This was followed by the claim that “the high road of competitive advantage” is what will serve Australia’s interests. The idea of comparative advantage versus competitive advantage is a ridiculous oxymoron. If Australian firms have a comparative advantage over foreign firms in the production of a particular products then by definition they are competitive.

Some years ago Legge revealed that he had absolutely no understanding of comparative advantage when he said that it was based on “constant returns to scale”. This, like so much he has to say about economics, is utter nonsense. As an exasperated Professor Gottfried von Haberler put it:

Somebody or other is always trying to show that the Law of Comparative Cost [comparative advantage] is valid only under the simple assumptions upon which it was originally formulated. But ...this is not so and that the simplifications merely help the exposition without affecting the essentials of the matter. (Theory of International Trade, William Hodge and Company Limited, 1950).

Legge obviously thinks that it is because of comparative advantage that Australia has come to rely on “commodity products”. He clearly does not understand that the country’s advantage in commodity production is not a comparative one but an absolute one. The difference between the two concepts is extremely important.

Comparative advantage is really an opportunity cost concept. Therefore when a country has lower opportunity costs in the production of a product it is called a comparative advantage. But an absolute advantage occurs when a country can produce more of a product with the same factor inputs.

This is why Australia has an absolute advantage over Japan and Korea in the production of coal, just as Jamaica has an absolute advantage over the UK in the production of bananas. With comparative advantage the same factor inputs can produce the same quantity of P in different countries. However, those countries with a comparative disadvantage — those with the highest opportunity costs — would find that they would either have to subsidise P or abandon its production.

In other words, comparative advantage has nothing to do with Australia’s production of commodities. Having revealed that he cannot distinguish between comparative advantage and absolute advantage he went on to expose his utter ignorance of how capital is accumulated and real wages determined by claiming that the Government’s labour market reform package will halt innovation because firms will be able to make profits by cutting wage rates.

This is the most incredible economic nonsense. Legge is evidently too dim to realise that according to his logic industrialisation is literally impossible. (See The US trade deficit with China and protectionist myths for a detailed refutation of this outrageous fallacy).

What should really bother free market supporters is not Legge’s claptrap but the apparent inability of Liberal Party staffers to refute it.

Labour market reform comes under attack and the Liberal Government flounders exposes more of Legge’s economic illiteracy.

Gerard Jackson is Brookes’ economics editor

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