Russ Roberts

Roberts on Smith, Ricardo, and Trade

EconTalk Episode with Russ Roberts
Hosted by Russ Roberts
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Russ Roberts, host of EconTalk, does a monologue this week on the economics of trade and specialization. Economists have focused on David Ricardo's idea of comparative advantage as the source of specialization and wealth creation from trade. Drawing on Adam Smith and the work of James Buchanan, Yong Yoon, and Paul Romer, Roberts argues that we've neglected the role of the size of the market in creating incentives for specialization and wealth creation via trade. Simply put, the more people we trade with, the greater the opportunity to specialize and innovate, even when people are identical. The Ricardian insight masks the power of market size in driving innovation and the transformation of our standard of living over the last few centuries in the developed world.

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0:36Intro. [Recording date: February 4, 2010.] No, guest today. Thoughts on trade. Thanks for request for feedback on experimental Mike Munger podcast. Read all email even if not enough time to respond to all. We are on Twitter at EconTalker. About 15 years ago, wrote book The Choice, in which David Ricardo comes back to life as a ghost to try to convince a television manufacturer that trade is good for Americans even though it will destroy his company and hurt his home town. Central is Ricardo's idea of comparative advantage. A few years ago, essays on Econlib. In last couple of thinking has changed: perhaps an even deeper insight and more important than Ricardo's which is in many classrooms. Ideas on trade have not changed so much as gotten richer. Insights come from conversations with Don Boudreaux; seminar with James Buchanan, podcast with Mike Munger on division of labor; podcast with Paul Romer on growth. Quote from article by Robert Frank, NYTimes: "For example, as a Peace Corps volunteer in Nepal long ago, I hired a cook..." Question is: Why does a spectacularly resourceful and intelligent person in Nepal earn spectacularly less than a lazy untalented American? Daughter, age 17, babysitting for 2-3 years; makes about $10 an hour, a lot more than anybody in Nepal makes who is incredibly talented. Her main talent is her ability to show up on time and not burn the house down. Patience helps; a few other skills, but not like thatching a roof or butchering a goat. Frank points out that relatively unskilled people in America make a lot more than people in Nepal. David Henderson EconLog blog post closer to the truth. Will try to answer why and impart insights.
5:55The one-sentence answer comes from a quote from the book The Choice, and that is that "self-sufficiency is the road to poverty." Self-sufficiency in everyday language is a good thing--standing on your own two feet and not relying on others. In the context of economics and trade, realize quickly that standing on your own two feet if you mean it literally, you are going to be desperately poor and probably will not supply. PBS special, "Frontier House"--try to live in 1880s in Montana. None of the families made it: didn't generate enough output with just their own skills to have made it through the winter. One family that created a still, made liquor and swapped it was viewed as cheating by other families. Modern skills not well suited; but also if you only rely on yourself you are going to be very, very poor. Literally, couldn't use tools others made. Quick answer. Slightly longer answer, coming from David Ricardo, is that specialization and trade make us rich. The more America trades with Nepal, the better off both of us will be; trade is mutually beneficial; trade allows people with diverse skills, even if you are not as good at everything as someone else. Even if Russ is not as good at thatching a roof or butchering a goat, and even if you are better at all those things than Russ, both will be better off if you each specialize in one of those things and trades for the other things we want. The power of specialization in that setting isn't what we normally think of, which is learning by doing. It simply has to do with each devoting himself to what he is relatively good at; more can be produced than otherwise. Opponents of globalization want us to be more like Nepal. But deeper answer as to why Nepal suffers comes from insight by James Buchanan in a paper he wrote with Yong Yoon on increasing returns and Adam Smith. Example they use: You and I and a bunch of fellow human beings are part of a group of hunter-gatherers, close to subsistence living conditions. We get all of our food from hunting; basically one task; meat sustains us. Daughter and wife vegetarian, but in primitive society probably not that common. Primitive society of hunters. Sitting around at the end of a long day of hunting for deer; suppose tired of living on a very small amount of venison; would like to have more meat, more output, higher income. What are your choices? How could we move toward a higher level of prosperity? three options: can bang your neighbor on the head and take his meat; you can develop a technique that allows you to be a more successful hunter for every hour you spend hunting:--improve the knife you use, invent a bow and arrow, invent a gun or net, learn to track deer more successfully--generally called productivity. Theft, plunder; productivity. There is a third option which is trade. Banging people on the head: Walter Williams observation: that first option of banging people on the head has been the historical favorite for a long time. Only in the last few centuries have people done something else. Tend to think of theft as a zero-sum game--if I get richer by taking your venison, I'm better off and you are worse off. But it's important to remember that theft is a negative-sum game. If I know I might get banged on the head, my incentive to accumulate wealth is smaller. And I'll have to devote resources to keeping you from banging me on the head--lock meat up or hide it. Secure property rights are an important part of prosperity. The other two methods, productivity and trade, are not zero-sum; they are positive sum. They certainly make me better off without making someone else worse off--assume lots of deer and no congestion problems. A better way to kill deer or trading for it also makes you better off as well as me, certainly in the trade case. If I make a better knife and you see me coming home with more meat, you are going to wonder how I did that; might follow you around; I might share idea, sell it to you, or you might figure it out on your own.
14:27When we think of trade--third technique--we think of David Ricardo. We think of specializing in some task full time and trading. In the Ricardo story, what drives trade is our differences, the fact that we are not the same. Jonathan Sacks, Chief Rabbi of the United Kingdom: Trade makes diversity a blessing. Often, diversity is a source of conflict and tension; but because of the opportunity to specialize with trade, trade encourages us to cooperate. But what if we are all identical? Ricardian incentive to trade goes away. If you are a teacher, you know that it isn't just a special case where we are literally identical; if you are twice as good as I am at two tasks, our incentive to trade disappears, or three times as good. What really matters is our differential ability in Task A versus Task B. If we are all equally good at all tasks, it looks like there isn't going to be any specialization; certainly isn't going to be Ricardian specialization. But it turns out--this is the Buchanan-Yoon point--that there is a possibility for specialization and trade even when we are all identical. Rather spectacular--didn't appreciate it, hadn't thought about it; important. Back to hunting scenario: only one task, hunting; but there are other tasks as well. We have to keep our tents or lean-to's thatched. Hunting is just the only way of gathering food. One thing we have to do before we go out into the woods is make sandwiches; no restaurants. Each of us takes some time to make a sandwich for breakfast and for lunch; takes away time from hunting. One of us decides to open a business with take-out lunch solution; pre-made sandwiches so the hunters don't have to do it for themselves. At first glance, this takeout solution cannot succeed. What's required for this to succeed is that for my business as the sandwich maker, you have to be willing to pay more for a sandwich than I give up by not being able to hunt. By making the sandwich for you, I'm going to lose time hunting; you're going to free up time. You as the buyer of the sandwich want to pay less than you normally have to spend in time--foregone hunting--to make the sandwich itself. So, if we are all identical, and it takes me just as long to make a sandwich as it takes you and we are equally productive as hunters, my making a sandwich for you is not a viable business opportunity. Cannot be profitable. It seems we need the Ricardian world. But what Buchanan and Yoon point out is that even when we are all identical, it is possible that the sandwich business can thrive. We are leaving out non-monetary factors--you might want to stay home and make sandwiches even if it means giving up meat production, you might want to sell the sandwiches cheaper than your foregone costs of going out into the field, because you hate hunting--it disgusts you or you hate the woods or you love cooking. So there are non-monetary factors which we are putting aside for now. Continuing with the example.
20:30At first glance it appears there is no advantage to specializing and trading if we are all identical. But in fact if there are enough hunters, it can be productive for me to become a sandwich maker and make all of us better off. What it requires is the addition of technology to the sandwich-making process that makes sense when I am making 100 or 500 sandwiches but that doesn't make sense when I am making 1. Economies of scale: suddenly I can now produce a sandwich at a low enough cost to me--I can do it quickly enough--that my foregone time per sandwich is less than it would take you with your production of a single sandwich. Some obvious ways that might happen: facetious examples--if making one loaf of bread, small oven, might knead the dough myself, slice the meat and spread the mustard with my knife, grow the mustard in my mustard field--all those things are technology when making one sandwich. But if I'm making 500, I might have a special oven when baking bread; food processor or mix master for kneading the dough, power electric meat slicer; mustard field that is easier to cultivate enough for 500 sandwiches a day. Shocking--when making 500 sandwiches, the addition of those technologies, of adding capital, those technologies make the sandwich cheaper per sandwich in terms of foregone time, which allows me to make a profit, pricing it at a price that makes you want to buy it. You can't say that as the buyer of that sandwich, and here's what's interesting: 'Oh, I'll just do that myself; I'll get my own slicer.' But if you are making just one sandwich, a meat slicer makes a sandwich more expensive, not cheaper. One sandwich is not enough to amortize the cost of the meat slicer; you have to have a large volume to exploit the advantages of that technology. Puzzle sometimes why in primitive societies: why don't primitive societies today use the most up-to-date technologies available? It's not profitable. It's not productive to use a grain thresher when you have a plot of land that's 20 feet by 30 feet. You have to have a big farm. Important to notice that the scale of the operation has a huge impact on how much capital to employ. This was one of Adam Smith's most fundamental insights in The Wealth of Nations: the division of labor is limited by the extent of the market. Mike Munger podcast: not just that you divide the sandwich-making up into smaller and smaller pieces. That's part of it. Might have one person baking the bread, another person assembling the sandwich, someone who tears the aluminum foil. As volume expands, more and more specialization. But more important insight is the application of capital, technology, suddenly becomes profitable, wise to use. Then have an incentive to improve that technology. Leverage our potential as human beings. If you lift weights, you can be stronger and carry more books around with you. You don't need technology--you can do pushups. But you can add some technology--can add a backpack. But then you can kick it up a notch--you can add a Kindle. Then can have a thousand books. Can leverage your human abilities to carry stuff. If I'm producing enough sandwiches, it can be possible to add technology to make it profitable. A couple of points: First, the technology isn't sitting there. You have an incentive to invent a meat slicer. Somebody has to come up with a way to make the process worthwhile, and that's only sensible when you have lots of people around you. Might take a few million people, or tens of millions around you to make it worthwhile to produce an automobile instead of crafting something in a more artisanal way. Fifty people gathered in the wilderness--let's make them the most skillful Nepalese--they're going to be desperately poor. Self-sufficiency is the road to poverty because even fifty people can't maintain the modern standard of living we've become accustomed to. Have to be able to interact with tens of thousands, millions of people to attain the scale.
