I have made a research about competitiveness in my article " assessing porter's framework for national advantage: the case of Jordanian agricultural sector " , and an other article about competitive capacity determinants.

Article Assessing Porter's Framework for National Advantage: The Cas...

Article Competitive Capacity Determinants for Jordanian Exports of S...

Dear Masnat;

Thanks. When reading your paper, I came to realise that M. Porter's approach may provide a (partial) answer if we look at factor endowments and comparative advantages not in the product space but from a trade-in-task perspective.

The "portability" of absolute advantages (competitiveness) for firms specializing in tasks is higher than for firms competing for trade in final products.

Hubert

You have to ask yourself first: What notion of comparative advantage? Ricardo's notion or the one propagated by economic textbooks? 

Ricardo's notion of comparative advantage is not incompatible with competitive advantages. After all, he wrote in the Principles: “The motive which determines us to import a commodity, is the discovery of its relative cheapness abroad: it is the comparison of its price abroad with its price at home” (Vol. I, p. 170). 

Preprint Ricardo’s Numerical Example Versus Ricardian Trade Model: A ...

We have a tremendous trouble with the notions of comparative advantage and competitive advantage. We have to check all related concepts and reorganize the system of terms. To do that requires a theory. Today I have no time to explain it in detail, but a new theory is now available. It is the new theory of international values. Most simple introduction is my comment on Faccarello's paper below (You may have read it.)

A very rapid account of the new theory is as follows:

(1) Define the variety of commodities that are produced or producible in the world. They may be differentiated, but this causes no easy problem, because two products can be classified as the same products or as different ones, according to criterion you have. When product differentiation intervenes, this is a big problem. For the moment and for simplicity, assume that the transport and transaction costs are negligible, then you have a variety of products which have one price in the world (indicated by pj). We suppose there M countries and N commodities (M is about 200 and N is perhaps of the order of hundred of millions). Labor in a country is assumed to be homogeneous and has the same wage rate. Of course, different countries have different wage rates (indicated by wi).  

 (2) We assume that each firm in a country possesses a production technique that is expressed by input-output coefficients. It may have two or more production techniques for the same product. You can transfer the production technique from one country to another, but even the same firm cannot realize the same productivity (i.e. the same production technique) if the production takes place in different countries (difference of workforce, infrastructure including public utilities, and so on). I you have different firms that produce the same product, then each firm has its own production technique.

(3) The ruling principle is quite simple.

Those firms with the lowest cost ( = cost plus "competitive" profit) can produce their commodity and export.

As Jorge Morales Meoqui writes it above, Ricardo was thinking in this way. Faccarello also emphasizes this. There are no essential differences in the principles of domestic and international competition. The crucial difference is that each country has its own wage rate. (I here omit the most difficult point: firms are in reality completing with differentiated products with different prices.)

The costs are calculated in money terms. Assume a dollar for example. In the history of comparative advantage, a real cost comparison has been pursued by various economists. We may include Viner (1933) and Deardorff (2005). It does not work in our more complex cases.

(4) Each firm takes the "world optimal procurement and sourcing" policy.

In other words, a firm searches and finds the combination of sourcing that gives the minimal cost for its product. Outsourcing is one of its options.

 (5) Another simple fact:

 Cost depends on wage rates and prices of inputs.

 How are they determined? This is the place where a theory is required. In the new theory of international values, a unique system of international value

     v = (w1, w2, ... , wM; p1, p2, ... , pN).

is normally uniquely determined when we pose some assumptions on the world demand. 

I is important to note that wage rate of a country depends or is determined by the total structure of set of production techniques.  

(5) World competitive pattern and trade pattern are determined at the same time as the international values are determined. The countries that have firms that produce a commodity competitively (i.e. most cheaply) produce and export the commodity.

(6) Production techniques are always changing. Labor productivity (a part of production technique’s productivity) possibly changes more than 10 % a year. Then the competitiveness changes year by year and trade pattern changes in a long run. Michael Porter’s competitiveness is concerned in this changing competitive pattern and the dynamics of production techniques of nations (and possibly the product variety questions).

(7) As a conclusion, I can say that 

Ricardo's theory of comparative advantages and Porter's theory of competitive advantages are already reconciled in principle although there remain refinements  and developments.

Ricardo's theory of comparative advantages (in its modern form, i.e. the new theory of international values) gives the theoretical frameworks and Porter's theory is observing and arguing how the competitive pattern changes dynamically.

People appreciates a dynamical theory, but the problem that  Hubert Escaith posed reveals that more refined basic theory is necessary. This theory seems static and many economists are not interested in it, but it is this theory that shows how the competition works everyday in the world.  Without this theory, all you talks and explains remains in the plain of history. I do not deny the relevance and importance of history but you also need theory if you really want to understand what is happening in the world. World is complex and intractable without having a good tool of analysis. That is the theory.

Conference Paper The New Interpretation of Ricardo's Four Magic Numbers and t...

The local problem of prices is a limitation to understand economics.

Milton Friedman in Price theory put a condition to his demand-supply curves. "Demand curve for a determined collectivity".

How to understand "a collectivity" or two different collectivity. Here there is a ontological problem.

I think this is a problem of different reference system defined for how buyer or seller appreciate price of goods.

This reference system includes

1. Knowledge of production process

2. Legal system, taxes, class of money

3. Individual perception of production-distribution facts

this is a very difficult thing but must to be researched in detail.

International commerce have too much specificity, for example, in XIX century and before, England has a monopoly of seas routes defended with wars an menaces of wars, and establish prices in conformity with Thomas Mun recommendations.

The rule for such commerce in conditions of monopoly was to put a price that produces maximin of gains. This condition can permit to understand a important part of commerce.

Now yet in TPP, NAFTA etc, there are more sophisticated technics to obtain gains fo organizers of international trade and established in fine print letter in commercial international treatises.

Thanks everybody: I have now several papers to digest.

Francisco's remark about the locality of prices is a real issue, albeit I fear that it has to be ignored...

Most of us work with the facilitating assumption of unique prices for tradable products (mainly merchandises). Heterodox economists would rather criticise the implicit assumption of a single “market price” for internationally tradable goods (and the underlying hypothesis of profit maximization under non-monopolistic competition) which means that the price of domestically produced tradable goods will rise in line with the international price, plus the trade costs and the tariffs (a nominal protection granted against the competition of substitutable imported goods).

For most heterodox economists, in particular the Post-Keynesian school (see Lavoie' 2014 book on heterodox economics), prices are formed by adding a mark-up to production costs. Therefore, the domestic price of locally produced goods should increase only in proportion of the additional production cost of imported inputs. This cost-push effect is expected to be considerably lower than the full nominal protection granted on competing imports. 

Similarly, I believe that most business economists would agree that firms with some degree of monopolistic power (e.g., all of them with strong brand recognition) tend to price to markets.

So, be it for heterodoxy or for mainstream monopolistic competition, prices are not the same across countries for the same product.

But once you have said that all cases are particular cases, it becomes difficult to proceed with our usual analytical indicators (at least for a mediocre mind as mine).

So, in the end, you (at least, me) have to make the simplifying hypothesis that prices of tradable products tend to equalize (plus trading costs). Otherwise, you end-up with a collection of country-case studies (another approach of comparative economics that I do not disdain, but which  requires lots of resources and manpower).

This said, thanks all again,

Hubert

Our interest is  to understand things and methodology is to find abstractions that simplify our vision., but not negate parts of reality.

Locality is recognized for anyone. Solution is in identify parts of locality and see how this are integrated to more ample regions and on which bases.

