Ethics and Comparative Advantage

Presented at Brigham Young University by George P. Brockway
March 3, 1988

Let’s start with a story. Professor Paul Samuelson tells us that several years ago, when he was asked by a Harvard mathematician to name “one proposition in all the social sciences which is both true and nontrivial,” he confessed that this was a test at which he always failed. “But now, some thirty years later, he says, “on the staircase, so to speak, an appropriate answer occurs to me: the Ricardian theory of comparative advantage; the demonstration that trade is  mutually profitable even when one country is absolutely more or less productive in terms of every commodity.

If Professor Samuelson is right, there is no point to this conference. Foreign trade goes on the way it does because of the law discovered by David Ricardo less than two centuries ago. While subject to refinement and correction, as is any scientific law, it is nevertheless immutable in the sense that we poor mortals cannot repeal it.

Most economists consider their discipline a science on the model of physics. There is nothing good or bad about “S = ½ gt²”; that’s the way the natural world works regardless of our feelings on the ethics of falling bodies. Even when Aristotle, two millennia before Galileo, had an entirely different theory, no one thought ethics had anything to do with it. And most economists hold that there’s nothing good or bad about the law of comparative advantage, which, they say, is the way the economic world works, regardless of our feelings and intentions.

Let us consider this remarkable law in three ways: historically, empirically, and morally.

First, what is the law? Ricardo explained it this way: Suppose that a certain amount of wine exchanges for a certain amount of cloth. Suppose that in England it would take a year’s labor of 100 men to make the cloth, and of 120 men to make the wine, while in Portugal the man-years required are 90 and 80 respectively. In these circumstances, it would be to Portugal’s advantage to make only wine and England’s to make only cloth, with the countries exchanging the surpluses. Portugal would multiply its wine output 2.125 times, and England its cloth production 2.2 times; and since the cloth and the wine are equal in value, both countries would come out ahead, as follows:

Table I

Men per Cloth

Unit
Wine

Product per Man

Total Men

Total
Product

England

100

120

1/100

220

2.2 units

Portugal

90

80

1/80

170

2.125 units

[editor’s note: The Khan Academy has a 9 minute video that explains in more detail]

You can see why economists are fascinated by the law. In the case before us, Portugal is more productive than England in both wool and wine; yet specialization is advantageous for both countries, and particularly advantageous for England, the less productive of the two. And note this: Ricardo does not even mention the economies of scale that might well result from the specialization.

The law of comparative advantage is the bedrock of the standard theory of international trade, taught with remarkable unanimity in almost all economics departments throughout the land. On this foundation arguments for free trade–for GATT and against Gephardt–are erected. There have of course been many more or less technical corrections. For example, when Ricardo compares industries on the basis of the labor involved, he is using his special brand of the generally discredited labor theory of value. Today the notion of productivity is usually used. (For my part, I should question that notion, too, but that’s another matter.)

The principal modification of Ricardo was advanced by the Swedish economist Eli Filip Heckscher in 1919 and developed by his student B. Ohlin in 1933. They argued that it would always be advantageous for countries to specialize in those industries where they were capital intensive and to import those goods where they were labor intensive.

So much for the history of the law. Now we come to what I find one of the most astonishing facts about it. Ricardo published it in 1817, but it was not until 1951–one hundred thirty-four years later that a serious attempt was made to find empirical confirmation of the law. The attempt was made by one G. D. A. MacDougal, and in the thirty-odd years since his paper appeared in Economic Journal, a debate has smoldered as to whether his results actually do support Ricardo. Of two widely used textbooks on international trade that I consulted at random, one says flatly that MacDougal did confirm Ricardo, and the other says just as flatly that he did not.

I think you will agree that this is an extraordinary state of affairs for a discipline that claims to be a science. Can you imagine a proposition in physics being taught as gospel for one hundred thirty-four years before anyone bothered to test it? And can you imagine it still taught as gospel when the test proved equivocal? And finally, in your wildest nightmare, can you imagine such an equivocally tested theory used to design a structure on which the livelihoods of literally billions of people may depend? An engineer who proposed to build on such a basis would be treated as a madman and locked up as a threat to civilized society.

But wait, as the television commercials say, there’s more. Professor Ohlin published his elaboration of Professor Heckscher’ s theory in 1933. It had to wait only twenty years–still an unconscionably long time for an alleged science to act–before its first full-dress test, which was conducted by Professor Wassily Leontief. And what was the outcome? The sad fact is that the empirical findings were the diametric opposite of the predictions of the Heckscher-Ohlin theory. Leontief didn’t merely fail to confirm Heckscher-Ohlin; he refuted it.

