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Source link: http://archive.mises.org/8757/trade-makes-people-better-off-even-superheroes/

Trade Makes People Better Off, Even Superheroes

October 13, 2008 by

How can trade make both parties better off if one is so much better at everything than someone else? Productivity differences, even extraordinary productivity differences, do not mean that both parties can’t gain from trade. Even superheroes like Superman, Batman, the X-Men, and the Civic-Minded Five can gain from trade. FULL ARTICLE

{ 22 comments }

Inquisitor October 13, 2008 at 11:57 am

Very nice article. Thanks.

David Spellman October 13, 2008 at 5:38 pm

And then we have the scenario where the X-men and the Civic-minded Five are ruled by the Self-Aggrandizing Tax Man. He charges 2 pizzas a day and demands that one of his criminal colleagues be released each day. One less crime solved and two less pizzas for trade. The problem with economists is they don’t adjust for real world conditions ;).

Charles Anthony October 13, 2008 at 6:23 pm

The problem with economists is they don’t adjust for real world conditions ;).

How true.

The law of comparative advantage certainly is indisputable in theory. However, in the real world, it can only hold true between myself and my local retailer. I have no idea how the good I am buying actually came to market.

If we are talking about trade in the import/export market, I am completely ignorant of the foreign manufacturing and production processes. If the importer robs the coffee, the sugar and the bananas to bring it overseas to my local retailer, the law of comparative advantage is just a vulgar libertarian smoke screen. Heaven forbid the foreign producer bulldozed over the landscape, evicted the local residents from their peaceful humble homes, imposed taxation and only offered sweat-shop jobs to earn the domestic state-printed currency with which to pay their taxes!

newson October 13, 2008 at 8:25 pm

to charles anthony,
a vulgar carsonite! what is your solution? that people only trade with friends? grow your own vegetables? echoes of xenophobia, too. so you don’t like foreign trade? buy american. that way, you can give your conscience a rest. the third world needs your sympathy.
light a candle for them.

P.M.Lawrence October 13, 2008 at 8:40 pm

Newson, that’s like saying you can’t see if something is wrong unless you also know how to fix it, that a critic has to be able to do more than criticise if he is to be allowed to criticise in the first place. But criticising with empty mockery is all you’re doing!

simik October 14, 2008 at 3:53 am

Charles Anthony,

The law of comparative advantage certainly is indisputable in theory. However, in the real world, it can only hold true between myself and my local retailer. I have no idea how the good I am buying actually came to market.

The law of comparative advantage is indisputable in real world, too. The fact that it doesn’t bring the world to the state you want doesn’t mean it’s wrong, or that it’s a bad law. It’s the law of nature, it just describes an aspect of human interaction. And don’t forget that as it is a law of human action it deals with subjective, or agent-dependant values, not with money prices.

When you buy a product produced in a sweat shop of some third world country and you know about the origins of the product you pay both the money price and the moral price. And if the moral part of the price is too high to justify the lower money price you would just prefer a product of some other (more highly moraled) manufacturer.

And it is to that highly moraled manufacturer’s advantage to inform you about the moral price you pay for his competitor’s products. Isn’t it exactly what we see in the real world? With all that “buy local” and “save the rain forests” campaigns.

The fact that sweat shops are still in business tells us that humans value the money price difference more than sufferings of some far away workers, they are okay with paying that moral price. And the law of comparative advantages just shows you this. It’s stupid to blame the law itself for the misery of sweat shop workers.

Charles Anthony October 14, 2008 at 5:50 am

The fact that sweat shops are still in business tells us that humans value the money price difference more than sufferings of some far away workers, they are okay with paying that moral price. And the law of comparative advantages just shows you this. It’s stupid to blame the law itself for the misery of sweat shop workers.

I am not blaming the theory. I am blaming vulgar libertarians who erroneously apply the theory when the basic assumptions do not hold.

The law of comparative advantage only holds when each agent is free to leave. In the real world, that is not the case. In the real world, people in third world countries are coerced.

