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