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How important are comparative advantage and
absolute gains to Liberal approaches to IPE?
Introduction
Since the ideas of comparative advantage and absolute gains were
adapted to Liberal approaches, these two notions turned out to be the
central focus of all Liberal approaches, including not only classical
liberalism but also neoliberalism and neoliberal institutionism. The
concept of absolute gains or absolute advantage was supported by the
Scottish political economist Adam Smith (1723 -1790) in his brilliant
masterpiece of 1776, An Inquiry in to the Nature and Causes of the Wealth of
Nations (Moon 2000:33). In addition, the concept of comparative
advantage was a focal point for classical theorists, especially David Ricardo
(Jones 1988: 34).
In this essay, the first section will clarify and map the issue, and will consist
of a sketch of the ideas and the key characteristics of absolute gain
comparative advantage and Liberalism. After that, the importance of
comparative advantage and absolute gains to Liberal approaches to IPE will
be criticized and analysed. Following this will be the final section, which will
comprise a conclusion of this w o r k .
Liberalism
Absolute gains
According to “The Wealth of Nations” (1776) by Adam Smith, benefit from
trade between two nations is based on the absolute advantage theory,
which can be simply described in the following terms: country A has
absolute advantage in producing one commodity over country B, which
also has absolute advantage over country A in another different
commodity, but both have absolute disadvantage with respect to the
other nation in producing a second commodity. To maximise their
interests, the two nations can gain by each specializing in the production
of its absolute advantage and exchanging part of its output with the other
nation for the commodity in which it has absolute disadvantage. They will
discover that it is possible in this way for a mutually advantageous bargain
to be struck (Jones 1988: 34-36).
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From the example mentioned, it may be noted that comparative
advantage can be an advantageous experience for both parties. (Sinclair
2002). In this sense, there is no winner or loser because both countries
gain from trade and the result of specialization and trade enhances the
satisfaction of consumers in both societies (Jones 1998:36).
Comparative Advantage
On the basis of the traditional theory of comparative advantage originated
by David Ricardo (1772-1823), a classical theorist, in his “Principles of
Political Economy and Taxation” (1817), trade can still be beneficial to
both parties even though one nation may be less efficient than another in
producing both commodities. While one of the countries is admittedly
able to produce everything more efficiently than the other, it does not
necessarily follow that the more efficient country must exclusively produce
everything, leaving the less efficient country in a position of inability to
trade with the superior. Actually, the competent producer should locate
the commodity in which its absolute disadvantage is smaller, and specialize
in the production and export of this commodity, simultaneously importing
the commodities in which its absolute disadvantage is greater. Therefore,
the state should focus its attention on the areas where it is most efficient
or has the comparative advantage (Sinclair 2002).
Liberalism
Liberalism is like all grand theories that combine a number of different
ideas (Dunne 2001: 162), and it naturally altered its form according to the
altered circumstances of life in differing epochs. Dunne has also pointed
out that the Liberal aspect is no different, beginning with the liberal
internationalism of the Enlightenment, and then modifying to liberal
idealism during the inter-war period, and ending with the liberal
institutionism which became popular in the immediate post-war years
(loc.cit).
The core concept of all liberalism is ‘laissez faire economic principles’
(ibid.) where the individual is regarded as the basic unit of analysis, whilst
markets provide the location for facilitating individuals’ demand of goods
and services by profit -seeking firms (Sinclair 2002). In addition, the idea of
economic liberalism is associated with the maximization of production and
consumption in a world of scarcity (Gill 2000:50).
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For liberal internationalism, the phrase laissez-faire or “let be” (Balaam and
Veseth 2001: 49) and the idea of a natural order underpinning human were
regarded as key features. And a law-governed international society could
emerge without a world government. Adam Smith also referred to “an
invisible hand”1as another idea of liberal.
For Idealism, laissez-faire was believed that it would deliver peace, but it
could only be secured with the establishment of an international
institution to deal with the international anarchy and facilitate peaceful
change , disarmament, arbitration and enforcement. (Dunne
2001:167,171). All economic barriers should be removed. New
International Economic Order was set up to solve the problem about
uneven distribution of wealth and power between developed and
developing countries. The protection of individuals from human rights
abuses and importance of education were added under this school
following Woodrow Wilson’s ‘Fourteen Points’(ibid.:168 -9).
Consistent with the Neoliberal institutional key concept, David Mitrany’s
ideas stem the proposal that new actors (transnational corporations, nongovernmental organizations) and new patterns of interaction
(interdependence, integration) should be more considered (loc.cit.).
Robert Keohane (1989), added that the actors must have some mutual
benefits which they must potentially gain from their cooperation (Keohane
1989:2), and variations in the level of institutionalization utilize substantial
consequences on state behaviour (ibid: 3). Nevertheless, ‘cooperation is
not automatic, but requires paining and negotiation,’ as is argued by
Keohane (op. cit.:10).
III. The Importance of absolute gains and comparative advantage to
Liberal approaches to IPE The idea may be supported that the concepts of
absolute gains and comparative advantage are mainly about the
exchange or trade of production between countries that have different
potentials for generating goods or services. These two schemes are
important to Liberal approaches to IPE in many areas.
First, these two perceptions have become extremely central to the Liberal
IPE view (Sinclair 2002). As Jones claims, ‘ the principal of comparative
advantage is both one of the major propositions of liberal political
economy and a central part of argument that associates associate laissezfaire with the well-being of all the inhabitants of the world’ (op.cit.: 34).
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Furthermore, it has been added that comparative advantage is essential for
any review of a liberal political economy (loc.cit.).
