply to you. The game theorists have contributed to this position with half-baked, irrelevant arguments based on strategic positioning – e.g. South American orange producers will only sell oranges cheaply to us until they have wiped-out our industry when they will jack up the price.
Andrew Norton in an interesting post argues that Australian public opinion is not quite as inclined to be deceived by arguments against free trade as the Samuelson quip would suggest – Aussies are a bit fooled but not completely! Most Australians seem to recognise the value of free trade in terms of generating lower prices but they still object to free trade agreements with China on the grounds that China has ‘much lower labour costs’ so workers here will cop it in the neck. They won’t of course – they will move into producing outputs that can be produced here relatively more cheaply than in China. The failure of citizens to grasp this last clause means they still don’t quite get the idea of comparative advantage!
Andrew Leigh urges a demonstration in favour of free trade to redress contrary impressions given by the socialist left at the APEC meetings in Sydney this week. APEC supports a move toward free trade among all its members. This move would substantially benefit all APEDC members although there would be transitional problems particular for the protected agricultural sectors of Japan and Korea.
My own view is that the leftwing demonstrators at the APEC meeting in Sydney are unlikely to listen to any arguments that point out the value to developing countries of developing trade so I probably wouldn’t join in a counter protest in favour of free trade. Most of the left-wingers are closer to brown-shirt supporters of the Nazi Party than to idealists concerned with the position of developing countries. Their attendance to protest at the APEC meeting is a childlike attempt to rehearse for the socialist revolution (look at the pictures at the top of this webpage) and to have a bit of a punch-up with the ‘pigs’. The demonstrators are contemptible, adolescent ninnies. They should, of course, be held one-hundred per cent responsible for any personal attacks and property destruction that they cause.
The best solution for fostering moves that support mutually advantageous trade between developing and developed countries is to encourage the study of economics. My suggestion with respect to the brown-shirts is to ignore them – they will grow up.