Comparative Advantage, Clearly Explained

I continue my series on social science in Mint with my latest column on comparative advantage, published today.

Comparative advantage teaches us that free trade and free markets will benefit poor people and poor nations.

Yet, this important principle is little understood today, almost 200 years after David Ricardo first formulated it. In the column, I give the example of a student of economics who called upon me to ask whether comparative advantage still applied to the modern world. Her professors had told her it didn't.

At that time, the girl already had a BA in Economics from Bombay University, and was pursuing a master's degree in the same subject from Delhi's Jawaharlal Nehru University. There is a slight error in the column, which refers to the student as male. The story is otherwise factual - and horrifying. The error is due to last minute re-writing that the editors wanted. Haste caused the error. Sorry, Rathi.

The fault, of course, lies with Ricardo himself, and the weird way in which he presented his argument. The same argument has been parroted by economics teachers ever since. This is why no one really understands the principle involved, and its application to everyday life.

Indeed, I was prompted to write this piece explaining Ricardian comparative advantage after reading Tim Harford's bestseller, The Undercover Economist. Harford is also a Bastiat prize-winner, but his exposition of the Ricardian principle leaves much to be desired. Hence this piece.

The crux of the argument is the powerful case made for free trade, free immigration and free markets.

As far as understanding Society is concerned, comparative advantage is presented as the Law of Human Association - the first law of Sociology.

In case you have not read the earlier articles on social science, I list them below:

First, the differences between science and social science, here.

Second, the defence of Individualism, without which Society cannot be comprehended, here.

Third, on spontaneous order in Society, and how this enables money to emerge on its own, through the actions of trading individuals, here.

And fourth, on comparative advantage, here.

I will be continuing on this theme in future columns, explaining how Society actually functions, as understood by the "exact" laws of praxeology.

Stay tuned.

And keep on pushing the tempo!