Valentine’s challenge to Comparative Advantage

Sometimes it’s worth challenging a concept that is fundamental to Economics, such as specialisation or the theory of comparative advantage (video here). This crucial theory views international trade as profitable even for a country that can produce every commodity more cheaply than any other country (an absolute advantage). According to Robert Skidelsky, the textbook example is that of a town’s best lawyer who is also its best typist. Provided that she is better at law than at typing, she should specialize in law and leave her secretary to do the typing. That way, both of their earnings will be higher. The same logic applies to countries. Each country should specialize in producing those things that it produces most efficiently, rather than producing a bit of everything, because that way its income will be higher.Why does Skidelsky go on to challenge that view?

Skidelsky – the famous biographer of Keynes – discusses comparative advantage on the pages of Project Syndicate. He sticks up for the view, regarded as daft by most mainstream economists, that buying cheap imports from China destroys Western jobs. He quotes another economist saying “being able to purchase groceries 20% cheaper at Wal-Mart does not necessarily make up for the wage losses.”

That’s debateable (or measurable, at any rate). But the more interesting point for me is the argument for free trade is an argument for welfare, but welfare defined exclusively in terms of money. Time is money: the more money you can squeeze out of an hour’s work, the better off you are. But what about all of the things that you enjoy doing, or that you think of as valuable, that do not maximize your earnings?

The goal of squeezing as much money as possible out of time makes a great deal of sense in poor countries, where inefficient use of time can lead to starvation. But is this true for rich countries? Does the logic of comparative advantage break down if you enjoy doing lots of things that do not maximize your earning power?

With Valentine’s Day coming up, you might give this a thought.