It can be easy to take for granted that things are common knowledge just because they are common knowledge in your industry.
@Car shared a cartoon in the @saloon that suggests a misunderstanding of what comparative advantage is, so here I am to save the day. The cartoon itself is potentially fine, since it's a question, but the premise of the question is flawed.
Why do more productive economies trade with less productive economies?Why do more productive economies trade with less productive economies?
This was one of the big questions of classical economics. Adam Smith's explanation of gains from trade was that some nations are better at making certain things than others and they trade with nations that are better at making other things. That's called absolute advantage.
The problem with absolute advantage is that it's incomplete. What happens if one country is better at producing everything than another country? The implication seems to be that they would not trade with each other.
This is wrong, though. There are still gains from trade even when one country is more productive across the board.
ExampleExample
Imagine a simplified economy where two bitcoiners produce two goods (podcasts and vibecoded apps) and those are also the only goods the bitcoiners consume.
- Car can make 30 podcasts or vibecode 12 apps per year (or any linear combination in between)
- GrayRuby can make 6 podcasts or vibecode 6 apps per year (or any linear combination in between)
Car is better at producing both goods. He has an absolute advantage in podcasting and he has an absolute advantage at vibecoding.
1) No trade. Each puts half their effort into each good
- 18 podcasts produced (15 from Car and 3 from GrayRuby)
- 9 apps produced (6 from Car and 3 from GrayRuby)
Without trade, Car consumes his 15 podcasts and 6 apps and GrayRuby consumes his 3 podcasts and 3 apps.
2) No trade. GrayRuby only makes apps. Car does 2/3's podcasting and 1/3 apps
- 20 podcasts produced (all from Car)
- 10 apps produced (6 from GrayRuby and 4 from Car)
- Car consumes his 20 podcasts and 4 apps
- GrayRuby consumes his 6 apps and 0 podcasts
The world has more podcasts and apps because the producers specialized, but Car has 2 fewer apps and GrayRuby has 3 fewer podcasts than they each had before. We can't say that they're each better off...yet.
If Car could trade between 1-5 podcasts for 3 or more apps, he'd be better off.
Similarly, if GrayRuby can trade between 1-3 apps for 4 or more podcasts, he'd be better off.
3) Previous case with trade
- Car trades 4 podcasts for 3 apps
- Car now has 16 podcasts and 7 apps
- GrayRuby now has 4 podcasts and 3 apps
Compared to the first case, Car has more of both goods, while GrayRuby has more podcasts and the same number of apps. They are both better off.
Specialization and trade increase both the total amount of goods available and each individual consumption bundle.
GrayRuby has a comparative advantage in vibecoding apps, even though Car is actually better at that task, because they are both better off when he focuses his efforts on it and they exchange with each other.
Even if someone’s better at everything, trade works because comparative advantage focuses on relative efficiency. Specializing makes both sides better off
Does this really hold, though, when you take everything into account, in practice?
I'm thinking of countries that sell their natural resources and never develop, and then, some years later, they are despoiled of resources, and a handful of elites live in armed compounds with their harems.
I understand the logical argument. I'm calling into question the empirical results.
It occurred to me that you have almost the opposite concern of the classical economists.
Interesting. Say more about this.
They didn't see what the rich had to gain by trading with the poor (loosely speaking), while your concern is about whether the poor really do benefit from trading with the rich (again, loosely speaking).
Ah. Yeah, that makes sense. CA would seem to refute the former. The latter seems impossible to adjudicate in the abstract, at least if you consider the entire ecology.
Yes, the latter could be thought of as an aggregation problem.
Your scenario is really rich people in poor countries trading with people in rich countries (although it doesn't really matter if the trade partner is rich). If those gains from trade increase their ability to engage in non-voluntary exchanges with the poor people in their own countries, then the trade may well be a net negative for those poor people.
So, the poor country gets richer without the poor people in it advancing.
Most of this in my mind falls into the category of identity-theoretic problems which is not simple aggregation, which economics (and most everything else, in fact) chokes on. Simple example:
Tim wants heroin. He gives Burt $100 and gets heroin. It is fantastic for a little while! And then Tim's life goes to shit. Not all at once, but little by little. But even in the very short term, Tim who wakes up the next day and has to go to his job suffers from the behavior of Tim the night before.
So what can we say about this? I don't even know what sense the standard economic narrative would make of it -- Tim's utility increased, else he wouldn't have bought the heroin, it is tautologically true, therefore it was utility-enhancing? Something about temporal discounting?
But this to me is the most obvious nonsense. Every sensible person knows that Tim is worse off after this trade. Zero people who are not deeply mentally ill would say "if I was Tim's dad I'd want him to get the heroin" which is a pretty good way to pragmatically assess bullshit from sense. A notion of "free" in which an alcoholic is free to drink himself to death in the grips of his compulsion needs amendment, to say the least. And much "freedom" has a similar bouquet when you zoom in a bit.
