The pedagogy of comparative advantage

What does the theory of comparative advantage (or see the Wikipedia entry) actually predict?

1. Every person will trade with every other person in the world.  This is clearly false, although it would seem to follow from some presentations of the concept.

2. In a world of only two people, they will probably trade with each other.  This is very likely true (especially if they are both "hot"), though not certain at the theoretical level.

3. Everyone will trade with at least someone.  Whoop-dee-doo. 

Worse, #3 is not even true.

The key counterexample is animals.  They have well-defined preferences, downward-sloping demand curves, demand for multiple commodities (if only both food and water, plus of course sex), and differential abilities.  Yet most animals don’t trade with any other animals.

Why not?  There are high fixed costs to trading at all.  Most animals can’t overcome those costs.  They aren’t smart enough.  Lack of opposable thumbs, or lack of extended long-term trust, are other obstacles, not to mention "fear of being eaten."  There is nothing in a Walrasian model to rule out q = 0 no matter what kind of critters are walking around.

In human communities there will be much more trade than we find amongst the eagles.  But the theory of comparative advantage deflects our attention away from the fixed costs of trading.  As a result, many people overestimate the benefits that free trade (which, I might add, I fully favor) will bring to the developing world.  And they underestimate the importance of those fixed costs of trading in holding nations — and people — back from a better future.

Comments

Well, the biggest problem is the lack of enforceable contracts in non-human societies. Trading does exist (known as mutualisms or cooperation), but understanding how cheaters are contained in these often-anonymous systems is a growing research area for biologists.

I disagree with the notion that animals don't trade. I would say EVERY animal trades, as pretty much every animal has symbiotic relationships with other organisms. Animals trade carbon dioxide with plants for oxygen. They trade food with microorganisms for digestive "services" etc.

Animals come into conflict with each other and fight over pasture, females, food...etc. Conflict and fighting is a form of trade because the animals exchange their current health for future consumption. Moreover, many animal conflicts do not result in fights but are instead resolved by one animal surrendering to the other's threatening gestures. I think there's a game theoretic literature on this somewhere.

All you people, I am not saying that animal trade is zero, only that it does not follow a priori.

Illustrations of the theory are always presented with the assumption that it costs nothing to trade. This is a very standard assumption in economics as we all know and is not in any way exciting. The realization that the theory doesn't hold perfectly in the real world because - gasp! - the assumptions don't hold perfectly in the real world is news to exactly no one.

Not really seeing the point, here. If the lesson is that transaction costs are real and thus the gains from trade to developing nations are not as large as we might think... well, who's imagining they are "free" in the first place? Does this "realization" have any actual policy ramifications?

I don't know where these supposed predictions
came from, Wikipedia? If so, one more reason
to be cautious about what one reads there.

All careful trade theory assumes no transport
costs, as well as no transactions costs. In
the real world, trade theorists know that the
higher transport costs are, the less trade
there will be and the less specialization.
No remotely knowledgeable trade economist
would ever predict something as patently
stupid as any of the things on this list.

I don't think animals qualify as rational actors under economic theory.

Tyler makes some great points here. I'm suprised at all the attacks; are you people so enamoured of every economic idea that you can't stand to read any criticism of it? (Remember Leodard Cohen: "There is a crack in everything. That's how the light gets in.")

1. As long as animals have rational preferences and act to optimize with respect to them, economics should apply to them as well as humans.

2. A key prediction of compartive advantage is that actors will not just trade, but specialize. Recriprocal back-scratching doen't count. One animal that does all the hunting while the other does all the gathering would count.

3. If you can find a counter-example of animal specialization, that hardly destroys Tyler's point. There are still obviously a lot of potentially useful specializations that animals do not take. (There are some that humans don't take, too.) The interesting question is why, and how can we modify our theory to account for that. Transaction costs are one possibility, but it's not obvious to me that's the "right" answer.

David Wright writes

"A key prediction of compartive advantage is that actors will not just trade, but specialize. Recriprocal back-scratching doen't count. One animal that does all the hunting while the other does all the gathering would count."

This is complete specialization ("one animal does all the hunting")which most certainly is NOT what the theory of comparative advantage requires to be validated.

Why am I not suprised that I lost more marginal brain cells while reading another marginal Tyler Cowen post?

1) Strawman, no one says this.

2) ??? "Probably ...?" Everything has a probability of happening. What does this say?

3) Um, not if their social/trade aversion is high enough.

Animals: How is this a counterexample if you recognize the key: that they aren't smart enough to recognize the gains from particular trades. Many *humans* have a hard time seeing the benefits of trades until it is explained.

I'm accustomed to seeing non-libertarians put up strawman versions of neoclassical theories... but a neoclassical doing it? What are these theories you're referencing? What theory says, "Right now, everyone should be trading with everyone else, OH!!!! looks like free trade isn't so hot!" ?

Stolper-Samuelson assumed perfect competition and constant returns to scale. Forgive me if I don't take it seriously.

Besides, it's easy to show the gains from trade without considering the gains to your trading partner. The primary beneficiary of trade is always the consumer.

Kurt: Actually this is irrelevant, because economics deals with humans, not animals.

The intelligent insectoid people of planet DXP-91 might respectfully disagree with this view.

Comments for this post are closed