My colleague, Shruti Rajagopalan, points out that today is the 200th Anniversary of the publication of David Ricardo’s On the Principles of Political Economy and Taxation. It was here that the notion of comparative advantage began confounding protectionists and nativists. Shruti offers this famous example of it in practice:
Apparently, when asked if Ringo Starr is the best drummer in the world, John Lennon quipped, “Ringo isn’t the best drummer in the world. He isn’t even the best drummer in the Beatles.” And while Lennon may have fancied himself a better singer, guitarist, songwriter, and drummer, than Ringo, the Beatles are still better off with Ringo at the drums.
The essence of comparative advantage is that you don’t need to possess a great talent to benefit from trade within a group, whether we are talking about individual people or nations. So long as there exists some variation in relative talents, people will be able to benefit from specialization and trade.
This message is as relevant as ever. The British Parliament has just voted to hold fresh elections. This is supposedly to strengthen the Prime Minister’s hand when negotiating new terms of trade when Britain leaves the European Union. Politicians act as if trade is dangerous, always a threat to the national interest unless carefully constrained. They negotiate complex deals and regulation on market access, essentially holding their own consumers hostage, preventing them from buying foreign goods unless other countries agree to open their own markets. They fear that their domestic producers will be out-competed by superior, or cut-priced, businesses from abroad.
What comparative advantage shows is that even if that happened to be true for every single industry, domestic businesses could still specialize so as to be competitive on the world market, and improve domestic living standards at the same time. Britain could open its ports and wallets to foreign goods and services with no tariffs, even without any reciprocal deal from the EU, and yet still benefit from trade.
Why? Because it doesn’t matter if you have to be the drummer, just so long as you are in the band.