So there's something needed that when we say "Tim" we're really talking about a gradient of beings through time, loosely described as "Tim" from the outside, and that there's no such thing as talking about what's good for Tim in a way that means much. Good for Tim-at-time-t perhaps; but then the calculation of Tim's utility becomes an exercise in integration; or else we consider Tim as a vector and his utility function as vector components? Presumably there is work on this someplace.
Anyway, similar logic around this aggregation idea. Who are we talking about, exactly, wrt how "the rich" and "the poor" of countries X and Y benefit from trade? Assessed when, and how? Simple and intuitive language is insufficient to the task, perhaps because the metaphysics of the issue are complicated and horrifying to entertain.
That's what I think, anyway.
Yes
Yes, but Tim is not a sensible person and does not have a sensible person's preferences. Should non-sensible people be forced to behave as though they were sensible?
I want to recommend L.A. Paul's work about transformation. Here's an EconTalk interview. Also, this one with Agnes Callard (my wife's favorite living philosopher) about aspiration.
The idea that we could want different things than we currently do (and can even want to want different things) is hard to grapple with in a rigorous way, but that's what you're getting at. There might be a version of Tim that's glad someone intervened in his prior behavior and got him on a path that doesn't involve drug abuse. Tim never wanted to become that person but he is happy he became that person.
It's a tricky problem. There's no bright dividing line between forcing someone to change for their own sake vs changing for the sake of the person doing the forcing.
The empirical case of international trade is actually really fascinating.
If you just replace the two individuals in the example with countries, then the global pattern of trade doesn't resemble what you'd expect at all. What we actually see is more like everyone producing everything and trading everything with each other.
There's some specialization, but it's hyper specific rather than being broad (i.e. specialization in steering wheels vs specialization in cars). When looking at broad categories, like vehicles or agricultural goods, approximately the same amount gets sent in each direction.
Back in the mid-twentieth century, an engineer noticed the empirical regularity that trade flows between countries can be very accurately predicted just by the two countries' GDPs and the distance between them. It's literally the gravity equation with GDP as mass and no economist had any idea why that would be the case. It took decades to even come up with plausible models that could fit the pattern and they're still arguing about exactly which explanation is correct.
The cases you're describing are more about economies that have been strangled by bad institutions. They aren't poor because they specialized in trading their resources. They specialized in trading one resource because the rest of the economy was hamstrung.
Wrt bad institutions: this is close to the heart of it. There's many examples of a thing that, within a limited view, is "correct" but when applied to extant ecologies, turns out bad. One argument is that the world is wrong somehow, that if only people were different, than the thing would work and it would be better. Isomorphic to No True Scotsman.
Except the world isn't different, it is as we find it. So broad swathes of arguments are just ... dumb. They don't survive contact and are consequently not worth taking seriously. If your tx doesn't work in humans it's a waste of time to perseverate on how well it works in mice.
Wrt comparative advantage, I may be making the error @SimpleStacker mentioned and assumed the existence of CA meant that all international trade was to be desired in all cases. Or put differently, I may be arguing against a position for CA that nobody actually holds.
My point about the bad institutions is that it isn't clear the counterfactual of not trading the resources is better than the realized outcome.
Bad institutions lead to poverty and corruption. Trading away the resources may not have left anyone any worse off and it pretty obviously left some people grotesquely better off.
That's kind of the thing I had in mind when I made my original comment. Something like:
Based on this scenario, a reasonably intelligent person might defensibly say any of these things:
That seems basically true, but also incomplete. If I was a Suckistan peasant, I don't know that I'd view the granola export industry as a great deal for my future prospects. If I banned together with my fellow countrymen and overthrew the elites, I'm not sure what I'd want our next move to be, either.
I mean, having all of us become enlightened and wise and producing great institutions out of the ashes, and making an equitable division of our nation's granola resources before unleashing flourishing trade would be nice, but again, that's generally not the world we find ourselves in.
Anyway, I've hijacked your post. But that's the context behind my question.
I think it's the starting point that needs more examination.
Why did people live in Suckistan in the first place?
Why were the elites in a position to trade away all the granola?
If they hadn't traded away the granola, what would they have done?
It's not clear to me at which point trade is to blame for the problems in Suckistan.
Also it sounds like Suckistan has no middle class, there are 2 classes, elite vs untouchable
No, you're not. Plenty of people hold to that simplistic view of trade. If you were a B+ economics major in college, that's probably your point of view. (Even if you were an A+ student you'd probably think that way, unless you're prone to think deeply about your college courses.)
Yep, this is the general position you'd find from almost any libertarian or free market conservative.
The point of the theory / example isn't to say that there are no other considerations, or even that international trade is always good on net. (Though unfortunately, many people with a shallow understanding of economics take it that way.)
The point of the theory is just to illustrate the nature of the gains from trade, and how people can gain from trading even with people who are worse than them at things.
For example, I'm probably a better mathematician than my kids' math teachers at school. But they teach my kids math and not me (though I supplement, on occasion), because of the theory of comparative advantage.
Ah, I am one such. I thought the "official" Econ view was that trade was always beneficial.
