Edited by Richard Epstein, Mario Rizzo, and my Mercatus Center colleague (and former student) Liya Palagashvili, the Routledge Handbook of Classical Liberalism has just been published. In it, you’ll find chapters by (among many others) David Schmidtz and Jason Brennan (on the foundations of classical liberalism), Richard Wagner (on fiscal policy), Tom Hazlett (on price controls), Larry White (on banking and financial regulation), and Pete Boettke (on the future of classical liberalism).
I wrote Chapter 36 (“Liberalism and Trade”). Here are three slices from my chapter:
Liberalization of international trade—free trade—has been central to the liberal project from early on. Adam Smith’s 1776 Inquiry Into the Nature and Causes of the Wealth of Nations has at its core what remains an extraordinarily powerful and still‑relevant case for a policy of unilateral free trade. Smith made this case largely in the course of exposing as fallacious many of the key tenets of mercantilism and its associated plea for active government regulation of trade.
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Yet in the minds of many people mercantilism remains dominant today. For example, Donald Trump regularly interprets American trade deficits as evidence that America is losing money (see, for example, Kiely, 2019). Nearly all of Trump’s decades‑long pronouncements on trade, while foolish from the perspective of liberal economics, make perfect sense from the perspective of mercantilism.
This interpretation of international trade by a businessman is unsurprising. Businesses succeed economically by earning revenues greater than expenses. To the businessperson’s mind, therefore, it seems natural that countries succeed economically by doing the same. But this mercantilist mindset is not confined to businesspeople; it is widespread among the general populace. The skepticism evinced by Donald Trump to trade—skepticism in particular to imports—is not at all unique to Trump or to right‑wing populists. It is commonplace across the political and ideological spectra, consistently rejected only by liberals.
Yet as Adam Smith observed, mercantilists have matters exactly backward. Economic activity—including international trade—is valuable only insofar as it increases people’s access to goods and services that improve their standard of living. The value of international trade lies not in how much money it brings into the country but, instead, in how many goods and services it brings in as imports in excess of the goods and services that are exported in exchange. The greater the net amount of goods and services made available in the home country by trade, the better the trade. And individuals, not government officials, are the best judges of which goods and services are most likely to improve their standard of living.
Two key tenets emerge from the liberal rejection of the philosophical foundation of mercantilism. One is that a country is not akin to a company; a country is not an organization the goals of which citizens must be taxed, subsidized, or regulated to pursue. Free trade is normatively justified in part because individuals are not employees or agents of Country, Inc.
The second tenet, which follows from the first, is that the measure of trade’s value is its contribution to the well‑being of all the citizens—including the masses—of a country. Trade’s impacts on the government or on particular producer groups are relevant only insofar as these impacts affect the welfare of the country at large—a welfare that ultimately is measured by the material well‑being of the population at large and not by any “absurd” accounting figure such as the balance of trade.
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The most frequently encountered economic objections to free trade—such as that free trade permanently reduces either employment or real wages in the home country—have been addressed by economists for over two centuries and consistently found, both theoretically and empirically, to be unwarranted. In this chapter, I largely ignored these commonplace complaints about free trade, as refutations of these are by now practically countless (see, for example, Yeager & Tuerck, 1966; Boudreaux, 2008; Lemieux, 2018; Panagariya, 2019; Irwin, 2020). The liberal case for free trade of course includes trade’s pure economic benefits. But the liberal case extends beyond narrowly economic benefits to embrace trade’s integration of thousands, millions, and even billions of strangers into an extensive—today truly global—commercial society that, in addition to better providing the masses with the material means necessary for flourishing, promotes freedom, creativity, openness, toleration, and peace.
