It often happens that both countries can technically produce both the articles that are internationally exchanged. It may frequently happen that one of the two countries has an advantage in amount of sacrifice and effort, as to both articles; but if the advantage is greater in one article than in the other, the foreigners, like the low-paid clerk, will be willing to exchange at a ratio that will make it profitable to specialize in the product wherein the greater superiority lies. Therefore not the advantage as to a single product, enjoyed by one country over the other is most important in determining whether to produce at home or to exchange, but the comparative advantages enjoyed in the production of the two articles in question.
Examples of comparative costs
It must be remembered that comparative cost as here used refers to cost in effort, not to money cost,—a point on which there is often confusion. The money cost of a certain product is often greater in a new country because wages are high, and wages are high just because psychic cost is low, that is, because labor can produce so much. At the time of the great gold discoveries in 1849-50, the price of goods in California was much higher than in the East, and much higher in Australia than in Europe. A day's labor doubtless would produce as much food in Australia and in California as in New England and in Norway, but it produced far more gold. Hence butter and cheese were shipped by long routes from Norway to Australia and from New England around Cape Horn to California, to be exchanged for gold. One of the standing arguments against foreign trade is based on the idea that a country cannot profitably import goods unless it is at an absolute disadvantage in their production. It is declared that as our country can produce these goods "as well" as foreign countries (meaning with as few days' labor), there is a loss on every unit imported.
Selection of the most paying industries
4. The equation of international exchange is that adjustment of prices which results in the equalizing of the imports and exports of the country. The superiority of a new country over an old one is not equally great in every line of industry. It is almost certainly most marked in those enterprises where natural resources are employed. To compete with the older country in less favored industries, capital and labor in the new are forced to take a lower rate than they can earn in the more favored. Without any government supervision, therefore, but simply through the choice of enterprisers seeking the best investment of capital, industries are developed in which the country is either most markedly superior or least inferior to its neighbors.
If the productive energies of men interchanged between industries and between countries with perfect readiness, a perfect equilibrium of advantage would everywhere result. In every country, in every occupation, labor and capital of given quality and amount would receive the same reward. But the interchange of labor and capital between countries is never without friction. Adam Smith said that "a man is of all sorts of luggage the most difficult to be transported." The higher wages in a new country are sufficient to attract constantly from the older lands a portion of their labor supply; the higher rate of interest in the new countries attracts constant additions of capital; yet, despite these forces working toward equalization, the inequality may remain and through the working of other influences even increase in the course of years.
Persistence of the differences
The laborers, enterprisers, and investors in the one country are thus in a position of more or less enduring advantage relative to those of the other countries. The advantage is sometimes said to be a "monopoly" which they, or the country as a whole, enjoy; but in the absence of any contractual limiting of competition, this is a misuse of the term monopoly. This variation in the degree of scarcity of agents in different territories is not peculiar to nations as a whole. Differences of the same nature exist between the Northern and the Southern states of the American Union, have continued for decades between Eastern and Western states, and are found even between neighboring counties. The differences between two countries, however, are likely to be more marked, the circulation of factors being so active within a country that it is allowable to speak broadly of prevailing national rates of wages and of interest.
The ratio of international demand defined