
Ricardo's Difficult Idea by Paul Krugman (1996) - force_reboot
http://web.mit.edu/krugman/www/ricardo.htm
======
carsongross
_My objective in this essay is to try to explain why intellectuals who are
interested in economic issues so consistently balk at the concept of
comparative advantage._

This is ridiculous. It was ridiculous then, and it's even more ridiculous now.

If there is _anything_ that economists (even Marx!) agreed on, it was the
benefits of international free trade. Hayek, Rothbard, Krugman, Mises, Keynes:
all international free traders to a man. I would be surprised if one in ten
readers of HN thinks international free trade can hurt an economy: it's a
nearly universally assumed good amongst the intelligentsia.

It has always been the populists and, usually silently while publicly
encouraging it for others, the mercantilists who have demurred.

I happen to think that the last twenty years have demonstrated that
international free trade can be very detrimental to the majority of people in
a particular economy, whatever theory might say, but the idea that this is a
majority opinion amongst intelligent people (let us set aside the obvious
response) is absurd.

~~~
StanislavPetrov
>I happen to think that the last twenty years have demonstrated that
international free trade can be very detrimental to the majority of people in
a particular economy, whatever theory might say, but the idea that this is a
majority opinion amongst intelligent people (let us set aside the obvious
response) is absurd.

"Free Trade" as proposed by pointy heads like Krugman is absolutely terrible
for most people, and his argument is baseless because it rests on so many
false assumptions.

The first false assumption always put forth by the "free traders" is that a
rising economy raises all boats. This is something any of the 37% of Americans
without a job or the 80% of Americans who are one missed paycheck away from
homelessness or severe crisis can tell you is nonsense.

The second false assumption is that the metrics used to measure productivity
are at all related to useful and beneficial economic activity. GDP has always
been a particularly useless metric, and has been even more worthless since
incorporating the book-cooking activity on Wall Street as "productivity",
especially when that shell game represents some 55% of US GDP.

The third false assumption that Krugman's nonsense rests on is that so-called
"free trade" deals like the TPP have any relation to theoretical free trade
theories like the one put forth by Ricardo. The oppressive and innovation
killing patent laws, copyright laws, and global DMCA contained in deals like
the TPP are literally the opposite of theoretical "free trade". These treaties
do nothing but strengthen the strangehold of large entrenched interests,
globally.

Finally, all of these "free trade" theories are based on the supposition that
there is a free market. An economy where central banks control interest rates
and print trillions of dollars to buy stocks and bonds to prop up markets
(among many, many other things) is literally the opposite of what a free
market is.

~~~
mattlutze
_> This is something any of the 37% of Americans without a job or the 80% of
Americans who are one missed paycheck away from homelessness or severe crisis
can tell you is nonsense._

80% of Americans are not one missed paycheck away from homelessness, nor is
the functional unemployment rate 37%. We can play with "people who have left
the job market" numbers all day, but that foggy arena yields the numbers for
either side to build its foundation.

Further, general quality of life for people who live in countries with mostly
open "free" trade agreements and treaties has improved. So it seems that those
boats have in fact risen.

Developing countries where ^ isn't the case likely don't have very balanced or
"free trade" treaties, on the other hand. I think the argument would be to
actually determine how to balance those to make them fairer and more "free"
for both parties.

 _> [...] especially when that shell game represents some 55% of US GDP._

This will need proof, or some sort of actual background. Could you help me
find the argument here other than an open accusation against Wall Street?

 _> The third false assumption that Krugman's nonsense rests on is that so-
called "free trade" deals like the TPP have any relation to theoretical free
trade theories like the one put forth by Ricardo._

I'm not finding where Krugman cites free trade deals deals, agreements or
treaties as a foundation to his thesis in this article. He mentions NAFTA near
suggesting that central banks regularly manipulate market conditions to try
and improve employment in their countries. In fact he seems to agree with you
that these agreements aren't economy boosters but have net-neutral long run
effects on employment, there.

It sounds like your argument against Krugman's essay is an assumption that
he's arguing against your ideals, rather than a criticism of what he wrote. Is
that a fair characterization?