The only intelligent conclusion we can made in the real world is that trade makes me better off. I can not make any conclusion about anybody else. If you skip the assumption of non-cercion, you may as well advocate that theft makes a thief better off too.

P.M.Lawrence October 14, 2008 at 8:29 pm

Consider the slave trade: buyers (plantation owners), middlemen (slave traders) and sellers (slave raiders) were all trading freely and were all better off. It’s just that this isn’t covering everything, like the slaves themselves and the guns the raiders got in trade and used in raids…

fundamentalist October 15, 2008 at 8:28 am

Charles Anthony: “However, in the real world, it can only hold true between myself and my local retailer.”

I think you misunderstand comparative advantage as absolute advantage. Absolute advantage means that someone else is better at something than I am. In the article, Superman is much better at fighting crime and savings kittens than is Batman, so he has an absolute advantage. If saving kittens and catching burglars were considered equal substitutes, then Batman has a comparative advantage in saving kittens. But he chooses to focus on catching burglars and the world is better off because of it.

Comparative advantage teaches that when countries trade with each other, the one with the absolute advantage does not crush the other. Total world production will increase if the country with the absolute disadvantage will focus on producing what it produces best. And the country with the absolute disadvantage will grow wealthier at the same time.

Now if some countries don’t benefit from trade in the way that comparative advantage says they should, that doesn’t mean that comparative advantage is wrong. It just means that other factors overpower the effects of comparative advantage. For example, it’s a rule in economics that people buy more of an item when the price falls. But we have seen in the past few years that people will buy more gasoline as the price rises, especially at the height of vacation season. Does that mean that the economic principle is wrong? No. The unstated caveat to all economic theories is that all other factors are equal.

Trade will make people better off than they would have been without any trade at all. That doesn’t mean that it will make Africa as wealthy as North America over night. Some people make exagerated claims about what trade is supposed to accomplish. Trade helps, but it can’t overcome lawlessness, lack of property rights, corruption, theft, mass murder or all of the many other things that afflict poor countries. And it can’t end so-called sweat shops. Third world sweat shops pay meager wages by American standards, not by the standards of the third world. Generally, sweat shops pay higher wages than anyone else in the country, which is the reason people work in them. But total factor productivity determines wages and people in poor countries are very unproductive. The ratio of US wages to sweat shop wages is very close to the productivity of US workers to the productivity of sweat shop workers. Cost of living also plays a role in wage determination.

david Ch October 15, 2008 at 9:03 am

All this talk about sweatshops does nothing to refute Ricardo or his law.

Absent forced slavery (which is by definition not a component of trade in a free market), the appropriate question facing a sweatshop worker is not about what a lousy job it is or whether he is being exploited

The only relevant question is : Am I better off workiong here, or NOT? And he is th eonly person qualified to answer that question.

The fact that he elects to take the job rather than not, is firm evidence that he is in fact better off. If he wasn’t, he wouldn’t.

Charles Anthony October 16, 2008 at 9:01 pm

I can not believe the horrifying nonsense that I am reading!

The fact that he elects to take the job rather than not, is firm evidence that he is in fact better off. If he wasn’t, he wouldn’t.

Better off than what?????????????
Given freedom, you have no idea what his free choice is at all. In all likelihood, that poor guy is forced to pay taxes. Therefore, to say that this is evidence that he is better off with trade is the height of absurdity.

He is better off working in a sweatshop than being sent to jail for not paying taxes. My guess is that he would be even better off if the crony-capitalists stopped conspiring with government.

Mr. Fundamentalist,
I am not confusing absolute advantage with comparative advantage. I am suggesting that it is foolish to think that the poor guy working in the sweatshop is uncoerced. You have no idea what coercion he faces.

P.M.Lawrence October 18, 2008 at 3:28 am

“Absent forced slavery (which is by definition not a component of trade in a free market), the appropriate question facing a sweatshop worker is not about what a lousy job it is or whether he is being exploited”.

