In the second episode of our Trade series, Nick and Goldy talk with author Nat Dyer about his book Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray. Dyer reveals how David Ricardo’s famous theory of comparative advantage—long touted as proof that free trade is always a win-win—was built on unrealistic assumptions and a false history. They trace how this elegant but misleading model fueled globalization, masked exploitation, and locked nations into centuries of stagnation. From Trump’s tariff tantrums to Biden’s “small yard, high fence” strategy, their conversation challenges the myths of free trade and asks: when does trade strengthen societies, and when does it doom them to decline?
Nat Dyer is a writer and researcher specializing in global political economy and author of the book Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray. He is a Fellow of the Schumacher Institute and the Royal Society of Arts. He has worked for Global Witness and for Promoting Economic Pluralism and his stories have been reported on by the BBC, the New York Times and Bloomberg.
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Further reading:
Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray
Escape from Model Land: How Mathematical Models Can Lead Us Astray and What We Can Do about It
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Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Goldy:
The last five decades of trickle-down economics haven’t worked, but what’s the alternative?
Nick Hanauer:
Middle-out economics is the answer.
Goldy:
Because the middle class is the source of growth, not its consequence.
Nick Hanauer:
That’s right.
Speaker 3:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Nick Hanauer:
Goldy, I’m really looking forward to talking to our guest today, Nat Dyer because he’s most definitely a fellow traveler and shines a bright light on some of the ridiculousness that permeates contemporary economics or orthodox economics. And he’s got this cool new book out, Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray that zeros in on our old friend, David Ricardo and his theory of comparative advantage that has so dominated traditional economic thinking and has heavily featured in the neoclassical models that have influenced policymaking over the decades.
Goldy:
And reshaped the world over the past 40, 50 years through globalism, free trade, et cetera, which is all … I don’t know if you’ve paid any attention to the headlines, but trade is a big issue right now.
Nick Hanauer:
It is. It is.
Goldy:
And it’s really frustrating.
Nick Hanauer:
It’s so frustrating, right?
Goldy:
Because even if Trump was right about trade, even if he was absolutely right, even if his analysis was dead on, and I don’t think there’s any analysis there.
Nick Hanauer:
No.
Goldy:
The approach to, “Okay, we’ve had this trade regime, low tariffs and free trade and global supply chains, and now we’re going to go back to early 20th century levels.”
Nick Hanauer:
No, no, no. We’re going back to 18th century.
Goldy:
Right. Right? We’re going to 140% tariffs on stuff coming in from China overnight. Look, it’s insane, but at the core of this is a legitimate complaint, and that is that we were promised in the ’80s and ’90s by opening up to China and bringing down tariffs and opening up to free trade, there would be some winners and losers, but the loser would be compensated. And in the aggregate, we would all be better off.
And it ended up de-industrializing much of the American economy. It ended up just devastating the Rust Belt and small cities and towns throughout America. There used to be throughout America, in rural America, there was manufacturing. There were small manufacturers all over the place, which supplemented these rural economies and kept people at work and kept your children from moving away to not just better opportunities, but any opportunities someplace else. And all that has been destroyed over the past 50 years and people are reasonably upset about that. Right?
Nick Hanauer:
Yep.
Goldy:
And so a lot of this, it creates a very … It’s a very difficult position for people like us to talk about trade because we agree that these trade policies were ill-conceived. And on the other hand, Trumpism is beyond ill-conceived. It is catastrophic if it’s allowed to continue because at some point you can’t just roll things back overnight.
The other thing is of course, and what attracted me to Nat’s book is this idea that Ricardo is more than just about trade, comparative advantage. He was the first economic modeler, the first economist to bring math into economics. And that is the world we live in today, where economics is … You and I, we’ve both been told this, we don’t understand the math. Right? So, who are we to criticize economics if we can’t do the math? It’s a heavily mathematized theoretical profession right now, and this all goes back to David Ricardo.
Nick Hanauer:
Well, let’s talk to Nat.
