The Intrinsic Flaws of Free Trade
An AI critique of David Ricardo's Theory of Comparative Advantage
I asked Deepseek to share what it thought of what has, for more than two centuries, served as the conceptual foundation of the free trade policy that has served as a quasi-religion for the Western elite of the post-WWII era. And while I knew it was a fundamentally flawed theory, so much so that economist Joseph Schumpeter once described its question-begging formulation as “the Ricardian vice”, I was still a little surprised to see how completely it was demolished by the pattern recognition of the Chinese AI system.
David Ricardo's Theory of Comparative Advantage is a cornerstone of international trade theory, but it has several limitations and critiques when applied to real-world scenarios. Here's a structured analysis of its key flaws:
1. Simplistic Assumptions
Two Countries, Two Goods: The model reduces global trade to two nations and two products, ignoring the complexity of multilateral trade and thousands of goods/services in modern economies.
Labor as the Only Factor: Excludes capital, technology, natural resources, and other inputs critical to production, leading to an incomplete analysis of comparative advantage.
2. Static Nature
Constant Costs: Assumes no economies or diseconomies of scale, neglecting how production costs might change with output levels.
No Technological Change: Fails to account for innovation or shifts in competitive advantages over time (e.g., a country losing its edge due to foreign technological advancements).
3. Unrealistic Mobility and Employment
Perfect Labor Mobility: Assumes workers can seamlessly transition between industries, ignoring skill mismatches, geographic barriers, and unemployment during transitions.
Full Employment: Presumes all resources (labor) are fully utilized, which rarely holds true in practice.
4. Neglect of Real-World Costs and Barriers
Transportation Costs: Ignores the expense of moving goods, which can negate comparative advantages.
Trade Barriers: Overlooks tariffs, quotas, and non-tariff barriers that distort trade flows.
5. Distributional and Social Impacts
Income Inequality: While trade may benefit a nation overall, it can harm specific industries or workers, exacerbating inequality.
Dependency Theory: Specialization in low-value goods (e.g., raw materials) may trap developing nations in exploitative trade relationships.
6. Environmental and Externalities
Environmental Costs: Fails to address ecological degradation from overproduction or resource extraction driven by trade.
7. Modern Economic Dynamics
Services and Digital Trade: Focuses on goods, not services, which dominate modern economies. Factors like intellectual property and digital infrastructure are ignored.
Terms of Trade: Benefits depend on export/import price ratios, which can deteriorate and erase gains from specialization.
8. Political and Social Factors
Power Dynamics: Ignores geopolitical influence, lobbying, and social norms that shape trade policies beyond pure efficiency.
Summary of Flaws (13 Key Points)
Oversimplification (two countries, two goods).
Labor-centric production (ignores capital/technology).
Constant costs (no economies/diseconomies of scale).
Unrealistic labor mobility.
No transportation costs.
Ignores trade barriers.
Static model (no technological/dynamic changes).
Income inequality and social disruption.
Environmental externalities.
Full employment assumption.
Dependency/terms of trade risks.
Neglect of service sector/modern economies.
Political/social influences on trade.
Even the leading critic of free trade, Ian Fletcher, only managed to come up with seven fundamental flaws; I added one more with my Labor Mobility and National Erosion argument. So it should come as no surprise that conducting industrial and trade policy on the basis of such a deeply flawed and fundamentally incorrect theory should have turned out so poorly for the economies that adopted it.
The Labor Mobility aspect of the Free Trade issue is actually much, much more significant than even I'd imagined. I'll provide a follow-up to this on Tuesday that will be informative in this regard.
Happy to see Vox taking on the ‘Free trade’ question. I mentioned in my On Tariffs post that Ricardo was worshipped in the Berkeley Economics department. It took me a long time to peel back the onion but now I consider him one of the primary traitors to economic theory… I will return to this topic and talk about who I consider the other traitors in good time!