What do you think the economics profession, that stern band  this of scientists, did when faced by this contretemps? I could give you a million guesses, and you’d never hit it. Psychologists tell us that the first step in mastering a fear is to name it; so the economists gave the results a name in capital letters–Leontief’s Paradox. Then they said Leontief had chosen a bad year for the test. (So Leontief took another year, and Heckscher-Ohlin still failed, though not quite so badly.) Then an entire new industry grew like a fungus within the economics profession. If you needed a subject for your dissertation, or if (after getting your Ph. D.) you needed a subject for a journal article to ensure your promotion, all you had to do was to come up with a new explanation of Leontief’s Paradox. The field was, and is, wide open. The only comparable situation I can think of is the Modern Language Association’s fascination with William Faulkner. Since it was not clear, perhaps not even to Faulkner, what he had on his mind, there are no limits to what one can write about him. It’s hard to say something new about Shakespeare, but anyone can be an innovative critic about Faulkner. It’s an academic goldmine. Likewise Heckscher-Ohlin and Leontief’s Paradox.

There is, however, a difference. Much ink and paper and brain power are no doubt wasted on Faulkner, but the damage is pretty well controlled within the profession. A few susceptible students may suffer temporary disorientation, but no one is much hurt. The case is otherwise with Heckscher-Ohlin, where it’s not much too much to say that the fate of nations–particularly this nation–hangs in the balance.

Now, I think you’ll agree that it would be legitimate to argue that the economics profession has, by and large, been morally irresponsible in its unequivocal advocacy of equivocal doctrines. This is not, however, the ethical issue that concerns me here. I wish to call into question, not the morals of economists (who as individuals are probably no better and no worse than ordinary people), but their view of their discipline as an amoral science– not an immoral science, whatever that might be, but an amoral science, like physics, where the behavior of electrons is neither right nor wrong.

Let’s begin at the beginning–at least at the beginning of international trade. The first requirement of international trade is that there be nations. If there are no nations, there can scarcely be trade among them. This point may be stupifyingly obvious, but its consequences are far from trivial.

We haven’t time to examine in detail the meaning of nationhood, but we can make a few observations. A nation will have citizens, and it will have boundaries, and within those boundaries it will be sovereign–a law unto itself. An aspect of that law will be that its citizens have, in the grand old phrase, certain rights, privileges and immunities that are denied to those who are not citizens. If we who are citizens are not, in this way, distinguished from those who are not citizens, of what meaning is citizenship to us?  And if national citizenship is without meaning, of what meaning is the nation?

I leave the questions open. Maybe we don’t want a nation; and immunities that are denied to those who are not citizens. If we who are citizens are not, in this way, distinguished from those citizens, who are not” of what meaning is citizenship to us? And if national citizenship is without meaning, of what meaning is the nation?

I leave these questions open.  Maybe we shouldn’t have one. Perhaps we reserve our loyalty for those who are very near and very dear to us. Perhaps, as D. H. Lawrence put it, we “love-whoosh for humanity.” I’m prepared to argue those questions, but my point here and now is merely this: If we have international trade, we have a nation; and if we have a nation, then the well being of our fellow citizens is vital to us. We can’t demand respect for our own well being unless we, at the same time, to the same extent, and for the same reasons, respect theirs.

David Ricardo was open to such considerations. He wrote that patriotic sentiments, “which I should be very sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations.”

What Ricardo could not foresee, and what his modern followers have overlooked, is the fundamental irresponsibility of the modern multinational corporation, which knows no boundaries other than the bottom line. Today capital flits from Schenectady to Singapore more speedily and safely than it moved in Ricardo’s time from London to York. Aside from a few temporarily secret processes, technology anywhere is quickly available to literate people everywhere. Domestic availability of raw materials has not dictated a country’s industry since the Industrial Revolution and certainly does not do so now. Today the costs of all but one of the factors of production are nearly homogeneous throughout the world.

But the cost of labor is not internationally homogeneous. And since labor is usually the single most costly factor, as well as always the original and necessary factor, the heterogeneity of wage scales and working conditions overrides all other considerations.

Returning to our parable, we find that what happens is not that England specializes in wool and Portugal in wine, but that England abandons the production of both wool and wine and imports both from Portugal.

The question becomes, how will England pay for the imported wool and wine? By exporting something else, most economists will answer; but they tend to be coy when asked what that something else might be. If because of its wage scales (or for any other reason), Portugal can underprice England in the production of every product you can name (many of which Portugal does not consume herself), why should she buy anything at England’s higher prices?

