Chapter 2: Classical Trade Theory
SMITH ON FOREIGN TRADE The Wealth of Nations (1776) launched the new science of political economy. Its foundation was the maximising behaviour of individuals in free and competitive markets. Its objective was twofold: (i) to explain and interpret the workings of developing capitalism; and (ii) to advise, guide and direct policy according to the sound principles of political economy. Central to its concerns was an interest in economic growth, a topic Adam Smith placed prominently on the agenda of intellectual and political debate right from the start. Another was the role of international trade in the process of economic development. These were, of course, the very concerns of mercantilism; but the approach and perspective of the classical economists were radically diﬀerent. Like Smith, they rejected blundering mercantilist (or government) regulation and placed their bets on the competitive market as the best mechanism for promoting growth. Foreign trade – which connects the national market with the wider world market – had an important role to play in this process. To be sure, these economists did not all speak with the same voice, but, in general, they had optimistic visions of prosperity and progress based on the potential of developing capitalism. Classical political economy is associated in the popular mind with domestic laissez-faire and international free trade. At least in respect of foreign trade this portrayal of classical orthodoxy is substantially correct. This policy preference was derived from hypotheses purporting to reveal the true nature and beneﬁt of trade for all countries....
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