Dear Jorge

It seems that you might have derived some notion of comparative advantage different from the commonly accepted one. That is a good thing to get into.

I am downloading your paper and after reading it I will try to write something.

Till then, I would stop at saying that the comparative advantage is more a tool of mercantilist making than being a naturally evolving one. It is a political and strategic instrument much utilized by the dominant economies to indoctrinate the poor Third World to streamline their production structures according to the dictated signals of the First World. It is a very powerful tool since imperial controls till yet.

With thanks

Israr

Dear Israr, 

Thanks in advance for taking the time to read and comment my paper. 

I'm curious to find out if you still have a similar opinion about comparative advantage after reading it. 

Best regards,

Jorge 

Jorge and Israr,

A crucial anlysis. I will do likewise. up to this time i have been of the view that you cannot seperate productive advantage measures from the speculative workings of currency markets as everything dissolves into a supposedly common unit of value measurement, ie the dollar. It is also important to not ivnore the fact that it is almost exculsively in primary extractive and agricultural products that r=this question is considered, but they are also the only commodities in which markets and futures markets are strongly upheld as institutional icons within the systems that benefit from the validation that they provide.

Robin

Dear Jorge

You have taken good efforts to elaborate upon Ricardo's and the Ricardian theories of comparative advantage. It is a very good effort. You have sharply drawn the attention toward what the classical economists like Ricardo had in mind and what the followers, mainly the neoclassical ones, intended to have. You have successfully derived your inferences.

I think the point raised in your contention that 'If the labour theory of value would regulate the relative value of these commodities, the amount of labour time embodied in the respective quantities of cloth and wine traded would have

to be the same, or Ce = Wp. Making the corresponding substitutions in the two inequalities mentioned in the above paragraph, we obtain Wp < We and Ce < Cp.' the inference is a go back to SMITH'S ABSOLUTE ADVANTAGE.

You have been arguing about the redundancy of neoclassical assumptions for Ricardo's comparative advantage and by dropping of assumptions you wish to give a simpler superiority to Ricardo. Does it mean Ricardo's theory attract less

criticism and more reality?

Dear Jorge, starting, as most of the economic analysis does, from AXIOMATIC postulates or starting from explicit assumptions is quite similar in terms of analytical utility; it is something like the derivation of what one intends to derive with a logical rigour.

Does your reading of AXIOMATIC comparative advantage gives, other than simplicity, any more validity to the model? How?

I am sorry for differing with you.

With regards

Israr

Dear Jorge, 

My take with comparative advantage is essentially empirical. Ricardo's basic idea of comparative advantage fits well the general empirical observation that over the long run open trade policies have characterized rich countries. That Sweden (Heckscher and Ohlin's homeland) that used not long ago to be poorer than Argentina, became richer both because it practiced open trade and because starting around 1930 Argentina closed its economy. Such an experience can be synthetically formalized in a two good model along the HOS of comparative advantage. This theory whose assumptions have been criticized ad nauseum still fit the acid test of time: if it consistently helps to understand our real world economy then the simplicity is welcome although its assumptions do not always come close to reality. 

All of us have some comparative advantage and this helps to understand why it is dangerous to use the theory for targetting policies. How could anyone have predicted that Denmark would have comparative advantage in Lego? In our modern world economy the beauty of the theory of comparative advantage lies in its underlying policy message: open trade policies are a crucial recipe of what can be considered good policy advice to politicians who at least here in the developing world are constantly being taken by protectionist interest groups. 

Many thanks for contributing to this never ending discussion.

Regards,

Julio

Dear Jorge,

I concur with Israr regarding your analysis of Ricardo's ideas and of the development's from them in the inter-war years.  I found it very interesting, easily understood and illuminating at many levels.

Israr has made the observation that the neoclassical restatement in Ricardo's name of classical trade theory served the purpose of providing a key part of the process of validating the rationale for the economic institutions and self-interested goals of the developing foreign and trade policies of the developed nations.  This was at a time when these nations were developing an awareness of their critical dependence upon maintaining favourable 'terms of trade' between themselves and those less developed regions that increasingly provided critical inputs to their economies and which also represented valuable potential markets for their manufactures.  Ricardo's work served an almost completely analogous purpose in the context of validating the actions of the dominant nations of his own Mercantilist times, as Great Britain began its main period of imperial expansion.

