Trade or Comparative Advantage (cont.)

Last post I claimed that trade could improve the lot of all participants, be they more productive or less productive, higher cost producers or lower cost producers, advanced or backwards.

I even claimed that if you are better then me at every productive activity, I can benefit from trade with you. This is the opposite of the wisdom that capitalism and voluntary exchange allows the “stronger” to take more from the “weaker”.

To simplify everything I imagined a shipwrecked pair, Mr. A and Mr. B on an island. Their little economy was focused on survival and the main element of GDP was fishing and gathering fruit. Reality compels them each to somehow obtain four fish per day and four small fruit to thrive.  I claimed that if Mr. A was better at fishing and Mr. B was better at gathering, if they traded the products of their effort they could get the same output for less work because they could specialize at that which they were best.

As a baseline we could imagine each of Mr. A and Mr. B had to work four hours each day at fishing and four hours at gathering to get their requirements. Now suppose Mr. A has some sort of absolute advantage over Mr. B.  Mr. A. can not only catch his four fish in three hours but is a killer at gathering, getting four fruit in two hours effort.

Of course, Mr. A could work five hours per day getting everything he needs (3 hrs for 4 fish, 2 hrs for 4 fruit). He could with satisfaction watch poor Mr. B work eight hours a day for the same. Or he could be smart and realize that if he traded with Mr. B, he could spend all his time on his most productive activity – gathering fruit. He could gather enough fruit for all their needs in four hours instead of personally meeting his fish and fruit needs in five, but he could only do it if Mr. B joined in an agreement with him. Mr. B had to give him some of his fish for Mr. A to specialize in fruit. Even though Mr. A is better at fishing then Mr. B, he is even more better at gathering fruit. Obviously they would come to some agreement that splits the gain for Mr. A (five hours work reduced to four hours work) with Mr. B in exchange for Mr. B allowing him to specialize in his best field.

Mr. B stops gathering fruit and spends all his time fishing. Even though he is no more productive fishing than gathering fruit, his specialization enables Mr. A to produce more at less effort. His reward for enabling Mr. A is some of Mr. A’s higher productivity.

That is why the lawn care guy benefits from the brain surgeon. When I was a kid in a working class neighborhood nobody paid to have their lawn mowed.  Well maybe a few people did as favors to enterprising kids or when facing declining health.  Where I live now, people make lots of money when they are working. In fact most would trade money for a little free time for themselves and their family. Their high productivity makes it possible for very low productivity people (perhaps someone who can not read or write or speak English) to get a little of the higher productivity person’s production.

Far from the strong taking advantage of the weak, capitalism and voluntary exchange spreads the wealth. If Mr. A with his higher productivity did not exist, poor Mr. B would be stuck working eight hours a day to live. When higher productivity Mr. A arrives, there is surplus available for them to split. If Mr. A tries to claim all the new surplus for himself, Mr. B can simply decline to trade with him being no worse off then before.

Trade or Comparative Advantage

Trade, voluntary exchange, is now controversial, particularly international trade. Are we being taken advantage of by the Peoples Republic of China?  After all they have lower labor costs and fewer expensive pollution controls. Or, as in most areas of life, is it a trade off between benefits and detriments? Free trade with the PRC gets American consumers cheaper Iphones but causes other Americans to experience a loss of high paying manufacturing jobs.

I contend that trade creates a free benefit for all parties involved, be they more or less productive, higher or lower cost producers, developed or underdeveloped economies. Interestingly when trade occurs, the stronger benefits the weaker, as well as itself.

Imagine two castaways on an island.  In abstract, an economy

I will postulate some reality constraints on them.  Each has to eat to survive.  There are two categories of food available to them: fish and fruit.  If one ate only fish he would die of scurvy, if one ate only fruit he would lack protein and starve,

Our castaways, Mr A and Mr B, each need 4 small fish per day and 4 fine fruit to meet their caloric requirements. Mr A and Mr B can meet their requirements by each fishing 4 hours per day and each gathering fruit 4 hours per day. Under these conditions there would be no trade between them.

In the real world, some people are better than others at tasks.  Anyone who ever played a pick up game of sports knows some people are better than others at any given task. Suppose Mr A is a better fisherman and can catch his 4 small fish in three hours.  Suppose Mr B is a better gatherer and can gather his 4 fruit in three hours.

Without trade

Mr A      3 hours fishing (4 fish)      4 hours gathering (4 fruit)     7 hours work to survive

Mr B      4 hours fishing (4 fish)       3 hours gathering (4 fruit)      7 hours work to survive

Now suppose it occurs to Mr A and Mr B to make a trade.  Mr A could trade 4 fish to Mr B for 4 fruit.  Now the situation is:

Mr A     6 hours fishing (8 fish)   0 hours gathering fruit  (no fruit)      6 hours to survive

Mr B     0 hours fishing (no fish)   6 hours gathering fruit (8 fruit)     6 hours to survive

Our little economy just achieved the same output with two fewer hours of work per day, for free.

Next entry: what if Mr A is better at both fishing and fruit gathering than Mr B?

Profits Are Good

When I got to college I was surprised at how much disdain capitalism and the bourgeoisie were held in.  I was a small town unsophisticated kid.  To me, a law abiding person who served the wants of fellow people and supported a family seemed good. The way life was ordered, with shopkeepers, tradesmen, doctors, clerks, was not only familiar but correct.

Professors didn’t agree with me. In fact, it was implied that my thinking was shallow. The bourgeoisie were exploitative, secretly dishonest, depraved, and above all boring.  The artist, the academic and the world historical individual were the ones who deserved respect. Don’t think too much about the trail of blood left by the world historical individual.

Anyway it is a story for another time how I came to decide that capitalism is good. I have decided to start a blog defending capitalism. To defend capitalism one has to defend profits.  For under capitalism no business exists and grows unless it is profitable.

Continue reading “Profits Are Good”