In first term we have states. It is simple to select  countries that manage international trade in very particular form. From autarchic behaviors, to primitive economies with openness, to regularly industrialized states with more o minus openness, and very industrialized and developed countries with openness and claiming more openness.

Parallelly, states have military apparatus to put pressure on other states to supply or permit access to resources.

To simplify this situation, you can to prepare a model on international trade that show how is behavior of  economy in absence of actions of violence or intimidation. This is   like  Adam Smith's.approach. He speak on free trade and its advantages. Also David Ricardo make abstraction of theses existent condition of dominion of England on sea trade routes and distribution of commodities along world.

A linear model is possible like Sraffa model for each local market. There are other approaches.

I think,as first thinking, than a model like inner product expressed as Hilbert spaces used  in BRA KET notation can be used to represent union of market localities.

This approach or another can construct a model that may be explined to local states to represent advantages of international trade and also permit to formulate commerce treaties that bring peace and prosperity.

Regards

Ricardo portrayed comparative advantage as static; but comparative advantage could well be dynamic and contribute to the circumstances that encourage innovation, which Porter saw as central to competitive advantage. Indeed, our research indicates that the basis for comparative advantage does change. 

http://www.ChinaSubsidies.com

Thanks Usha,

I have some hesitations in stepping into the (direct or indirect) export subsidy issue, for obvious reasons :-) Let's say Strategic Industrial and Trade Policy is a hot topic now-a-days, especially when global demand is low and there are clear signs of over-supply in the heavy industry sectors... So, an other reason more for having a rule based multilateral trading system.

From a systemic perspective, strategic trade policies, especially when they entail subsidies (fiscal or monetary, including competitive exchange rate devaluations) remain somewhat problematic as they are subjected to the fallacy of composition, when many countries play this game: The path to a new stable equilibrium may be downward.

A simplistic comparison would be the strategic Maradona's move during the 1986 football championship. Argentina won the match against England and the Cup; but if all players had started playing like Maradona, using also their hands for scoring, the whole competition would have been a mess, with probably the players' hands used also for hitting other targets than footballs: as soon as there are no more rules, there is no game ... 

Best,

Hubert

Dear Usha,

Ricardo's notion of comparative advantage was not static at all. Only the so-called Ricardian trade model of economic textbooks has a static approach, due to the definition of the four numbers as constant unitary labor-time costs. This definition does not correspond to the numerical example in the Principles, though. 

Best 

Jorge

Article Reconciling Ricardo’s Comparative Advantage with Smith’s Pro...

Dear Huber Escaith

1, As far as you are concerned with the problem 'countries do not trade, firms do', there is no reconcile problem in two theories.

Comparative advantages theory is actually 'absolute cost advantage theory' in the sense the producer with the lowest production cost takes all demand for that product.

 If we interpret a country as a representative firm which produces in that country and the consumer in each county purchase only the goods produced by a representative firm with the lowest cost, we can get the production allocation among countries as the competition among representative firms. Virtually this is what comparative advantages theory says.

 The term 'comparative advantage' belongs to the technology property and 'absolute cost advantage' belongs to cost consideration.

Two considerations are connected through wage-rate which is a main cost factor in trade model.

Two phenomena are compatible because wage-rates in terms of the same currency can differ between two countries’ labor markets and each representative firm must employ the labor at each wage –rate.

The wage-rate in terms of the same currency depends on the local currency wage rate and the exchange rate between two currencies.

These are very complicated subject covered by other fields of economic theory and I would like to skip here since these variables are given condition for the individual firm and we can see the relation between two theories without knowing exact determination theories on these variables.

 Naturally this framework can be extended to more general setting with multi-countries, many goods, many representative firms with different alternative production methods.

And we see the trade pattern as the result of global competition among the representative firms as well as the choice of the optimal production site of each representative firm among different countries.

Shiozawa's papers listed below fully analyzed these problems in the most general setting.

 (i), A New Construction of Ricardian Trade Theory--A Many-country, Many-commodity Case with Intermediate Goods and Choice of Production Techniques

https://www.researchgate.net/publication/233943493_A_New_Construction_of_Ricardian_Trade_Theory--A_Many-country_Many-commodity_Case_with_Intermediate_Goods_and_Choice_of_Production_Techniques

 (ii), A Final Solution of the Ricardo Problem on International Values

https://www.researchgate.net/publication/269519877_A_Final_Solution_of_the_Ricardo_Problem_on_International_Values

 (iii), Conference Paper: The New Interpretation of Ricardo's Four Magic Numbers and the New Theory of International Values / A Comment on Faccarello's " Comparative advantage "

https://www.researchgate.net/publication/296467573_The_New_Interpretation_of_Ricardo's_Four_Magic_Numbers_and_the_New_Theory_of_International_Values_A_Comment_on_Faccarello's_Comparative_advantage

 I believe we will get many insights from them to understand the current global competition aspects.

 2, If you are concerned with the productivity difference problem among many firms in the same industry in the same country and you are asking whether comparative advantages theory can deal with these aspects successfully, the situation is a little bit complicated.

Strictly speaking, the current 'comparative advantages theory does not admit the survival of less efficient firm since this theory is virtually 'absolute cost advantage' theory as I noticed. So the two theories are incompatible.

However if we introduce many additional variables such as the profit margin, fixed equipment, extra trading cost of exporting,distinguishing goods by not only physical property but also production location and purchasing location etc. and relax the lowest cost firm takes all demand for that product, I suppose we could get the almost similar conclusion to original comparative advantages model with admitting survival of less efficient, less profitable and unable exporting firms.

Obviously this extension is a rather complicated task, so I would suggest a more practical compromised solution that we regard the comparative advantages theory as showing the determination of shares among the firms with lowest cost and the New New trade theory as dealing with the intra-industry problem in one country on less efficient, less profitable and unable exporting firms.

 Best regards

Article A New Construction of Ricardian Trade Theory--A Many-country...

Book A Final Solution of the Ricardo Problem on International Values

Conference Paper The New Interpretation of Ricardo's Four Magic Numbers and t...

Economists are starting to move to the position of rejecting the analytical utility of the concept of comparative advantage.

check out the following essay:

https://fee.org/articles/comparative-advantage-an-idea-whose-time-has-passed/

Hubert, great you are opening this. You can always go back to Krugman's early 1996 piece https://www.staff.ncl.ac.uk/david.harvey/ACE2006/Competition/KrugmanComp.pdf

and many after that, 

or a more recent one http://www.princeton.edu/~pkrugman/deardorff.pdf

and for a fun thing see here http://www.nytimes.com/1997/02/16/business/like-oil-and-water-a-tale-of-two-economists.html?pagewanted=1

best Mia

Dear Christopher,

Michael Munger is not an economist, but a political scientist. It is not surprising he claims like this and he is right in many of his claims. However, he is committing several errors in economics (two major errors and a misleading conclusion). I am not defending economics in saying this, because a significant percents of economists believe and repeat what Munger understood and explained.

In general, Munger knows very well what is commonly taught as “comparative advantage” in economics classrooms, but it is a pity that many of such teaching and textbooks are wrong. Munger explains comparative advantage by a parable of Orange production in Alaska and rice production in Saudi Arabia. It may be a good illustration for a beginner, but it is strongly misleading because it gives an impression that comparative advantage theory is restricted to the differences of production techniques due to climates and natural resources, just like Munger himself understood.

Munger tries to impress readers that Ricardo’s account of comparative advantage is based on a fixed production technique assumption. However, Ricardo's example of Portugal wine and England cloth production was only an illustration. He did not think that his logics must be confined to the climate difference cases. He was aware that production techniques changes.

