L.A. Hall

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Does comparative advantage mean a one-world economy would be less efficient?

Please, tell me if I'm an idiot. I have a macroeconomics question. The concept of comparative advantage forwards the idea that, even if one individual is better at, say, making shirts AND shoes, than he can be more efficient by teaming with another maker of those same two goods, EVEN if he is worse at both. Does this mean that if you had a territory of a hundred thousand square miles, it would be more economically efficient to divide it into two states rather than keep it as one? And does this, by implication, mean that a one-world, united economic, political system would be LESS efficient and productive than a divided one? Does this mean that the more divided Earth's territory becomes, the more economically efficient it becomes? Answer me, smart people!

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    Jan 3 2013: if comparative advantage works on territories, then yes. like governments. larger number of smaller governments or smaller jurisdiction areas mean specialization and competition. supposed they are ready to cooperate, but that!s another problem.

    but the economy as a whole has nothing to do with governments. just by splitting artificial territories, you don't change the land, the minerals, the people, the knowledge, the standing capital, the existing corporations. on the contrary, by raising artificial walls to trade, you reduce division of labor.

    so tl;dr: more territories can be good if free movement and free trade between territories are not hindered.
    • Jan 3 2013: Indeed, nice post Krisztian.
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    Jan 4 2013: I agree that is what national (or any ) boundary does in general. That does not mean it cannot be changed (even on a global scale).
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    Jan 4 2013: We already have one world economy, most of us just don't realize it yet.
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      Jan 4 2013: But that feeling that boundaries exist make us act differently, like they do, don't they? For example, if the state of New Hampshire -- I'm about to say horrible things about my character -- was absorbed by the state of Vermont, I think many -- me included -- would treat them better than we do now.
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    Jan 3 2013: So the big takeaway here is that political boundaries are arbitrary, and in the real world -- a world that sees things through a different lens -- what matters are divisions of ideas, resources and people? But could it be said that drawing political lines around a people brings them together (the more distinct the line the stronger the connection)? I am closest to my family, and then I feel an affinity for my neighbor and street-mates, and then all those who live in my town, a bit less for my country, less still for my state, still for my country, and so on. It seems that when you tell small groups of people "you are this," they internalize it, and believe it, and band together.

    SO, it may seem that, by this logic, the more divided we get the more efficient we get. But what we really, desperately need to figure out is how to impart that incredible, profound sense of connection we feel with our smaller tribes -- families, friends and communities -- into the whole of the world community.
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      Jan 3 2013: see? it happens naturally. you are more close to people who are ... well, close. why would you want to introduce a cliff to that nice slope?

      btw that feeling of kinship, would not it be strengthened by the eradication of this artificial unit, the country? today, people in many aspects have to, against their will, treat all "country-mates" a little closer than they otherwise would be. it creates a false bond within the "nation". that is another unnatural effect, other than what i have mentioned already, namely alienating those outside of the borders. if we get rid of that unnatural unit, people will be more free to declare closer kinship within the same city, same district, same neighborhood, without being deemed "traitors".
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        Jan 3 2013: Very interesting. I think you see that a lot in people who are forced to bond by circumstances in which they are outsiders. Think two Americans in Spain, or two Spaniards in America. Two people who, in their own country might hate each others' guts for very legitimate, moral reasons, are often brought together by circumstances in which they are outliers. Do you think its plan outlandish to even talk about trying to instill that sense of "hey, I know you, we're connected somehow!" into everyone on earth, not just everyone from Kentucky?
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    Gail .

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    Jan 3 2013: Diveristy is ALWAYS a strength, but you must remember that just because you speak of economics, you cannot discount the second law of thermodynamics. (Things - including fiscal models - disintegrate & die).

    Remember that money is a man-made invention. You make it difficult for yourself when you conflate natural orders and human-made orders. We can keep a human alive artificially. We can also keep an economy alive artificially. If you were to step outside of the current fiscal paradigm, efficiency takes on a different meaning.
  • Jan 3 2013: Comparative advantage does not require one of the parties to be more efficient than the other in both shoe and shirt production, as long as they are better at their own specialization the effect will exist, so let's get that out of the way first.

    Differences in production efficiency are not only caused by political separation: the world will have different climates in different regions even when there's one world government so some degree of comparative advantage will always exist. The part of comparative advantage that is the result of policies (region A giving subsidies for shoe production, region B giving subsidies for shirt production) can always be mimicked in a united economy (the new region AB can afford to give subsidies for both shoe and shirt production), or simply be taken over by businesses (specializing in shoes or shirts).

    Btw, if you go from a situation where one region is more efficient at both shoe and shirt production to one where both regions are equally efficient (but specialized in different things) then on average the population of the combined region AB has more purchasing power and no one will have lost anything. If the relative efficiencies of shoe and shirt production also become equal (no difference in specialization) then there is no comparative advantage anymore and the formerly more efficient region will have lost some purchasing power (they can no longer profit from the misery of the less efficient region) but the other region will have gained more, on average the purchasing power in the region AB will still have gone up.

    Comparative advantage is a mitigating side effect of disparity, but having no disparity is always better.