When I really learned the David Ricardo idea

[Update: Tim Worstall has a beautiful response to this post, applying the Ricardian idea to trade between humans and robots (or the human owners of robots). Will the robots out-compete us in everything, causing mass unemployment? Nope. Robots will never have a comparative advantage in everything. Once again, Tim's Ricardian point seems totally obvious once you have seen it, but was totally non-obvious (to me) until he said it.]

Noah Smith says: "Maybe people are perfectly smart and rational enough to understand the David Ricardo idea,..."

I'm not so sure.

I must have been taught the David Ricardo idea two or three times, and I must have taught it to my students about 20 times, and then this happened:

I was chair of economics at Carleton. One of the jobs of the chair is to decide (with consultation etc.) which professor teaches which course. All courses are different, and all professors are different, and teaching is important, and I thought it was really important to make sure that each course was taught by the best professor for that course.

So I went down the list of courses, assigning the professor who I thought was best for that course. (Can you see my mistake? It's not that obvious, is it?)

I got about halfway down the list of courses before I realised that something was badly wrong. I had some professors teaching more courses than they could possibly teach.

Then it dawned on me. I was allocating scarce resources (professors) according to their absolute advantage. I tore up the list, and started again, this time allocating scarce resources according to their comparative advantage.

Glenn MacDonald and Jim Markusen would beg to differ. But I think their point would be that if ECON 1000 is much more important than all the other courses (as I like to think it is), and if two identical professors teaching the same course do not teach the students twice as much as one of those professors (which seems reasonable), you might put the best prof in ECON 1000 even if that prof would be only slightly better than others in ECON 1000 but much better than others in some less important course. We need to look at relative importance of courses as well as relative abilities of professors, if things don't scale up in proportion.

(One other related anecdote from that era: for some forgotten reason I was a reviewer for the proposed Ontario high school economics curriculum. One item on the proposed curriculum was the gains from trade due to differences in absolute advantage. I said it should be comparative advantage. They said it was too hard to teach comparative advantage. I said they should teach comparative advantage even if it meant deleting everything else from the curriculum, or else not teach gains from trade at all. They thought they had an eccentric cranky professor on their hands, and would only accept my recommendation if it were supported by other chairs. Which is why, somewhere deep in the silicon records, there are emails from the chair of every single Ontario economics department saying we should teach that the gains from trade come from comparative advantage not absolute advantage. I fear that some may still be teaching the case where England has an absolute advantage in wheat and Portugal an absolute advantage in wine. And stopping there. And that's the kids who actually take economics at high school.)

Comments

[Bob Smith]

That anecdote is so sad...

[Nick Rowe]

Bob: I think they looked at it this way: If England can produce 2 tons of wheat or 1 gallon of wine per acre, and Portugal can produce 1 ton of wheat or 2 gallons of wine per acre, then there are gains from trade. Sure, you can also get gains from trade if Portugal can produce 4 tons of wheat or 8 gallons of wine per acre, but that's harder to teach, so let's just teach the simpler case. And I was trying to explain that in both cases England has a comparative advantage in wheat and Portugal a comparative advantage in wine, and that absolute advantage only creates gains from trade when, by chance, it coincides with comparative advantage. (There are gains from trade in exporting goods that are the same colour as your national flag, if it happens to coincide with comparative advantage.)

It really is a *difficult* idea, as PK said.

[Scott Sumner]

My daughter is in one of America's better high schools, and her business textbook gets it exactly wrong---confusing comparative and absolute advantage.

It's hopeless.

[Ingrid Bryan]

Hi Nick,
You and I were the university representatives on the committee, and I also remember the incident very clearly. Does anyone know what the current curriculum teaches?

[Nick Rowe]

Scott: Oh dear! The way I see it, the only point of mentioning absolute advantage at all is to show that there are gains from trade even if those accursed Portugese have an absolute advantage in everything. It's opportunity cost that matters.

Hi Ingrid! I think it was just you and me, right? Another thing I vaguely recall: some parts of the rest of the curriculum were VERY sophisticated things that would have been VERY hard to teach properly. But I can't remember it exactly.