------
Sniffnoy
I'm surprised this essay doesn't mention what I would be expect to be a big
reason people don't get comparative advantage: Because it sounds similar to
something simpler that people already know, so they conflate the two ideas.

Because if you don't know what the law of comparative advantage actually says,
it sounds kind of like, "If I am better at A than you are, and you are better
than B I am, then we can benefit from trading which each other." Which is
true, but also basically obvious; the law of comparative advantage is more
general than that. There's a reason it's the law of _comparative_ advantage
and not _absolute_ advantage!

So I would expect that a lot of people are getting what it says mixed up,
because it sounds like something they already know.

~~~
meric
Law of comparative advantage:

"If my ability in A compared to my ability in B as a ratio is different to
your ability in A compared to your ability to B as a ratio, then we can
benefit from trading which each other."

------
SapphireSun
This essay inspired me to read about comparative advantage. I pulled up this
wikipedia article:
[https://en.wikipedia.org/wiki/Comparative_advantage](https://en.wikipedia.org/wiki/Comparative_advantage)

I have to say that I'm still a bit confused by it. In the example given,
Portugal has an absolute advantage in cloth and wine. Let's say England's
productivity was massively less than Portugal (say it took a 1M hours to
produce cloth and 1.3M to produce wine), but Portugal takes 90 and 80
respectively. Wouldn't the world be flush with Portugal's product in both
industries rather than only in wine?

EDIT: This link was useful though I think I'm still unsure about the case I
proposed.
[http://economics.fundamentalfinance.com/micro_comparative.ph...](http://economics.fundamentalfinance.com/micro_comparative.php)

~~~
lambertsimnel
The suggestion is that the more productive country would convert all of its
production to one commodity, leaving an opportunity for other commodities to
other countries. This is a bit simplistic, as it assumes that production can
be converted, that there no region of the country where a different industry
is more productive, that producers have the relevant information, etc.

~~~
SapphireSun
Wikipedia had an interesting segment on the general case where there are more
than two industries:

"In both Ricardian and H–O models, the comparative advantage concept is
formulated for 2 country, 2 commodity case. It can easily be extended to the 2
country, many commodity case or many country, 2 commodity case.[17][18] But in
the case with many countries (more than 3 countries) and many commodities
(more than 3 commodities), the notion of comparative advantage requires a
substantially more complex formulation.[19]"

------
force_reboot
I recently came across this article by Paul Krugman, which is different to his
more recent writing (for one thing it is on his area of expertise,
international trade). It's both a great exposition of mainstream economic
thought on trade, and a discussion of why otherwise educated people reject
these ideas. The story on MakerBot's relocation of its manufacturing to China
was my immediate inspiration for posting this, but I think it's relevant to a
lot of discussions on HN.

------
explanibrag
I think free trade has benefited mankind hugely and is largely responsible for
lifting China out of poverty. However, I don't find the standard model of
comparative advantage to be a convincing argument in favour of free trade.

The problem is that the basic model is heavily oversimplified, and more
complex models get very complex very quickly. With a model, it's hard to be
sure you've captured all the effects and calibrated it correctly (especially
in a world with changing demographics and changing technology).

I think most intelligent people hear the basic idea, and then come up with
criticisms like the following:

1/ It appears to assume that comparative advantage is fixed. But couldn't a
country deliberately specialise in something it's not innately good at, thus
retraining its workers and eventually shifting its comparative advantage over
time?

2/ All the textbook examples concentrate on manufacturing. It's not a giant
leap to see the same effect in services, but I don't think it's completely
clear-cut either.

3/ It assumes labour is immobile. Otherwise why wouldn't the specialist
weavers from England move to France and the specialist masons from France move
to England?

4/ How can a country know what its comparative advantages are? Comparative
advantage is not observable in the real world, so producers have to resort to
guesswork. How can we know they guess correctly?

Now if you ditch some of the basic assumptions it's not at all clear how the
conclusions change. So I think it's perfectly reasonable for laymen not to be
convinced by the basic model.

~~~
jimmytidey
I think you're right about these points, except they miss the surprising
aspect of the theory.

