200 Years of Ricardian Trade Theory: How Is This Still A Thing?

maxresdefault.jpegOn Saturday, April 19th 1817, David Ricardo published The Principles of Political Economy and Taxation, where he laid out the idea of comparative advantage, which since has become the foundation of neoclassical, ‘mainstream’ international trade theory. 200 years – and lots of theoretical and empirical criticism later – it’s appropriate to ask, how is this still a thing?[1]

This week we saw lots of praise of Ricardo, by the likes of The Economist, CNN, Forbes and Vox. Mainstream economists today tend to see the rejection of free trade implicit in Trump and Brexit as populist nonsense by people who don’t understand the complicated theory of comparative advantage (“Ricardo’s Difficult Idea”, as Paul Krugman once called it in his explanation of why non-economists seem to not understand comparative advantage). However, there are fundamental problems with the assumptions embedded in Ricardo’s theory and there’s little evidence, if any, to back up the Ricardian claim that free trade leads to balanced trade. On this bicentenary, I therefore think it’s timely to revisit some of the fundamental assumptions behind Ricardo’s theory of comparative advantage, that should have led us to consider alternative trade theories a long time ago. Read More »

The Case Against the Universal Liberalisation Model for Economic Growth

power-electricity-line-pylon-159218

For years, policy-makers have used the United Nations’ country classification, based on per capita gross national income, as the measurement of their country’s development. The aspiration to move up the scale assumes that: 1) economic growth is the international standard measurement of development; and 2) the more one produces, the better one’s quality of life will be. The history of political movements and economic policies has witnessed both successful and failed attempts to move up the scale. The countries that have accelerated their economic growth have been celebrated worldwide and the general perception is that the people in these countries now enjoy a more resourceful life. This attitude towards economic growth has created a presumption that pro-growth policies observed in more developed countries and actively promoted by international institutions could be applicable in other developing countries. Can this classification ever be misleading?Read More »