30:01Question: Even if we are all identical we can have this potential for specialization. So, which one of us is going to become the sandwich maker? One answer is it doesn't matter. Any one of us could. Better answer, from a student--it's the first person to think of it. It's not obvious that there is the potential for profit from sandwich making. Not obvious that there are two jobs--hunting and sandwich making. Important insight. When we teach trade, we get stuck in this two-by-two matrix. But there aren't two tasks. There are n; and we don't know how big n is. The number of tasks emerges from our insights. There is no book; they have to be figured out by human creativity. In the real world we are not all identical. We are all different. Ricardo's question: If we are all different, which one of us becomes the sandwich maker? Who would do it best, who of our group would be the best person to assign to that task? Said that two different ways, don't really mean the same thing. What we mean by best is not literally the best, because what we are trying to do with that phrasing is to get at comparative advantage. Say it a little better, make the distinction: there is a person who is best at sandwich making and the best person for the job; may not be the same person. That was Ricardo's insight. Who will it be? It's tempting to say that the sandwich maker--could think of this as a competitive process, could be one person starts it and somebody else competes with him and drives him out of business, or a few of them might open up. Could also think about a cooperative process: there's fifty of us sitting around; which of the fifty of us should not be a hunter and should stay home every day? Either could come up with the right answer. Think about what appears to be the obvious answer and why it's wrong. Obvious answer is: let's have a competition. Everybody makes sandwiches; whoever can make sandwiches the quickest should be the sandwich maker. That's not true; will show in a minute. A second obvious but not true answer is: let's just take the worst hunter. The reason those answers are wrong was David Ricardo's great insight--you have to look at opportunity cost. Summary on website, Lauren Landsburg. What you give up is the true cost of making the sandwich. The cost of making a sandwich isn't money but the time you give up and what you can do with that time. Even though you're the best sandwich maker in the competition, you might be so good at hunting that it would be nuts to make you the sandwich maker; the market in a competitive process would never assign sandwich making to you because you give up too much coming out of the field. And even if you are the worst hunter, you could be so awful at sandwich making that you are better off staying a hunter. That was Ricardo's insight, that what you give up to do a particular task is really the determinant of who you assign to do a task.
36:14Another way to think about Ricardo's insight also is that it matters who does what. You don't assign people randomly to tasks. If you want to make the pie of economic activity as large as possible, you don't just assign sandwich making to the best sandwich maker because that can be too costly. It could mean giving up a lot of venison if that guy is an extraordinary hunter. Which people do which thing is not obvious because you want to look at their relative abilities. One of the lessons here is--talking about economic output, maximizing the size of the pie; holding off non-monetary aspects, they do matter; if talking about the true size of the true pie we'd want to talk about those aspects as well. So, one of the lessons of the Ricardian insight and approach is: there are two ways to get venison. Direct way--you go out and be a hunter. Roundabout way--make sandwiches and swap them for venison. True for individuals or for nations. Trade is fundamentally in this Ricardian story--implicit cooperation where we leverage each other's skills. Important point in the Ricardian story: in a world where we are different, the pattern of trade that results is an illusion. The observed pattern of trade can fool us into thinking what the underlying cause of trade is. If you and I are in this primitive society and I become the sandwich maker; and after a few years have added fancy new breads and spices to the venison, improved the sandwiches a lot; an observer could look at it and would say it's obvious why he's the sandwich maker--he's terrible at hunting. And it would be true. After not hunting for five or ten years and running the sandwich shop, my hunting skills would probably atrophy. You in the kitchen would look inept trying to slice the meat or bake the bread. The pattern of skills is endogenous. It emerges. Depends on the technology that evolves. The person in Nepal who has to do all those things for himself, because there aren't enough people around him to specialize--Smith's point. By looking at the exterior, apparent skills, fooled. Self-sufficiency is the road to poverty. Nepal relatively cut off-tariffs, not a lot of good infrastructure. Spence podcast. To answer the question why the Nepalese person is so desperately poor and the American so rich: that Nepalese cook doesn't have as many people to exchange with; goods are more costly. Smithian because the more people you can exchange with, the more you can leverage the economies of scale; Ricardian because the more people you can exchange with, the more diverse they are likely to be and the more you can specialize. Ricardo story that there are differences is a different story in terms of timing than the Smith story. Ricardian story is about a point in time: at this point in time, given our skills and technology, it makes sense to specialize. The Smithian story is about the power of trade to change our technology in a much more dynamic way. Growth of innovation and technology, power of ideas and knowledge--Paul Romer point.
44:28Question: We've said if there are enough people to trade with, and there could be some false starts, even if there are no differences in skills, then specialization and exchange--trade--makes us better off; and even if there is no difference, they make us better off. What is the difference between becoming a better hunter--making a better knife, creating a spear or a net--and having the opportunity to buy a sandwich on the way to the field? The answer is: there is no difference. It doesn't matter to me as a hunter whether I've got a better tool or can buy a sandwich--both allow me to become more productive. Both create time. Time is our most precious resource. That means there are only two ways to improve our standard of living. You can bang your neighbor over the head and take his stuff, or you can figure out ways to make your resources to be more productive. Steal or figure out ways to make your time, energy, skills to yield more. Two ways to be productive: add technology so that spear goes faster--fishing rod, better fishing rod, net, trawler--or specialization with trade, which allows us to use all of our skills. Theft or plunder, or increase our productivity. Two ways to be more productive: either increase our technology to be more productive, or specialize and trade more, taking advantage of technology. fundamentally all about technology, but one is direct and the other is roundabout. Over the last 300 years this has been the story of human enterprise. In the United States in the last century, an increase in our standard of about 10 times. More capital and most productive people based on their opportunity costs. But not everyone is better off every minute. A textile worker in North Carolina can have a lower standard of living today than a few years ago because of economic forces. Example: about 50 years ago, a typical North Carolina textile worker operated about five machines at once. Each capable of running a thread through a loom 100 times a minute. Today's machines are six times as quick--600 times a minute. That's the standard productivity change we think of. In addition, each machine itself is easier to oversee; so instead of overseeing 5 machines, each worker oversees 100 machines. Output per worker way up 20 times over; worker is 120 times more productive in total. Smith's point: maybe you should put the textile mill in China. But person in North Carolina may not find other work right away. The people who wear clothes benefit and have more resources to do other things, but the worker in North Carolina may suffer. Same true of farmers in 1900. This is how our standard of living improves. Overall our standard of living improves even though not everyone's situation improves at the same time. In about 1900, about 40% of our population was on the farm; today about 2% or a little under 3%. A farmer in 1900 told that would happen would assume people would starve to death and there would be riots in the street because people wouldn't have jobs. What happened was that new jobs came along. Economic change; Don Boudreaux podcast--everything we observe around us is the result of an enormous web of specialization and trade. Incredible blessing in United States--large country with open trade. We specialize a lot. Also true that even when economy is humming along there are going to be short-run challenges; but even when struggling they are doing better than people did hundreds of years ago.
55:25More questions. This story about specialization and trade increasing our standard of living--Smith and Ricardo stories--what does that story have to do with borders between nations? If hunter is in Maine, and sandwich maker is a few feet away in Canada, does it change the conclusions about specialization and trade? Not at all. Borders have nothing to do with it. Both sides better off. What's the difference between Toyota figuring out a better way to make cars and Ford figuring that out? between finding ways to make your land more productive through fertilizer or better harvesting techniques and buying cheaper food through foreigners? They are the same. Obviously ups and downs. Question: in the real world we live in, David Ricardo's world, how do we decide who does what? Not just the 2x2 matrix of hunting and fishing. There isn't one. What steers people into different tasks are the wages, sending people into the most productive uses of their time. Suppose you believe you have a God-given obligation to use your skills and talents to serve mankind. How would you decide what to do? What is Roger Federer better at--tennis or fly fishing? Meaningless question. Surprising! Let's have him play tennis for a while and then let's have him fly-fish for a while. Maybe he's not just the best tennis player in the world but the best fly-fisherman in the world. Not obvious. It's the value of his playing tennis that matters, not his absolute aptitude. How good he is at fly fishing doesn't matter. Take Andy Roddick--one of the top 50 tennis players in the world--could be he's the best knot-tier in the world, so that's what he should do. It's the value of what your productivity produces relative to the other values of things you be doing. Enormous matrix; which as Friedrich Hayek pointed out would be an impossible problem to solve. You could never gather that information, much less use it to allocate people. The wages and prices steer people into their activities. Knot-tying doesn't pay. Once you put the value in, Roddick puts his energy into tennis. It could be that Federer is the best golfer in the world, even better than Tiger Woods; but he sticks with tennis because he loves tennis. That's okay too--that's the non-monetary aspect. You don't just take the job that pays the most money. You take the job that's most rewarding based on both the monetary and non-monetary aspects. You take the job that pays the most where the pay isn't just the monetary pay but also the satisfaction you get. Very few of us take the job that pays the most. Few of us take the job that takes the most.

