Bryan Caplan  

A Solipsist's Guide to Comparative Advantage

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According to extreme solipsism, you're the only person who really exists.  Suppose this strange position were true.  What would it imply for the Law of Comparative Advantage?

Consider a standard textbook problem with two agents: you and me.  By hypothesis, I'm a mere illusion, but I'm still a useful resource.  Suppose that an hour of time yields the following output.

 

Wheat

Steel

You

10

1

Me

1

5

Now suppose that the wheat:steel price ratio is 1:1.  Ordinarily, we'd say that you could just trade with me, making us both better off.  But on the solipsistic assumption, you can correctly regard me as a mere tool for converting one unit of wheat into one unit of steel.  For all practical purposes, then, you can forget about my existence, and simply recalculate your own productivity:


Wheat

Steel

You

10

10

Now suppose I'm the solipsist, and you're illusory - a mere tool for me to convert one unit of steel into one unit of wheat.  Then I can forget about your existence, and simply recalculate my own productivity:


Wheat

Steel

Me

5

5

Of course, solipsism is false.  But we two solipsists can still teach the world a lesson.  Namely: in a deep sense, trade increases productivity:

 

Without Trade

With Trade

 

Wheat

Steel

Wheat

Steel

You

10

1

10

10

Me

1

5

5

5

You might object, "We already know that trade increases productivity via shared knowledge, increasing returns, etc."  But these are all empirical claims.  My point is stronger: Trade tautologically increase productivity.  And if a solipsist can see this, so should everyone.


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COMMENTS (18 to date)
Ironman writes:

Why, it's so easy that even a caveman could see it!

Less Antman writes:

> Of course, solipsism is false.

That's just one man's opinion.

Steve Miller writes:

Isn't this technically about absolute advantage, since you are more productive in steel than I, and I am more productive in wheat?

RPLong writes:

Prof. Caplan, this is brilliant. Where do you come up with this stuff?

Also: What have you been reading lately? Between this and the Socratic Dialogue, you seem to be heavily immersed in classic logic these days.

MikeP writes:

But on the solipsistic assumption, you can correctly regard me as a mere tool for converting one unit of wheat into one unit of steel.

I'm not a student of solipsism. Do I get to assume that the n-1 imaginary people in the world can work twice as many hours a week as I do?

Because that's the only way I can see You getting 10 steels per hour out of Me.

edlarso writes:

MikeP,
You could produce 10 wheats (in an hour) and trade them to Me for 10 steels regardless of how long many hours it takes Me to produce them.

MikeP writes:

edlarso,

I suppose so, so long as You doesn't ever want more steel than wheat for an extended period of time.

But that's still more than You could have without trade, so... point made!

Prior_Analytics writes:

Trade doesn't benefit the actors if it changes the prices.

Base Asumption (Production per Hour)
You: Wheat:10, Steel:1
Me: Wheat:1, Steel:5

Local Price Ratio (Wheat:Steel):
1 Wheat for 1 Steel

Results with Local Trade
You: Wheat:10, Steel:10
Me: Wheat:5, Steel:5

International Price Ratio (Wheat:Steel):
1 Wheat for 2 Steel

Results with International Trade
You: Wheat:10, Steel:20
Me: Wheat:2.5, Steel:5

By including markets that have different prices, I went from a W:5,S:5 position to a W:2.5,S:5 position.

Why would I not want to encourage only local trade? Also, I can clearly see why you would want international trade prices in the scenario.

As such, anyone competitive on the international market will always want international trade, but people who are not may not want it for good reason.

-p_a

RPLong writes:

P_A - In what unregulated situation might the local competitive price of a good be lower than the international competitive price of a good?

Prior_Analytics writes:

Hi RPLong,

In what unregulated situation might the local competitive price of a good be lower than the international competitive price of a good?

Well, there seems to be two parts of this question.

1) A presumption that all markets are inherently 'international' and if it were not for 'regulation' all markets would express themselves as parts of a single (international) market.

2) A presumption that the price of a good is equal for all destinations.

In regards to the first, all markets are in flux. Some goods clearly compete more often in one market than another. Services are very often restricted to local markets. Small, lightweight, easily transportable, high value goods are more often than not something that compete at a global scale.

Its no coincidence that I rarely consider barbers in the next county when I go to buy a haircut, while almost always considering almost every competitor for Digital Camera market when I go to buy a digital camera.

Some goods travel better than others. So, to your example, buying a haircut locally is almost always in my favor in terms of price, as are houses, math tutoring, and toilet water.

In regards to the second presumption, a simple input like 'transportation' costs make a huge difference in prices of a good from one destination to another. There are plenty of examples where a local good is priced lower than the price it is sold at much farther away. In fact, if the value (thus market price) didn't go up faster than the cost of transportation as distance increased, no goods would ever be sold outside the local market.

That said, in a Solipsist's view of the world, we are all 100% personally responsible for all ill effects of regulation.

