Regarding Paul Craig Roberts on Ricardian association and free trade: While I would not phrase the problem in quite the same way, Mr. Roberts has identified a legitimate issue that Misesians should take seriously and not dismiss as mere Buchananism. In fact, he is considering a specific instance of a more general problem: to what extent do the arguments for various economic policies, which are based on economic laws that generally presuppose the operation of some regime of private property rights, remain valid when those rights are systematically violated? This is a topic of some interest to Misesians, as it essentially is at the heart of their critiques of socialism, interventionism, and the business cycle. For example, as Misesians must constantly remind critics of their business cycle theory, the issue concerns malinvestments, not over-investments. The theory does not deal with too much of an otherwise good thing, but something quite different in nature. Free trade of course can simply be considered as an extension of the division of labor to the international arena, but inasmuch as the division of labor presupposes some system of property rights, we should ask what, precisely, happens when that underlying system is corrupted, as by governments.
Mr. Roberts is of course right that Ricardo’s argument, as it is typically presented, depends crucially on certain assumptions. In Human Action (1998, p. 161-2) Mises explains what these assumptions are: ”that only two products are to be produced; that these products are freely movable; that for the production of each of them two factors are required; that one of these factors (it may be either labor or capital goods) is identical in the production of both, while the other factor (a specific property of the soil) is different for each of the two processes; that the greater scarcity of the factor common to both processes determines the extent of the exploitation of the different factor.”
Thus, it is “possible to establish substitution ratios between the expenditure of the common factor and the output,” and so “we can content ourselves with comparing only physical input and physical output. [...] With the law of comparative costs we compare the output of two different products. Such a comparison is feasible because we assume that for the production of both of them, apart from one specific factor, only nonspecific factors of the same kind are required.”
Furthermore, Mises notes that: “If we do not want to deal with the law of comparative cost under the simplified assumptions applied by Ricardo, we must openly employ money calculation. We must not fall prey to the illusion that a comparison between the expenditure of factors of production of various kinds and of the output of products of various kinds can be achieved without the aid of money calculation.”
So the main purpose of these assumptions (which Mr. Roberts identifies somewhat narrowly as the immobility of capital), is essentially to be able to carry out computations in kind, that is, in terms of goods such that the output of production can be directly appraised without reference to the valuation of the means used in that production. That is why, in the text-book discussions of comparative advantage, one is able to speak of domestic opportunity costs between the two goods in comparison with an international exchange rate between the two goods and thus demonstrate the possibility of mutually beneficial trade.
However, as Mises pointed out in his discussion of Ricardo quoted above (and of course in much greater depth in his discussion of the socialist calculation argument), such computation in kind is impossible with regards to producer goods, and such goods can only be appraised via monetary calculation, which of course requires prices for those goods, which of course requires that those goods be privately owned. If we relax Ricardo’s assumptions and allow for the free flow of capital goods, then his law of association (as Mises called it) is still valid, only now we must reckon in terms of money prices. For example, if in one hour (say) A can produce $3 of good x and $4 of good y, while B can produce $2 of good x and $1 of good y, then it remains the case that B should still specialize in the production of good x, where he enjoys a comparative advantage. It is possible to find an exchange rate between x and y (or more accurately, a relative price) where B can so specialize and engage in mutually beneficial trade with A (who may not be able to completely specialize in y but might also need to produce at least a little of x to meet all of his needs; the point is he can still do better via trade than production in isolation of B).
Now, the point is, for these results to be valid, there must, as I said, be two things: (1) free markets in producer goods (capital), and (2) sound money. Here, I think, is the problem with the current world trade order: neither of these two conditions is even remotely satisfied. It is not so much that capital is mobile, but rather that we live under a system where producer goods are still highly state-controlled (the fact that there is international mobility masks heavy domestic control [short of public ownership], including regulation, subsidization, grants of monopoly, etc.) and the monetary system is a fiat, inflationary regime. Thus the monetary calculations underlying the justification or rationale of comparative advantage are essentially meaningless (or at least, in comparison with the calculations and resulting allocations that would arise under a true private property order; this point was raised in my two most recent working papers on mises.org). It is for these reasons, I think, that Ricardo’s argument does not hold today, and the current regime of international trade is worrisome. It does not follow that trade in the absence of tariffs and other explicit regulations is always beneficial, because the apparent benefits based on current profit-and-loss calculations may be completely illusory. The point is, what appears to be a comparative advantage may in actuality not be, and we should not advocate trade policies based on conditions that may not hold.
A few more points: One often hears an argument in favor of free trade along the following lines. If goods (including capital) cannot cross borders freely, then people (workers) will. It is interesting to note that, while the massive export of capital Mr. Roberts describes is going on, the Western ruling elites continue to encourage high levels of immigration. Also, while one would expect that rates of return between foreign vs. domestic investment would eventually even out as foreign wages are bid up, it seems like Western businesses (who are, largely, part of the ruling class) are moving operations to countries where (1) labor is cheap but hardly free, and in fact is often more slave-like and kept in check by oppressive local governments acting as accomplices with Big Business, and (2) political instability, if not outright warfare, is rampant and hence the need for these businesses to appeal to the U.S. military for periodic assistance and thus socialize their security costs. Thus the process can be continued indefinitely beyond the point where market forces would ordinarily bring a stop to it. It almost seems as if there is some sort of “master plan” to bring the entire world, both West and non-West, into some global system of feudalism, with perhaps a pool of subliterate but technically skilled analysts (a phenomenon known to anyone who has attempted to read a software manual) for the design and maintenance of weaponry. Plainly there is more going on with Western trade policies than meets the eye.
This scenario is very disconcerting, and it is good that attention is being given to these issues by Mr. Roberts. To point these things out is not to advocate protectionism, and it would be unfortunate if Misesians missed the point and instead focused on the red herring of free trade vs. protectionism. The notion that the free movement of goods might not be an unmitigated blessing in the presence of destructive State policies seems no more controversial than to say that the free movement of peoples (i.e., immigration) might not be desirable in the presence of a massive welfare state. To say, e.g., that those are arguments against State interventions and not free trade as such is correct but largely irrelevant. The current system is a reality, and one that we must deal with. Defenses of free trade that do not critically consider whether their underlying assumptions are applicable are not the ideal way to do so.
