Back when David Ricardo formulated his theory, Portugal was capable of producing only a limited amount of wine and Britain a limited amount of cotton (or wool? I do not remember). Given the preconception that neither country could saturate a market with their product, due to their crude production and distribution methods, this theory made solid economic sense. However, in today’s world, if the nation of Portugal truly desired to create the infrastructure, it may be possible to actually “capture” a market by producing so much of a given product so as to constitute a virtual monopoly. I believe that if California and Australia truly wanted to dominate the market in wine, they conceivable would be able to do so. However, if they should do so, then they would be sounding the death knell to David Ricardo’s theory of comparative advantage, since this theory does not recognize the possibility that oversupply of a product will result in a decrease in its value. The basic “supply and demand model” at work.

Therefore, we must recognize an inherent limitation to Ricardo’s theory of comparative advantage. It only works if the element of “oversupply” is not factored in. Otherwise, the introduction of “oversupply” will distort the “supply and demand” equation and the costs to Portugal of producing wine may be optimum considering that Portugal can obtain maximum price for its product in a market that can assume it production capabilities. However, when a market is subjected to “oversupply” of a given product, it reacts counter-intuitive and the price is thus driven lower, notwithstanding the fact that Portugal is more “efficient” in producing wine as compared to Britain in producing cotton (or wool). The same can be said of Britain if they attain the capacity of saturating the market with cotton or wool.

In the final analysis, I propose that while David Ricardo’s theory of comparative advantage may have been relevant during it’s time, that in this age when a nation is capable of oversupply and market saturation, it is no longer a useful economic model. That is why OPEC nations have instituted quotas on crude oil production so as to maximize the price per barrel. Without such coordinated effort (aka cartel), each nation would compete by maximizing production while at the same time depressing the price per barrel – maximum contribution for minimal return.

We really need to stop subscribing to economic models solely because they are “clever” and fully rationalize them.

If a nation state wants to maximize the efficiency of production of a given product, they should do so with the idea that maximum expenditure of labor payments is beneficial to the local economy and that foreign trade with other nations in this product should be made with the understanding that the product cost premium they pay by purchasing this product from this given nation is in the purchasing nation’s best interests because trading with another nation in this product would be detrimental to the purchasing nation’s interests in the grander scheme of things – with the particular price of this product being relative to the purchasing nation’s overall needs and desires.

And lastly, the purchasing nation should be made to realize that any resulting trade deficit will dealt with decisively. In simple terms, you will purchase our product, regardless of the fact that it may be more expensive, because the purchasing nation does not want to incur the economic penalty of refusing to do so. Perhaps we should call this the theory of “desirable coexistency”?

http://www.mises.org/story/2012

Rothbard destroys Smith with utmost precision… quite shocking!

A personal Rothbard favorite of mine is “What has government done to our money?”. A small but very clear and precise book about the origins of money, inflation and the banking system.

You can read it online here: http://www.mises.org/money.asp

…thanks for this blog btw – it’s very good.

I probably spent eight hours last weekend raking my leaves. I did it the old-fashioned way- with an old rake and some garbage bags. I could have spent $150 on a leaf vacuum, or paid some guy money to do it, but I chose to do it myself instead. I work in a legal setting, and sometimes I think some of the guys in suits would benefit from four hours of pushing a lawn mower- would probably bring them down to earth a little bit.

I raked because I had nothing better to do, and I enjoyed working in the yard on such a beautiful day. I don’t know if this makes any sense, but a lot of times I’d rather drive on roads without traffic for fifteen minutes than sit in traffic for ten. That’s probably not a good analog, but I’ll use it anyway.

I’m guessing Trent plugs into the book like the people in the matrix.

For instance, driving home late in the afternoon when you’re tired and don’t want to cook but everyone’s hungry… you COULD just take the family through the drivethrough for $30. Problem solved in 5 minutes. You get a crap meal, but you get it quickly.

OR, you could go home and put some sausages on a frypan, cut and steam some vegies, and be eating 30 minutes after you walk in the door. Again, a boring meal, but probably about $5-7.

So: is $25 worth 25 minutes of your life? I don’t about you, but it would take me, after tax, about an hour and a half to earn that money. My time’s worth more than that. I’m not going to waste an hour of my time at work, slaving away, time that I COULD have been spending doing ANYTHING else.

When the time it takes to EARN the money, is longer than the time that you SAVE by spending now, it’s not worth it. You shouldn’t go drivethrough: it’s a waste of time.

Trent, it’s very exciting to hear that you’re reading about economics – and primary sources too, not just a textbook. It would be so nice for the economically inclined people (such as myself) if everyone was like you!

Then of course, I fight the battle of newer (not new) vehicle cost vs. time/repair cost of the older one, but that is a discussion for another time.

Best Wishes,
D4L

This is a serious question – how many of you are there? I’ve been reading your blog for months now, and if I were able to do half as many things as you, I’d be a happy gal!

You know what would make a great post? A description of how you spend an average weekday/weekend. Would be great for those of us who would love to get ideas from how you manage to fit all these zillions of activities into your schedule!

He said “It’s only cheaper if your time is free.”

True enough.

On the topic of economic books, Alan Greenspan’s book The Age of Turbulence: Adventures in a New World is up there with the best I’ve read. I think you would find it a very worthy read.

Cheers.