Sunday, July 15, 2012

Avert your eyes

In which I publicly engage in the practice of the Ricardian Vice:

Unit Labor Costs

Britain 100 cloth 110 wine
Portugal 90 cloth 80 wine

In the absence of transportation costs, it is efficient for Britain to produce cloth, and Portugal to produce wine, as, assuming that these trade at equal price (1 unit of cloth for 1 unit of wine) Britain can then obtain wine at a cost of 100 labor units by producing cloth and trading, rather than 110 units by producing the wine itself, and Portugal can obtain cloth at a cost of 80 units by trade rather than 90 by production.

Now let's do this Ricardo-style and assume the perfect mobility of labor, maintaining, as Ricardo does, the perfect immobility of capital. We will likewise assume that Britain and Portugal have equally-sized labor forces. We will also follow Ricardo in leaving time and transport costs out of the equation. So, what are the consequences?

Obviously the wine and cloth laborers will move to Britain, since they will receive an 11 percent raise and a 38 percent raise respectively. However, once they get there, the doubling of the labor supply in Britain this causes will cause the price of labor to be cut in two. Britain can now produce the same amount of cloth for the cost of what was previously 50 units of labor and the same amount of wine for 55, thereby obtaining both wine and cloth for a much lower unit labor cost than what it used to cost to produce the wine alone. Portugal doesn't get anything out of it, but that doesn't matter because they've got no ability to retain their laborers without resorting to badges and guns.

Therefore, open immigration is not only desirable, but is vastly preferable to comparative advantage by a factor of 105/200 and autarky by a factor of 105/210. QED. What else can we conclude?

1. Ricardo implicitly postulated the immobility of labor.
2. The mobility of labor not only fails to disprove comparative advantage, but actually strengthens the case for even freer trade... at least if you're in the higher labor cost country and you only look at the labor costs.
3. The mobility of labor will eliminate international trade since everyone will be living in Britain.
4. The mobility of labor operates to the detriment of labor.
5. Ricardo's logic is remarkably stupid.



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