Comparative Advantage and Socialism

If you are a free market advocate, if you are opposed to excessive Government or you just are a Punk Anarchist which doesn’t support any form of authority, you must knowingly or unknowingly worship Adam Smith, and let’s Say… David Ricardo.

Anyone that studied International Economics, knows that each country must specialize in something.

Adam Smith said: Do what you do better!

But Ricardo replied: Even though you may the Best in some deed, maybe there’s some other quest you must pursue

After that, the Invisible Hand would do its magic and through international trade, Earth’s welfare would increase.

Let’s now narrow our vision, let’s focus on intranational trade, our everyday lives.

Just a simple example.

In country A, there are two professions: Fisher and Builder.

Let’s say John is a “10” fisher, but a “8” builder.

Adam is a “8” fisher, but only a “3” builder.

Both wannabe employees, Adam and John will first apply to be a Fisher, because they know they are good at it, so they may end up earning a higher wage.

And the captain of the ship, will obviously choose John, which is the better Fisher.

Therefore sadly, Adam will end up being a lousy builder.

So…the free market society, through its invisible hand will end up with total welfare (measured as production in this simple example assuming we can compare fishes with buildings) of 13!

The free society will exploit naturally the absolute advantages, trying first to employ the ones with the “best” absolute advantage, disregarding the possible job misallocations that that may lead to.

“A socialist society, through the visible hand of its benevolent dictator” would allocate the employees not to their decision (based on absolute advantages) but to society’s “greater good”, taking into account comparative advantages, achieving in this example a total welfare of 16!!

This is all great, but honestly my head could not feel peaceful with this socialist victory through efficiency. It was a true puzzle, which even asking some die-hard libertarians, I couldn’t get a better answer than: “Stop talkin about Unicorns, dumb ass”

But eventually I came up with a solution to this socialist victory puzzle.

Socialism wins clearly the (short-term) battle.

But Capitalism wins the war.


Imagine you know that you may excel at something, but eventually some crazy Government bureaucrat will tell you that you are more useful to society picking thrash off the streets.

Can you feel the frustration? Yap..

Who will try their best to excel at something ever again?

Hurray for Liberty and free markets (in this simple example).

Capitalism won by inter-temporal efficiency knock-out.

I guess David Ricardo can stop now rolling in his grave.



2 thoughts on “Comparative Advantage and Socialism

  1. The greatest advantage of capitalism lies not in the its Efficiency as mesured by absolute or relative advantage that most textbook advocate…

    if that happend we would tend to have smaller and smaller companies and not bigger and bigger.

    If one wants to achieve efficiency, socialism and dictatorship are much better ways given that the one commanding the troops is wise… If there’s no wise man to rule, than even in a capitalist system cant save you…

    What capitalism offers, not by it’s functioning as a system as many believe, but by the feeling and the mindset it promotes, its innovation as a by product of the mindless persuit for profit…

    But there’s a catch… If innovation isn’t nedded to obtain profit… well…. it won’t happen…

    For the last part…

    That bureaucrat story is a fallacy, since one also feels the frustration in the first situation, for he believes is better as a fisher than as a builder.

    Liked by 1 person

  2. I presume your numbers for fishing and building roughly correspond to productivity. I feel that if you expand your example from 2 people to many more then there will be a shortage of good builders such that the John’s of this world (better builders and fishers) will eventually be compensated more to build than to fish as otherwise not enough building would be done. Hence I think that capitalism isn’t as sub-optimal as you make out. Even if productivity is generally higher in fishing than building, in a capitalistic system labour can capture more of the productivity gain in a less productive endeavour. The fact that everyone can fish on average better than build means the captain of the boat should see a lower capture of the wealth creation than the chief of a building team. This to some extent nullifies the win that socialism may have. Also the ability of capitalism to allocate people via pull incentives (being paid more) rather than push incentives (being forced into a particular line of work) generally makes for a happier, more motivated and hence more productive population.

    I do of course agree that there are times when socialism beats capitalism in allocating resources effectively. Improving train networks can often increase productivity significantly but despite this private sector companies struggle to make a return on building the infrastructure. I think this is because the benefits are broad based and captured in increases in local business revenues and land values around the stations. The only actor capable of such a broad capture of the dispersed revenues is the state through general taxation. Capitalists tend to argue that if the private sector can’t make it work then the project should not be backed by the state. In the case of large scale projects this is wrong as the problem is the lack of ability to capture the productivity gains not with the project itself.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s