Imagine there were two countries in the world, say France and England, and
France was better at making every kind of product. Most people would conclude
that England would need to protect itself from France by limiting trade.
Comparative advantage tells this is not true - England will always be richer
if it trades, no mater how good France is at manufacturing. That is the key
insight.

Yes - England could train its weavers, or entice weavers from France, or
develop wine growing regions, or focus on services. But no matter what it
does, it will always benefit from trade. Comparative advantage isn't telling
you about training, labour mobility, or the difference between goods and
services. It's telling you about trade in general.

Of course it's a model, but many economists find it compelling.

~~~
ajuc
> England will always be richer if it trades, no mater how good France is at
> manufacturing. That is the key insight.

Not what happened in real life.

Compare Argentina and USA. Both had been worse than Great Britain at industry,
and better at agriculture. Argentina was more wealthy than USA at the start.
Argentina have followed the theory (specializing in agriculture), USA acted on
the contrary (introducing tariffs and specializing in industry).

At the end - USA is much more wealthy than Argentina.

Comparative advantage is about optimizing for current situation, not about
strategic decisions.

~~~
jimmytidey
Comparative advantage is just a model, as you rightly point out, I'm sure in
any real world instance the situation is much more complicated.

However, its important to know that many economists believe its the
foundational model on which further elaboration of trade policy should be
built. That's why it's worth understanding.

~~~
explanibrag
Yes, but my original point was that the foundational model isn't convincing at
all to the layman. It can't stand on its own feet, and needs additional
structure. Any decent model should come with caveats, and should specify the
domain in which it's applicable.

Krugman was using the model to argue in favour of free trade. He'd be much
better off arguing using historical examples if he wanted to be convincing.

------
jimmytidey
Comparative Advantage drives me insane. It's so widely misunderstood, or just
unknown, and yet its crucial to understanding so many political decisions.

I don't have a position on TTIP, but many of my friends do. Having a view on
TTIP without understanding comparative advantage is like having a position on
Israel without knowing that Palestine exists. It's not that you could be
better informed - everyone could always be better informed - it's that you
missed the crucial motivating factor that explains everyone's behaviour.

Yet, comparative advantage is hard to explain and seems like some rhetoric
thought up by evil, exploitative international capitalists.

To me, the simplest explanation is that trade is always beneficial, because
parties only agree to it when they both see advantage.

I've thought about how I'd run a workshop to explain this. I'd divide up the
group up into teams and issue a different selection of chocolates to each
team. Then I'd ask everyone to swap, and ask each team to say if they were
happier after the swapping. Unless the workshop is full of pathologically
irrational people, everyone will be happier or at least as happy as before.

~~~
explanibrag
_" To me, the simplest explanation is that trade is always beneficial, because
parties only agree to it when they both see advantage."_

That's true in an efficient-economic-agent sort of way, but do you really
think it's true in the real world? Do you think actors (nations, companies,
individuals) don't make errors of judgement?

~~~
jimmytidey
Yes, I think people make errors of judgement. I also think the 'path
dependency' mentioned in another comment exists. I also think, as another
poster mentioned, there are strategic reasons to ensure a balance of
industries in your economy.

I think the comparative advantage model remains a compelling starting point
despite all this.

But it doesn't matter what I think, the key thing is that many people who
actually do make decisions use the comparative advantage model.

------
MrTonyD
I think Krugman is both brilliant and blinded by his own brilliance. Krugman's
focus on economic data blinds him to the second and third order consequences
of worldwide trade. In particular, trade outside borders allows schemes for
hiding income, evading taxes, harming particular groups of people, undermining
governments, ignoring social values (eg. climate change, workplace safety,
quality of life for workers, wages) and amassing fortunes for multi-
billionaires who then create even more problems. If that weren't enough, there
are still many "fuzzy" areas of economics, and I think that many of those
areas are fuzzy precisely because they are so complex due to the "open
systems" created by free trade (unlike "closed systems" which can be
controlled by a nation's laws and monitored using modern Big Data techniques.)
So, while Krugman is brilliant, he is also very flawed - dragged down by the
very data that he understands so well. But isn't that always the case for
technocrats?

