One of my favourite quotes from “Yes Minister” goes: <\/p>\n
An aggressive question is like fast bowling. Unless it is deadly accurate, one can use its pace against itself.<\/p><\/blockquote>\n
It is a favourite quote because the Blogosphere reminds me of it quite often. The latest to remind me of it is Ritwik Priya’s “fisking” in two parts [1<\/a>,2<\/a> (via<\/a>)] of Niranjan Rajadhyaksha’s rather innocuous article <\/a> in Mint<\/em> about how schools should allow children to specialize. Ritwik accuses him of, among other things, misusing Ricardo’s theory of comparative advantage.<\/p>\n
Now, if you plan to accuse a trained economist of misusing basic economic concepts, your own concepts better be deadly accurate, or they’ll be hit for a four at third man. But this is what Ritwik says:<\/p>\n
Ricardo’s theory is one of the most insightful in the entire field of classical and neoclassical microeconomics but it makes certain assumptions, namely<\/p>\n
1) There is free trade of goods (explicit)
\n2) There is no trade of labour or capital, i.e factor inputs (explicit)
\n3) The demand for the traded products is reasonably similar (implicit, because what is actually being measured is the opportunity cost)<\/p>\nHere, the ‘good’ that his daughter will specialise in is a certain level of competence in a field or a subject. It is thus safe to assume that the free trade assumption holds true. However, the second and the third assumptions are not true. The factor inputs in this case are aptitude and capital (the investment into the education to gain these skills) and on the individual level, capital can easily be traded. The situation will hence move towards absolute advantage. The product that her daughter, or anybody for that matter, will get in return for their skills is money. Money has a high demand almost universally. The same is not true for the product traded in return – i.e skills.\n<\/p><\/blockquote>\n
Can you count how many things are wrong in this?
\n
\nFirst, let’s take point 2, i.e. the “assumption” that there is no trade of labour or capital. <\/p>\nTake two neighbours – Hyderabad and Secunderabad. They have different kinds of labour and capital. Assuming that they cannot trade labour and capital between them (an intentionally absurd assumption) then Hyderabad and Secunderabad will have different products in which they will have a comparative advantage, and they will trade those products between themselves. <\/p>\n
But what will happen if labour and capital are completely mobile? Then labour will move where it will get higher salaries. Capital will move where it will get better return on investment. As a result of this movement, salaries and interest rates in both the cities will equalise and neither city will have a comparative advantage over the other. As a result, it no longer makes sense to specialize or trade. <\/p>\n
In reality, such a thing never occurs – we will leave the why not as an exercise for the reader and proceed. <\/p>\n
What will be the equivalent of Hyderabad and Secunderabad trading labour and capital when you are talking of trade between people? Can I trade my aptitude for mathematics in return for your skills in music? Can I become 60% of a farmer, 25% of an industrial worker, 10% of a technologist and 5% of a politician? What possibly could Ritwik have meant by what he said? <\/p>\n
The next point is so strange that I had to read it many times to convince myself that I was not misunderstanding some profound point. Is Ritwik really ignorant of the role of money? If I make a tractor and sell it to a farmer in return for money and I use that money to buy food from the farmer, what is actually being traded is the product of my skill in tractor-making in return for the product of the farmer’s skill in agriculture. Of course, real-world transactions are more complex than this, but trade in goods does not cease to be a trade in goods when money is involved. Ritwik has a good case for a refund from whoever taught him economics. <\/p>\n","protected":false},"excerpt":{"rendered":"
One of my favourite quotes from “Yes Minister” goes: An aggressive question is like fast bowling. Unless it is deadly accurate, one can use its pace against itself. It is a favourite quote because the Blogosphere reminds me of it quite often. The latest to remind me of it is Ritwik Priya’s “fisking” in two […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[2],"tags":[],"_links":{"self":[{"href":"https:\/\/www.ravikiran.com\/blog\/wp-json\/wp\/v2\/posts\/2841"}],"collection":[{"href":"https:\/\/www.ravikiran.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.ravikiran.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.ravikiran.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.ravikiran.com\/blog\/wp-json\/wp\/v2\/comments?post=2841"}],"version-history":[{"count":0,"href":"https:\/\/www.ravikiran.com\/blog\/wp-json\/wp\/v2\/posts\/2841\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.ravikiran.com\/blog\/wp-json\/wp\/v2\/media?parent=2841"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.ravikiran.com\/blog\/wp-json\/wp\/v2\/categories?post=2841"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.ravikiran.com\/blog\/wp-json\/wp\/v2\/tags?post=2841"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}