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Comparative Advantage

5 min read

Part of Markets and money.

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Every episode (2)

Who argued it

Bart J. Wilson · Richard Epstein

Tariffs

Background

The concept

Comparative advantage is the idea that each person or country can produce some things at a lower cost than most others, so specialization and exchange leave both parties better off. Richard Epstein set out the distinction between absolute and comparative advantage: a person with an absolute advantage can do everything better than another, but comparative advantage arises when each party makes two things at different relative costs, so that each specializes in the thing it does cheaper Trump Vs. Free Trade with Richard Epstein (2017). Epstein attributed the notion to David Ricardo, roughly two hundred years ago, and said it explains why someone inferior at everything still finds a place in the marketplace if he can produce goods below the price demanded there. He added that Adam Smith’s observation still holds: the bigger the market, the more such pairings can be found.

Don Boudreau reduced the concept to its simplest essence: each person can produce some things at a lower cost than can most other people. He gave his own example of a comparative advantage at teaching and writing economics, his eye doctor’s at ophthalmology, and his department store’s at retailing clothing Trump’s War on Trade (2019). Boudreau said that because trade is always among individuals, Americans buying pencils from Canada or Indonesia must mean those producers can make pencils at a lower cost than Americans can. He invoked Adam Smith’s household analogy, and argued that when foreigners sell things at a lower cost than it takes to make them ourselves, we make ourselves richer by buying rather than making.

Applications

Epstein applied the concept to energy. He said the United States for years would not allow the export of refined or unrefined gasoline or oil overseas, which kept people with a real comparative advantage in this country from reaching foreign markets and let someone else—Russia, or Gazprom—hold a monopoly position and charge higher prices Trump Vs. Free Trade with Richard Epstein (2017). He called trade barriers a self-inflicted harm by the nation that imposes them, most savagely on itself, and said free trade is a rosy story even if the other side does not practice it.

Boudreau applied it to the pencil. He noted Bob Zadek’s reference to Elizabeth Warren bemoaning that pencils are not made in America, and to Leonard Read’s essay on the pencil, which Boudreau called one of the greatest things ever written and encouraged listeners to find online Trump’s War on Trade (2019). Boudreau conceded that Americans could produce pencils, and perhaps by some measures more efficiently than Indonesians or Canadians, but argued that producing them here means giving up more of other things than buying them from foreigners does. A handful of pencil producers might be made better off, but Americans as a whole are made poorer. He also said jobs are costs rather than benefits, and that protecting jobs in a way that decreases our standard of living makes no sense.

Bob Zadek offered two analogies of his own. He compared a football team, which operates most effectively when each position is staffed by the one most competent to do it, to the planet Earth, which functions most efficiently when everybody contributes by doing what they do best and buys the services of others with their earnings Trump’s War on Trade (2019). Boudreau added a sports example: Babe Ruth was a great pitcher, but the Boston Red Sox and later the New York Yankees used him as a slugger because that was where he was most effective. Zadek also characterized bringing jobs home as the mother of all wealth transfers, moving wealth from American consumers to a small protected subset, with government as the mover.

Across episodes

The topic recurs in three episodes, and the treatment shifts with the news rather than with the theory. In 2017 Epstein explained comparative advantage as the engine of free trade and used oil export restrictions as his example Trump Vs. Free Trade with Richard Epstein (2017). In 2019 Boudreau restated the same concept through the pencil and Babe Ruth, in the context of the Trump administration’s tariffs Trump’s War on Trade (2019). In 2022 Jonathan Bydlak applied it under sanctions: he noted that Congress had voted days earlier on the President’s suggestion to remove normal trade status for Russia and for Belarus, and observed that countries that trade together and interact peacefully tend not to go to war, while calling what is happening in Ukraine perhaps the exception that proves the rule The Economic Consequences of Russian Sanctions (2022). Bydlak’s own illustration was oranges: Massachusetts does not grow them because it is easier to have them grown in Florida, a lesson he said is often lost in the international context. He also argued that energy independence has not insulated the United States, since prices are set globally, and that unless one proposes autarky there will always be some exposure.

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