The Smithean model is just as well-known as the Ricardian model, except being commonly seen as an inferior counterpart of the latter. But since Ricardo modified Smith, the two have many shared features. Both focused on labor costs or labor productivity; both promoted specialization and trade; and both were set up using two entities and two goods. It is common to this day to see absolute advantage being accused of missing the link with opportunity cost. But to be fair, neither Smith nor Ricardo could possibly think in terms of opportunity cost, which did not exist at the time. Given that, both utilized similar logic without mentioning the term itself. For example, accounting cost or more specifically labor cost, is a part of opportunity cost — the explicit part to be accurate.
The difference between Smith and Ricardo is smaller than commonly perceived
Now the difference: Absolute advantage is a simpler model that only compares accounting costs, more accurately the marginal labor costs between two goods (or more generally two projects), by two entities. Interestingly, while comparative advantage also only looks at marginal labor costs, the way it does so is unique: It compares weighted marginal labor costs — weighting the marginal labor hours of the chosen option by the marginal labor hours of the best alternative. To be sure, this is not exactly the same as the full-fledged implicit opportunity cost, defined as the expected benefits or returns from the best alternative. Ricardo only compared apples to apples, or labor hours to labor hours, without counting in all the potential benefits of the best alternative. Putting marginal labor hours in a ratio and then comparing ratios are less counter-intuitive than combining the explicit cost of the chosen option with the implicit cost (i.e., the expected returns or benefits) from its best alternative. The only slightly counter-intuitive part in the Ricardian model is to compare marginal labor costs in ratios, involving divisions rather than subtractions. Smith essentially did the latter, not the former. Yet the Ricardian ingenuity changed how we understand and handle choices: It is no longer just to have options available but to consider and compare their marginal labor costs jointly. To give more credits to Smith, many firms indeed only care about the simple difference in accounting costs, labor costs in particular, in making outsourcing and FDI (Foreign Direct Investment) decisions. Many business managers may be talking Ricardo but are really following Smith, in the sense that they compare marginal labor hours by subtractions rather than by divisions. Asking an average business manager to reduce the implicit opportunity cost by cutting down the estimated returns from the best alternative may only create confusion.
Breaking a level playing field
Why should we care about this seemingly trivial difference between the two? First of all, the Ricardian model has promised a level playing field, in the sense all entities have comparative advantage all the time. While comparative advantage does exist for everyone, not everyone is equally capable of growing such advantages. This means sooner or later the level playing field will become uneven, not that entities will stop possessing comparative advantage but they will differ from each other in turning comparative advantage into absolute advantages. One fundamental reason for this to happen is that entities have mixed incentives: Sometimes they want “Win-Win” while other times “I Win, You Loss.” Unilateral wins care little about whether everyone has some advantage in something but for “me” to have more advantages than “you” do for as long as possible and in as many fields as possible. For that they strive to differentiate themselves from each other.
Not all comparative advantages were equal
It is not just what entities want but the facts or resources they can leverage to get what they want. Two such facts are that not all comparative advantages were born equal and that elementary comparative advantage can be weak if each stays isolated. Elementary advantage comes and goes faster than integrated or packaged advantages. In the long run and in crucial, pivotal moments agents /entities always compete on packaged advantages or resources. The Sino-US trade war for example is never just a war on tariffs but an integrated, multifront conflict on technologies, institutions, rule of law, rates of economic growth, risk tolerance, friends and allies, intellectual properties and state role in growth and development. Within each package all constituents of elementary advantages play a role but some matter more than others at any particular time. All packages are dynamic to allow elements to swap positions over time, and they are semi-transparent as they respond to various degrees to changes outside the package.
Why the Smithean Model Still Matters
The Smithean model plays a crucial role in breaking the level playing field and in connecting and packaging elementary advantages. Although Smith believed entities can gain from specialization and trade, his model did not promise a level playing field. Instead, some entities are allowed to have multiple absolute advantages while others none. As a simpler model it has its unique advantage, a major one being to make it easy to think and to calculate accumulated advantages. Since the model does not use ratios and ratio comparisons, all it takes is to count the number of goods or services that one can produce with greater quantity and/or better quality than others — using the same amount of resources. Mathematically, because the Smithean model involves no ratios/ratio comparisons, it is straight to add up individual absolute advantage for the same entity, and to compare entities on that ground. By contrast, adding up comparative advantage is harder, as everything is relative and each made of difference between two ratios. Because everyone has comparative advantage, an entity with comparative advantage in one field is likely to have offsetting comparative disadvantage in others.