Free Trade

A curious paradox lay at the heart of Ricardian theory. On the one hand, Ricardo emphasized distributional conflict, the factors affecting the division of the spoils. On the other hand, he insisted that free trade would benefit everyone.

Mercantilist theories had urged nations to export as much as possible, and import little, accumulating gold. Smith had persuaded most of his readers that the wealth of nations should be tallied by its overall consump­tion, not merely by its stores of gold. Smith's defense of free trade generalized his confidence in the division of labor. Let nations, like persons, specialize in what they could do best. Ricardo took Smith's reasoning one step further, building on earlier insights of Torrens and others to articulate the theory of comparative advantage. In a famous numerical example of the exchange of British cloth for Portuguese wine, Ricardo carefully specified the assumptions under which both countries could gain from trade, even if the absolute cost of producing both com­modities were cheaper in Portugal.

If neither labor nor capital could cross national boundaries, and both countries were fully utilizing their factors of production (with no unemployment), differences in the relative efficiency of producing two goods had momentous implications. Modern economists often explain this argument in terms of opportunity cost and counterfactual compari­sons. If Britain decided to make its own wine by reallocating labor from cloth production, it would give up a great deal because its cloth production was relatively more productive.

The illustration that Ricardo chose was compelling partly because Portu­gal had an obvious absolute advantage in the production of wine, which was never very successfully produced in Britain. But his example also made it clear that the same results would follow even if it were cheaper to produce cloth as well as wine in Portugal. The reasoning behind comparative advantage only holds under strict assumptions. For instance, if capital could flow easily across national borders it might well be more efficient to produce both wine and cloth in Portugal.

Even in its modern formulation, the theory applies only when endow­ments are naturally given rather than socially created.²⁵ The declining importance of agriculture compared to high-tech services reduces the influ­ence of natural endowments on comparative advantage. Some countries will always have the sunshine and rainfall better suited to grapes than others, but countries can invest in manufacturing, transportation, or the educational infrastructure that can develop a highly skilled labor force.

Ricardo's theory of comparative advantage pioneered the type of math­ematical reasoning that would later come to dominate the discipline. Its analytical clarity was compelling; its assumptions, however limiting, were clearly stated. Furthermore, it resonated with utilitarian virtue. Elimination of tariffs would obviously threaten those who had taken advantage of their protection, leading not only to business failures but also to loss of jobs. But even if some were hurt, many more would benefit. The squawking protests might be more audible than more diffuse cheers, but by Ricardo's reasoning free trade would serve the greater good.

While his reasoning was correct, it was incomplete. All else equal, free trade could make everyone better off. But little else was equal. Countries could use their military power to force trade on their own terms, as the British did in India—where they virtually prohibited handloom weaving, and in China—where they sent their battleships to expand the opium trade. Imperial power often retarded technological development in the colonies and strengthened the political class that Ricardo himself believed was retrograde, namely landlords. Britain's head start in the development of new industrial technologies made it difficult for other countries to com- pete.²⁶ Most critics of the doctrine of free trade—and in the newly indus­trializing United States there were many—argued that it simply ratified British monopoly.