The neoclassical restatement occurred in the context of the start of a debate which culminated in the process which saw a 'global' abandonment of the 'gold standard' by those same rationally, self-interested nations.  One can see this event as being a logical extension, an inevitable corollary, of the neoclassical restatement.  Why is this?

Gold, amongst its many physical traits that make it suitable as a monetary substance is one which links it directly to Ricardo's labour theory of value.  Gold is acceptable in a monetary role everywhere in the world.  Within any economic region, throughout history, every person had some idea of the locally accepted value in gold of one year of work in any of the roles that they might fulfil - as producer, employee, government servant and so on.  Broadly speaking these regional values had equivalence from one region to another in terms of the components of customary ideas of well-being in each area.   Paper money, so long as it is backed by gold equivalent in value to its face value, serves the same purpose as gold.

Thus a monetary institution that is global in scope and based on a broadly common valuation of labour-time creates prices which cannot vary far relative to one another.  This occurs because these prices must of necessity closely reflect the time-value comparative-advantage existing between different regions with regard to competing and substitutable products. 

The 'full-value' time-value pricing of product 'c' from region 'C' would of course be different in region 'A' and region 'B' and region 'C' according to the full labour-time accrued in the process of delivering product 'c' to the same equivalent point in the value chains of countries 'A', 'B' and 'C'.  Distance between point of production and point of consumption being just one element contributing to comparative advantage as seen from any particular context, in this case a geographical one.

In Ricardo, the 'full-input time-value' delivered price of a specific product resulting from a specific process in a specific location, if it can be expressed in terms of a common 'value proxy' such as gold provides, is theoretically equivalent to one term in a statement of the 'comparative advantage' of that location to the other.  Thus trade based on exchanges which employ a gold standard as a common value-proxy tend to reflect 'terms of trade' between regions which reflect their 'natural' comparative advantage in their production of each product.   This facilitates trading decisions of individuals that are 'price-based' in the absence of any practical way of bartering or of knowing what particular product exchanges might have the a time-value benefit for their region and thereby increase their potential productive capacity.  A profitability calculation suffices.  In a world where wealth was synonymous with the control of gold and in which its source of accumulation was primarily seen as being profitable trade the Ricardo's explanation provided the necessary authoritative basis for policy.

The neoclassical restatement simply 'updates' Ricardo's model to suit the growing realisation amongst industrialised trading nations that the growth in trade volumes was faster than the growth in the availability of 'new' gold for currency backing.  Gold, as a commodity in short supply, no longer displayed a suitable stability of price.  It was deemed, by the main trading nations, to be better to adopt as 'reserve' currencies those of a few of main trading nations as being as 'good as gold' and backed by the strength of their respective economies.  And the ability of their central banks to set up and control the institutions and the  markets to dictate the value of their own currencies to gold and to those of each other nation.  This meant that 'terms of trade' experienced by powerful countries and by less powerful ones were now 'responsibly' manageable by the agencies of the powerful nations.

It is these institutions, and the policy controls to which they are subject, which have evolved so that by the first decades of the 21st century we are now able to see how they have become instruments, within an ever growing range of institutional instruments, which together are able to maintain an international structure which systemically values the time-value of labour across regions and occupations in favour of those activities in which the main trading nations dominate from time to time thereby ensuring the structural extraction of surplus labour value from the less powerful trading economies into the more powerful trading economies.  This is the international analogue of the same internal institutional structures that characterise the domestic economies of 'developed' trading nations whereby surplus labour value is constantly appropriated from 99%of the population towards an economically powerful 1%.

So Jorge!  My answer is that in their appropriate time and place both Ricardo and the neoclassical restatement of comparative advantage were correct.

I would note two things however.

1) It is a waste of intellectual effort to ask the question that has been asked unless one is social historian seeking to understand the past.  Both positions reflect good working hypothesis for the purposes and needs of economic understanding and governance at the times of the conception. In that respect, and for good authoritative 'spin' value at the time, it would have been desirable in their times to present them as 'axioms' and to imply that they are therefore part of an imagined, but widely promoted, body of Natural Law.  If one's aim is to explain and justify neoclassical policy development and its continued application to our present times then use the restatement and give it a major overhaul consistent with the currently accepted metaphysics and goals of political and commercial governance.

2) If one' view of economics is not that of a seeking to describe and ameliorate the unexpected consequences of following a network of working hypotheses and 'rules of thumb' as axiomatic truths which purport to describe a stable, universal behavioural profile of man's economic activity, one which does not exist, then one should rather be asking normative questions about man himself.  One would be better rewarded by seeking to understand and identify the axiomatic needs which drive man's relationship with the realities he must survive within and from which perspective each person is driven to build a lifetime of well-being as best he can.  

Economics should not seek to describe how mankind fits into and is shaped by supposed autonomously-extant economic axioms. 

As in all science there are no axioms. Except this one.

Everything else represents our currently best working hypotheses based on the limited views of reality that our poor technological tools and our equally poor sensory organs are able to deliver to the imperfect conceptual centres of our brains.

Economics should seek to describe, through a never ending project, how the myriad individuals of mankind constantly create and develop activities and behaviours in response to their need to create well-being in constantly changing and diverse habitats. 

Economists, through that understanding, should then constantly be seeking to identify the tools as 'institutions', useful behaviours - as 'bounded activities' and the social structures which might help to provide the means of achieving universally sustained and improving states of well-being with assured durability and resilience in the face of every perceived challenge.

An explanation of economic value that can have any claims at all to the highest accolade available to any concept in the behavioural sciences - that of 'Theory' (no 'Laws'  and certainly no 'Axioms') must be rooted deeply in the very nature of man, and in some concept of 'right' and of 'wrong' which ultimately must embody some position regarding the 'Big Questions' of Life itself and of 'Man' in particular.  One needs to have a 'Theory of Moral Sentiments' before a 'Theory of Value', for the latter can only exist in the context of the former.  Adam Smith did that for the 18th century.

Who is daring to update his work for the goals, aims and desires of the so-called 'Humanitarian Age'?  I say 'dare' advisedly.  We have seen that the institutions of power which characterise our modern world have grown out of, and still very strongly embody, the moral sentiments, economic theories and elitist social mores of the Mercantile Era of Jacobin and Hanoverian Britain.   The moral precepts of a global Humanitarian Era are vastly different.   Theories consistent with realistically representative economic behaviour, moral sentiment and social mores in the present humanitarian era must inevitably give rise to radically different implementations of practically all of our economic institutions - including those of responsibility, ownership, production, trade, governance and commercial power.  

It is the shape and operation of those evolved, 'humanitarian era' institutions and of our individual and grouped interactions with them that will give rise to the theories to describe them and from which the models and forecasting tools needed will then be able to be developed.

We cannot expect to successfully build a humanitarian 'universalist' future on a 'green economy era' adaptation of an 'industrial age' adaptation of models of 'economic man', 'value', 'trading' and 'manufacturing' that are all derived from the moral sentiments of the mercantile era of 200 years ago.  Nor can we expect to successfully understand ourselves now and so help ourselves into the better future we hope for.

Kind regards and with deep respect,

Robin

Dear Israr,

Thank you for your interesting answer and sorry for the late reply. 

The validity of a model or a proposition can only be asserted in the real world. 

The question I have tried to answer is the following: What did Ricardo meant to illustrate with the famous numerical example? 

I think only two propositions: 1) that his labor theory of value is not valid in international exchanges as long as capital is less mobile across countries than within country borders; and 2) that as a result of this, a country might import a certain amount of a commodity although it could produce it with less quantity of labor than the exporting country.

These two proportions can be easily observed in the real world. That is why I think that they are indeed valid. 

Best, 

Jorge

Sir Jorge

I am a man of meagre learning. I agree with your conclusions; however, not for the reasons that LTV is not valid and countries trade according to comparative advantage ratios. 

I agree with you on a practical basis.  But then, to me, the explanatory variable is not the cost alone. Rather, it is the profit component that goes behind the trade. You know, most of the trade is not directly between the consumers but by the traders interested in commodity arbitrage.

LTV remains short of getting requisite validity because the large margins of profit obliterate the reality. 

