
Comparative advantage and when to blow up your island - how-about-this
https://www.lesswrong.com/posts/eLRSCC7r4KinuxqZX/comparative-advantage-and-when-to-blow-up-your-island
======
defen
These simple models of free trade work fine when discussing commodities or raw
materials, but one thing I never see addressed (I'm far from an expert, just
an interested layman) is that modern manufacturing involves far more than the
raw inputs - there's complicated logistics and an entire holistic knowledge
base of the company or companies which produce a thing. A society can forget
how to make things, especially if no one in the society makes those things any
more. The classic example is that "no individual knows how to make a #2 pencil
from scratch". Or, more recently, the USA can't even produce large numbers of
N95 masks. So, there can be a short-term benefit to free-trade, but an unknown
cost down the line if your trade partner goes away for some reason and you can
no longer make things you were trading for.

~~~
merpnderp
I'm starting to see a consensus that one of the biggest drawbacks to free
trade is the loss of skills. It is great to get cheap steel from China and
great for China to sell steel at a profit, but it sucks losing the engineering
jobs. But what truly is awful is now there is hardly anyone who knows how to
run a steel mill anymore in the US. The US might not always be friends with
China, but the US will always need steel.

~~~
admax88q
On the other hand free trade stops wars. If each party is specialized in a
needed item that the other side no longer knows how to produce, its much
harder to go to war.

The fact that the US will always need steel helps ensure that they _will_
always be friends with China, so long as they also specialize in something
that China needs.

~~~
eloff
Economists were saying that about the interconnected economies of Europe prior
to WWII. War is declared by human politicians in an instant. It is not
required to be rational any more than human behavior is in general.

~~~
missedthecue
On the other hand, it's been what... 80 years since a conflict between
continental European nations. Has there ever been a gap that long in recorded
history?

~~~
avmich
Sigh. If only. Do you know what happened with Crimea in 2014 - and what was
going on in Debaltsevo, Donetsk region, Ukraine, in February 2015?

~~~
chii
but those are wars that are isolated to a region, not a region-wide war like
the WW.

~~~
avmich
So what? Those are still invalidating the idea of "80 years since a conflict
between continental European nations".

------
aklemm
"Comparative advantage" has always embodied, to me, the difficulty with
electoral politics. It's a fairly easy concept, taught fairly widely, yet
almost no one really understands it and views the world through that lens.
Most voters are operating without an understanding of comparative advantage.

Now apply that to dozens of other concepts in other fields. Same situation.
It's depressing.

~~~
lordnacho
I agree so much with this. The more I study economics, the more issues I run
into that people ought to know but are unknown to everyone who hasn't studied
it. Arrow's Impossibility theorem is another interesting one that perhaps
ought to be more well known.

~~~
andybak
What's worse is when someone thinks they understand it and acts like a
complete ass: [https://forum.electionscience.org/t/arrows-theorem-
mentioned...](https://forum.electionscience.org/t/arrows-theorem-mentioned-on-
bbc-question-time/315)

~~~
lordnacho
In the quoted context I'd agree it isn't a great use. However I do think it's
something worth knowing about.

Another economic topic would perhaps be marginalism, so we don't keep getting
flooded with "but why is water cheaper than diamonds, it must be injustice/bad
values/conspiracy".

And perhaps some kind of history of thought on value, so we don't get the
simple version of labour theory, or the Fisher-Price version of utility theory
again and again.

Perhaps I sound like a snob, but I find a lot of economic discussions are
derailed by having to clear up confusions that appear repeatedly.

------
082349872349872
If I understand correctly, one reason there seem to be so many results for
zero-sum games is that they have defined solutions, whereas in other
situations, a mathematically valid strategy is to be a jerk ("blow up the
island") and attempt to take the lion's share[1] of the surplus for oneself.

One of the early game theory papers considers two people with radios,
parachuted onto a grid, who must rendezvous. It derives a theoretical
strategy: broadcast one's location, then destroy one's radio, forcing the
other player to do all the walking.

Bonus clip:
[https://www.youtube.com/watch?v=2yfXgu37iyI](https://www.youtube.com/watch?v=2yfXgu37iyI)

@ 3:42 whew, still there:
[https://www.bbc.co.uk/sounds/play/live:bbc_radio_fourfm](https://www.bbc.co.uk/sounds/play/live:bbc_radio_fourfm)
all OK, Boomers!

