The Argument for Free Trade and its Underlying Assumptions

Adam Smith and David Ricardo both played important roles in the development of the theory of international trade. Both argued strongly for free trade on the basis that gains from trade were universally available. Both economists were concerned with reducing the degree of protection from very high levels, and both were writing in that period of surging dynamism, the industrial revolution. Smith was primarily concerned with the elimination of involvement on the part of government in economic matters: his doctrine of the efficiency of the invisible hand relied upon the existence of effective competition among firms. Smith’s advocacy of free trade relied on the existence of gains from trade and a more competitive economy. Ricardo was a major intellectual force behind the repeal of the Corn Laws in the UK in 1846. Neither argument was laid out with an explicit set of assumptions, but Smith (1976, Book IV, ch. 2) did countenance the need for some gradualism in the rate of reduction of protective measures. He found even this argument exaggerated on the grounds that workers ‘thrown out of one employment would easily find another’. The classical assumption of full employment and the spontaneity of its attainment was a basic component of the argument. Mill’s refutation of protection is standard. The argument is presented in a chapter entitled, ‘Of Interferences of Government Grounded on Erroneous Theories,’ and the text leads into the subject matter with, ‘Of these false theories, the most notable is the doctrine of Protection to Native Industry’ (Mill, 1909, p. 917).