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COMMENTS (73 to date)
Juan Carlos writes:


I have a question: many models of international trade, including ricardo's comparative advantage model take labor and capital as homogeneous and derive the gains from trade from the fact that labor and capital can be reallocated to more productive uses.
Krugman writes, in a piece called 'Ricardo´s difficult idea' that:
"Wages are determined in a national labor market: The basic Ricardian model envisages a single factor, labor, which can move freely between industries. When one tries to talk about trade with laymen, however, one at least sometimes realizes that they do not think about things that way at all. They think about steelworkers, textile workers, and so on; there is no such thing as a national labor market. It does not occur to them that the wages earned in one industry are largely determined by the wages similar workers are earning in other industries"

What would austrian theory say about that? is ricardo's aggregation wrong? is his model, therefore, misleading?

RJB writes:

I enjoyed listening to your podcast, this morning, and I had a simple idea. In your example of a primitive society of hunter gatherers, you talked about the addition of technology (and significantly larger numbers) that makes specialization valuable and increases the overall wealth of the community. In my simple thinking about it, even without technology there is an advantage in specialization. Nearly every task has a certain amount of overhead. Specialization lowers the overhead and creates an opportunity for profit or increased overall wealth. In your example, every hunter is making their own sandwiches, but the "overhead" of making the sandwiches includes: opening the refrigerator, taking out the mayonaise jar, unscrewing the top, washing the lettuce, cleaning up, etc. If I am specializing in sandwich making, the overhead per task goes way down. Certainly your point about technology is true, but I think the overhead of tasks is greatly understated, if it is observed at all.

Regards,

rjb

Greg Ransom writes:

Russ, what you are talking about here in your "scale of operations" argument takes you into Mengerian / Bohm-Bawerkian / Hayekian production goods theory -- i.e. the extent of the market changes the economic goods / non-economic goods nexus. This nexus has a TIME dimension, if the "extent of the market" grows, the structure of production gains extra time-taking steps, and these extra steps involve new technologies and materials that "suddenly" convert non-economic goods into goods which now fall under the consideration of economic valuation and choice. They are economized.

E.g. fiber from a branch become subject to economization in the production of nets for fishing -- a production process that takes an addition time stage of production as compared to grabbing fish with your hands.

Greg Ransom writes:

Russ, what you are talking about here in your "scale of operations" argument takes you into Mengerian / Bohm-Bawerkian / Hayekian production goods theory -- i.e. the extent of the market changes the economic goods / non-economic goods nexus. This nexus has a TIME dimension, if the "extent of the market" grows, the structure of production gains extra time-taking steps, and these extra steps involve new technologies and materials that "suddenly" convert non-economic goods into goods which now fall under the consideration of economic valuation and choice. They are economized.

E.g. fiber from a branch become subject to economization in the production of nets for fishing -- a production process that takes an addition time stage of production as compared to grabbing fish with your hands.

Smee McPhee writes:

I wonder if I'm the only one who listens to EconTalk at the gym, instead of music?

[Note from Econlib Ed.: Video link deleted. You can't post links on EconLog that use purloined, uncredited music.]

Greg Ransom writes:

The Bohm-Bawerk / Hayek insight is that it matters _what_ does _what_ within the time stages of production -- do we use the branch fibers for tonights fire or do we use them in a time consuming production process making nets for fishing next summer.

It is THIS central trade-off within the "extent of the market / division of labor" nexus that economists has pretended doesn't exist since about 1936, when Keynes failed utterly to understand the econ 101 of the issue, and managed spread his failure of understanding to undergraduates and Harvard economists.

The next stage in thinking about opportunity cost and "comparative advantage" beyond Smith and Ricard is Bohm-Bawerk and Hayek (who was a student of Wieser, who invented the notion of "opportunity cost"). It is only this next stage which truly takes into consideration production goods and economics coordination across time.

DRDR writes:

Juan Carlos -- Ricardian comparative advantage can be misleading if misapplied, but its insights of how gains from trade occur when individuals specialize are very robust to all kinds of situations. But yes, Ricardian comparative advantage is too simple to describe most trade between countries. To achieve gains from trade in the simplest Ricardian model, you have to completely stop producing in one of the two industries -- and rarely do we observe that at broad levels of aggregation. Also, the Ricardian model doesn't have any model of innovation (one of Russ' main ideas here). But this does not mean the Ricardian model is useless. It still provides valuable insight, for any given point in time.

There are many models of trade in which factors of production are not freely mobile (Viner's specific factors model is the simplest and most common one). You could argue against a Ricardian model on the basis, "I have firm/industry specific skills, and when I lose my job when someone abroad learns my skills, I lose a lot of my earning power, I don't gain from trade." This is why you hear about "losers" from trade.

But the main message I get from Russ/Don's podcasts is, there really are no "losers." Even if one person is worse off from losing a job all else equal, that person is far better off than they would be in a counterfactual world where these dynamic gains from trade through innovation and specialization were never allowed to occur. One can't have it both ways -- accepting the benefits of trade while never acknowledging the potential costs of losing one's job and having to find a new way to be productive.

Ryan Langrill writes:

It seems to me that identical people can beneficially exchange, on top of the way you talk about, in tasks that have increasing returns to scale (in the number of workers sense). For example, if both me and an identical person both need to move a couch, we can save on labor time by working together.

Fred Giertz writes:

Was appropriate credit given to Paul Krugman's work?

From Nobel Prize Annoucement:

http://nobelprize.org/nobel_prizes/economics/laureates/2008/press.html

"Krugman's approach is based on the premise that many goods and services can be produced more cheaply in long series, a concept generally known as economies of scale. Meanwhile, consumers demand a varied supply of goods. As a result, small-scale production for a local market is replaced by large-scale production for the world market, where firms with similar products compete with one another.
Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities."

[Note: This comment was reformated to indent the multi-paragraph quote. No original text or discussion has been submitted by the commenter, Fred Giertz..--Econlib Ed.]

emerich writes:

I enjoyed the podcast. One reason econtalk is so good is that I get to participate in your exploration and learning process. That process is considerably enhanced by your candor about what you know and don't know, understand or don't understand completely, quite unlike the usual media pundit. That's also why your talks with Mike Munger are so much fun; the exploration comes from both sides.

Not to get fawning, but I would listen to you lecture any time. In this case, being reminded (and I think I learned it the first time in your conversation with Mike Munger a while back) that the benefits of trade have two key sources: not just different "endowments" but also the gains from innovating and adding technology. Smith and Ricardo.

Greg Ransom writes:

Here's an ultimate compliment.

My 8 year old daughter was home sick today -- while I was playing the show, she stopped doing what she was doing and sat on the couch listening to your discussion.

True story.

Matthew Newhall writes:

Very interesting. It seems as if you are saying that trade is a implementation of specialization and specialization and implementation of productivity. In this scenerio productivity breaks down to economy of scale, technology, and a diversity benefit. Diversity benefit and technology primarily qualify as productivity as an implementation of the economy of scale. So Economy of scale is the bedrock and the motivation behind trade and you backed it up with a quote from Smith. Nice!

To think my longing for self sufficiency is really just a veiled suicide attempt. What would Freud say? Seriously I have many skills which are notable, but not as salable as my computer specialization. It warms my heart to think that my capitally unproductive skills are not pointlessly lost, but that I am expressing my civilization AND improving my standard of living by ignoring them. No wonder career choice is so arduous.

As for the proper placement of workers I see it as a three prong problem. Most teenagers can not recognize that what they are good at, and what they like to do, may not be comparable. An individual should always start by identifying what they are good at using as short a path as possible to moderate accuracy. Then use a blend of present and future market pricing information and what things you would actually like to do to narrow down a few career choices. Apply the cost of training to the final candidates and you are done. At least this worked well for me. :)

Sending someone straight to college after 12 years of mandatory education based on a 20 minute conversation about "what you want" in a guidance office is inane and will lead to a thick fold in employment inequity, subsequently misguided populist anger, and then trade failure. Global trade may be best for all, but unemployment and poverty are local to those effected. This leads to broader question, is the cost of retraining to high, or is the economy of scale finally rendering people utterly useless? Has the progress via economy of scale been this way for a while and we are just noticing now that most of the globe has embraced trade. What can these growing outliers do to participate?

I know what Greenspan would say, 'services'. *shiver*

What else can they do? Servants? Slaves? or do let them redistribute wealth at will? If we do nothing they may attempt to elevate themselves through force. Seems like the default is some of each.

Please interview yourself again soon. :)

Frederick Davies writes:

Great podcast: it provides a fuller image on the mechanisms and benefits of trade, and how trade is always good, even when comparative advantage does not apply. It also adds time to the mechanisms by which the advantages of trade are realized (Richardian comparative advantage is a point-in-time phenomenon, while Smithian economies of scale is a process).

I also think that the Smithian way to explain the advantages of trade is easier for the layman to understand (economies of scale are something most people intuitively "get"), while comparative advantage can be confusing to explain. As a tool to help promote Free Trade, I think it has definite advantages.

Just one quibble: "...maybe the ports and harbours aren't so good..." In Nepal!? The place is landlocked (which, by the way, is also another reason why it has limited trade opportunities; I think Spence mentioned that in his podcast).

Tom Vest writes:

Great podcast today. For the record, I have also found the Smithian "extent of the market" insight to be single best explanation for both the Internet's unique value (i.e., as an extraterritorial, trans-national standard for exchanging communications and information-based products and services), and for the unprecedented speed with which it has grown globally and diffused throughout a wide variety of productive sectors.

I wonder what implications Prof. Roberts feels that that "extent of the market" factor has for institutions like (established) technical standards -- some of which are invariably perceived as "non-market" impositions on personal freedom by some (generally small number of) individuals in every generation that comes after the adoption of that standard? IMO both modern national currencies (e.g., post-1913 $US) as well as key elements of the Internet's TCP/IP protocols provide illuminating examples of how standards which are widely perceived to be "functioning," or fulfilling the purposes for which they were designed -- in this case, providing liquidity to facilitate the exchange in different physical environments -- nevertheless always attract a body of passionate, absolutely committed critics.