Second, the two notions encourage people to formulate clear-cut
definitions of mutual interests. This may be simply cited by any Liberal IPE;
for instance, one of the Neoliberal institutionalist perspectives which is
germane to an international system, maintaining that the actors must have
some mutual interests which can be explained that they must potentially
gain from their cooperation (Keohane 1989: 2) is a result of absolute
advantage or comparative advantage. Because when one state trades with
another, both of them will gain mutual benefits in following the law of
absolute gains or comparative advantages.
Third, in accordance with the principles of comparative advantage and
absolute advantage, the state must locate where it has the greatest
comparative or absolute gains so that it can specialize in the commodity
that it is more productive than the other. Hence, if countries agree to
produce merchandise which they profit from, resources will be less used
because the specializing countries know how to use it efficiently. As Liberal
IPE is concerned with the scarcity of resources, the exchange of products
between countries can help reduce input units for each commodity. It can
be deduced that people are able to consume more while the world’s
resources are less used.
Fourth, because of the specialization of production, people’s income among
countries participating in this economic cooperation will rise. For example,
let it be assumed that country A produces both fish and prawns at the
ratio 2:6, and country B generates the same goods at the ratio 6:2. In this
analysis, it is clear that country A has an absolute advantage in prawns, and
country B has an absolute gain in fish. Assuming they agree to export the
products in which both have absolute advantage, and import
the
manufactured goods in which they have absolute disadvantage, the
economic growth will rise. It can be expected that there will be an
expansion in the exported sector, of each country, in the commodity in
which they are skilled. On the other hand, their imported sectors will
depress due to the fact that the imported merchandise from the other
country will dump the price in this sector. In this case, the prawn price in
country A and fish price will grow; subsequently, people who work for the
section will earn more money. In contrast, people in the imported sector, in
this case, that produce fish in country A and prawns in country B will
receive less income as a result of price equalisation. To solve this problem,
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the measure of distribution of income should be applied. States should
interfere by collecting more tax from the exported sector and subsidise the
money to the imported section so that the exported division will not be
subject to excessive growth, and the imported area will not be at a
disadvantage due to the agreement of specialization.
Fifth, the cooperation between states through the exchange of specialized
products helps to create and maintain good relations between trading
partners. Hence, states under economic cooperation are less likely to seek
political power, because they are satisfied by the benefits from
economics. One may take the EU as an example of this reason. Moreover,
from Woodrow Wilson’s view, the reduction of all economic barriers and
the establishment of an equality of trade conditions among all nations can
lead to peace (Kegley 1995:13). As a result, it may be said that economic
cooperation among countries helps to protect from the possibility of an
outbreak of war.
Sixth, as IPE always concerns itself with broader cross-national and nationstate relationships, comparative advantage and absolute gains can cause
the countries’ leaders to focus on domestic issues, because they have to
locate and exploit the product that will provide the greatest absolute
advantage to their countries. Thus, the two ideas emphasise the
significance of domestic issues; this can be regarded as a new aspect for IPE
scholars’ view.
Seventh, economic cooperation under absolute gains and comparative
advantage helps to establish the complex and mulitlayered political
process seen at bilateral and multilateral levels, between and surrounded
by nation-states and many international organizations, regional groupings
and global agreements (Balaam and Veseth 2001: 5).
Nevertheless, it can be said that liberal approaches are too idealistic
because of many reasons.First, the concept of mutual interests under
comparative advantage and absolute gains cannot solve the problem of
countries’ cheating to maximize their benefits by forcing non-liberal
countries to be accepted their liberal views through the regulations of
international organizations such as WTO, IMF. From the Asian financial
crisis, the IMF applied heavy conditions to the Asian countries by
criticizing that the domestic factors caused the problem.(Woods 2001:
292). Actually, transnational corporations and muti national corporations
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also played part in this crisis because when they withdraw a large amount
of money from those countries, it caused a lot of problems in financial
sectors which governments of Asian countries could not deal with.
Therefore, the financial crisis were emerged. And it can be said that the
Asian crisis showed the failure of international organizations especially IMF
which could not solve this problem effectively.
Second, because there is no world government, the world is still anarchic.
Therefore, the interest sharing between trading partners can be seen in a
equality way which western countries or developed world gain more than
developing countries when they are under the same rules of international
organizations or institutions which are supported by powerful states that
have been trying to maximize the advantages by using the available
resources of developing countries.
Third, under liberal view, decision makers can decide what they should do
for maximum interest by using the rational choice approach, so each
interest groups or states can gain from their decisions. But, in this
globalisation era, national interests are not fixed as the rational choice
thinker assumed because the role of international institutions and the
trade conditions between states make the world more complex and have
much more actors and interest groups. As a result, the decisions of states’
leaders will be forced from many factors not only national individual
interests.
III Conclusion
To sum up, comparative advantage and absolute gains, which are
concerned as one of the central concepts of Liberal schemes, are
suggested by Paul Krugman to be the everyday concern of states (Sinclair
2002). Because these two ideas can be easily assimilated and adapted to
Liberal IPE approaches. These two notions formulate the idea of economic
cooperation between nation-states, help to create more mutual benefits
between or among nations and make world’s resources efficiently exploited
Moreover, comparative advantage and absolute gains give a new
perspective to IPE about domestic issues because IPE generally focuses on
international matters. Furthermore, as there is no comprehensive world
government to cope with monetary stability and open international
trading order (Sinclair 2002), the cooperation between nations can assist in
preventing the war and unrest which would be caused from the seeking of
power by states. And lastly, complex and mulitlayered relations which are
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now the focus of IPE can also be regarded as a result of comparative
advantage and absolute gains. However, liberal ideas under comparative
advantage and absolute gains cannot explain the real situations which
cheating in cooperation ,many gaps between developed and developing
countries, misperception of leaders and inequality of mutual interests
have still been major problems.