Ricardo's Difficult Idea (Comparative Advantage)
"...My objective in this essay is to try to explain why intellectuals who are interested in economic issues so consistently balk at the concept of comparative advantage. Why do journalists who have a reputation as deep thinkers about world affairs begin squirming in their seats if you try to explain how trade can lead to mutually beneficial specialization? Why is it virtually impossible to get a discussion of comparative advantage, not only onto newspaper op-ed pages, but even into magazines that cheerfully publish long discussions of the work of Jacques Derrida? Why do policy wonks who will happily watch hundreds of hours of talking heads droning on about the global economy refuse to sit still for the ten minutes or so it takes to explain Ricardo?
In this essay, I will try to offer answers to these questions.
The first thing I need to do is to make clear how few people really do understand Ricardo's difficult idea -- since the response of many intellectuals, challenged on this point, is to insist that of course they understand the concept, but they regard it as oversimplified or invalid in the modern world. Once this point has been established, I will try to defend the following hypothesis:
(i) At the shallowest level, some intellectuals reject comparative advantage simply out of a desire to be intellectually fashionable. Free trade, they are aware, has some sort of iconic status among economists; so, in a culture that always prizes the avant-garde, attacking that icon is seen as a way to seem daring and unconventional.
(ii) At a deeper level, comparative advantage is a harder concept than it seems, because like any scientific concept it is actually part of a dense web of linked ideas. A trained economist looks at the simple Ricardian model and sees a story that can be told in a few minutes; but in fact to tell that story so quickly one must presume that one's audience understands a number of other stories involving how competitive markets work, what determines wages, how the balance of payments adds up, and so on.
(iii) At the deepest level, opposition to comparative advantage -- like opposition to the theory of evolution -- reflects the aversion of many intellectuals to an essentially mathematical way of understanding the world. Both comparative advantage and natural selection are ideas grounded, at base, in mathematical models -- simple models that can be stated without actually writing down any equations, but mathematical models all the same. The hostility that both evolutionary theorists and economists encounter from humanists arises from the fact that both fields lie on the front line of the war between C.P. Snow's two cultures: territory that humanists feel is rightfully theirs, but which has been invaded by aliens armed with equations and computers...."
...What is different, according to Goldsmith, is that there are all these countries out there that pay wages that are much lower than those in the West -- and that, he claims, makes Ricardo's idea invalid. That's all there is to his argument; there is no hint of any more subtle content. In short, he offers us no more than the classic "pauper labor" fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates. The point is not that low-wage competition never poses a problem. Rather, what is significant is that despite ostentatiously citing Ricardo, Goldsmith completely misses one of the essential lessons of his argument.
http://web.mit.edu/krugman/www/ricardo.htm
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