The advantage in comparison

The advantage in comparison by Sauvik Chakraverti

Posted: Thu, May 28 2009. 11:15 PM IST

Without comparative advantage, life in the city would be like life in the jungle: the survival of the fittest. But now the free market allows the lesser skilled to thrive 

How do atomistic individuals combine to form Society? And does this result in the “survival of the fittest”? Do weaker, lesser skilled or handicapped people face extinction in free market competition? 

The answer to all these questions lies in David Ricardo’s principle of comparative advantage, propounded in 1817. However, the manner in which Ricardo laid down this principle is flawed. It looks at nations trading, not individuals. Such abstract theorizing in economics has rightly been called the “Ricardian vice”. Yet, Ricardo’s principle is hailed by those who understand it correctly—such as the great classical liberal, Ludwig von Mises—as the law of human association, or the “first law of sociology”. There is much that misses our perception of earthly reality if this law is not firmly ingrained in the intellect. 

Recently, I was asked by a student if Ricardian comparative advantage applied to the modern world. It seemed his economics professor had questioned its continued relevance. As I groped for a quick answer, the doorbell rang and my gardener entered. I replied: “I am a better gardener than my gardener, but he has the job because he possesses a comparative advantage over me.” 

Indeed, this phenomenon of a lesser skilled individual being gainfully associated with one who has far better skills in the same area is common. The woman of the house is almost invariably a better cook than the person she hires. The owner of a car is often a better driver than his chauffeur. The only reason why these individuals with inferior skills hold jobs is because each possesses a comparative advantage. 

In a market catallaxy, each of us must specialize in our own area of comparative advantage. Among all my skills, which include gardening, cooking, driving, singing and writing, I must specialize in what the market will reward the highest. I have chosen to write. I therefore have to hire a second-rate gardener, a third-rate chauffeur and a fourth-rate cook. This is an economical arrangement because of comparative costs—I pay these people less than what it would cost me, in opportunities forgone, to do these chores myself. This is why they possess a comparative advantage over me. 

Note that I myself am not the “best writer”. Catallactic competition is different from “games” where the winner takes all. In catallactic competition, all are winners: The market merely grades them according to consumer choice. The best whisky sells alongside the worst. Life in the jungle is “survival of the fittest”. Life in the city is not. Stevie Wonder, blind from birth, is a superstar only because of free markets. 

Indeed, the law of human association is valid even in non-market situations, when individuals spontaneously specialize. My girlfriend does the cooking while I do the dishes because I am “least bad” at the latter task. She is better than me at both. But when we associate spontaneously, we both gain. I get better meals, while she gains from an extra pair of hands. Both the lesser skilled as well as the greater skilled individuals gain.

The poorer countries of the world have the most to gain by obliterating national boundaries. This means free trade, free immigration and free markets will not benefit the rich and the strong alone. On the contrary, poorer nations have even more to gain by obliterating national boundaries. By trading our poor skills, we will obtain the produce of highly skilled nations. So, by working at a call centre, a low-end skill, we can buy German cars, Finnish mobile phones, American software—all “hi-tech”. This means globalization is a good thing. Free trade will benefit the entire developing world. 

The law of human association tells us that there are eternal harmonies between all our economic relations. The rich, the poor, the unlettered, the scholars and even the blind and the lame can happily coexist in the free market—and all will gain. There are no mutual antagonisms. Rather, all dissensions are the produce of spurious ideologies, from pure xenophobia to protectionism and economic nationalism. These spurious ideologies, when translated into official policies, harm the entire world. 

A vital corollary: The personnel of the State do not associate with the rest of society according to comparative advantage. The State is but a monopoly on force, compulsion and coercion, while Society is formed by voluntary association. As Thomas Paine wrote in the opening lines of Common Sense (1776): “Society is created by our wants, and government by our wickedness; the first is a patron, the last a punisher.” The only purpose of the State is to punish outlaws. By not understanding the first law of sociology, we have also failed to understand the first law of political science—that the State must be limited by law if Society is to flourish. 

We Indians have placed the State at the “commanding heights of the economy”. This is an invitation to the misuse of coercion—the foundation of tyranny. Under an unlimited government, Society invariably collapses. The socialist confuses State with Society because he is blind to the law of human association. 

Finally, it must be realized that a great deal of mischief is being wrought in the minds of our youth by the State’s education system. We Indians are compounding our errors by also placing the State at the commanding heights of education. 

Sauvik Chakraverti is an author and columnist. He blogs at www.sauvik-antidote.blogspot.com. Comment are welcome at theirview@livemint.com