Some limitations of the Ricardian model
So I went through the Ricardian model that shows how agents' differences in opportunity costs of production give reasons for trade that results in gains all round, contrary to the US folklore of exchange as a battle between Smart and Stupid.
But of course life is more complicated. Though the basic principles David Ricardo discovered are important and valid, there are complications.
For one thing, while the model predicts that the more different nations are the more they have to gain from trading, differences in opportunity cost are often accompanied by differences in tastes or in consumption technology* that limit the scope of trade. In one gaudily dreadful example, the British initiated the Opium Wars to force Chinese authorities to permit British tea companies to sell opium to the Chinese-- because the Chinese had little use for other British goods, and the flows of silver from Britain to China were becoming a problem. (A problem not because Oh Nos Wealth Drain, but because of how the international money system worked-- maybe I'll get to that next year.)
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While the Ricardian model of trade shows that full-employment economies both benefit instantly through their trade with each other, it's a different-- and less predictable-- story for economies that are not at full employment. Workers in such economies can be hurt by trade.
But that doesn't mean that nations at less than full employment should forgo trade. Rather, they should use policy to promote full employment.
In fact, there's a general theorem in economics that says that policy to cure an economic problemshould be applied as close as possible to the source of the problem-- fewer side effects.
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The Ricardian model of opportunity costs in production as a cause of trade and of mutual gains from trade shows those gains being realized in part by the countries specializing in production of their comparative-advantage output for export.
(In the very simple model we walked through, specialization in the exportible is complete-- in more complex models and of course the actual world production processes are more complex and specialization is not complete.)
But even partial specialization caused by trade means the shifting of productive resources-- labor, and plant and equipment (capital), among others-- from one sector to another.
Those shifts are seldom costless. Labor needs retraining and re-equipping. Plant and equipment need to be converted.
So trade tends to lead to transition costs.
But then, changes in consumption tastes or in technology or anything else that affects production, lead to transition costs even as choice-makers optimize.
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The Ricardian model demonstrates mutual gains from trade in the form of a strictly larger choice set for consumption, at the time of trade.
But current choices often have future consequences.
Consider, for example, a country whose comparative advantage lies in its stores of exhaustible natural resources. In this case today's extraction and export decrease tomorrow's ability to extract and export-- in fact, may decrease tomorrow's comparative advantage
Even when comparative advantage comes from renewable natural resources, if action is not taken to maintain them trade gradually depletes one source of the country's wealth.
Here's an example..
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I talked about resource depletion as an issue that doesn't appear in the Ricardian model of trade, whch showcases differing opportunity cost as the grounds for mutually beneficial trade.
Another important environmental issue for international trade concerns a cost of production that is not incorporated in the Ricardian model or even more sophisticated models in which both labor and capital (plant and equipment) are assumed to produce output. Most production processes produce waste as well as the desired output, and most economic models, concentrating on other issues, assume this away.
Some waste, such as nuclear waste, produces a problem for future production, consumption, and life even when the producers who create it "dispose" of it.
Some waste, such as dirtied or heated air or water, readily floats away from production sites to create costs for a world that has not consented to be polluted. This is a public bad. It is also a negative externality-- a cost of production that markets typically don't handle well
So while I want readers to remember the value of trade and importance and influlence of the social inventions that support it, I want now to move on to discussing public goods and services, externalities, and the ways societies can optimize in these situations.
* An example of a consumption technology would be the availability of reliable high-enough-voltage electricity, without which many US-consumed items are inoperable.
Facebook posts incorporated:
The roles of consumption technologies and tastes in trade
Trading nations with less than full employment
Transition costs as trade affects national production
Resource depletion and trade
Pollution and other externalities as production/consumption costs
But of course life is more complicated. Though the basic principles David Ricardo discovered are important and valid, there are complications.
For one thing, while the model predicts that the more different nations are the more they have to gain from trading, differences in opportunity cost are often accompanied by differences in tastes or in consumption technology* that limit the scope of trade. In one gaudily dreadful example, the British initiated the Opium Wars to force Chinese authorities to permit British tea companies to sell opium to the Chinese-- because the Chinese had little use for other British goods, and the flows of silver from Britain to China were becoming a problem. (A problem not because Oh Nos Wealth Drain, but because of how the international money system worked-- maybe I'll get to that next year.)
--
While the Ricardian model of trade shows that full-employment economies both benefit instantly through their trade with each other, it's a different-- and less predictable-- story for economies that are not at full employment. Workers in such economies can be hurt by trade.
But that doesn't mean that nations at less than full employment should forgo trade. Rather, they should use policy to promote full employment.
In fact, there's a general theorem in economics that says that policy to cure an economic problemshould be applied as close as possible to the source of the problem-- fewer side effects.
--
The Ricardian model of opportunity costs in production as a cause of trade and of mutual gains from trade shows those gains being realized in part by the countries specializing in production of their comparative-advantage output for export.
(In the very simple model we walked through, specialization in the exportible is complete-- in more complex models and of course the actual world production processes are more complex and specialization is not complete.)
But even partial specialization caused by trade means the shifting of productive resources-- labor, and plant and equipment (capital), among others-- from one sector to another.
Those shifts are seldom costless. Labor needs retraining and re-equipping. Plant and equipment need to be converted.
So trade tends to lead to transition costs.
But then, changes in consumption tastes or in technology or anything else that affects production, lead to transition costs even as choice-makers optimize.
---
The Ricardian model demonstrates mutual gains from trade in the form of a strictly larger choice set for consumption, at the time of trade.
But current choices often have future consequences.
Consider, for example, a country whose comparative advantage lies in its stores of exhaustible natural resources. In this case today's extraction and export decrease tomorrow's ability to extract and export-- in fact, may decrease tomorrow's comparative advantage
Even when comparative advantage comes from renewable natural resources, if action is not taken to maintain them trade gradually depletes one source of the country's wealth.
Here's an example..
---
I talked about resource depletion as an issue that doesn't appear in the Ricardian model of trade, whch showcases differing opportunity cost as the grounds for mutually beneficial trade.
Another important environmental issue for international trade concerns a cost of production that is not incorporated in the Ricardian model or even more sophisticated models in which both labor and capital (plant and equipment) are assumed to produce output. Most production processes produce waste as well as the desired output, and most economic models, concentrating on other issues, assume this away.
Some waste, such as nuclear waste, produces a problem for future production, consumption, and life even when the producers who create it "dispose" of it.
Some waste, such as dirtied or heated air or water, readily floats away from production sites to create costs for a world that has not consented to be polluted. This is a public bad. It is also a negative externality-- a cost of production that markets typically don't handle well
So while I want readers to remember the value of trade and importance and influlence of the social inventions that support it, I want now to move on to discussing public goods and services, externalities, and the ways societies can optimize in these situations.
* An example of a consumption technology would be the availability of reliable high-enough-voltage electricity, without which many US-consumed items are inoperable.
Facebook posts incorporated:
The roles of consumption technologies and tastes in trade
Trading nations with less than full employment
Transition costs as trade affects national production
Resource depletion and trade
Pollution and other externalities as production/consumption costs