Last December, I gave a talk at the Osher Lifelong Learning Institute (OLLI) on Adam Smith’s Wealth of Nations. I blogged about the talk here. And you can see the talk here.
At about the 4:13 point of my talk, I told about being on a taped interview about 20 years ago with someone who I thought was on the same wave length as me. When the host was talking about trade, he stated that Adam Smith had believed in comparative advantage. I corrected him, noting that that idea didn’t come along until James Mill and David Ricardo discussed it in the early 19th century. The host argued back and I stuck to my guns. We had just got started but he got angry, abruptly ended the interview, and hung up on me.
Later in my OLLI talk, at the 23:05 point, I highlighted this quote from The Wealth of Nations:
What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. (pp. 478-79 of the Edwin Canaan version.)
Then a little voice in my head said, “Wait a minute; that sounds awfully close to comparative advantage. When I used a numerical example to explain comparative advantage to my students over the years, it always came down to cost differences between the two countries. One had an advantage in one; the other had an advantage in the other.” I like learning as I talk. So I confessed to the audience that maybe the guy who hung up on me was making a good point.
I thought of all this when I read an excerpt from Shruti Rajagopalan’s interview of trade economist Doug Irwin (which Tyler Cowen recently quoted).
RAJAGOPALAN: I have a different question on Adam Smith. We’re all taught Adam Smith’s division of labor, specialization, economies of scale, the cliff notes version of that. Then, we learn about absolute advantage in about five minutes. Then, we set it aside and start thinking about comparative advantage.
The first question I have is does Adam Smith’s basic model of division of labor, specialization, and economies of scale anticipate the comparative advantage trade models, or does it actually undermine the comparative advantage trade models in the way that Krugman wrote about or something else?
My answer would have been that Adam Smith did not talk about absolute advantage. Once he uses the word “cheaper,” he’s talking about comparative advantage.
Doug Irwin has a different answer.
IRWIN: I think that Adam Smith has a broader view of trade, a much richer view of trade than what I would think is of the narrower David Ricardo theory of comparative advantage. If you have to read one of the two, read Adam Smith because it’s much more fun to read. Reading David Ricardo is more like reading a textbook in the sense that he doesn’t have this broad historical sense and these new rich ideas and how they’re interacting that leaves a lot to the imagination and leaves a lot to future research to flesh out.
He’s saying, “England can produce wine and cloth. Here are the labor coefficients, and we’re going to do this static comparison between England and Portugal.” That’s a very narrow way of thinking about trade.
It’s true that Smith didn’t have labor coefficients. But he did a lot with words. And with words, I’ve now concluded, Adam Smith was implicitly discussing comparative advantage.
