Against the Tide

An Intellectual History of Free Trade

Douglas A. Irwin

• Publisher: Princeton University Press
• Year: 2020
• Print ISBN: 9780691058962, 9780691011387
• eBook ISBN: 9780691213019
• Topic: Économie
• Subtopic: Histoire économique

About two hundred years ago, largely as a result of Adam Smith's Wealth of Nations, free trade achieved an intellectual status unrivaled by any other doctrine in the field of economics. What accounts for the success of free trade against then prevailing mercantilist doctrines? And how well has free trade withstood various theoretical attacks that have challenged it since Adam Smith's time? In this readable intellectual history, Douglas Irwin explains how the idea of free trade has endured against the tide of the abundant criticisms that have been leveled against it from the ancient world and Adam Smith's day to the present. An accessible, nontechnical look at one of the most important concepts in the field of economics, Against the Tide will allow the reader to put the ever new guises of protectionist thinking into the context of the past and discover why the idea of free trade has so successfully prevailed over time.


Irwin traces the origins of the free trade doctrine from premercantilist times up to Adam Smith and the classical economists. In lucid and careful terms he shows how Smith's compelling arguments in favor of free trade overthrew mercantilist views that domestic industries should be protected from import competition. Once a presumption about the economic benefits of free trade was established, various objections to free trade arose in the form of major arguments for protectionism, such as those relating to the terms of trade, infant industries, increasing returns, wage distortions, income distribution, unemployment, and strategic trade policy. Discussing the contentious historical controversies surrounding each of these arguments, Irwin reveals the serious analytical and practical weaknesses of each, and in the process shows why free trade remains among the most durable and robust propositions that economics has to offer for the conduct of economic policy.

PART ONE

Origins of the Free Trade Doctrine

Chapter One

EARLY FOREIGN TRADE DOCTRINES

ON WHAT GROUNDS was the case for free international trade rejected among intellectuals prior to the appearance of Adam Smith’s Wealth of Nations in 1776? On what conceptual basis did the case for free trade finally emerge and come to be accepted by economic thinkers? Attention to these two questions will be the focus of the first half of this book. Economic thought in support of free trade arose and coalesced in reaction to the seventeenth-and eighteenth-century mercantilist literature, which frequently proposed government regulation of foreign trade (through tariffs and other trade interventions) to achieve various objectives. Before discussing this literature in chapter 2, early attitudes toward trade and descriptions of trade policy, especially those prevailing in the Graeco-Roman and Judeo-Christian traditions, will be briefly considered. The ideas generated over the course of these early centuries, despite the absence of any significant economic analysis, strongly influenced the intellectual basis of later considerations of commercial policy.

ANCIENT ATTITUDES TOWARD FOREIGN TRADE

Because land transportation was costly in antiquity and the sea provided easy access to the various regions in the eastern Mediterranean and beyond, ancient attitudes toward the sea lend insight into some of the earliest recorded thoughts about the nature and desirability of foreign commerce. Greek and Roman writers were ambivalent about whether location near the sea was a blessing or a curse. Some believed that God created the sea to promote interaction and to facilitate commerce between the various peoples of the earth. Around A.D. 100, for example, Plutarch (1927, 299) wrote of the sea’s beneficence: “This element, therefore, when our life was savage and unsociable, linked it together and made it complete, redressing defects by mutual assistance and exchange and so bringing about cooperation and friendship . . . the sea brought the Greeks the vine from India, from Greece transmitted the use of grain across the sea, from Phoenicia imported letters as a memorial against forgetfulness, thus preventing the greater part of mankind from being wineless, grainless, and unlettered.” Without the exchanges made possible by the sea, Plutarch maintained, man would be “savage and destitute.”

Others writers and poets were more suspicious of the sea. Instead of charitable in its effect, the sea brought contact with strangers who could disrupt domestic life by exposing citizens to the bad manners and corrupt morals of barbarians. With this lament, Horace (1960, 27) saw the sea as being deliberately divisive: “In vain has God in his wisdom planned to divide the land by the sea’s separations, if, for all that, ungodly ships are crossing the waters that he placed out of bounds.” These contrasting views of the sea led naturally to dual views of trade, either that it presented an opportunity to enhance national prosperity or that it threatened the security of the nation and its economy. This dichotomy has continued throughout history to the present day, and popular preferences about free trade may hinge in part on which preconception about international commerce (as a threat or an opportunity) one adheres to.

