he concept of comparative advantage is used with great effect by economists as a sheep/goat separator. Those who understand it are the sheep, almost exclusively economists. The sheep sometimes use comparative advantage to justify things that seem to the goats, the non-understanders, to be counter to common sense. But the poor goats are helpless, silenced by their own ignorance and the confidence of the knowledge-wielding sheep.
Unfortunately, among the sheep are some who tell us that it doesn't matter if we lose one industry after another to our rapidly developing trading partners. We will just do something else that is in accord with comparative advantage in the new economic situation.
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An audience member asked a university professor on the panel how he would feel if most of the professor's courses were delivered from India by someone else and at a lower price. His reply, delivered with perfect confidence, was that it would not matter; he and his peers would rather just teach graduate students anyway.
In a similar vein but on a far grander scale, the Financial Times recently lectured the nation of Japan on its attempts to retain manufacturing in Japan (using robots) in the face of low-wage competition from other parts of Asia. The Financial Times, calling on the wisdom that the recent economic successes of the financial sector had apparently made self-evident, told the Japanese to give up manufacturing and concentrate on research and on telling other nations what to manufacture. The FT article had as its title "The malady of manufacturing."
Ignored in all these discussions is the obvious fact that when you don't make for yourself the things you need, you will have to trade for them. If you have to import cars and all sorts of manufactured goods, you will be importing on a large scale; to trade for them you will need to create additional goods or services that you can export on an equally large scale.
How does the FT's prescription for Japan stack up if we look at it that way? It looks like nonsense. Research is a small-scale activity; in most companies only a few percentage points of revenue. There is no way that the output of this small activity can be traded against a nation's need for manufactured goods. Similarly, you simply cannot pay for large-scale imported education by teaching smaller numbers of graduate students, even if they were all visiting foreigners so that all the teaching you did counted as export.
If you give up large things and specialize in exporting small-scale things for which the demand is limited, you will not be able to buy many of the things that are needed on a large scale. If the things you are going to export don't add up to something big, you will be neither making nor importing what you need. You will simply not have them. You will be a poor nation.
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Ricardo's remarkable observation was this: even though Portugal makes cloth more productively than England, it still benefits her to move some people from cloth-making to winemaking and then send the wine they produce to England to exchange for cloth. Similarly, it benefits England to move people from winemaking to cloth-making to make more cloth for export. A shift of this sort works out well for both countries because Portugal's advantage in wine production is larger than its advantage in cloth. Both countries come out ahead. In the modern terminology, they were exploiting the fact that Portugal has a comparative advantage in wine.
Some of Ricardo's successors, however, have elevated comparative advantage into a principle all its own, with such rules as "countries should specialize in the things in which they have a greater comparative advantage." What is often taught nowadays about the England-Portugal example is that England should make only cloth (specialize in cloth) and Portugal should specialize in wine.
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Let us by all means do the things in which we have the greatest advantage. But let us make sure the new things we do, together with the things we continue to do, add up to enough to make us a rich nation. Vague talk about future innovations, about a post-industrial society, or of an enormous explosion of services exports to where they can balance the manufacturing trade deficit is not the stuff on which to bet the prosperity of a nation. This vagueness disguises our real situation and the need to rethink both our fundamental economic goals and how they can be attained.
Manufacturing should not be given up but rather rebuilt, as G.E. CEO Jeffrey Immelt has recently advocated. We cannot afford to get out of manufacturing unless and until there are new things that we are good at and that add up to the same scale. But today that condition is nowhere near being met.
Manufacturing is both high-wage and R&D intensive, and comparative advantage in manufacturing is not a gift of nature but something that is mainly man-made. All of this strongly suggests that we should be aiming at building a strong manufacturing sector rather than wishing it away.
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