Nat Dyer:
Hi, my name’s Nat Dyer. I’m an author from the UK and I’ve recently published Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray. Prior to that, I worked for a new economics organization called Promoting Economic Pluralism, and before that for an anti-corruption organization called Global Witness.
Nick Hanauer:
Why don’t you, at a high level, sort of take us through the thesis of your book? Remind listeners who David Ricardo was and his theories and how it influenced economic thinking over the last 100 years.
Nat Dyer:
Sure. Yeah, so I described David Ricardo as the other founding father of economics. Your listeners Will doubtless have heard about Adam Smith and the Invisible Hand. And coming a couple of decades after Adam Smith was David Ricardo. He was a stockbroker turned political economist turned politician, and I argue that he had an outside role in the history of economics, both in being one of the main people who introduced abstract models into economics, and also as the founding father of international trade theory as well.
So yeah, so his theory that he’s probably most well-known for in the current day is called the Theory of Comparative Advantage, which I can break down a little bit more if you’d like me to.
Nick Hanauer:
Yeah, absolutely.
Goldy:
That’d be great because right now, I don’t know if you heard, but trade is kind of a big issue right now, tariffs and all that. So we thought we’d dive into … Let’s get to the heart-
Nick Hanauer:
Let’s get to the heart of this.
Goldy:
The heart of the argument for free trade, which is comparative advantage. Why don’t you try to explain that for us?
Nat Dyer:
Totally, totally. Well, yeah. I mean, ever since at least going back to the ’90s if not longer, sort of economists, whether they’re on the left or the right on national issues have agreed on the idea that international free trade is a positive, is a win-win. And a lot of that argument stems from David Ricardo and from his theory. And economists are keen to say, “If you argue against this, you’re arguing with 200 years of economic wisdom.”
And Paul Krugman back in the ’90s would write essays saying things like, “Well, if …” Comparing those people who didn’t believe in free trade to creationists or evolution deniers. So essentially, economics is a science and it says that free trade is good.
So yeah, so what I do in the book is look at the context in which Ricardo created this theory and some of the reasons why it doesn’t always stack up. To go back to the argument for it, the idea is that trade is always win-win. So, Ricardo used a very simple model of two countries and two commodities, and it doesn’t matter if one country is better at everything than another country, it still makes sense for both countries to trade. They just both need to focus on what they’re best at, or what they’re least bad at. And you crunch a few numbers, and it’s this counterintuitive result that has been marveled at by generations of economists and being called beautiful and unshakable basis for globalization that essentially says that both countries individually benefit and the whole world benefits as long as there is trade.
Goldy:
And given the assumptions in Ricardo’s model, I mean it really is beautiful. It’s elegant. It’s counterintuitive. You can see why it enthralls people because the math works. It’s undeniable, the way he sets up this. And it’s the first time we really see the introduction of mathematical models into economics.
Nat Dyer:
Totally, but yeah, as you say, there’s quite a lot of assumptions underneath that. So Ricardo, in the way that he set up the model, he assumed that each country had full employment. He assumed away any idea of transportation costs, whether that’s financial costs or ecological costs. He even assumed that money can’t cross borders. And probably the biggest one of all, he assumed that there was equal power between the trading partners.
And so this is an example that Ricardo used back in 1817 when he first set out the model. So he says, “Imagine a situation in which England and Portugal trade in two commodities, cloth and wine.” And in his example, Portugal is better at producing both cloth and wine than England. But still you crunch a few numbers, and if Portugal concentrates on wine and England concentrates on cloth, then they exchange and both countries benefit.
But that’s essentially what happens in the model world. And if you actually look at the real historical record, you get a very different story. So there was actually a booming trade in cloth and wine for about a century before Ricardo wrote his model, but it looked nothing like the way he describes it.
So, Portugal did export wine to England and they imported vast amounts of cloth, but they never exported enough port to make up for the cloth. So how did they make up the difference? They made up the difference by sending London huge quantities of Brazilian gold. So, Brazil was a Portuguese colony at the time, and that gold was largely dug by enslaved Africans.