Production techniques change sometimes very rapidly. Japan had succeeded in catching up Europe and North America by elevating its efficiency of production techniques. Behind this, there was a change of production techniques. There was no change of climates and no discovery of oil fields. It was a result of human efforts and creation. And the logic of this success was completely conformable to comparative advantage theory.

Munger emphasizes that "Comparative advantage is fixed and exogenous." He is right when he claims that many economists claimed this. But he is wrong with this claim. It reveals that he does not understand comparative advantage in depth. Even a mediocre economist would not say that.

What Don Lee characterizes Datan as "industrial clusters" is simply the phenomenon that Alfred Marshall named as external increasing returns. Industrial concentration in a region increases the productivitiy of firms in the region. All these increased returns are results of numerous innovations. Munger is completely wrong when he says that

• Ricardo’s classical formulation leaves no space for human creativity, no role for division of labor, and no room for innovation to affect the dynamics of cost.

His second error is his emphasis of opportunity cost theory. He explains it in this way:

• Economists routinely act as if three related key concepts — division of labor, comparative advantage, and opportunity cost — are distinct.
•  They are not. Comparative advantage is not a separate concept at all. It is simply an explanation of the implications of the division of labor (the engine that drives prosperity) and opportunity cost (the concept that guides the choice of which activities a person, or a nation, should specialize in).

He is right in saying that the comparative advantage is a part of division of labor, but he is wrong when he says that comparative advantage is an explanation of opportunity cost. He is making the same error as Harberler did in 1933.

In the first half of 1930’s, there was a famous controversy in the theory of international trade and there intervened three imminent economists: Viner, Haberler and Ohlin. Viner argued for “real cost” approach, Haberler opportunity approach and Ohlin an approach based in money prices. In the debate, Viner conceded to Haberler, but Harberler himself was wrong because opportunity costs depend on trade and they cannot be defined independently inside of a nation when input products are traded. Russ Robert is only repeating Harbeler's claim. See my paper below (Section 5 in particular):

The third point is not an error. He is intentionally leading his readers to a wrong understanding. He concludes his article by this expression: "the human mind is the mainspring of a market economy." The content is true, but the expression leads readers to think that the trouble stops if we abandon the "comparative advantage" concepts. Blaming "comparative advantage," he leads people to think that we are free from the forces of comparative advantage. Gains from trade and the job losses are but two faces of the same effects that market economy induces. He discusses the troubles (e.g. job loss or “shipping job” to China) caused by free market economy (free trade policy), but as a conclusion he hides this truth and blame comparative advantage alone.

International trade theory in Ricardo's tradition has changed much recently. It can now treats changes of production techniques and the change of specialization patterns. It is no more a static theory. Another important change of the theory is that the new theory can explain the possibility of unemployment.

The new theory of international trade (or new theory of international trade) tells the truth that free trade may cause job loss for trading countries, at least for a considerable lapse of time. It is the error of traditional trade theory which preaches the gains from trade but does not (or cannot) observe or tell that unemployment is a possible consequence of free trade. The mainstream theory is based on a framework of equilibrium. Full employment is assumed In the definition of equilibrium and thus the traditional theory precludes unemployment from the theory. 

Conference Paper The New Interpretation of Ricardo's Four Magic Numbers and t...

I am getting confused here...

I see little connection between comparative advantages and opportunity cost, at least from a pure international trade perspective "old style".

Comparative advantages, to me, are buyers driven (and therefore somewhat connected to competitive advantages and market prices). It is because buyers purchase the best products at the lowest price that competitive advantages translate into comparative ones . 

Opportunity costs are more supply side type of decision making: where should I put my monney and what is in balance. From a 21st trade in GVC perspective, it may boil down to a "buy or make" decision: should I outsource /offshore a task or keep it as part of my core activities. What are the benefits, risks and forgone opportunities. 

Competitive / comparative advantages and opportunity costs are connected only through a dynamic relationship: green field investment will tend to go towards more profitable activities, fostering a specialization pattern determined by comparative advantages. 

But for this to happen, we need to factor-in time and investment. In the short term, there is little connection.

or I am wrong?

Dear Huber Escaith

The comparative advantages trade theory has two contents.

One is the determination of the production allocation among the countries as the result of the global competition.

Another is the efficiency of this production allocation in the sense that we can not increase any goods without decreasing some goods.

This is so-called 'benefits of the free trade'.

Opportunity costs come in the demonstration of this part.

Unfortuniteｌy, usual textbook explanation has not been distinguishing these two contents explicitly and combining them by explaining as if the central planning authority above the counties determines the efficient production allocation among the countries.

This type of explanation has been the cause of misimpression of the theory meeting with opposition 'countries do not trade, firms do '

Best regards

Dear Mia Mikic,

New York Times article you have suggested is still informative. It shows there is a big schism even inside of the economics: Paul Krugman and the mainstream economists in one side and Lester Thurow and Robert Reich and some dissident economists in another side. This reflects a characteristic feature concerning economics affairs in general and in trade policy in particular.

To state it very roughly, Krugman and mainstream economics admits gains from trade but no troubles in employment (unemployment and low wages). As I have indicated in my previous post, it is the very framework of their economics that precludes these questions. On the other hand, Thurow and Reich are much worried with the reality of this world and think there must be something wrong not only in economy but also in economics. They put more importance to the facts they observe and give doubt to conclusions derived from standard economics.

The second paper of Krugman (2009), that Mia has recommended to read, shows that Krugman still thinks and argues based on Factor Price Equalization Theorem (FPE Theorem). All readers should know what this theorem means. It tells that factor prices of two nations (say China and USA) become equal when some technical conditions are satisfied. There is no need to know what these conditions are. Problem is this: FPE Theorem tells that factor prices for both trading countries are equal if products are freely traded. As work force is one of production factors, the theorem claims that wages in China and wages in USA are equal. Who can believe that any conclusions derived from this unbelievable hypothetical world have some relevance to our life?

Defenders of TPE theorem (and Hechscher-Ohlin-Samuelson theory which comprises the theorem) would say that Chinese wages are rising rapidly and it will become equal in the long run. All right! It is a good thing that the wage of Chinese will be raised as high as Americans’. But can we solve the present problem by imagining a wonderful future which will come in 30 or 50 years? Of course, not.

Hubert, 

do not worry too much about opportunity cost story. Michael Munger wanted to disgrace "comparative cost" concept by claiming that opportunity cost is more fundamental than comparative cost advantage. Opportunity cost is a way of thinking. In some cases, it tells which industry is more profitable to invest. World economy with global value chains includes the activities of CEOs who seek optimal global procurement. However, opportunity cost principle alone cannot explain how the world trade is organized. You need some macroscopic view which is not included in the opportunity cost.

Dear Christopher, Mia, Hubert and Masahiro,

I have no intention to criticize Michael Munger. I wanted to make clear the situation we face in the topic of international trade. He presents a good example to illustrate the present state of disciplines concerning international trade.

We have mainly two disciplines which treat or analyze international problems concerning international trade. One is economics. It has its special field named international trade theory (ITT). The other is political science. It has its special field named international political economy (IPE).

As I have explained with respect to Michael Munger’s paper, we have actual serious troubles with regards to international trade: unemployment, industrial decline, stagnating wages and so on. These are real problems and in this point, IPE is right. IPE people realize what problems are. ITT ignores unemployment and generally do not realize that international trade has its negative sides as well as positive sides (i.e. gains from trade).