Is it fair to say that enduring technical standards like these are intrinsically "oppressive" to those who did not participate in their original development -- and hence by definition that they constitute "non-market" constraints on successive generations -- based solely on that temporal disjunction? Recognizing that such standards play a major value-enhancing role in defining, if not creating, the extent of almost every modern market, how should standards-setting processes be designed so as to balance -- and continuing balancing over time over -- the competing goods of extended, modularized (i.e., diversity built upon shared standards) markets vs. individual freedom of choice?

Emmanuel Martin writes:

Nice podcast Mr. Roberts. Several comments :

1. I would recommend reading Buchanan's inspiration : Allyn Young's 1928 "Increasing returns and economic progress". Used to be a classic before economics became some sort of physics. Very Marshallian in its "organic" vision of the economy as an evolving complex system. Actually there's a nice complementarity with Lachmann's "Capital and its structure". There are connections between Austrian and Smithian evolutionary vision of economics.

2. This description of economic progress is actually - I think - the proper interpretation of Say's law.

3. Back to trade : Funny as two weeks ago I left a comment on Rustici's podcast : why did we have the 1929 crash ? Well maybe because investors could feel that the Smoot-Hawley was going to politically reduce "the extent of the market", which meant that the level of roundaboutness in the economy was going to be inadequate for the new, reduced extent of the market.

4. A modern version of all this economics of specialization applied to various fields would be : Xiaokai Yang, "Economics: New Classical versus Neoclassical Frameworks", New York: Blackwell, 2001

Greg Ransom writes:

If you look at things the Hayek way, there is a _third_ way to be make scarce resources yield more stuff:

3. coordinate the use of old production goods with new production goods across unknown individuals and across shifting consumption / production trade-offs -- perceiving when to repair worn production goods and when to junk them, when to invest in more time consuming processes and when not to, when to expend high costs on improved technology and when not to, etc.

Folks who are good at making these trade-off judgments are the entrepreneurs who are responsible for much of the output of the production process.

If you are bad at this coordination process, you will squander masses of productive resources.

Hayek's case against centralized economic planning rests on this 3rd source of producing yield from scarce resources. See Hayek's essays on central planning in his _Individualism and Economic Order_.

Russ in his lecture said:

There are two ways to be more productive.

1. add technological improvements.

2. specialize and trade more.

From the show notes:

Two ways to be productive: add technology so that spear goes faster--fishing rod, better fishing rod, net, trawler--or specialization with trade, which allows us to use all of our skills. Theft or plunder, or increase our productivity. Two ways to be more productive: either increase our technology to be more productive, or specialize and trade more, taking advantage of technology.

TB writes:

Really enjoyed this podcast. As someone who never studied economics I found it instructive and enlightening. I would welcome more monologues like this one.

TO writes:

Great podcast! A bit basic, but still fun.
Always fun when the topic is trade and production.

Less Fed/Depression/Bailout,
more Trade,Production and Mike Munger!

Hubert Lee writes:

Absolutely perfect podcast, this one on trade and comparative advantage.

A nice departure of style. I would love to hear more of these "lectures" in addition to your great interviews.

Thank you for your years of hard work and eloquence.

AHBritton writes:

Juan Carlos,

I have to admit I'm a bit perplexed. You call attention to, and quote, Krugma's essay "Ricardo's Difficult Idea," but after reading it I am left to wonder whether you actually did.

This whole essay is a defense of Ricardo's concept of competitive advantage and the quote you cited is one of many references he makes to a misunderstanding of Ricardo's ideas. In fact repeatedly draws the analogy that people who deny Ricardo's concept of competitive advantage as comparable to deniers of evolutionary theory.

Unless there is something I am DRASTICALLY misunderstanding, it seems that you may have taken this quote from somewhere else out of context. Although I'm sure Hayekian's will disagree ti much of Krugman's "scientism" (I'm not a 100% sure that's the correct word) Krugman's article actually fits remarkably well with what Russ Roberts describes, and I think many free-marketeers would find it inspiring and similar in critique of those who misunderstand comparative advantage.

Juan Carlos, if I am misunderstanding and way out of line let me know. It wouldn't be the first time I missed something obvious. In this instance, however, I am rather sure I'm correct.

Robert Simmons writes:

It was a good podcast. But I really think your greatest strength, Russ, is in having a great converation with another very smart person. You might say it's your comparative advantage. The market is large enough that we can get lectures elsewhere and have you specialize in high level discussions here.

Robert Kennedy writes:

I generally agree with Robert Simmons. I found myself missing the interplay between Russ & his guest while listening to this week's podcast. At various times when Russ would say something, I found myself expecting a guest to pop in and say "Well, let me challenge that" or whatever.

And, don't take this too literally, this monologue style smacked a bit of various radio talk show hosts and their uniformed rants about whatever. Yes, a zillion times more thoughtful and rigorously defended. But just a bit similar.

In terms of the content, I kept hoping for a bit more references to current policy discussions/decisions. The reference to economic behaviors at the Maine/Canada border and the North Carolina t-shirt manufacturing was good but i wanted more.

And, these trade issues, as was pointed out repeatedly, go beyond just country vs country protectionist instincts. I wanted to hear more about how various current government policy choices can stifle efficient choices and therefore negatively impact overall standards of living.

All that said, I still liked it a lot. Among other things, because it was all Russ, he could keep the discussion focused to make the points that he wanted to make at the pace that made sense to him. On a personal note, I was indeed lifting weights when Russ brought up the weight lifting vs. Kindle example. Unfortunately, I was not convinced to just give up and buy a Kindle!)

John Strong writes:

It's always good to get a recap of the various reasons why trade enriches us:

  1. Comparative Advantage:
    • how well I do one thing, not compared to other people (absolute advantage), but compared to how well I myself do other things (comparative advantage)
  2. Economies of Scale: good reminder that this has several dimensions
    • ability to leverage absolute advantage with respect to others thereby producing more consumer surplus (microphones)
    • ability to leverage capital (forklifts)
    • new, innovative uses of capital
    • classic gains from large scale industrial processes (Henry Ford, etc.)
The larger the market, the more these dynamics are catalyzed.

To this list we could add a point Mike Munger made in his most recent podcast:

Large markets =>

Long distance cooperation =>

Social habit (culture) of cooperation and trust of strangers =>

Reduced transaction costs

Juan Carlos writes:

AHBritton, I think you misread the essay by Krugman. Krugman says that people misunderdstand Ricardo´s point because they think of several labor markets instead of one national labor market, where labor can shift between sectors pretty easily.
In this regard, it seems at odds with austrian theory.

Russ, help us out here

John Strong writes:

Juan Carlos, sounds like you drew the wrong inference from Paul Krugman's statement about national markets. He was not questioning the law comparative advantage. He was trying to explain why some people do not understand it. One reason is that critics of trade are prone to think of labor markets as being segmented by industry (steel workers, construction workers, office workers, etc.). This is just a mistake. In a modern nation-state, markets are national.

However, if memory serves, Pete Boettke did say in a previous podcast that the Austrian school is skeptical about economic models that exaggerate the fungibility of factors. Obviously, 100,000 laid off steel workers will not immediately become computer programmers. And you can't disassemble an auto factory and turn it into a cheese factory.

Nevertheless, I am certain that Austrians would defend the benefits of trade. Reallocation of factors is not frictionless, but comparative advantage still does its magic, at some level.

Great podcast as always, but I'd like to play devils advocate for a brief moment to raise a concern or two.

The exact placement of a border may be rather arbitrary, but it does represent quite a lot as you know. You used the US and Canada in your thought experiment, but both of these countries are stable and have trustworthy governments which counts for a lot. A trader in Minnesota is confident that while trading with someone in Canada the odds of a serious dispute happening are small and if something does arise the trusted weight and influence of a greater community at large, i.e. the government, will be behind them.

However, the line separating say North and South Korea isn't quite so meaningless. And moving to the greater international community specialization is a legitimate concern as the area covered becomes more diffuse and encompasses people who: a)have never seen one another, b)have different value sets and c)have a high likelihood of coming into conflict in the future. I don't think it's a mute point to say that we're not living in the ideal political landscape that in my opinion allow for trade to be mutually beneficial in virtually all respects.

This is an issue that I've struggled with: if we keep in mind that conflicts arise between individuals (and that potential for conflict increases with geographic and cultural separation), where do we turn for our sandwiches, which we now deeply rely on in order to properly hunt, if this trade is cut off? You pointed out that after a few years the sandwich maker will be far better than all the hunters at making sandwiches and that barriers to entry get larger as an individual or country specializes more and more.

So do we just hope that the sandwich maker is smart enough to realize that he relies on the hunters as much as they rely on him? What about when the items on which we rely have very different degrees of necessity?

Increasing specialization creates an ever increasing level of reliance but, since goods are by nature unequal in their degrees of necessity, that reliance on one another won't be equal either and this will almost surely create a politically tenuous situation.

I very much support free trade in virtually all respects, but I also have to say that I see a certain political/defense value in keeping a struggling automobile industry afloat for instance. The minute that industry goes away, the knowledge gap between countries with and without an automobile industry will grow significantly and reach a point where countries without one wouldn't be able to make a car no matter how hard they tried because the barrier to entry is just to great and they've sacrificed their capital in order to produce other goods.

Sorry for the length; I'd love to hear what you think.

Nick writes:

Adam Hockenberry :


I very much support free trade in virtually all respects, but I also have to say that I see a certain political/defense value in keeping a struggling automobile industry afloat for instance. The minute that industry goes away, the knowledge gap between countries with and without an automobile industry will grow significantly and reach a point where countries without one wouldn't be able to make a car no matter how hard they tried because the barrier to entry is just to great and they've sacrificed their capital in order to produce other goods.

