The theory of free trade

The theory of comparative advantage, as it evolved from Adam Smith’s critique of Mercantilism and David Ricardo’s subsequent critique of Absolute Advantage, is presented highlighting the fact that in Ricardo’s version of comparative advantage labour productivity is employed as a proxy for economic efficiency, which in turn emphasises differences in technology between nations. Hence for Ricardo, free trade results in mutually beneficial outcomes as these nations would concentrate their scarce resources in the most efficient sectors of their economies. David Ricardo’s motivation here was his opposition to the continued imposition of the Corn Laws and he was at pains to point out that impediments to free trade would only impart damaging effect on all trading nations. We then present the arguments of the neo-classical approach to comparative advantage, illustrating how differences in technology in the Ricardian construct is replaced by differences in factor endowment in the Heckscher-Ohlin (and others) version. This results in specialisation in either, labour-intensive or capital-intensive production, which the proponents argue, results in mutually beneficial outcomes for free trading partners.