Home » Uncategorized » More on Comparative Advantage, or Living Well is the Best Revenge.

More on Comparative Advantage, or Living Well is the Best Revenge.

Yesterday’s article about 10 Myths was well received, but it seems one point needs elaboration. Some people seem to think that trade benefits both countries only if both of them “play fair”. But if one of them does all kinds of wicked stuff, like imposing tariffs, or subsidizing their industries, or whatever, then the country that plays fair will lose by trading with the unfair country.

Devil’s Advocate: Well, of course. If they won’t buy our products, and are only willing to sell us theirs, it stands to reason that this asymmetry will harm us. They get to sell their wares, but we are stuck with ours and can only buy from them. I say we strike back. Retaliate in kind. That’ll show ’em.

SD: You poor devil. Let’s explain it beyond all doubt with the parable of the Doctor and the Secretary.

Doctor X is very successful and very smart. He makes a thousand dollars an hour treating the rich and famous. He has a secretary who is not very bright. She files his stuff and so forth, but is pretty slow.

One day his secretary dies. Doctor X has to do the filing himself. And he is really a whiz at it. What took the secretary a day he does in an hour. So question: Is he better off now the secretary is dead?

DA: Sure, look at how the filing gets done so much faster.

SD: I say he is much worse off. Secretarial work pays 20 bucks an hour. So he paid his secretary $160 to do 8 hours work, which he does in an hour.

DA: You see? He is saving $160! I told you he’s better off without her. And all he has to do is put in an hour’s work instead of her 8. Should have fired her long ago, if you ask me.

SD: Yes, he is saving $160, but he is losing a thousand dollars. Because in that hour, instead of filing, he could be out there treating the rich and famous and getting a thousand an hour. Net loss: $1,000 minus $160 equals $840 for every day she is gone.

DA: I never thought of it that way.

SD: Now, just to see all sides of the situation, what happens if the doctor dies? And let’s pretend there are no other doctors, and this secretary has to shell out a thousand bucks of her hard earned money, over a week’s pay, every time she needs a doc. So now he dies, and she has to treat herself. Is she better or worse off?

DA: Better off. Look at all the money she is saving.

SD: Actually, she is much worse off. Because the doc is so expensive, she only goes to him if she has a medical problem she cannot take care of herself. That’s why she is paying him so much. Who knows how she will botch things up if she has to perform surgery on herself, for example.

DA: OK, I get it, each one benefits from their situation. She has a job and a doctor. He has a secretary that frees up his time to make big bucks, plus he has a patient that pays him a thousand bucks an hour every so often.

SD: OK, now lets wreak some havoc.

One day the doctor says “You’re fired.” In retaliation, she stops seeing him as a patient. “If he won’t buy my services, I won’t buy his. That’ll show him!” Was she being smart or stupid?

DA: Smart, I say. It’s exactly what a country should do if the other country imposes high tariffs. Fight back and impose counter tariffs.

SD: Actually she is being very, very stupid. She used to have two benefits from him, a good job and a good doctor. Now the job is gone, but she still has the advantage of having a good doctor. If she “retaliates” and stops going to him when she needs to, what will happen to her health?

DA: Get well soon, secretary, though I don’t give you much chance. I see your point now. Just because she lost her job, why shoot herself in the foot and lose her doctor, too?

SD: Same thing if the doc says,”You can keep your job, but I refuse to accept you as a patient from now on.” If she quits, she is doing the dumb thing. She lost her doctor, why lose her job, too?

DA: But of course.

SD: Now let’s reset and wreak havoc the other way around. The scenario begins with peace and harmony. She does the secretarial work and also visits the doc as a patient, paying him well. Two benefits for him. He has two benefits from her as well. She frees him from the secretarial work so he can make more money, plus she occasionally pays him cash when she is a patient.

DA: In other words, this new scenario begins at step one.

SD: Yes. Now the secretary tells the doc “I found another doctor.” Should he fire her in retaliation?

DA: Only if he likes losing money. Just because he lost a patient, why lose $840 a day doing his own secretarial work?