Ancient attitudes toward those engaged in commercial activity also lend insight into early conceptions of trade. In the fourth and fifth centuries (B.C.), philosophers in ancient Greece looked down on traders and merchants, especially in retail trade, as occupations beneath the dignity of citizens. Plato, for example, suggested in the Republic that well-governed cities ensure that shopkeepers and laborers were chores reserved for inferior persons who were useless in other tasks. In Politics, Aristotle (1932, 51) maintained that the use of money in exchange arose from exporting and importing and condemned such nonbarter trade as “justly discredited (for it is not in accordance with nature, but involves men’s taking things from one another).” Indeed, it was widely believed that citizens should not participate in commerce, but that it should be left entirely to resident aliens who were deprived of political rights and kept separate from the civic life of the Greek city-state. According to Johannes Hasebroek (1933, 39), this separation of commerce and citizens meant “not only was [Greek foreign commerce] not based upon national labour, but it was divorced from national life.” Consequently, there was no real economic issue of imports displacing domestic production by citizens; indeed “the very notion of a protective tariff . . . was utterly unknown to the classical Greek world.”

Philosophers and statesmen in ancient Rome generally shared this contempt and low regard for merchants and trade, as John D’Arms (1981) has described. To them, a trader or middleman, who bought goods at one price and retailed them at a higher one without changing the nature of the product, was engaged in a vulgar occupation. Such activity was beneath the dignity of elite citizens, and laws even prohibited senators from participating in commerce.

In De Officiis, Cicero concurred with this perspective in the context of international trade, but made an exception for commerce that either entailed great benefits or that improved the intelligence of the people. Despite acknowledging the great advantages arising from trade, Cicero (1913, 155) could not bring himself to endorse such commerce positively, but only to view it less negatively: “Trade, if it is on a small scale, is to be considered vulgar; but if wholesale and on a large scale, importing large quantities from all parts of the world and distributing to many without misrepresentation, it is not to be greatly disparaged.” Pliny (1969, 2: 385–86) was more positive in his attitude toward overseas trade, praising the construction of public works, such as roads and especially harbors, which “linked far distant peoples by trade so that natural products in any place now seem to belong to all . . . and without harm to anyone.”

The Greeks recognized that those party to a voluntary exchange of goods reaped a benefit from such transactions and appeared to acknowledge that this also applied to overseas trade. Certain writers also appreciated the public benefits that resulted from the arbitrage of goods prices undertaken by profit-seeking merchants. Xenephon (1918, 519–21) mocked the notion that merchants performed their jobs out of inherent love for the occupation:

So deep is [the merchant’s] love of corn that on receiving reports that it is abundant anywhere, merchants will voyage in quest of it: they will cross the Aegean, the Euxine, the Sicilian sea; and when they have got as much as possible, they carry it over the sea, and they actually stow it in the very ship in which they sail themselves. And when they want money, they don’t throw the corn away anywhere at haphazard, but they carry it to the place where they hear that corn is most valued and the people prize it most highly, and deliver it to them there . . . all men naturally love whatever they think will bring them profit.

As it was to develop centuries later, the case for free trade was based in large part on the gains arising from the division of labor. If individuals or regions or countries specialized in the production of goods for which they are most suited and then exchanged those goods amongst each other, total output and consumption can be larger than in the absence of such specialization. Perhaps Plato’s (1930, 153) greatest contribution to economics was his early discussion (dating from about 380 B.C.) of the advantages of the division of labor in the Republic: “The result [of such a division], then, is that more things are produced, and better and more easily when one man performs one task according to his nature, at the right moment, and at leisure from other occupations.” In this discussion Plato also observes that “it is practically impossible to establish the city in a region where it will not need imports.” To carry on trade, Plato realized that the state will need merchants and that domestic production of certain goods will exceed domestic requirements so the excess can be exchanged for imports.

Perhaps this constitutes an implicit extension of the benefits of the division of labor and specialization to trade between regions or countries, but Plato was far from explicit in making the connection. About twenty years after Plato, Xenephon linked the extent of the division of labor to the size of the market. Xenephon (1914, 2: 333) noted that in small towns each individual was employed in multiple tasks, whereas in large cities each individual concentrated on a single task: “It follows, therefore, as a matter of course, that he who devotes himself to a very highly specialized line of work is bound to do it in the best possible manner.” Close though he came, he never quite spelled out the notion that interregional trade effectively expands the size of the market, permits a more refined division of labor, and yields material economic benefits. Both Plato and Xenephon described the division of labor with reference to the individual but did not apply the notion to the different trading regions of the world.

