The way I understand Ricardo's Law of Comparative Advantage, it goes something like this:
two countries, England and Portugal. England produces wool and wine.
Annually, England can make 400 bales of wool and 200 barrels of wine.
Portugal is also in the wool and wine business, but the Portuguese are
less efficient. They can only produce 100 bales of wool and 100 barrels
of wine per annum. Nevertheless, England should concentrate on producing
wool and Portugal on making wine. Even though England is more
efficient at everything, it should concentrate on what it is most
efficient at, while Portugal should devote itself to its area of
greatest relative efficiency (i.e. the thing it is least inefficient at
compared to England).
We know this because some maths shows that
such a strategy will lead to the greatest total combined output of both
products. The two countries can then trade and, assuming the price
system works well, they will both be better off than before*.
is supposedly the closest that economics gets to a physical law, what
economists cite when they're asked to name something in their discipline
that's definitely true. It's what smart people explain, speaking slowly
and occasionally rolling their eyes, when naiive interlocutors wonder
about the benefits of free trade.
But let's look at how freer
trade and increased specialisation could play out. Imagine that wool
production in Portugal is undertaken by smallholders while wine is grown
on estates owned by a landed oligarchy. After the Portuguese government
enthustiastically embraces its new FTA with England, the sheep farming
land is put into wine production and the former wool producers work on
the estates. However, despite the overall gains from trade, the estate
owners see no reason to pay more to either the new or the existing
workers. In fact, maybe they can pay them less, since now there's little
chance they'll run off and become a small-scale wool producer.
some technological advances in wine production allows the Portuguese
estate owners to increase production while laying off some of their
workers. Fearful for their jobs, the remaining workers daren't ask for
any pay increases.
This looks like it could lead to things getting
worse for the majority of Portuguese who aren't wine estate owners. But
never fear, an elightened Portuguese government ensures that the
benefits of a growing economy are widely distributed. Having "grown the
cake", the government receives increased tax revenues, which it uses to
provide generous welfare payments to unemployed workers and increase
funding for education.
However, this government is voted out, as
the opposition rails against the the "irresponsible bribes" to
"unproductive parasites". Why should the wealth producers give up their
hard-earned income to support those who aren't contributing to the
economy? Both the weathy wine estate owners and many of the embattled
workers buy in to this argument.
This scenario is obviously
simplified but may also sound rather familiar. You'd think that smart
economists would factor in such changes to the political economy and
would have done some serious thinking about how they could be addressed
in the real world. You'd also think that in a democracy such changes
would have to be thoroughly considered and negotiated before being
accepted. But then, maybe I'm being naiive.
*If I'm working it out
right, England could potentially end up with 450 bales of wool and 200
barrels of wine, while Portugal would have 150 bales of wool and 100
barrels of wine.