-p_a

Philo writes:

"According to extreme solipsism, you're the only person who really exists." Since you don't specify to whom 'you' refers, you should probably think of solipsism as not a single theory but a family of theories. There is Bryan-Caplan-solipsism, according to which only Bryan Caplan exists; there is Philo-solipsism--that only Philo exists; generally there is an x-solipsism for every person x.

Admittedly, this "family" would be *empty* if there were *no* persons. But in fact there are very many persons, and so very many solipsisms--each one false (of course).

Kurbla writes:

Tautologies have to be true in all existing and possible worlds. It is easy to find counterexample for "trade increases productivity:" Hoss produces wheat and socks. Hoss needs one day of work for socks, or he can produce 8 units of wheat in the same time. Hoss decides to buy socks and pays 80 units of wheat. QED. Why would one do such a stupid trade? It is beyond our interest.


Stephen writes:

The reason this example works is because there are two people, each with their own comparative advantage. A potential problem arises when you introduce a third agent who has a comparative advantage in the same good that I do. Let's say that a third agent is 1 wheat and 10 steel. The price of steel will decline. This third agent may very well be willing to trade 2 steel for 1 wheat. My wheat productivity has just been cut in half, from 5 wheat to 2.5 wheat! I'm better off killing this third agent in this extreme solipsist world so I can increase my productivity back to 5 wheat/5 steel.

RPLong writes:

p_a - Are you serious?

There are too many holes in what your saying for me to successfully point them all out. But...

1 - If the local price is less than the international price, then the citizens of the country will continue to trade locally and the higher international price won't affect them. So why prohibit international trade in this situation?

2 - Your "mathematical" critique of Caplan's point assumes a solipsist's gains from trade are different locally than they are internationally. This is logically absurd. In order to see how comparative advantage still works, recall that in both your local and international examples, "Me" gains from trade as compared to the base assumption. The other details merely represent a price change - but the gains themselves are present in both examples.

3 - Your service-economy counter-examples in your second comment (barber, etc.) have nothing to do with the arguments against international trade in your first comment. As you mentioned, haircuts aren't traded internationally (except in border towns), and no one is thinking about haircuts when they, as you say, "may not want [international trade] for good reason."

Prior_Analytics writes:

Hi RPLong,

"If the local price is less than the international price, then the citizens of the country will continue to trade locally and the higher international price won't affect them. So why prohibit international trade in this situation?"

I didn't suggest this was a reason to restrict trade internationally. My claim was that when international prices, for the good that you produce, are lower, then you do not benefit from others trading with people internationally.

" recall that in both your local and international examples, "Me" gains from trade as compared to the base assumption."

In what universe is the base assumption that no one trades with no one. This is a classic straw-man argument, suggesting that because some trades are are beneficial to those who do not trade, that any increase in trading levels increases the benefits for all actors.

I rejected both the base assumptions, the the unsupported conclusion.

In most cases, people are not concerned with a decision between no trade at all and full-on free trade, they are only concerned with incremental changes in trading activity levels.

Your service-economy counter-examples in your second comment (barber, etc.) have nothing to do with the arguments against international trade in your first comment.

Correct, they were given in response to your question "In what unregulated situation might the local competitive price of a good be lower than the international competitive price of a good?"

If you think this question (and thus the answer to it) is irrelevant to the post, I would agree.

-p_a

RPLong writes:

Haha... Uh...

Let's start here:
http://en.wikipedia.org/wiki/Comparative_advantage

Dan Weber writes:

Of course, solipsism is false

That's exactly what the simulation would tell me to try and get me off my game.

Nice try, faker universe!!

Prior_Analytics writes:

Hi RPLong,

"Let's start here: http://en.wikipedia.org/wiki/Comparative_advantage"

Ok, let's.

Assumptions needed to make the model work:(from wikipedia article)


1) "Full employment - if one or other of the economies has less than full employment of factors of production, then this excess capacity must usually be used up before the comparative advantage reasoning can be applied."
2) "Constant opportunity costs - a more realistic treatment of opportunity costs the reasoning is broadly the same, but specialization of production can only be taken to the point at which the opportunity costs in the two countries become equal. This does not invalidate the principles of comparative advantage, but it does limit the magnitude of the benefit."
3) "Perfect mobility of factors of production within countries - this is necessary to allow production to be switched without cost. In real economies this cost will be incurred: capital will be tied up in plant (sewing machines are not sowing machines) and labour will need to be retrained and relocated. This is why it is sometimes argued that 'nascent industries' should be protected from fully liberalised international trade during the period in which a high cost of entry into the market (capital equipment, training) is being paid for."
4) Before specialization, half of each country's available resources are used to produce each good.
5) Perfect competition - this is a standard assumption that allows perfectly efficient allocation of productive resources in an idealized free market.

Which of these premises would you like to start with first?

-p_a

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