johnswentworth

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Gears Which Turn The World
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Gears of Aging
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Comparative Advantage is Not About Trade

Removing peaceful trade may lose the point Ricardo wanted to make, but modern economics cares about as much about what point Ricardo wanted to make as modern physics cares about what point Kepler or Newton wanted to make. (The latter, after all, was deeply into numerology, and probably wanted his work to make a point about that.) Comparative advantage itself is the central concept here, and that concept is plenty useful without any peaceful trade.

Comparative Advantage is Not About Trade

Just because there's no profit to seize doesn't mean that goods won't move from one person to the other if the person who wants to use the goods uses coercive force. 

Right, this is exactly why I talk about goods moving bidirectionally. If someone is just straight-up seizing goods by force, then there's no reason for goods to move back in the other direction. So, if the profit requires goods moving bidirectionally, then that indicates some relative advantage is involved somewhere.

Comparative Advantage is Not About Trade

For the US income tax example: generally speaking, (monetary) income comes from people trading with each other, and that generally wouldn't happen without comparative advantage between the two people trading. No comparative advantage => no trading => no income to tax.

I think part of the confusion is that I am NOT claiming that the people/organizations making a profit have a comparative advantage. People can totally make a profit by seizing that profit from someone else. But without comparative advantage, there's no profit to seize (relative to a world where goods never change hands). If the profit requires goods moving bidirectionally between people, then there must be an underlying comparative advantage.

Now, it's possible to find someone operating in isolation (i.e. collecting their own salt) and seize part of what they're producing. Then comparative advantage won't play a role. (Of course, that'll be hard to enforce - it's not easy to prevent people from producing things for their own consumption in secret.) The key point is that this scenario does not increase the total amount of goods produced relative to everyone operating in isolation. Comparative advantage is about changes in total production, not changes in distribution.

About a local variation of Rock-Paper-Scissors and how it self-negated its own problematic dynamic

For others who want to check those numbers: note that glue dominates scissors (both beat paper, lose to rock, and glue beats scissors), so scissors should never be played. With that simplification, it's an ordinary game of rock-paper-scissors, except "scissors" is now called "glue".

Comparative Advantage is Not About Trade

To be clear, the claim in the OP is not that anything is all about comparative advantage. Comparative advantage is the main factor in pareto-optimal production; allocation (i.e. who gets the gains) is where other factors enter. Comparative advantage was a necessary element for anyone to make any profit from a salt monopoly, but they still had to enforce that monopoly in order to actually capture the gains.

(Also, I don't know why people keep assuming I was talking about British India. The same dynamic was present in many places - e.g. the Chinese government profited from monopolies on iron and salt a millennium earlier.)

+1 to the Kurlansky recommendation - his book on Cod was excellent, and Salt has been on my reading list for a while.

The rationalist community's location problem

"You get what you pay for" isn't really the rule. The rule is more like: in order to get it, you must pay for it. But the converse does not hold: just because you pay for it, does not mean you get it.

In the Bay Area case specifically: there's a lot of people in the Bay Area with very high-paying jobs, who would not make nearly as much money living elsewhere. In order to get those high-paying jobs, they have to shell out for expensive Bay Area living costs. (In order to get "it" - i.e. the high-paying job - they must pay for it.) This was certainly the main reason I lived there for many years. But paying those high Bay Area living costs will not magically cause one to make lots of money. (Just because you pay for it, does not mean you get it.)

In terms of pareto frontiers: the Bay Area is on the "software engineer salary" pareto frontier, but that has very little value to people who do not currently work in software. (Going by the numbers from this survey, I'd guess that about half the LW community is in the software industry. The other half can probably make about as much money elsewhere, at much lower living cost.)

The rationalist community's location problem

I moved from the Bay Area to Las Vegas three months ago. Some relevant notes...

First, not all the factors in the OP are equally important - visas/citizenship considerations and cost of living were more important considerations than everything else on this list combined. Living in the US is a hard constraint for my girlfriend; moving outside would have been a deal-breaker.

On the cost of living front, the cost-of-living differential between (Bay Area/NYC) and (basically anywhere else) is much bigger than the differential between most other places within the US. We got an apartment with 50% more space at roughly half the rent, and it has more amenities and (IMO) a better location too. I'm an independent researcher at the moment, so my financial runway is a major consideration; my runway went from "I have to think about money within the next year" to "I don't have to think about money within the next year". That's a major qualitative shift, which allows me to explore very different research directions.

