Chapter 3: Free trade theory and its critics
This chapter concentrates on pro-free trade arguments, particularly the theory of comparative advantage. The theory shows that countries can potentially gain from trade. In the simplest examples it demonstrates that both of two parties can benefit from trade even when one of them is absolutely more efficient at producing both of two goods. Much, much more is often claimed of the theory. A leading textbook informs its readers boldly: ‘Free trade brings benefits to all nations. This theme forms the foundation for any basic discussion of international trade’ (Caves et al. 1993: 199). However, as the chapter shows, the theory of comparative advantage is insufficient to support the weight it is asked to bear as either a description or a justification of real-world trade practices. This chapter has six substantive sections. It first discusses Smith, who is usually seen as providing the basis of modern trade theory. It argues that Smith’s work hardly justifies his appropriation by the modern pro-trade enthusiasts. As the section following on from it articulates, Ricardo is more clearly a proponent of free trade and the elegance of the theory of comparative advantage bears repetition. The subsequent four sections then critically evaluate the Ricardian foundations of pro-free trade theory. It is argued, respectively, that the theory ignores market imperfections, time, space and the role of money and credit. Each of these areas produces potentially fatal problems for the basic theory.
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