§ 5. Doctrine of comparative advantages. It may be that two countries both possess the necessary technical conditions for making both articles that are to be traded for each other. It may even be that the people in one country would be able to make not only one of the two objects of trade, but both of them, more easily and with less sacrifice and effort than the people in the other. If, for example, American labor can produce two bushels of wheat in a day and English labor but one bushel a day; and American labor can produce just as much iron in a day as English labor - or more - the question always arises: Is it not foolish and wasteful not to produce both the wheat and the iron?

Now, exactly the same case is presented in almost every simple neighborhood trade. The proprietor may be able to keep his books better than does the bookkeeper whom he employs. The merchant may be able to sweep out the store better than the cheap boy does it. The carpenter may be able to raise better vegetables than can the gardener from whom he purchases. Yet the merchant does not turn to sweeping and the carpenter to raising vegetables, because if they did they would have to quit or limit by so much their present better-paying work, and would lose far more than they would gain.

So whenever the people in one country have a greater advantage in one article than in another, relative to another country, the foreigners, like the low-paid man, will be willing to exchange at a ratio that will make it profitable to specialize in the product wherein the greater superiority lies.

As an example, suppose that a day's labor in country A will secure two bushels of wheat (2x) and two hundred pounds of iron (2y), whereas in B a day's labor will secure lx or 2y. Then A's comparative advantage in producing x becomes a reason for A's not trying to produce y. Trade can take place (aside from transportation outlay) at any ratio between 2x = 2y (A's minimum) and 2x = 4y (B's maximum). Evidently at any rate between these two ratios each party would gain something by the trade, e. g., at 2x=3y A would get 3 instead of 2y by a day's labor, and B would get l 1/3x instead of lx for a day's labor (2x for 1 1/2 day's labor instead of for two days'). There can be no motive for trade unless the ratio of exchange is such as to enable the producers in each country to get somewhat more goods by specializing than they could get by applying their labor and resources to both kinds of products.

§ 6. Advantages confused with monetary costs. The doctrine of comparative advantages is always a hard doctrine for the popular mind, and particularly for the commercial mind endeavoring to carry on a business that cannot be made to "pay" in the face of foreign competition. It is easy to believe that a country ought not to import goods unless it is at an absolute disadvantage in their production. It is often declared that as our country can produce any kind of goods "as well" as foreign countries (meaning with as few days' labor), there is a loss on every unit imported. The fundamental principle of trade as applied to such cases shows that not the advantage which one country enjoys over the other as to a single product determines whether it will gain by producing at home, but the comparative advantages enjoyed in the production of the two articles in question.

The difficulty of clear thinking in this matter is increased by the fact that this theory usually has been, and still is, presented under the name of "the doctrine of comparative costs." The word "costs" is very misleading in this connection, because it is now generally applied to enterpriser's outlay. It seems best, therefore, to replace it in this phrase by the word "advantages." Of course, it never can be true that an article can be " profitably" imported when its monetary costs (all things considered, freights, insurance, merchant's profit, etc.) are higher in the exporting than in the importing country. Indeed, the importation of any article is proof conclusive that the importer thinks that the monetary costs of an article are higher in the importing than in the exporting country.

How does it happen that the monetary costs of any particular goods in one country are higher than those of another country? The answer to this can be made only in the light of the equilibrium theory of prices.6 "Monetary costs" are but the prices reflected to agents from the products which they aid to produce. The relatively short factor in each of the trading countries is priced higher, the relatively long factor is priced lower, than in the other country. For example, agricultural land in England is priced higher (in grains of gold) per acre than equally good land in America, and an ordinary day's labor in America is priced higher than similar labor in England. The manufacturer in America who is trying to manufacture something in which the labor element is large has to go into the labor market and pay higher wages than his English competitor just because there are other industries that can afford to outbid him for that labor; whereas the English farmer trying to produce wheat finds that he has to pay land rent per acre much higher than his American competitor in North Dakota whose wheat is sold in Liverpool. These differences in relative prices within each country have important effects in the degree of inten-siveness of utilization of economic agents, both human and material. Men often speak carelessly as if America were a country of uniformly high prices, compared with Europe, but that is because they are thinking only of the kinds of goods that we import. American (wholesale) prices of the things we export to Europe are lower than European prices; if they were not the things could not profitably be exported. These facts and principles are contrary to much of the popular and political opinion with regard to protective tariffs.

6 See, e. g., Vol. 1, pp. 71, 162, 213, 227, 399-404, 438.