@ 3:55 unlike the House of Windsor during '14-'18, Kongo-Müller didn't bother
to change his name:
[https://news.ycombinator.com/item?id=24423024](https://news.ycombinator.com/item?id=24423024)
(esp. 53:40-56:15)

Those who prefer their skulls virtual are advised to avoid 30:10-33:30 and
instead regard
[https://www.youtube.com/watch?v=hn1VxaMEjRU&t=57](https://www.youtube.com/watch?v=hn1VxaMEjRU&t=57)

[1] [http://read.gov/aesop/141.html](http://read.gov/aesop/141.html)

~~~
hinkley
Similarly, if you get stuck trying to traverse a hallway or an intersection
due to another person who keeps deciding to go at the same time as you,
breaking eye contact is the quickest way to end the standoff.

------
rbecker
_James K. Galbraith has stated that "free trade has attained the status of a
god" and that " ... none of the world's most successful trading regions,
including Japan, Korea, Taiwan, and now mainland China, reached their current
status by adopting neoliberal trading rules." [..] These comments have been
heavily criticized by mainstream academics like Paul Krugman, who noted the
lack of mathematical modeling or simulations supporting the argument_ \--
[https://en.wikipedia.org/wiki/Comparative_advantage#Criticis...](https://en.wikipedia.org/wiki/Comparative_advantage#Criticism)

Imagine criticizing an empirical result on the basis that simulations don't
support it. In other sciences, it's the other way around - if the simulation
differs from the experiment, it's the simulation that's considered faulty.

I guess economists think their simulations are so perfect and complete, such
good representations of a system as complicated as human behavior and society,
that any result disagreing with those simulations must be due to experimental
error.

Edit as reply to the question of whether Japan, Korea, Taiwan, China reached
their status "without utilizing free trade":

They utilized trade, but not completely free, unrestricted trade. I'm sure
we're all aware of China's historic and current protectionist policies.
Western countries also used and still use various "protectionist" policies
(e.g. corn subsidies in the US), they just try to be subtle about it. That's
what was meant by "neoliberal trading rules".

~~~
andybak
However historical contingency is such a huge factor in economic outcomes that
it swamps any possibility of forming deductions from observation.

So empirical evidence vs simulation is somewhat Hobson's choice.

~~~
rbecker
True, but it still means the current status is: Several countries that reached
prominent economic positions with protectionist policies, and zero countries
that reached such positions without them.

Now perhaps those countries would have succeeded even more without
protectionism. Do you go with something proven to work for your country, or
experiment with an alternative with a worse track record?

------
thomashobohm
I think it's sort of strange to refer to comparative advantage, which is
taught in every "Introduction to Macroeconomics" class/textbook in existence,
as an "arcane" part of economics.

~~~
jacobr1
Arcane might be the wrong word ... but how many people leave an economics
class actually understanding comparative advantage? I would bet (just on the
basis of my mostly college educated friends and family) that most don't
actually retain the knowledge if they even learned in the first place.

------
AQXt
What about dumping? From wikipedia:

"Dumping, in economics, is a kind of injuring pricing, especially in the
context of international trade. It occurs when manufacturers export a product
to another country at a price below the normal price with an injuring effect.
The objective of dumping is to increase market share in a foreign market by
driving out competition and thereby create a monopoly situation where the
exporter will be able to unilaterally dictate price and quality of the
product."

How would it work in this example?

The other guy would sell you coconuts and bananas well below the Zone of
Possible Agreement (ZOPA), and you would be so glad to buy everything from
them -- destroying your industry.

A few years go by, and they raise their prices above the ZOPA -- and you have
no option because it would cost you a lot to rebuild your industry from
scratch.

If you try to produce bananas, they drop the price of bananas; and make profit
from coconuts. If you try to produce coconuts, they drop the price of
coconuts, and make profit from bananas. (You need coconuts and bananas!)

That's what happens in real world -- developing countries export iron for
$100/ton (2,200 pounds) and buy high value-added products (phones, tablets,
computers) for $500/unit.

Rich countries use the profit they make from high value-added products and
services to subsidize their farmers, pushing the price of food down. For
instance, wheat costs $188.75 per metric ton, less than $0.20 per kg ($0.10
per pound).

Without subsidies, the farming industry would be decimated from rich
countries, and prices would go up.

So, "free market" is an abstraction that doesn't exist in the real world --
and you can see it in this idealized model of two islands.

------
mabbo
What bothers me in today's world is that we ignore _how_ some countries
achieve their comparative advantage.

Why did Hershey's chocolate close the factory not too far from where I grew
up, and move the manufacturing to Mexico? Well, labor is cheap there because
there are no unions, few health and safety regulations, few workers' rights
groups. That makes it much cheaper to operate.

Why can China manufacture clothing cheaply? Well, they have hundreds of
thousands of Uighur prisoners being 're-educated' via forced labor.

