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My Continuing Conversation With Ian Fletcher

Mr. Ian Fletcher

Dear Ian:

You continue to misunderstand the case for free trade.  Let’s take two examples from your latest essay (“Free Trade Theory Known to be Wrong – Since 1817!“), which you exported to me yesterday by e-mail.

First, it’s untrue that “The economic argument for free trade is ultimately based on the theory of comparative advantage.”  Comparative advantage does supply one important basis for justifying free trade.  But as Adam Smith showed, specialization and exchange generate net economic gains independently of specialization according to comparative advantage.  Likewise with the greater ability made possible by expanding markets for producers to take advantages of larger economies of scale.

Second, contrary to your claim, the principle of comparative advantage applies even when capital is mobile.  Mobil capital can (and often does) change the pattern of comparative advantage, but this mobility doesn’t eliminate comparative advantage.  The reason is that a producer has a comparative advantage whenever the amount of good A that he (or it) can produce relative to the amount of good B he can produce differs from the amount of good A that some other producer can produce relative to the amount of good B that that other producer can produce.  Unless and until the opportunity cost of producing every good and service in the world is identical for every producer in the world, comparative advantage will exist and provide occasions for mutually productive specialization and trade.

Capital mobility is highly unlikely to bring about such a weird, universal equality in productive capacities.  But if, per chance, it should do so, still no need to worry: see Example 1 (above).

Donald J. Boudreaux

P.S. Stealing an idea from my former research assistant Mark Perry, I do a little editing to a part of your essay —-

This is precisely the problem Americans experience today: when imports technological advances replace goods produced here by workers with goods produced here by machines, capitalists like the higher profits and consumers like the lower prices—but workers don’t like the lost jobs. Given that consumers and workers are ultimately the same people, this means they may lose more as workers than they gain as consumers.

Contrary to free-trade economic-growth mythology, there is no theorem in economics which guarantees that workers’ gains will exceed their losses under these circumstances. Things can go either way, which means that free trade innovation can be a losing move for them.  Whether it will be a losing move is a complicated question that turns on a number of different variables, but the threat is real.  The “win-win” guarantee that free traders those who celebrate advances in knowledge and innovation believe in is pure fantasy.