The development of these concepts also did not translate into a favorable view of foreign commerce. Indeed, Greek philosophers advocated restrictions on trade because of the moral and civic danger associated with it. They believed that contact with foreign strangers would be detrimental to law and order and could undermine the moral fabric of society. Aristotle argued in Politics, for instance, that in choosing the ideal location for a city, preference should be given to territories that ensured maximum self-sufficiency because this would limit trade to “natural” domestic barter, promote national defense, and preserve domestic morals—all by reducing contact with foreigners. Self-sufficiency was deemed far better than dependence on overseas trade, although self-sufficiency did not imply complete autarky because Greek philosophers reluctantly conceded that at least some foreign trade was imperative.¹ If the exposure to undesirable foreigners could be avoided, then Aristotle (1932, 561–63) agreed that trade “is advantageous in respect of both security and the supply of necessary commodities . . . importation of commodities that they do not happen to have in their own country and the export of their surplus products are things indispensable.” For example, a seaport active with trade could be adjacent to the city, but separated (perhaps by a wall) so that it could be closely monitored by the authorities. Aristotle stressed, however, that even under these conditions the import trade should stop at the provision of certain essential items, such as food for consumption and timber for shipbuilding, and not be carried beyond this point for the sake of profit. Thus, Aristotle (1926, 45) advised statesmen to know which exports and imports were “necessary” in order to obtain commercial agreements with other countries to furnish them with what they required and to ensure just conduct in trade. Plato (1914, 2: 185) was more explicit than Aristotle in stating the means for attaining self-sufficiency: no duties should be placed on exports and imports, but the government shall ban imports of “foreign imported materials for a use that is not necessary” and should forbid exports of “any of the stuff which should of necessity remain in the country.”

What accounts for this, at best, tepid approval of trade in ancient times? The economic gains from trade were clearly recognized by Greeks and Romans, but they were wary of trade for a number of noneconomic reasons. Each group thought itself superior to foreigners and had no desire to promote extensive contact with others. Early writers were suspicious of merchants and traders and raised questions about their activities and their loyalty as citizens. “It has been argued that the contempt of the Greeks for industry [and trade], as it is displayed in so much of their literature, is really an aristocratic prejudice,” Hasebroek (1933, 39) suggests, “but it was really far more profound and widespread than that.” Yet trade was far from unreservedly condemned and the goal of self-sufficiency was never thought to imply complete autarky. Early thinkers reluctantly admitted that some amount of trade was indispensable and, consequently, merchants and tradesmen had to be tolerated but not encouraged.

THE DOCTRINE OF UNIVERSAL ECONOMY

The doctrine of universal economy evolved from early favorable accounts of the sea to become the leading theory as to why trade between regions should be accepted as beneficial and even be permitted to run its course free from interference. The doctrine held that Providence deliberately scattered resources and goods around the world unequally to promote commerce between different regions.² According to Jacob Viner (1976, 27–54), in its best expressions the doctrine uniquely combines four distinct elements of thought. First, it embraces the stoic-cosmopolitan belief in the universal brotherhood of man. Second, it describes the benefits to mankind arising from the trade and exchange of goods. Third, it embodies the notion that economic resources are distributed unequally around the world. Finally, it attributes this entire arrangement to the divine intervention of a God who acted with the deliberate intention of promoting commerce and peaceful cooperation among men.

The doctrine was developed by philosophers and theologians in the first several centuries (A.D.). Seneca, the stoic philosopher writing sometime just before the year 65, came close to expounding the doctrine fully. Seneca (1972, 115) noted that Providence arranged the natural elements such that “the wind has made communication possible between all peoples and has joined nations which are separated geographically.” However, his statement is not far in advance of Plutarch’s quoted earlier. Philo (1929, 2: 73–74) of Alexandria presented the doctrine at greater length:

He has made none of these particular things complete in itself, so that it should have no need at all of other things. Thus through the desire to obtain what it needs, it must perforce approach that which can supply its needs, and this approach must be mutual and reciprocal. Thus through reciprocity and combination. . . . God meant that they should come to fellowship and concord and form a single harmony, and that a universal give and take should govern them, and lead up to the consummation of the whole world.

Origen (1953, 245), an early Christian writer, wrote around the year 245: “Lack of the necessities of life has also made things, which originate in other places, to be transported to those men who do not possess by them the arts of sailing and navigation; so that for these reasons one might admire the providence.”

Perhaps the finest early statement of the doctrine came from the fourth-century pagan Libanius, who declares in his Orations (III):

God did not bestow all products upon all parts of the earth, but distributed His gifts over different regions, to the end that men might cultivate a social relationship because one would have need of the help of another. And so He called commerce into being, that all men might be able to have common enjoyment of the fruits of earth, no matter where produced.³

This succinct statement has all the four elements that Viner pointed to and was often cited centuries later as the epitome of the universal economy doctrine. Libanius taught several students at Antioch who helped propagate it further. St. Basil (1963, 65) wrote that the sea “becomes a patron of wealth to merchants, and it easily supplies the needs of life, providing for the exportation of superfluous articles by the prosperous and granting to the needy the remedy for their wants.”⁴ Another student of Libanius, the theologian St. John Chrysostom (1874, 124–25), echoed his teacher’s words in writing that the sea connects various lands to prevent distance from discouraging friends...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• List of Illustrations
• Acknowledgments
• Introduction
• Part One: Origins of the Free Trade Doctrine
• Part Two: Controversies about the Free Trade Doctrine
• Conclusion: The Past and Future of Free Trade
• References
• Index