I see what you are saying I don't know if thats really true, I would think it would be much easier because you can build on the success and failures of others. Every car maker has reaped the benefits of Henry Ford's trial and error, the later to market, the bigger the benefits reaped by simply copying what other people had already found to work.


Adam Hockenberry writes:

Point well taken Nick. I should have clarified that I'm referring more in the short term. Your analysis in the medium to long run is absolutely correct. However, without existing infrastructure in the terms of machines, a factory, and a trained workforce we have to accept at very least a year or so waiting period.

For cars that might not be a big deal, but for food especially, as well as more ubiquitous resources like steel, that long ramp up time could be cripple a country as bad as any bomb.

Christis Tombazos writes:

Dear Russ,

Thank you for another lovely podcast.

You may be interested to hear, if you do not already know, that the mechanism that you discuss in this edition of econtalk is formalised in the context of a simple yet elegant model in Xiaokai Yang and Jeff Borland's "A Microeconomic Mechanism of Economic Growth" Journal of Political Economy, Vol. 99, No. 3 (Jun., 1991), pp. 460-482.

A host of related contributions are collected in the 2005 anthology entitled "An Inframarginal Approach to Trade Theory" (ISBN: 978-981-238-929-9).

Finally, you may also find it of interest that the new journal "Division of Labour and Transaction Costs" (ISSN: 0219-8711) is dedicated to promoting research that explores the nexus of relationships between the various elements that you discuss in the podcast (specialisation and associated economies, productivity, trade, extent of the market, etc.) and the all important transaction costs (to which you have not made a reference in the podcast).

Schepp writes:

I prefer Russ interacting with a guest, past use of GMU colleagues to interview Russ work much better for me.

Still the best show in town, I will be back next week.

John R Palmer writes:

Russ,

I am 48 years old and have a rewarding engineering career. One reason I like it is because it allows me to more deeply understand and appreciate how the world works.

This podcast almost made me want to quite this job and go take economics at GMU.

Thanks for a great way of getting across the other important way the world works.

- JRP

John R Palmer writes:

[of course I mean "quit my job" - sheesh!]

Mark Gilleland writes:

Does anyone have constructive thoughts or solutions about the U.S. social implications of rapidly expanding global trade?

On the one hand, U.S. consumers are reaping tremendous benefits of trade through lower cost, higher quality, and greater variety of goods and services – relatively quickly.

On the other hand, the majority of U.S. workers in many industries and professions are facing significant downward wage pressures from greater trade as production of goods and services evolves through technology-driven and lower cost of labor productivity gains.

The perception is that:

A) The changes are occurring so fast that most U.S. workers don’t see the changes coming and after the fact don’t adjust very quickly to the new pattern of production and trade. (e.g., an auto worker retraining herself to be a computer network technician.)

B) In the U.S., to maintain a level of income or increase your level of income workers must have the personal endowments (some combination of intellect, virtues, etc. – or luck) to move to jobs higher up the value chain – presumably requiring more knowledge and greater skill. Since half the U.S. workforce is “below average” (by definition) across these various personal endowments, it stands to reason that below average workers will find it harder and harder to maintain their current level of income as they attempt to acquire greater knowledge and skills required for those more demanding jobs.

In a historical context, since the 1950’s it seems as if U.S. workers have enjoyed an unnatural level of prosperity – “unnatural” due to the U.S.’s position coming out of WWII and several other factors at that time (GI Bill, Marshall Plan, influx of intellectuals into the U.S. before/during the war who stayed, etc.) Since however, that “unnatural” level of prosperity for the average U.S. worker has been and continues to be eroded due to greater competition through free trade (perception ‘B’ above.)

This narrative seems to be the underlying subtext of any discussion in the U.S. on expanded trade.
IMHO, the harder issue in the U.S. isn’t the economic justification for more trade it is the social implications of where the majority of U.S. workers have been since the 1950’s to now and the prospects going forward.

More trade will have tremendous benefits for “above average” U.S. workers. However, for “below average” U.S. workers, relative to where they have been and where they are now, the implications for them of greater trade seem to be a net threat (cheaper/better goods but not enough to compensate for lower income.)

Is this directionally true? If this is directionally true, what to do?

What are the social implications of a growing divide between the above average who prosper and the below average who muddle along at best? “Life is not fair”, although true, is a bitter pill to swallow as the divide grows larger and larger. The advocates of greater trade need a solution to this larger issue.

Scott Packard writes:

It just seems the discussion this week is at an introductory level. The modern market seems seldom rational or free.

- Wal-Mart receives harsh criticism for selling foreign-made goods while Costco gets a pass, but both sell goods made in China, among other countries.

- Ron Gettelfinger represents only the interests of his UAW members when he acts. Likewise for his opposites, the Alliance for Automotive Manufacturers and the Center for Auto Safety. Tangentially for the numerous associations that represent various countries or regions' auto manufacturers. They all want a piece of the American vehicle market.

- Why do milk mfgrs. keep using melamine to adulterate their product? Or, in an open market you have to visit daily, why would a sugar vendor in a sleight of hand substitute sand for sugar?

AHBritton writes:

Russ,

My main complaint with your analysis has to do, well, less with your analysis and more with what it leaves out.

Let's say you are a small, largely subsistent and underdeveloped nation. Your main product is corn, which you use to subsist and feed the local population. As trade opens up, vast inflows of cheap corn are introduced to your economy. It's a mixed blessing, but net benefit. Many farmers end up out of work but the population receives a cheaper food source.

They manage to shift some of this unemployment to an admittedly embryonic textile industry, spawning some exports. Then, sadly, there is a dramatic spike in global corn prices, do either to natural weather patterns, or say a push to use corn as and energy source. Suddenly, a culture that was admittedly already living a rather subsistent existence, is now devastated by not having the money to import this food, nor the domestic crop to alleviate the hunger.

Admittedly domestic fluctuations could cause this problem as well. Was it necessarily the best idea to completely abandon domestic production or is it possible that they could have come up with a collective (governmental?) solution to ease the society more stably into the world economy? I'm not saying there's an easy answer but I think these are the tough questions that can't be understood through isolated and abstracted theorizing and logic. That it's possible to defer to local knowledge, however imperfect, in order to divise collective solutions to problems.

P.T. Carson writes:

Hi Russ,

thanks for your work.

I think you are too quick to dismiss the importance of borders and sovereignty. First national borders must serve some perceived organizational benefit, otherwise we should be having fewer borders by now. But beyond that I think that in many cases the national borders represent your example of a king being able to club their neighbor (or their own citizens) over the head and take their venison.

The clubbing and theivery takes several forms; in the US it's an obscenely engorged Federal government. In China it's the states intervention in price signals on labor and goods that comes from their choice to fix a currency peg tighter than necessary for longer than useful. So the average Chinese workers productivity has gone up significantly more than their real wages. This allows for further employment there.

Isn't that the same as the Chinese politburo clubbing some American engineer over the head and stealing their ability to work in an American factory that might be competitive if the Chinese engineers pay reflected their vast improvements in productivity?

I understand that some US firms are not competitive at any value of the yuan, but I also believe that on the margin, there are a lot of Americans losing jobs that would be competitive if price signals were not destroyed by sovereign national policy. In that respect borders matter to the trade discussion.

Of course the US distorts pricing in markets too - so one may argue that all the distortions may average out to a wash.

Lastly the time domain shouldn't be dismissed so quickly either. When a short term disruption in labor markets means 10-20 years and has multi-generation payback periods, then some damping mechanisms may aid the adjustment. I think this is the current dilemma. We face structural changes to labor markets and we have models that assume short run times are smaller than they really are.

Nick writes:

P.T. Carson,

I asked Dr Roberts a similar question via e-mail. I also asked if free trade is good, why haven't nations become wealthy engaging in it. If someone could answer this question I'd rally appreciate it, because I cannot find anything in terms of practical support for this position. The greatest nations all had mercantislist backgrounds or practice it today. So its a bit hard for me to swallow the idea that free trade leads to property is anything more than an substantiated hypothesis.

Nick writes:

Jeez I should have proofread, the last line should read

So its a bit hard for me to swallow the idea that free trade leads to prosperity is anything more than an unsubstantiated hypothesis.

Bo Parker writes:

Another insightful discussion with some meaty issues cornered and simplified. Several posts have already addressed the (unintentional?) slight of borders. Do I detect a determination to convince us that free trade by definition always creates the best outcome?

Russ, your Hoover colleagues Bernstam and Rabushka show a compelling figure (2.2) in http://media.hoover.org/documents/predation_chapter2.pdf. When the issue is creating the context for economic growth the level of government involvement in the economy was a key determinant of success.

I often find the "meta economics" of growth strangely missing from discussions of global trade. How do differences in the ability of nations (borders again) to innovate emerge over a 20 year period, for example? And why have more protected economies (China) been better at this transition than less protected economies?

emerich writes:

Carson and Nick,
You missed the point. Suppose you're an engineer and an engineer down the street insists on doing the same sort of work you've been doing just as well but at a lower salary. You get fired and he gets hired. You don't benefit, but the company that hires him and others like him benefit, and so do the company's customers because the company is able to lower the costs of its products and gain market share. It doesn't matter if he's down the street or on the other side of the world, the same logic applies.

Nick writes:

emerich,

That's all fine in theory, but it doesn't seem to have any support in practice. Aside from hong kong, no other country that i know of has achieved wealth in this way. Japan, China and S. Korea developed because they protected their domestic industries and continue largely to do so. Based on the theory they should be extremely poor countries.

The countries which are extremely poor are compelled by IMF rules to engage in free trade. These countries do not seem develop to develop domestic industry because naturally its cheaper to just buy it from the producers who are already adept at it overseas. So these countries subsit by selling off their natural resource or agricultural products to get money to import foreign goods. However this does not seem to make them better off, the societies dont exhibit the "pie getting larger" as dr roberts would say..

so how would you reconcile this? i believe its a fair question. I am not a political or ideological axe-grinder I am asking in earnest.

