In economics, there is no such thing as destructive competition, like war, where participants actively harm each other. Even if competition exists, its sum always benefits society as a whole. In this sense, economics is a discipline of peace.
Competition is essential for the development of economic theory. Extremes suggest that without competition, there would be no transactions; without competition, the concept of price would not exist. If only altruistic people were to exist, who attempt to sell cheaper and buy at higher prices, prices would not form. For example, if a seller offers a bicycle worth 100,000 won for 90,000 won and a buyer offers 110,000 won, their concessions would widen the price difference. Paradoxically, when selfish humans competitively strive for profit, vital information called price is created. This price acts as Adam Smith’s ‘invisible hand,’ driving today’s complex economy.
The shared values of competition are numerous. Firstly, it allows for the efficient allocation of precious resources on Earth. Secondly, it motivates people to develop better technologies, facilitating the spread of knowledge.
Various schools of thought exist within economics, each holding slightly different hypotheses about competition. The most influential are the Classical and Neo-Classical schools, which absolutely believe that competition’s mechanism brings individual demand and supply into balance. For them, competition defines prices, and through these prices, the market achieves balance, resulting in an efficient market. Vilfredo Pareto emphasized that economic equilibrium through competition is inevitably a societal balance as well, suggesting that competition optimizes both the economy and society.
Some economists view competition as a Darwinian mechanism that weeds out inefficient market participants, allowing those who offer high cost-effectiveness to survive, thus creating a market ecosystem. Figures like Ludwig von Mises and Friedrich August von Hayek laid the ideological foundations for neoliberalism. Others, like Joseph Schumpeter, see competition as the driving force behind innovation.
So, what does economics teach us to do for self-satisfaction? It teaches us differentiation. The importance of differentiation is simply explained through the theory of comparative advantage. However, many people mistakenly use the term comparative advantage to mean a competitive edge over others. Comparative advantage actually refers to possessing a competitive edge due to one’s different abilities, not in comparison to competitors.
The theory of comparative advantage in economics explains that there is valuable work for everyone in the world, and through such work, survival is possible, and it also benefits society as a whole. In this regard, economics is indeed a discipline of peace, emphasizing that competition does not lead to monopoly but rather to a reciprocal exchange.
Before discussing comparative advantage, it is necessary to understand absolute advantage. Adam Smith, who laid the foundations of ‘Classical Economics,’ discussed absolute advantage in a relatively concrete manner. In his book “An Inquiry into the Nature and Causes of the Wealth of Nations,” Smith emphasized the importance of division of labor as a factor that increases production, and viewed international trade as a specialized form of division of labor. More than one person coming together and focusing on what they do best can produce not just double, but far more output than alone. This is the synergy effect and the law of increasing returns.
When attempting to divide labor, productivity can vary depending on who does what work. The simplest approach is to divide tasks based on what one is best at. Not everyone is the same. Some people are physically strong, while others excel in delicate tasks. Naturally, productivity increases when people work together based on these characteristics.
Adam Smith argued that this principle of division of labor should not only apply among individuals but should also be extended to regions and nations. He believed that it was beneficial for countries to practice division of labor and engage in trade because it was profitable for the nation. For example, if it costs 5 pounds to produce wheat in England and 3 pounds to import it from France, it would be wise for England to import all its wheat from France. Smith called this scenario, where a country has an advantage in producing a particular good, absolute advantage, and argued that a nation should only allow imports of foreign goods in which it has an absolute advantage.
Let’s consider a more realistic example. A working couple, a man and a woman, get married and have a child. Both place great value on child-rearing, and they decide that one of them should focus solely on caring for the child while the other focuses on earning money. Who should take care of the child? Generally, women have an absolute advantage in child-rearing. They can provide breast milk and are naturally more suited to nurturing the child since they carried the child. Conversely, if there is physically demanding work, men usually have an advantage. In this case, we can say that the man has an absolute advantage in earning money.
