The horizon is not so far as we can see, but as far as we can imagine

Understanding Absolute Vs. Comparative Advantage & Why It Matters

There are two types of advantages.

A comparative advantage is when you have or can produce more of something than someone else. (Person, country, whatever.)

An absolute advantage is when you have or can do or produce something others can’t. This can be threshold matter: in World War II the Allies had more than enough oil and the Axis didn’t have enough to run their war machine. While in numbers terms it looked like a comparative advantage, it was actually an absolute advantage: it strangled Axis production and their ability to field mechanized troops, aircraft and ships. Up until the nuclear bomb, in terms of tech, the opposing great powers were about equal, but in terms of the key resource required to run everything, the Allies were in surplus and the Axis never had enough.

Firearms were an absolute advantage. Once they spread, European firearms were usually still better and Europeans understood how to use them properly, while their opponents rarely did. Cultural understanding is often necessary to get the most out of a technology. In India, the British East India company often faced off against Indian armies with the same weapons as them, but they deployed them atrociously: they didn’t know how to use them properly.

Machine guns, when first deployed, were an absolute advantage. The Maxim gun, deployed in Africa, let British troops defeat armies literally 100 times larger than it.

Horse archers, properly deployed, were an absolute advantage. Genghis Khan didn’t just united Mongolia (making many tribes all into Mongols), he changed society and military organization and how horse archers were deployed. For about a century the Mongols were essentially undefeated, creating the largest land empire in history, and when the first real loss happened, the Mamluks inflicted it by using a Mongol style army effectively against the Mongols.

The steam engine plus factories produced goods in such quantities that it was a relative advantage which become an absolute advantage. Factories had existed before steam, indeed we have evidence of factories in India before the Aryan invasion, thousands of years ago. But add steam, and BOOM. (Oil and electricity merely increased production, but they weren’t the quantum leap.)

In the invasion and conquest of the Americas, the absolute advantage wasn’t cannons and firearms nearly so much as it was European diseases, which the Europeans had some immunity to and the natives had no immunity to. End result, 90% of the population killed off by disease. Without that Europeans might have done an “India” and conquered various North American areas, but they would never have been able to colonize all of it and drive most of the population to extinction so they could keep it in the long run.

Cannons were an absolute advantage for a time. The monarchs of the early Renaissance were able to use them to reduce the noble power massively and turn them from semi-independent rulers (feudalism) into aristocrats dependent on the king, since castles could no longer hold out in sieges for any length of time.

Further back, the European Knight had an absolute advantage over peasants and most European infantry (minus the Scots and Swiss and a few exceptions.) That advantage didn’t extend much out of Europe. Knights were better than Byzantine cataphractoi and Muslim cavalry, but not so much as to allow lasting conquest. However, against internal enemies in Europe, their superiority was massive, especially against peasant armies.

Absolute advantage is about having something or being able to do something your competitors don’t have or can’t do. The current imbroglios over computer chips and airplane manufacture are the West’s attempt to keep the few places where they still have an absolute advantage over China, since they’ve given (sold) the rest to China, and lost most of their comparative advantages.

In eras of absolute advantage, small societies can do astounding things. The Mongols conquered vastly more populous areas and so did Europeans in general and the British in particular.

Eras of relative advantage, on the other hand, are eras of the most and the biggest.

Reader question. Are we in an absolute or relative era?



Podcast Interview On US Politics and the Midterms


Open Thread


  1. Willy

    Maybe we’re living in an era where elites think that publicly declaring desires to achieve absolute advantage is no big deal for the masses?

    I was once home sick watching Oprah. During audience question time somebody asked Oprah what her ambitions were. She shouted out “I want it all!”, then got gleeful loud applause. I shuddered. There seemed something really wrong to about wanting to stick absolutely everybody with the ramblings of “Dr.” Oz, Gayle, and Deepak.

    Fortunately, we still get to observe absolutists making complete asses of themselves. At least when their egos overpower their handlers ability to keep them restrained.

    But maybe this is more about technology, such as big pharma or big tech or big transport? I think everybody knowing that their being unlikely to develop the next big drug, computer, or transport things in their garages, has confused most folks into believing that our CEOs deserve absolute advantage. I dunno. But it seems that the more we get to observe them on a personal level, the more we get to realize that allowing anybody absolute advantage is a really bad idea.

  2. bruce wilder

    I am more than a bit skeptical about the terms of this analysis. “Comparative advantage” is about resource allocation to specialized uses and the concept, though valid, is not really all that important practically, except as a tool of propaganda aiming to obscure what is important.

    What is important, imho, is power: as Hannah Arendt had it, the source of political power is social organization. Effective social organization creates political power to allocate resources to productive uses and the achievement of individual and shared goals.

