Ricardo's comparative advantage

In 1817 the English economist David Ricardo published On the Principles of Political Economy and Taxation. In it he laid out the law of comparative advantage with a numerical example: England and Portugal, wine and cloth. Portugal could make both more cheaply than England, but if England specialized in cloth and Portugal in wine and they traded, both would end up with more of both goods. What matters is not who is better in absolute terms, but each country's relative cost of making one good in terms of the other.¹²

Ricardo, a wealthy London stockbroker and later a Member of Parliament, was building on Adam Smith's Wealth of Nations (1776), which argued that specialization and trade increase wealth, but Smith had focused on absolute advantage, a country making something cheaper than anyone else. Ricardo wrote during Britain's debate over the Corn Laws, which protected landowners by taxing imported grain, and he argued that cheap grain would benefit manufacturers and workers. The idea had precursors: Robert Torrens published a similar argument in 1815, and economists still debate how much credit each man deserves.¹²

Comparative advantage is a core idea of economics and one of its most counterintuitive. It was a key intellectual weapon in the campaign that led to the repeal of the Corn Laws in 1846, and it underpins the case for free trade made by organizations such as the World Trade Organization. The theory simplifies by assuming full employment, no transport costs and fixed technology, and critics point out that trade creates winners and losers within countries, so modern economists such as Paul Samuelson, Paul Krugman and others refined or challenged its policy conclusions. Its central logic remains in nearly every economics textbook.