How important are comparative advantage and absolute gainsto Liberal approaches to IPE?

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 criticised and analysed. Following this will be the final section, which will comprise a conclusion of this work.

I 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).

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 ...

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Liberalism

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).

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”as 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, non-governmental 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 laissez-faire with the well-being of all the inhabitants of the world’ (op.cit.: 34). 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, 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 nation-state 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 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 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.

This idea was referred to as the mechanism which intervenes between the motives of the individual and ‘end’ of society as a whole (Dunne 2001:166).