In this family, the division of labor becomes clear. The woman takes care of the child at home while the man goes out to work and earns money. Similarly, individuals, businesses, and nations should only produce goods in which they have an absolute advantage. Does this mean that a country with an absolute advantage should not engage in trade with other countries and live independently?
Not according to David Ricardo, a British economist who completed the theoretical framework of the Classical School started by Adam Smith. Ricardo introduced the concept of comparative advantage, arguing that free trade benefits all countries. In other words, Ricardo stated that if free trade is practiced, each country should specialize in exporting goods in which it has a comparative advantage and import goods in which it does not, thereby benefiting all nations. As mentioned earlier, Ricardo’s notion of comparative advantage differs slightly from our conventional understanding of competitive advantage.
It is here we come to the heart of the matter. The economic principle of comparative advantage’, ‘a country may, in return for manufactured commodities, import corn even if it can be grown with less labour than in the country from which it is imported.
David Ricardo
Let’s further discuss the story of the couple mentioned earlier. In jobs that require physical strength outside the home, men generally have an advantage. However, in this couple’s case, suppose the woman has an accounting certification and can earn a higher salary than the man, who works in a manufacturing job. In both child-rearing and earning money, the woman has an absolute advantage over the man. In such a unique situation, who should take care of the child and who should earn the money? If earning money is deemed more valuable, then the woman should go to work, and the man should take care of the child. In this case, it is said that the man has a comparative advantage in child-rearing.
Comparative advantage can be more precisely defined as the competitiveness that exists even when behind in absolute advantage, considering the opportunity cost of production. Here, the crucial factor is opportunity cost. In other words, the person with the lower opportunity cost of producing a specific product has a comparative advantage. Opportunity cost is simply what one gives up to acquire something else. Expressed in measurable units of value or cost, it represents the highest value forgone by choosing one option. This forgone value is the cost of the choice, which is the cost of the lost opportunity.
In the example above, the opportunity cost for the man in taking care of the child is the income he would have earned from working. The opportunity cost for the woman in staying home to raise the child is the income she could have earned as an accountant. That is, the opportunity cost of child-rearing is higher for the woman and lower for the man, therefore, the man has a comparative advantage in child-rearing, from a monetary value perspective.
Let’s consider another everyday example. Suppose a law firm employs both a lawyer and an assistant who drafts documents. Suppose the lawyer is not only knowledgeable in law and skilled in litigation but is also better at drafting documents than the assistant, even exceeding the assistant’s speed in document preparation. Would it be more advantageous for the lawyer to work alone without hiring the assistant? Not necessarily. Although the lawyer can produce more documents in less time, spending that time on more lawsuits or preparing for court can be a more lucrative use of their time.
Even if the assistant is less skilled at document preparation than the lawyer, if the time saved by the assistant allows the lawyer to generate additional income that exceeds the assistant’s salary, even by just one won, then the assistant has a comparative advantage in document preparation. Indeed, many jobs are created for this reason.
In this way, even if an individual or a country is inferior in all aspects compared to other individuals or countries, if each specializes in an area where they have a comparative advantage and exchanges the goods produced, a wealthier and happier society can be created than if each were to produce various goods independently.
The primary purpose of the theory of comparative advantage is to explain the benefits of international trade. Therefore, scholars who support this theory argue that each country should specialize in areas where it is relatively efficient and export some of the products from those areas to exchange for goods in which they are comparatively disadvantaged. But what would happen if a country with an absolute advantage made everything itself, focusing solely on exports and not importing?
Countries without an absolute advantage would inevitably become debtors. Finding a comparative advantage means focusing on that area to develop an absolute advantage. Until then, even if a comparative advantage is identified, one might have to live with despair, like the man mentioned earlier. In economic theory discussing comparative advantage, we learn that we must find our comparative advantage, train it, and develop it into an absolute advantage. The study of turning such absolute advantage into competitiveness is primarily the subject of business management.
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