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The theory of comparative advantage shows how voluntary exchange benefits both parties and encourages specialization. You don’t need to possess an absolute advantage in any particular productive activity to enjoy a comparative advantage. Your comparative advantage is whatever you can do relatively cheaply compared to everything else and everyone else. For instance, Haiti still trades with the U.S. even though it’s a much poorer economy. The reason is that the U.S. worker focuses on her/his comparative advantage – making stuff like microchips, software, financial services, houses, retail, design, engineering services, accounting services, higher education services, wheat, corn, soybeans, apricots, and airplanes – and leaves other stuff for workers in other countries, like making t-shirts, steel, rubber, bananas, coconuts, furniture, and toys. Haiti, in particular, specializes in making t-shirts. An American worker could probably make more t-shirts than a Haitian one – we have better tools (more capital) – but it doesn’t pay for us to spend our time on that when we could be doing on the things aforementioned. So we buy t-shirts from Haiti instead.

At e3ne.org I have a new post up explaining the theory and offering a short quiz. I’ve copied it below. Feel free to take your shot at the answers in the comments!

1. Imagine you’re the chief executive of a successful information technology business. You rose through the ranks as a graphic designer and are very good at that, but you’re also a good manager and fundraiser. Your task now is to write up an annual report for the shareholders. Should you use your graphic design skills to format an excellent annual report, or should you simply type up the information and delegate the formatting of the report to one of your employees?

2. Imagine the U.S. opens up to imports of clothing from China. What happens to the price of clothing in the U.S. and in China?

3. Does opening up to Chinese clothing affect the quantity of U.S. exports, say, of microchips?

4. Does opening up to Chinese clothing affect the price of microchips in the U.S. and in China?

The economic thinking behind “buy local” campaigns is typically terrible. One such example is the claim that a dollar “circulates more” when you spend it locally. The rate of circulation of a dollar doesn’t create any wealth. Try it out: circulate a dollar among a group of friends and feel your standard of living stay the same. In general, “buy local” activism commits the broken-window fallacy: ignoring opportunity costs. Spending more on the same product because it’s local means you can’t spend on other things that make you happy. And you are part of the local economy!

At e3ne.org, I have a longer critique of the fallacies behind “buy local” and “buy American” campaigns. An excerpt:

[I]magine that everyone bought local, all the time. Cars, airplanes, software, clothing, food… everything would have to be made and exchanged in the town where you live. What would happen to everyone’s standard of living? It would fall dramatically. (How many skilled airplane manufacturers does your town have?) The same principle applies at the national level, or any other geographic level you choose. If you buy everything within that circumscribed area and exclude everything outside it, your community will be worse off than it would be if it bought from any willing seller.

Now, that’s an extreme example, but it illustrates the principle. Some things are impossible to make locally (airplanes). Other things are difficult and costly to make locally (shipping and retailing of plastic bins). A few things will be most efficiently and affordably made locally, and you will want to buy them locally without having to be goaded into doing so – they’ll simply be the best products for the price. Goading your community into buying shoddier or more costly products just because they’re local or American or whatever just makes your community poorer.

Read more.

Mill on Paternalism

I have a “nutshell” summary and critique of John Stuart Mill’s On Liberty now up at e3ne.org. Excerpt:

Mill thus defends freedom of conscience, speech, and lifestyle on completely “practical” grounds, but he leaves some significant loose ends in On Liberty. For instance, there are lots of examples of “harms” that the government shouldn’t regulate, like breaking up with a longtime boyfriend or girlfriend. It may cause emotional damage to break up with someone, but there’s no justification for forcing someone to stay in a romantic relationship. So the Harm Principle may establish a necessary condition for government regulation but not a sufficient one (in other words, the government should regulate nothing but harms, but not all harms).

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How does globalisation, especially foreign direct investment, influence the risk of intrastate conflict? While several prominent studies have found that globalisation reduces the probability of civil war, we use new data and methods to approach the question. In particular, we test for the possibility that foreign investment is endogenous to conflict risk and appropriately use inward foreign investment stock rather than net inflow to measure an economy’s exposure to international capital markets. We find no evidence that foreign investment affects civil conflict, suggesting that governments’ fundamental security interests trump the economic losses they can expect to suffer from failing to compromise with potential rebel groups.

New from Sorens & Ruger (full text to first 50 viewers).

The latest in my series of blog posts based on discussions with Ethics & Economics Challenge students is up at e3ne.org. It’s on whether it’s possible for us to have a right to do wrong in some cases, i.e., for there to be some moral obligations that it is not morally permissible to enforce. A selection:

The students correctly understood that the right to free speech doesn’t mean that whatever you speak is accurate. They also picked up on the fact that the right to free speech even covers speech that is immoral. One student brought up the case of Westboro Baptist Church. They engage in hateful protests where they say hateful things, yet it would be wrong to imprison or otherwise punish them for their hateful, morally (and factually) wrong speech.

Read more.

I’ve recently begun the Ethics & Economics Challenge program with students at Merrimack Valley High School in Concord, N.H. We’ve been discussing what Adam Smith’s Theory of Moral Sentiments can tell us about what types of moral duties may legitimately be enforced. I’m blogging my reflections as we go. Here is a selection from the first installment:

Last week, I talked with the students at Merrimack Valley High School in Concord about Adam Smith’s Theory of Moral Sentiments. According to Smith, you know an act is right when an impartial spectator would sympathize (or empathize) with the emotions motivating your act. Smith says that an impartial spectator will always empathize with both the kindness of someone who acts to benefit others and with the gratitude of the recipients of that kindness. So, as Smith sees it, acts of beneficence are always right. Does it follow that acts of beneficence are moral duties?

Bring me some coffee.
The simplest example we discussed in class is that of a friend who usually brings you coffee in the morning. If he fails to bring you coffee one morning, are you justified in resenting him? Has he acted immorally?

There is a clear answer here using Smith’s logic. An impartial spectator wouldn’t empathize with your resentment against someone who merely failed to be generous one morning. And an impartial spectator would never want to force someone to be kind.

Smith believed that we do have duties to be beneficent toward others, but they’re not duties we should enforce. To go further, duties of beneficence are what philosophers call imperfect duties, that is, they are not owed to specific people in specific circumstances. We have a duty to live beneficent lives, helping others freely and cheerfully, but we don’t have a duty to perform specific beneficent acts to specific people, like bringing coffee to my friend on a specific morning.

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The Eight Year Mirage

The search for a legacy always begins in earnest as presidents approach the final years of their time in office. Josh Kraushaar (National Journal) has an interesting piece on the Obama legacy. A key passage:

By ignoring the electorate and steering the country in an unmistakably progressive direction his final two years in office, he’s ensuring that his presidency will be more of an eight-year mirage for liberals, rather than one known for winning lasting support for policies that would move the country in a leftward direction.

All presidents have legacies, of course, but they are rarely what they might have imagined when they entered office.

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