Adam Smith thought there should be no barriers to movement of labour, or capital, or goods. He was basing his ideas on "absolute advantage" and that bears some thinking about. As I noted above, there is no reason why 12 hours working in a field should have less value than 12 hours working in a factory. So absolute advantage does not inhere in labour. Capital is capital the world over: a printing press in Madrid will print the same number of newspapers there as it will in Edinburgh. So absolute advantage does not rest in the means of production (capital). A tomato is a tomato is a tomato. So absolute advantage is not located in the goods. If it is to arise at all I think this means that it is in the land: or more properly in such things as climate and other non-human givens.
As has already been observed, some countries (places) have no absolute advantages at all: and the problem is that because the source of advantage is not of human origin there is nothing that can be done about that. Some folk just can't play this game and they are going to remain poor. There is nothing they can produce more cheaply than anyone else and so they have nothing to trade profitably. They are out of the Free Trade game.
The adoption of the comparative advantage model changed all that: because it shifted the focus to relative costs etc, not absolute ones. And we have seen how that works, in theory. But this entails some rather large assumptions. What you have to ask yourself is, where does the comparative advantage come from? And the more I thought about this the more mysterious it became. The same considerations as I have just outlined with regard to labour, goods and capital still hold, presumably: at least at a the level of theory. The absolute differences which are related to land and climate are still there, and so that absolute part is still in play. If we are to account for the fact that there are differences we can exploit over and above those absolute advantages, it follows that there is some aspect of the other factors of production which are not equal, despite appearances. And in the real world which Ricardo faced that was true. It was true because he did not come along when humanity had just arrived out of the trees or wherever we are supposed to have come from. We had in fact been around for a long time, and we had been producing and trading and thieving all that time.
As noted, the world which Smith and Ricardo contemplated had been shaped by centuries of Mercantilism. Not the whole world, probably, but all the bits of it they could recognise and model. And Mercantilism had served the imperialist countries very well, on the whole. They had followed their system and concentrated the measure of wealth (gold) in their own hands: they had determinedly pursued a positive balance of trade for themselves: they had ensured that subject peoples produced raw materials and they themselves made finished goods: and they had controlled all this through law and tax and tariffs and war. So when Ricardo realised that absolute advantage was not enough he was able to see that the other factors of production were not equal at all. There was a comparative difference between working in a field and working in a factory. Well actually there wasn't, if you consider the worker, because it was an intrinsic part of mercantilism that the workers were to be kept at subsistence levels, no matter what they prodcuced: it kept the prices down. Rather there was a comparative difference between the profits to be made from agriculture and from finished goods. And this was always going to be true, because it is what they had set out to ensure in the fiirst place. But so far as I can tell Ricardo mistook this for a natural law.
So on his model the comparative advantage comes from differences between things which
are under human control, in reality. Which brings me to capital. Ricardo recognised that it would reasonable to expect that capital would go to wherever it gave the biggest return. Profit is what this is all about, after all. He saw that labour does not make the difference: there are people everywhere, and because of the mercantilist system which preceded Smith, they were pretty much all poor. For raw materials and for agriculture there is the absolute advantage: but for finished goods there is really no reason at all for a comparative difference to exist, or to sustain. In fact the opposite should happen.
In the example I have been using, Spain was producing tomatoes and Scotland was producing mobile phones. What happened was that Spain got stuck and Scotland didn't. So Scotland got richer, in that it ended up with enough tomatoes and could never get too many mobile phones. So far so good, and this was all based on comparative advantage. The real wealth was couched in terms of the goods to keep it simple; and money was left out of the account as it is only the measure of wealth. But however you count wealth, it is a relative concept. And the point of profit is wealth. So there comes a point when all the Scots have a mobile phone but not all the Spaniards have one. Curiously this means that nobody in Scotland is rich: but there are rich people in Spain. The way this whole system of the free market is supposed to work is through competition. And competition depends on incentive. Incentive means that I can get more than my neighbour, if I am smart and work hard and all of that. So I cannot be content with equality, even if I am better off than I used to be. That is why we are told that inequality is a good thing, a mantra we hear often. Free Market capitalists don't object to a general rise in prosperity: but they do object to equalisation of wealth, because that leads to stagnation and complacency and a whole lot of bad things which never happen if there is the prospect of "more for me". So in these terms Scotland is a disaster now. So how can the Scottish individual get rich?