Our problem (for researchers) is that IPE lacks economics basis and the mainstream ITT is a wrong theory. The only solution is, I believe, to find or build a new theory of international trade which can treat and analyze unemployment and other problems. Fortunately, we have already such a theory: the new theory of international values (TIV). What we have to achieve is to realize the collaboration between IPE and the new TIV.

Comparative advantage is a mainstream tool to manifest the potential for the exchange of equivalents in international trade, which is untenable.

Dear David,

have you really examined comparative advantage theory? I am afraid that you are only putting a label on a theory without examining it closely.

In recent days,  understandings with regards to comparative advantage developed much. You should follow those movements.  Have you read for example my paper that I have cited in the previous answer (post number 4) and related papers.

Labeling does not advance sciences. That attitude retards advancement of your research, too.

Conference Paper The New Interpretation of Ricardo's Four Magic Numbers and t...

Note for the following three continuous posts

This is a part of a draft paper written with my colleagues. When it was submitted to a journal, it was rejected by the reason that one section that includes the part does not fit to the journal. So the whole section was dropped down. However, I think some parts of the section just answers in part to the Escaith's question. So, I reproduce here a part of the section with minor modifications. I tried to make this post as short as possible. If you have some difficulty to understand any parts, please ask me to give more detailed explanation.

To make the text easy to read, I have divided it into three parts.

Comparative advantage in real terms 

The theory of international values solves the specialization problem and the wage and price determination problem at the same time. It covers most general cases that include trade of intermediate goods. In this very general situation, Smith's rule holds true, whereas the classical rule of specialization is difficult to formulate for general cases. 

These results shed a new light on the old problems with respect to the classical rule of specialization, absolute advantage theory, the true nature of comparative advantage theory. 

There was a long tradition to define comparative advantage in real terms. There were even an understanding that prices, money costs or money expenses of production have nothing to do with comparative cost principle (Viner 1937, VIII.91).It is true that comparative advantage is defined in real terms in the two-country, two-commodity case. Inequality that defines comparative advantage is expressed only in real terms. This rule was generalized to two-country, many-commodity or two-commodity, many-country cases (Haberler 1936, Viner 1937, Deardorff, 2005). They talked about "a chain of advantage." However, this method ceases to be applicable for more than two country or two commodity cases. 

How about more realistic cases of many-country, many commodity cases? "Although comparative advantage provides rather strong predictions of trade patterns in simple cases,” as Deardorff (2005) admits it, "it fails to do so in models that allow for even a small amount of realistic complication." What is the utility of the theory of comparative advantage? Deardorff argues that it explains gains from trade. This is a poor excuse, because he avows that "an important part of gains-from-trade result has nothing to do with comparative advantage. 

It seems there is no hope comparative advantage. This is true if we continue interpreting comparative advantage in real terms. However, there is another possibility. It is to abandon to reason only with real terms. The fundamental theorem and its corollaries show us that, if we use money terms such as wage rates and prices, it is possible to formulate comparative advantage in a very wide class of economies. What are compared in the fundamental theorem are costs in money terms (including profits after Ricardo). What is required is simply to switch from real-term analysis to money-term analysis.

Comparative advantage in Money terms

If comparative advantage is to be formulated in money term, we have to abandon the long tradition that comparative advantage is to be examined in terms of real costs. It is true that Ricardo compared in real terms when he examined four numbers. This does not imply that he excluded from his theory of international trade any analysis in money terms. In fact Ricardo considers and explains in money terms in various places. The latter two third of his On Foreign Trade chapter examines the exchange ratio and subsequent variations of prices.

The misunderstanding occurred because Ricardo could not present his theory of international values. In other words, Ricardo could not give a firm theory on how the values (wage rates and prices) are determined. Even in this incomplete state of the theory, Ricardo could explain persuasively that trade is advantageous to both trading countries even in the case that one country has absolutely inferior production techniques.

If we understand “costs” in comparative cost theory in money terms, the meaning of comparative cost must change. The comparative cost principle simply tells this. The country which produces the product at the least money cost is most competitive and will export its product. No difference exists between the principles in domestic exchange and international exchange.

When a country has inferior production techniques for all commodities, it will have a (relative) low wage rate and it can export relatively advantageous commodities. In this adjustment, wage rates play a crucial role. In the case of four magic numbers, England is inferior to Portugal both in cloth and wine production. This is the reason that English wage rate must be lower than Portuguese wage rate.

Questions of terminology

If we examine in money terms, the Smith's rule is not different from comparative cost principle. Up to present, two terms “comparative advantage” and “comparative cost” have been used interchangeably. If it is appropriate to distinguish the two, it will be better to rename the Smith's rule as comparative cost principle. Comparative advantage principle must be used when we refer to the formulation in real terms. Then the comparative cost principle holds true for all Ricardian trade economy (and in fact for all Ricardo-Sraffa trade economy).

If we make this distinction, we can say that comparative cost principle is valid for a wide class of international trades, whereas comparative advantage principle must be confined to a very narrow situation such as two-country, two commodity, or Jones case and others (the two-country case includes Dornbusch-Fischer-Samuelson 1977 with a continuum of goods).

Writers before and even after Adam Smith were ambiguous when they talk about "cost" and "labor cost" in particular. It may mean money cost and real cost (I mean cost measured in physical terms). In many cases we have to suppose that those writers were not aware of existence of this ambiguity. This paved the background of almost all misunderstandings and misinterpretations. The comparative advantage principle in the above defined sense helped to endure this ambiguity and it opened a new kind of misunderstanding because it can be applied only for a very restricted situation. Most of these confusions can be wiped out if we firmly distinguish two different theories.

Dear readers of this question page. 

I want now to return to the Hubert's original problem: How can we reconcile Ricardo's theory of comparative advantages with competitive advantages?

I believe that this requires really theoretical analysis, because two different concepts are contrasted and sometimes treated as conflicting. I want to know the basic documents on this argument.

As a preparatory step, I have read

Smit, A.J. (2010) The Competitive Advantage of Nations: Is Porter's Diamond Framwork a New Theory that Explains the International  Competitiveness of Countries? South African Business Review 14(2): 105-130.

This contrast two "schools of thought" on country competitiveness. One is "economic school" represented by Paul Krugman and the other is "management school" inaugurated by Michael Porter. So the two following papers

Porter, M. (1990) The Competitive Advantage of Nations, Harvard Business Review March-April Issue 1990. (A digest of the book with the same title)

Krugman, P. R. (1992) Making Sense of the Competitiveness Debates, Oxford Review of Economic Policy 12(3): 17-25. 

The latter is recommended by  Mia Mikic. Christopher Alcantara recommended a review from the side "critical" to comparative advantage:.

Munger, M. (2015) Comparative Advantage: An Idea Whose Time Has Passed, Trending Stories December 28 2015, Foundation for Economic Education.

I wonder if there are any other basic papers.  If you have some papers in mind, please inform me. You are requested to exclude Individual research papers. Thank you.

Three weeks have passed since I have promised to return to Hubert Escaith's original question.

I was working on a paper which is partly related to our problem. The paper Mill's Reversion and an Origin of Neoclassical Revolution

https://www.researchgate.net/publication/305810200_Mill%27s_Reversion_and_an_Origin_of_Neoclassical_Revolution

(still in a first draft stage, uploaded in my contribution page) claims that the neoclassical economics derives from young John Stuart Mill tried to solve an unsettled question left by Ricardo. Mill thought to have solved the question but in reality he opened a new road from economics of production to economics of exchange.

I say that this is partly related to our question, because  Hubert's question is related to how we interpret Ricardo's comparative advantage.