And so you’ve kind of got on one level, you’ve got this idea of this win-win trade between England and Portugal, but if you zoom out, then you can see actually there’s a different hidden story of exploitation and slavery in the very example that Ricardo used, and has been repeated time and time again for why trade is always a positive.
Goldy:
Right, because in the real world, it’s not just two countries, it’s many countries. It’s not just two products. You can ship capital across borders and there are these vast power imbalances. And in fact, as you point out, a lot of the English cloth that Portugal was importing was then being used to trade for slaves in West Africa, to send to Brazil to mine the gold that was shipped back to pay for the trade imbalance.
Nat Dyer:
Exactly, yeah. And this is history from 300 years ago, but as we said at the top, this is highly relevant to what’s happened in recent decades. But also, just recent weeks and months, as you guys know very well, there’s a very solidly defended dogma, free trade dogma, and it was used in the ’90s to sort of remake the world through the creation of organizations such as the World Trade Organization, but also a blizzard of regional and bilateral trade deals.
And who would argue against freedom or free trade? But actually, if you dig into what was actually happening, many people have argued that it actually, what was in those deals were things that increased the rights and powers of corporations in Wall Street. And so you can see that with increased patents, which plumped the profits of pharmaceutical companies among others, but made it more difficult to get medicines in the Global South. Finance, any barriers to hot financial flows going across countries were ruled out of bounds. You had the so-called shadow courts, investor state dispute settlements where corporations can sue governments, and all of it basically constrained any room for any national priorities, whether that be economic, social, or ecological that didn’t align with hyper-globalization.
Nick Hanauer:
So, there are a couple of, I think, really interesting themes that you explore, but I want to separate them out.
Nat Dyer:
Sure.
Nick Hanauer:
The first is why modern economics became so focused on these elegant models and mathematical abstractions, because that’s a very interesting thing. And as you know, and certainly as our listeners know, over time, those models became ever more abstract and divorced from reality and were used, I think with ill effect.
But the other thing I’d like to talk about after that is trade itself, because I don’t think you’re making the argument. I mean, Ricardo was wrong in the sense that all trade is not good trade. It’s also not true that trade is bad by definition.
Nat Dyer:
Correct. Yeah.
Nick Hanauer:
Yeah.
Nat Dyer:
For sure.
Nick Hanauer:
So let’s start with the first issue. So explain to us how the mathematics, this formal model that Ricardo invented became embedded in economics more generally. Even Paul Samuelson used his math to build models and stuff like that.
Nat Dyer:
I guess what I try and do in the book is lift the lid on the 200-year battle within economics about whether highly abstract theory often built on unrealistic assumptions is a good starting point for economic theory or not.
Often, if you listen to people, they will tell a story that maybe goes back to Samuelson in the ’50s or other developments in the 1970s, but I try and tell a deeper historical story that talks about the birth, the death, and the rebirth of this idea of guiding policy by abstract theory.
And so I say that the birth happened around the time of David Ricardo, who is a very different sort of economist to Adam Smith. And one of the figures, one of the imaginary creatures at the center of so many economic models is economic human or homo economicus, which is this rational, self-maximizing individual.
And I argue that it was actually David Ricardo who brought this figure into economics. And as I mentioned, he was a stockbroker on the London Stock Exchange from the age of 14. And essentially, he retired from the stock market having made an absolute mint in his early 40s. And when he retired and wrote up his economics, he essentially looked out into the world and saw a stockbroker inside everyone, like himself, minutely focused on figures trying to benefit themselves. And it was through this great imaginative leap that he sort of created the idea of the economic human.
But as I said, that was the birth and then there was the death. What I mean by that is that within a generation or two, many thinkers had come up to say, “Look, the theories that Ricardo and his fellow classical economists are putting forward are not helping society.” You had the workhouse, you had many of the horrors of industrial Britain at the time, and you had a new generation of historical and institutional thinkers in the UK, but also in the U.S., also in Germany who pushed back and rejected Ricardo.
But then you have this rebirth in post-war America. So people like Samuelson, as you talk about who kind of had a foot in both camps. And then most prominently, Milton Friedman, who in the ’50s argued that the more unrealistic the assumptions underneath the theory, then often the better the theory, which is kind of a wild argument.
