Being Thankful for Comparative Advantage

When asked what people are grateful for, common answers during Thanksgiving are family, friends, financial security, good health, or a nice, wonderful Thanksgiving meal.  These are good answers, and I certainly don't eliminate them as things for which I need to be thankful.  However, I would like to add something a bit more idiosyncratic to the list.  This year, I would like to focus on why I am thankful for comparative advantage.

It might seem peculiar to be thankful for an theoretical concept in economics.  However, when we see how that theory is applied to practice, the reason for the gratitude becomes visible.  The law of comparative advantage, also known as the Ricardian Law of Association, states that an entity, whether it be an individual, firm, or country, has the ability to produce a good or service at a lower opportunity cost than the other.  Although it might not seem logical for a country with absolute advantage in multiple goods or services to trade with a country with absolute disadvantage, the reason for exchanging goods and services makes sense when one considers relative efficiencies.  For example, Michael Jordan might be better both at playing basketball and mowing his lawn than his landscaper (i.e., absolute advantage), but because of comparative advantage, Michael Jordan decides to play basketball while letting the landscaper cut his lawn because his comparative advantage in the former is much greater than the latter.  By using specialization and division of labor, we come across a few things.

On the international level, this translates to free trade.  Free trade leads to competition in the international market, which leads to a greater incentive to create a better product.  Since nation-states are participating in free trade, that also means that they have to cooperate.  Think of Britain and France, two nations that had fought wars with each other for centuries.  When they started to trade with one another, they stopped fighting.  Why?  Because the benefit of improving the quality of one's lifestyle exceeds the costs of warfare.  It's also one of the reasons why China is not attacking Japan right now (although American military backing of Japan and the balance of power issues also attribute to China's military inaction).

To conclude in layman's terms, the free trade induced by the principle of comparative advantage is a stabilizer amongst people.  It better allocates resources.  It brings the competition needed to produce better goods and services.  Overall economic welfare is increased, which means we can all enjoy much better living standards than if we didn't have it, and that is something for which we should all be thankful.

Happy Thanksgiving!