Trade + Comparative Advantage = Happiness?

Adrian Collins/Summer School Morning/ Mrs. Hansson

What is the best way to go about producing and trading goods? Is it ideal to be self-sufficient, producing all goods within isolation, or better to trade by means of advantage? All methods of production being considered, the question arises of which is the most beneficial to a country such as America or China. In this day and age is it still safe to say that America and China both benefit from trade between nations?  These questions come to mind when deciding whether trade leads to happiness or complications. Adam Smith’s The Wealth of Nations addresses the topic of trade and the comparative advantage. He presents the best options for scenarios that happen often today even as he wrote in the 1700s. While this time probably had just as much complexity within the economy as there is now, we are able to adapt Smith’s words to today’s events. We will delve into selections of his writings to discover what is optimal (if anything) regarding trade.

First, we shall address the question of absolute vs. comparative advantage: which is more beneficial? Well, after doing some research and reading The Wealth of Nations, it is safe to say that a country most likely can’t go wrong when the choice is made in favor of comparative advantage. If given the choice between maxing out the number of goods that can be attained and settling for self-sufficiency at a lower rate of attaining goods, which would be chosen? Common sense would naturally choose the former if extreme pride was not an addition to the equation. It is natural for nations to have the desire of acquiring the largest number of goods at the cheapest rate possible (no matter where it’s produced).

We can observe this concept even looking at today’s method of production between the United States and China. Through all the debate about whether it is beneficial for the US to outsource production to China, it is easy to make an argument in favor of outsourcing when it is taken into account that the labor is cheaper, more efficient, and more beneficial for business. From a corporate standpoint, trade between China and the United States is a great idea; however, there are always many different ways to look at situations such as this and a corporate standpoint doesn’t take happiness into account when discussing economic options. If we are to look back at the given situation of trade between the United States and China while also observing the effect of this outsourcing on average Americans, we could see why this method of production may not be ideal for the happiness of all people. We may even be able to go as far as to say that it is less beneficial to outsource even though production may be booming for large businesses. It all comes back to happiness.

Depending on which view of happiness is being considered (whether the Utilitarian view of the majority rules, the Aristotelian view of finding a happy mean, or any other type) for each person involved (whether the producers or the consumers), we are required, through this argument, to define whether the comparative advantage system of trade is truly beneficial for each nation involved. Does more production always lead to greater happiness? The answer lies in unemployed Americans. Many people living in the United States have lost their jobs due to the increase of the desire of private firms to outsource to countries like China. Though the unemployment rate may rise, the rate of production also increases. This causes a win-lose situation. It all comes down to whose happiness matters the most. It seems silly to say that since most people have probably always thought that one person’s happiness shouldn’t matter more than another’s. It also seems silly to say that all things being considered, the US is still debating over this topic and whether it is good or bad.

With all the above being said of comparative advantage pros and cons, let’s discuss that of the road not taken (pun intended): taking advantage of the absolute advantage. Let’s imagine that the United States banned foreign trade in efforts to try self-sufficiency in order to boost the economy. No more imports or exports, no more outsourcing, everything is made with a “Made in USA” sticker in plain sight. Employment rates go up as more firms hire American employees. Along with the large increase in employment, however, comes a steady increase in prices. What used to be cheap and “Made in China” now costs a measurable amount more being that it is now “Made in USA” and the labor is no longer as cheap as it was in foreign countries. Of course people are elated at the beginning of this transition… they have jobs and incomes!

Although this fantasy world seems great, the excitement decreases as grocery shopping increases. Higher prices definitely do not make Americans happy even though they are necessary for firms to receive business and be successful. Wait, what was that again? The people still aren’t happy? Here’s our same problem all over again. Same question: who’s more important, the producer or the consumer?

Now, there may actually be an answer. We must look back to the economists and great thinkers before our time. If we were to have a conversation with Ludwig von Mises this afternoon to discuss this question, he would tell us that the consumers have the most control, and are possibly more important. Karl Marx and Friedrich Engels may agree. The truth is, the answer to the question is in the eye of the beholder. In other words, it’s an opinion question. We’re back to the silly question of whose happiness is better to consider.

Another few things to take into account are factors of production. If the United States were to consider whether Chinese production outdoes that of the US, this would be taken into account deciding for or against trade. Not only does cheap labor come into play, but efficiency, quality, and many other factors of production. Are the benefits of outsourcing worth unemployment in the United States? Does production outweigh happiness?

Again, the answer lies in the eye of the beholder. Although this is true, it is also a dangerous statement to make. Because the fate of the economy does not lie in the hands of every American citizen, we must trust that the leaders of firms will make the best decision for the economy and for the people. That decision may not lead to happiness for all, however, as these leaders may regard economic success as a more important outcome than happiness for all people. This dreary fact just emphasizes that we as mere citizens and workers do not have the power to change things within economics. That being said, we, as consumers, may actually have that power. We, as consumers have the ability to demand what we want the most. And there is a chance that we can change some of the decisions these firms make regarding trade.

All in all, it is safe to say that foreign trade has numerous pros and cons. Deciding whether self-sufficiency or foreign trade is better for a nation is a big decision. Many things go into play: happiness of consumers or producers, benefits to society or the economy, and factors of production. The take-away message is not as much an answer to a question, but an extended thought. If we, as consumers, hold the power of changing things, will we take a stand for our own happiness? Should we? All factors into account, the idea of whether foreign trade leads to happiness or success is still a mystery to the majority of Americans. This is true because although unemployment doesn’t lead to happiness, cheaper prices do, in fact, increase demand for products and services. I will leave this thought up in the air, because the answer is not definite for all people, consumers and producers alike. The answer is many shades of gray for citizens of the United States.

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