[Jacques René Giguère]

And of course, in business classes, they usually teach that trade is good because firms export more. My students, even the best ones, always have problems understanding that the point of trade is importing. (I am all for economies of scale, but let's wait for the second trimester).

[Jussi]

Maybe you could teach by making a simple game? I think the idea should be pretty intuitive once it is in practical level.

[Angella MacEwen]

I think Noah's central point was more interesting and relevant to public discussions of trade deals. Anyone who hires an accountant, or a cleaner, or a caretaker understands comparative advantage. It's not that comparative advantage is hard to understand, it's that it means nothing to the lives of people who lose out from trade deals.

[Jeremy Fox]

People forget, or misunderstand, opportunity costs in all sorts of contexts. I complained about this a while back in the context of course and curriculum design. Every faculty member always thinks that students should be taught more of X, where X is the faculty member's favorite subject. And every faculty member can point out how students would be better off if they knew more of X. But nobody ever says what students should learn *less* of, in order to free up the time and other resources to teach them more of X.

https://dynamicecology.wordpress.com/2014/10/08/what-should-ecologists-learn-less-of/

Everybody wants to go to heaven, but nobody wants to die.

[Nick Rowe]

Angella: "Anyone who hires an accountant, or a cleaner, or a caretaker understands comparative advantage."

Dunno, especially for accountants. My guess is that 99% of the people who hire accountants are worse at accounting than the accountant they hire. It's only when you hire someone who is worse than you at doing the job you hire them for that you are forced to think about comparative advantage. And even in that case most people would just say "Well, they were cheap, and I was too busy to do it myself." The whole point of having a market economy is that people don't need to understand how it works; they just look at the prices.

[rsj]

I think Von Neumann once gave a challenge to his social science colleagues to produce just a single result in their fields that wasn't trivial. The only one he accepted was comparative advantage.

At the same time, I think that the reason why our brains weren't programmed to think naturally in terms of comparative advantage is because it's just not a very useful way of looking at the world.

In almost all cases, your ability to do something is a function of how much time you spend doing it. It is very difficult to measure absolute potential or ability, and pretty much impossible to measure relative potential or ability (and there are conceptual problems with even defining potential comparative advantage).

For example engineering departments will rotate people to make sure that there are enough skilled people to cover different positions. You would assign someone to a job not based on how good they are at it, but based on how good they will be at it once they are assigned to it, knowing that as they move out of one area, they become worse at it as well. Therefore comparative advantage almost always follows absolute advantage. I.e. you are worse than the accountant you hire because you don't do accounting full time. Your choice in what to trade determines your absolute and comparative advantages. For the individual, it may make sense that they are stuck with a certain skillset for life, but for the nation it doesn't make sense. Nations don't change their trade based on comparative advantage, they change their comparative advantage based on trade. Therefore they don't take comparative advantage into account when planning trade policies, just as a farmer doesn't take today's temperature into account when deciding to plant a crop.

In some very rare cases rooted in more or less fixed geology -- nation A has a lot of oil, nation B has ideal pastures for sheep -- you can ignore the fact that comparative advantage is a function of activity intensities and take the comparative advantage as a given, then activity intensities from it. But it is in general a backwards approach to looking at trade.

[Avon Barksdale]

People tend not to think about opportunity costs unless it's their own money. It's no wonder that comparative advantage gets ignored in central planning, even at a university department level!

[Bob Smith]

I think it was more the "let's not teach it because it's hard" attitude that's the most frustrating.

[Patrick]

Is comparative advantage really that hard? At least, in it's most basic form. I have no economics training at all - apart from attending Prof. Rowe's WCI classes :). I just read through the Wikipedia entry 10 minutes ago, and as soon as I though about Ricardo's England/Portugal example and asked "what would I do if I was England/Portugal?", then it made sense right away. Presumably 16 or 17 year old's can think selfishly.

[Nick Rowe]

Patrick: from my own experience, some find it really easy, and some find it really hard. Like the rest of economics.

