Mr. Ahiakpor's post deals with two issues, so I
will respond in two posts. This one will deal
with the intellectual sources of free trade, and
the next with the issue of the self-regulating economy.
>I thank John Medaille for finally producing the
>source from Ricardo that he wants to interpret
>as assuming full employment as a condition for beneficial free trade:
>
>"This exchange might even take place,
>notwithstanding that the commodity imported by
>Portugal could be produced there with less
>labour than in England. Though she could make
>the cloth with the labour of 90 men, she would
>import it from a country where it required the
>labour of 100 men to produce it, because it
>would be advantageous to her rather to employ
>her capital in the production of wine, for which
>she would obtain more cloth from England, than
>she could produce by diverting a portion of her
>capital from the cultivation of vines to the manufacture of cloth. "
>Medaille interprets the above thus: "Now
>clearly, the only reason the question comes up
>is because Portugal has to make a choice: She
>can employ her capital in increased wine
>production *or* increased cloth production, but
>not both. In other words, she is at full
>employment and must make a choice. If there was
>slack in the economy, and she had absolute
>advantage in both commodities, then the question
>of a comparative advantage would not arise. It
>is only because resources are scarce that one
>has to make a choice, that one has to
>'economize.' With an absolute advantage in both
>commodities, and the capacity to increase
>production in both, she would do so rather then
>seek the lesser good of a comparative advantage.
>It is only full employment that makes a choice necessary."
>But Medaille is mistaken in his interpretation on at least two counts.
>Scarcity exists even in conditions of less than
>full employment. If that were not so, all
>prices would go to zero any time a country's
>labor force was not fully employed. A positive
>price for any commodity is a clear sign of its scarcity.
>Secondly, whether in full employment or not,
>Portugal would still have the choice of
>producing either wine or cloth, having
>(developed) the capabilities in
>both activities. In Ricardo's simplified
>example, Portugal would choose to specialize in
>the production and exportation of wine because
>that is her comparative advantage.
But that's the point: "Portugal" does not choose
anything, Portuguese traders do, and traders--all
traders--seek an absolute advantage, not a
comparative one. That has always been the problem
of comparative advantage, namely that it has to
be composed out of traders seeking absolute
advantage, and the composition problem is
somewhat chancey. As Ricardo realized, they seek
their advantage until the advantage is exhausted,
and then they seek something else; that is the
meaning of saying "Portugal makes a choice." Up
to the point of full employment, no choice is
necessary. Traders will simply seek their
advantage until the market is saturated.
>Furthermore, as Adam Smith explains repeatedly
>in the Wealth of Nations, opening up a country
>to unrestricted international trade -- without
>restraint or subsidies to domestic producers --
>is one sure way to extend the market for its
>produce, increase its annual revenue, and
>increase employment opportunities for its labor
>force. Thus, free trade may be a surer way to
>promote full employment in a country than trade restrictions.
But that's a different question. You asked about
sources, and I provided them. Now you are
addressing the substantive issue rather than the
historical one. On this issue, it is not a
question of whether trade is good or bad; on that
there is no debate. The question is whether free
trade can be absolutized and dogmatized so that
even trading at a chronic loss is counted as a
good, or even "competing" against slavery and
child labor is to be honored. In other words,
what we are really discussing is whether we
should drop the assumption of ceteris paribus and
make trade an unchanging, untouchable and
immutable dogma. Pardon me, but my personal
belief is that the best thing to do with an
economic dogma is to question it. And no economic
proposition is absolute; they all are held (or
should be), ceteris paribus. In a state of
continuous and hopelessly unbalanced trade, there
can be no question of advantage, comparative or
otherwise. Or at least, no advantage to us.
>Regarding Medaille's requirement of a balance of
>trade as a condition for beneficial free trade,
>Smith also writes: "Nothing, however, can be
>more absurd than this whole doctrine of the
>balance of trade, upon which, not only these
>restraints [on imports], but almost all the
>other regulations of commerce are founded. When
>two places trade with one another, this doctrine
>supposes that, if the balance be even, neither
>of them either loses or gains; but if it leans
>in any degree to one side, that one of them
>loses, and the other gains in proportions to its
>declension from the exact equilibrium. Both
>suppositions are false. A trade which is forced
>by means of bounties and monopolies, may be, and
>commonly is disadvantageous to the country in
>whose favour it is meant to be established ...
>But that trade which, without force or
>constraint, is naturally and regularly carried
>on between any two places, is always
>advantageous, though not always equally so, to both."
Two points. The first is that you seem to have
abandoned the argument that Ricardo was not
supposing balanced trade, when quite obviously he
was. He is quite specific that either the trade
will be balanced or that currency fluctuations
would wipe out any advantage that the trade had,
bringing trade to a halt. He did not anticipate
an international currency that depended only on a
supply of paper and ink, and a willingness of
countries to accept our paper. Of course, the
real question is whether that can be prolonged
indefinitely. Let us just say that this point, there is room for doubt.
The second point is that this is a complete
misreading of Smith, one that is out of both its
textual and historical context. The contexts for
Smith's views on trade is given by those who held
the mercantilist view that Smith opposed. The
mercantilists did not seek balanced trade, but
only unbalanced; they believed that countries
only grew rich by being always on the winning
side of such trades. And when there was any
danger of balance or of, God forbid, negative
trade, they used it as an excuse to demand
subsidies, quotas, tariffs, and bounties from the
government. In a real sense, mercantilists didn't
believe in trade at all, in our sense of the
term; they believed in plunder; they didn't
believe that a mere exchange of equal values
could benefit a country, but only an unequal
exchange. This kind of thinking was, of course,
the source of the strange "trade" regulations with America and India.
Smith opposed all this, and it is in connection
with trade that he gives us his famous "invisible
hand" statement. But the "invisibility" was not
something mystical, but something concrete,
namely "invisibility" from the government
commissioner. Smith believed that trade would
tend to balance itself out, and that no
government policy was necessary, much less a
policy of subsidy and tariff. To take Smith's
opposition to mercantilism and to absolutize it
into a blessing of all trade, no matter how
chronically unbalanced, is simply not supportable
from the text. Indeed, Smith didn't believe our
current situation was even possible; if there was
a shortage of wine, those who wanted wine would
give more of their goods for wine, but if there
was a shortage of gold (meaning unbalanced
trade), England would simply give a higher
percentage of her goods to get some, and these
problems would right themselves. This was in line
with the view of the economy as a self-regulating mechanism.
Furthermore, Smith was very aware of the social
context of trade. He knew that ruining a country
is the easiest way to make a profit: "But the
rate of profit does not, like rent and wages,
rise with prosperity, and fall with the
declension, of the society. On the contrary, it
is naturally low in rich, and high in poor
countries, and it is always highest in countries
which are going fastest to ruin. The interest of
this third order, therefore, has not the same
connexion with the general interest of society as
that of the other two." And he gives a concrete
example of what he means by a ruined country:
"The great fortunes so suddenly and so easily
acquired in Bengal and the other British
settlements in the East Indies, may satisfy us
that, as the wages of labor are very low, so the
profits of stock are very high in those ruined countries."
In short, the Smith of legend is not the Smith we
actually meet in the Wealth of Nations. About the
former, there is a "Smythology" (as John Mueller
puts it) of the absolute free trader, capitalist
ideologue, prophet of selfishness, and mystic of
the invisible hand. But the Smith of the text and
of history is quite otherwise.
John C. Medaille
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