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Tuesday, July 10, 2018

A Note on Comparative Advantage: It Changes Frequently

Comparative Advantage Explains Patterns of International Trade

Suppose that Jane started off her adult life as plain. She possessed neither unusual skills nor impressive learning. On the day that she turned 18 years old, her comparative advantage was as working as a motel maid, which she commenced to do.

On Jane’s 19th birthday she decided that she no longer wished to work as a motel maid, so she enrolled in college. After sixteen years of determined application of her mind and energies—and finances—Jane became a board-certified cardiovascular surgeon, boasting a medical degree from Harvard’s medical school.

Jane consciously strove to change her comparative advantage. And she succeeded. Her comparative advantage today no longer is found in cleaning bathrooms and changing bed linens; it is in treating people with cardiovascular illnesses. Obviously, her pay today is far higher than it was sixteen years earlier. But her becoming a cardiovascular surgeon caused other cardiovascular surgeons to earn less than they would have had Jane remained a motel maid.

Does anyone think that what Jane has done is unusual? Is there anyone who supposes that Jane’s successful effort to improve her skills violates some foundational assumptions or laws of economics? Would anyone claim that the theory that explains why the 18-year-old Jane found it advantageous to specialize at being a motel maid, and why motel owners found it advantageous to pay her to perform those maid services, cannot explain why the 35-year-old Jane finds it advantageous to specialize at being a cardiovascular surgeon, and why hospitals find it advantageous to pay her to perform those health-care services?

Of course not. (Or, I hope not!)

Government Intervention

And yet it is common to encounter faux-sophisticated claims that the principle of comparative advantage doesn’t explain real-world patterns of specialization and trade because governments attempt—sometimes successfully—to transform some industries under their jurisdictions from ones without, to ones with, comparative advantages in the global economy.

Whatever the merits or demerits of such government attempts, and whatever their frequency of success, these attempts and their successes do absolutely nothing to reduce the power of the principle of comparative advantage to explain observed patterns of international trade. These government attempts do nothing to diminish the gains from trade that are possible at any moment from the currently prevailing array of comparative advantages.

Those who understand the principle of comparative advantage understand the above to be true. Those who deny the truth of the above do not understand the principle of comparative advantage.

Reprinted from Cafe Hayek

  • Donald J. Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, and a professor of economics and former economics-department chair at George Mason University.