Goldy:
Well, it works well if you’re wrong. You’re advocating for wrong things as Friedman does. That’s a wonderful approach.
Nat Dyer:
Totally. Even at the time, someone like Samuelson called this, direct quote, “A monstrous perversion of science.” Herbert Simon, who went on to win the Nobel Prize said, “This is like building economics on the principle of unreality,” but still the Friedman camp kind of won out. And so you had these crazy economic models that influenced many different aspects of society, often in a bad direction.
Nick Hanauer:
So now let’s go back to trade. So I mean, obviously trade is on everybody’s mind, and I think-
Goldy:
You’re struggling here, Nick because it’s really uncomfortable that on the one hand, what Trump is doing is absolutely insane and yet on the other hand there’s some truth in it?
Nick Hanauer:
Exactly, exactly, exactly. So I think we can agree that the approach to trade the Trump administration is taking is completely bonkers and insane, and it’s not really economic policy, it’s more of a social dominance ritual, I think if you understand it correctly.
But that being said, there are theorists like Ricardo Hausmann who make very, very persuasive arguments for limiting trade because it’s not how much stuff we produce that defines prosperity, it’s the quality of the things that we make that defines prosperity. And if you can’t make anything, you can’t generate the innovation that is the font of prosperity.
And so as you wrote this book, did you come to a new understanding of how high-functioning societies should think about trade?
Nat Dyer:
Just to circle back, I’d agree completely that what Trump has done has been totally chaotic and wild. But what’s interesting about it is that he is using a legitimate grievance about some of the excesses of hyper-globalization to push a dangerous and alternative solution, which isn’t going to work.
But as you know, what’s been interesting about the evolution of trade theory in the U.S. is that Trump in his first term introduced tariffs on China, and then Biden actually kept some of those tariffs and then had this … He didn’t go back completely to free trade.
And so he had this idea of the small yard with the high fence. That makes sense. And even if you go all the way back to Adam Smith, he talked about how defense was more important than opulence, is the way he put it. So therefore, there are certain things in his day he was writing about sail cloth and gunpowder. We might think these days about microchips and critical minerals perhaps, that for national security, you might need to control those supply chains better.
But certainly what we can see with Trump is that he’s using the national security argument wildly by putting tariffs on, I don’t know, Madagascar and the Falkland Islands, for example, where it doesn’t work at all.
Goldy:
Well, we need to protect our strategic vanilla bean industry.
Nick Hanauer:
That’s right. Yes, and mangoes and bananas.
Goldy:
Well, I have to tell you, Nat, that I know you reached out to me, but your book was already on my radar the moment I saw the title. I am not an economist. I never even took an introductory economics course because I glanced through the textbook and just thought, “Oh, my God. No.”
A lot of my economics education has come over the past 10 years working with Nick, but even I was familiar with comparative advantage. I don’t know when it was taught, whether it was in high school or some political science class in college. I can’t remember whether I just picked it up naturally.
And as I started to get deeper into what’s wrong with neoclassical economics, it’s over-reliance on these simplifying assumptions and these bullshit models that don’t describe the real world at all. Very quickly, I had this intuition that it all traced back to Ricardo. This obsession with turning everything into a mathematical model was just trying to reproduce the elegance of that first model because it is beautiful.
When people describe it as beautiful, it is, it works. It’s undeniable on paper, and we’ve talked a bit about trade, but you talk in the book about it really has distorted all of economics over the past 50 years at least.
Nat Dyer:
Yeah, and just about its beauty. I don’t know if you know, there’s a famous quote from George Box that’s often used when people criticize models. And he said, “All models are wrong, but some are useful.” But I actually went back and read that initial paper where Box said, “All models are wrong.” And he says in there, “Don’t be like Pygmalion and fall in love with your model.”
So I was like, “What is this Pygmalion story?” And actually, it’s a story that’s inspired Hollywood movies like My Fair Lady, and it comes from a Greek myth of this sculptor who decided he disliked real women. So he went back to his studio and he sculpted himself his version of an ideal beautiful woman, and he ends up falling in love with this woman and buying her clothes and buying her jewelry and laying her down in bed.
