Adam smith free trade
Adam smith-free tradeIn the earlier days of recorded history, nations traded to obtain more goods, especially those they couldn't produce themselves, which seems like a logical enough motive. But by the 17th century, this motive for trade gradually eroded. The desire for goods was replaced by the desire to accumulate gold instead. This seemingly irrational motive for international trade, which came to be called mercantilism, colors some nations' international economic policy to this day. Mercantilism flourished during the 16th and 17th centuries, especially in England, France, the Netherlands, Spain, and other West European countries. Mercantilist states felt that the primary objective of trading internationally was to export as much as possible while limiting imports and accumulating gold in return. They felt that gold (as supposed to goods) represented true wealth. By the 18th century it was generally acknowledged that a favorable balance of trade meant exporting more than importing and accumulating a surplus of gold in the process.
But in the Wealth of Nations (first published in 1776), the Scottish economist-philosopher, Adam Smith argued that nations, as well as individuals, gain when they specialize in what they can do best and trade. Not, however, by trading goods for gold, but goods for other goods. "The revenue," he said, "of the person to whom it is paid, does not so properly consists in the piece of gold, as in what he can get for it or in what he can exchange it for" (Smith 499). This heretical statement set the stage for a controversy that has persisted for more than two hundred years. If Smith was right, as most economists nowadays believe he was, then there is no place in a rational world for measures to restrict trade through artificial barriers such as tariffs and import quotas.
Smith also elaborated how people gain by pursuing their own self-interest. "It's not from the benevolence of the baker, the brewer, or the butcher that we expect our dinner, but from their regard for their own self interest," Smith said in one of his most famous quotes (Pool and Stamos 8). People specialize in doing whatever they can do best and exchange it for something else. In the process more is produced and everyone's income and standard of living is improved.
When applied to nations trading internationally the same reasoning applies. The theory that explains this is comparative advantage, it posits "that all countries benefit when nations specialize in what they produce most efficiently and trade their surplus production with other nations for what they can produce most efficiently" (Pool and Stamos 8). It has been around since English economist David Ricardo first developed it in the early 1800s, after he had thoroughly studied Smith's work. Comparative advantage is perhaps best explained by the now-fabled example of the secretary and the lawyer who works in the same office....
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