Justin P writes:

Nick - If Japan, China and S. Korea didn't engage in their limited version of trade they'd all be as poor as N. Korea. Modern politics isn't black and white, there is enormous gray area. Take our NAFTA, which isn't so free that the US can't impose tariffs on Canadian products via ARRA, which leads to Canadian retaliation against US products.

Are the US manufacturers in the protected industries better off than the ones that aren't? Of course they are, but as a whole is the US better off? Almost certainly not, since resources have to be wasted to protect certain politically sensitive industries. Not to mention the workers in the industries that now can't sell their products in Canada or the communities that those factories are in. With tariffs on their goods, they sell less to Canada, and that means less money going through their local economies as well...are those people better off?
And who has to pay tariffs? Like taxes, the consumer has to pay eventually, either through higher prices or lower quality.
Yet if trade were truly free, there would be no tariffs.

The countries the IMF compels are certainly better off than they would be if they just closed their borders. But again you have to look at the political structure involved in those poor countries. If the people are free then free trade would lift them up. If the people are ruled by a totalitarian regime, what on earth would make you think the people would reap any of the benefits of trade in the first place?
Even then, the people working in those factories to make things to trade are better off than they would be. What are their alternatives?

The truly depression fact is that free trade is the ideal but no country really practices it. As a result every country is poor than they otherwise could have been. The waste, the could have been, is usually sopped up by the political class. It's a typical bootlegger and baptist model. The only ones that "benefit" are the politicians and the politically sensitive industries, it's everyone else that has to pay and suffer.

Russ Roberts writes:

I want to thank everyone for so many thoughtful comments. I'm not going to get to everything interesting or provocative here. I waited a while, hoping to rely on economies of scale and then you get overwhelmed. But let me get started.

Greg, I appreciate the compliment (and the thoughts on Mengerian/Hayekian production.) I suspect your daughter may be a bit more interested in economics than the average eight year old. Either way, give her my best.

On Krugman, I don't know his work very well. I should. What he is known for is the argument for economies of scale for a nation (rather than an individual) and that it might be worthwhile theoretically to snare a key industry so that the synergies can redound to you rather than to foreigners. This created a justification for industrial policy that Krugman himself rejected on practical grounds. But the quote from the Nobel Prize suggests a more Smithian approach. I'll check it out. The point about like nations trading with each other is discussed in an EconTalk episode with Ed Leamer.

National borders do matter (P.T. Carson and Adam Hockenberry). But not in the way we traditionally think--"we" have to keep "them" from getting "our" jobs. They matter in that the rule of law is observed within our borders with more care than in some other countries. We have certain cultural advantages and so on. But for trade, i think the focus on borders even within free trade circles, is often misleading. Talking for example about the "American" comparative advantage may not really make sense. Ricardo got us thinking that way and it leads often to confusion and xenophobia. That was my point about borders being unimportant.

An innovation coming from Canada or Mexico or China vs. the US is not so relevant. What is important is having access to the skills of lots of different people. See the Bhide podcast for some related discussion.

Frederick Davies is correct to point out that (gulp), Nepal is landlocked so talking about her inadequate harbors is a bit absurd. Of course being landlocked is an example of having a *really* bad harbor but while the logic is correct, I was simply ignorant.

As for history supporting the case for mercantilism, I don't think that's an easy case to make. Yes, Japan had a good run posing as protectionist but they, like us, were protectionist with a handful of politically powerful industries and were pretty open to the world otherwise. Similarly, China is very open to the world. It's true that China imports capital rather than goods, but that is what you would expect a low-skill country to do even if it weren't practicing some strategic plan.

Over the last 50 years, the US has opened its borders and lowered tariffs. The US has run large trade deficits and large capital surpluses over the last 35 years. It has been a pretty good half and quarter century. Most nations that are open to the world thrive and most that are closed, do very poorly. Africa, for example, is the most cut off from the world and has grown very little. Of course that could be due to other factors. And the success of Japan could be due to factors other than say it's government/business cooperation and alleged strategic trade factors. Maybe Japan would be even richer had they not protected their rice producers, for example. I believe that to be so but it is hard to verify with any precision. I would encourage you to rely on logic alongside history. How does cutting yourself off from opportunities to buy things more cheaply enhance a nation's standard of living? What is the logic?

Christis--thanks for all the references.

John R. Palmer--glad you like your day job but we always welcome good students to GMU. Then again, EconTalk's price is right, both in the out-of-pocket sense and in opportunity cost. So happy to have you as my student here every week.


Nick writes:

I understand that there are gains from trade. It also seems that there are no wealthy societies which are not industrialized. This does not seem to me a coincidence. If i am in an agricultural pre-industrial society, say burkina faso, or somewhere like that odds are my costs are higher than societies which have machines to assist in agriculture. if i am engaging in free trade, then im selling my goods without subsidy. Odds are the price is very non competitive, and I wont have many customers and my margins wont be very good. If i am ever able to amass enough capital to industrialize that may take a very very long time, if ever.

If i subsidies my exports to make them competitive then i'm more likely to quickly amass enough capital to get the industrialization ball rolling and reap those big growth gains. Is this not exactly what china does with their currency manipulation?

I imagine there is some point at which the gains from this game are diminishing and you have to give it up. This is why I keep asking which country became prosperous through free trade.

Also I think its naive to say, as Dr Roberts has in several podcasts, "nobody cares about the trade deficit between states" and make the assertion that "the USA is a free trade zone".

The people in Michigan absolutely care that the balance of trade has shifted away from their state. That is why their government spends an enormous amount of money to subsidize new industries to come there.

If nobody cared why does virually every city and county government have an economic development office. Subsidy is just as much a mercantilist practice as tarriff, but it is one that can be done on the sly.

Almost every Walmart negotiates a tax abatement with the municipality to put in the store. Once the store is there they can often negotiate these abutments in perpetuity. So are they successful because they have some comparative advantage or because they have co-opted government mercantilists to subsidies their business?

Nick writes:

Justin P


The truly depression fact is that free trade is the ideal but no country really practices it. As a result every country is poor than they otherwise could have been. The waste, the could have been, is usually sopped up by the political class. It's a typical bootlegger and baptist model. The only ones that "benefit" are the politicians and the politically sensitive industries, it's everyone else that has to pay and suffer.

Your statement sounds like the communists who would tell you that communism is a great system but no one has ever really implemented it correctly and that's why it hasn't worked in practice.

Of course I have infinitely more faith in free trade than communism (why else would I read this website) but i feel a little skeptical because it seems that the majority of the world has rejected true free trade...if it is really the closest thing to the "free lunch" than i'd think it would basically be embraced and celebrated by everyone.

David K writes:

Russ, can you please reference the book or article where Rabbi Jonathan Sacks makes his observation that trade makes diversity a blessing?

Matty writes:

Great podcast. I think trade is something which most people struggle to understand. I wish more people would listen to this podcast so we can then have more informed debates on Globalisation, Protectionism and "Fair" Trade. These ideas are simple once understood but are not so simple to initially understand - this podcast explains the nuances well and remains accessible to anyone who would wisely choose to listen.

Justin P writes:

Nick - Trust me I'm no communist. My point was merely that because we have a system run by politicians, we are never going to come close to an "ideal" free trade regime. Politicians will always be there to make rules that will benefit some at the expense of others. It's reality.

Russ Roberts writes:

Here is the full quote from Rabbi Jonathan Sacks taken from his book The Dignity of Difference:


In an age of resurgent tribalism, the global market offers—as trade has always done—an alternative script to difference as a source of conflict, and therefore tragedy. It turns difference into a form of blessing from which not only I, but others also, benefit. Adam Smith was not wrong when he invested the market with a quasi-religious significance in speaking of the ‘invisible hand’ by which our individual contributions combine to enhance the general wealth of nations. Economic virtues—hard work, inventiveness, the profit motive—have always seemed tame when set against the heroic virtues of military societies. But military societies kill. Wars destroy. Valour, courage, dying in a noble cause seem heroic from the point of view of victors, but not from their victims.

If the price of war has become too high, which it has, we will have to value the habits of trade—the only thing that—throughout history, has brought tribes and nations together, benefiting from one another and from their several and different skills. The interlinking of nations in a network of trade causes many problems to which I now turn. But it is also our last best hope for peace. Unlike the battlefield, the market is an arena in which both sides can win.

Steve writes:

to paraphrase: "Nepalese are poor because, unlike Americans, they are unable to participate in a large, diverse, specialized economy. Separately, the way these specialized economies form is that market (self-organizing) forces adjust wages which naturally push people from sector to sector, and this in turn forms some relatively optimal configuration of job assignment to increase the "size of the pie" overall." It isn't obvious to me that this is the best way or even a particularly good way to get a productive arrangement, especially not a sustainable one.

In this economy, you describe, of N tasks there are a set of jobs that are sort of meta-jobs, they don't produce anything per se, but rather have to do with the fluidity of the market, the transfer of that information contained in wage value and credit around the network. They enable others to produce goods and services. This function is contained in the financial sector, of course, (and governmental regulators.) It almost seems like this superior vantage allows this sector to basically 'hack' the market system. 1) Is this a meaningful distinction and/or can they 'hack' the system?

The value of this sector of the economy can't be "compared" to a different sector, because there is no way of measuring the productive direction of the entire economy or of valuing that direction. There might be comparison when there are several competing economies, but not with a single increasing global one. It seems like at some level of complexity this isolated economy reaches a point where innovators are increasingly devalued because no matter how important or productive to everyone their innovations are, these are not more important than the functioning of the entire economy itself. So while that innovator can compete with most non-finance sectors and therefore survive by borrowing from lenders, increasingly more and more of the economic reward/control is funneled into a relatively smaller and smaller sector which is devoted towards the functioning of the economy itself, causing (often random-walk) growth to make more money. 2) What prevents more and more total economic production disproportionately enriching the financial sector, what prevents it from becoming a de facto global government? What force moves an equal amount of credit and control permanently back into some other portion of the economy?

