Written by David Langlieb

There is an apocryphal story known to students of economics which appeared some years back in the late humorist P.J. O’Rourke’s excellent book Eat the Rich—a natural scientist asks an economist to name a law of economics that is neither obvious nor unimportant. The economist’s reply was David Ricardo’s Law of Comparative Advantage. O’Rourke describes the law:

“If you can do X better than you can do Z, and there’s a second person who can do Z better than he can do X, but can also do both X and Z better than you can, then an economy should not encourage that second person to do both things. You and he (and society as a whole) will profit more if you each do what you do best.”

Boiled down to its essence, Ricardo’s law means one thing—specialize. We profit—both individually and in the collective—if every member of any society figures out what they are best at and then goes to work tirelessly producing that one thing. This applies within small communities in much the same way as it applies among nations. If Switzerland makes excellent chocolate and Japan makes excellent automobiles, it would be a waste of time and resources for the Swiss to learn how to make automobiles, even if they need quite a few. Ricardo’s Law dictates that Swiss economic policy should be to trade for the automobiles they need by producing more chocolate than they could ever eat. 

Still, Ricardo’s Law is counterintuitive. This is partly true because, on an individual level, we get bored doing one thing. We get bored even (and sometimes, especially) if we are good at it. There is also a shortcoming to Ricardo’s Law, which is that it cannot factor in dynamism over a long-term time horizon. Japan, for example, did not make excellent automobiles the first time it tried. Its automobile industry developed and improved over several years, in part because of the macroeconomic policy of the Japanese government. Ricardo’s Law is best understood as a tool—a way of thinking about decision-making and focusing on an individual and organizational level.


Lending with Ricardo In Mind

What does this have to do with us at the Philadelphia Accelerator Fund? Our lending orientation—our policies, our focus, our outreach—is in no small part informed by Ricardo’s Law. We believe strongly that businesses and non-profit organizations benefit from knowing and constantly reassessing their own comparative advantages. What are we good at? How are we uniquely positioned? And, most importantly, what are we better at than anyone else? Here are a few ways in which we approach these questions: 

Given that we lend only in Philadelphia, we are laser-focused on the local economy, particularly as it concerns housing and the development landscape. Banks and regional lenders have access to multiple data points about Philadelphia, which informs their lending. But we are hyper-aware of these things. We understand which neighborhoods need new investment, the developers who work in these neighborhoods, the developers who want to work in these neighborhoods, the blocks where the vacant parcels are concentrated, and the blocks that are intact with single-family homes but need infill development or rehab work. 

We know exactly where our capital fits. We have cultivated relationships with partner lenders, both for-profit and non-profit, and we maintain a dynamic understanding of how these partnerships can work. We stay apprised of who our partner lenders might be and try to grasp their risk tolerance, their mission, and many other factors that play into their credit decisions. Part of our work involves ‘arranging marriages’—finding the right financing product and partnership to make a project possible.

We are nimble. In some ways, this is the most unique and important of our comparative advantages. Our small size carries certain disadvantages, of course, but it also allows us to work proactively with borrowers as opportunities to build affordable housing arise. We draft term sheets quickly and analyze projects efficiently. In an industry like affordable housing development, where margins are thin and time is money, we have found that our borrowers appreciate this level of responsiveness. We work hard to maintain it even as we grow.

These are just a few general points since identifying and cultivating comparative advantages never really ends. But at the Philadelphia Accelerator Fund, we know that our impact is proportionate to the strength and specificity of what we do best, and we always keep that principle front of mind.