    In a purely economic context, hierarchical social organization — the use of bureaucracy by business entreprise — emerged into industry first with the railroads in the 1830s and 1840s and then generally with industrial manufacturing, processing and distribution beginning on a continental and global scale in the 1870s and 1880s. That was when the first behemoths of industrial capitalism emerged — Standard Oil, the Pennsylvania Railroad, General Electric, IG Farben, Friedrich Krupp AG, Mitsubishi zaibatsu (1870) and so on.

    The success of mass organization in business enterprise did depend on the advance of a scientific technology and the rapid application of that technological knowledge in developing, controlling and managing production and distribution processes, powered by the use of fossil fuels and electricity. It is all tied inextricably together — energy, knowledge, organization.

    One thing I would point out, as an economist by training, that very little of this phenomena emerges into the economics textbooks or the neoliberal ideological rhetoric: that’s all “markets” and an “invisible hand”, while the visible economy is all bureaucracy and rules. “Comparative advantage”? Allocational efficiency? Even the much vaunted “markets” are rare — most prominently, financial markets in esoteric contracts and pledges.

    There is a concept in economics — a tenet or dictum if you like — called “gross substitution” that suggests great fluidity in the combining resources to produce what you want and need. Labor short of supply and expensive; use more machines. The implied idea is an adaptive allocation of resources, varying the mix of factors of production.

    It is all b.s. really. The allocation of resources is important enough in its own right, but it tends to be dominated by the political power generated from intelligent organization. It is simple enough in principle: production processes (broadly understood) have to be organized and managed to standards of “technical” efficiency as well as allocative efficiency, and by technical efficiency we can understand the control of error and waste. Technical efficiency — back before my day, economists sometimes refer to the black box of “x-efficiency” — tends to dominate allocational efficiency. The great economics Vilfredo Pareto observed that there was usually only one steering wheel on a farm tractor — a farm tractor fueled with fossil fuels of course — was capable of multiplying the effort of the farmer, but multiplying the farmers relative to the fixed stock of tractors (or the land — very important in history!) wasn’t really an economical option. When the famous Sassoon family took British satanic mills to India, they did not redesign the textile machinery to take advantage of relatively plentiful Indian labor. Technology makes nonsense of fatuous reasoning concerning the “comparative advantage” of plentiful labor and scarce capital competing against plentiful capital and expensive labor.

    And, I am not sure any concept of “absolute advantage” fares much better. What matters is effective and productive social organization generating political power and applying scientific knowledge and fossil fuel power of another kind to the task of controlling production and distribution processes, reducing error and waste. The means to do so entails sunk-cost investments — so-called capital investment — to create superior capability to produce, whether it be processed commodities, butter or guns. When we talk loosely of “absolute advantage” I think we usually mean first mover advantage and superior organization of industry and armies and hydraulic civilization and marauding armies.

  3. bruce wilder

    I think we are on a trajectory set in motion by the scientific revolution and emergence of political modernity in the 17th century. That combination of social organization, financial organization, scientific knowledge, and fossil fuels became entwined with population growth, global resource exploitation, scientific advance, as I think we all intuit all too well without seeing what can be done to steer the collective from a date with the four horsemen of the apocalypse.

    Seriously, the reaching for the “absolute advantage” of superior or at least early scientific technological knowledge is competing furiously with access to natural resources after an era when access to natural resources seemed almost secondary.

    Ghana, say, having an absolute advantage of sorts in cocoa production counted for little in a world in which European chocolate makers could add so much value by dint of industrializing social organization and advanced scientific technological knowledge (as opposed to mere craft). I can readily believe that knowing how to make good chocolate is not such an exclusive province today as to stand in the way of Ghanaians realizing whatever ambition they may have to secure dominance in chocolate by leveraging their “absolute advantage” in cocoa.

    I think technophilia will have a run at trying to make science beat dwindling resource availability and I think the technologists will fail, exacerbating the problems of our accumulating waste and depleted resource pools, not to mention the corruption of psychopathic leadership driven by unlimited greed interacting with a passive, submissive mob of morons.


  4. Purple Library Guy

    Currently, actual technology seems to spread pretty quickly. And while there are some key, and potentially key, resources, just who has a stranglehold on them seems pretty fluid.

    The main potential source of absolute advantage in military matters today is institutional: The US military complex may be incapable of emphasizing war-winning capacity as an important quality in the weaponry it produces. If its competitors are able to do that, such as by emphasizing ship-killing missiles over incredibly expensive floating targets (AKA aircraft carriers), they may be able to acquire and maintain an absolute military advantage . . . at least until the US gets its nose thoroughly enough bloodied to make major institutional changes in how they do military stuff. So far we don’t know how thoroughly that would have to be. One would think it wouldn’t take that major a defeat to make them do some re-evaluating–they want to win, after all. But the US system of corrupt military procurement is very deeply intertwined with their overall system of elite enrichment, so it could be quite hard to shift.