Moreover, it is the absolute cost advantage that follows LTV. The comparative cost advantage follows comparative variables of numerous hues that can well-nigh overshadow the LTV advantage.

With thanks and apologies.

Israr

Dear Julio, 

Thanks for your comment.

I am in favour of free trade, as you can read in my dissertation (please see the link below).  

 At the same time, I believe that the current mainstream case for free trade is based on a shaky theoretical foundation. The textbook version of comparative advantage (wrongly called the Ricardian trade model, as I argue in the paper), as well the HOS trade model do not make a good job in explaining the benefits of free trade.

Those who are in favour of free trade should go back to the original case formulated by the classical political economists, since they offer a superior explanation of the benefits of this trade policy. Their explanation does not require any unrealistic assumption. 

Regarding your empirical approach with regard to comparative advantage, you need a good theory to understand and explain reality, since as Einstein once said, “it is the theory which decides what can be observed.” 

Regards, 

Jorge

Thesis Classical Free Trade: A Policy Towards Economic Growth and Development

I am wondering if comparative advantage only applies to agricultural commodities. I remember something from Keynes that indicated he thought along these lines.

Dear Wayne, 

It is important to know which notion of comparative advantage you have in mind.

The classical rule of specialisation – which is the rule Ricardo and other classical political economists applied in order to find out whether a particular trade is beneficial for a country or not – applies to all kinds of commodities. 

Dear Jorge

I am sorry for such delay in replying to you.

Sir, I want to add the following to what I have written in my previous post.

I do agree with your conclusions but I find difficulty while assimilating the repercussions of the theory. You have, no doubt, done a good and great job by delineating a clear demarcation between the Ricardo's and the Ricardian Theory of trade.

With kind regards

Israr

Dear Jorge,

Forgive me for asking you what might seem to be an unnecessary, or even ill-informed, question but I am as much concerned by the manner in which the theories and ideas within the 'body of knowledge' that make up our 'discipline' relate to and thereby identify themselves as oriented towards a common goal, or a set of disparate goals, as by their details.  Also by the existence of any disparity between their apparent, or stated purpose, and their evident, or correlated purposes.  My question arises from your statement "The classical rule of specialisation – which is the rule Ricardo and other classical political economists applied in order to find out whether a particular trade is beneficial for a country or not..".

I would like to ask, initially perhaps:

"Does all of the classical economic writing, upon which the modern mainstream of economic teaching and of national policy development advice is ultimately based, have as its proximate, or its immediate, goal the benefit of the country or state?"

It occurs to me that if the 'production value' of the labour of individuals, to them, is to be maximised by their mutual specialisation of their individual labours in the context of their being a free and fair mechanism for the mutually agreeable exchange of the greater volumes of goods, and hence of greater value at fixed prices, that is being produced by their specialisation, and then one quickly moves on, as both Ricardo and Smith do, to  a consideration of the same basic processes across wider geographic areas which then subsume national boundaries and then to re-state the previously identified benefits to skilled or able individuals of the specialised application of their labours to being legitimately identified with "the benefit of the country or state" is to build into all subsequent economic argument the implicitly assumed and non-violate and rigid relationship to exist between 'the state' and the individuals through whom it is manifest and the individuals whose labour produced the products by and through which the benefit of 'the state' is being sought through this body of theory.

This seemingly natural identification of the goal of the benefit to 'the state' --- which is to be gained through the application of economic understanding and policies that are based upon that knowledge of the benefits which individuals labouring to produce goods in greater volume by their mutually 'agreed' specialisation avail themselves through their subsequent free and fair agreeable exchange  ---  dramatically exposes the nature of the social order existing in Mercantile times.  One in which the right of 'dominion' over lands had already been extended for hundreds of years to imply an absolute right of holder's of that dominion to be extended over the lives, labours and possessions of the main body of people residing within those dominions whenever and however it pleased them.

This assumption, it seems to me is still embedded today in our 'political economy', that is to say the 'study and development of state policy towards the economic activities of the people within the state'.  Further it suggests that very socio-political structure must tend to generate its own legitimate 'theory of political economy' as a body of views and policy generation processes in service of each state.

