Adam Smith's Theory of International Trade in the Perspective of Economic Development

Abstract

summary of these criticisms by a distinguished line of economists including Bastable, Robbins and Viner, see Bloomfield (1975). He recognizes the importance of Smith's analysis of the growth-stimulating effect of foreign trade, but substantially endorses the traditional view when he says: Admittedly, Smith was not a great theorist .... He did not come up with the comparative costs, reciprocal demand or others of the concepts and tools that were to be developed by the later, classical writers on international trade (pp. 456 and 480-481). There are also criticisms against the aspects of Smith's theory arising from his failure to give an explicit formulation of Hume's specie flow mechanism in the Wealth of Nations. The aspects of Smith's foreign theory will, however, be omitted from this paper. The aim of this paper is to re-appraise the significance of the real as distinct from the monetary aspect of Smith's international theory. It will be argued that Smith's theory of foreign is so closely interwoven with his theory of domestic economic development that the two have to be considered together. This means that Smith's theory should not be treated simply as a static cross-section analysis of the existing pattern of based on the allocation of the given resources with the given productivity; rather it should be considered as an attempt to study the longer-run mutual interaction between foreign and domestic economic development, essentially involving an increase in the total volume of the resources and a rise in their productivity. The plan of this paper is as follows. In Section I we shall give a general outline of Smith's trade-cum-development approach. It will be argued that, while Smith's failure to discover comparative costs may have deprived his static cross-section analysis of of its cutting edge, it has also brought considerable advantages for his longer-run trade-cum-development approach. He was left free to incorporate into his analysis a richer and more realistic model of the domestic economy than would have been possible within the restrictive framework of the comparative cost theory.