Ricardo's Law of Association
In the early 1800's an English economist by the name of David Ricardo developed what has become known as Ricardo's Law of Association or, sometimes, Ricardo's Law of Comparative Advantage. It is my opinion that this economic law has been under appreciated, that it's application is greater than the context in which it was first formulated.
Economists love to make simplifying assumptions and so to help me explain Ricardo's Law of Association to you I'm going to ask you to imagine a very simple situation and then show how slight variations in these assumptions result in the charts I've passed out.
The situation is that there are two men, Mr. Stronger and Mr. Weaker, who both want to build a garden shed. The sheds will be identical, each will require 100 boards and 1000 nails.
The first three charts assume that Mr. Stronger is exactly twice as good as Mr. Weaker at both sawing boards and hammering nails. The first chart shows the results when each builds his own shed. The second chart shows Mr Stronger sawing all the boards for both sheds and Mr Weaker hammering all the nails. The third chart shows the reverse.
Equally Unequal (Chart #1)
| Boards | Nails | Total Hours | |
| Mr. Stronger | 100/20 = 5 | 1000/100 = 10 | 15 |
| Mr. Weaker | 100/10 = 10 | 1000/50 = 20 | 30 |
| Total Hours | 15 | 30 | 45 |
Equally Unequal (Chart #2)
| Boards | Nails | Total Hours | |
| Mr. Stronger | 200/20 = 10 | 0 | 10 |
| Mr. Weaker | 0 | 2000/50 = 40 | 40 |
| Total Hours | 10 | 40 | 50 |
Equally Unequal (Chart #3)
| Boards | Nails | Total Hours | |
| Mr. Stronger | 0 | 2000/100 = 20 | 20 |
| Mr. Weaker | 200/10 = 20 | 0 | 20 |
| Total Hours | 20 | 20 | 40 |
What we see here is that there is no particular incentive for the two of them to cooperate in building their sheds. In the second chart, while Mr Stronger spends less time laboring, Mr Weaker spends more. And conversely, in the third chart, while Mr Weaker spend less time laboring, Mr Stronger spends more.
If you spend some time fiddling with the numbers you'll discover that the only way for the total hours to be less is for one or the other of the men to actually work more hours than he would if he were to build his shed himself.
Now let's look at the second set of charts, labeled "Unequally Unequal." The assumption here is that while Mr Stronger is four times better than Mr Weaker at sawing boards, he is only two times better when it comes to hammering nails. In other words, while Mr Stronger is still better than Mr Weaker at both tasks, the two men are unequally unequal.
Chart four shows the results when each builds his own shed.
Unequally Unequal (Chart #4)
| Boards | Nails | Total Hours | |
| Mr. Stronger | 100/20 = 5 | 1000/100 = 10 | 15 |
| Mr. Weaker | 100/5 = 20 | 1000/50 = 20 | 40 |
| Total Hours | 25 | 30 | 55 |
Since Mr Stronger is four time better at sawing but only two times better at hammering, chart five shows the results if Mr Stronger does all the sawing and Mr Weaker does all the hammering. Note that while Mr Weaker works the same number of hours, Mr Stronger works fewer and the total is less than if each had worked alone.
Unequally Unequal (Chart #5)
| Boards | Nails | Total Hours | |
| Mr. Stronger | 200/20 = 10 | 0 | 10 |
| Mr. Weaker | 0 | 2000/50 = 40 | 40 |
| Total Hours | 10 | 40 | 50 |
Now we come to the interesting and important part. Chart six shows what happens if Mr Stronger does all the sawing and some of the hammering. Each works less than if they had worked separately and the total is less than if each had done only one task.
Unequally Unequal (Chart #6)
| Boards | Nails | Total Hours | |
| Mr. Stronger | 200/20 | 200/100 = 2 | 12 |
| Mr. Weaker | 0 | 1800/50 = 36 | 36 |
| Total Hours | 10 | 38 | 48 |
What we have here is an illustration of the fact that as long as two people are unequally unequal it will be advantageous to both of them to cooperate. They will both be better off than they would have been if each had built his own shed.
Ricardo developed his Law of Association to show that trade between two countries was always advantageous, even if one country could do everything better than another country. He was combatting the idea that a country should be self-sufficient. What Ricardo showed was that self-sufficiency resulted in a lower standard of living, that a country would be more prosperous by trading with other countries, even if those other countries were inferior in every way.
The point I want to make is that the same argument applies at the level of individuals.
One of the objections I sometimes get when I advocate a fully free market is that laissez-faire would result in the less able being shut out, that only the strong would survive. What Ricardo's Law of Association shows is the error of that objection. Even those who are better at every task (which by the way would never happen) are better off cooperating with others provided they are unequally unequal. And that, ladies and gentlemen, is always the case.
Capitalism, laissez-faire, the free-market, however you want to refer to it, is a good deal for everyone.
Presented by Rick Pasotto on 2000-04-25
