The Development of International Trade Theory

Abstract

Trade theory is the oldest branch of economics. The reason may well be that the central economic fallacy prior to Adam Smith had to do with international exchanges: the mercantilist doctrine that the only way for a country to prosper was to run an export surplus. When Adam Smith and David Hume exploded this fallacy, the way was set for a paradigm shift. Thus, the revolution in trade theory occurred very early when David Ricardo stumbled onto the law of comparative advantage. As fate would have it, the paradigm shift was sort of a family affair. James Mill, the father of John Stuart Mill, had convinced Ricardo to write a book explaining economics. It was during the writing of that book the essential revolution occurred; and John Stuart, who of course knew Ricardo as a child, completed the paradigm shift when he presented the Ricardian model as we know it today — a model which still flourishes in the modern literature as a vehicle for exploring difficult issues.