Re: Comparative Advantage

Barry, I agree with you assessments. Using the proper definition of comparative advantage does rather shoot down Roberts's particular contentions. However, I think there is still some hay to be made here. First off, as Barry noted, excess labor supply is not well handled in Ricardo's model. And there are a number of additional factors that exacerbate this problem.

Ricardo's theory seems to me to be simply a matter of showing that a country has differing degrees of efficiency in production, and will naturally focus on those industries where their efficiencies are highest, which means that in the areas where they are not specializing they may rely on trade with other countries to fill their needs even though those other countries may not be as efficient. The labor problem is obvious and serious. Looking at the classic (wine and wheat) example, if Portugal was able to produce enough wine to satisfy the demands of all both England and the domestic market and still had labor capacity left over, Portugal would then also produce its own wheat as well. England would be frozen out of the market and would simply bleed money and jobs. So, for one, labor surpluses break the model.

An amplifying effect is lent to this problem by the developing nature of the market. In Ricardo's day, while the factors of production may have been mobile, I don't believe that the factors of efficiency (if there is a such thing) were terribly mobile. This is sort of what Roberts is getting at, I think. In the classic example, the efficiency of Portugal is probably, at least in part, determined by climate and soil type and other agricultural factors. These could not pick up stakes and move. Historically, much of the value in goods was strongly related to natural resources that were either used to produce the goods, or were refined into the goods themselves. This has changed. Natural resources have largely been commoditized and are traded on very low margins. Profit margin is generated in the processing of the resources. Increasingly, with services and intellectual property there are no natural resources involved to speak of. This eliminates one of the major factors of efficiency. Education and skill levels of the labor pool have also traditionally been a factor of efficiency. This, as Barry mentioned, is also becoming increasingly commoditized. Essentially the market is progressively eliminating all factors of efficiency but one: the cost of labor.

What follows from that is that if a) you have excess labor supply and b) a market where the factors of production can flow quickly and easily, and c) the sole factor of efficiency is labor cost, the result is going to be a rapid flow of work from the locations with the highest labor costs to those with the lowest. Which is exactly what we're seeing.

Furthermore, if we assume that labor costs are relative to a general labor cost index (ie if a doctor in the US makes 5x the US mean income, then a doctor in China probably makes 5x the Chinese mean income), it would be the case that the higher the income level of a job, the greater the savings of moving it to a country with a lower cost index. That would imply that the greatest efficiency advantages for countries with a low cost index would be those industries with the highest wages. So even if we eliminated the labor surplus and had an exact balance of labor supply to labor demand, it would be the case that all of the highest paying jobs would move from wealthy countries to poor ones, leaving menial jobs for the wealthy countries. I would assume that the existence of a labor surplus only serves to accelerate this process.

Let me add one more aggravating factor to the mix. One cap on the impact of trade is that (obviously) it only affects those industries whose products can be traded. This set of industries, however, is also rapidly expanding due to ubiquitous high speed data networks, and an ever greater portion of the economy is becoming subject to these pressures. This particularly impacts service industries, on which our economy has become increasingly dependent.

In the end, I guess I don't have any great insightful revelation here. But I feel like we're further refining our discussion and our understanding of the relevant terms and theories. It again comes back to deep structural problems that will confound any of the efforts I have thus far heard proposed to stop the bleeding of jobs out of the US.