And this is essentially what Box is saying is that, and other people have said too, that there’s this case of what they call the Pygmalion syndrome, in that too many economists have fallen in love with their representation of what the economy looks like rather than looking at the real thing.
To your point about how it’s influenced other areas of economic policy, I have a little, if I could just read a few lines from the conclusion. So I’d say the book looks at financial models with no crashes, global trade models with no state power, anti-monopoly models with no corporate power, climate models with no climate, and all kinds of economic models with no humans in them. So it’s actually across a vast swathe of different areas of policy.
What I would say is that people like us who critique economic models get the pushback, economics has changed these days. We’re much more empirical, we’re much more real-world. I do think there are definitely signs for hope and things have been moving in a better direction, but I think economics as a discipline itself has not faced up to the magnitude of the problems. And it’s only a very rare economist, like someone like Angus Deayton who will put up his hands and say, “Mea culpa, I made a big mistake.”
Nick Hanauer:
100%. And the signs of hope cannot be found in places like the CBO or with the folks who do the modeling at Penn Wharton.
Goldy:
Or in the introductory economics textbooks in Mankiw’s Principles of Economics. He still uses the minimum wage to illustrate the inverse relationship between price and demand. And he still says that raising the minimum wage inevitably creates unemployment, even though we’ve had three decades of empirical research finding that, that is not true.
It’s amazing to me how resilient these neoclassical models are to objective reality that proves them wrong.
Nat Dyer:
Totally. And I think it is a mix of naivety, which is kind of the Pygmalion story I was talking about earlier, but also there’s the knowing misuse of models sometimes, too. And so I’m thinking about some of the financial economists who get contracts from Wall Street or some of the economists in the law and economics movement that get paid.
I think there’s an estimate that one leading economist earned $100 million in defending large corporate mergers, or you can look at what happened in the run-up to the 2008 financial crisis. There’s a lot of knowing misuse of models as well as the naive stuff.
Goldy:
And a lot of it, I think has to do with the pathology of the profession itself. I mean, there’s Paul Romer’s paper, The Trouble With Macroeconomics, and he dubs it post-real macroeconomics. And I think that the quote I have here, he attributes it to a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.
And I think what we’ve seen in economics over the past 50 years, despite this move towards empiricism, is if you want to get ahead in the field, you don’t make waves.
Nat Dyer:
Yeah. I mean, I think there is hope for a younger generation of economists, say 40s and younger, who are actually trying to do things in a different way and are much more focused on what’s happening in the real world. But I will meet your Romer quote with another one.
I like to this, he writes that, he worries that presenting a model is like doing a card trick. “Perhaps our norms will soon be like those in professional magic. It will be impolite, perhaps even an ethical breach to reveal how someone else’s trick works.” And essentially that’s what a lot of this is theoretical cherry-picking. If you choose the assumptions, you can essentially choose what the conclusions is going to be, and we need to have much more awareness of what assumptions go into these models.
I use another analogy that models are a bit like the spotlights in a theater. So if they’re focused on the main action, the person at the front of the stage who’s speaking, they can help sharpen our awareness of what’s happening. But if they’re focused on a side character, what happens with the spotlight in a theater, it puts the rest of the stage into darkness. And I think you can see that with models as well. The things that are left out often, whether that’s political power, or the natural world, or culture, or real humans, often they get left in darkness.
Nick Hanauer:
Yeah. Inequality being-
Nat Dyer:
Totally.
Nick Hanauer:
… a very important one.
Goldy:
Yeah. Let me ask you a bit of advice from you since you’ve looked into this so much. Nick and I are, a lot of what we try to do is synthesize what I’ve increasingly called the new economics, economics that is grounded more in complexity theory and evolutionary theory, and describes the real world a lot better than neoclassical economics does. But part of the problem with an economics that views the economy as a complex adaptive system is that it’s very difficult to model.