Krugman (1992) (See my previous post for references) contains a brief explanation of "the classical  model of international trade".  Krugman thinks that this is the one  that is "essentially stated by Ricardo and formally nailed down by John Stuart Mill and still remains the main subject of international economics as it is taught in universities." (ibid, p.19)

My paper above contends that Mill opened a way to neoclassical economics and his "solution" was in fact a pseudo-solution which is of very different nature from what Ricardo might have imagined when he wrote his famous Foreign Trade chapter in 1816.  

As for the "new" interpretation of Ricardo's  four magic numbers, please see Faccarello's encyclopedic article Comparative Advantage. 

https://www.researchgate.net/publication/290821134_Comparative_Advantage?ev=prf_pub

The biggest problem with Krugman (1992) is this: He believes that what is taught in universities and he himself teaches is simply true and that there is no alternative.

In a paragraph he writes:

• How can such a simple model offer a world-view that is much more subtle and complex than that held by the vast majority of even highly intelligent commentator, no matter how many facts they know? The answer, I suspect,  is  that general equilibrium is a very difficult thing to understand unless you are willing and able to think about  it mathematically. (Krugman 1992, p.21. Emphasis is mine.)

 What a naive scientist he is! Equilibrium is the simplest idea of a stable state in physics (The idea can go back to remote classical era). But, since more than half century ago, new type of steady state system is discovered  and named by Ilya Prigogine dissipative structure.  (See, for example, my short presentation Economy as Dissipative Structure.)

https://www.researchgate.net/publication/236149834_Economy_as_a_Dissipative_Structure?ev=prf_pub

Krugman does not understand that the notion  of equilibrium including general equilibrium now functions as an "epistemological obstacle" and prevents economists to think other wise. As far as he continues to think in the framework of general equilibrium, there is no unemployment except as transitional friction.

However,  many but a minority of economists and many non-economists know that economy has no automatic tendency to reach equilibrium.  Krugman and many other mainstream economists are forgetting that economics has never succeeded in proving that an economy out of equilibrium tends to an equilibrium. They only believe that the economy is almost always near to an equilibrium and, if it is disturbed, tends quickly to an equilibrium.

If I state about equilibrium, instead of Krugman,  I would say

• General equilibrium is a very difficult thing to escape from. Economists cannot escape from this yoke unless they are sincerely seeking a true economics.

If I repeat a parable I use frequently, equilibrium economics is a kind of Ptolemaic geocentric system. It is finely constructed and can answer almost everything except those economic questions really important.

Krugman emphasizes that

• Economists, in general, do not use the word "competitiveness". Not one of the textbooks in international economics I have on my shelves contains the word in its index.  ...  the debate over competitiveness is simply a matter of time-honoured fallacies about international trade being dressed up in new and pretentious rhetoric. (Krugman 1992, p.24)

Krugman is trapped in his pseudo-theory. Competitiveness can be a useful concept not only for particular industry but for a nation as a whole. In the next post, I will try to present a definition of such a concept. For that I need a short preparation. It is concerned with two different concepts in social capability of technology.  

Conference Paper Economy as a Dissipative Structure

Chapter Comparative Advantage

Working Paper An Origin of the Neoclassical Revolution: Mill's "Reversion"...

Technological capability of a society in static and dynamic concepts

The idea I expose here is based on my old paper, a chapter written for a book in Japanese titled International Comparison of Technology Formation / Social Capability  of Industrialization edited by Tetsuro Nakoka and published from Shikuma Shobō in 1990. (Japanese title: 技術形成の国際比較 / 工業化の社会能力)

My paper's title was "Technological Capability of a Society /  static concept vs. dynamic concept." (Final chapter, pp.333-361.)

The main idea is simple. To keep the present state of production techniques or to improve it, what is necessary for a society? Many factors are related. A production technique is supported by knowledge. It must be transmitted. Workers become sometimes ill. They become old when year passes. Then their techniques must be transmitted to a younger generation. A training system is necessary. To conserve a technique, tools and machines are necessary. One can procure them either by purchasing them or by making them. To keep those machines in a workable state, maintenance knowledge is necessary. One may cite many others. Infrastructures of a society are important to maintain a level of productivity. Roads, canals, ports, electric powers, mail system, and telephone network contribute for the high efficiency in transportation and speed of making transactions. Commercial　customs and habits help transaction to be quickly to be done and sometimes reduce legal enforcing costs.

One may call this total network that makes possible to keep and improve the set of production techniques of a society technological capability of the society. It is necessary to make clear what kind of things are included and how they are related with each others (whole of my paper is written for this clarification.), but I do not enter to the details to avoid to make this post too long.

Now, it is necessary and important to distinguish two concepts of technological capability: static and dynamic. Imagine a society that is in a steady state. Even such a society needs its technological capability to support it s activity. It is the technological capability in static concept. Professor Nakaoka pointed that certain level of technological capability is required in order that a nation succeeds in industrialization. If there is too big a gap between the technological capability of an accepting nation and that of an exporting nation (the country or an area that exports industrialization itself), the process of industrialization becomes sinuous and requires longer transition period. When Nagaoka pointed this, he must be thinking of technological capabilities in static concept. However, in some cases, technological capability in dynamic concept becomes a vital condition which determine the destine of a country.

In 1960’s when Republic of Korea (South Korea) started its process of industrialization, its technological capability was in a lower level that that of some Latin American countries, for example, Mexico and Brazil. However, if we see the later courses of Korea and Mexico, we must say that Korea had a higher level of technological capability in dynamic concept.

Some economists in development and technology call this technological capability of a nation National System of Innovations. We may adopt this concept in place of technological capability of a nation in dynamic concept. However, when we want to compare two capability in static and dynamic concepts, this apparent contrast static vs. dynamic is sometimes convenient. In the case of National System of Innovations we must invent a new key concept which works in keeping the production and its productivity at the present level. It may be simply called Technology but in this case the contrast between two concepts is not apparent.

When we try to introduce the concept of competitive advantage, this static versus dynamic contrast is necessary. In the next post, I will try to give my definition of competitive advantage. In the following posts, I will explain how the competitive advantage concept is different from comparative advantage. I will also explain why the standard theory in international trade could not produce these two concepts.

Definition of competitive advantage

To define competitive advantage and distinguish it from comparative advantage, it is necessary to make a short homework or revision of the theory of comparative advantage. However, the traditional explanation does not help us. We may even say that it is rather mystifying than elucidating. Major difficulty of the traditional theory is the lack of attentions to wage rates. I am obliged to appeal to the new theory of international values. For more detailed account, please read my paper: New Theory of International Values: a General Introduction (uploaded in my Contribution page).

https://www.researchgate.net/publication/304717720_New_Theory_of_International_Values_A_General_Introduction

Suppose each country is given a set of production techniques P(i). We suppose many-country, many-commodity economy. Production techniques are supposed to be of simple production, meaning that there are no joint productions. The number of production techniques is normally supposed to be equal to or more than the number of commodities, because we suppose that each country has a production technique that produces a given product. In many case the cost of production of a product may be exorbitant, as in the case of petrol production in Japan.

Suppose a set of production techniques is fixed for each county. There is a vector of international values v for {P(1), P(2), ... , P(M)} that satisfies the two conditions:

(1) All production runs competitively.

(2) All countries are in full employment.

The first assumption means that if the production level of a technique is positive, the production cost including profit (standard rate of markups) is equal to the price. See Theorem 3.4 (Fundamental theorem for Ricardo-Sraffa economy).

The vector v is composed of wage rates of all countries (uniform in each country) and prices of all products, uniform for all countries if the transportation costs are negligible.

