Re: comparative advantage?

["William B. Ryan" <w_b_ryan@xxxxxxxxx>]

Thanks to Professor Gunning for his provisional
chapter prior to publication.  I've downloaded it and
will read and comment later.
--

Bill's model is one in which an absolute dictator or
aristocracy commands subjects to produce gifts of
cars for a foreign country. The country that receives
those gifts faces an adjustment problem.
-----------------------
The cars are not gifts.  They are being produced for
"profit" according to the rules of accounting.  The
"dictator" is able to "price" them in foreign markets
in ways that have nothing to do with "comparative
advantage" in natural endowments.  He is in effect
arbitraging differences in social relationships and
standards and states of development between nations
rather than exploiting natural comparative
differences.  For example, if nation A has standards
on smokestack emissions that impose monetary costs on
the manufacturer in A, the manufacturer in B with no
such requirement can "price" his products in A's
market below the monetary costs of production to the
manufacturer in A, thereby putting him out of
business.
--

I don't see how this kind of model is relevant to
import tariffs.
-----------------------
Nation A has decided that the real costs of imposing
emission standards are less than not imposing them to
the society as a whole.  Let's say it is determined
that the standards impose a monetary cost of X to
each unit product of its domestic manufacturer.
Imposing a tariff of X to each unit product imported
from B would compel trade to develop more along the
lines of natural comparative advantage, benefiting
both importer and exporter from A's perspective.  Not
doing so retards the social development of B and
erodes the economic development of A.
--

Benefits from trade can come into existence even
without differences in initial factor endowments.
-----------------------
But that would be from specialization rather than
exploiting natural differences in factor endowments,
as in the "lawyer" and "her" "secretary" example
where the typist would have been the lawyer and the
lawyer the typist if it had not been for social
inequality.  The gains from specialization have
nothing to do with natural endowments per se.  The
law firm's productivity is enhanced through
specialization though it is less that would have been
the case if that specialization had also exploited
relative factor endowments.  But the industrialized
nations have already specialized.  The progressive
substitution of foreign manufacturers for domestic
manufacturers is not specialization but the
destruction of real wealth; it is pure financial
parasitism that will ultimately kill both host and
parasite.
--


---original message---
Date: Sat, 06 Mar 2004 11:27:52 +0800
From: Pat Gunning <gunning@xxxxxxxxxx>
Subject: comparative advantage?
To: austrianschoolofeconomics@xxxxxxxxxxxxxxx
Reply To: austrianschoolofeconomics@xxxxxxxxxxxxxxx

The principle of comparative advantage was developed
for the two-nation, or two-person case.  Regarding
Gary's comment, trade between two market economies
always, in practice, leads to winners and losers. But
I do not see how this is relevant to Bill's example.

Bill's model is one in which an absolute dictator or
aristocracy commands subjects to produce gifts of
cars for a foreign country. The country that receives
those gifts faces an adjustment problem. If the goal
of the recipient country is to completely avoid harm,
it should consider a policy to distribute the free
cars so that the displaced workers are compensated
for their losses. For example, the cars might be
given directly to the suppliers of resources to the
car industry and to the car producers.

I don't see how this kind of model is relevant to
import tariffs. I recommend that Bill read some more
about comparative advantage and the situations to
which it is relevant.

I agree with Bill's introduction about the premises
of the theory of comparative advantage, although I
thing that the statement about the commodity is
superfluous. The theory assumes that people have the
right to exchange their work services for money.
That's all that needs to be said.

I also agree that existing factor specialization need
not reflect initial differences in factor endowments.
The theory of international trade has come a long way
beyond the simple case that Bill describes. It also
deals with the case in which comparative advantage is
produced. Benefits from trade can come into existence
even without differences in initial factor
endowments.

I discuss this idea in an elementary context in my
provisional chapter on "the market economy,
opportunity costs, and the production of human
capital."

http://knight.fcu.edu.tw/~gunning/omancoll/intrecon/in-04new.pdf

But Bill's policy argument does not logically follow
from his premises. He writes about a policy of
adopting "reasonable controls" on imports:

"Doing otherwise progressively enslaves the
workforces of net exporters, and impoverishes net
importers."

First, he does not make it clear what he means by the
workforce of the net exporters, but I assume that he
means the enslaved workforce of the donor nation.
Obviously, the accepting of free gifts by the
recipient nation is not responsible for the
enslavement. That responsibility lies with the
dictator or aristocracy of the donor nation.
Moreover, if the government of the recipient nation
wanted to do something about this, it could simply
reject the free cars. Whether the workers in the
donor country would be better off as a result of this
depends on factors that have nothing to do with
economics. Would the dictator or aristocracy leave
the workers alone if they were not producing cars?
Who knows?

Second, the word "impoverishes" seems to deny that
the suppliers of resources to the car industry in the
recipient country have other opportunities. It
suggests that they are somehow tied, like feudalistic
serfs, to the car industry. I may have misunderstood
Bill's comment, however, since I am interpreting the
term "net importer" to refer to the people who supply
resources and entrepreneurship to the car industry of
the recipient nation. (In Bill's description, the
concept "net importer" seems out of place; since
there are no car exports from the recipient nation
and since importers are middlemen who presumably have
lots of alternative ways to earn income.)

--
Pat Gunning
--

Pat Gunning, Feng Chia University, Taiwan;
New book: UNDERSTANDING DEMOCRACY: AN INTRODUCTION TO PUBLIC CHOICE
http://nomadpress.com/public_choice/
http://mail.ebtnet.net/~manta/public_choice/

Web pages on Praxeological Economics, Democracy, Taiwan,
Ludwig von Mises, Austrian Economics, and my University Classes;
http://www.constitution.org/pd/gunning/welcome.htm
and http://knight.fcu.edu.tw/~gunning/welcome.htm
--


[from Bill Ryan]
Comparative advantage is based on the premises that
1) pricing reflects natural differences in factor
endowments; and 2) labor is a commodity to be
purchased and sold like any other.  Reject either
premise and this so-called "law" collapses to
complete irrelevance.

Recardo's example was the hypothetical "Portugal" and
"England" producing wine and cloth.  Portugal is
better at producing both but is "comparatively"
better at producing wine, so should specialize in
wine in the integrated trading system, letting
England supply cloth.  This would reflect relative
differences in natural factor endowments, presumably
climate and land.

A more recent textbook example is the "lawyer" and
"her" "secretary."  The lawyer is a better lawyer and
typist than her secretary, but the law firm's
productivity is enhanced if the lawyer specializes in
law and the typist specializes in typing.  It is by
no means sure that this would reflect natural
differences in factor endowments.  If there had been
equality of opportunity when both were young, perhaps
the typist would now be the lawyer and the lawyer the
typist.  Here, the relative differences are entirely
artificial or social.

Two countries, one producing automobiles primarily
for its own population, the other with no capacity to
produce automobiles whatsoever but with a teeming
population.  The first, after a century of struggle,
treats its workforce as something other than a
commodity.  The second treats its workforce as
chattels.  Build a factory in the second.  Suddenly
it has "comparative advantage" in selling automobiles
to the first.  There is of course no comparative
market in the second for automobiles or anything
else.

The case can be made that the exploitation of natural
comparative advantage is enhanced through reasonable
trade controls, and degrades to the extent they are
removed.

Doing otherwise progressively enslaves the workforces
of net exporters, and impoverishes net importers.
--



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