Stay informed with free updates
Simply sign up to the Economy myFT Digest — delivered directly to your inbox.
Growing up in a land of eucalypts, I had not even seen a rake before moving to England. Now I live in the countryside and swear like an Anzac every time a leaf drops on my grass. You can keep the divine colours this autumn.
But if I’m honest, it isn’t the endless raking and rides to the tip that annoy. It’s the words of an ex-boss ringing in my ears whenever I do manual labour. Makes more sense to pay someone else, he always said. You should work on receiving a big bonus.
Too true. So instead of enjoying the outdoors or much-needed exercise, I merely fret over the books I should be writing or projects that remain incomplete. If I wasn’t always stuck outside, I’d be a millionaire by now for sure.
The economic theory of comparative advantage was a bombshell when it landed in the early 19th century. Previously it was assumed that countries trade based on their respective costs of production. David Ricardo proved it’s the relative costs within a country that matter.
In other words, do what you’re best at. So it’s irrelevant that I’m cheaper than paying a gardener £20 per hour. I should only offer the services on which I make the highest return on my efforts. Hear that Mrs Kirk?
Which is why it’s also right that delegates at COP29 agree a “new collective quantified goal” for climate finance over the next week. Rich countries should be funding poor ones to help transition their economies.
But the reason for doing so has nothing to do with fairness. The popular justification is that developed nations have reaped the benefit of emitting in the past and should therefore compensate developing ones who haven’t. Actually, the case is much simpler.
Developed countries must pony up because they have a comparative advantage when it comes to generating wealth versus decarbonising. The developing world should receive the money because that is where almost 65 per cent of current emissions are coming from.
If we extend this logic, however, it also means the “ambitious” climate goals promised by some rich nations are counterproductive. On Tuesday, for example, Britain’s prime minister, Sir Keir Starmer, committed to reducing emissions by (a laughably precise) 81 per cent by 2035.
That’s a mistake. The UK only produces 1 per cent of the world’s carbon dioxide — yet its economy is the sixth largest on the planet. Far better to focus on maximising growth and tax revenues in order to send more cash to where it is needed.
Going green is costly and burdensome. Yet some emitters are environmental sideshows. Why risk those laying golden eggs? Indonesia spews almost twice the carbon the UK does but has roughly two-thirds less GDP. It should decarbonise and send the bill to Starmer.
Three other news stories this week also require a comparative advantage lens. Still in Baku, the first was Azerbaijan’s president calling oil and gas a “gift of god”. He added that petrostates cannot be blamed for the fact the world still needs both.
Indeed. The most efficient way to transition is for consumers to use less fossil fuel. Demand is our comparative advantage. Finding and supplying the stuff — which still provides 80 per cent of global energy needs — is Azerbaijan’s.
Likewise, Shell’s legal victory on Tuesday. It was madness to impose a reduction target that included emissions from customers. Compared with cleaning up their own acts, oil companies have no power when it comes to making us take the bus instead of driving.
Opportunity cost, as can be seen in all the examples above, is a key tenet of comparative advantage theory. It certainly sprang to my mind when Elon Musk’s new job tackling US bureaucracy was announced. Should he really be doing this?
Sure, he has the chops when it comes to cost cutting. But whereas my curriculum vitae is only marginally superior to someone who rakes lawns for a living, Musk is already busy revolutionising transport and telecoms, not to mention ensuring our survival via the colonisation of Mars.
That’s the last guy I want spending his days bent over PowerPoint slides with Vivek Ramaswamy. The opportunity cost is too high. Save humanity please Elon! It’s even more important than cutting red tape.
When you pan out from the past five days’ headlines, it seems to me that policy blunders aplenty stem from losing comparative advantage as our north star. Free trade has long been an obvious casualty — and looks set to worsen under Donald Trump.
On the other hand, one hopes that the president-elect’s new administration will at least push back on one of the most egregious forms of comparative disadvantage: the pressuring of companies to drive social and cultural change when they should be focused on making money and inventing fabulous products. Such as a silent leaf-blower that actually works.
