Home > Uncategorized > The benefits of free trade — a fallacy based on a fantasy

The benefits of free trade — a fallacy based on a fantasy

from Lars Syll

Plenty of people will try to convince you that globalization and free trade could benefit everyone, if only the gains were more fairly shared …

trade-copyThis belief is shared by almost all politicians … and it’s an article of faith for the economics profession.

You are right to reject it …

It’s a fallacy based on a fantasy, and it has been ever since David Ricardo dreamed up the idea of “Comparative Advantage and the Gains from Trade” two centuries ago. The best way to prove that is to apply real-world scepticism to the original argument in favour of free trade …

Ricardo’s model assumed that you could produce wine or cloth with only labour, but of course you can’t. You need machines as well, and machinery is specific to each industry. The essential machinery for making wine can’t be used to make anything else, if its use becomes unprofitable. It is either scrapped, sold at a large loss, or shipped overseas. Ditto a spinning jenny, or a steel mill: if making steel becomes unprofitable, the capital involved in its production is effectively destroyed …

Ricardo’s little shell and pea trick is therefore like most conventional economic theory: it’s neat, plausible, and wrong. It’s the product of armchair thinking by people who never put foot in the factories that their economic theories turned into rust buckets.  Steve Keen

As always with Keen — thought-provoking and interesting. But I think he misses the most powerful argument against the Ricardian paradigm — what counts to day is not comparative advantage, but absolute advantage.  David_RicardoWhat has changed since Ricardo’s days is that the assumption of internationally immobile factors of production has been made totally untenable in our globalised world. When our modern corporations maximize their profits they do it by moving capital and technologies to where it is cheapest to produce. So we’re actually in a situation today where absolute — not comparative — advantages rules the roost when it comes to free trade.

And in that world, what is good for corporations is not necessarily good for nations.

  1. April 30, 2017 at 10:56 am

    Interesting indeed. Prof. Keen seems to be pandering here to President Trump’s aversion of free trade by recurring to alternative facts.

    Some statements in Keen’s article like the one that claims that Portugal was England’s main rival in 1817, or that the opponents of the abolition of the “Corn Laws” argued that “Portugal would undercut England in all industries” are rather perfect examples of simply making stuff up so they fit into the desired narrative that Ricardo came up with the numerical example in order to prove that free trade was superior to protection.

    Another example of alternative facts in the article: “Ricardo’s model assumed that you could produce wine or cloth with only labour, but of course you can’t. You need machines as well, and machinery is specific to each industry. (…) Ricardo ignored this little detail in his example, pretending that goods could be produced using labour alone.”

    In reality, Ricardo mentioned “capital” several times in the exposition of his numerical example. The four numbers refer only to labour-time requirements in the respective countries for a very simple reason: Ricardo wanted to illustrate with the numerical example first and foremost that his labor theory of value was not valid in international exchanges.

    Unlike the neoclassical case for free trade, Smith and Ricardo never denied the fact that some industries and workers could be negatively affected by international competition.

    In combating neoclassical fairy tales about comparative advantage, Prof. Keen unfortunately creates his own version of the fairy tale.

  2. May 3, 2017 at 10:03 am

    Some of the comments from the original article by Keen are also quite critical of it. One commenter argues that even if capital is destroyed free trade continues to provide benefits that offset that destruction. Another argues that in basic resources, which is the majority of world trade comparative advantage still works. A position I’ve seen favored on this blog. This same commenter argues that countries that make a product such as wine also often have superior knowledge and facilities for making this wine. Which they can export for a price to other nations.

    These are all good points, in my view. But the basic assumptions of Ricardo’s and today’s comparative advantage arguments remain un-examined. Just because you can make something doesn’t mean you will. And even if you do make it, you may not want to or have the opportunity to trade it. After all, the English may prefer beer to wine or Portugal may want to keep it’s wine at home. Ricardo assumes that he knows which things people will and will not trade. He never even considers the prerequisite assumption that they may reject international trade. For cultural, political, or even religious reasons. In other words, Ricardo and his progeny assume that economic factors (as they define them) will always be primary. Ricardo, etc. also assume that all markets look and work alike. He never even considers that those who want to use markets will design them to suit their needs. And these often are different from the needs economists believe markets serve or ought to serve. Also, these markets many not function as economists assume they must. Again hubris raises it head with economists. The market of economics textbooks is often not the best market or the market that best suits the needs of actual people and situations.

  3. C-R D
    May 3, 2017 at 6:57 pm

    The Treaty of Methuen in 1703,to which Portugal had to agree to in return for naval protection of its colonies stated that Portuguese wine imported into England should be charged 1/3 less than French wine, but English clothing would enter free of duty into Portugal. We now know the net result: Portugal became an ‘entrepot’ for English goods heading for Brazil. I wonder where did Ricardo find his numerical examples?

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