Comparative advantage vs. China
He was confident of the truth of all that he uttered. And he uttered a lot.
He — call him Ben — is an urbane man who was seated across from me recently at a lunch group organized by a mutual friend. Ben spoke speedily and with authority on everything from cinema to Miami restaurants to bookstores in the Tel Aviv of his youth. Knowing little about these matters, I nodded my head politely at all he said. I had no reason to doubt its truth.
But my attitude changed when Ben turned his verbal virtuosity to economics. “You watch,” Ben warned. “The Chinese work so hard and are so smart that they'll soon gain a comparative advantage over Americans at producing everything.”
I knew immediately that Ben knew far less about economics than he fancied himself knowing.
I politely asked Ben a few questions to be certain I understood what he was saying. Sure enough, he was asserting that producers in China will soon be producing everything at costs too low for any American producers to match. Ben believed that, unless Congress stops Americans from buying so much from China, trade with China will eventually impoverish Americans.
Ben's understanding of trade, and of comparative advantage in particular, is entirely wrong.
“Comparative advantage” has a precise meaning in economics. Smith has a comparative advantage over Jones at producing hams if the number of goods and services that Smith “gives up” in order to produce hams is smaller than the number of goods and services that Jones gives up to produce hams.
But here's a surprising implication of the principle of comparative advantage: To become more efficient at producing one good means that you become less efficient at producing other goods. This occurs not just sometimes or usually. This occurs always. It's unavoidable.
Suppose that in the time it takes Smith to produce one ham, he could have produced one pumpkin. So, if Smith actually spends time producing a ham, he doesn't spend that time producing a pumpkin. Smith's cost of producing a ham, therefore, is the pumpkin that he doesn't produce. And if Smith had instead spent that time producing a pumpkin, that pumpkin would have cost him one ham.
What happens if Smith becomes a more efficient ham producer — say, doubles his efficiency at producing hams? In the time that it takes Smith to produce one pumpkin, he can now produce two hams. Smith has clearly become better at producing hams, making it harder for other producers to compete successfully against him in the ham market.
Notice, though, that by raising his efficiency at producing hams, Smith reduces his efficiency at producing pumpkins. Before, if Smith spent time producing a pumpkin, he would have sacrificed the opportunity to produce one ham. But now, if Smith spends time producing a pumpkin, he sacrifices the production of two hams.
Becoming a more efficient ham producer raises Smith's cost of producing things other than hams, such as pumpkins. He can't — and China can't — become more efficient at producing everything.
I tried to explain this reality to Ben, who looked at me blankly. He wanted to continue to believe that the Chinese are destined to become more efficient than Americans at producing everything. The fact that economics explains why his pet belief is foolish made no impression upon him.
Ben would make a good politician.
Donald J. Boudreaux is a professor of economics at George Mason University in Fairfax, Va. His column appears twice monthly.