Monday, February 27, 2006

David Ricardo's Comparitive Advantage

David Ricardo wrote in the 18th century that a nation should export the products that it can produce with a lesser production-cost/price ratio, and import those of which they have the greatest cost/price ratio.

Regarding social studies, (I’m opposed to the term “social science”), we make a big deal of concluding the logically obvious. This policy's satisfactory if there’s sufficient foreign demand for your exports at your price.

When Ricardo was writing of comparative advantage, democratic nations were a new, daring and rare experiment. There have been democratic city-states, and USA’s democracy was said to have been inspired by the Iroquois nation of tribes, but I believe the USA was just establishing the first republic and England's democratic monarchy was evolved. Minimum wage if conceived was radically utopian.

Then much more than now, no government with a standing army had reason to be overly concerned for or fear their own citizens. Only powerful and privileged nobility need be respected.

Then as now if a nation’s production cost exceeded the global price there would be no demand for the nation’s exports. In Ricardo’s time if there was insufficient global demand due to labor expense, wages could be driven down until production cost would satisfy the global market. Then poverty or starvation of large segments of the population was simply an unfortunate and hopefully temporary condition.

Today even a tyrannical government must have some consideration for the majority of their citizens. In democratic USA we’re inundated with illegal immigrants and cheaper imported goods and our median wage is less than otherwise. The effect upon our wage scales is mitigated by the minimum wage and (at no small cost to all levels of our governments) social welfare provisions. Remember the French revolution was one of the first examples of a national “Burn baby burn!” syndrome. The city of Paris is still almost synonomous with the nation of France.

Today communication and transportation is exceedingly faster and more reliable. A nation with an absolute cost advantage of a product, to the extent that trade is determined by economics rather than politics within a “pure” free trade environment, becomes the absolutely complete producer of that product. Today nations are more democratic thus less able to decrease their median wage to evade this truth.

Within an environment of less than “pure” free trade, (Warren Buffett’s proposal for IMPORT Certificates), comparative advantage works precisely as Ricardo described without directly or indirectly (e.g. by currency inflation) decreasing the value of labor or additional spending for social welfare.

An explanation of trade deficits harm to the GDP and median wage can be found within WWW.USA-Trade-Deficit.Blogspot.Com


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