In fact, the critical assumptions on which the economic case for free trade rests are highly descriptive of reality: (1) the ultimate justification for economic activity is to improve living standards for consumers; (2) producers facing competition serve consumers better than do monopolists; (3) each party to a voluntary trade is generally made better off by such trades; and – most importantly – (4) the first three assumptions aren’t nullified merely by putting a national political border between consumers and producers.So if people in the South Island are made better off by trading with people in the North Island (and vice versa) then people in the South Island are made just as well off trading with people in Iceland (and vice versa).
Other subsidiary assumptions, when they hold, explain particular trade patterns and the size of trade’s benefits. But the proposition that trade between America and, say, India is beneficial for the people of both countries rests on assumptions no more unrealistic, tentative, or fragile than does the proposition that trade between Arizona and Indiana is beneficial for the people of both states.
Tuesday, 3 July 2012
Assumptions underlying the case for free trade
Don Boudreaux has been writing to the Washington Post about the assumptions underlying the economic case in support of free trade.