I am writing on a document that mentions outsourcing at the moment, which made me remember the best explanation of Ricardo and the theory of comparative advantage I have found so far: Eat the Rich, P. J. O’Rourke’s brilliant a-bit-too-well-informed-to-be-real-gonzo “treatise on economics” (pp. 116-118):
There are, however, a few things about economics that don’t seem to make sense at all. Todd G. Buchholz, in his book New Ideas from Dead Economists, says “An insolent natural scientist once asked a famous economist to name one economic rule that isn’t either obvious or unimportant.” The reply was “Ricardo’s Law of Comparative Advantage.”
The English economist David Ricardo (1772-1823) postulated this: If you can do X better than you can do Z, and there’s a second person who can do Z better than he can do X, but can also do both X and Z better than you can, then an economy should not encourage that second person to do both things. You and he (and society as a whole) will profit more if you each do what you do best.
Let us decide, for the sake of an example, that one legal thriller is equal to one pop song as Benefits to Society. (One thriller or one song = 1 unit of BS.) John Grisham is a better writer than Courtney Love. John Grisham is also (assuming he plays the comb and wax paper or something) a better musician than Courtney Love. Say John Grisham is 100 times the writer Courtney Love is, and say he’s 10 times the musician. Then say that John Grisham can either write 100 legal thrillers in a year (I’ll bet he can) or compose 50 songs. This would mean that Courtney Love could write either 1 thriller or compose 5 songs in the same period.
If John Grisham spends 50 percent of his time scribbling predictable plots and 50 percent of his time blowing into a kazoo, the result will be 50 thrillers and 25 songs for a total of 75 BS units. If Courtney Love spends 50 percent of her time annoying a word processor and 50 percent of her time making noise in a recording studio, the result will be one half-complete thriller and 2.5 songs for a total of 3 BS. The grand total Benefit to Society will be 78 units.
If John Grisham spends 100 percent of his time inventing dumb adventures for two-dimensional characters and Courtney Love spends 100 percent of her time calling cats, the result will be 100 thrillers and 5 songs for a total Benefit to Society of 105 BS.
(Just to make things more confusing, note that Courtney Love loses 40 percent of her productivity by splitting her time between art and music, while John Grisham loses only 25 percent of his productivity. She has the “comparative advantage” of making music because her opportunity costs will be higher if she doesn’t stick to what she does best.)
David Ricardo applied the Law of Comparative Advantage to questions of foreign trade. The Japanese make better CD players than we do, and they may be able to make better pop music, but we both profit by buying our CDs from Sony and letting Courtney Love tour Japan. And if she stays there, America has a definite advantage.