Tuesday, January 5, 2016

Discover Your Macadamia Nut

Writing at the Foundation for Economics Education, Duke University Professor of Political Science Michael C. Munger excoriates Ricardo. Comparative advantage, he argues, is a dead letter in an age of highly mobile capital, fewer obstructions in labor markets, and an astonishing acceleration in the market discovery process.


Analysts seeking to understand idiosyncratic patterns of production and exchange need look no further than the two fundamental questions of economics:

1) Opportunity cost: what is the value to all salient parties of alternative uses of the resources in question?

2) Division of labor: to what extent does the structure of the market permit buyers and sellers to strike a mutually beneficial (dare I say euvoluntary?) exchange?

Answer these two questions, my friends, and you can explain why it was that New England was home to most American manufacturing in the 19th century (lower opportunity cost for building multi-story mills plus Western European immigration) as well as the advent of the sharing economy (insanely cheap communication allows for otherwise idle resources to be employed rapidly). The "comparative advantage" of dumpy Connecticut mill towns was an illusion, little more than the vagaries of historical accident and geographical fancy. Imagine an alternate history where Jamestown had been a few miles north, out of the swamp and the disease. Semi-skilled laborers might have landed in Roanoke rather than Boston and the American industrial revolution might have taken place on the Potomac. And don't tell me for an instant that you think there's something innately advantageous about an ambitious family renting out a spare bedroom with Airbnb.

So is there any role left for comparative advantage? Shall we toss Ricardo's poor bones onto the pyre and be done with him? I'm not entirely sure.
Admittedly, it was a significant intellectual achievement to show that the weaker trading partner benefits from trade, even if the stronger partner is better at everything. But those fixed differences have largely disappeared in many markets. The question of what should be produced, and where, is now answered by dynamic processes of market signals and price movements, driven by human ingenuity and creativity. The cost savings resulting from successfully dividing labor and automating production processes dwarf the considerations that made comparative advantage a useful concept in economics.
Emphasis added.

Judged against the immense volume of commerce on this little blue-green planet of ours, the macadamia nut is pretty humble. Yet this sensitive little guy is picky about climate. Perhaps not as sensitive as the vanilla orchid, but you're not likely to find a macadamia farm in Wisconsin. Dairy farmers give up too much milk production to justify a futile attempt at hothouse macadamia trees, at least at typical market prices. Australia is better suited to the task (70% of world macadamia nut production is Australian). You might say that fixed geographical differences persist in some agricultural markets. Nuts. Spices. Wine. Wild-yeast beer.

And, perhaps also in natural talents. "Ringo isn't even the best drummer in The Beatles" may be a false Lennon quote, but it captures the spirit of immutable differences in endowments. Try as I might, I'll never have the lungs and paddle-like extremities of Phelps, nor will I be able to dunk from the free-throw line (indeed, I'll never be able to dunk at all, except on my daughter's toy hoop). I will never write anything as good as either Charge of the Light Brigade or Ozymandias. I can't sing. But where Munger's point shines, it is here. Ability is one part natural talent and 99 parts practice. I had no particular affinity, no natural talent for operating a nuclear reactor, nor for churning out button blanks. Yet I performed these tasks admirably enough with sufficient practice. Opportunity cost and the division of labor determine the extent to which I am able to discover and hone what talents nature has bestowed. Comparative advantage is a starting point, a suggestion. At the extremes, in winner-take-all tournament competition, it might still matter, but for most of us, we pick something that suits our tastes and then practice until we get good at it.

And then we have to start all over again when the market conditions change. Life, friends, ain't easy in the hive.

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Do you have suggestions on where we could find more examples of this phenomenon?