That would be an absolutely correct response to anybody who was criticising the free market. Only, that’s not what it is. It’s a criticism of what’s actually going on. Refusing to accept criticism of what’s actually happening on the grounds that it’s not what would happen if things were going right – why, it’s like the Captain of a ship refusing to keep clear of rocks on the grounds that his ship was meant to work in water.

fundamentalist October 18, 2008 at 9:30 am

Charles: “I am suggesting that it is foolish to think that the poor guy working in the sweatshop is uncoerced.”

What does coercion have to do with comparative advantage? Most people outside the West and a few Asian countries face some time of coercion daily. But they are still better of with trade than without; better off with the “sweatshop” job than without, given their coercion.

newson October 19, 2008 at 5:00 am

to charles anthony/pm lawrence:

the law of comparative advantage still applies where slavery prevails; it’s just that the benefits flow to the slave owner (naturally) and his trading partner.

are you suggesting that trading caused the slavery? the two are completely separate issues. north korea has a fine slavery system with very little trade. do we help them with a trade blockade? will that free their people?

i cannot think of one trade embargo that has done anything but impoverish the little people and consolidate tyranny. cases in point: us versus saddam’s iraq, us versus cuba.

charles anthony, i don’t believe there is any magical “fix” to third world sweatshops, or at least none that can be imposed by external parties. trade local if you want, but spare us the moralizing.

P.M.Lawrence October 19, 2008 at 7:02 am

Fundamentalist asks ‘What does coercion have to do with comparative advantage? Most people outside the West and a few Asian countries face some time of coercion daily. But they are still better of with trade than without; better off with the “sweatshop” job than without, given their coercion.’

This is completely missing the point. It presupposes ceteris paribus (“other things being equal”). If there were just as much bad stuff happening in those countries as there would be without this sort of trade, then yes, trade would be making them all better off than the alternative. But that’s not what’s happening; there are kleptocrats on the take in those countries. So, they put more squeeze on the other locals because that lets them get more of a cut. It’s not a comparative advantage thing at all, it’s about how enabling kleptocrats causes harm. There are other ways things can go wrong too, e.g. US investment in Costa Rica – which uses the US$ – doesn’t mean 100% flow of real capital there, but a proportion of real capital flow and the rest a wealth transfer from Costa Rica by exporting US inflation. That’s a process which is quite enough to overwhelm the gains for Costa Rica from comparative advantage.

Newson writes “the law of comparative advantage still applies where slavery prevails; it’s just that the benefits flow to the slave owner (naturally) and his trading partner”, then asks “are you suggesting that trading caused the slavery?”

Of course it still applies; I pointed that out. I didn’t suggest that trading caused slavery (but see below), it’s just that we can’t just say “comparative advantage, therefore all is well”. The mechanisms involved can mean that more than 100% of the gains can flow to some people, with others actually getting worse off. Slavery is just an extreme case to illustrate the principle.

He goes on to discuss “i cannot think of one trade embargo that has done anything but impoverish the little people and consolidate tyranny. cases in point: us versus saddam’s iraq, us versus cuba”.

But that’s asking the wrong way round. The problem isn’t whether embargoes on already bad situations make things worse. The problem is whether opening things up when they aren’t already bad enables harm, like the local kleptocrats. And the Charles Anthony stuff isn’t moralising, it’s pointing out that things don’t work out according to the theory when the result is distorted by other economic mechanisms.

Aside: the African slave trade started out as buying surplus (mostly male) captives who would normally have been killed off, who were a “bycatch” of local raids for local reasons, mostly to get women. Pretty soon the trade became so profitable that it fuelled further raiding; the tail started to wag the dog (maybe in the late 17th or early 18th centuries). It didn’t help that the trade had an arms race to the bottom as an incentive; guns were part of the trade goods, and any group that didn’t trade got raided worse.

newson October 20, 2008 at 9:19 pm

to pm lawrence:
from what i can understand of your points, you seem to be saying that somehow trade augments tyranny. i can’t see that you’ve made the case.

why shouldn’t have trading ( i’m not talking about subsidized trade here) with the soviet union have generated comparative advantage? just because they had gulags? they would have existed regardless.

i agree exchange rate misalignments can override or compromise trade advantages.
the massive moves on currency markets in the last couple of years no doubt make offshoring versus domestic sourcing a difficult call. but this is a result of fiat money distorting price mechanisms, not a failure in the law of comparative advantage.

