First Principles October 2007

Beyond Belief

Some economists are beginning to doubt the benefits of free trade. What’s wrong with them?
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Paul Samuelson, an undisputed titan of 20th-century economics, was once challenged by the mathematician Stanislaw Ulam to name a single proposition in all social science that was both true and nontrivial. It took a while, but Samuelson finally thought of a good answer: the principle of comparative advantage. This classical theory was true, Samuelson explained, as a matter of mathematical deduction, and its nontriviality was “attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.”

Paul Samuelson

ONETIME DEFENDER of free trade Paul Samuelson, in 1950.

The doctrine in question, devised by David Ricardo in 1817, makes a strong claim about the gains that accrue from trade. It would be difficult to exaggerate the centrality of the idea in modern economics. For nearly 200 years, the principle of comparative advantage, and the ideas about economic policy that flowed from it, divided the world into two camps: those with basic economic literacy, and the rest. Understanding this idea, and advocating it to the world, was part of what it meant to be an economist—especially an American economist.

Lately things have changed. Some of America’s most eminent economists, including Samuelson himself, have edged away from that earlier consensus. Their support for liberal trade is far more tepid and tentative than before. The shift is both momentous and disturbing. Just why it happened is a mystery.

To understand this issue, one must first understand what the principle of comparative advantage does not say. Intuitively, trade between two countries will make both better off so long as each is especially good at making something different from the other. They should specialize and trade to maximize this absolute advantage—as Adam Smith had earlier advocated in The Wealth of Nations. Ricardo’s idea was subtler—and remarkable. He showed that there are mutual gains from trade even when one country is better at producing everything. All that matters is that its margin of superior efficiency is greater for some products than for others. The two countries should still specialize, even on the basis of this comparative advantage—if England is slightly worse than France at making wool, and much worse at making wine, it should specialize in wool and trade. However unproductive a country may be, even if it is uncompetitive across the board, it gains from trade.

The proof is a few lines of math, as anyone with an hour or two’s training in economics will know. Nearly everybody else, as Samuelson said, finds the idea difficult to believe. People sometimes think they believe it when they don’t. The term comparative advantage is widely used, to be sure, but absolute advantage is what the politician or pundit usually has in mind. If I may speak for those with an hour or two’s training, we used to find this confusion quite gratifying. “What happens if a country has no comparative advantage in anything?” people would ask, gravely. How we laughed.

Ricardo’s theory did not cover every circumstance. Exceptions to its general rule (potential benefits from protecting “infant industries,” for instance) were recognized long ago. Nor did the theory claim that everyone gains; only that gains exceed losses. Nonetheless, the idea and the literature that grew up around it created a strong presumption that free trade was best. Exceptions were narrow and often exotic. The case for liberal trade commanded close to universal agreement among America’s leading economists.

Astonishingly, Samuelson himself struck the heaviest new blow against the discipline’s confidence on the issue. In 2004, aged 89, he roused himself to a burst of indignation, in the pages of the American Economic Association’s Journal of Economic Perspectives, at conventional defenses of globalization. They were simplistic, he later told The New York Times. Under certain circumstances, he pointed out, the losses from trade could exceed the benefits, not just for particular industries but for the economy as a whole. BusinessWeek said Samuelson and others were “beginning to question the basic tenets of free-trade theory … Is it possible that David Ricardo’s economic analysis doesn’t work for the 21st century?” Trade skeptics were exultant. Vindication from on high!

Since then, mainstream economists’ disenchantment with the old near- certainties has continued to build, and at a gathering rate. Top-tier orthodox economists such as William Baumol, Alan Blinder, Paul Krugman, and Brad DeLong—invariably prefacing the point with the words “Although I’m no protectionist—have expressed new fears about what imports and offshoring are doing to living standards. Lawrence Summers, Bill Clinton’s treasury secretary from 1999 to 2001 (and before that a revered mainstream scholar), is the most surprising new doubter. In a July Financial Times forum, he wrote, “It is not even altogether clear that [globalization] benefits America in aggregate.”

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