Reassessing Comparative Advantage: The Impact of Capital Flows on the Argument for Laissez-Faire

Abstract

The theory of comparative advantage is one of the oldest, and judged by its widespread acceptance, one of the most successful theories in the history of economic doctrines. The essential attributes of the theory of comparative advantage are disarmingly simple, and the implications that can be drawn from the model appear to be widely applicable. Specifically, comparative advantage draws upon the idea that specialization is efficient in order to forcefully establish the broader generalization that free trade must be in the best interest of all trading countries. In the words of one prominent neoclassical economist, There is a that free and voluntary exchanges increase welfare, both within national and across national borders [Aliber 1994]. Unfortunately, Professor Aliber's basic presumption is intellectually suspect. It may seem obvious, but it is nevertheless important to recall that under a free trade regime a country does not typically engage in the exchange of goods. Individuals and firms within a country participate in exchange relations with individuals and firms in other countries [Culbertson 1985, 8-9]. This simple fact directly raises the possibility of a coordination failure within the larger, international market. If it is a host of individuals, rather than two countries, who are engaged in trade, it is reasonable to raise the following questions: What is the effect of trade on employment levels? What is the effect of trade on a country's distribu-