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Archive for March, 2015

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?

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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.

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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).

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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.

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