David Ricardo: Comparative Advantages and Globalization

In the previous post we boarded a similar line of thought, regarding Adam Smith and The Wealth of Nations. It is only natural, almost a reflex, to do the same thing with another pillar of economics, the  British, David Ricardo (1772-1823).

Among the many anxieties and fears about globalization, there are two very closely related, legitimate questions that stand out:

  1. How do we currently deal with globalization?
  2. What is the best way to deal with globalization?

positive effects of globalization

From my experience, the best way to answer these questions is by using the principle of comparative advantage, brilliantly explained by David Ricardo. Ricardo stated that economic activity and international trade, at all levels, depends on everyone doing what they know how to do best. This principle is universal and applies to all individuals, societies, corporations, regions, and countries at all times.

Originally, Ricardo termed it the principle of comparative costs, and documented it when opposing the protectionist Corn Laws, which restricted imports of wheat. That term was later substituted by comparative advantages – also frequently referred to  as competitive advantages. Personally, I also use the expression making a constructive use of differences, to refer to the same principle.

Human preferences, tastes, abilities, physiques, and metabolisms are different. Therefore, another way of understanding the principle of comparative advantage is by focusing on the constructive use of all differences that exist among individuals.

The principle of comparative advantage can be fully implemented even within a single work group. A football team can be a good example. The position of each player on the field is well defined and different from the others. Yet the individual positions complement one another and are thus mutually reinforcing. Everyone relies on their own team members—just as it happens in everyday life, be it within a profession, family, or any other setting.

The business and professional world is exactly like sports. Using comparative advantages involves specialized labor, for the constructive use of differences and teamwork. The good news is that, as hard as it may be to believe, there are enough jobs for everyone in the world. However, this only holds true if society is appropriately organized. A reasonably well organized society functions under the not-a-zero-sum-game principle, whereby new growth is constantly created, without having to subtract that growth from elsewhere, on the average. In order to properly understand the not-a-zero-sum-game principle, in this context, we must constantly have in mind the creative destruction mechanism. On top of that, given the ever-present protectionist instinct in many nations, it makes us wonder how much humanity has really learned about the multiple, profound and lasting benefits of free trade. The evidence suggests that there is still plenty of learning to do in this regard.

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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  1. […] can be summed up in one concept: high competition spirit/action based in each individual’s unique comparative advantages. This, of course, also fully applies to all levels of society  (organizations, countries, […]

  2. […] came across a simple law of economics, first thought of by David Ricardo in 1817. It’s called Ricardo’s Law of Comparative Advantage and it really should be required reading for any citizen. Especially those in the […]

  3. […] David Ricardo was one such mind. In our post,  one of our most tweeted posts of the year, ”David Ricardo: Comparative Advantages and Globalization,” we look at the comparative advantage and explain Ricardo’s development of that […]

  4. […] Panama is an excellent example of a relatively tiny nation that has been recently moving smartly along the lines of its basic competitive advantages. […]

  5. […] That desire has to be transformed into intensive work and order, of a creative and constructive nature, making the most of the country’s comparative advantages. […]

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