Sadly, that's what most people think about economists, which is both fair and unfair.
It's fair because if you go through Econ 101 in college, it's very much oriented to explaining why specialization and trade is good. Which I think is appropriate, because that's the foundation of a strong economy. But because of that, if you just take what the course says at a surface level and don't think too deeply about things, you'll come out with a simplistic understanding of "trade is good", which is where I think most CNBC-type talking heads have landed.
It's unfair because it misunderstands the more nuanced views that people with a deeper understanding of economics hold
I'd say the most fair characterization of most economists would be something like, "Voluntary trade between people/countries is generally welfare improving for both sides. But there are many caveats."
Some of the caveats include:
Bunch of stuff like that.
Those are really good caveats and seem to get at the heart of the matter. I don't hear them made much, but I'm probably not in the places where they would be made. The level of public discourse is substantially lower, surprise surprise.
Buckle up for caveats:
The standard econ position is that voluntary exchanges are believed to be individually welfare improving by each participant, ex ante.
I'm having buyer's remorse
Tough. You should have been more in touch with your feelings ahead of time.
If everything's functioning correctly, they teach your kids math and get paid less to do so. Not to be gauche.
Can you provide an example? a real not fake example
which country? which natural resource?
trade works because it aligns incentives, not because parties are equal. Productivity gaps don’t eliminate cooperation prices and exchange let both sides convert their time into more value than isolation ever could.
Is it going to far out on a limb to say this is never true?
it doesn't matter, extreme examples clarify ideas and concepts
Basically that, but it also does matter when you're comparing a country to the rest of the world.
There's nothing special about countries in this analysis and it certainly might be the case that a particular small poor country is not the best at producing anything.
ah ok, your talking about opportunity cost i gotcha! yes this makes a lot of sense
Yes, even though you're better at vibecoding, GrayRuby should keep doing it because you still have better things to do.
The TL:DR of this discussion is right here with this comment
widest margin of superiority
Just wanted to say that this is very nice. What I really like is that you didn't use arbitrary lines on maps enforced with guns produced by stealing money from the people as an example, but you explained it peer to peer. That's great.
Peer to peer trade is the standard way of teaching comparative advantage in economics
Thanks. The logic of comparative advantage is peer to peer. Nation to nation trade is an extrapolation.
i.e. sub Sahara Africa
You stole my thunder. I was gonna make this the topic of my next Pleb Evonomist since I saw the conversation between you and Car
Muahaha
Back to the dry well for inspiration
#1407551
I'm on it!
The example would have been better if Car produces cars and Ruby produces rubies
I agree
From Gemini:
While David Ricardo is the name most famously associated with the discovery of comparative advantage, the history is actually a bit of a "confused tangle" involving three key figures:
In short: Torrens likely published it first, Ricardo made it famous and proved it mathematically, and James Mill may have been the "ghostwriter" or intellectual catalyst behind it.
The concept was first described in print in 1815, but the actual term "comparative advantage" did not appear until later.
Summary Timeline:
Yes, many people were circling the same ideas and it's hard to pin down who had an idea first.
As the robot says, Ricardo gets credit because he demonstrated comparative advantage with a very clear numerical example.
Being less productive doesn't mean you are in wrong way.
In the Suckistan example the issue is not trade per se but the institutional environment that determines who captures the gains. Without mechanisms that channel trade profits into broad-based development the comparative advantage story is incomplete. This is where political economy matters more than the abstract math. The incentives of elites the structure of property rights and the capacity of the state to invest in human capital will shape whether trade fuels prosperity or entrenches inequality.
It is worth noting that modern trade theory has evolved to acknowledge these frictions. Concepts like rent seeking resource curse and Dutch disease are attempts to map the real-world consequences when a country specializes in a narrow set of exports and the returns flow to a small segment of the population. That is also why development economists often emphasize institutional reform alongside trade liberalization. An open trading system can be a powerful engine for productivity gains but without parallel investments in governance and infrastructure the gains will either leak away or be captured by the few.
So when thinking about trade and comparative advantage it is useful to hold both truths together. The theoretical logic illuminates why trade can work even in asymmetric productivity settings. The political reality explains why in many countries it does not work as promised for the majority of citizens. The bridge between them is institutional quality which ultimately decides whether comparative advantage translates into shared advantage.
this sounds great in theory ... do you have a concrete example?
what is shared advantage? it sounds fabricated
Shared advantage just means the gains from trade or productivity are widely distributed across the population instead of concentrated in a small group. It is not a new theory, just a way to highlight that comparative advantage only delivers on its promise when institutions make sure the benefits reach more than a few insiders.
One real-world example is South Korea after the 196s. The government supported export industries but also invested heavily in education, infrastructure, and land reform. As manufacturing grew and trade expanded, the benefits went beyond the elite. Wages rose, living standards improved, and the economy diversified. Compare that with oil-rich states where export profits often stay in the hands of a narrow political class same trade logic, totally different outcomes because the distribution mechanism is broken.
Trade creates the potential for advantage. Good institutions decide whether that advantage is shared...