This value vector v is unique up to scalar multiplication if the world demand d lies in the interior of a facet (or in a regular domain). Then, all countries have unique wage rates in which every country satisfies condition (2) under the assumption of condition (1). By conditions (1) and (2), each country has its competitive subset of production techniques that are competitive at the vector v.

If in a country the price vector with a given wage rate is different from that implied in the vector v, then the workers of that country can enjoy higher real wage if the free trade world economy (Theorem 4.2 Gains from trade).

The principle of comparative advantage compares shows these gains from trade but it usually ignores the possibility of unemployment following a sudden liberalization of international trade (Theorem 4.3 Existence of unemployment).

All these stories go at the assumption that the set of production techniques remains constant. To keep the level of wage rate, each country must have some technological capability in a static sense. Without such a capability, it is difficult to conserve the present level of productivity for production techniques and the real wage level is forced to decline with the lapse of time.

However, sets of production techniques of each country can also improve. Any improvement of production techniques that will reduce the cost of production at the given international values will contribute to raise the wage level keeping two conditions. (I do not enter here into the process how this change of wage rates occurs.) What enables this improvement of production techniques is the technological capability in a dynamic sense. They may differ country to country. A country with a very dynamic technological capability in dynamic sense may improve the set of production techniques much rapidly than other countries.

Suppose for simplicity, each country i improves its labor productivity uniformly by a rate δ(i) per year for all competitive techniques. We suppose that no change occurs in material input coefficients (Harrod neutrality of technology improvement). Then the country i can improve its real wage rate by a rate δ(i) every year with the constant price p = (pj). When for a short span of time, pattern of specialization does not change but each country's real wage rate changes year by year. If the improvement rate is big, we can say the country has more competitive capability than other countries.

Even in the case when the assumption of Harrod neutrality does not hold, we can also define the level of a country's technological capability by δ when it permits to raise each year the wage rate by δ per year. This rate δ may change by country to country according to the differences of technological capabilities in dynamical sense.

Now we can define the concept of competitive advantage as a capacity of each country's technological capability in a dynamic sense.

We can interprete that Michael Porter's diamond as four major pillars that compose technological capability in dynamical sense of a nation. Poters' four conditions are:

(A) firm strategy, structure, and rivalry

(B) factor conditions and factor creation in particular

(C) demand conditions

(D) related and supporting industries

The role of government in changing these four conditions is emphasized by Porter. So we can say that he has grasped an essence of technological capability in dynamic sense of a country.

As I have stated it in a previous post, the concept of National System of Innovations can play a similar role and function as technological capability in dynamic sense.

In a real economy, conditions (1) and (2) are not necessarily satisfied. If there is considerable rate of unemployment and if it is necessary to bring down its wage rate, it is necessary to make certain modification. If some industry is running with markup rate less than the standard rate, we should also make some modifications. I do not enter in these details, because what is important is the core concept of competitiveness in an international trade situation. I believe this was done by the above definition.

Working Paper The New Theory of International Values: An Overview

At the first moment, my definition may sound difficult, but in reality not. Let me explain by an analogy. 

We are in a dynamical world. Every country and the world economy are always changing. In such an economy, the present position is not sufficient to characterize the state of a country. The state of a moving body is defined by two variables: present position and the speed (or changing velocity).

Present wage level is a kind of position and the growth rate of the wage is the speed of a nation.

 Roughly speaking, the set of production technique determines the wage level. Suppose that other countries are improving its set of production techniques and our country cannot improve its set of production techniques. Other countries will raise their wage rates but the workers of our country cannot improve their wage rate at best, and have to endure decreasing wage rate at worst.

 If I cite another parable, economy is like a world of the Red Queen. In order to stay at the present position, one has to run as fast as one can. (I have no intention to say that this is a good or ideal world. You are impelled to do so, if you like it or not.)

 Competitive advantage is something like Red Queen's race. Its performance depends not on the state of the economy but on the changing speed of the economy. This kind of race or competition has never been conceived by the traditional theory of international trade. Paul Krugman believes that there is no concept like competitive advantage, because he is only thinking in the old framework of comparative advantage.

Some textual evidences from Michael Porter (1990)

In his big book The Competitive Advantage of Nations (1990), Michael Porter talks much about competitive advantage but he did not give any formal definition of "competitive advantage." Instead, he has left several positive and negative characterizations on what competitive advantage of a nation should be and should not be.

I do not claim that my definition of "competitive advantage" satisfies all Porter wanted to cover by the term. As he put it, Porter's "book is about why nations succeed in particular industries, and the implications for firms and for national economies." (p.29) This subject comprises some dimensions which are not particularly related to the concept of "competitive advantage of a nation" I have given. It may comprise both static and dynamic dimensions of technological development and competitiveness. However, my definition satisfies many of Porter's characterizations of his "competitive advantage" idea.

 Let me first cite (parts of) three paragraphs from the part under the head "Toward a New Theory of National Competitive Advantage" in the 1st chapter of his book.

•  (1) A new theory must move beyond the comparative advantage to the competitive advantage of a nation. ... A new theory must reflect a rich conception of competition that includes segmented markets, differentiated products, technology differences, and economies of scale. (p.20)
•  (2) A new theory must start from the premise that competition is dynamic and evolving. ... Competition is a constantly changing landscape in which new products, new ways of marketing, new production processes, and whole new market segment emerge. Static efficiency at a point of time is rapidly overcome by a faster rate of progress. (p.20)
•  (3) A new theory must make improvement and innovation in methods and technology a central element. We must explain the role of the nation in the innovation process. ... This (how a nation provides an environment for innovation) will also be fundamental in explaining how entire national economies progress, because technological change, in the broad sense of the term, accounts for much of economic growth. (p.20)

Citation (1) proclaims that "competitive advantage" is something different from "comparative advantage." Citation (2) requires that competitive advantage must express dynamic and evolving. Citation (3) makes clear that "competitive advantage" should reflect improvement and innovation in methods and technology.

My definition of comparative advantage as technological capability of a nation in dynamical sense does not contradict to all of these requirements.

Porter gives us also several negative points that he want to exclude. Competitiveness should not be interpreted as activities which limits productivity growth and results in downward pressure on wages (p.8). He is here explicit that "competitiveness" gained from wage cut and others is not a real competitiveness of a nation. He also points that "pursuit of competitiveness defined as trade surplus, a cheap currency, or low unit labor costs contains many traps and pitfalls."(p.9) It is clear that my definition passes these negative check points.

Comments on J. S. Smit (2010) 1   An Introduction to my comments

I have cited Smit (2010) in my post (#27). I give no reference here. As I have commented there, Smit (2010) “contrasts two ‘schools of thought’ on country competitiveness. One is ‘economic school’ represented by Paul Krugman and the other is ‘management school’ inaugurated by Michael Porter.”

This paper seems to be read and cited by many articles. Google scholar (consulted August 10, 2016) shows that Smit (2010) has been cited by 96 papers. We must say that this is a high cited paper. It may have made a substantial influence on the competitive advantage controversy. Therefore, it would be opportune to give some comments on this paper. To avoid making each of my comments too long, I divide my comments into several parts and point the problems with it only briefly.

Excepting Introduction and Conclusion, Smit (2010) can be divided into two parts:

(1) Ttrade theories and the international competitiveness of countries (pp.108-115), and

(2) Management theory and the international competitiveness of countries (pp.115-120).

The first part treats Smit and other trade economists’ interpretations of competitiveness. This represents major contentions from the “economics schools.” The second part treats criticism on competitiveness concepts of the “management school.” In the two following posts, I will criticize Smit’s contentions.

