Ricardo's Law of Comparative Advantage and the Law of Association: A Subjective Analysis

The law of association, which is a generalization of Ricardo's law of comparative advantage, is one of the most fundamental laws in economics, which explains the benefits of international trade in the macroscopic level and the division of labour in the microscopic one. However, the derivation of the law is traditionally based on aggregate production criterions rather than on the producers' subjective preferences. An economic law, which ignores subjective preferences cannot be regarded as a fundamental one. In this chapter, a subjective analysis of the law is presented, to the best of our knowledge, for the first time. It is shown that when subjective considerations are introduced the tendency to trade can be reduced. An algorithm is presented to illustrate the dynamics of the process, in which the information regarding the subjective preferences is transferred via the previous trading prices. Furthermore, the effect of specialization on the production frontiers, which is absent in most economics derivations of the law, is taken under consideration. It is shown that even if both producers are identical a non-trading state is unstable. It is therefore shown that counter to mainstream thinking, comparative advantage is neither necessary nor is it a sufficient condition for trading.