Does Real-World Air Resistance Nullify the Law of Gravity?

by Don Boudreaux on October 31, 2010

in Myths and Fallacies, Trade

Attacking free trade over at The American Thinker, John Griffing repeats the urban myth that the principle of comparative advantage justifies free trade “only if three conditions were met: zero international capital mobility, full employment, and balanced trade.”

Nonsense.  That one person or country has a comparative advantage at producing, say, wine while another person or country has a comparative advantage at producing cloth – and, hence, that both persons or countries benefit by specializing and trading – depends not in the least on any of the conditions that Griffing alleges to be prerequisites for comparative advantage to justify free trade.

David Ricardo, and countless economists since, have indeed often assumed one or more of the conditions that Griffing mentions (and many conditions that he doesn’t mention).  But such assumptions are made only to explore the different detailed ways that comparative advantage works under various conditions, or to simplify the explanation of the central insight of the principle.  Economists never for a moment believed that the central insight of comparative advantage requires these assumptions to hold in reality.

As the late Fritz Machlup (a giant among trade theorists) wrote on page 57 of his 1977 book, A History of Thought on Economic Integration,

most of the established propositions in the theory of international trade were derived from assumptions many of which are quite unrealistic – some idealised but still acceptable as approximations to real-world conditions, some downright counterfactual.  They were nevertheless accepted as heuristic fictions because they yielded interesting conclusions which were judged to remain relevant even if some of the assumptions were relaxed or entirely dropped.

Also, the principle of comparative advantage is not the only principle that helps to form the economic justification for free trade.  Adam Smith, after all, never heard of comparative advantage.

(I thank Steve Bradley for alerting me to Griffing’s essay.)

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