Today, with enough data you can build simulations that can approximate some of the ideas. But humans are not rational, so that makes it really hard to model their behavior. They’re not perfectly informed, they’re not any of the things. And I’ve had pushback saying, “Well, if you can’t model it, what’s the use of it?” Is it useful to have an economics that can’t model?
Nat Dyer:
Yes is the short answer, and I think one of the things we need more of in economics is humility. And there’s been this attempt to try and create a sort of physics of society. There’s sort of been this idea of sometimes it’s called physics envy, and this attempt to try and predict future behavior with decimal point accuracy.
And I would argue that it’s way … And John Maynard Keynes said something similar back in the mid 20th century. “It’s much better to be vaguely right than exactly wrong.” And we have a rash of this illusionary precision where people produce these numbers and it comes with all the logos, and sometimes they have Nobel Prizes attached.
And so unless you really dig into it, you think this must be correct, but actually it is often the numbers crumble once you look into them.
Goldy:
You know, I’ve had economists tell me that they’re kind of like meteorologists. It’s hard to predict the weather because it’s so complex and there’s all this data. But the big difference is, first of all, meteorologists tend to get their forecasts right and economists almost never do. I mean, sometimes they’re lucky.
But the other big difference is, is that when a meteorologist makes a forecast, it never, ever, ever changes the weather. And economic forecasts often change the economy because it changes the way people behave. And one of the things that really annoys me about economics and economists is that they don’t own up to their own role in affecting the economy.
Nat Dyer:
Totally. No, I’d agree with you. And yeah, you’re reminding me also, a friend of mine called Erica Thompson, she’s a climate scientist. She put out a book called Escape from Model Land a couple of years ago, and she talks about the difference between what she calls weather-like models and climate-like models.
And what she says with weather-like models, “If you’re predicting something that’s going to happen in a day or two, it’s really easy to say, ‘This was our prediction. Okay, what happened in a day or two?’ But if you’re predicting something that’s sort of 5, 10, 20 years out, there’s not that same feedback loop. So it’s much easier just to get stuck in model land essentially, and not make that connection with the real world.”
Nick Hanauer:
A couple of final questions. We have the benevolent dictator question, Nat. If it was up to you, what would we do with economics?
Nat Dyer:
Sure. I would love to see much more humility within economics. I think it needs to become more diverse, more real world, aware of history, and the fact that the economic system is a subset of the natural world. So in a word, a more human economics is what I’d love to see. And I’d also love to see a informed public, more aware of more questioning about what assumptions have gone into economic theory.
Nick Hanauer:
Yeah. I mean, for my own part, I’m convinced that the collapse in democracies of trust in experts and expertise is largely a consequence of the economics profession. You’ve had these so-called experts telling people that it’s all going to work out for them for decades now, and they were clearly just completely full of shit. Right?
When the scientists say, “Hey, here’s a thing that’s going to happen,” it generally happens. But most people don’t follow science, but they follow because they must, social policy, economic policy. Right? It’s what shapes our everyday lives. So the experts that most people come in contact with, kind of where the rubber really meets the road have been economists. Right?
Nat Dyer:
I think I agree with you in part. I don’t think it’s just economists, but I think it’s had a really damaging impact on public trust of elites. And yeah, I tell the story of people like, people who’ve said this before. John Maynard Keynes has talked about it.
One story I have in there is even there’s a guy from the early 19th century who created the term scientist, and he was actually William Whewell. He was an arch critic of Ricardo because he said that the type of science that Ricardo was doing was not actually science at all, and that it would tarnish the image of all the sciences, and I think he’s been proved correct.
Nick Hanauer:
Yeah. Interesting. And one final question, why do you do this work?
Nat Dyer:
I would say it’s a mix of anger and hope. So, anger that there is these really high-profile, as someone said earlier, often bullshit ideas that receive, sometimes great accolades. And also, hope that ordinary people can arm themselves intellectually to push back on this stuff, and that some of the obvious beauty that we see in the world can be cherished and flourish.
Nick Hanauer:
Fantastic.
Goldy:
Yeah, a pleasure to talk with another cock-eyed pessimist.
