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