SD: And what if the havoc begins by her saying, “I quit.” Should the doc refuse her as a patient?

DA: You mean should he lose the thousand bucks an hour she brings in every once in while by being his patient, on top of the loss of a secretary? Of course not.

SD: So bottom line, no matter which of their relationships one party ends, the other party is being foolish if he or she retaliates by ending the other one.

DA: Yep. The benefits of the doctor-patient relationship and the benefits of the boss-employee relationship are independent. If one ends, no matter the reason, they both lose even more if the other one ends as well.

SD: There you go. Now we can understand what happens when one country imposes a tariff. One of their mutually beneficial relationships has ended. Country A can no longer sell to Country B, for whatever reason. Does that mean Country A should stop buying from Country B?

DA: Not unless they want to shoot themselves in the foot. If Country A was buying from Country B until now, that means they found it beneficial. I mean, when you go to the store to buy a Chinese TV set, you do it because you like what they are selling.

SD: Do you think to yourself, “You know, I only benefit from buying this TV set if the Chinese will buy American products?”

DA: Of course not. When a plumber goes to the grocer, he doesn’t think, “It’s only worth buying these veggies from him if he will buy my services as a plumber.”

SD: Exactly. Every trade is always done on its own merits. If the citizenry are buying the imports, that means the imports are a better deal. Meaning the citizens are getting more bang for their buck. Meaning they are benefiting. What’s not to like?

It’s called the theory of comparative advantage. And just because the rest of the world is too stupid to understand and gain by it, that doesn’t mean a smart country shouldn’t take full advantage of the principle of comparative advantage. If some country refuses to buy our stuff, that’s bad for us. But why make it worse for ourselves by refusing to buy something from them when we need it?

DA: Dave, you just don’t understand the warm rewards of spite and revenge.

SD: I have nothing against spite and revenge. If you are into that, I have nothing to say as an economist. But at least don’t fool yourself into thinking that spite and revenge will save you money somehow. Your spite and revenge comes at a price, and don’t pretend that it is good for you in terms of dollars and cents.

DA: Say the govt tells people, “You are all going to lose a lot of money by our spiteful and revengeful retaliation against Country X, but I’m sure all you patriots don’t mind having a permanently lower standard of living for you and your children, so we can get our spiteful revenge.” I don’t think that will go over very well.

SD: No, it won’t. That’s why a smart country will have a big sign on its border that reads, “We buy anything if the price is right. Import all you want, guys, duty free. No tariffs, nothing, even if your country does not accept our exports.”

At this point Dave and the Devil light their imported Cuban cigars and eat their imported Russian caviar, washing it down with imported French wine, as they tool around in their imported Italian racing car.

Living well is the best revenge.

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2 Comments

  1. Michael says:

    Where are the externalities in your post? What happens when the doctor, who now has employment and medical history in his hands, starts extorting his patient?

    Like

  2. Smiling Dave says:

    Not sure what you mean by externalities in my post.

    The question about the doctor extorting his patient is a very good one, in the medical system in force in the USA these last hundred years. I refer you to the mises.org website for how that scam works. For example, you can look at https://mises.org/daily/5066.

    However, good as the question is, it is unrelated to my humble post. First, the doctor can extort or not extort anyone, not just his secretary. So the secretary gains nothing by quitting, Second, the story assumes competition, as is the case [or should be] in trade between countries. If China starts charging too much, one can buy from Hong Kong, or whatever. So that extortion is impossible.

    Perhaps if you elaborated a bit, I could better understand how your question fits in to my analogy and the main thrust of the article, to wit, that the two sides of trade between countries. importing and exporting, are each advantageous to both parties, each aspect independent of the other.

    In short, when you buy stuff in a store, it is advantageous to you and the store, even if you never sell the store anything. Same if you sell something to customers, it is advantageous to both of you even if you never buy anything from them. International trade works the same way. Even if we only import, or only export, to a given country, it is good for both of us. So even if they do not allow exports to them, we only lose by refusing to import from them “in retaliation”.

    Like

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