[K Thomson]

I teach comparative and absolute advantage to my students in high school though it is in an IB Economics course. Unfortunately, at least in BC, very few students take Economics in high school.

[Peter Dorman]

I find myself caught in an in-between zone on this issue. Half of me completely agrees with Nick, that it’s important for the logic of comparative advantage to be conveyed as a core idea in economics. It’s not logically trivial, and understanding it is a big step forward in thinking about how markets function. As someone who thinks markets, including those spilling over national borders, need smart regulation, I get really frustrated when people supposedly on my side (e.g. critics of undesirable trade agreements) make elementary mistakes in reasoning, of which failure to comprehend comparative advantage is an example. (Another example: the claim that trade theory is silent on the question of capital mobility.) They are providing more data points to those who claim that trade skepticism is based on ignorance, and, more important, by clinging to false reasons they are precluding a careful analysis of what the real problems are and what should be done about them. Grrrrr!

But there is also a sanctimoniousness to the call for everyone (within our speaking range) to learn about comparative advantage (and similar entry-level how-markets-work concepts). People who don’t know anything about trade theory but have a general awareness of the world around them may worry about trade deficits or the effects of competition with workers in low-wage countries or regulatory arbitrage. These are real problems, and they are not “solved” simply by invoking comparative advantage. There is a whole world of reasoned economic debate about open economy macro, international political economy, labor market policy, etc. that recognizes Ricardian (and Stolper-Samuelsonian) logic but goes further and deeper. What I often see is something like this:

1. Average citizen worries about trade deficits and wage competition.

2. Economist says, this is because you don’t understand comparative advantage. If you did, you wouldn't worry about these things.

I’m torn because I agree that people should know about comparative advantage, but I also think it’s intellectually wrong as well as arrogant to assume that the lack of this knowledge is the cause of the political concerns. (Nick, I’m not accusing you of this, just noting how common it is in general.)

[khodge]

I think that what is really hard is not the thinking about comparative advantage but but developing the habit of thinking, instinctively, like an economist, especially when one is not in academics.

[Bob Smith]

Peter,

I would say that a lack of knowledge of comparative advantage in an introductory economics course would be a problem of political concern i.e., what exactly are we teaching and if we're not teaching this, why are we bothering?

[Peter Dorman]

Bob, of course, on one level you're absolutely right, but it's also a matter of context. To take one example dear to my heart, in my macro text I begin with a general discussion of liberal approaches to international political economy (as exemplified by Smith) and contrast it with nationalist approaches (Hamilton and List) that focus on changes in comparative advantage. In that context, comparative advantage theory is a basis for understanding different traditions in this field. Later I bring in and develop the notion of persistent surplus and deficit countries and how this interacts with typical macro dynamics, but again it's not framed as a matter of absolute advantage, since both high productivity and low productivity countries, for instance, can be in the deficit camp and vice versa. My point might be summed up as, understanding comparative advantage is necessary but not sufficient for understanding the main patterns of international economic relations. My gripe is that people with a strong liberal bent (including a lot of economists) treat skepticism toward market liberalism as a result of insufficient education -- even though there actually is a problem with insufficient education! It's a dilemma.

[Bob Smith]

I don't think we agree on the broader point. There are lots of reasonable critiques of free trade (i.e., they may be right or wrong, but they aren't prima facie stupid), but they all presuppose an understanding (and not just the cartoonish caricature too common in the anti-globalization movement) of what is being critiqued.

[Peter Dorman]

Completely agreed, Bob, and if comparative advantage would be presented in this way I wouldn't face any dilemmas at all.

[notsneaky]

"But nobody ever says what students should learn *less* of, in order to free up the time and other resources to teach them more of X."

In Intro courses: half of the cost curves (you got to keep MC and ATC), isoquants, long run industry level economies and diseconomies of scale, actually a lot of the stuff about "long run" supply and demand changes, price floors and ceilings (less of, not none of), and the voting/democracy stuff (leave that to the folks with the comparative advantage in it). Off the top of my head.

That still leaves a lot though.

