NC business owner offers lesson in comparative advantage

When you proselytize for free-market public policies, you’re bound to hear a common response.

“Your ideas sound good in theory, but we’re dealing with the real world.”

From targeted tax incentives to occupational licensing restrictions to certificate-of-need health care regulations, sound reform plans often stall when policymakers express fears about real-world impacts.

That’s why it’s refreshing to hear stories of theory matching up with practice.

One such case presented itself on June 5 in New Bern. A local small-business owner offered insight about the real-world benefits of “comparative advantage.”

Described in “The Concise Encyclopedia of Economics” as an idea “both universally true and not obvious,” the notion of comparative advantage dates back more than 200 years.

The concept holds “that what matters is not absolute production ability but ability in producing one good relative to another,” George Mason University professor Donald Boudreaux explained in the encyclopedia entry.

When “each person concentrates more fully on producing those goods that each produces comparatively efficiently — that is, efficiently compared with others,” total economic output grows, Boudreaux added.

Comparative advantage applies in economic interactions involving as few as two people. “What is important is the existence of at least one price that is mutually advantageous for both persons,” Boudreaux wrote. “And such a price (or range of prices) will exist if comparative advantage exists — which is to say, if each person has a different cost of producing each good.”

In other words, comparative advantage benefits both parties any time there’s a disparity in skill levels, resources, or other factors determining economic output.

The idea proves just as valid for interactions among multiple nations as it does for individual economic actors.

“Adding millions of people and millions of goods and services only increases the applicability and power of the principle, because larger numbers of people and products mean greater scope for mutually advantageous specialization and exchange,” Boudreaux explained.

Comparative advantage “is the root reason for all specialization and trade,” he concluded.

Businessman Danny Batten didn’t spout theoretical arguments about comparative advantage when speaking in New Bern earlier this month. Yet his description of real-world business decisions offered proof of the principle’s practical applications.

Batten owns Surf, Wind, and Fire, an outdoor lifestyle company with stores in New Bern and Edenton. His business interests include retail, wholesale, and custom apparel design and printing.

“If you look around the world at manufacturing, certain areas are good at certain things,” he said. “They’re like industry leaders.”

“If you want to manufacture hats, you’re probably going to go to Vietnam,” Batten explained, “because they’re the best at manufacturing hats. They have all the supportive businesses there that can do that.”

Batten turned first to a Pennsylvania manufacturer to produce a hat with a special type of enzyme wash. “We wanted an earth-friendly enzyme that only used sodium because we wanted it to look like it had been bleached at the beach,” he said. “We didn’t want harsh chemicals.”

The American company “could not produce that enzyme that we wanted.” A conversation with a Vietnamese factory owner led to “tons of other companies” there that could help Batten meet his goal.

“When you’re developing a product, to bring that expertise back to the United States would take generations,” he said. “It took [the Vietnamese] generations to develop that specialty.”

Batten discussed bringing a new “blue widget” to market for the American consumer. “Designing that one widget creates a lot of revenue for American companies and American employees, and it keeps a lot of people hired.”

Along with the American designer, money flows to Americans who transport widgets, store them in warehouses, sell them in retail stores, and market them. “Only a very small percentage of that revenue is left outside the United States,” Batten explained.

“If you’re using the hat example, you’re using a part of the world where they’re very good at manufacturing this product, and they’re very efficient,” he said. “We can create better products and more products. That actually creates American jobs and creates revenue that stays right here in the USA.”

Batten never uttered the words “comparative advantage.” He cited no academic studies nor 19th-century economic theory.

Yet a bedrock free-market principle clearly guided him as he worked to provide the widest variety of products at the lowest possible cost to meet his consumers’ demand.

It’s refreshing to hear a case of theory holding true in the real world of North Carolina’s economy. Bureaucrats and politicians would do well to pay attention to Batten’s example.

Mitch Kokai is senior political analyst for the John Locke Foundation.

“NC business owner offers lesson in comparative advantage” was originally published on www.carolinajournal.com.