Today, Tyler Cowen of Marginal Revolution makes what I think are some rather bizarre assumptions about the theory of comparative advantage. He cites primers on the subject here, and here. His deductions are as follows:
1. Every person will trade with every other person in the world. This is clearly false, although it would seem to follow from some presentations of the concept.
2. In a world of only two people, they will probably trade with each other. This is very likely true (especially if they are both “hot”), though not certain at the theoretical level.
3. Everyone will trade with at least someone. Whoop-dee-doo.
Worse, #3 is not even true.
The key counterexample is animals…
Last things first, Animals are not what most people (let alone, Economists) would consider rational economic actors. I think it’s fair to completely discount this “counterexample” on rational grounds alone.
Additionally, I’ve never seen the theory presented in such a manner that would suggest “every person will trade with every other person in the world,” although I think there are certainly arguments that support this, at least theoretically. Is Tyler familiar with I, Pencil? This is a question that needs to be answered. Certainly, from that simple example, it follows that most people, in most circumstances, trade (at least indirectly) with a great many others, most of whom are not even aware of one another’s existence or contribution.
That said, transaction costs do exist, and given their existence, it simply is not probable that all people will trade with all others. Tyler’s conclusion supposes that all people are buyers of all goods, and I don’t believe this follows from Comparative Advantage. People trade with those who create the goods and services for which they have a need. I don’t have a need for Anne Rice novels, and accordingly, it is unlikely that I will ever trade with Anne Rice. Likewise, she does not have much need for whatever it is I produce (real estate title insurance, at present) in Southeastern Michigan.
I do however endorse his ultimate conclusion, that “[M]any people overestimate the benefits that free trade (which, I might add, I fully favor) will bring to the developing world. And they underestimate the importance of those fixed costs of trading in holding nations — and people — back from a better future.”
This conclusion rears its ugly head with great frequency among the anti-free traders, who imagine or assume away the transaction costs involved in trade, notably that businesses will always orient themselves operationally to the markets where labor is cheapest, or regulations are the most lax. These anti-traders also underestimate the benefits conferred to even the poorest people, who are lifted (marginally, albeit) from the extreme poverty in which they previously lived.
There’s some merit to his final conclusion, but I think his 1-2-3 of Comparative Advantage is pretty much sunk.
