Post Keynesian Theory and Policy

Post Keynesian Theory and Policy

A Realistic Analysis of the Market Oriented Capitalist Economy

New Directions in Post-Keynesian Economics series

Paul Davidson

How did economic “experts” worldwide fail to predict the financial crisis of 2007-2008? Eminent economist Paul Davidson discusses how mainstream economic theory may not be applicable to the world of experience. Post Keynesian theory is designed to be applicable to the real world, and this book demonstrates how applying it to policy formulation could help practically resolve economic problems. Davidson goes on to demonstrate how many Post Keynesian economists warned of the impending financial crisis as early as 2002.

Chapter 10: Is international free trade always beneficial?

Paul Davidson

Subjects: economics and finance, history of economic thought, post-keynesian economics


One of the most widely believed policy conclusions of classical economic theory is that free trade among nations is beneficial in that it increases wealth and provides more goods and services for residents in all of the free trade nations. It consequently follows that all import and export markets should be made permanently free of any government regulations and/or restrictions such as tariffs or quotas. Nations such as the United States should pursue free trade agreements with all other nations on the globe. What is the classical theory basis for such a conclusion? The classical theory’s “law of comparative advantage” is claimed to be a universal applicable truth that assures free trade produces more goods and services globally as all resources in every nation are fully employed in their most comparative productive capacity. This is accomplished by each nation specializing in producing and exporting from the domestic industries that have a “comparative advantage.” Comparative advantage associated with any nation’s industry is determined by supply side relationships regarding the productivity of capital and labor in the specific production process. Any government interference with a free trading relationship between nations following the law of comparative advantage, it is claimed, will prevent the economic prosperity of the nations involved from reaching their potential optimal production solution.

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