Comments on Smit (2010) 2  Trade Theories on the competitiveness

Major part of Smit’s interpretation are based on two writers: Salvatore (2002) and Krugman (1992, 1993b, 1994a, 1994b, 1995, 1998). Salvatore (3rd ed. 2002) is a very successful textbook which now counts 12 editions (2016). Salvatore has published two other international economics books: Introduction to International Economics and Outlines of International Economics. He is author of many other economics books including Microeconomics and Managerial Economics. It is sure that Salvatore is a good textbook writer but his comments on trade theory are quite cursory and conventional. Majority of Krugman’s interventions are polemical and aimed at popular persuasion. 

Here is a list of phrases that I found in Smit (2010) and not vey accurate either logically or historically. 

• Adam Smith and absolute advantage (p.109)

There is no text that indicate Smith argued on the so “so-called absolute advantage”. He may have referred to “cost”, but at the time of Smith it may stand for either real cost and money cost. If he meant monetary cost, his argument is simple a repetition of Henry Martyn’s “18th century law.”

• Ricardo and comparative advantage (p.109)

It is true that Ricardo found a case where two countries can trade beneficially even in case where one country is more efficient in real terms (e.g smaller labor input coefficients) he did not give an explanation like comparative advantage ratio comparison. See Gilbert Faccarello (2015) Comparative Advantage (available in RG). I have also a comment on his paper.

• Ricardo’s theory of comparative advantage is based on the labour theory of value. (p.109)

It is a misunderstanding that Ricardo’s theory of value is labor theory of value. See for this point Susumu Takenaga Structure of the theory of value of David Ricardo (available in RG). Ricardo represented by labour all material inputs including raw materials and parts. It is a pure cheating of innocent students.

• If the Ricardian theory of comparative advantage is redefined in terms of opportunity cost, then a country …   (p.103)

This is a simple repletion of Haberler’s claim in 1930’s.

• enough empirical evidence exists to supports the theory of comparative advantage (Bernhofen abd Brown 2004, Schott 2004, Uchida and Cook 2005, Krugman and Obstfeld 2003) (p.110)

Smit (2010) cites these papers with arbitrary interpretations. For example, Schott (2004) states in his Abstract of the paper, that

• These facts reject factor-proportions specializations across products but are consistent with such specialization within products. The data is inconsistent with new trade theory models predicting an inverse relationship between price and productivity. (Schott 2004)

Comments on Smit (2010) 3  Trade Theories on the competitiveness (continued)

• Ricardian model of trade conveys the essential idea of comparative advantage, it does not explain the direction of trade. (p.110)

Smits (2010) and Salvatore (2002) are forgetting that Ricardo’s four magic numbers gives the direction of trade: cloth from England to Portugal and wine vice versa. They have misunderstood the explanation of Heckscher-Ohlin type factor endowment argument. When sets of production techniques are given for all countries, the direction of trade and specialization is normally determined under the condition that world demand is given.

• Most of these theories were mere modifications and extensions of the basic H-O theory and did not reduce the validity of the theory in explaining the direction of trade between countries. (p.111)

This ignores the famous empirical research made by Trefler (1995) The Case of the Missing Trade. and other HOV Mysteries. American Economic Review 85(8): 1029-1046. In Trefler’s account, his HOV model produced 148 correct directions (49.8%) among 297 couples of countries. This means that HOV model’s predictive power is equivalent to coin tossing. Smits (2010) (or Salvatore 2002) is missing another important empirical studies like Bowen, Leamer and Sveikauskas (1987).

• traditional assumption of constant returns to scale unworkable to explain intra-industry trade. (p.111)

This is the contention that Krugman made. It was correct when Krugman first produced an explanation of intra-industry trade. However, intra-industry trade depends much on the granularity of classification. The new theory of international values based on linear production techniques can analyze indeterminate number of goods and well explain the existence of intra-industry trade.

• As Stone and Ranchhod (2006; 284) explain, “Porter (1990a) clearly disagrees with what he calls “standard economic theory” … [he] even dares to suggest that economists like Adam Smith (1776) and David Ricardo (1817), who advocated this thing are ‘plain wrong’! ” (pp.114-115.)

If Smit (2010) cites Stone and Ranchhod (2006; 284) correctly, they disfigure Porter’s arguments. Porter (1990) discusses Smith and Ricardo in pp.11-12 under the line heading Classical Rationales for Industry Success, but does not say anything similar to the above citation. Let me cite a part of his argument:

• While Ricardo was on the right track, however, the focus of attention in the trade theory shifted in other directions. The dominant version of comparative advantage theory, due initially to Heckscher and Ohlin, is based on the idea that all nations have equivalent technology but differ in their endowments of so-called factors of production such as land, labor, natural resources and capital. (Porter 1990 p.11)

Porter oppose to HO-theory or factor proportion theory and not to Ricardo. In p.173, Porter repeats the same thing in this expression:

• My perspective is Ricardian, in that I view trade (and foreign investment) as determined most importantly by productivity differences, here broadened from Ricardo’s theory to include differences in technology, factor quality, and methods of competing. (Porter 1990, p.173)

Comments on Smit (2010) 4  Trade Theories on the competitiveness (end of this part)

In sum, Smit (2010)’s arguments are incorrect and disfigured. He wants to present the “right interpretation” of international trade theory but exhibits his shallow understandings on this matter. Compare to Smit (2010), Porter shows more exact and logically structured understanding.

However, these arguments have no direct relevance to the arguments on how to under stand competiveness of a country.

Smit (2010) stands on an extremely simple scheme:

• [C]ompetitiveness of countries may be understood as a negative sum game, whereas , according to international trade theory, it is a positive sum game. (Smit 2010,  p.108, at the end of introduction)

It seems that the first section Trade Theories and the International Competitiveness of Countries (pp.108-115) is devoted to prove that international trade theory has shown that “competitiveness” (or international trade?) is a positive sum game.

To argue that international trade is positive sum game, there is no need to argue the whole history of the theory of international trade. Domestic trade is also positive sum game if they are done without enforcement by violence. If the concept of competitiveness and positive sum game can coexist, why do they not in international trade?   

Smit (2010) shows his fear (or risk as he put it) that concept as competitiveness of a nation leads people to misunderstand that international trade is negative sum game. He is right in this point. Then, what he should do is to guide people to know this fact. He may have tried to do that in the first half of his paper, but he does not succeed at all. His argument is so rough and inexact. He may fool innocent students but a bit learned people. 

Smit (2010)’s outstanding error is that he supposed two propositions:

(1) Porter’s competitiveness of a country is the same as strategic trade policy.

(2) Porter is thinking that international trade is negative sum game.

Strategic trade policy people may have used Porter’s concept, it does not prove that “competitiveness of a country” concept is impossible. If there are misuses, what is required is to make clearer and more workable definition and not to expel the concept. It is rather Smit (2010) that has misunderstood that competitiveness of  a country stands for negative sum game. but it is a sheer misunderstanding from the part of Smit (2010).

I will see proposition (2) in the next post.

Comments on Smit (2010) 5  Management Theory on the competitiveness (continued)

Whereas the first half is a defense of (traditional) theories of international trade, the second half is a criticism of Potter’s concept of “competitiveness of a country.”

