No Such Thing as a Free Lunch: Principles of Economics (Part 175)

I do believe that international trade agreements benefit both nations, always.

Phil Knight

International Trade, Comparative Advantage, and Protectionism

(Part B)

by

Charles Lamson

The Economic Basis for Trade: Comparative Advantage

Perhaps the best-known debate on the issue of free trade took place in the British Parliament during the early years of the nineteenth century. At that time, the landed gentry---the landowners---controlled the Parliament. For a number of years, imports and exports of grain had been subject to a set of tariffs, subsidies, and restrictions collectively called the Corn Laws. Designed to discourage imports of grain and encourage exports, the Corn Laws' purpose was to keep the price of food high. The landlords' incomes, of course, depended on the prices they got for what their land produced. The Corn Laws clearly worked to the advantage of those in power. 

With the Industrial Revolution, a class of wealthy industrial capitalists began to emerge. The industrial sector had to pay workers at least enough to live on, and a living wage depended greatly on the price of food. Tariffs on grain imports and export subsidies that kept grain and food prices high increased the wages that capitalists had to pay, cutting into their profits. The political battle raged for years. However, as time went by, the power of the landowners in the House of Lords was significantly reduced. When the conflict ended in 1848, the Corn Laws were repealed.

On the side of repeal was David Ricardo, a businessman, economist, member of Parliament, and one of the fathers of modern economics. Ricardo's principle work, Principles of Political Economy and Taxation, was published in 1817, two years before he entered Parliament. Ricardo's theory of comparative advantage, which he used to argue against the Corn Laws, claimed that trade enables countries to specialize in producing the products they produce best. According to the theory:

Specialization and free trade will benefit all trading partners (real wages will rise), even those that may be absolutely less efficient producers. 

This basic argument remains at the heart of free-trade debates even today. It was invoked numerous times by Presidents Reagan and Bush as they wrestled with Congress over various pieces of protectionist legislation.

Specialization and Trade: The Two-Person Case The easiest way to understand the theory of comparative advantage is to examine a simple two-person society. Suppose Bill and Colleen, stranded on a desert island in part 5, have only two tasks to accomplish each week: gathering food to eat and cutting logs to construct a house. If Colleen could cut more logs than Bill in a day and Bill could gather more berries and fruits, specialization would clearly benefit both of them.

But suppose Bill is slow and clumsy and Colleen is better at both cutting logs and gathering food. Ricardo's point is that it still pays for them to specialize. They can produce more in total by specializing than they can by sharing the work equally. (It may be helpful to review the discussion of comparative advantage in part 5 before we turn our attention to absolute advantage versus comparative advantage in the next post.)

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., P. 667*

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