The Perils and Pitfalls of the Theory of Comparative Advantage:
Some Economic Myths that Everybody Should be Aware of
At the time Ricardo wrote he was right that England had a comparative advantage in making cloth and Portugal in making wine. But this was not the result of economics, much less did it prove the superiority of free trade (Magdoff 1978, chapter 5). History reveals that the comparative advantages of England and Portugal had their origin not so much in economics as in politics. “The comparative advantage that mattered was rooted not in soil or labor productivity, but in the superiority of British sea power and in Portugal’s inability to hold on to its overseas empire without the protection of the British navy” (Magdoff 1978, p.156). Indeed, once the incipient capitalist nations found it more profitable to restrict industrial development to their own part of the world and consolidated their monopolistic position, this could not be given up without seriously disturbing the whole fabric of Western capitalism. To preserve the nonindustrial nations as markets for their manufacturing industries, the developed nations had to develop a commercial policy, and enforce it. It was argued that nature itself destined some countries to to be producers of primary products. More than a "natural" fact, this division was also an economic convenience, as summarized in the theory of comparative costs (i.e., countries should produce what they are better at). This way, the argument continued, everyone would be better off and everyone would gain by this international division of labor into industrial and non-industrial nations. As we know, however, the exchange between these two groups of countries has favored the developed ones and been disadvantageous to the underdeveloped ones. It has proven a dauting task for most developing countries to capitalze production in competition with the already highly monopoplized capital of the developed world. In reality, the widening productivity gap between the capitalistically developed and underdeveloped regions is a well-documented fact.
Magdoff describes in detail the economic and political relationships between England and Portugal, going back to the fourteenth century. The fate of the two countries was sealed in a series of treaties between the seventeenth and eighteenth centuries, where England, in exchange for its military help to Portugal to maintain its colonies, imposed the conditions which enforced an international division of labor, “celebrated up to this day as a prime example of the virtues of objective and independent economic laws” (Magdoff 1978, p.156). These treaties fostered Portugal’s economic dependence on England by opening the door English ships in Portugal and in Portugal’s African and Indian territories. Moreover, they gave special privileges to English traders in Portugal, and required that Portugal buy all its ships from England.
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This brief historical tour indicates that there is much more about the development of the theory of comparative advantage than standard textbooks tell. More important perhaps than the Ricardian example of trade between England and Portugal in historical perspective is the relation between England and Asia. In fact, Portugal –and to a lesser extent Spain- Holland and England, had successfully dominated the trade routes to the East. As noted recently by Pomeranz (2000), until around 1800 the living standards in the West, including England, were not very different from those in the East, particularly in PRC. In fact, if anything, trade with Asia – starting with the trade and silk routes dominated by Arab, Venetian and Genoese merchants and up to the nineteen century – was the result of Western demand for the more developed and sophisticated Eastern goods (e.g., silk, cotton textiles, species, porcelain, rugs, etc.). Further, Pomeranz (2000) shows that several measures of well-being demonstrate that the PRC was ahead of Europe. Grain and sugar consumption was higher as well as caloric intake. Furthermore, wages were in general higher, and in particular, Chinese textile workers received higher wages. More importantly, life expectancy measures show that PCR was not lagging behind. This is the inescapable conclusion one must derive from Maddison`s (2000, pp. 29-41) data too.
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The new emphasis on the similarities between Western Europe and the PRC up to the late eighteen early nineteen-century is certainly important. However, the emphasis on similarities should not obscure the big difference associated with Western European dominance of long distance trade. The dominance in long distance trade reflects, despite revisionists’ claims, a more advanced naval technology, and more importantly, more developed weaponry (Landes, 1998). Not only did Western Europe dominate the trade routes that connected it with Asia, but also Portuguese, Dutch and British ships dominated a good part of intra-Asian trade. Between the great discoveries and the Industrial Revolution, the European share in total world trade increased – in particular because intra-Asian trade and intra-American trade was dominated by Europeans– while that of Asia decreased drastically. However, if Asia was not lagging behind technologically and its living standards were close to those on the West, how did they lose their trade position? According to Krugman’s story the trade position had to be a reflex of the technological situation.
The analysis above leads us to conclude that comparative advantage was “historically created” as the result of colonialism, wars, nationalist rivalries and military power. And, as Magdoff points out, “this is but a mild example of the origins of the international division of labor: it occurred, after all, between two Christian, colonizing powers” (Magdoff 1978, p.159). And according to Cohen: “In order to fully grasp the nature of this drama, let us examine the Southern part of Ricardo’s program” (Cohen 1998, p.35; italics added). When England started specializing in manufactures and industrial production, it had to find countries that were willing to import. Portugal was one of them, but it was very small. Other markets were needed. The other large and powerful countries of Europe were trying to catch up with Britain and were also developing their industrial base. “In practice, trade could occur only with countries that were under British rule. When India was flooded with British products, the result of was total destruction of its industrial base” (Cohen 1998, p.36). In the early nineteenth century, India was a net exporter of textiles and its cottage industry was well developed. However, by the end of the century, three-fourths of the textiles consumed in India were imported from England. “But the tragedy did not stop here” (Cohen 1998, p.36). India produced wheat and other food crops. However, England preferred to import these from the United States, with the consequence that it left India with exports of cotton, jute and indigo. This meant that India was forced to specialize in the cultivation of products that did not guarantee its own food supply. India saw itself having famines, importing basic products, and each time the world’s state of affairs was unfavorable, not affording to import food. Magdoff, quoting historian Carlo Cippola, summarizes all this state of affairs brilliantly:
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While reading standard textbooks one is implicitly led to believe that Ricardo wrote pages and pages about his theory of comparative advantage, and that this was a central theme in his writings. Neither is true. Ricardo was concerned with the dynamic process of capital accumulation and he analyzed this issue in the context of economic classes. The key questions in his writings were: how is surplus extracted?, who gets it?, and what is it used for? (i.e., questions about distribution). Ricardo lived between the end of the eighteenth century and the beginning of the nineteenth. At this time, England was not self-sufficient in food production, and Ricardo saw capitalists’ profits being reduced by the rising costs of corn (generic for grain, mostly wheat, production). This situation benefited the landlords, who would spend their rents on luxury consumption. Ricardo argued that the key to growth lay in the greatest possible accumulation of capital. This would induce the demand for labor to rise, leading to a tendency for the wage rate of the working classes to be above the subsistence level. This would increase consumption. But this depended, of course, on food being cheap, corn freely imported, and rents low so that the landlords would be unable to suck up most of the surplus for luxury consumption. The policy that Ricardo proposed for unbinding the British economy from the trap of land resource constraint was liberalization of grain imports, or more specifically, the repeal of the Corn Laws that had imposed a tariff barrier on the import of cheap grain from abroad as part of the mercantile system. Ricardo argued that superior lands should be available in infinite amounts not within Britain, but tin the world including new continents. The repeal of the Corn Laws was a necessary condition to sustain modern economic growth that began with the Industrial Revolution. As such, Ricardo provided to the emerging bourgeois class a theoretical edge to fight the vested interests of landed aristocracy and gentry.
This is the historical context in which Ricardo included no more than a couple of pages on comparative advantage. Ricardo saw the incipient capitalist mode of production as the most advantageous for the creation of wealth, and thus saw the importance of capitalists in this process. Ricardo was ruthless toward the English aristocracy because they were siphoning the surplus due to the high prices of corn. The solution was to import corn. When Ricardo set out the case against protection, he was supporting British economic interests. ...
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