If you want proof that comparative advantage does not work

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In 1819 David Ricardo promoted the idea of comparative advantage in trade.

He used this example (which I have borrowed from Wikipedia in this form):

In Portugal it is possible to produce both wine and cloth with less labour than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.

But, as ever there were implicit assumptions that led to this conclusion, most of which have been ignored ever since. One was that labour was immobile, and by and large that is still true. The second was that capital was immobile. It was until 1980, then Thatcher and Reagan gave it free reign to move at will. The result is this:

Productivity has risen because capital has sought out the cheapest labour possible to substitute for that bought in the US. That cheap labour – mainly Chinese in the US case – has forced down US labour rates. But the return to capital has grown enormously – reflected in the supposed productivity curve, which does actually reflect substitution of labour.

So, labour is much worse off as a result of free trade where capital can move and labour cannot. No wonder the Tories want to cap immigration. Keep it at a distance paying it as little as possible is their plan. that increases profit.

But it’s more important than just that – however important this is. Profits have risen for decades on the basis of no innovation or research or development in many industries. All that had to be done was to substitute cheap, sweat shop labour for that in the domestic market and profits rose. Why invest in that case? Unsurprisingly we now find the economies that most heavily embraced globalisation – the UK, the US and in extremis Ireland – the most exposed. They have no skills left. But they also have no innovation of investment base left either. Free riding the system has left them financially, intellectually, and socially bankrupt. France and especially Germany took a different route. And it’s paying dividends.

The fact is that the free flow of capital is not beneficial to most societies. It harms labour returns and reduces the income of the majority. In the states where labour is already poor the pressure to keep standards low is high so oppression continues. And as serious, the guts are taken out of the economies that allow the free flow of capital. So this flow undermines the nation, the state, its people and in the end its whole identity. Ireland is the perfect example. Others please note.