P.M.Lawrence October 21, 2008 at 12:41 am

Newson wrote “from what i can understand of your points, you seem to be saying that somehow trade augments tyranny. i can’t see that you’ve made the case.”

No, no and no!

I am saying that it gives an incentive to kleptocrats, as, when and if they are present. That’s pretty much a tautology, true by definition, and only leaves the factual questions of whether they are present and whether the institutions allow them to operate.

Do you see the difference? It’s not about tyranny at all, and in fact kleptocrats can operate as a host of smaller parasites within a system without there being one big one as a tyrant. What Stalin did with Gulags has indeed got nothing to do with it, and he did it all the same even without outside incentives. But, precisely because it has got nothing to do with it, it isn’t testing whether the kleptocrat issue matters. Are there any active kleptocrats? Yes, indeed there are. Big and obvious ones like Mobutu have finished their careers, and we can look at their actions and consequences as a whole. Likewise, there are others around right now, many not so big as him; they are quite common in Latin America.

You might want to look at this letter on the area I got published in the Australian Financial Review of 5.10.00.

fundamentalist October 21, 2008 at 8:27 am

PM Lawrence: “It presupposes ceteris paribus (“other things being equal”).”

Unfortunately, that’s the only way to study particular theories. Statisticians do the same thing. In order to find the pure effect of a particular variable, you have to hold all other variables constant. The only way you can tell if comparative advantage works is to have all other variable be equal so that only comparative advantage varies. Otherwise you have “confounded effects”, or in other words you can tell which variable is the cause. You seem to be arguing against trade in general and not comparative advantage because of this:

PM: “It’s not a comparative advantage thing at all, it’s about how enabling kleptocrats causes harm.”

No one disagrees. Many, many factors can overwhelm the benefits of trade. And it’s true that trade often enable kleptocrats to stay in power. There are many things that can go wrong with trade, too, as you point out. So are you saying that, given the state of the world, poor countries are made worse by trade? That could be true on an individual basis, but not as a theory.

Still, I think the benefits of trade for economic development are overblown. Trade reduces our costs of producing many goods, such as clothing, toys and oil, and makes us wealthier. That’s true for any advanced, relatively free economy like ours. But it can’t change oppressed, poor countries ruled by kleptocrats. And in some cases it might make the situation worse. Like the late great Peter Bauer, I think trade is a result of advanced economic development, not a cause.

newson October 21, 2008 at 10:55 am

to pm lawrence:
a kleptocrat on the national scale is necessarily a despot, otherwise he’d be in goal. a despot is necessarily a thief, unless you believe in benevolent, altruistic tyrants.
semantics aside, you’ve still made no cogent case that trade, and the associated benefits to both principals, are in any way likely to favour despotism.

how are you able to get into stalin’s mind and analyse his motivations, or mobutu’s, for that matter?

Michael A. Clem October 21, 2008 at 11:46 am

Let’s assume that trade with poorer, less free nations helps the kleptocrats of that nation. Do you think that the kleptocrats want to kill the goose that lays the golden eggs? The degree that they keep the poor from benefiting from their productivity is also the degree that they keep the gold from flowing in.
The solution to the kleptocrats is not to have our government work out trade agreements with the offending nations, or trade restrictions–we’ve seen how well that did at kicking Fidel Castro out! “Most Favored Nation” status gives the politicians a bargaining chip to get what *they* want, not what consumers want, with foreign nations, but at the cost of individual freedom and effort. Playing the kleptocrats’ game in the U.S. won’t kick out kleptocrats in other nations.
Even if unilateral free trade doesn’t do as much as I think it will do to end tyranny in other nations, it won’t hurt us the way that restricted trade does.

