Doubts Over the Effectiveness of Free Trade Economic Theory Essays

Decent Essays
Paul Krugman’s article “Is free trade passé?” (1987) espouses the argument that free trade economic theory today is “more in doubt than at any time since the 1817 publication of Ricardo’s Principles of Political Economy” (p. 131, citing Ricardo, 1821). Ricardo was the first to put forth the theory that “[t]he value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour” (Ricardo, 1821, p. 1.1). It was his theory that specialization, even to the point of eliminating certain industries in a country, optimized a country’s trade advantage (p. 31.17). As…show more content…
Increasing Returns and Imperfect Competition
New models of international trade, stressing increasing returns and imperfect competition, began to emerge in the 1970s:
These models immediately established the idea that countries specialize and trade, not only because of underlying differences, but also because increasing returns are an independent force leading to geographical concentration of production of each good. Indeed, at a logical level, increasing returns are as fundamental a cause of international trade as comparative advantage. (Krugman P. R., 1987, p. 133).
While this approach supported the existence of trade as opposed to no trade, it began to move away from free trade as the only answer in international economic theory.
Consequently, while government intervention does not always work, it has become more of the norm in current international trade. However, as Krugman points out, “[e]ven in a world characterized by increasing returns and imperfect competition, budget constraints still hold. A country cannot protect everything and subsidize everything” (Krugman P. R., 1987, p. 140). Even within a country’s internal economy, a government must determine which industry or industries to favor in allocating resources, because international trade policy cannot favor every industry. Allocation of resources to one industry must, of necessity, take away from other industries, and a policy that favors one must by
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