2017 : WHAT SCIENTIFIC TERM OR CONCEPT OUGHT TO BE MORE WIDELY KNOWN?

Psychologist, UPenn; Director, Penn Laboratory for Experimental Evolutionary Psychology (PLEEP); Author, Why Everyone (Else) is a Hypocrite
Comparative Advantage

The intuitively clear effects of a tariff—a tax on goods or services entering a country—are that it helps domestic producers of the good or service and harms foreign producers. An American tax on Chinese tires, say, transparently helps American tire producers because the prices of the tires of their foreign competitors will be higher, allowing American producers to compete more easily.  

Those are the intuitively clear effects. These effects—advantages for domestic firms, disadvantages for foreign firms—are useful for politicians to emphasize when they are contemplating tariffs and other forms of protectionism because they appeal to nationalistic, competitive intuitions.  

However, not all ideas surround international trade are so intuitive. Consider these remarks by economist Paul Krugman: “The idea of comparative advantage—with its implication that trade between two nations normally raises the real incomes of both—is, like evolution via natural selection, a concept that seems simple and compelling to those who understand it. Yet anyone who becomes involved in discussions of international trade beyond the narrow circle of academic economists quickly realizes that it must be, in some sense, a very difficult concept indeed.” 

Comparative advantage is an important idea, but is indeed difficult to grasp. To try to illustrate the point, consider the economist’s device of simplifying matters to see the underlying point. You and I are on a desert island, harvesting coconuts and catching fish to survive. You need one hour to harvest one coconut and two hours to catch one fish. (For this example, I’ll assume you can meaningfully divide one fish [or one coconut] into fractions.) I, being old and no fisherman, am less efficient than you at both activities; I require two hours per coconut and six hours per fish. It might seem that you need not trade with me; after all, you’re better than I am at both fishing and harvesting coconuts. But the economist David Ricardo famously showed this isn’t so.  

Consider two cases. In the first, we don’t trade. You produce, say, four coconuts and two fish during an eight-hour workday. I produce just one of each.  

For the second case, suppose we specialize and trade, and you agree to give me a fish in exchange for 2.5 coconuts. (This is a good deal for both of us. For you, catching one less fish gets you two hours or two coconuts; 2.5 is better. For me, that fish saves me six hours, or three coconuts.)  Now you produce one extra fish and give it to me in trade, leaving you with two fish and 4.5 coconuts. For ease of exposition, let’s say I only harvest coconuts, produce four and give you 2.5 of them, leaving me 1.5 coconuts and the fish I got from you. In this second case, you have just as many fish and an extra half coconut; I also have the same number of fish—one—plus the half coconut. Through the magic of trade, the world is one coconut better off, split between the two of us.  

The lesson is that even though I produce both goods less efficiently than you, we are still both made better off when we specialize in the good for which we have a comparative advantage and then trade. This is an argument for a role for governments in facilitating, rather than inhibiting, specialization and trade. It should be clear, for instance, that if the island government forced me to pay them an extra coconut every time I purchased one of your fish—driving the coconut price to me from 2.5 to 3.5 coconuts—I wind up with only half a coconut and a fish after the trade, and so would prefer to revert to the first case in which I split my time. In turn, you lose your trading partner, and similarly revert to the previous case.  

These gains reaped from world trade are less intuitive than the patriotic gains reaped by those of domestic firms protected—and therefore helped—by tariffs and other trade barriers. For this reason, given the outsize role that questions surrounding world trade play in current political discourse, the notion of comparative advantage ought to be more widely known.