[Tim Worstall]

"I think Von Neumann once gave a challenge to his social science colleagues"

Stanislaw Ulam (friend of Von Neumann) to Paul Samuelson.......

"That it is logically true need not be argued before a mathematician; that is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."

[Nick Rowe]

Peter: in my experience (teaching intro), the trickiest bit about applying the Ricardian idea is that we need to go from a barter model to a monetary model, and usually one with two moneys. It is one thing to show that both Canada and the US *could* gain by Canada exporting apples to the US and importing bananas from the US, and another thing to show that this will in fact happen.

I first tell a barter story, showing that when we allow trade, individual traders will find it profitable to buy low and sell high, so that goods will in fact flow in both directions, because the relative price of apples to bananas will initially be lower in Canada than the US, and vice versa for the relative price of bananas to apples. But students (instinctively) know that this can't be the whole story, because we buy and sell apples and bananas not for each other, but for money.

So I then talk about the "nightmare scenario": what if the dollar price of both apples and bananas is initially lower in the US than in Canada? Will the exchange rate adjust to allow goods to flow in both directions? Or, with fixed exchange rates, will dollar prices adjust to allow goods to flow in both directions? Or will there be mass unemployment in Canada?

And these are inherently money/macro questions. And this is week 2 or 3 in intro economics. So I wave my hands and say it depends on price flexibility and on whether the Bank of Canada does the right thing. It's a hand waving answer, but it's basically right.

*Money/macro is what makes it hard to apply the concept of comparative advantage.* Goods have dollar costs, as well as opportunity costs.

[simon]

Tim Worstall is wrong (about it being literally impossible for robots to steal all jobs in the article linked in the update). Currently there is trade between labour and resource holders. Robots or robot owners trade with the resource holders and compete with the labour, making the resource holders vastly better off but the workers potentially worse off. There is no reason in principle that robots could not become so efficient at all jobs that they could do jobs less than the cost of food to a human worker, thus making it impossible for anyone to get enough money to survive from working.

[Jacques René Giguère]

Simon: indeed. Despite all those Joris Ivens documentaries
on how peasants with baskets built dams
http://en.wikipedia.org/wiki/How_Yukong_Moved_the_Mountains, the Chinese used bulldozers.
If there is a value for time, you will go with machines.If making machines is cheaper than making humans, nobody will ever use humans. The comparative advantage will work out between various machines.
We don't mine all ores. Some stay in the ground and are simply called rocks. In my area, mines are closing. Out of ore, mine closure produce millions of tons of instant rock.

[Nick Rowe]

simon: you are right that introducing land into the model may make a big difference. My old post saying this.

If a country with labour and land opens for trade with a country with labour only, wages will fall and land rents will rise in the first country. Heckscher Ohlin model. Just like immigration. Assuming all labour is identical (and robots are identical to labour).

[NoniMausa]

Simon: "...There is no reason in principle that robots could not become so efficient at all jobs that they could do jobs less than the cost of food to a human worker, thus making it impossible for anyone to get enough money to survive from working..."

There's one capability of robots which could make them both more subservient, and less subservient than living humans, in the labour market. The difference depends on their level of sapience and the rights accorded to them by their society.

What hobbles living humans in labour negotiations is their need for a continuous supply of food, water, warmth, a place to safely sleep, and so on -- the price of being alive. Robots, by contrast, could power down indefinitely when not needed, requiring only a safe place to "sleep" and guardians while they were inert.

This makes them easier to control, because they probably wouldn't mind being inert. But it makes them HARDER to control, because unlike living people they could withdraw their labour services and bargain vigorously (like Terry Pratchett's free golems) without their own lives becoming hostage to the bargaining process. There could be two very different results in the labour market, depending on how sentient robot workers' rights and circumstances were arranged.

So, human workers might be preferred for some positions simply because of their self-hostage potential.

Noni

[Jacques René Giguère]

So we will threaten both workers and robots that the other will work for nothing.

[simon]

Noni, that would require not only that the robots have rights but also that it be illegal to create to robots in the first place with programming/personalities to "voluntarily" be highly subservient.