While the "market" is supposed to represent and channel the pooled needs, desires, and demands of all the people in economy, instead, it becomes merely the voice of the industry that can control that force directly.

3) Is there anyway to guide the total direction or the set of predominant industries that we as a society of individual people want? Can we intelligently decide what to emphasize, once we don't just make "deer sandwiches"? Can we steer towards what the economy as a whole is geared towards producing or is that evolution completely above human control?

Glenn Kasten writes:

I thoroughly enjoyed this podcast. However I'd like to hear part 2. Part 2 is about the consequences of Part 1, one of which is that while society as a whole may best be served by this model, some individuals may become worse off - the classic efficiency vs equality debate. What do Ricardo and Smith (or others) say about the "losers"? Aside from the moral issues, you can't ignore these individuals because they have great incentive to make things worse for the society (e.g. tariffs, violence.)

Nick:

In an earlier entry you note "I feel a little skeptical because it seems that the majority of the world has rejected true free trade".

The rarity of countries embracing free trade regimes should not be taken to imply that there are intellectually credible questions regarding the optimality of free trade.

Instead, for reasons exhaustively studied and well understood, trade impediments are the result of political dynamics that favour these suboptimal impediments over the alternative. If you would like to learn more about this look up the theoretical and empirical literature on "Endogenous Trade Policy".

As for a crude first taste of the empirical evidence regarding the impact of trade on prosperity you may want to start with Deirdre McCloskey's "Learning to Love Globalization" Eastern Economic Journal 25 (1, Winter 1999): 117-121.

Gil writes:

I just wanted to add my praise for this podcast.

I do enjoy the usual interview/dialogs very much, but I think that thoughtful lectures like this one add something a little different, and doing it once in a while would be a good idea.

Bruce Jones writes:

As someone who follows information technology as an avocation I couldn't help but be struck by how much the Smithian version of productivity reminds me of one often mentioned phenomenon. The IT folks often talk about "the network effect". Meaning that some systems don't really work until they have large numbers. So twitter, facebook, etc become useful when large numbers of people subscribe and follow. When the numbers are small - it's uninteresting. Ironically, in that world much of the capital investment comes from the consumers rather than the producers.

Mort Dubois writes:

I'm with Glen - the pain involved in the continual churn of growth is mentioned, but is there a way to quantize it? I presume that the advantages of trade have been modeled mathematically - is the pain part of the equation? Is pain proportional to the rate of growth of trade? Is there a scenario where the total amount of pain is sufficient to negate the benefits of trade? Or sufficient to drive a political reaction that limits trade? Is there a quantifiable benefit to stability in an economy? Is there a scenario where people value the security of knowing what their situation is likely to be in the future more than the increased benefits of more trade? Is there a point where sufficient wealth has been created by trade so that more isn't worth the pain? I'd like to hear more on the relationship between growth and pain.

Mort Dubois

Alexander Pronozin writes:

Dear Professor Roberts. I enjoyed your podcast as usual. Nevertheless it lacks analysis of arguments against unlimited free trade. It would be very interesting to know for example your thoughts about Paul Krugman’s insights on this topic. As far as I understand Krugman he points out that specialization leads to mixed consequences. Some of them are good, such as efficiency. Some of them are bad, such as instability.

Let’s imagine the ultimate specialization where there are as many different people as different tasks which they perform in economy. And each person performs his specific task. In that ultimate scenario failure of one person can drive the whole economy to halt. Imagine for example that this person is an air dispatcher.

Let’s take another example. A plane with one engine may be much more efficient than that of with four engines. It may consume less fuel, deliver more power and require less maintenance. But if one engine fails, three working engines of the four engine plane can save people’s lives. However if there is no specific security regulation some airplane production companies in pursuit of their short term interest may prefer to produce more efficient one engine planes.

Perhaps there is some point after which specialization and hence free trade have more negative sides than positive ones? If it is so, where is this point? Who should draw it and guard economy against overreaching it? Can it be someone except the state? It would be great to know your take on it.

John Strong writes:

One last followup on the Krugman piece. You can read it here: Ricardo's Difficult Idea.

Krugman not only defends the Law of Comparative Advantage in this piece, he attacks two critics of trade, Robert Reich (his co-host on ABC's Good Morning America) and James Fallows of The Atlantic, for not understanding comparative advantage.

I really got a chuckle (major Schadenfreude) out of Krugman's attack on Fallow's praise for 19th century economist Friedrich List, because Fallows is so solemn and self-important. He claims to have discovered some deep wisdom about economics, long understood by Asians and ignored by Westerners. You see, we Westerners are enslaved by dogmas and capitalist nostrums. Alas.

You'd think Krugman would thank Fallows for standing in the breach and offering bold and creative alternatives to our capitalist group think. No, afraid not. Here's what Krugman says:

    "One must assume that Fallows actually read List; in which case his praise for List shows clearly that he does not understand Ricardo. For List's old book, like Goldsmith's new one, is the work of a man who, right from the beginning, just didn't get it; who could not get straight in his mind how trade between two countries could raise incomes in both. (A sample List argument: he points out that agricultural land near cities is more valuable than that far away, and concludes that tariffs on manufactured goods will help farmers as well as industrialists)."

Finally, Krugman offers some refreshing criticism in this article of intellectuals who popularize weird and cranky views because they want to gain status as an enfant terrible. He puts Michael Lind in that category. Quite frankly, I have sometimes thought of Mr. Krugman himself in those terms.

Elaine Cole writes:

I love your "Roberts on Roberts" (I've renamed the 2-8-2010 podcast.)

Also, I appreciate when guests come into the sound studio. The interview quality is so much better than on the phone.

I try to listen to Harvard Bood Review’s podcast, but the quality is just too poor.

Oh, and Happy Valentine's Day to you and everyone you love.
Warmly,
Elaine Cole
Los Angeles, CA

Big Al writes:

Another great show - thanks, Russ. When it comes to trade, one angle I don't hear discussed much is the basic idea of economic liberty. If Costco can get some quality products manufactured cheaply in another country, ship them to my local store, and I go there and buy them, how is it that the government gets to decide whether that private transaction is "good" or "bad"? This is one of the basic gripes I have about tariffs - that they are abitrary restrictions on the economic liberty of the individual. But I don't often hear that point made.

Again, thanks for the podcast and all the great shows.

Jim Kelley writes:

Another multiplier is the amount of energy available, the idea that each of us has 20 to 100 energy servants. The per person energy available correlates with the increased living standard. If not necessarily causative energy availability deserves more consideration. Obviously there is a complex interaction with the Smith/Ricardo factors. What is the smallest group to manage a complex high energy economy?

Marcelo Pecanha writes:

Russ,

Without going into the discussion here, I would just like to chip in with an anecdote that finally made me understand comparative advantage, that went through before I was of an age to understand the fine print.

Perhaps you have heard about a Brazilian soccer player named Pele, arguably the best to have ever played the game. His ability puts Ronaldo and his contemporaries out of comparison -- by their own analysis. He played mid-field, but has under his belt more than a thousand goals as an attacker. That is quite a lot by any standard.

Well, what not many people outside Brazil knows is that Pele was the best goalkeeper in most of the teams he played. In fact, he was such a natural that his son (nephew? not sure) played for the national team as a goalkeeper. Some people argue he played the position better than the official one at winning Brazilian team at World Cup '70 (they trained together!).

The question I was asked at a tender age was: would you take Pele out of mid-field and let him play goalkeeper, knowing he was the best on the team at the latter position? Well, why not?

And then the lights went on.

PS: if Mr Palmer can quit being an engineer at 48 I surely can quit the offshore business at 37 and enroll GMU, right?

ToriAdams writes:

In terms of stealing things, I was thinking of my own country men in India in the 18th C. The British found that their comparative advantage was in providing troops and military expertise to various warring Indian states. Very quickly they got into a position to take things themselves and then to rearrange to terms of trade to favor themselves.

This caused me to this quite common. In your parable of the deer and the sandwiches one thing that always occurs to someone is that they are good a taking things from people. Presumably in some organic/Hayekian system these people create people that are good at protecting. In time these people becomes lords and ladies etc. and complete their specialization in extraction and exploitation and become government?

Aleksander Gangov writes:

Hello Russ,
this was an excellent podcast and I am sorry I listened to it so late (it was released 2 weeks ago. While I did not have time to read all the comments, I hope you are still skimming through them....
The idea that bothers me appeared at the end of the podcast, when you talked about national borders and you reiterated the same thing in your comments -borders don't matter. This I generally agree with given the same currency. Trade defficits tend to depreciate currencies and thus limit the purchasing power of individuals employed in businesses which are realtively more productive in US than Canada. Let's ignore here Bodreaux insight that current account defficits are offset by surpluses on the capital account, because the later is highly volatile and it is very possible for a country to experience negatives on both current and capital accounts of the BoP. My claim is that it matters where the job is being outsourced - whether it is a country which USA runs deficit with or one characterized with surplus.

AHBritton writes:

Russ,

My main complaint with your analysis has to do, well, less with your analysis and more with what it leaves out.

Let's say you are a small, largely subsistent and underdeveloped nation. Your main product is corn, which you use to subsist and feed the local population. As trade opens up, vast inflows of cheap corn are introduced to your economy. It's a mixed blessing, but net benefit. Many farmers end up out of work but the population receives a cheaper food source. They manage to shift some of this unemployment to an admittedly embryonic textile industry, spawning some exports. Then, sadly, there is a dramatic spike in global corn prices, do either to natural weather patterns, or say a push to use corn as and energy source. Suddenly, a culture that was admittedly already living a rather subsistent existence, is now devastated by not having the money to import this food, nor the domestic crop to alleviate the hunger. Admittedly domestic fluctuations could cause this problem as well. Was it necessarily the best idea to completely abandon domestic production or is it possible that they could have come up with a collective (governmental?) solution to ease the society into the world economy? I'm not saying there's an easy answer but I think these are the tough questions that can't be understood through isolated and abstracted theorizing and logic.

