Yesterday, I posted about how globalization is not about comparative advantage (the ideal) but arbitrage (the reality). Comparative advantage is taking advantage of some natural/cultural and abundant resource that can be sold cheaply on the global market; arbitrage is "taking advantage of the price differences between two or more markets." In the heat of composing that post, I forgot to mention the source of the idea—a book, Demand Side Economics: Demand Side Minds, by the economist Alan Harvey. (You can read my 171 highlights and 2 notes of the book here)

The relevant passages:

Explicit in the new globalization is the free flow of capital and the opening and integration of markets. And while "trade" denotes an exchange, the current phenomenon is one of arbitrage of labor, regulation, currencies and financial instruments. Arbitrage is taking advantage of the price differences between two or more markets.

Financial arbitrage involves taking advantage of tiny differences in interest rates, exchange rates, spot and futures prices, or any other differences that can be found, buying in one market and selling in another. Financial arbitrage accounts for a tremendous proportion of the volume of financial transactions. Labor arbitrage refers to exploitation differences in wage rates (adjusted for productivity) by moving operations, notably to the country with the lowest wages per unit of output. Regulatory arbitrage indicates the tendency to move activities to jurisdictions with the least onerous restrictions.


The model that originally described the gains to be expected from trade was developed in the 19th Century by British economist David Ricardo (1772-1823). It is based on the concept of comparative advantage. Where one country might have a comparative advantage in wine and another in wool, it benefits both parties to trade. "Comparative" signifies other than absolute. For example, if country A can make 8 gallons of wine or raise one sheep and country B can make only 4 gallons of wine per sheep, it doesn't really matter if "A" can make 100 gallons per man and "B" only 20. The benefit exists to trade sheep (or wool) for wine. No matter the relative level of prosperity, if we can get more wine by growing sheep and trading wool for it than by growing grapes and producing it ourselves, we are better off to do so. Ricardo's principle of comparative advantage and win-win from trade has the precision of the hypothetical.

In my post, the example of comparative advantage was taken from Adam Smith, but it was in fact David Ricardo who formalized and hardened the concept.

Again, and this is pointed at my critics—particularly the ones whose eyes turn red when I post about biology—I never write out of pure air. What ever I post has the matter of a book in mind.

Lastly, I will have something to say about this 2012 film in the near future: