David Ricardo is renown economist who advocated for international trade based on comparative advantage of a country. The main tenets of his discussion were to disagree with Adam Smith tenets of concentration of wealth within a country. Ricardo mainly advocated for a free trade where goods and services were allowed to flow from one country to another but on the assumption that the level of technology is constant (Peach). Through the concept of comparative advantage, he suggested that trade between two countries has a positive impact on their real incomes. He compared this to the simple idea of evolution via natural selection. This idea has had its challenges in terms of understanding especially to scholars from different fields like journalists who can’t grasp how trade would render mutual benefits. There are three main reasons that explain why the scholars criticize economists stand for free-market globalization. First is that these scholars often opt to challenge the Ricardo hypothesis just to appear intellectually smart since they know economists value the concept of free trade. Secondly, they choose to disregard Ricardo’s ideology just because they don’t understand it. One has to have economic basics like the competitive market mechanisms so as to grasp the ideas passed through this concept. The third and most prevalent reason is that comparative advantage and natural selection are grounded on mathematical models which they don’t understand.
The intellectuals only focus on the elements that would make comparative advantage not feasible and expound on them neglecting the opposite, which is that it actually works. What they forget is that economists are knowledgeable about the reasons that would make free trade not work easily based their arguments on the Ricardian simple model. The economists understand that free trade results to under-investment in the import sectors which causes distortions in the labor market and may either reduce the wages of labor or result to unemployment, therefore, as much as there is an increase in income in the country, its distribution in the country is affected adversely.
David Ricardo is outlined, in Sir James Goldsmith’s books, to bring out the concepts of comparative advantage and specialization. It states that countries would choose to specialize in activities that they do extremely well in. This can be expanded to mean countries should develop certain sectors and industries while neglect others as they have a more comparative advantage in them over other countries. The countries would end up increasing their productivity and efficiency since they will export surpluses and import what they don’t have or produce. This idea is not manifest in the real world. Ricardo idea by Goldsmith is rendered invalid as there are countries that offer fewer wages than the developed countries. He bases his limitation on labor fallacy.
Another Washington intellectual, James Fallows, wrote articles against free trade citing his consideration on the Asian triumph in economic growth despite their protectionist policies. He is evasive on the reasons why comparative advantage is not working in this era. He supports Friedrich List concepts brought out in his book. List, however, is seen not to understand the logic behind trade increasing income for the two countries involved. He states that tariffs on goods manufactured benefit both farmers and industrialists.
There are new intellectuals like Michael Lind, who has gained fame through his criticism in politics. In Harper’s, he published about international trade stating that those who advocate for free trade basing their arguments on the productivity neglect the fact that wages are decreased despite this factor. The gains from trade can’t offset the wage pressure present as it will continue to decrease as long as workers are in plenty and are competing for the scarce jobs. This rejects the advantages of free trade and bases his arguments on un-factual concepts. The increase in productivity he outlined as 30% were only achieved in the manufacturing sector as the business sector experienced a 13% increase. Real wage decreased as he outlined though he neglected to include that there was a resultant 2% increase in average worker remuneration. The share of compensation in national income in the U.S. rose during this period having been stable for a decade. Mr. Lind just wanted to increase his fame by skewing people with his doctrine rather than understand the free trade concept which is intertwined with other variables in the economy (Peach).
The basic Ricardian model considers two goods, two countries, one production factor and a perfect competitive market. The Ricardian basic model is aligned on three assumptions namely;
It is under the national labor market that wages are determined: It regards labor as a mobile factor of production, therefore, wages earned in one industry is influenced by the rate in other industries. The gains from trade can be demonstrated by workers shifting to the industry which is experiencing comparative advantage. The relationship between wages and productivity is not well understood as the non economists expect wages to show signs of productivity. The non economists don’t understand the idea that wages are endogenously generated like Goldsmith who compares countries like Vietnam and U.S questioning themselves how they are able to achieve western productivity yet, they operate under low wages. They don’t understand the distinction between national-level and factory-level productivity.
Employment is usually held constant. This is against the basic Ricardian model that assumes the economy to operate under full employment, which is not the reality. This assumption is brought about by the fact that international trade is a long-term concept, therefore, it is faced by natural pressure that self corrects itself to full employment. This assumption also holds because of the central banks which try to maintain employment at a constant level through its policies. This is not regarded by the critics, and they go ahead to declare that their doctrines against free trade would increase employment. What they forget is that the Smoot-Hawley tariff brought about the Great Depression.
There is no problem with the balance of payments. The basic Ricardian model clearly outlines that the trade must be balanced thus, the claims that there would be deficits in the case of free trade, are not substantive. Economists separate balance of payments with international based on David Humes argument that it self-corrects itself as a country that has surplus will want to acquire specie, therefore, prices in the world market would raise. A deficit country, on the other hand, will find its goods competitively priced. This will be an automatic mechanism resolving itself, and there will be government influence. Exchange rates adjust as the monetary policies deal with unemployment issue. Trade imbalances don’t depict a problem as long as it stands out attractive to the foreign investments. The non economists don’t know the difference between savings and investments equals the difference between export and imports.
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Peach, Terry. David Ricardo: Critical Responses, Volume 1. London: Routledge, 20
Interpreting Ricardo. Cambridge: Cambridge University Press, 2009.
Roncaglia, Alessandro. The wealth of ideas: a history of economic thought. Cambridge: Cambridge University Press, 2005.
White, Lawrence H. The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years. Cambridge: Cambridge University Press, 2012.