And while I don't disagree that for some countries that are trying to move up
in development, so-called 'sweat shops' can represent a stepping stone forward
(2 generations ago, South Korea had plenty of them), the question is how long
that's an acceptable excuse?

In my opinion, we need trade rules that explicitly tax and tariff those
countries who are only finding comparative advantages through exploitation and
unethical activity.

~~~
bluGill
Note that Hershey's moving only works out for them if the resulting change in
labor situation means that their customers can still afford their candy. If
the excess labor instead means wages at home go down and now people cannot
afford candybars it doesn't work out for them.

In short, we are better off for not having Hershey's in the US. Mexico gets
better wages (more competition) and out people are freed from making candybars
and can move to more productive uses of our people.

~~~
letitbeirie
In theory, but

> ...freed from making candybars and can move to more productive uses of our
> people

relies on the presumption that there is sufficient local demand for laborers
(who may not necessarily have any experience that doesn't involve the
manufacture or distribution of chocolate) in positions of increased
productivity.

The decaying socioeconomic situation for wide swaths of the rural US suggests
that this was not the case.

~~~
bluGill
Half you are stateing what I said...

US rural areas face a very different issue: high wages relative to other
countries (shared with cities), but with the population density advantages of
cities. I don't need to look to tell you Hersey didn't move to a rural area of
mexico they moved to a city of some sort. They don't need the largest city,
but a small town cannot supply their labor needs.

------
learnstats2
The article describes someone exploiting an unfair advantage and then says
they are "worse off" when they are situationally forced to stop that
exploitation.

This is a horrible perspective. Exploiting another person's need to survive in
order to gain unlimited labour is akin to slavery.

Serious question: Is there an ethics course for popular economics?

~~~
MiroF
Exploiting someone's need to survive for labor is what the modern labor market
is

------
nautilus12
What about strategies that involve blowing up the bridge instead of one of the
islands? This seems much more real world feasible.

~~~
pdonis
_> What about strategies that involve blowing up the bridge_

The article rules those out by presenting scenarios in which there is always
_some_ advantage to trade. In any such scenario, neither party has any
incentive to blow up the bridge, since there is always _some_ way for each
party to improve their situation by using the bridge to trade, compared to
what their situation would be if the bridge did not exist.

In the real world, there are cases where there is _no_ advantage to trade,
usually because one or more of the "complexities" described in section III of
the article applies. The obvious one, of course, is "there might be more than
two people"\--in the real world, there are _always_ more than two parties with
whom potential trades can be made (this is true even if we consider the
"parties" to be nations instead of individuals), and as the article notes, in
that case there can be scenarios where at least one party will gain nothing
from trade.

~~~
nautilus12
But can't you leverage cutting off trade in the same way that he talks about
threatening to blow up your island, and it wouldn't result in total loss of
everything (which any rational player would see through as a bluff, as opposed
to losing trade which would be a negative but still survivable).

IE think about the modal logic intersected with the game theory, no one will
believe that you will blow up your own island, but they may believe that you
will blow up the bridge.

~~~
pdonis
_> can't you leverage cutting off trade in the same way that he talks about
threatening to blow up your island_

If you are the only possible party the other party can trade with, then
blowing up the bridge and blowing up your own island are, as far as the other
party is concerned, equivalent, yes. So if there is any benefit to the other
party in trading with you, they have an incentive to have that trade available
to them, and hence to do whatever it takes to have you not blow up either your
own island or the bridge.

However, if there are any other parties besides you that can be traded with,
that is no longer the case, because you not being there just means they go
trade with someone else.

Another thing to note is that the article's assumption of non-violence, which
basically means neither party will do anything to harm anything that isn't
their own property, also rules out blowing up the bridge, since the bridge, by
hypothesis, is not the property of either party. A better analogy to
withholding trade in the article's scenario would be something like building
an impenetrable wall at your end of the bridge.

~~~
nautilus12
I'm not sure you are following my point though, whether its blowing up a
bridge or building a wall, if you look at the payout to the party that is
blocking it is higher than blowing up the island. If you then use modal logic
to analyze the opposite parties perspective of whether or not that party would
actually go through with it then their threat seems much more believable.

~~~
pdonis
_> if you look at the payout to the party that is blocking it is higher than
blowing up the island_

Ah, yes, you're right. I was only looking at the payoff for the other party.
You're correct that for the party that is making the threat, they're much
better off after blowing up the bridge or building a wall than they are after
blowing up their own island, so the former is a much more credible threat. I
think the "modal logic" thing confused me because I don't really see how modal
logic in particular is involved here; but game theory certainly is, yes.