I do not argue the four conditions that compose Poter’s diamond. Smit (2010) seems to have difficulty in criticizing four conditions because they are more detailed conditions of actor endowments and others. He is rather defensive where he should be more offensive. For example, under the head Factor Conditions he repeats two times that something/s “do/does not invalidate the theory of comparative advantage”. The second example is this:

• The fact that Porter uses a colloquial style based on logical reasoning (which is easier to under stand) rather than mathematical models to explain factor conditions, thus does not invalidate the standard theory of comparative advantage.　(Smit 2010, pp.115-116)

If colloquial style is logically solid and easier to under stand, where is a merit of using mathematical models? Smit (2010) should have pointed that Porter get in confusions because he did not use mathematical model, but he could not. Porter’s aim in discuss the four conditions is not to criticize standard theory of comparative advantage. He has done it before these arguments.

Let me cite this part:

• According to Porter (1990), it is firms that ultimately compete internationally, but it is the international competitiveness of a country that shapes the international competitive advantage of firms. It is this assumption that a country’s competitiveness ultimately determines a firm’s international competitive advantage that led to the belief that countries, like firms, compete internationally and thus that the international trade engagement of countries is a negative sum game, as it is the case of firms. This is in sharp contrast to the general understanding in trade theory that trade is positive sum game irrespective of the nature of the sources from which such game from trade are derives..(Smit, 2010, p.117)

Smit betrays here his misunderstanding. Porter does not think that competition of firms is negative sum game. Porter believes that rivalry is the critical driver of competitiveness of firms.

Comments on Smit (2010) 6  Management Theory on the competitiveness (end)

Let me prove that Porter does not think that competition of firms is negative-sum game.I have only 1998 edition of Competitive Advantage. I cannot confirm if the relevant text is the same in 1990 edition. At least in 1998 edition, Porter explains explicitly in his Introduction (added in 1998) that

• In my theory, competitiveness and prosperity are not a zero-sum game. Many-nation cane simultaneously improve their productivity and with it their wealth. (Porter 1998 Introduction p.xii.)

In the text (probably the same as 1990 edition), Porter repeats the same warnings several times:

• National competitive advantage is not a zero-sum game. One nation’s firms need not succeed only at the expense of another’s. (Porter 1998, p.682)
•  As I have discussed, national competitive advantage is not a zero-sum game. … Progress in many nations will widen the breath of economic activity and improve the overall living standards in the world economy. (Porter 1998, p.684)
• National economic prosperity is not a zero-sum game in which one nation’s gain is at the expense of others. A healthy process of economic upgrading can allow all nations to enjoy a rising standard of living. (Porter 1998, p.735)

Porter (1990, at least in 1998 edition) explicitly expresses that his competitive advantage or economic prosperity is not a zero-sum game. Does this mean that his competitive advantage is a negative-sum game? No, of course, not. This is evident from the following sentences. He thinks that world economy is a positive-sum game. It is only Smit who interpret that competition between firms is negative sum game. This misunderstanding comes from the fact that he believes that domestic competition among firms is negative-sum game and the international trade by virtue of comparative advantage is alone positive-sum game.

Comments on Smit (2010) 7  Conclusion

In his introduction, Smit (2010) proclaimed:

• The focus of this article is to the debate as to whether or not countries compete internationally, as proclaimed by  Porter (1990). There are two schools of thought. ...The purpose of this article is to explain why Porter's Diamond Framework is not a new theory that explains the international competitiveness of countries.  (Smit 2010, p.107)

Admitting that Smit is right in his purpose, we cannot  admit that he has clarified the issue on the notion of "competitive advantage of a nation." First of all, his understanding of theories of international trade is so confused and ambiguous. What he believes to be Porter's idea (for example, whole story around negative-sum game) is a fictive idea that Smit framed up for himself. 

Most important thing for us: Smit (2010) has failed to prove the irrelevance of  competitive advantage concept.  It only revealed that traditional theories of international trade cannot suitably treat the dynamic feature that Porter proposed to consider as an agenda. My definition based on the new theory of international values gives a firm concept of competitive advantage that Porter would have imagined vaguely.       

Addendum to Comments on A. J. Smit (2010)

For the sake of Krugman's honor, I would like to add this comment. At the end of his critique of Management School section, Smit contends like this:

• This is because productivity is purely domestic matter and has nothing to do with the international competitiveness of a country (Krugman 1988). (Smit 2010, p.120)

If we read this part, we normally understand that Krugman is saying something similar to this argument. I have checked Krugman (1988) The Accidental Theorist, but I could not find such a place. There were 14 pages that comprise term "productivity" but there were no similar argument that Smit (2010) suggests.

I wondered if this is a misprint of some other paper and I checked Krugman (1986). There I found a similar expression in p.18.

• Either they [influential people] suppose that ‘competitiveness’ is a poetic way of saying productivity, and has nothing to do with any actual conflict between countries; or they suppose that people who talk about competitiveness must understand the basics and have in mind some sophisticated departure from standard economic models, involving imperfect competition, external economies, or both. (Krugman 1996, p.18)

 If we read this part hastily, it is possible to summarize this part as contending that

• productivity has nothing to do with international competitiveness of a country.

In fact if we replace "international competitiveness of a country" for "any actual conflict between countries", we get the above expression. But, there are two important differences between Krugman and Smit. Krugman (2010) cites this part as a thought of some other people (they), whereas Smit (2010) argues as if this is Krugman's contention. Secondly, Smit (2010) criticizes competitiveness argument identifying competitiveness and productivity but Krugman distinguishes two expressions pointing that it is possible that they are supposing "competitiveness" is a poetic way of saying productivity. Smit (2010) is heavily confused in presenting Krugman's contention.

Dynamic Capability of an Organization in Management Science

Professor Takahiro Fujimoto sent me a few days ago some of basic papers on dynamic capability. One of them was

D. J. Teece (2007) Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Entrepreneurial Performance. Strategic Management Journal 28: 1319-1350.

It is a long paper. I read it skipping several places. Central idea is the existence of dynamic capability compared with static capability. As this is the topic that comprises almost all arguments in management since 1990, it is not easy to explain what the dynamic capability is in a few words. Perhaps we can discuss in detail the content of this concept. It suffices here to say that dynamic capability is presented to differentiate all other management concepts that have a static inclination. Teece sometimes call the latter technical capability in comparison to evolutionary capability. I am not sure if this dichotomy is justified or not. If we include social and human elements among “technical capability,” technical capability may well comprise evolutionary capability.

To return to our main concern, that is, the conceptual differentiation of comparative and competitive advantage, the arguments in management science is highly indicative. If there is something that we can call dynamic capability for a firm or for an organization in general, we can easily guess that a nation or a society with certain coherence would have dynamic capability as well as static capability.

In post number 29, I introduced concepts of technological capability of a society in static and dynamic concepts. This comparison is based on my chapter in Nakaoka (ED.) (1990) and focused on technology. I argued that a society has two different kinds of capability in relation to technology. The static capability enables us to keep the current efficiency of production techniques. The dynamic capability is concerned to improve the efficiency, introduce new commodities, and innovating business operations and management. Except this focus on technology, the only difference between my concepts and Teece is that I am concerned with social or national level capabilities and Teece with firm level capabilities.

This must be the basic reason why management science specialists are willing to argue international competitiveness of a nation, whereas economists (and international trade specialists) are reluctant to talk about country level competitiveness.

As Hubert posed his third question, I came to remind of this question page. I have been forgetting what I have wrote in this question page but re-reading many posts (sorry to so many posts of mine), I think that Hubert's new question contains many common points with our discussion in this page.

Please visit the new question page:

Inter-industry trade in the 21st century: Do we still need a trade theory?

https://www.researchgate.net/post/Inter-industry_trade_in_the_21st_century_Do_we_still_need_a_trade_theory