Well one way is he can move to Spain: because his mobile phone is a measure of wealth in Spain. His possession of it makes him a rich person even if he doesn't do anything else. More than that, if he waits until there is more than one mobile phone per person in Scotland he can gather up all the grey ones people threw away, and instead of giving them as charity to spaniards he can get some of the spaniards who can't sell their tomatoes and put them to cleaning them up, or even painting them blue. He got them for nothing so he can swop them for less than the 1000: 100 ratio previously established. Say he is willing to accept 500 tomatoes for 100 of these phones. Now Spain has the same number of phones as before, but at a cost of only half the tomatoes. The phones are not as good, arguably, but your man has a proper new scottish one every year if he wants one, because he has 500 tomatoes, and a new one does not cost that much. So he is even richer.
20 people who were producing tomatoes nobody wanted are now cleaning and painting phones instead. Spain is back to producing the 2000 tomatoes, which represent the world wide demand for tomatoes. It is still getting 100 phones (though maybe not of the first quality) But our enterprising scot has 500 of the tomatoes and Scotland is short 500.
Scotland is still producing 400 mobile phones: but it is no longer swapping 100 of them with spain for 1000 tomatoes. So it is richer in mobile phones: but there is a tomato crisis. It has to have tomatoes. So Spain puts the price up. Let us say it doubles the price (that likely won't work because at some point the price will cross a threshold and Scotland will go back to producing its own tomatoes: but in the figures I happened to adopt at the outset Scotland is actually incapable of meeting its internal demand unless absolutely everybody grows a tomato: so for this example it will. The idea is the same whatever numbers you use anyway: and, as ever, I am rubbish at numbers or I would have made them more realistic in the beginning: but hey ho). Now Scotland can get 1000 tomatoes for 200 mobile phones. So it has got poorer, because the stock of mobile phones has dropped, and they still only have one tomato each. But spain has got richer: It has got a tomato each and 190 mobile phones now. Our enterprising scot has got a tomato and 100 mobile phones: because half the tomatoes sent to Scotland were his. Spain has gained, but not as much as he has in the scheme of things. And Scotland has lost. ground.
Ricardo thought that this would not happen because he said that captial is immobile: and he thought that for some of the same reasons as labour is not all that mobile in practice. He said
QUOTE
the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and entrust himself with all his habits fixed, to a strange government and new laws, checks the emigration of capital
But he was writing in 1824, when travel was a very different prospect to what it is now. The more important thing he said was this though:
QUOTE
if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities, than the additional quantity of labour required to convey them to the various markets where they were to be sold.
In other words, in a situation when capital can travel there is no such thing as comparative advantage. And that seems to be the case.
Three things remain: there is the absolute advantage conferred by productive land, and wealth in natural resources. There are the differences which were manipulated into being in the mercantile era, and which persist. The latter are largely differences in accumulated capital: we have rich states and poor states. And there is the much larger wage differential between states than existed under mercantilism. That is attributed to the requirement for the free market to ensure ever rising demand, if you follow the free market narrative: and we are to be grateful for the benefits we enjoy through that mechanism. But if you think about that and read some history I think it is not plausible. The hey day of the Free Market was in the 19th century. That was not a period of prosperity for most of the people in the richest countries in the world at the time. The Free market seemed to get along just fine without mass consumerism, and the conditions of the people were not much different than they were under mercantilism: which was actually
trying to keep them poor. It is my contention that the differential is due to quite different factors: like trades unions, and regulation of the corporations and financiers, and universal suffrage which gave the people some direct means of defending their interests. The prosperity was achieved in the teeth of the opposition of the free marketeers. And we see the same lack of concern for mass prosperity and consumption right now. Despite what they say there is no apparent reluctance to impose austerity measures which will put people back to the place they were in in Victorian times. Some voices talk in terms of the adverse effects of killing "demand" and this is what Keynes addressed. But they are not powerful voices in the scheme of things: and they are not Free marketeers.
We have already seen the impact of mobility of capital, to some limited extent: the corporations which persuaded us that trades unions must be curbed because they were "holding the country to ransom" now say quite openly that if things don't suit them they will take their money elsewhere. Where is the outrage at that form of "holding the country to ransom"? The effects of the wage differentials are also plain to see: labour in India is cheaper, because of the history of empire and mercantilism and because of Keynes and his heirs after WW2: And with no regulation on the movement of capital there is indeed the effect Ricardo identified. Capital goes where it gets the best return, and wages are driven down to the lowest common denominator as a result. What Ricardo relied on to combat that trend is mere sentiment: and sentiment underpinned by practical constraints which no longer exist. I don't think that is going to be good enough, personally