Worstall and Coppola on Comparative Advantage

Tim Worstall corrects Frances Coppola on the theory of comparative advantage. Writes Worstall,

Comparative advantage is not about what you are better at compared to other people. That is absolute advantage. Comparative advantage is what you are better at doing relative to the other things that you could be doing. And as such it greatly strengthens the case for trade.

Worstall is pretty much correct, but I’m not sure that the first sentence is right. There is an interpersonal comparison of productivity. We should specialize where our opportunity cost is lowest. This, as described above, means we have to compare the costs of the alternative actions of one individual, but then we compare these opportunity costs to those of other individuals who could specialize in the same profession. If the theory of comparative advantage didn’t include an interpersonal element, then it wouldn’t make sense to make a connection between that theory and the theory of the division of labor.

But, the theory of comparative advantage is the least of our worries with respect to Coppola’s piece,

  1. Trade is not zero-sum. It could be zero-sum from an ex post analysis, if we consider malignant cases of asymmetric information. But, my guess is that the vast majority of exchanges are positive sum: we enter into exchanges to mutually improve our welfare. There are problems with things like persistent trade deficits, but again these are unique cases that are exceptions to the general benefits to trade. We don’t consider it a bad thing when we run a trade deficit against the local grocery store;
  2. While I agree that running a large, persistent trade deficit or surplus is a sign of a problem, I don’t know why this immediately leads us to the conclusion that the country in surplus needs to conduct structural reforms. Take the case of Germany and the Eurozone. Maybe we ought to blame bad monetary policy, or bad public policy in the countries running a deficit — maybe they’re the ones that should push structural reform;
  3. Coppola continues with the zero-sum theme throughout the piece, arguing that “[c]ountries compete with each other for market share and profits.” But, she neglects to mention that international trade allows us to increase the size of the pie, without necessarily increasing our productivity. Trade allows us to consume on a consumption possibility frontier that is beyond our production possibilities frontier. Further, she paints exporting capital in the same light as colonialism. There are no similarities between the two; one involves forced political acquisition, the other involves voluntary exchange. If we treated the export of capital to third world nations as the same as colonialism, and put an end to it, the third world would be worse off because of it — this is capital that isn’t accessible without trade, and capital that increases the wages of third world workers over the long-run. So, a firm in Uganda is owned by an American…so what?

I agree with Coppola that whoever advocates “exporting towards prosperity” is wrong. I think that anybody who currently makes that case is mistaking the purpose of countercyclical monetary policy. They think that monetary policy will make that country’s exports internationally cheaper, because traditionally that’s what we associate easy money with. When there’s a shortage of money, however, the role monetary policy plays is to increase demand, without necessarily decreasing the relative prices of our exports. But, Coppola takes her argument beyond that and ends up writing a generally anti-trade diatribe that is, in my opinion, dangerously misleading.

7 thoughts on “Worstall and Coppola on Comparative Advantage

  1. Alexi

    Easy monetary policy enables persistent deficits, especially if your currency is the world reserve. The woman’s opinions are frankly bizarre, to be honest. If exporting capital is ‘colonialism’, then hey, I am pro “colonialism”!

    1. Frances_Coppola

      I did point out in a footnote to my post that the US is a different matter. Perhaps you didn’t read down that far.

  2. Frances_Coppola

    I really don’t see how you interpret my piece as “anti-trade”. Like many, you have confused trade SURPLUSES with trade itself. Trade itself can increase or decrease, but persistent trade surpluses always mean persistent trade deficits somewhere else. That is the point I was making.

    Tim himself did not misunderstand that point. He merely objected to my statement that comparative advantage implies the existence of near-monopolies. Unfortunately too many other people confused micro with macro and therefore drew the wrong conclusions from my post. I am certainly not “anti-trade”. Quite the reverse, actually. Persistent trade surpluses do not increase global trade. They may actually reduce it – and that is why I object to them.

    Since so many of you misunderstood, I’ve explained the point more fully here:


    And Chris Dillow has explained it rather more lyrically here:


    1. JCatalan

      Like many, you have confused trade SURPLUSES with trade itself. Trade
      itself can increase or decrease, but persistent trade surpluses always
      mean persistent trade deficits somewhere else.

      I get that, but I don’t think that second sentence matters as much as you think it does (and, I don’t think the fact that trade surpluses must be canceled out by trade deficits implies that trade is zero-sum).

      1. Frances_Coppola

        I agree my first sentence is misleading. I was talking only from a macroeconomic trade balance point of view. However, I clarified it in the explanatory post. Link is in the comment above, but the relevant paragraphs are these:

        “Firstly, let me address the (partly justified) criticism that I had incorrectly described international trade as zero-sum. Clearly, from the point of view of individual agents trading with each other, this is not true. One business’s exports are not bought at the price of another’s: people that fail to compete in one market will look for other markets where they can be more successful, so overall, competition tends to increase global trade.

        “But from a macroeconomic point of view, international trade is zero sum. If one country has a trade surplus, other countries must have trade deficits to the same value. The absolute volume and value of trade across the globe may indeed increase as businesses compete with each other for domestic and export markets, but that makes no difference to the nature of trade between countries. Whatever the scale of global trade, national trade surpluses and deficits always sum to zero. An increase in trade surplus by one country always means an increase in trade deficit somewhere else.

        “So a national trade policy that aims to create a trade surplus is no more capable of increasing the volume or value of trade than a policy that aims to create a trade deficit.”

        The second sentence DOES matter. Persistent trade imbalances are market inefficiencies that limit or even reduce trade. In order to maximise trade, you need to address the causes of persistent trade imbalances – which by and large are various forms of protectionism, overt and covert. This is why I am frankly gobsmacked that you took my first post as being ANTI-trade.

        1. JCatalan

          My point is that at the macro-level international trade is not zero-sum. You’re right that, tautologically, that one country has a trade surplus implies that other countries have to make up for it by having a trade deficit of equal amount. But, this doesn’t mean trade is zero-sum. Countries that run trade deficits aren’t necessarily worse off; we run a trade deficit because, on aggregate, we feel that the intertemporal tradeoff is worth it. This seems to be one of those instances when we mistake an accounting identity for a relationship.

          And, like I wrote in the post, I agree that persistent trade imbalances point to problems. But, this has nothing to do with trade (not) being a zero-sum game.

          1. Frances_Coppola

            You’ve forgotten the main point I was making in the post – that people assign moral values to “surplus” and “deficit”. When maintaining a trade surplus is regarded as “good” and a trade deficit “bad”, the game is zero-sum. The real economic benefit is indeed neutral, as you say (deficit position confers as many benefits as the surplus position), but that isn’t everything. Achieving moral objectives matters. You may think those moral objectives are absurd. So do I. But they are real, and failing to achieve them diminishes utility.

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