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November 7, 2016 at 9:32 pm #18828sheyboerParticipant
How would an Austrian economist respond to the following criticisms of David Ricardo’s theory of Comparative Advantage found on wikipedia?
Ricardo’s argument in favour of free trade has been attacked by those who believe trade restriction can be necessary for the economic development of a nation. Utsa Patnaik claims that Ricardian theory of international trade contains a logical fallacy. Ricardo assumed that in both countries two goods are producible and actually are produced, but developed and underdeveloped countries often trade those goods which are not producible in their own country. For example, many Northern countries do not produce tropical fruits. In these cases, one cannot define which country has comparative advantage.
Critics also argue that Ricardo’s theory of comparative advantage is flawed in that it assumes production is continuous and absolute. In the real world, events outside the realm of human control (e.g. natural disasters) can disrupt production. In this case, specialisation could cripple a country that depends on imports from foreign, naturally disrupted countries. For example, if an industrially based country trades its manufactured goods with an agrarian country in exchange for agricultural products, a natural disaster in the agricultural country (e.g. drought) may cause an industrially based country to starve.
The development economist Ha-Joon Chang challenges the argument that free trade benefits every country:
Ricardo’s theory is absolutely right—within its narrow confines. His theory correctly says that, accepting their current levels of technology as given, it is better for countries to specialize in things that they are relatively better at. One cannot argue with that. His theory fails when a country wants to acquire more advanced technologies—that is, when it wants to develop its economy. It takes time and experience to absorb new technologies, so technologically backward producers need a period of protection from international competition during this period of learning. Such protection is costly, because the country is giving up the chance to import better and cheaper products. However, it is a price that has to be paid if it wants to develop advanced industries. Ricardo’s theory is, thus seen, for those who accept the status quo but not for those who want to change it.
ThanksNovember 8, 2016 at 12:48 pm #18829jmherbenerParticipant
Here are my thoughts.
1. This argument rests on a false premise. Tropical fruit can, in fact, be produced anywhere. Entrepreneurs in Norway, for example, could build greenhouses, import soil, install misting equipment, heaters, artificial lighting, and so on. The only reason they don’t do this is comparative advantage, i.e., their relative costs are too high compared to costs in tropical areas.
Of course, if the critic of comparative advantage means that there are cases in which one country has a natural resource unavailable in another country, say diamond deposits, then his criticism misses the point. The theory of comparative advantage addresses only cases in which various goods can be produced either domestically or in foreign lands because there is no difficulty in explaining why people in different countries who desire goods produced exclusively in other countries would trade with each other, selling what they produce domestically for what they cannot produce domestically. It is a more difficult case to analyze when the various goods can be produced either domestically or in foreign countries.
2. This arguments fails to recognize that entrepreneurs build the consequences of catastrophic events into their production costs. Including the costs associated with catastrophic events occurs in all lines of production. There is nothing distinctive about agriculture in this regard. If a manufacturing area is subject to earthquakes, then entrepreneurs will including re-building costs or the extra expense of sturdier construction into their costs. If an agricultural area is subject to drought, then entrepreneurs would include in their costs, the expenses of irrigation equipment and other drought mitigation. They would store some of their product during good times to have it available to sell during droughts. Alternatively, they could pool some of their income during good times to get them through droughts. In fact, other entrepreneurs would start up insurance companies to make the pooling more efficient.
3. This is a form of the old “infant industry” argument advanced in the late 18th century by Alexander Hamilton. It overlooks the fact that the corollary of free trade in goods is free movement of capital funding. Entrepreneurs in the world economy invest in technology and capital capacity that will be profitable. So, production of technology and capital capacity is also subject to comparative advantage. The entrepreneurs in the developed world have the expertise and the saving to invest right now. They will do so in underdeveloped areas if it is profitable. Witness western investment in China over the last 30 years.January 17, 2017 at 6:31 pm #18830daniel_newhouseMember
Free trade should be simple – a nation has the policy that there are no tariffs, custom duties, or quotas at all.
Export restrictions imply that a company has to register a product with the source and destination companies and let the governments track whether the products meet import/export restrictions.
This systems would work great if people did not have the ability to sue companies and individuals for compensatory or punitive damages. Then business would no longer be liable for errors in imports and exports.
Liability of individuals and businesses could be replaced by liability of the government. Citizens could seek redress of grievance from the government for failing to uphold the law.September 4, 2017 at 9:12 am #18831Maxter000Member
Here is another criticism of Ricardo and Comparative Advantage that is a very popular argument in the anti-free-trade right, especially the pro-Trump wing:
This is a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry, and the crucial machines in one industry cannot simply “move” to another without loss of productivity.
The archetypal machines for cloth and wine manufacturing in Ricardo’s time included the spinning jenny and the wine press. It is stating the obvious that one cannot be turned into the other, but stating the obvious is necessary, because the easy conversion of one into the other was assumed by Ricardo, and has been assumed ever since by mainstream economic theory.
In fact, the relative mobility which Ricardo assumed for his ubiquitous concept of “capital” is the opposite of what applies to machinery. Machinery designed for one industry simply cannot move to any other, even in the same country; but machinery in one industry can (and frequently is) shipped between countries.
So capital immobility from one industry to another sinks the whole thing? I wouldn’t think so but I don’t have the technical understanding to answer these protectionists on the right. Since Trump though I see them growing. Prominent blogger and writer Vox Day, who Bob Murphy debated on Tom’s podcast, uses this argument frequently.September 4, 2017 at 10:49 am #18832jmherbenerParticipant
Actually, Ricardo assumed the immobility of both capital goods and labor across international boundaries. In his model, only produced goods can move from one country to another, not resources.
Here is Bob Murphy discussing this point which was raised as an objection to Ricardo’s argument for free trade by Paul Craig Roberts:
Here is the debate between Vox Day and Bob Murphy:
Neither Bob nor Vox discusses the claim that the argument for free trade is negated by the immobility of capital goods. (I listened only to their opening statements, so maybe later on in the debate Vox does claim this.) The only reference to mobility in his opening statement, Vox claims that the same logic applies to free trade in goods as free immigration of persons. Then, he asserts that we see empirically that free immigration impairs the wealth of the country receiving immigrants. He concludes from these two propositions that free trade of goods can also impair the wealth of countries receiving goods. He is wrong to conclude this. Free trade moves more goods into the country (we obtain goods with less sacrifice of other goods) and leaves the population the same. So, per capita standards of living rise. Free immigration increases population. So, per capita standards of living increase only if that of immigrants is above the per capita standard before immigration. The logic of free trade and free immigration is not the same.
In the article replying to Roberts, Bob gives an example of the mobility of capital goods: an American capitalist ships a tractor to Brazil to take advantage of low wages. The only completely immobile factor, then, is land.
The argument you quote above confuses capital specificity with capital mobility. Capital goods are relatively specific, which means they cannot be shifted from one production process to another production process and maintain their productivity. Capital goods, however, can be moved from one location to another in the same line of production as Bob’s example illustrates. Even factories and other structures on particular land sites can be dismantled and reconstructed elsewhere. Of course, it’s typically less costly to invest capital funding in building a new factory in another location and re-allocating the existing factory to a different use. In such cases and in even more extreme ones in which capital improvements on land cannot be dismantled and moved (like a mine shaft), there is a dynamic mobility of capital structures brought about by the mobility of capital funding.
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