{"id":10305,"date":"2020-01-15T16:52:00","date_gmt":"2020-01-15T21:52:00","guid":{"rendered":"https:\/\/americancompass.org\/?p=10305"},"modified":"2022-11-18T16:58:17","modified_gmt":"2022-11-18T21:58:17","slug":"comparative-disadvantage","status":"publish","type":"post","link":"https:\/\/americancompass.org\/comparative-disadvantage\/","title":{"rendered":"Comparative Disadvantage"},"content":{"rendered":"\n

The heart of Samuel Gregg\u2019s case against economic nationalism is an abiding faith in the theory of comparative advantage. So well does this theory guide national economic development on behalf of the national interest that interventions by policymakers can only make matters worse. His faith is misplaced.<\/p>\n\n\n\n

\u201cIn the first place,\u201d writes Gregg, \u201ceconomic nationalism makes it harder for individuals, regions, and nations to discover their comparative advantage.\u201d As an example, he suggests that \u201cIsrael may be able to produce more manufacturing goods and technology than Australia. It\u2019s still, however, the case that Israel can obtain more manufactured goods from Australia by specializing in technology and trading some of that output for imported manufactured goods.\u201d<\/p>\n\n\n\n

This description is the \u201cA\u201d answer on an introductory economics exam. Comparative advantage allows trading partners, whether individuals or nations, to specialize where each has the lower opportunity cost, increasing total output and, through mutually beneficial exchange, leaving both with more to consume. The sooner that each side \u201cdiscovers\u201d its advantage and specializes accordingly, the sooner benefits can flow. By contrast, Gregg argues, a protectionist policy that interferes with trade in a free-market international economy, \u201cgradually dulls a nation\u2019s awareness of its comparative advantages.\u201d<\/p>\n\n\n\n

But the description bears no resemblance to how the international economy operates. Even the stylized example raises more questions than it answers. Israel is indeed an international technology powerhouse. But why? Is it simply in the nature of small, socialist agricultural communities founded by refugees and beset constantly by war and terrorism to become centers of innovation? Is it something about the Mediterranean winds, perhaps? Or, as the World Bank suggests<\/a>, has it \u201cbeen the Israeli government\u2019s explicit goal to position Israel at the core of the knowledge economy.\u2026 There is broad agreement as to the significant role played by the government in the emergence and development of Israel\u2019s vibrant and dynamic high-tech sector.\u201d<\/p>\n\n\n\n

Australia, for its part, might appear sensible to specialize in manufactured goods. The example conveniently provides only the desirable-seeming technology and manufacturing industries as candidates for specialization. What about kangaroo meat? Would Australia be wise to outsource all its technological needs to Israel so that it can focus on its own comparative advantage in marsupial herding? The theory assures us that, in year one, the Aussies will enjoy a greater bounty of software and \u2018Roo-ribs than if it tried to develop software itself. But what sort of economic trajectory would the nation then travel?<\/p>\n\n\n\n

The idyllic conception of an international economy in which countries all benefit from specializing in their discovered comparative advantages fails both because comparative advantage is not discovered and because specialization can backfire.<\/p>\n","protected":false},"excerpt":{"rendered":"

If comparative advantage is created rather than discovered, refusing to play the game has 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