David Ricardo, Conparative Advantage, and all that.
Since Ricardo and the “principle of comparative advantage” have been used in some recent propaganda for TPP, here is a backgrounder. No links will be given – all this can be confirmed in any standard textbook of the history of economic thought.
Ricardo (1772-1823) retired from a successful career as a financier to devote himself to economic theory. Among his contributions were the labor theory of value, a theory of land rent that is still considered valid, the invention of the “gold standard,” and the theory of trade according to comparative advantage. In this theory, Ricardo relied on the labor theory of value, but observed that because of different qualities of land, labor values could differ from one country to another. Trade would then be to mutual advantage provided that it took place at a world price intermediate between the labor values of the two countries. The advantage was that each country would obtain its import goods at less sacrifice of the exported good than would be the case if they produced both at home. Ricardo assumed constant full employment and “capital” played no part in his trade theory.
In the Twentieth Century, the labor theory having been abandoned by orthodox economists, the theory of comparative advantage was rebuilt using neoclassical price theory, and including “capital” along with land as nonhuman means of production that might differ from country to country. The assumptions include the idea that consumers prefer a certain amount of variety in what they consume, that neither capital nor labor flows from one country to another, constant full employment, no monopolies, a given and universally available technology, and identical property rights laws. Trade would then be advantageous in that consumers would obtain a preferred variety of goods at the same or less cost. Among the conclusions were that with free trade, wages and rates of return to capital would converge to the same level. We have known for generations that this conclusion does not agree with the facts and that, given changing technology, even in theory one country may lose out. This is called “immiserizing growth.”
I hope this is enough to demonstrate that the principle of comparative advantage, even if empirically valid, has nothing to do with the TPP, which (so far as we can find out) is about international flows of capital, monopolies, and varying laws of property rights.
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