[explanibrag]

I think free trade has benefited mankind hugely and is largely responsible for lifting China out of poverty. However, I don't find the standard model of comparative advantage to be a convincing argument in favour of free trade.

The problem is that the basic model is heavily oversimplified, and more complex models get very complex very quickly. With a model, it's hard to be sure you've captured all the effects and calibrated it correctly (especially in a world with changing demographics and changing technology).

I think most intelligent people hear the basic idea, and then come up with criticisms like the following:

1/ It appears to assume that comparative advantage is fixed. But couldn't a country deliberately specialise in something it's not innately good at, thus retraining its workers and eventually shifting its comparative advantage over time?

2/ All the textbook examples concentrate on manufacturing. It's not a giant leap to see the same effect in services, but I don't think it's completely clear-cut either.

3/ It assumes labour is immobile. Otherwise why wouldn't the specialist weavers from England move to France and the specialist masons from France move to England?

4/ How can a country know what its comparative advantages are? Comparative advantage is not observable in the real world, so producers have to resort to guesswork. How can we know they guess correctly?

Now if you ditch some of the basic assumptions it's not at all clear how the conclusions change. So I think it's perfectly reasonable for laymen not to be convinced by the basic model.

[jimmytidey]

I think you're right about these points, except they miss the surprising aspect of the theory.

Imagine there were two countries in the world, say France and England, and France was better at making every kind of product. Most people would conclude that England would need to protect itself from France by limiting trade. Comparative advantage tells this is not true - England will always be richer if it trades, no mater how good France is at manufacturing. That is the key insight.

Yes - England could train its weavers, or entice weavers from France, or develop wine growing regions, or focus on services. But no matter what it does, it will always benefit from trade. Comparative advantage isn't telling you about training, labour mobility, or the difference between goods and services. It's telling you about trade in general.

Of course it's a model, but many economists find it compelling.

[cousin_it]

Ricardo's model assumes that capital cannot move between countries. That's getting less true every year. And that's not a minor hole either, it completely destroys the argument that uncompetitive countries also benefit.

[ajuc]

> England will always be richer if it trades, no mater how good France is at manufacturing. That is the key insight.

Not what happened in real life.

Compare Argentina and USA. Both had been worse than Great Britain at industry, and better at agriculture. Argentina was more wealthy than USA at the start. Argentina have followed the theory (specializing in agriculture), USA acted on the contrary (introducing tariffs and specializing in industry).

At the end - USA is much more wealthy than Argentina.

Comparative advantage is about optimizing for current situation, not about strategic decisions.

[jimmytidey]

Comparative advantage is just a model, as you rightly point out, I'm sure in any real world instance the situation is much more complicated.

However, its important to know that many economists believe its the foundational model on which further elaboration of trade policy should be built. That's why it's worth understanding.

[explanibrag]

Yes, but my original point was that the foundational model isn't convincing at all to the layman. It can't stand on its own feet, and needs additional structure. Any decent model should come with caveats, and should specify the domain in which it's applicable.

Krugman was using the model to argue in favour of free trade. He'd be much better off arguing using historical examples if he wanted to be convincing.

[explanibrag]

What if England doesn't realise it could be better at heavy industry than it is at financial services?

Edit: shouldn't your point be "no matter what England does, someone will always benefit from free trade"? What's globally optimal isn't necessarily optimal for England.

[jimmytidey]

If England was smarter than it is, then it would be richer than it is. Perhaps if they had the smarts to notice they were better off doing heavy industry they would be better off. But, England ought to be trying its very best because individuals are motivated to have as much nice stuff as they can.

Free trade does ensure global optimality. It also ensures a better outcome for every country that participates. It does not ensure that every single person within every country will have got richer. It does ensure that, on average, every citizen of every country will be richer.

Again, only within the comparative advantage model we are discussing.

[ajuc]

Ad 4 - country can simply compare the prices of goods they export. If you export iron for 10 times the price of grain, and other country does so for 8 times the grain price - you have comparative advantage in grain and the other country - in iron.