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Wednesday, July 16, 2008

Free trade, or shop local?

An essay on the basic argument for trade, at Mises. But the author does admit a problem with externalised costs that aren't taken into account.

A thought: what if we in the UK really don't have much of a comparative advantage in any area, long-term? Once the East has caught up on skills, what do we have that anyone will want to buy?
And what about the monetary distortions in the market? It's like Monopoly with some players cheating by using secret stashes of extra banknotes.

Are the economists misled by an idealised picture of economics?


Woody Finch said...

Congrats on the blog by the way which I've been enjoying. However I think you're confused here.
Every country always has a comparative advantage in something, because it simply means what they can produce at the lowest opportunity cost.
You're talking about absolute advantage I think (which doesn't really matter for the purpose of the general argument for trade).

Anonymous said...

Yep, comparative advantage doesn't mean that we have to be better at something than, say, Japan, just that there's bound to be something at which our incompetence relative to Japan is least.

Anonymous said...

An illustration I saw on a website:

Compare two cavemen making spears. Each spear needs one shaft, one blade.

In one hour Fred can make 4 shafts or 2 blades, and Kevin can make 1 shaft or 1 blade.

It is to their mutual advantage to trade, with Fred spending half-an-hour making 2 shafts and Kevin spending 2 hours making 2 blades. Kevin still has a source of income even though he's less competent than Fred at both tasks. Of course, he ends up poorer than Fred, because he has to do 2 hours work for the same income (one spear) that consumes only half an hour of Fred's time.

Unless, of course, you invent Socialism and just steal some other bugger's spear.

Sackerson said...

Woody, DM: thanks for the corrections on comparative advantage. I think my general drift is right, i.e. we seem bound to get poorer because we can't match the competition at our current level of wages.

Woody, thanks for the encouragement, too.

Anonymous said...

Well it is a bit more complicated than that surely? Not all trades are equal. Making spears has lower "vaue-added" than open-heart surgery. We leave the spear making to ill-educated people in developing countries so we can do things that have a higher value added. There is a basic rule in business that the closer you are to the consumer, the more profit you make, Thus in the UK we have focussed less and less on raw materials, less and less on manufacture, and more and more on services. We play the game to maximise our profit. Thus we design microprocessors at ARM in Cambridge, but they are made by various factories in Taiwan and Korea. Maximising our income for the minimum number of people employed in creating the wealth. Doing this allows us to deploy other people in non-wealth creating parts of the economy like education, but since a good education helps to improve our chances of staying ahead of the other players at the table it all helps. The key thing is to keep remembering how this game is played to our advantage and not dabble with crazy ideas like socialism that would lead to disaster in an economy like Britain's. Imagine how many nurses get to eat well because JK Rowling sells Harry Potter books to the Chinese.

Sackerson said...

Maybe I'm too close to our education system to see how good it is!

Anonymous said...

Ryan, I don't see that you added anything but waffle to the blogsters little yarn.

Anonymous said...

OK, dearieme, let me put it in a simpler manner.

Sackers suggested "what if we in the UK really don't have much of a comparative advantage in any area, long-term?"

Whereas I am suggesting that we have a comparative advantage in the foreseeable future exactly because we gave up doing the things the Chinese are now doing. We don't compete with the Chinese. We don't even try to. Business is all about avoiding competition, not meeting it head-on.

I would point out that powerhouse of production Japan is still behind the UK in terms of per capita GDP, despite the UK having lumbered itself with some god-awful government. We are not quite as bad as the Jeremiahs would have us believe. Spending too much time on blogs warps the perspective.

Sackerson said...

I agree that one can get a distorted perspective, Ryan; unfortunately, the MSM fails to inform us as well as it claims (look how slow they were on the credit crunch), which is why I started looking around the blogosphere over a year ago. I'm still trying to find a realistic balance between the opposing voices.