What I've Learned About Comparative Advantage

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In the last couple of years, my thinking on trade has as changed. I've realized there's an even deeper insight about trade perhaps even more important than david ricardo's. And these insights come from conversations i've had with don budro and james buchanan. It's also related to a podcast i did with paul romer an.

Russ Roberts, host of EconTalk, does a monologue this week on the economics of trade and specialization. Economists have focused on David Ricardo's idea of comparative advantage as the source of specialization and wealth creation from trade. Drawing on Adam Smith and the work of James Buchanan, Yong Yoon, and Paul Romer, Roberts argues that we've neglected the role of the size of the market in creating incentives for specialization and wealth creation via trade. Simply put, the more people we trade with, the greater the opportunity to specialize and innovate, even when people are identical. The Ricardian insight masks the power of market size in driving innovation and the transformation of our standard of living over the last few centuries in the developed world.