~~~
maxerickson
Do you think his assertion about the labor share of income providing
information about the impact of trade is wrong or otherwise not a good
measure?

~~~
MrTonyD
It is information...but if you read my original comment you will see that the
benefit of such increased income is far outweighed by other considerations. As
I recall, even Krugman himself described that gain as very small (small single
digit percents), and potentially mistaken (depending on the average of small
numbers across studies.) We, as a society, are paying huge prices for what may
be a statistical anomaly.

~~~
maxerickson
He says _as everyone who is even slightly familiar with the numbers knows, the
share of compensation in U.S. national income has been quite stable in recent
decades_. The implication of that is that workers are receiving the benefits
of trade and increasing productivity, and it doesn't read as ambiguous or
potentially mistaken to me.

~~~
MrTonyD
I've been reading Krugman for decades. He has said a lot of things.

------
darawk
There are at least two serious criticisms of free trade that I can think of
that are not addressed in this article:

1\. Borrowing from Taleb's latest book, free trade encourages economic
fragility. A country that specializes in textiles will be completely ruined
when textile manufacturing is automated. Further, this level of specialization
may crowd out other opportunities for growth and suppress the evolution of an
economy towards even more productive exports by suppressing variability.

2\. It is possible, as we are seeing in the US to some extent, that the
comparative advantages that a country may have simply don't need to employ
very many people. In the case of the United States, some of our biggest
exports are tech and finance, and those industries simply cannot support
massive employment on the scale necessary to give everyone a job.

I'd be curious to hear any counter-arguments to these ideas.

~~~
jimmytidey
1a) Fragility - yep that's a fair point, however, you'd have to weigh the
opportunity cost of not produce your most efficient good with the size of the
predicted crash. I guess this is the notion of the Banana Republic.

1b) Crowding out - On conventional wisdom (if such a thing exists) this is not
valid, the economy should automatically target production to whatever is most
effective through the profit motive. However, some think that doesn't always
work: this is the idea of 'lock-in' or 'path dependency'. As you say, maybe
it's hard for a developing country to switch from the garment industry to more
sophisticated manufacturing, and they get stuck on a particular course. You'd
have to explain why that didn't happen in the West.

2) Comparative advantage says nothing about how many people will be employed.
All it's saying is that the sum total of the value of goods will be greater.
However, in theory, even if the US had very low employment rates, the few
remaining high earners could redistribute that wealth and make everyone
richer. Politics may come into play here!

~~~
darawk
1b) I think i'd say that it is both path-dependent and also the simple lack of
variation (as in any evolving system) produces poorer results with respect to
long-term innovation and sustainability. If I had to venture a guess as to why
this didn't happen with the west, i'd say it's because we were first. It was
easy for us to transition into new markets because there were no established
players already doing it better - making a shitty car is a great business if
everyone else is riding horses.

2\. Ya, that's fair. But I think it's a pretty huge caveat to "free trade is
good" to have to say "free trade is good on the whole, but harms poor, low
skilled workers in the absence of concomitant and independent wealth
distribution reforms (which are, here at least, politically untenable)". And
it's strange to me that Krugman who I think is generally considered leftist
wouldn't address this seemingly obvious shortcoming.

~~~
jimmytidey
On point 2, it's worth noting the Corn Laws in UK, where the poor pushed for
international trade in grain, because they wanted cheap bread. The rich owned
farms, and wanted high grain prices, so pushed back against free trade.

There is no 'default' distributional effect from free trade, it can go in any
direction.

------
jokoon
I wonder if one can simplify comparative advantages by considering economies
of scale. If countries specialize, it will always be beneficial thanks to
economies of scale.

~~~
dllthomas
There are sometimes diseconomies of scale.

------
maxerickson
What a horrifying exposition.

------
SixSigma
For a counter points

Six Reasons for U.S. to Abandon Free-Trade Myth: Ian Fletcher

[http://www.bloomberg.com/news/articles/2010-10-26/six-
reason...](http://www.bloomberg.com/news/articles/2010-10-26/six-reasons-for-
u-s-to-drop-free-trade-myth-commentary-by-ian-fletcher)

And

[http://www.freetradedoesntwork.com/](http://www.freetradedoesntwork.com/)

