Quote of the Day: I, Peach: A Lesson in Comparative Advantage

At the Independent Institute, Austrian economist Robert Higgs explains the the law of comparative advantage based on the peach market: [bold and italics mine]

Now, you might think that transporting peaches from California, perhaps from the area near Fresno where I grew up back in the 1950s, flies in the face of your understanding of comparative advantage, which you acquired in an elementary economics class in college. After all, the United States of America is an economically advanced country, and Mexico is a relatively less developed and more labor-abundant one. Shouldn’t the Mexicans export agricultural products to the USA and import goods such as sophisticated machinery, computer software, and technically advanced services? Well, in a word, no. At least, not exactly.

You see, there is more to comparative advantage than professors can fit into the simple Ricardian model of England and Portugal trading with one another, the former specializing in the production and export of cloth, whereas the latter specializes in the production and export of wine. The basic idea remains sound, though, however much we complicate the example: the country whose producers have a relatively lower real opportunity cost of producing a certain good will be better off if they do so, and if the country’s merchants import the goods for which its own producers have a relatively higher real opportunity cost.

In the real world, of course, the complexity of trade defies comprehension, as countless millions of goods and services are produced, exported, and imported seemingly in defiance of any clear pattern. Yet, an underlying pattern is there, and it remains basically the same one described in its essence by Ricardo two hundred years ago.

We must recognize, however, that what is being traded is not simply “agricultural exports from Mexico” in exchange for “technologically sophisticated goods and services from the USA,” but countless specific goods and services made available at specific times and places. So, for example, it might be the case that a specific type of “tomatoes” flows from a particular place in Mexico to a particular place in the USA at one time and in the opposite direction at another time. Mexico currently exports much petroleum, for example, but imports many refined petroleum products. No mystery here, just the glories of entrepreneurs striving to earn profits by pleasing consumers at minimum real opportunity cost. Similar statements might be made for any number of goods and services being traded by any number of trading partners on opposite sides of the border. The upshot of this incomprehensively vast and complex process is an enormous increase in the economic well-being of the world’s people. Indeed, if this process were to be shut down, it is extremely doubtful that the earth’s current population could survive at all.

It is no refutation of the basic economics of trade that governments interfere in the trading process everywhere in the world to some degree. This interference, driven overwhelmingly by domestic rent-seekers who wish to avoid open competition with foreign sellers, distorts and discourages the overall process, but the benefits of the trading process are so great that it continues and greatly enhances the well-being of consumers everywhere notwithstanding the barriers and predatory interference that governments create.