§ 4. Persistence of differences between nations. If both 5 See Vol. I for numerous statements of the effects of varying quan tities of agents upon the economy of utilization; e.g., pp. 138, 163, 164, 213, 228, and chs. 84 and 35 entire.
men and wealth interchanged between industries and between countries with perfect readiness and without any outlay what ever for transportation, these differences would soon disap pear, and perfect equilibrium of advantage would everywhere result. In every country, in every occupation, labor and wealth of given quality and amount would receive the same reward. But the interchange of labor and of products be tween countries is never without friction.
The laborers, enterprisers, and investors in a naturally rich country are thus in a position of more or less enduring ad vantage relative to those of older and poorer countries. Dif ferences of the same nature appear as between different parts of the same country, as between the northern and the south ern states of the American Union, between the eastern and the western states, and even between neighboring towns in the same state. The differences between two countries, how ever, are likely to be more marked, the circulation of factors being so active within a country that it is allowable to speak broadly of prevailing national rates of wages, of in terest, and of profit. Although, as Adam Smith said, "a man is of all sorts of luggage the most difficult to be transported," the higher wages in a new country attract constantly from the older lands a portion of their laborers. The higher rate of interest in new countries constantly attracts investments from abroad; yet, despite these forces working toward equal ization, the inequality may remain and, through the work ing of other influences, may even increase in the course of years.
§ 5. Doctrine of comparative advantages. It may be that two countries both possess the necessary technical con ditions 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-ad vantage 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 maxi mum). Evidently at any rate between these two ratios each party would gain something by the trade, e. g., at 2x=-3- y A would get 3 instead of 2y by a day's labor, and B would get 1%x instead of lx for a day's labor (2x for 11/0 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.