    I’m not sure if that’s quite what Mr. Welsh was looking for though.

  5. VietnamVet

    Nuclear Weapons give the holders absolute advantage – government and the military. Their destructive ability is so absolute that many believe they won’t be used. This has given rise to the wealth death-cult, the upper caste, who have comparative advantage over the “hoi polloi”, everyone else, by financialization of anything of value and flushing government down the drain. The end result will be a feudal no-man’s lands around remnants of human civilization or a global human extinction event.

    Having served in the first Cold War; this is nostalgia, but functional government, democracy, rationing, equality, and secure borders are the alternatives to the de-development of the West.

  6. c1ue

    Personal view quibble: the steam engine was only the vehicle; the real driver was coal. Coal was what enabled the UK to take over high energy intensity businesses from the Dutch like sugar production, ceramics, salt etc. Coal energy is what enabled steam engine development – no coal, no steam – and industrialization came after the UK dethroned the Dutch both economically and militarily – at least in part due to waning of peat supplies (what the Dutch used for energy). Ironically, the first underwater energy mining was likely the Dutch invention of technology to pull usable peat that was literally underwater…
    As for absolute vs. comparative advantages in the current Russia/Ukraine/West/China situation:
    1) semiconductors: the West has absolute advantage in leading edge semiconductors. The impact of this advantage in overall economic and/or warfare is zero. Others have said that most military semiconductors are 60 nm; I personally believe you don’t even need that small a process geometry for microcontrollers sufficient to enable missiles and what not. There have been megahertz speed microcontrollers for 2+ decades already. Even for things like AI: Cray was making supercomputers for decades and there is zero reason to believe that sufficient computing power requires 10 nm transistors as opposed to say, 45 nm FPGAs.
    2) Energy: Russia has it in all forms. The West does not. We don’t have enough regular oil in the US to feed American diesel demand much less supply Europe’s because 60% of US oil is fracked meaning basically devoid of the heavy hydrocarbons comprising diesel. Europe doesn’t have enough natural gas to sustain its industry. The US consumes so much oil, and is so dependent on personal gasoline transport, that its enormous production capacity has very little margin for price or supply shocks much less industrial warfare requirements. Specifically: the US consumes around 18 million barrels/day in oil = 6500+ million barrels of oil a year; US gasoline and diesel consumption alone is over 180 billion gallons = 3200+ million barrels equivalent. This situation exists for many/most commodities outside of food but including fertilizer.
    3) Manufacturing: China has it in all forms. Their main weakness in the past was energy; the pushing together of China with Russia has resolved that. China doesn’t just make the iPhones – they make the vast bulk of manufacturing inputs that go into what little industry remains in the West – from pharma intermediate manufacturing chemicals to steel pipes to aluminum billets to glass and on and on and on. The West clearly no longer has the machines, to produce the machines, to feed the machines, to make stuff that is needed.
    4) Sheer economic size and amount of capital. The West in the form of the G7 used to dominate the global economy: 60%+ in 1991. Now the G7 is ~30%. This means the West can no longer force the rest of the world to supply the energy, minerals, etc at prices the West dictates. The entire present sanctions regime against Russia is clearly based on inaccurate understanding of how the world’s economic order has changed.
    5) Intellectual rigor and Individual/Societal craftsmanship. It is glaringly apparent that the level of honesty and objectivity in the West is very low. The lies and groupthink which enabled the US invasion of Iraq in 2003 have now proliferated even beyond pretexts for war into all areas of society. The West can’t even objectively view reality much less analyze what to do about it going forward.

  7. Ché Pasa

    Many of our current elites have no interest in the masses; some clearly don’t recognize the existence of any such thing as “The Masses.” They’re fine with clearing the globe of excess eaters through disease and war and perpetual impoverishment of the Lower Orders — much as their 19th century and earlier ancestors were.

    The 90% extinction rate of indigenous peoples in the Americas was seen as both inevitable and excellent, exceeding the 50% rate in Ireland, and barely 30% in India. No matter what, the ideal was/is a vacant landscape — or nearly so — for the exclusive use and pleasure of our overlords.

    The current level of rage by the elites over the early payments to the Lesser People at the outset of the Pandemic — the cause they say of dreaded inflation — is largely due to the survival of so many of us, when the probability/possibility was that an enormous number, not just a million or so, would perish. The rage at China for enforcing Zero COVID until recently is similarly based. They want a substantial extinction rate, and they will have it.

    Or not? The jury is still out.