Within roughly those constraints, we satisficed: Las Vegas was the closest city to the Bay Area with roughly "normal" (for the US) housing prices. (It was close enough that moving costs were ridiculously low - it was on the order of $300 for everything. Tip: a transit van which would cost $800 to rent from Uhaul for a cross-state move cost me $150 to rent from Hertz.)

I expect I'm not the only one facing roughly-similar incentives, especially with tech people all working remotely. The fact that we basically satisficed on two constraints means that there's enough degrees of freedom here for "location of other rationalists" to actually determine the decision - i.e. if there'd been a rationalist cluster in Pheonix or Salt Lake City or ... then there's a decent chance we'd have ended up there instead.

The rationalist community's location problem

You're not going to find a place that has great weather and cheap property value and proximity to great cities; that's not how efficient markets work.

That's not entirely true - these are only three variables. Efficient markets says that everywhere will be on some pareto frontier, not on this particular pareto frontier. And given the extreme distortions in the Bay Area housing market, there's a plausible argument that the area isn't on any pareto frontier.

Comparative Advantage is Not About Trade

I intentionally didn't give the general statement in the post, because I wanted to keep the post non-mathematical, and the general statement is pure math. It's basically just Arrow-Debreu-style microeconomics.

Here's the general version:

  • Assume pareto optimal production of goods (any number of them, all continuously divisible). Pareto optimality means that there's an implicit "price" vector: the normal vector to the pareto surface. Our particular point on the pareto surface is the point at which the maximum total value of goods is produced, according to those prices (assuming concavity of the surface, which is pretty much always assumed in economics).
  • To achieve that point on the pareto surface, we use a greedy algorithm: whenever there's a choice, take the option which produces the most total value given those prices. (This is the multi-good version of "comparative advantage".)

The typical assumptions built-in to the models ensure that the greedy algorithm actually achieves the optimal point - e.g. independent production functions, continuous allocation of time/other resources, etc. (We don't necessarily need linear production functions, but concavity is usually assumed.)

Intuitively: the price vector quantifies the trade-off between production of goods in the system as a whole. If e.g. the price of apples is 1, oranges is 2, and bananas is 3, then that means producing 1 more apple costs 1/2 orange or 1/3 banana or (in general) 1/2*x orange and 1/3 * (1-x) bananas. That's opportunity cost in the system as a whole, assuming that a pareto-optimal trade-off is made - i.e. assuming that we produce the additional apple while remaining on the pareto surface. The resources required to produce an additional apple could have been used to produce 1/2*x orange and 1/3 * (1-x) bananas instead, for whatever value of x we want (assuming it's small enough that the linear approximation still holds).

But an individual person, or any particular choice faced, may have different trade-offs than the system as a whole. Maybe I have an opportunity to produce 1 apple at the cost of 1 orange, or 1/4 bananas, or 1*x orange and 1/4*x bananas (so my prices are 1, 1, 4 rather than 1, 2, 3). What's my optimal move? Well, if I devote a fraction x1 of my resources to apples, x2 to oranges , and x3 to bananas, then I'll produce (something proportional to) 1*x1 apples, 1*x2 oranges, and 1/4*x3 bananas, for a total value (proportional to) 1*1*x1 + 1*2*x2 + 1/4*3*x3. In that case, I'll achieve maximum value by devoting as much production as possible to oranges.

In general, assuming the greedy algorithm works, we maximize total value by locally choosing the option with highest (global price)/(local price), where prices capture the opportunity costs of producing one thing rather than something else.

Does that make sense? Happy to give more detail/math on any particular points.

Also, one minor side note, in response to this:

Dynomight's post seems to provide a sufficient counterargument to this, in its example illustrating how with more than 2 players, opening up a trade route may not be a Pareto improvement (may not be a good thing for everyone).

Note that, in that example, the new trade route still allows a pareto improvement in total production of goods. It's "not a pareto improvement" in the sense that fewer goods may be allocated to a particular agent. Thus the standard argument from economics that we should rely on free markets plus wealth transfers: free markets ensure pareto optimal total production of goods, and wealth transfers allow that production to be distributed in such a way that nobody ends up worse off. That's the theory, anyway.

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