Not an absolutist

We’re still in the sub-series of posts on “honorable mentions” in our wider search for the world’s greatest thinker ever. To remind: in this sub-series I commend great thinkers who made a huge contribution, but in a circumscribed area of expertise. Today: David Ricardo.

Area of interest: Trade (not necessarily between countries!)

Why great: Because he demonstrated with simple logic something non-obvious, which is that two individuals (or households, or countries…) can both benefit from specializing and exchanging their wares even if one side is better (more efficient) at producing all the wares.

The key insight is that there is a difference between absolute advantage and relative advantage, or comparative advantage, as Ricardo called it. Let’s say that A is better at making guns and butter than B, but its advantage is greater in guns. If A makes the guns and B the butter and both trade, both will have more guns and butter than they did before.

Comment: At first glance, Ricardo’s idea may seem very geeky. But actually it has far-reaching implications about interdependence in a harmonious society, which includes a household and a global society. For all its simplicity, the idea is also astonishingly hard to grasp. People keep getting it wrong. You hear politicians and journalists saying things like: “What if China has a comparative advantage in everything…” Well, that’s logically impossible. It means that the speaker does not understand the idea.

But the moment I realized that this was a truly great idea came when I read about research that showed that the Neanderthals succumbed to us, ie Homo Sapiens, because they did not have a division of labor whereas we did. Neanderthal women joined the men in the hunt. Cro Magnon women looked after the children and gathered, whereas the men went off to hunt. Even if women of both species had been better at hunting in absolute terms than men, their relative advantage would have been greater in caring and gathering, so that specialization and trade gave us the edge. Put differently, Smoot and Hawley were … Neanderthals. 😉