Wednesday, February 24, 2010

Ricardo was wrong

From Harvard Magazine Mar-Apr 2010
A truism about the benefits of international trade holds that countries that specialize in producing goods that they are best at manufacturing will enjoy the greatest prosperity. But a recent study of economic complexity provides a different take on the wealth of nations. Using “network science,” a method of analysis that examines webs of connections in complex systems, Ricardo Hausmann, professor of the practice of economic development and director of Harvard’s Center for International Development, and CID research fellow C├ęsar Hidalgo, a physicist by training, have shown that the richest countries are those with the most complex economies—and actually produce the greatest diversity of goods. “Firms and individuals specialize, countries diversify,” emphasizes Hausmann.
The reason Ricardo's truism is wrong is that he assumed a static world in which there were a given number of products and a given demand for each product. But the world isn't static. The successful countries are those that can adapt as times change and as new products become important. The most successful countries are those that invent the new important products.

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