A Dangerous Misunderstanding
2 October 2007
Mr. Thomas Palley
www.ThomasPalley.com
Dear Mr. Palley:
Thanks for including me on your distribution list. But I dispute your claim that the principle of comparative advantage applies only when capital is immobile. You mistake an assumption typically made to render the explanation of comparative advantage clearer as being a condition necessary for the principle to hold in reality.
Like other real-world happenings, capital mobility does indeed change the specific pattern of comparative advantage. It does not, however, nullify the principle. If it does - if, as you assert, capital mobility makes comparative advantage "obsolete” - then the principle of comparative advantage would be useless for explaining the pattern of specialization and trade within national or local economies, where capital has long been mobile.
Of course, comparative advantage has always helped to determine the pattern of specialization and trade between Brooklyn and Queens no less than it has always helped to determine the pattern of trade between America and other countries. And this helpfulness does not diminish as capital mobility increases.
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Mr. Thomas Palley
www.ThomasPalley.com
Dear Mr. Palley:
Thanks for including me on your distribution list. But I dispute your claim that the principle of comparative advantage applies only when capital is immobile. You mistake an assumption typically made to render the explanation of comparative advantage clearer as being a condition necessary for the principle to hold in reality.
Like other real-world happenings, capital mobility does indeed change the specific pattern of comparative advantage. It does not, however, nullify the principle. If it does - if, as you assert, capital mobility makes comparative advantage "obsolete” - then the principle of comparative advantage would be useless for explaining the pattern of specialization and trade within national or local economies, where capital has long been mobile.
Of course, comparative advantage has always helped to determine the pattern of specialization and trade between Brooklyn and Queens no less than it has always helped to determine the pattern of trade between America and other countries. And this helpfulness does not diminish as capital mobility increases.
Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Posted by Don Boudreaux on
Saturday March 29, 2008 at 4:40pm