Free trade delusions

29 Sep, 2022 at 13:51 | Posted in Economics | 10 Comments

Trump, the death of 'free trade' and the rise of bilateral trade agreementsWe must ask why economists still ignore the obvious reality that application of their standard free trade model failed to generate broad-based income gains. Why do many still turn a blind eye to the mounting evidence of the social, economic, and human costs of the globalization experiment? Some were genuinely misled by the fancy algebra. But many know their models are irrelevant. They were seduced by the surprising willingness of political leaders to believe their sophistries and appoint them to positions of money, power, and influence … Paul Samuelson, himself a lifelong skeptic of free trade, once said that economics advances funeral by funeral. Old economists find it hard to give up on the theories that made their careers.

I will give the final word to John Maynard Keynes, who was also a free trade skeptic:

“Free trade assume that if you throw men out of work in one direction you re-employ them in another. As soon as that link is broken the whole of the free trade argument brakes down.”

Jeff Ferry

Thought-provoking and interesting. But I think Ferry misses the most powerful argument against the Ricardian free trade paradigm — what counts today is not comparative advantage, but absolute advantage.

David_Ricardo

Since Ricardo’s days, the assumption of internationally immobile factors of production has been made totally untenable in our globalised world. Our modern corporations maximize their profits 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 rule the roost when it comes to free trade.

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

10 Comments

  1. Dear Lars,

    I already posted in the comments section of rwer issue no 101 why I believe that Mr. Ferry’s arguments don’t apply the David Ricardo’s case for free trade. You can read it here:
    https://rwer.wordpress.com/comments-on-rwer-issue-no-101/

    Ricardo’s case for free trade is also completed unaffected by your claim that current international trade is based on absolute advantage. Why?

    1) The common contraposition of absolute and comparative advantage has recently been debunked. It arose out of J. S. Mill’s misinterpretation of Ricardo’s theory of value, as explained here:
    https://www.cambridge.org/core/journals/journal-of-the-history-of-economic-thought/article/overcoming-absolute-and-comparative-advantage-a-reappraisal-of-the-relative-cheapness-of-foreign-commodities-as-the-basis-of-international-trade/87D17DABA90FCF909E0F73EC230D73E8/share/f040cb3a195dd26d48bea41a92aee5bff929503b

    2) Ricardo’s case free trade was based on a simple rule. It stipulates that one should not attempt to make a commodity that costs less to buy, and that it is generally beneficial to import commodities whenever they are bought more cheaply than what their internal production would cost.

    3) Ricardo did not assume international capital immobility in his famous numerical example. Instead, he assumed that capital was less mobile across national borders than within a country, which is a realistic assumption even nowadays.

    4) Should this assumption one day prove to be invalid, it would not affect his case for free trade. Capital moves easily within a country, and no one advocates protecting local production from “imports” from other regions of the country.

  2. Lars I think you had an excellent video link posted here once on comparative advantage, the free trade orthodoxy, which also covered Paul Krugman and Fred Hirsch. By Unlearning Economics? Economics ?Unchained? Can’t remember who it was by but perhaps worth considering a repost.

    • Of course this discussion not only relates to trade in goods, it is about the neo-liberal pro uber-globalisation and deregulation orthodoxy in general.

      On economists, abstraction, humility and caution:

      • I would add it is not only the right that do this. Neo-Keynesians do it as well. For example a lot of talk went around a few years ago making blanket claims such as “the economy is not a household” and “government debts don’t matter if they are denominated in the country’s own currency”. The saga unfolding in Britain suggests that those claims require a little more nuance.

        • Sorry once I again I meant New Keynesians.

  3. The discussion here has very limited relevance to most of todays world trade.
    The “New Trade Theory” of Krugman et al. takes into account increasing returns to scale and imperfect competition.
    See: https://en.wikipedia.org/wiki/New_trade_theory
    .
    Krugman concluded:
    “The economic cautions about the difficulty of formulating useful interventions and the political economy concerns that interventionism may go astray combine into a new case for free trade. This is not the old argument that free trade is optimal because markets are efficient. Instead, it is a sadder but wiser argument for free trade as a rule of thumb in a world whose politics are as imperfect as its markets.
    … It is possible, then, both to believe that comparative advantage is an incomplete model of trade and to believe that free trade is nevertheless the right policy.”
    Paul Krugman: Is Free Trade Passe? JEP 1987
    https://www.aeaweb.org/articles/pdf/doi/10.1257/jep.1.2.131

  4. A couple of links from Don Boudreaux on comparative advantage:
    .
    Does Factor Mobility Nullify the Principle of Comparative Advantage?
    .
    https://cafehayek.com/2018/03/factor-mobility-nullify-principle-comparative-advantage.html
    .
    It’s Impossible to have a Comparative Advantage at Everything
    .
    https://cafehayek.com/2018/09/impossible-comparative-advantage-everything.html

  5. A quote from Don Boudreaux:
    .
    Another assertion that protectionists often make about comparative advantage is that it rests on the assumption that capital is not mobile across national boundaries. Such an assumption – which was indeed made by David Ricardo in that part of his book in which he explained comparative advantage – merely makes explaining the logic of comparative advantage easier by assuming away one factor that can cause the particular international pattern of comparative advantage to change. As Deirdre explains in her essay, comparative advantage exists in all instances in which individuals specialize and trade. When it comes to teaching principles of economics, I have a comparative advantage over my next-door neighbor no less than over an orthopedic surgeon in Olso. And this comparative advantage makes it worthwhile for my neighbor to pay me to teach his daughter economics no less than it makes it worthwhile for the orthopedic surgeon in Oslo to pay me to teach her son economics. The fact that capital is much more mobile between my house and that of my neighbor next door than it is between my house and that of the orthopedic surgeon in Oslo does nothing to eliminate comparative advantage as an economic fact that makes it profitable for my neighbor and me each to specialize in what we each do best and to trade with each other.
    .
    Asserting that comparative advantage “breaks down” or “doesn’t work” when capital is mobile across international boundaries is a sure sign of failure to grasp the meaning and logic of comparative advantage. People who make this argument present the superficial appearance of being highly informed. But in reality, the very fact that they make this argument is sufficient proof that they don’t understand comparative advantage.
    .
    Jon Murphy responds in agreement in the comments section:
    .
    Most laymen see the simplfying assumptions economists make and incorrectly assume that those assumptions need to hold. But they do not. They just make the point clearer. The ceteris is never truly paribus, but that does not mean we do not learn anything from ceteris paribus analysis.

  6. Keynes was indeed cautious about free trade, and was very aware of the dangers of international capital market liberalisation.

    Samuelson was directly behind the (re) emergence of free trade dogma, and indirectly by creating a social science that does not question but rather reduces analysis to constrained optimised rational choice based modelling. And don’t forget the Samuelson-Stolper Theorem.

    Click to access samuelson.pdf

    No one would sanely suggest a return to autarky. But the work of the likes of Samuelson has had the effect of marginalising important historical and other work that draws on knowledge from other disciplines and areas. For example import substitution policies were very important in many successful cases of industrialisation.


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