September 16, 2004
Ricardo?s difficult idea

A few days back, Amardeep Singh, (who writes a lively and erudite weblog primarily about South Asia) linked to an intriguing article on NYT describing an upcoming article by Paul Samuelson (apparently) questioning the economic arguments for free trade in services. Obviously questioning free trade is nothing new, but what is unusual about this is that an economist of Samuelson?s stature is writing it.

In the context of the article, Amardeep wanted an explanation of Comparative Advantage theory of Ricardo. A commentator has already linked to the Wikepedia entry on a comment to his post.

As a non-economist, I found this page to have the most lucid explanation. It also linked to ?Principles of Political economy and taxation? in its entirely in both html and PDF. Modern theory of comparative advantage has apparently come a long way since 1817 when Ricardo wrote it, although Ricardo remains something of a patron saint of free trade.

One the reasons people keep taking potshots at comparative advantage theory is because the argument for free trade is built on the mathematical foundations provided by it. You can?t fight the idea for free trade in respectable economic circles without at least euthanizing Ricardo (kind of like you can?t talk about creationism without taking on the elephant in that particular room, Darwin?s theory of evolution).

As early as 1994 Krugman wrote a paper entitled Ricardo?s difficult idea that anticipated and addressed most of the challenges to the comparative advantage theory on the op-ed pages. (It is a little unfortunate that Krugman?s reputation as a political commentator seems to have overshadowed his academic reputation as one of the finest economists of his generation; he is also one of the most lucid writers on political economy for laymen like us). In order to get a context, it is worth reading that particular Krugman paper when reading any critique of Ricardo.

The last prominent op-ed attacking comparative theory that I had noticed was in January 2004; written by Charles Schumer and Paul Craig Roberts. This response by Noam Scheiber in TNR to that article was particularly witty. I think it still remains relevant as a rejoinder.

However, it would be ridiculous to even suggest that Samuelson doesn?t get Ricardo. (Although I do think that Western thinkers often make certain wrong assumptions about outsourcing and Dr Bhagwati in an interview for that article suggested as much). Stanislaw Elam once asked Samuelson to name one theory, which is both true and non-trivial in the social sciences. After several years Samuelson replied that it is the theory of comparative advantage.

"That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.?

I don?t expect to get Samuelson?s scholarly article when it appears (when economists write for other economists, I suspect they take great care to ensure that it is inaccessible to those outside the fold!). Perhaps someone like Edward Hugh or Dr Delong would interpret that article for people like us!

Posted by Kaushik at September 16, 2004 07:19 AM | TrackBack
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