Reassessing Comparative Advantage: The Impact of Capital Flows on the Argument for Laissez-Faire

By Prasch, Robert E. | Journal of Economic Issues, June 1995 | Go to article overview

Reassessing Comparative Advantage: The Impact of Capital Flows on the Argument for Laissez-Faire


Prasch, Robert E., Journal of Economic Issues


The theory of comparative advantage is one of the oldest, and judged by its widespread acceptance, one of the most successful theories in the history of economic doctrines. The essential attributes of the theory of comparative advantage are disarmingly simple, and the implications that can be drawn from the model appear to be widely applicable. Specifically, comparative advantage draws upon the idea that specialization is efficient in order to forcefully establish the broader generalization that free trade must be in the best interest of all trading countries. In the words of one prominent neoclassical economist, "There is a basic presumption that free and voluntary exchanges increase welfare, both within national borders and across national borders" [Aliber 1994].

Unfortunately, Professor Aliber's "basic presumption" is intellectually suspect. It may seem obvious, but it is nevertheless important to recall that under a free trade regime a country does not typically engage in the exchange of goods. Individuals and firms within a country participate in exchange relations with individuals and firms in other countries [Culbertson 1985, 8-9]. This simple fact directly raises the possibility of a "coordination failure" within the larger, international market. If it is a host of individuals, rather than two countries, who are engaged in trade, it is reasonable to raise the following questions: What is the effect of trade on employment levels? What is the effect of trade on a country's distribution of income? Is the system subject to effective demand failures? These issues are not typically addressed by the theory of comparative advantage. Unfortunately, a failure to address questions does not assure us that such questions are ill-conceived.

Capital Flows, Productivity, and Income Distribution

When David Ricardo first articulated the theory of comparative advantage, capital flows did not constitute a significant issue. Ricardo could draw up his theory of comparative advantage in the absence of such concerns [Ricardo 1821, chap. 7].(1) Now, for better or for worse, we no longer live in the world as it was in the early nineteenth century. At this point in global history, international capital flows are enormous and as a result, Ricardo's theory of trade should be subject to revision or modification.

Not surprisingly, economists have argued that the bulk of capital flows are merely financial flows and that real capital movements are considerably slower. Neoclassical trade economists maintain that due to the nature of fixed assets, real capital may take much longer to shift locations. They argue that, at a minimum, one would have to wait for fixed assets to mature and depreciate before physical replacement elsewhere would take place.

There are two problems with this argument. First, the theory of comparative advantage does not incorporate time into its presentation. This is a fault to the extent that projections that estimate the gains to be obtained from liberalized trade are typically long term. Indeed, most estimates of the "gains from trade" are of a comparative static variety. This implies that such studies are concerned with the level and mix of output that will prevail after a nation's productive resources are redeployed to their most efficient uses. However, such an exercise can only make sense if the model under investigation is a "long-term" theory-one that allows for the mobility of physical capital. The point is that it is presumably just as time-consuming to switch a country's endowment of capital and technological skill into sectors where its comparative advantage is strongest as it is time-consuming for the same capital to actually move completely out of the country. This being the case, if it is legitimate for proponents of liberalized trade to discuss long-term gains from trade, it is equally legitimate for detractors to discuss the long-term impact of real capital leaving a given country. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Reassessing Comparative Advantage: The Impact of Capital Flows on the Argument for Laissez-Faire
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.