The consequence of this is that 'political economy' is greatly over reaching itself when it considers what is good for the world through the study and prescription of trade policy internationally, or any other area of policy for that matter, according to any specific, and probably dominant, socio-political order.   It is thus by this mechanism that a global hegemony in economic outlook is and has been established by the most dominant states and by which it is perpetuated.

This is neither 'scientific', legitimate or moral.....

....and the alternative of accepting the legitimacy of 'state specific' political economy cannot be legitimate either unless that study and body of policy is itself under-pinned by a basic, commonly and freely agreed body of knowledge and understanding regarding the individual rights and inviolate principles to be applied to the individuals comprising humanity itself.

Without this, everything we and our colleagues are engaged in serves humanity in no imaginable way for their long-term benefit, or short-term since that is always subsumed by the focus of political economy being on the benefits to be gained by the individuals most closely representing and embodying 'the state'.

Can you help me to understand what the actual purpose of all our evident philosophical and practical skills?  Is it to help all people?  or do we trust the interests of 'our paymasters' to be identical with those of all people?

And if they are "How do we know that as a fact and be sure that it will remain to be so?"

There is still a very long way to go before what we concern ourselves with now can be developed into something which has a context and demonstrable purpose within which we can then think about making the use of our skill in any way efficient and effective as a permanent means of benefiting mankind.

Kind regards,

Robin

Dear Robin, 

Thanks for your interesting comment. I'm not sure if I can give an intelligent answer to your question but I will try. 

It seems to me that every economic doctrine claims to pursue goals which are beneficial for the society as a whole. The question is whether the recommended economic policies are effective in achieving these goals or not. 

Adam Smith and David Ricardo certainly claimed that a free trade policy would be beneficial for the individual consumer as well as for the State. 

But I would like to clarify some important point: Although mainstream neoclassical economics claim to be the heir of classical political economy,  it is in fact a rival school of economic thought. 

As you could appreciate when reading the paper, what is taught today as "Ricardo's comparative advantage" has very little in common with what Ricardo actually wrote. 

Dear colleagues,

I have uploaded a revised version of the paper.

Best,

Jorge 

Joeorge's works is related to the "New Interpretation" of Rciardo's four magic numbers. In this regard, please read Takenaga's translation of late Professor Yukizawa on the "original meaning" of the four numbers.

Ricardo’s ‘Theory of comparative cost of production’: its archetypal understanding and deformational understanding by K. Yukizawa (1974).

https://www.researchgate.net/publication/307601848_Ricardo%27s_%27Theory_of_comparative_cost_of_production%27_its_archetypal_understanding_and_deformational_understanding

Working Paper Ricardo’s ‘Theory of comparative cost of production’: its ar...

International trade theory is now understood as a kind of special field for applications of economic theory. Economists who work in trade theory are not much interested in theory work. See my question

Why are researchers working on international trade not interested in theory questions?

https://www.researchgate.net/post/Why_are_researchers_working_on_international_trade_not_interested_in_theory_questions

However, international trade policy had been one of major objectives for economics theories and trade theory played a major role in the development of economics.

Professor Takashi Negishi once gave me a mail card and he remarked that

In our country international economists are not interested in the history of economic doctrines and historians of economic thought know little about the international economics.

He talks about Japan, but a similar situation can be observed worldwide.

This is cited in my paper Mill's Reversion and an Origin of Neoclassical Revolution, section 11, p.48.

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

Without having a good knowledge of the history of international trade theory, we may not even know the true history of development of economics. My paper above traces the history how the first idea of Ricardo was transformed by John Stuart Mill and opened a way to neoclassical economics through Jevons, Marshall and Edgeworth. Importance of this theory development is, it seems, not yet recognized by historians of economic theory. This may covering the true nature of neoclasscial revolution.

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

Dear Prof. Shiozawa, 

Thanks for drawing my attention to the translation of Yukizawa's paper. I was waiting for it since you and others mentioned to me that he had already published the correct interpretation of the numbers back in the 1970s. 

I will read it soon and come back to you with some comments. 

Best, 

Jorge

Here is a link to the published paper. All comments are welcome. 

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

Working Paper Overcoming Absolute and Comparative Advantage: A Reappraisal...

The above paper not only confirms that Ricardo had a different notion of comparative advantage than the one in economic textbooks, but denies the very existence of a law or principle of specialisation called comparative advantage.