Academic journal article Independent Review

Globalization as Framed by the Two Logics of Trade

Academic journal article Independent Review

Globalization as Framed by the Two Logics of Trade

Article excerpt

Economists are professionally biased in favor of free trade and open markets. Indeed, normative support for open markets is so universal among practicing economists that the logical origins of their positions are often obscured. Observers and sometimes economists themselves may fail to recognize that two categorically different logical arguments inform economists' thinking and that these arguments, these separate "logics," may have different consequences for generalized public and political attitudes toward the openness of markets. Globalization, as a catch-all term for movements toward more inclusive trading networks, may be viewed quite differently by persons who, even if vaguely, locate its normative bases differently. Such differences may surface more or less directly as explicit policies for moving toward or away from further globalization become alternatives for choice in democratic polities.

For expository purposes, we may label the two logics of trade as Smithean and Ricardian, with reference to the two leading figures of classical political economy, Adam Smith and David Ricardo. Neoclassical economic analysis, which dominated the discipline of economics from 1870 to 1970, was informed during that century by the Ricardian logic before returning partially and somewhat reluctantly to the Smithean logic in the 1980s and later. As the scientific arguments spill over into public and political attitudes, however, the Ricardian logic continues to hold its place, with obvious implications for the public perception of the effects of policy alternatives.

Specialization and Exchange

The Smithean logic is straightforward. Why do persons trade with one another? They do so because specialization is productive; people can produce more economic value if each person does one thing instead of trying to do everything. Concentration of productive effort on one good followed by exchange for other goods becomes a means of getting more of all goods than can possibly be attained in autarky. Trading is, quite simply, a more efficient means of producing.

Note particularly that in this model of exchange people need not differ either in their relative capacities to produce goods or in their preferences for the goods in consumption. Specialization and subsequent trade emerge between the parties because of a recognition that mutual gains are available, that there are increasing returns to be secured from concentrating effort in one activity or the other. Note also that if people do not differ, it is impossible to identify in advance which persons will specialize in which activity involved in the production of which good. Specialization will be observed, but there will be no naturally specialized factors of production.

Comparative Advantage

The Ricardian logic that explains the origins of trade differs categorically from the Smithean argument just outlined. As noted, Adam Smith's account of the benefits of specialization explains why exchange will be mutually beneficial even if the trading parties are initially identical in all respects. By contrast, the Ricardian logic locates the origins of exchange in the differences among persons--differences in their capacities to produce separate final goods. If such differences exist, specialization and exchange will always prove mutually beneficial. Trade emerges because different persons (or trading units, including countries) have different comparative advantages in producing different goods.

Consider what we might call a pure Ricardian setting in which there are no potential gains from specialization as such, even over small ranges of production. If persons are identical in both their capacities to produce and their preferences, trade produces no benefits. For mutually beneficial trade, persons must be presumed to differ in either productive capacities or preferences. Note the somewhat subtle reversal of the logical sequence in the two stylized settings outlined. …

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