  8. Some Guy

    Well, you have said yourself Ian that drones are weapons of the weak, and what I see today is that we are in an era of decline and an era of the advantage going to the defense. Perhaps this is similar to saying it is an era of relative advantage, certainly I see no force capable of imposing themselves on others the way that the Mongols or English were able to do.

    In an era of decline, I think the advantage goes to the more backward, in some sense. Where by ‘backward’, I mean less reliant on complex, expensive modern weapons, on complex, interconnected modern systems, on modern ethics which treats concepts of loyalty and duty and patriotism as faded irrelevancies.

    With drones and other similar tech that is low cost and easily spread, and with so many expensive, fantastically complex targets for them, it just seems so easy for even the weakest player to impose extremely high costs on the strongest player.

    Think about how the Amish are spreading under the radar, taking over more and more little pieces of the U.S. Think about the Pashtun tribes of Afghanistan and the inability of modern armies to defeat them. Where the Russians at least were able to leave in relative order, the much stronger (in modern reckoning) American force ended up practically running for the door.

    Think about the Ukraine, where most people (on both sides) expected an easy Russian victory, but it has turned into a long slog.

    I was reading about the great fire in Chicago a while back and the astonishing thing to me was the sheer power and speed of rebuilding. Nowadays we just don’t have the net energy, the manpower to rebuild in this manner. Look at the costs and timelines for construction projects in decades past and see how obviously we can no longer achieve these. Look at New Orleans, likely never to return to its pre-Katrina population level.

    If there is an advantage today, it is in simplicity, it is short supply lines (literally and figuratively), it is resilience, it is tradition. It is a hard notion to get my head around, since our modern religion of progress teaches us exactly the opposite from birth, but every day, month, year, the evidence seems to pile up.

    The U.S. has in some ways, the most advanced form of government (in terms of design) in the world. But as the ethical cohesiveness that made that system work fades away, such a complex system becomes a weakness, not a strength.

    I remember not too long ago, there was an issue with cellphone frequencies impacting airports. Every country in the world handled it routinely, but in the U.S. it was a big mess and last minute panic. They still use the penny, they still don’t use metric, these are small things but emblematic, they just can’t solve any problems any more at the government level.

    I don’t like to overstate the parallels between the eras, but I’d say that broadly, we are moving from an era of Romans and Carthaginians and so on, to an era of barbarians.

  9. Trinity

    “we are moving from an era of Romans and Carthaginians and so on, to an era of barbarians.”

    That’s an insult to the barbarians. 🙂

    “… at least until the US gets its nose thoroughly enough bloodied to make major institutional changes in how they do military stuff. So far we don’t know how thoroughly that would have to be. One would think it wouldn’t take that major a defeat to make them do some re-evaluating–they want to win, after all.”

    They don’t care if they win in the sense that I think you mean, the traditional prevailing nation(s) of a war, as in (loosely) WWII. Their actual war is with us, the plebes, the unwashed, the normal.

    That current war is a profit center, an opportunity to skim even more to feed their addiction, and can go on as long as they wish. If it doesn’t work out, they’ll find another way to bring Russia to heel and gain what they really want: control of Russia’s resources, especially utilities. They play a very long game, and have been winning for centuries, except that little blip in the mid 20th century.

    And Some Guy nailed it. Carrying capacity (and Google) say we will need three earths to meet the demands of 8 billion people living roughly (and proportionally) as we do now by 2050. I wonder what that says about their YouTube servers?

    And I’m with Bruce and others … what constitutes an advantage is changing every day, seems like. Every day feels like a mini earthquake occurred, as the big picture is beginning to take shape and coalesce.

  10. Willy

    Bill Gates didn’t have any beserker warriors with recurved bows riding speedy ponies in his ambition to computerize Asia under his banner/logo. Just a well-connected mother. I wonder if economists ever factor in the power of the mother?

    As an added bonus for Gates, few from the mob ever bitched that IBM should’ve gone with Bell Labs or Digital Research or some other name brand less corny than the then-unknown “Microsoft”. The rest got to be history, so bug-ridden and virus-prone. I wonder if economists ever factor in the powerlessness of a learned-helplessness mob?

  11. You treat this question on a national/regional basis, leaving out the domination of the global economy by TNCs and agglomerates. Absolute advantage is no longer about some THING, such as weaponry or organization, but systemic control, which is where we’re at now.

    Following 2008 an unquantifiable amount of free money was poured into the international finance system to stop the system going down. The vast majority of this was controlled by already huge international finance corporations, which poured at least part of it into control of the political systems in western liberal democracies.

    So the question becomes, not what is absolute advantage, but how advantage is created when the global systems for creating it are controlled by financial behemoths and a handful of billionaires?

Powered by WordPress & Theme by Anders Norén