Relatively Good Isn't Good Enough.


In 1817, David Ricardo wrote about comparative advantage and the mathematical proof that, regardless of your productive capacity, you could improve your community wealth by specialising and trading.

In basic terms, it tells even the most advanced producer to focus on that which they are best at producing and to exchange any surplus production for whatever else they need.

The corollary of this is that even the worst, most inept producers can exploit a comparative advantage by specialising in producing that which they are least bad at producing. They will improve their wealth (at least, marginally) by trading but, being inept, they are not going to get rich.

It was therefore surprising last night to hear Lord Mandelson (Britain's Minister for Business) give a speech outlining his ideas for a new policy of industrial activism in which he constantly referred to the need to identify those areas in which this country has a comparative advantage. Not once did he refer to sustainable competitive advantage.

The point is this - comparative advantage is all about looking at your competitors and trying to stay ahead of them via benchmarking and other unadventurous tactics. Competitive advantage is all about focusing on customers and being absolutely as good as you can be.

It is entirely possible to have a comparative advantage and still be the worst performer in a category. That is a lousy basis for an individual business, let alone a national industrial policy. Remarkable is not relative.

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