The popular notion that Adam Smith developed the theory of absolute advantage while David Ricardo developed the theory of comparative advantage is a common misconception. A closer examination of their works reveals that both economists advocated for a similar principle of specialization in international trade. This principle, often referred to as the “classical rule for specialization,” suggests that countries should focus on producing goods they can create at the lowest cost and import those that are cheaper to buy than to produce domestically.
This understanding is supported by Jorge Morales Meoqui’s 2021 paper, “OVERCOMING ABSOLUTE AND COMPARATIVE ADVANTAGE: A REAPPRAISAL OF THE RELATIVE CHEAPNESS OF FOREIGN COMMODITIES AS THE BASIS OF INTERNATIONAL TRADE,” published in the Journal of the History of Economic Thought (https://bit.ly/30GuzUl). Meoqui argues that the supposed distinction between Smith’s and Ricardo’s theories stems from a misinterpretation of Ricardo’s numerical example in his “Principles of Political Economy and Taxation” (1817) by John Stuart Mill. Mill erroneously attributed the concept of comparative advantage as the basis for international trade to Ricardo.
Meoqui contends that Ricardo’s example actually demonstrates absolute advantage. Using a simplified mathematical proof, he illustrates that English cloth production costs were necessarily lower than those in Portugal. If the cost of Portuguese wine (CWPOR) equals the cost of English cloth (CCENG), and the cost of Portuguese cloth (CCPOR) is greater than the cost of Portuguese wine (CWPOR), then the cost of Portuguese cloth (CCPOR) must be greater than the cost of English cloth (CCENG): CWPOR = CCENG and CCPOR > CWPOR, therefore CCPOR > CCENG.
This simple equation highlights that the English cloth enjoyed an absolute cost advantage over Portuguese cloth. This challenges the traditional interpretation of Ricardo’s example and reinforces the idea that both Smith and Ricardo championed the principle of specializing in producing goods with the lowest production cost.
Furthermore, Meoqui suggests that neither absolute nor comparative advantage fully captures the complexities of international trade. He argues that focusing on the relative cheapness of goods in the international market provides a more accurate and practical understanding of trade patterns and specialization decisions. The continued confusion surrounding the terms “absolute” and “comparative advantage,” along with their questionable origins, further supports the argument for their limited usefulness in explaining the foundational principles of international trade as envisioned by Smith and Ricardo.
In conclusion, the assertion that Adam Smith developed the theory of comparative advantage is inaccurate. Both Smith and Ricardo emphasized the importance of specializing in the production of goods with the lowest cost, a principle that predates the later and potentially misleading distinction between absolute and comparative advantage. A reevaluation of the original texts and a focus on the core concept of cost efficiency offers a clearer understanding of the classical economists’ insights into international trade.