Nat Dyer:
Thank you so much, Nick and Goldy. Thanks for having me on.
Goldy:
Yeah.
Nick Hanauer:
Well, that was a super interesting conversation, Goldy. I had not heard or seen that other Romer quote about models being like card tricks. I must say that’s a good one.
Goldy:
The big trick is of course, that it’s magic. That’s the invisible hand. It’s a magic trick, isn’t it? And you don’t ever want to reveal the secret because that goes against the rest of the profession. And what’s fascinating, again in the book, it is largely a history book.
Nick Hanauer:
Yeah.
Goldy:
I mean, he goes and he steps through, and we didn’t talk about it in the conversation, how there’s something magical about comparative advantage and how he reduces international trade to foreign numbers in a way that takes a relatively non-intuitive idea that if Portugal is more efficient at producing both wine and cloth, it still makes sense for it to trade with England. The trade benefits both sides and benefits the world economy, and it works on paper.
It clearly does and it’s a magical bit of math. And I recommend, even if you’re not reading Nat’s book, go look up comparative advantage and see, if you’re not familiar with it, and your mind will be a little blown because it is really beautiful, elegant, simple, and unfortunately, wrong.
Not again, Nick, that trade itself is wrong. Trade is good. Of course, trade is good. It’s just not always universally good and it’s not something you can evaluate outside all these other factors.
Nick Hanauer:
Right.
Goldy:
You know, the big thing you mentioned Hausmann when we were talking to … And just to expand on that a little bit, the notion that the most resilient and prosperous economies are the most complex ones. There’s a couple of reasons for that. One, if you understand market economy is an evolutionary system, you understand that you want economic diversity so that when things change, when there are shocks, you are better able to respond because you have a more diverse economy where if one industry falls a bit, another one can take its place.
But there’s another important concept of that, which is missed in orthodox economics, and that is that new industries and new technologies expand into adjacent product space.
Nick Hanauer:
That’s right. And if you don’t have the adjacencies, you can’t have the innovation.
Goldy:
Right. So if you have no steel industry, you can’t expand into specialty steels, that are specialty metals that are more complex and more profitable and more valuable. If you don’t have a semiconductor industry, if you can’t manufacture semiconductors, there’s all types of industries you can’t expand into.
And in his book, Nat points out something really important which is overlooked about that England-Portugal model that Ricardo uses. And that is when you go back, and this all goes back to a treaty between Portugal and England, which the Portuguese understood was not in their favor, but they did it because they needed British naval protection from the French and Spanish, because at that point the Portugal did not have much of a navy anymore, and they needed to protect their shipments of gold and other valuable imports from Brazil, from their main colony.
So they cut this deal. It was basically a protection racket on the part of the British. You’ve got this deal and we’ll protect your shipping, and the British did. That was the deal they cut, but it also set Portugal onto a three-century path towards slow growth and poverty. It was one of the poorest countries in Europe for centuries because its textiles that were the foundation of industrialization throughout the world. It was the U.S. protecting its textile industry in New England initially, that helped build their manufacturing base.
It was textiles that built the Britain into an industrial power. It was textiles initially, that China and the other Asian tigers focused on, because out of textiles you can expand into all of these adjacent industries. It is the core industry from which most other … Again and again, throughout the world, through which nations industrialized and expanded their expertise.
And because you destroyed the textile industry, the nascent textile industry in Portugal, and there was one, Portugal didn’t industrialize. It largely became an exporter of wine and agricultural products for two, 300 years. And so you locked Portugal into this path towards poverty through comparative advantage.
I mean, even if all else had been equal, Portugal focusing on wine and England focusing on textiles set England on a path towards being a wealthy industrial nation and Portugal on a path towards being a poor resource-based agricultural nation, and that’s something that comparative advantage totally ignores.
Nick Hanauer:
Well, a absolutely wonderful book, cool guy and great ideas.
Goldy:
Again, if you’re interested, we highly recommend it. There’s a link in the show notes to Nat Dyer’s book, Ricardo’s Dream: How Economists Forgot the World and Led Us Astray.
Freddy:
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