P.M.Lawrence October 21, 2008 at 10:35 pm

There are a lot of really basic misunderstandings around here.

Fundamentalist quoted me, ‘It presupposes ceteris paribus (“other things being equal”).’ then wrote “Unfortunately, that’s the only way to study particular theories. Statisticians do the same thing. In order to find the pure effect of a particular variable, you have to hold all other variables constant. The only way you can tell if comparative advantage works is to have all other variable be equal so that only comparative advantage varies. Otherwise you have ‘confounded effects’, or in other words you can tell which variable is the cause.”

That’s absolutely correct, and it would be a perfect objection if I had been talking about studying comparative advantage. I’m not, I’m talking about the actual outcomes in the real world situation where lots of different things are going on. Sure, we separate things out to study them – but we have to remember to put them all back in again when we get back to the real cases. What I’m objecting to is, only putting comparative advantage back in and leaving the other stuff out.

He goes on, “No one disagrees. Many, many factors can overwhelm the benefits of trade. And it’s true that trade often enable kleptocrats to stay in power. There are many things that can go wrong with trade, too, as you point out.”

Actually, a lot of people have been disagreeing.

He continues, “So are you saying that, given the state of the world, poor countries are made worse by trade? That could be true on an individual basis, but not as a theory.”

Actually, that’s what complete theory gives you – a full description, not a partial description of one aspect. Otherwise the objection turns into “that may be true in practice, but it isn’t true in theory”.

Newson misses the point here: “a kleptocrat on the national scale is necessarily a despot, otherwise he’d be in goal. a despot is necessarily a thief, unless you believe in benevolent, altruistic tyrants.”

Look again – I wrote of kleptocratS, plural, lots of them active in a country and no need for any one to dominate a whole country. It’s just easier to spot ones like Mobutu that are like that. But who can spot the many people Mugabe got on side by giving them a free hand?. Nothing about despotism, any more than it was about tyrants when he got it wrong the previous time.

He continues with a straw man, “semantics aside, you’ve still made no cogent case that trade, and the associated benefits to both principals, are in any way likely to favour despotism. how are you able to get into stalin’s mind and analyse his motivations, or mobutu’s, for that matter?”

And I never asserted any such tosh. I said it encouraged kleptocrats, doing their parasite stuff. Not despots, not tyrants – kleptocrats. People who abuse the process, extract value, and add to burdens in passing, not (necessarily) as an objective.

Michael A. Clem’s error is here: “Do you think that the kleptocrats want to kill the goose that lays the golden eggs?”

They do not have any ownership in it. If they don’t take all they can get, the next kleptocrat will. Any goose that get’s killed isn’t any one particular kleptocrat’s goose.

“The degree that they keep the poor from benefiting from their productivity is also the degree that they keep the gold from flowing in”.

That happens to be incorrect in general, at least while there are more targets for them (fresh locals to exploit after using up the current lot), but anyway it’s irrelevant for the above reason. Parasites make a trade off between not killing the host and getting it while the getting is good, they don’t always end up with a benign modus vivendi.

“Even if unilateral free trade doesn’t do as much as I think it will do to end tyranny in other nations, it won’t hurt us the way that restricted trade does”.

That may or may not be true, but it is a digression from the original point, that “free” trade, so called, can and does make people at the other end of the trade worse off from other locals abusing the unfree local systems.

P.M.Lawrence October 21, 2008 at 10:48 pm

I should further clarify my answer to Fundamentalist’s “are you saying that, given the state of the world, poor countries are made worse [off] by trade?”

No, I agree that the countries as a whole are generally better off. But that’s collectivist thinking. I’m pointing out that, quite often, people within those countries – not all of them, just some of them – end up worse off. More than 100% of the gain goes to others. Hey, it even happened when trade with England made Scotland better off, but the Highland Clearances happened to do it (land ownership rights weren’t adequate to prevent it and/or get suitable compensation).

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