Sunday, May 06, 2007

Advantages of Trade

Adam Smith’s Lost Legacy on Comparative Advantage could possibly bring on even further confusion about Absolute Advantage, Comparative Advantage, and what I will term Procedural Advantage. Absolute Advantage exists where one Producer has specialized resources for Production which heighten its ability to produce over Trading partners, who cannot acquire Substitute resources of sufficient quality to produce the Product. Comparative Advantage as defined by Ricardo highlights the advantage of Trade, even when one Trading partner can even show superiority of production in all Trading products; if, and this important, there is a Substitutability of Labor, Capital, and Resource between the Trade Products. Why the last qualification concerning Comparative Advantage?

Comparative Advantage exists only under the Relative condition of full production. This means there must be a technical full exploitation of all Productive resources, meaning Comparative Advantage is lessened or lost when there is a drop of the Productive assets employed coming from the practice of Trade. Current American Trade patterns, based upon the absolute least Production Costs, have forced many domestic Producers from the market with massive Layoffs of Semi-Skilled employees; they expected simply to Sit on the Sidelines as their labor is not required. This contraction of Labor Force participation due to Trade must be considered a Comparative Disadvantage, and Losses should be subtracted in the Accounting of the Gains of Comparative Advantage; a practice which current Economics does not do.

Procedural Advantage, as I define it, consists of the regulation of Trade so that the highest Profitability can be attained while in pursuit of full employment of Labor and other Productive resources. One has to remember that Semi-Skilled labor enjoys the same position as the employed Secretary, who provide valid service at Wage levels equal to their Skill level. The full employment of labor, unskilled, semi-skilled, or highly skilled, always produces quality Product (else it would not be paid), while the much greater sum of Wages paid out vastly increases the Consumer Demand in the Market. Economic growth and economic performance is both greater, and more balanced. I think there might be a justification for Tariffs in here somewhere. lgl


Gavin Kennedy said...

The explanation of comparative advantage given in Lost Legacy is no more than what it states: an example appropriate for Econ 101 students. It is stripped of all additional conditions and qualifications, such as fully employed factors and their elasticity of supply.

It is not clear to me how my examples of Amex and Chungwa, or the Journalist and the secretary, are confusing, when the examples do not discuss the merits or otherwise of free trade in situations of less than free trade in today’s international markets. It states the Ricardian theory of comparative advantage appropriate for Econ 101.

The original article presented an incorrect version of Ricardo’s comparative advantage model, claiming that Econ 101 students should know about the ‘errors’ in Ricardo as claimed by Senator Byron Dorgan and David Sirota; my examples corrected their assertions, as I would expect studetns (and certainly graduate students) to know what Ricardo actually said.

No economies adjust with the infinite velocity implied in formal models. Adam Smith didn’t think they did, hence his pragmatic approach to dismantling protected trade legislation. For example:

‘Humanity may in this case [protection employing ‘a great multitude of hands’] require that the freedom of trade should be restored only by low gradations, and with a great deal of reserve and circumspection’ [Wealth Of Nations, IV.ii.40: p 469].

Lost Legacy is about Smith’s legacy, it is not about the modern politics of international trade, hence I didn’t pursue the wider argument stated in Sirota’s Blog.

Lawrance George Lux said...

The problem which I have tried to correct are exactly those Students of Econ 101. Trained Economists know that no model accurately foretells the exact economic impact which can be expected. Presentation of Ricardian theory as infallable, without making Students aware of limiting circumstances, not only leads to a misunderstanding of Economics, but creates expectations of Heaven on Earth. A little knowledge can be a dangerous thing, as the old Saying relates; and fear exactly that segment of the Student body who does not go past Econ 101. lgl