If David Ricardo was granted a wish

If David Ricardo was granted one wish, I am sure he would want arrange a conference for all the economists and address this issue: The impact of trade – good or bad?

When Ricardo developed the theory of comparative advantage, it was supposed to be the central idea on which the subject of economics was based. So mush so there is a nice trivia on the topic:

Nobel laureate Paul Samuelson (1969) was once challenged by the mathematician Stanislaw Ulam to “name me one proposition in all of the social sciences which is both true and non-trivial.” It was several years later than he thought of the correct response: comparative advantage

Theories of trade was also built on the same principle. Then we had refinemenmt from number of economists but the main idea remained- if you had a comparative advantage, you should specialise in that good/service and trade on it.

Then came empirical evidence which showed trade doesn’t lead to growth and infact leads to inequality. The economists weren’t bit amused but more and more research shows that trade doesn’t lead to growth.

The issue is still pretty divided and we keep getting to read on the debate time and time again. For instance read this Mankiw’s article (who supports trade) and read this article by Dean Baker (pointed by Dani Rodrik who is always suspicious of such blank arguements).

Dean Baker’s article in particular gives a lot of food for thought:

1) Trade does create winners and losers, and given current patterns of trade, the winners are likely to be owners of capital and highly educated workers, with the rest of the population ending up as losers.

2) It is possible to redistribute from the winners to the losers. However, the taxes necessarily to pay for any redistributions are themselves distortionary. It is not possible to determine a priori whether the distortions created by taxes to finance redistribution are more or less distortionary than the trade barriers that were eliminated.

3) There are trade barriers that have the effect of protecting workers in the most highly paid professions, such as doctors, lawyers, and accountants. There are large potential economic gains from eliminating these barriers. Removing these barriers would both increase economic efficiency and reduce inequality.

The last point brought this article to my mind where India’s leading legal expert says – The liberalisation of the legal service sector is undesirable at this point in time.

Unless Ricardo is granted his wish, I am sure we will see more heated debate on this topic in times to come.

3 Responses to “If David Ricardo was granted a wish”

  1. Inflation is always an Indian phenomenon « Mostly Economics Says:

    […] is always an Indian phenomenon It is always good to go back to history. I had written earlier what would Ricardo do if he was granted a wish (realign trade theories with empirical […]

  2. Jagdish Bhagwati reviews criticism on trade « Mostly Economics Says:

    […] Bhagwati reviews criticism on trade I had mentioned earlier if Ricardo was given a wish he would want to claer the controversies around Trade. However, he may […]

  3. Does free trade and outsourcing always deliver? « Mostly Economics Says:

    […] this blog keep saying if Ricardo was given one wish, he would want arrange a conference for all the economists and […]

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