Another problem is one of power dynamics. Simply pointing out the benefits of comparative advantage (an idea I have no problem with) disavows the nature of real world problems and power dynamics. It is true, small underdeveloped countries have a lot to gain through open trade of products and ideas with the rest of the world. It is also true, because of their poverty, lack of infrastructure, education, and industry, that they are very vulnerable to outside influence and manipulation, not only economically but also politically. Just as industries in the US try to petition the government for protectionist policies and the like in order to protect their industries from outside influence. Those industries and corps. are in even a greater position of advantage, along with outside governments, of manipulating the governments and rules of underdeveloped countries to favor those more powerful countries with which they are trading. For instance, undeveloped countries outside the US are at a disadvantage in their domestic production of corn, not only because of the US's advanced agricultural techniques, but also as a wealthy nation we are able to heavily subsidize our corn industry. Other, more advanced countries, even without subsidization, are able to compete or not worry about the losses because it is comparatively much less of their livelihood. For a less developed country the subsidized cheap corn is possibly impossible to compete with because they can't afford to subsidize and support their domestic market.

Steve_0 writes:

I just wanted to say that this was one of my favorite EconTalk podcasts ever. It expressed clearly so many of the topic points I try to articulate to my friends when we discuss economics and politics.

My only point of disagreement is this: Russ says there is no difference between the worker increasing his productivity to buy more "Goods", and the price of "Goods" dropping by an equivalent amount.

From a strictly utilitarian, one unit perspective this is correct.

However, I believe people get a psychological and philosophical benefit from being productive, and being proud of their work. Imagine two worlds, one in which we all work the fry basket, but can buy TV's, boats, and broadway shows for a dollar- and one where we are Artisan bakers or woodworkers, but we have to buy fancy goods at more dear prices.

People enjoy earning something special to a degree, and they have pride in improving their work to a degree.

Also, another slight issue, those productivity improvements are precisely the other side of the coin that provides the cheaper good. As an cabinet maker, the price of going to a movie may drop, or I may invent a way to make a smoother wood finish- thus earning more money to go to the movies.

If I devise a new technique, it will eventually be adopted by the market, and other cabinet makers will benefit, as will more consumers; such that eventually even those of low income will have cabinets finished in such a fashion.

It seems to me you cannot have one without the other being attached. But in terms of human pride, accomplishment, and philosophical contentment- it does "matter".

Dan B. writes:

Hi Russ,

Great podcast. I like this format, and hope you'll continue to mix in monologues occasionally. I had two reactions to this story: the first is mostly a silly idea, but the second is intended sincerely.

While listening to the show, you list 3 ways one can enrich himself: (1) plunder, (2) productivity improvements, or (3) trade. You dismiss plunder, saying:

""""
We tend to think of theft as a zero-sum game--if I get richer by taking your venison, I'm better off and you are worse off. But it's important to remember that theft is a negative-sum game.
""""

I will play the devil's advocate and raise the possibility that you're being intellectually dishonest here. Is plunder always a net negative? Maybe not. What if neither you nor I has enough food to live through the winter? Won't "we" derive a net benefit if I take your food and one of us makes it through the winter alive?

What if it's not a matter of life and death, but theft gives me the time to invent new technologies while you're working twice as hard to recover what I stole? (You'd only voluntarily invest in me if you could anticipate a benefit from my innovations.)

I'd rather not make up any other examples, but I'll at least point out that your entire story does revolve around **killing animals for their meat**. That's a far cry from voluntary exchange between us and the animals, but it's no small part of our common history as meat-eating human beings in western society: plunder is what got us where we are today (or at least the first half of the way).


If you find yourself a bit disgusted by this idea, that's great: it makes a fair segue into the other point I wanted to make.

This episode is about the benefits of trade and the poverty caused by isolation. You mention the "spectacularly resourceful and intelligent person in Nepal" and ask why he earns less than "a lazy untalented American".

Unfortunately the answer is obvious: it's because he was born in Nepal without the good fortune of being a US citizen. If he were born here, he would be have had opportunities to enrich himself through hard work and ingenuity in the US labor market. Most people alive today are not free to move and work in the US because of where they were born, and yet, as you point out, access to markets is key to wealth. Isn't it unethical to judge classes of people based on the circumstances of their birth? Isn't it an enormous waste of human potential to exclude so many people from markets where they could meaningfully contribute? What is the calculation that we as Americans do to decide that our laws in this area are right? And do the assumptions we make in that calculation reflect the things we really believe?

Best,
Dan

Dan B. writes:

Given some further thought, I'm starting to come around and see the error in my comment about plunder.

If "theft gives me the time to invent new technologies", then any real increase in wealth is due to productivity improvements, not plunder. Plunder can concentrate wealth in the hands of a few people and enable those people to pursue worthwhile investments, but it doesn't create wealth on its own.

Anyway, this has been some fun to mull over. Thanks again for doing this podcast.

AHBritton writes:

One comment for Dan B.,

Although plunder may be a negative sum game in the short run for the entire system of parties involved, it seems to me plunderers, especially of land and resources, ends up rewarding those societies that engage in it. Most of the "winners" in history weren't the most congenial, non-coercive forces, but it seems to me the opposite, although there are those who would argue this point.

Next, I am INCREDIBLY surprised no one addressed this next point. I held off talking about it in my last comment because I felt sure someone else would tackle this issue.

Russ,

Nepal's "problem" is not so much an intellectual misunderstanding i.e., "they just don't understand the virtues of comparative advantage and how it applied to free trade," it is more a geographical, historical, and cultural product. They have a rugged landscape and were going through an internal struggle for Democracy until their first election in 2008. It's hard to establish infrastructure through a topographically complex and treacherous region. It is also difficult to bring about free and open trade in a country that is run by a monarchy and caught up in internal strife. So, in other words, you don't seem to have a very good grasp at all of the issues Nepal faces. I find this one of the disturbing aspects of many libertarian and economist's thought process. In order to understand why a society fails or succeeds economically you cannot just ponder abstractly, you need to actually read about the country in question, and I wonder if you even did this, as it seems like that would be at least the MINIMAL amount of preparation you could do regarding that argument. Which reminds me, you should have Jared Diamond as a guest, or if not give his book "Guns Germs and Steel" a read. If I am wrong about my assessment of your knowledge of Nepal I apologize, but that knowledge does not seem to come through in your discussion.

Also,

It seems like you spend a great deal of this podcast arguing against a very rarely argued extremist communist argument. Who is out there now days advocating that someone should decide what each and every persons job should be? With whom are you debating?

Although I'm glad that you illustrate and elucidate the various aspects of comparative advantage, as well as the Ricardian ideas and the idea that specialization is beneficial even when everyone is equal and it seem it might not be. As an economical concept it is a poorly understood one and it is good to enlighten people about it, although as I've pointed out, it does not exist in isolation.

John Havey writes:

You ascribe our standard of living to increased productivity fostered by trade. I'm sure it does have a big effect. But you don't compare it to the effect of theft. Is some portion of government taxation theft? Is the behavior of Goldman Sachs theft in some degree? Is inflation by the Federal Reserve theft? Patents on genes? Is there a point where influences of lobbying, collective bargaining, and monopoly constitute theft? And then of course there are the claims that our imperial strategy amounts to hitting small countries over the head, taking their resources, and giving them plastic trinkets or fiat currency in return.

So to complete that argument you would need to come up with some measure of how effective these two methods are. But there is a third way to get wealthy, and you would also need to assess the relative contribution of Method III.

Method III is: find a treasure. And the treasures of the last 300 years are the fossil fuels. All that productive technology runs on them now, and will have a difficult time running without them. But treasures, like other inheritances, tend to get used up.

Russ Roberts writes:

AHBritton,

Not debating with anyone. Trying to help people see the marvel that is the price system. It steers people into jobs without anyone having to be in charge. I don't think we appreciate the power or marvelousness of the world around us.

Jonathan Scanlan writes:

Listening to this podcast this morning, I couldn't help wondering about whether one really needs specialization and technology to emerge for there to be gains in productivity and wealth.

In the example of hunters, where everyone was the same, surely the sheer number of them would allow for the pack to cover a wider area, thus increasing probability of kill.

Within such a context, with prey landing essentially at random, the implicit promise of sharing the bounty in spite of who catches it could be construed as a form of trade. At least in the same sense that if I shout my mate a beer on the grounds that he'll return the favor, we mutually gain by being less bound to each of our financial situations.

Though one probably could concede that through learning and natural variation in experience, a diversity in skill would be emergent.

Either way, it's about division of labor.

Charles Roberts writes:

I had to laugh when you compared the Nepalese man to the lazy, untalented American, and then proceeded to hold up your daughter as an example. Does she know she's now the poster child for the lazy, untalented American?

BTW, one of my all-time favorite podcasts. Maybe I'm starting to understand this stuff a little better.

Francis writes:

Lots of good ideas in this one to ponder. Quick thought that this provoked in me - another way of framing the trade discussion:

I can specialize by investing in making myself more productive, say practicing to be a better hunter. But I can also specialize by investing in making *other people* more productive. That's essentially what the sandwich maker is doing. Look at him as an ongoing business - every time he gets better at making sandwiches, he creates a net surplus in the community of him and the hunters by creating more hunting time for the same effort on his part.

At least for me, this helped to put the "why trade" discussion in this podcast into perspective - if my value-add is making other people better, then I need to impact more people to drive up my return. And when we move to a tool technology (not sandwich making, but sandwich machine making), I need that at a massive scale - for me to supply my machine to 10 sandwich makers, I need 10 whole villages who've bought into the sandwich making idea.

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