The Economics and Ideology of Free Trade: A Historical Review

Published by EH.NET (August 2003)

Leonard Gomes, The Economics and Ideology of Free Trade: A Historical Review. Cheltenham, UK: Edward Elgar, 2003. x + 350 pp. $120 (cloth), ISBN: 1-84376-131-9.

Reviewed for EH.NET by Lawrence Officer, Department of Economics, University of Illinois at Chicago.

Leonard Gomes, formerly Reader in International Economics at Middlesex University (U.K.) has written a book that exposits and evaluates a large body of economics literature — both contemporary and modern — on the “free trade versus protection” controversy from the mercantilist era to modern globalization. There are two parts to the volume. Part I (“Free Trade: The Economics”) provides a history of economic theory on free trade and tariffs. The author here can be interpreted as taking the viewpoint of a linear improvement in theorizing over time, although, in fairness, he never makes that perspective explicit. Part II (“Free Trade: Rhetoric, Events, Policies and Ideology”) is concerned largely with applications of theory in light of some great pertinent events in trade history, beginning with repeal of the Corn Laws.

The first chapter (“Regulated trade — our mercantilist heritage”) sets the stage with good references to the economic doctrinal literature, which continues throughout the book. An important characteristic of mercantilism — integration of economics and politics, is well-stated: “What we would now normally regard as purely economic processes and events (business activity, consumer choice, investment decisions, the commodity composition of trade, the use of resources, and so on) were always thought of in relation to politics and strategy. …. The theme of ‘power’ and ‘plenty’ being mutually reinforcing joint goals of national policy echoes like a refrain throughout the mercantilist literature” (pp. 7, 15). The famous Mun-Misselden controversy is discussed. Mun’s program for the growth of wealth, while oriented to generation of a trade surplus, requires “prudent government regulation” (p. 9) — a quotation applicable to later trade policy. Gomes notes that Mun lacked the concept of opportunity cost, which, of course, was to be an important element in classical trade theory. The views of Keynes and Heckscher on the employment-policy aspect of mercantilism are assessed.

Gomes observes that the mercantilists advocated export promotion (except for domestic raw materials, physical capital, and skilled workers) and import restriction (except for essential foodstuffs and raw materials not in domestic supply). Of interest to economic historians is discussion of the use of bilateral commercial treaties to obtain such advantage. For example, several seventeenth-century treaties made Portugal “a virtual commercial vassal of England” (p. 14) solidified by the Methuen Treaty of 1703. Commercial treaties were customarily imposed after wars. “The English found that war as an instrument of policy could be both effective and profitable” (p. 15).

This reviewer found the first chapter to be the most interesting of the book, largely because the author exposits excellently the practical-policy orientation of the mercantilists. As Gomes (p. 27) concludes:

The mercantilist trade propositions are embedded in a total paradigm which includes a concern with international inequalities, national ambitions, growth and development. The trade theory which became associated with the classical economists — rightly or wrongly — abstracted from these real-world concerns, and this default impoverished the utility and relevance of classical theory.

Chapter 2 presents classical (free-)trade theory by author, including diverse modern interpretations. Torrens, Ricardo, and James Mill are all considered as originators of the theory of comparative advantage, and Gomes (p. 42) concludes that this was a case of “multiple discovery.” Gomes cleverly observes that Ricardo portraying Portugal as technologically more advanced (greater labor productivity in both cloth and wine) than England “only served to highlight the economic logic of the argument.” As for Adam Smith, he is considered an eminently practical or pragmatic free-trader: tariffs should be removed, but gradually. Other contemporary authors also receive attention. The “national economists” are the subject of chapter 3. The author properly views the most important as Friedrich List, but predecessor American protectionists (Alexander Hamilton and others) are not neglected. An important footnote (page 90) discusses the extent of American protectionist influence on List. Interestingly, in reverse, List is seen as helpful in bringing about the U.S. “Tariff of Abominations” of 1828. List’s program of orienting tariff policy to a country’s stage of development is exposited well. In particular, as is not realized by many but noted by Gomes, in both the initial (predominantly agricultural) and final (fully industrial) stages free trade is the proper policy objective. In the intermediate stages, the dynamic (long-run) gains of protection exceed the static (short-run) losses. Gomes observes that both Alfred Marshall and Joseph Schumpeter praised List.

