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Absolute vs. Comparative Advantage

Absolute vs. Comparative Advantage

In response to my earlier post, Paul Craig Roberts says that “If the factors can leave, they do not specialize within the country where they have a comparative advantage. They can move abroad where there is absolute advantage.”

I can make no sense of what he means.

First, the concept of absolute advantage is meaningless. All advantage, all cost, is relative — comparative. See, for example, page 46 of Fritz Machlup, A History of Thought on Economic Integration, where he says that “The notion of ‘absolute’ cost differences, or ‘absolute’ advantages in production, has bothered many students who correctly saw that differences and advantages must always be relative to something.”

Second, comparative advantage exists ultimately at the individual level. I have a comparative advantage — given my tastes, abilities, human capital, and access to resources — at producing X; someone else, given all of these things, has a comparative advantage at producing Y. Similarly, one team of laborers — call it a corporation — has a comparative advantage (given the above things) at producing W, while another team of laborers has a comparative advantage at producing Z.

We can speak, if we wish, of something called “a country” having a comparative advantage at producing, X, Y, and Z — but we must recognize that its not “the country” as such that has any such advantage, for “the country” — say, “the USA” — is simply a short-hand label for the many individuals (and their hugely complex and ever-shifting relationships to each other and to the world) who happen to live within the geopolitical region that, today, we conventionally refer to as “the USA.”

Third, and more to the point, the principle of comparative advantage emphatically does NOT — in any way, shape, or form — depend upon factor immobility. It applies with equal rigor when all factors can move costlessly across the factory floor, across town, or across the oceans — as well as if factors are totally stuck in place.

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