How to Identify a Brilliant Model

Comparative Advantage Simple ModelI’m taking a class on international trade theory, and we’re going over a number of models that help us understand the globalized allocation of resources. The Krugman–Obstfeld–Melitz textbook we’re using — which is great, since I find it clearer than a lecture — starts with the gravity model, which graphically depicts some relationships between aggregates that we might expect, and then moves on to the Ricardian model of comparative advantage (henceforth referred to as RCA) before dipping into 20th century trade theory. I’m reading these early chapters on my own to inculcate the models into my memory. Now that I’m farther in my studies than I was four years ago, looking at RCA again really allows me to enjoy the characteristics of a great model. It’s no wonder that Ludwig von Mises held the “law of association” (the law of comparative advantage) in such high esteem.

What makes it so great in my eyes is that the RCA starts from a very simple premise that holds true empirically almost self-evidently and explains so much: the division of labor, also providing a basis to study how factors of production are allocated (the models that follow comparative advantage in an international trade theory textbook will usually further develop this relationship between input allocations, relative prices, and productivity). But most models aggregate their foundations in a way that requires homogeneity; the RCA is based on heterogeneity, and I think this is really one of its greatest attributes. These are probably the reasons why this model has persisted for so long and why it’s almost universally accepted: this is an excellent example of something that’s incredibly close to Mises’ a priori theorizing, and of the power of such theories.

If there’s one thing I’d add to the textbook exposition of the RCA it’d be to stress that it explains exchange between individuals — whether inside or outside a country’s national borders. Then the true power of the theory is made obvious, and it becomes easier for the student to conceptualize why it’s nonsense to treat trade with foreigners as different than trade with compatriots (except for whatever relevant political contingencies). What the RCA in the context of nations helps us look at is the globalization of the division of labor. A world where the RCA works best is a world where the nation, politically defined, is essentially irrelevant.

  • gcallah

    Jonathan, your title is not idiomatic English. “How to tell” should take the form, “How to tell X Y.” But you have no Y. What you mean is “How to identify a brilliant model.”