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this post was submitted on 09 Apr 2025
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I remember learning about comparative advantage and opportunity cost, thinking it was the dumbest shit in the world. Now we get to see why 😈
In the context of macroeconomics, it refers to the idea that even if a country could make everything they need internally, it is ultimately cheaper for everyone if regions just specialized in producing stuff that they do better/cheaper than anyone else, and trade for the rest.
In a very simplistic sense, if Country A and Country B are each able to produce all the food and all the clothing that they need internally, but Country A is way better at making food and than clothing, and vice versa for Country B, it would make sense for Country A to just focus on producing a ton of food and import their clothing needs. Then everyone gets more stuff overall.
However, this implies that there are no geopolitical frictions between Country A and Country B. It works if countries can maintain friendly trade relations, but can make supply lines real fragile.
Also as homhom9000 says, sometimes "specializing" gets really stupidly specific.
It also doesn't account for the common situation where a country could do something more cheaply internally if they had a decade or two to spool shit up.
See China where it's gone from a comparative advantage in coal and not much else, to cheap manufacturing, to high tech manufacturing, to universal comparative advantage.
It's all about actually having the capital. China understood the assignment and put itself in a position to attract capital and gain that comparative advantage, now it's all paying out supremely.
This is absolute advantage. Comparative advantage is when a country can make something relatively cheaper then the other goods. So if a country A can make a coat for 10 tögrög and a bicycle for 20 tögrög, while a country B can make both for 30 tögrög, it means that the country B has comparative advantage in making bicycles and it would be more profitable for both if country B makes bicycles and trades for coats with country A.
What if country A doesn't produce that much at all and instead just prints dollars, then uses it's military to force everyone to trade oil and everything else in dollars enjoying a steady flow of goods and services in exchange for cheap paper? And what if country A then suddenly reverses course (because other countries start to move away from the dollar anyway) and tries to cash in on this flow, while it's still going, with high tariffs?
So much of undergrad macroecon classes is built on the idea that everyone plays nice and fair with each other.
You know, a fantasy land.
Opportunity cost to justify comparative advantage is dumb, not Opportunity cost in general.
Edit: "Moving my banana slicing factory to Thailand and picking the bananas in Brazil to sell to Canada has a better comparative advantage than slicing the bananas while they're in Brazil" like that
Yeah you're right because in that case it's not really a difference in the marginal costs that motivates the spreading out of the supply chain (on the contrary, having to transport the goods around adds a lot of overhead) but the colonialist need to keep each place from being self-sufficient.
However, you shouldn't throw out the baby with the bath water. Marxist economists still consider comparative advantage because means of production aren't equal in each country. From Chapter 10 of Towards a New Socialism (from 1993 so this comparison is outdated):
Of course, Cockshott goes on to develop a theory of how this structure actually works when the ratio of demand for the various commodities inevitably doesn't match the productive capacity of both economies. The point is, though, that even if we did away with exploitation we'd still have a situation where it makes more sense to do certain kinds of production in one economy due to unequal means of production that lead to comparative advantage.
also obligatory Cockshott is a TERF disclaimer
I don't disagree that there can be a benefit, thanks for the source, but in Keynesian economics comparative advantage is mostly used to justify colonial power over smaller nation states. Local industries are undercut for profit, once the "profitable" production is moved elsewhere(assuming they have the means) nations states are saddled with whatever was decided to be profitable for them to produce instead. It pigeon holes nation states into capitalist set industries that are mostly only advantageous for profit/productivity. What happens if the means of production is given the opportunity to equalize? At the same time, we all don't have to produce the same thing either.
I can't remember where I was reading this, I think in Palo Alto, but there was discussion about before colonialism many countries were known for certain things. Like India and textiles or China and pottery, Rugs in west Asia, but as countries were thrusted into global economics and with technological advancments, these profitable industries became no more, devastating economies. In it's place, is what's advantageous,most profitable, and productive to the ownership class.
Naturally this is already in place and we can't go back, nor would it be advantageous to, but we shouldn't rebuild colonialism for productivity.