Note: This is the latest entry in the Acton blog series, “What Christians Should Know About Economics.” For other entries in the series see this post.
The Term: Comparative advantage
What it Means: The ability of an individual or group of individual (e.g., a business firm) to produce goods or services at a lower opportunity cost than other individuals or groups.
Why it Matters: There is a story of the distinguished British biologist, J.B.S. Haldane, who found himself in the company of a group of theologians. On being asked what one could conclude as to the nature of the Creator from a study of his creation, Haldane is said to have answered, “An inordinate fondness for beetles.”
When we examine creation to uncover what it reveals about the character of God, one of the things we discover time and time again is the Creator’s fondness for diversity. Like Haldane, we can see this by looking at biology (e.g., there are more species of beetle than birds or mammals combined). But we can also find it when we turn to economics.
A primary example of God’s enthusiasm for diversity is the concept of comparative advantage. While the definition of the them makes it sounds dull and wonky, comparative advantage is a beautiful, theologically profound norm of creation.
Fully appreciating the nuances of the ideas requires timely reflection. But understanding it can be achieved when a few minutes. In this brief video, economist Donald J. Boudreaux does a masterful job of explaining how, when combined with trade, comparative advantage improves human communities.
(Here is a text-based explanation by Boudreaux that is similar to the video.)
The principle of comparative advantage shows how God uses the diversity of individual human talents and abilities in a way that can benefit everyone. Because of comparative advantage, anyone engaged in productive labor can potentially play an important role in meeting human needs and increasing the prosperity of a community, a society, or even the world. It also shows how God intended for human flourishing to be achieved not through absolute self-sufficiency, but by productive work and mutual beneficial exchange.
Other Stuff You Might Want to Know:
• An individual or firm does not need to have an absolute advantage (e.g., the best at something in a given field or industry) to have a comparative advantage.
• The original idea of comparative advantage dates to the early part of the 19th century. The original description of the idea can be found in an Essay on the External Corn Trade by Robert Torrens in 1815. David Ricardo formalized the idea in his 1817 book titled, On the Principles of Political Economy and Taxation, which became known as the “Ricardian model.”
• Comparative advantage is often considered the most important concept in international trade theory and the reason almost all economists support free trade between nations. As Steven Suranovic says, “The Ricardian model shows that if we want to maximize total output in the world then, first, fully employ all resources worldwide; second, allocate those resources within countries to each country’s comparative advantage industries; and third, allow the countries to trade freely thereafter.”