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Comment and Clarification

January 18, 2004

Dr. Roberts is misled by the emphasis on the specific institutional assumptions used by international-trade theorists — institutional assumptions used to reveal most clearly the relevance of their work to the study of international trade.  But it has been long recognized by economists, especially international-trade economists, that the principle of comparative advantage explains why individual people — you, me, Paul Krugman, Paul Craig Roberts, Paul McCartney, every productive member of society — specializes and trades.

For example, Frank Graham, the celebrated early 20th-century trade theorist, wrote that comparative advantage "is the universally valid analysis underlying the argument for free trade.  Time, place, and circumstance are irrelevant thereto.... It is a matter of mathematics, quite independent of environment, that there is an INHERENT gain in the specialization along the lines of comparative competence which unshackled trade tends to develop" [original emphasis].

A Princetonian of more recent vintage, Alan Blinder, wrote the following: "The divergence between economists' beliefs and those of (even well-educated) men and women on the street seems to arise in making the leap from individuals to nations. In running our personal affairs, virtually all of us exploit the advantages of free trade and comparative advantage without thinking twice. For example, many of us have our shirts laundered at professional cleaners rather than wash and iron them ourselves. Anyone who advised us to "protect" ourselves from the "unfair competition" of low-paid laundry workers by doing our own wash would be thought looney. Common sense tells us to make use of companies that specialize in such work, paying them with money we earn doing something we do better. We understand intuitively that cutting ourselves off from specialists can only lower our standard of living."

Graham's quotation is found on page 58 of his 1934 book Protective Tariffs.  Blinder's quotation appears in his essay "Free Trade," in the on-line Concise Encyclopedia of Economics, edited by David R. Henderson.

Finally, I recall being in Fritz Machlup's class on International Trade in 1981.  He repeatedly warned his students that one of the most frequent errors that non-economists make about trade is to overlook the fact that people specialize and trade internationally for the very same reasons they specialize and trade intranationally.

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Clarification: contrary to Dr. Roberts's claim, I do not write "that comparative advantage does not result from different countries having different internal cost ratios or different opportunity costs of producing one good in terms of another."  I fully agree that when different countries have different cost ratios or different opportunity costs of producing one good in terms of another that comparative advantage results.

My argument is that comparative advantage does not explain ONLY why people trade internationally; it explains, with no less rigor, why people in the same country specialize and trade with each other.  Indeed, it is THE bedrock explanation for why specialization and trade occur, whether it's trade within a household or with a stranger 10,000 miles away.

All the talk of "countries" misleads people into thinking that there's something fundamentally economically relevant about them.  Friedrich List and countless mercantilists, past and present, thought so.  I emphatically do not.



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