Well, it may be urged, England, limping into the post-industrial world, can concentrate on service industries; and while some services, like dishwashing and motorcycle maintenance, can’t be exported, financial services can be. Economists make much of the importance to the British Empire of “invisible imports”–interest, insurance premiums, royalties, profits, and employment for younger sons. Keynes once amused himself by calculating that the entire overseas wealth of the Empire at its height could be accounted for by 350 years of Queen Elizabeth’s share of only 3 ¼ percent on the loot Sir Francis Drake plundered from Spain in 1580. Yet during all those years Britain compound interest also made pots of money in the usual visible ways of manufacturing and exporting textiles and steel rails and steam engines and anything else anyone could think of.

In any case, invisible imports can only help pay for visible imports; they can’t carry the whole load or even a major share of it. All financial services together, including exploitative profits, account for certainly less that 35 percent of the cost of a commodity and often less than 20 percent. Thus 65 to 80 percent of the cost of imports remains uncovered even when the importing nation contributes the entire cost of financial services. And it’s not clear why the exporting nation should not itself contribute part and, eventually, all of these services, as exporters are largely doing today. We call the consequence a trade deficit.

The ultimate consequence of abandoning productive industry is national stagnation and decline, not merely of power but also of standard of living. It has happened before. In 1675 a Spanish nobleman, one Alfonso Nuñez de Castro wrote, “Let London manufacture those fabrics of hers to her heart’s content; Holland her chambrays; the Indies their beaver and vicuña; Milan her brocades; Italy and France their linens, so long as our capital can enjoy them; the only thing it proves is that all countries train journeymen for Madrid and that Madrid is the queen of parliaments, for all the world serves her and she serves nobody.”

Don Alfonso understated Spain’s contribution to the wealth and happiness of mankind. She produced no cloth, but she provided services–military services, administrative services, ecclesiastical services–to the New World, and also to the Two Sicilies, to the Low Countries, to Burgundy, and even to the Holy Roman Empire. These services, valuable though they might have been (there has been doubt on this point), were not enough to support the imperial style in Madrid. When the silver from the Indies ran out, Spain slipped into a slough of despond from which today, three centuries after Don Alfonso, she has yet to escape.

Immeasurably more important than the loss of imperial glory, the consequence of service orientation is unemployment. The owners of financial services (including the previous owners of those sold to cash-rich exporting nations) are as happy as clams, but the disemployed workers in the abandoned industries are not. People say that what matters is that those who still have jobs or money in the bank can buy cheaper sports shirts and classier sports cars. Nothing, they say, should interfere with the automatic working of the free market.

It is barely conceivable, as an imaginative exercise, that the market could be allowed much greater sway if we had a world state. Then it might be possible to say that the efficient accumulation and distribution of goods was the most important function of the state, and that the free market was the most efficient way of performing that function. But as it is–a world of nations and of international as well as intra national trade—we do not and cannot allow the market to define our national purposes or the method of their fulfillment. We will not buy our battle tanks from the Russians no matter how cost-effective they are. We may buy golf carts from Poland, but we will not contract with China to supply us with ground-to-air missiles, although we could thereby save half or more of the cost.

Since we make such exceptions to alleged economic laws in order to protect ourselves militarily, it is logically perverse to refuse at least to consider other exceptions in order to protect also the morale and well being of our fellow citizens and of ourselves. Indeed, that is why we have a nation–and why international trade is something to have a conference about.

We started with a story told by Professor Samuelson; let’s conclude with a quotation from his famous textbook: “Thus [he writes] if exchange-rate parities and money wage rates are rigid in both countries or if fiscal and monetary policies are poorly run in both countries, then the blessing of cheap imports that international specialization gives might be turned into the curse of unemployment.”

There is no doubt that the curse of unemployment is with us, with all of us all over the world. Can we conclude that our fiscal and monetary policies are poorly run? Who will claim they are not? How else could we Americans have doubled our national debt and turned ourselves from the world’s leading creditor nation into the world’s leading debtor?

Another fact beyond doubt is that “protectionism” in any form has not been part of the fiscal and monetary policies that have done so poorly for us. So “free trade” is not a plausible panacea for any ailment from which we now suffer. We have pretty close to free trade now, and we are very ill.

Proper fiscal and monetary policies are no doubt beyond the scope of this conference, but moral questions are inescapable. It is morally wrong for me as an individual or for the citizens of this nation or any nation to pursue our private pleasures at the expense of our fellow citizens. I have no moral need for a state-of the- art sports car or a state-of-the-style sports shirt, but I do

…. [copy ends – Editor would appreciate readers who may have the last page to send it on]

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