1. Comparative Advantage (Skip if you know what it is)
In Economics, Comparative Advantage is the description of a state where a producer can experience decreased opportunity cost for the production of a good or service relative to others. The classic example is guns and butter.
Japan produces in one day 5 units of butter, and 3 units of guns.
America produces in one day 6 units of butter, and 4 units of guns.
America has an "absolute advantage" - In one day it can produce more of either.
Japan gives up 3 units of guns for 5 units of butter, so each unit of butter costs ~0.6 units of guns.
It also gives up 5 units of butter for 3 units of guns, so each unit of guns costs ~1.7 units of butter.
America gives up 4 units of guns for 6 units of butter, so each unit of butter costs ~0.7 units of guns.
It also gives up 6 units of butter for 4 units of guns, so each unit of guns costs ~1.5 units of butter.
In this example, Japan relatively gives up less units of guns for each unit of butter. America relatively gives up less units of butter for each unit of guns. Japan has a comparative advantage in production of butter, and America in the production of guns. Japan should produce butter, and America, guns, and the two should trade. There is a total increase in the production of both goods in the same amount of time.
2. This is Situationally Horse Shit
What Ricardo did not factor into this equation is a myriad of other real world factors that change the values of these units of production immensely. What is the environmental effect from gun industry pollution, or monocultural cattle farming for butter? What is the geopolitical reality and cultural divide between two peoples? What is the general economic stability of the world? What is the elasticity of these goods? What is the effect of shock economic events or natural disasters? What is the marginal return on additional units produced in this trade? What is the real utility of these goods?
Well we see that with gas prices, or the War in Ukraine, when the world creates plantations out of countries rather than encouraging Autarky and diversification, there is a ton of chaos that ensues. We are seeing that right now with goods shortages, electronics industry collapsing, supply chain disruption that is still ongoing, and some non-monetary shock inflation(there is monetary inflation too).
Our economic woes today are because we have sacrificed stability and moderate, acceptable standards of living for exuberant over-production. Now this little conflict between two historical rivals, and a historically, relatively un-deadly virus is causing huge economic chaos in our supply chain. Comparative Advantage and Global Free Trade are farces that are enriching financiers and we are paying the price for it.
Ironically in my comparative advantage example, I used Japan. Well Japan doesn't like this model, which is why it uses what surpluses it can acquire for the subsidy of home industry *cough* Automotives *cough*. The broader West on the other hand loves this model, and here we see once immense industrial powers reeling for baby formula in the New World, and sitting on the verge of continent wide blackouts in the Old World. Another country that didn't get to play with this model? Russia, which was actually really smart in that it basically trades gas and oil for Gucci and Audi. Do you think they care if they have to give up those luxury goods? No, they'll just forego them entirely if it gets nasty. And they'll watch and laugh as Western Europe reels from its energy crisis. Or let's talk about China, which produces all the antibiotics and brought countries to their knees when they threatened to cut off trade of them during the pandemic.
This system is a scam, countries should be encouraging self-sufficiency and diversity in all essential goods fields. It's sickening that this is where we have come.