Global economy and comparative advantage
I recently listened to the podcast episode “Defending Globalization Means Embracing Comparative Advantage” by the globalist and liberal Cato Institute based in the USA. In the episode, Cato Institute member Donald J. Boudreaux discusses the economy, trade, markets, and other interactions, focusing on comparative advantage. Here are BoudrBoudreaux's points:
- Comparative advantage is crucial for understanding international trade dynamics. The belief that domestic production should replace foreign production overlooks the principle of comparative advantage, leading to economic misunderstandings.
- Just because someone can perform a task doesn't mean they should, as it may not be economically efficient. Comparative advantage isn't technical ability alone but cost efficiency in producing goods and services.
- Economies benefit from comparative advantage by specializing in areas that maximize overall productivity and welfare. Comparative advantages are discovered through market competition, highlighting the importance of global trade and flows.
- Comparative advantages are not static since they evolve as individuals, firms, and countries develop new skills and technologies.
- Countries don’t trade in the first place. Instead, it is individuals and companies, meaning that comparative advantage resides at these levels rather than at the state or country level.
- Subsidies and tariffs can distort market signals and hinder the discovery of comparative advantage, leading to inefficient resource allocation.
- Protectionist measures may benefit certain industries in the short term but often result in unseen costs, such as lost jobs and output, as resources are diverted from more efficient uses.
A part of the discussion that caught my attention more was the views on states, companies, and individuals. I read a similar statement in a school book on social sciences in Sweden published for high school students. The book states that when it comes to trade, individuals and companies trade in general, while trade between governments is more limited.
In my political experience, when people say “we trade”, both in political and popular discussions, many think about countries, nations, and states. The problem with such assumptions and views is that they do not reflect social reality.
For example, if you live in a village or a city and trade something with a person from another village or a city, it does not mean that villages or cities are trading. It means that individuals and organizations, such as companies or cooperatives, are trading.
Today, billions of humans are legally or illegally trading with each other because of the globalization process that began after the Cold War and early 1990s.
At the same time, trade agreements, world-level economic interactions, and human cooperation still depend on political decisions made by national governments or supranational entities such as the European Union. This can be compared to a case in which, for example, trade in the USA was mainly decided by the 50 state governments or if 290 municipalities decided to trade in a country like Sweden.
One of my thoughts for the future is how global or world trade can become “really” and fully global and worldwide. We humans can trade, exchange, migrate, and engage in other economic and social activities as equal planetary citizens.
A world-level comparative advantage is possible if democratic world-level public institutions can be established. Something that can be co-creared in a similar way the European Commision and the EU:s internal market functions today and has to be constantly improved.
Some degree of world government is needed to regulate a world economy, but the question is how much and what institutional powers such institutions should have.
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