In a very few words, the theory of comparative advantage states that
the economically rational course is not necessarily to do what one does
best, but what gives the greatest profit in the given market.
Economists in the 18th and 19th centuries discussed at great length the
conditions under which international trade was beneficial to the state
and to society generally. Adam Smith (1723–90) emphasized absolute advantage: if one country
is best at producing one product, and another is best at some other
product, then it is economically rational for each to specialize in one
product and obtain the other by exchange.
David Ricardo (1772–1823) refined Smith’s theory by introducing comparative advantage. If one
country has an absolute advantage in both products, it can still be
advantageous for it to specialize in one, export it, and import the
other. His example concerned wine and cloth in Portugal and England:
the Portuguese were best at producing both, but their advantage was
greatest in wine production; it was therefore rational for Portugal to
specialize in wine, export it, and import cloth from England.
In our example from 18th-century Norway
peasant production of iron had an absolute advantage over industrial
production, because peasant labour in the agricultural slack seasons
was cheap. In 1782, according to Ole Evenstad’s calculations, the
peasants still had this absolute
advantage in iron production, but in the course of the 18th century
something had happened – perhaps increased demand for timber, perhaps
improved transportation to markets – which shifted the comparative advantage over to
timber production. It became economically rational for peasants to
produce and sell timber and buy industrially produced iron.
There is a useful
short discussion of comparative advantage on Brad