I can definitely imagine human servants being a status symbol for the rich, though.

[Jacques René Giguère]

As Agatha Christie once said: "I never imagined that one day I would be rich enough to have a car or poor enough and not have a servant."

[notsneaky]

Introducing robots into the thing does not eliminate comparative advantage (except possibly by accident). Hence workers will still be employed. That's sort of the difference between the Ricardian model and Hecksher-Ohlin, but both of them are based on comparative advantage. Simon's comments in fact are the quintessential example of confusion between comparative and absolute advantage.

Also not clear on why introducing land would actually make a difference. Rybczynski Theorem comes out of the Hecksher-Ohlin Theorem. This is more like the Viner Specific Factors model. Yes, the distributional effects would be different. But there's still comparative advantage. I guess the case where robots are perfect substitutes for workers could result in some knife edge corner solutions? But if you go there you might as well throw out all marginalist stuff.

[notsneaky]

I did not see Tim's post before commenting above. He makes the point better than I did.

[J.V. Dubois]

Nick I find your course schedule job hilarious for a different reasons. Imagine you have 10 professors with different skills and you have to assign some coursework for them. There are more prestigious courses and there are some really bad ones. Now imagine that there is an idea of hiring another professor to bolster the team. On one side the workload of all your professors will drop by 10% on average. On the other side the professors that are less skilled are at risk of getting worse work come next year. Actually even for the more skilled professors they may fear this new addition because even if it is unlikely that she will be better than them (they are at the top after all) they may be risk averse and rather face a known situation then risk them being dethroned by this new upstart.

[Nick Rowe]

JV: there is actually a theory of tenure that goes partly along those lines. According to that theory, universities give profs tenure, because profs are the ones who choose which new profs to hire, and if profs didn't have tenure they would have an incentive to hire new profs who are worse than existing profs so that the new profs would be fired first if some profs needed to be fired.

In practice I don't seem to observe profs acting like you say. Yes, there is a bit of competition over who gets to teach the prestige courses, but if anything I tend to notice a bias towards hiring people who work in your area, because you think your area is the most important of all areas and needs more courses added, or more sections of the same course with smaller classes, plus you want people you can talk to about your area and do joint research with. But it probably does happen sometimes.

[simon]

notsneaky: "Introducing robots into the thing does not eliminate comparative advantage (except possibly by accident). Hence workers will still be employed"

You're right that there's still comparative advantage, so workers could get a non-zero wage. I fully understood this when making my comment above. However, if the market wage is below the cost of food, the fact that it is non-zero is academic. Food requires both labour and physical resource inputs. If the robots have sufficient absolute advantage in producing labour from physical resources, they can bid up the price of the physical resources to a point that human workers can't afford food.

[simon]

Whoops, obviously they get a non-zero wage even without comparative advantage. Yes, comparative advantage means the human workers could trade with the robots - but there's no guarantee that would raise the wages of human workers enough to afford food. My point about the robots bidding up the costs of resources stands.

[Jeremy Fox]

I'm late with this, but this old Krugman essay on "Ricardo's difficult idea" seems relevant to the post:

http://web.mit.edu/krugman/www/ricardo.htm

Argues that comparative advantage is difficult because its an irreducibly mathematical idea. (Irrelevant aside: I also find the essay fun for the criticism of verbal, non-mathematical approaches in evolutionary biology, exemplified by Stephen J. Gould's work. For a total outsider to evolutionary biology, in this and other pieces Krugman shows an impressively "insidery" grasp of the field...)

[notsneaky]

Actually that old Krugman column brings up an interesting point (which Paul misses): comparative advantage is NOT an economic insight. It is an engineering insight. Competitive markets, preferences, and all that stuff is beside the point. Think of Nick's initial example with assigning the professors. That's not a market using comparative advantage, that's a benevolent social planner (Nick) solving a straight forward engineering problem of how to optimally allocate resources to scarce ends.

People don't understand comparative advantage because they instinctively distrust economics and economists. If you frame your explanation of it as if you were explaining it to a construction worker, they tend to get it.