The “age of Marshall” is the subject of chapter 4 and “trade and general equilibrium” of chapter 5. These sections of the book complete, and bring up to the present, the doctrinal history that is the theme of Part I. Attention is devoted here to both European and British economists. The protectionist views of the great analytical economist Augustin Cournot might be surprising to some. Gomes (p. 153) makes an enchanting observation on the Stolper-Samuelson theorem:

At the time it was published, the Stolper-Samuelson result must have appeared pretty obvious to politicians and the public at large. Intuition suggests that protection of labour-intensive industries in a labour-scarce country such as the United States is very likely to tilt the distribution of income in favour of workers since it makes American labour compete [competitive?] with foreign labour that may be paid a fraction of the American wage. Economists at the time, however, would have been doubtful. Their reasoning would have been: yes, protection may in the short run benefit labour, but it is certain to lower overall income and, hence, will hurt workers too. What the Stolper-Samuelson result did was to show in an impeccably rigorous manner that the doubting economists’ reasoning was flatly wrong and that the obvious was really true after all.

Part II of the book might be of greater interest to most economic historians, as the author weaves the views of contemporary economists with events. Chapter 6 deals with the famous debate on the repeal of the Corn Laws, this repeal finally effected in 1846. The controversy is summarized well: “The great issue at stake then was: should the country try to maintain its agrarian economy [via continued protection] or turn itself into a giant manufactory [via free trade]?” Gomes assesses the debate among economists as distinct from popular pamphleteering. The famous economists of the day were fully involved in the debate. Gomes (p. 187) sees Ricardo “like Adam Smith … a pragmatic free-trader conscious of the power of vested interests.” Ricardo advocated a gradually reduction of tariffs, over a period of ten years, and combined with an export subsidy. Some economists, such as Torrens, gave free trade “a mercantilist twist” (p. 191), as British manufacturing would thereby gain an export monopoly.

In one of several (but perhaps, for historians, not enough) references to the historical literature, McCloskey’s counterfactual finding that British income might have been higher during 1841-1881 under protection is discussed. Gomes makes the interesting point that some (not all, of course) economists in the contemporary debate would not have been surprised by McCloskey’s findings. Another good observation of Gomes is that the debate on the removal of restrictions on the export of skilled artisans (done in 1824) and machinery (effected in 1843) found a later parallel in the controversy on export of technology in the United States in the l970s.

The British tariff-reform debate of 1903 is the subject of chapter 7. Here Gomes refers approvingly to the finding of Crafts and Thomas that Britain had a comparative disadvantage in human-capital-intensive commodities. The implication is that the decline of Britain’s industrial position relative to the United States and (later) Germany reflected a scarcity of human capital. Gomes exposits well the “fair-trade” agitation of the time, and discusses the free-trade manifesto of fourteen economists (including a reluctant Alfred Marshall), which manifesto “occasioned more ridicule than respect” (p. 230).

Chapter 8 deals with globalization then (late 1870s to World War I) and now (end of World War II to the present), with attention also to the interwar period. The topics here are perhaps discussed in greater depth in other works, but the author nevertheless keeps the reader’s interest with interesting tidbits. For example, President Herbert Hoover refused to exercise his veto over the Smoot-Hawley Tariff Act of 1930, in spite of a petition advocating this action signed by over a thousand economists! There appears to be an inconsistency (rare in the book) in Gomes’s view of the responsibility of protection for the Great Depression. At first (p. 270), he sees protection having an “immediate and devastating” effect on the world economy, ushering in the world depression. Later (p. 275), he assets that “protectionism was not one of the initial or initiating factors in the collapse of the economic system.”

In a chapter largely out of synch with the rest of the volume, Gomes concludes with reflections on globalization. His concern with increasing “global inequality” is manifested. The bind of labor-abundant poor countries is (1) the mass migration of the nineteenth century is not permitted, and (2) the flow of capital from rich to poor countries is falling. Refreshingly, Gomes correctly observes that “developing countries, for their part, need to look at the anti-trade effects of their own trade barriers against one another” (p. 324).

All in all, Gomes deserves praise for an excellent presentation and assessment of a large body of economic literature, and for incisive observations regarding history of thought and events.

Lawrence H. Officer is Professor of Economics at University of Illinois at Chicago. As Editor, Special Projects, EH.Net, he has recently completed “What Was the UK GDP Then?” which is available on the EH.Net website.