James C. Ahiakpor wrote:  
>  
>I earlier tried to direct Medaille to the   
>history of the comparative cost advantage theory   
>of trade with my request for him to show where   
>in Ricardo's writings the latter had assumed (a)   
>full employment and (b) balance of trade in   
>arguing the benefits of free trade.  I was   
>hoping that if he failed to find those   
>conditions in Ricardo's works, which I don't   
>think exist, he would then be inclined to think   
>differently about the benefits of   
>NAFTA.  Instead, he responded with threats of   
>debating me on free trade, as if such threats   
>were a legitimate substitute for the textual   
>evidence I requested.  (If I needed any   
>clarifications on the benefits of free trade, I   
>would rather consult the writings of Adam Smith   
>or David Ricardo than John Medaille's.)  Now he   
>writes as if it is those who argue the benefits   
>of the comparative cost  advantage theory of   
>trade that lack the historical context or are oblivious of reality.  
>Not so.   Indeed, Smith's and Ricardo's views   
>were very much informed by reality.  
  
They were indeed informed by reality, which is   
why they had contingencies, as reality always   
does; only abstract theorists loosen their   
propositions from the foreseeable contingencies   
of the market. And I would certainly agree that   
one ought to consult the original text, and would   
insist even more that one ought to consult it in   
preference to any text of mine. And the   
contingencies in Ricardo's text are as I outlined   
them. I had thought the source was known to all,   
chapter 7 of "On the Principles of Political   
Economy and Taxation." In that text, Ricardo states.  
  
"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. "  
  
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. If you attempt to   
redraw the examples so that Portugal can increase   
production of both commodities, then there is no   
comparative advantage in deserting one for the other.  
  
All the examples in chapter 7, without exception,   
are of balanced trade, and would not work if they   
were of unbalanced trade. You can do the exercise   
for yourself; Change the examples so that England   
has to borrow money from Portugal so that she can   
buy Portuguese wine, and the whole thing becomes   
nonsense. Ricardo notes that if there was such an   
imbalance, then trade would cease: "If then this   
premium for a bill on England should be equal to   
the profit on importing cloth, the importation   
would of course cease; but if the premium on the   
bill were only 2 per cent, if to be enabled to   
pay a debt in England of �100, �102 should be   
paid in Portugal, whilst cloth which cost �45   
would sell for �50, cloth would be imported,   
bills would be bought, and money would be   
exported, till the diminution of money in   
Portugal, and its accumulation in England, had   
produced such a state of prices as would make it   
no longer profitable to continue these   
transactions. " It is obvious that Ricardo didn't   
take into account the idea of a currency becoming   
an international currency, where one country   
could simply print up piles of the stuff on the   
supposition that it will be used in settling   
accounts between other countries and never come   
home to settle your own hash. Ricardo didn't   
believe that such imbalances could long continue   
without exchange rates simply wiping out the   
problem or wiping out the trade. The current   
practice of borrowing $2 B/day from the Chinese   
to buy Chinese goods would undoubtedly have   
struck him not so much as a form of trade as a   
form of insanity. With all due respect the Prof.   
Foldvary, the manufacture of "bonds" cannot be   
considered real trade, but merely what is: borrowing.  
  
Finally, one can infer that Ricardo assumes the   
fixity of national capital in his examples   
because he says so, explicitly: "but if in   
consequence of the diminished rate of production   
in the lands of England, from the increase of   
capital and population, wages should rise, and   
profits fall, it would not follow that capital   
and population would necessarily move from   
England to Holland, or Spain, or Russia, where profits might be higher. "  
  
Ricardo did believe that England could benefit by   
outsourcing all of the cloth and wine to a   
country with an absolute advantage, but he still had his doubts:  
  
"Experience, however, shews, that the fancied or   
real insecurity of capital, when not under the   
immediate control of its owner, together with the   
natural disinclination which every man has to   
quit the country of his birth and connexions, and   
intrust himself with all his habits fixed, to a   
strange government and new laws, check the   
emigration of capital. These feelings, which I   
should be sorry to see weakened, induce most men   
of property to be satisfied with a low rate of   
profits in their own country, rather than seek a   
more advantageous employment for their wealth in foreign nations. "  
  
In other words, he is assuming throughout all the   
examples that the capital doesn't simply relocate.  
  
And finally, we need to consider the source of an   
absolute advantage, something Ricardo did not   
consider. In the American South, it was slavery;   
in Australia, it was convict labor; in many   
places in the world today, it is child labor and   
exploitation. Are you really willing to divorce   
the theory from its social context? Is this the   
way to bring stability and prosperity to the   
world? I think there is room for doubt.  
  
  
>And on the assessment of the actual turnout of   
>events in regards to migration after NAFTA, I   
>had in mind J.S. Mill's advice on the evaluation   
>of theories in one of his Essays on Some   
>Unsettled Questions of Political   
>Economy.  Before one declares a certain   
>hypothesis to have been falsified, one needs to   
>be sure that all possible countervailing forces   
>or events have been taken account of.  That way,   
>hasty judgments would be avoided.  
  
Well, judgements certainly have been avoided, and   
responsibility as well. The irresolvable game of   
what-if provides infinite cover for every failure   
of the abstract theorist to see his predictions   
fulfilled. Yet, it would seem that intellectual   
curiosity, at least, would impel one to question   
a theory that failed to produce the promised   
results. The real question is whether one values theory more than reality.  
  
  
>I think historians of economic thought would   
>illustrate the usefulness of their subject by   
>drawing on the original sources of theories when   
>these come into question in modern debate.  In   
>particular, "full employment" as a condition for   
>arguing the validity of any classical   
>proposition is just ill-advised.  I am yet to   
>find any classical proposition that depends on it.  
  
While I can't think of one that doesn't. Indeed,   
the employment of all resources, both capital and   
labor, would seem to be the whole purpose of all   
the theories, for without that, the theories   
couldn't promise very much. The idea that an   
economy existed to employ the people and their   
funds was basic to all theories. Indeed, the   
inexplicable failure of the market economy to do   
this was the central political question of the   
19th century and occasioned the Speenhamland   
system and the Poor Law of 1834. It was the   
failure of these systems that finally led labor   
to winning some bargaining rights in the 1870's.   
Are we reading the same history?  
  
Finally, you have responded with some heat, for   
reasons that I cannot fathom. Perhaps it is the   
use of the term "flat-earthers." But I do not   
invent that term; rather it was chosen by   
advocates of unrestricted free trade for   
themselves, and one can do a group no further   
compliment than call them by the name they have   
freely chosen. If it sounds like an insult, if it   
conjures up an image of a pre-scientific and   
discredited theory, it is no use to complain to me. Take it up with Friedman.  
  
  
John C. Medaille