How Nations Grow Rich: The Case for Free Trade

By Griswold, Daniel T. | Freeman, June 1998 | Go to article overview
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How Nations Grow Rich: The Case for Free Trade

Griswold, Daniel T., Freeman

How Nations Grow Rich: The Case for Free Trade

by Melvyn Krauss

Oxford University Press 1997 195 pages $22.50

Ever since the modern nation state emerged half a millennium ago, the question of how nations grow rich has been bound up with international trade. The battle line in the debate, from the time of the mercantilists and Adam Smith to the controversies today about GATT and NAFTA, has been whether nations grow rich by restricting free trade or by engaging in it.

Professor Melvyn Krauss's new book, How Nations Grow Rich: The Case for Free Trade, won't end the debate, but it does provide a readable and well-argued defense of free trade on just about every point of current contention. As an emeritus professor of economics at New York University and the author of previous books on protectionism, foreign aid, and NATO, Krauss brings a deft hand to the task. Throughout his latest book, the author illuminates everything he surveys with clear writing and sound economic thinking.

Krauss begins at the beginning, by explaining the nearly two-century-old theory of comparative advantage in layman's language. The fundamental economic argument for free trade is that it allocates resources more efficiently by allowing people and nations to specialize in what they do best.

We don't trade with people in other nations to create more jobs. We trade to make ourselves better off. "Free trade does not create jobs-it creates income by reallocating or transferring jobs from the lower productivity to the higher productivity sectors of the economy. The argument for free trade-at least in the standard theory-is an efficient allocation of resources argument. Such reallocation increases income by increasing the average productivity of the nation's stock of productive resources," Krauss writes.

After his opening footwork, Krauss delivers a roundhouse right to the Clinton administration for its "managed trade" philosophy, followed by a series of quick jabs against the false arguments for protection. Among them is the assertion that free trade is only valid if it is "fair trade." "This argument-that equity demands the United States protect its producers when foreign countries protect theirs-has a certain appeal but is nonetheless fallacious. Free trade is fair trade to those whom it counts the most to be fair to-the domestic consumer," he writes. Other protectionist "tricks" Krauss exposes are the infant-industry argument, the "cheap labor" fallacy, and antidumping laws.

One of the most insightful sections of the book is Krauss's analysis of how the modern welfare state has corroded support for free trade. The tax bite and labor-market rigidity of the welfare state have created the high unemployment we see today in Western Europe, which in turn foments domestic pressure to curb imports in a misguided effort to save jobs.

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