Economic Theory

How free trade made Europe great (Part 1)

We are in the midst of the centenary of the First World War, which was fought from 1914 to 1918. But, in fact, the true first modern world war enveloped Europe and other parts of the globe more than a century earlier from 1791 to 1815, during which first Revolutionary and then Napoleonic France was at war with virtually all the nations of Europe.

Death and destruction followed everywhere as the French armies invaded and occupied countries and then were resisted and driven out. Historian Robert Mackenzie explained the conflict in his 1882 history of the nineteenth century:

“At the opening of the Nineteenth Century all Europe was occupied with war. The European people then numbered one hundred and seventy million, and of these four million were set apart, by their own choice or the decree of their governments, to the business of fighting. They were withdrawn from the occupations of peace, and maintained at enormous cost, expressly to harm their fellowmen. The interests of peace withered in the storm; the energies of all nations, the fruits of all industries were poured forth in the effort to destroy.

From the utmost North to the shores of the Mediterranean, from the confines of Asia to the Atlantic, men toiled to burn each other’s cities, to waste each other’s fields, to destroy each other’s lives. In some lands there was heard the shout of victory, in some the wail of defeat. In all the ruinous waste of war produced bitter poverty; grief and fear were in every home … Peace, it has been said, is the dream of the wise, but war is the history of man.”

Economic Warfare to Beggar-Thy-Neighbour

Matching the physical warfare of armies clashing and conquering peoples and places, the combatants introduced methods of economic warfare as well. In 1806 and 1807, Napoleon imposed what has become known as the Continental System, under which the French government attempted to restrict the importation of any goods arriving from Great Britain into countries occupied by or allied with France. In addition, the French navy imposed a blockade around the British Isles in an attempt to prevent war-supporting materials from landing in any British port.

The British imposed their own counter-blockade in the Atlantic and along the European coast against neutral ships trading with France or its allies. Soon there emerged a debate within British political and commercial circles as to whether or not it did any really serious harm to Britain’s material well-being if it was not able to trade with many of the countries on the European continent, including France.

After all, it was argued that Great Britain was a productive and efficient nation filled with industrious people in agriculture and manufacturing. What essential material loss was suffered from this lack of trade? It was true that there might be some goods and materials that could not be produced or found within the British Isles. And there might be some goods that, indeed, could be purchased for less from some nations at a lower cost.

But the fact was that Great Britain had an absolute advantage in the production of many of those goods previously imported. That is, the British producer could make any one of those products at a lower or equal “cost” in terms of time, labour and resources, than any of the foreign countries from which those goods were obtained in the past. Thus, British producers could supply them just as well, and less expensively, so that there was no great loss from the inability to trade with other nations. Indeed, Britain might even be better off.

The “Wonderful Opulence” from Freedom of Trade

This was challenged by a number of political economists, of whom the most important were Robert Torrens, James Mill, and David Ricardo. James Mill (1773-1836), in his Commerce Defended (1808) reminded his readers that individuals and nations only trade with each other when the costs of making something at home is greater than purchasing it from another in a different location or foreign land. Mill explained:

“The commerce of one country with another is in fact merely an extension of that division of labour by which so many benefits are conferred upon the human race. As the same country is rendered the richer by the trade of one province with another; as its labour becomes thus infinitely more divided, and more productive than it could otherwise have been, and as the mutual supply to each other of all the accommodations which one province has and another wants, multiplies the accommodations of the whole, and the country becomes thus in a wonderful degree more opulent and happy; the same beautiful train of consequences is observable in the world at large, that great empire, of which the different kingdoms and tribes of men may be regarded as the provinces.

In this magnificent empire too one province is favourable to the production of one species of accommodation and another province to another. By their mutual intercourse they are enabled to sort and distribute their labour as most peculiarly suits the genius of each particular spot. The labour of the human race thus becomes much more productive, and every specie of accommodation is afforded in much greater abundance.”

By this means, a country such as Great Britain, James Mill continued, may far better fulfil not only a provision of its essentials and necessities, but conveniences and luxuries that would raise the standard of living of all, including that of the common members of the society far below those of wealth and aristocratic landed possession. It actually served as an effective means to reduce the economic inequalities present in society by making more and less expensive goods available to the “working class.”

Comparative Advantage and the Benefits for All from Trade

In addition, Mill and David Ricardo argued that while a country like Great Britain may have an absolute advantage in the production of many goods over other countries, nonetheless, British producers were most likely more efficient and productive at some things compared to others, in relation to potential trading partners. Great Britain would be better off if it specialised in those lines of production, therefore, in which it had a comparative advantage, and buy other goods from less efficient producers in other countries.

The concept of comparative advantage was made most famous, perhaps, through its presentation in David Ricardo’s The Principles of Political Economy and Taxation (1817), though both Robert Torrens and James Mill had explained the general idea before him. Ricardo, too, emphasised the general benefits arising from a freedom of trade:

“Under a system of perfectly free commerce, each country devotes its capital and labour to such employment as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically; while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world. It is this principle which determines that wine shall be made in France and Portugal, that corn [wheat] shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.”

With a slight variation on the example given by Ricardo about comparative advantage, suppose that an English worker can produce one yard of cloth in four hours and takes one hour to harvest a bushel of potatoes, while an Irish worker takes 12 hours to manufacture that yard of cloth and two hours to harvest a comparable bushel of potatoes. England clearly is three times as productive as Ireland in cloth production and twice as productive in harvesting potatoes.

But equally clear is the fact that England is comparatively more cost-efficient in cloth manufacturing. That is, when England foregoes the manufacture of a yard of cloth, it can harvest four bushels of potatoes. But when Ireland foregoes the manufacture of a yard of cloth, it can harvest six bushels of potatoes.

If England and Ireland were to trade cloth for potatoes at a price ratio of, say, one yard of cloth for five bushels of potatoes, both nations could be better off, with England specialising in cloth manufacturing and Ireland in potato farming. England would receive five bushels of potatoes for a yard of cloth, rather than four bushels if it grew and harvested all the potatoes it consumed. And Ireland would receive a yard of cloth for only giving up five bushels of potatoes, rather than the six bushels if it manufactured at home all of the cloth it used.

Properly understood, the theory of comparative advantage shows that all individuals and all nations may find their place at the global table of commerce and trade. That both the “strong” and the “weak,” the most and less productive and efficient, each may find a niche in the international division of labour by which all of humanity may improve their circumstances by mutually bettering the conditions of others in an encompassing world market. Britain, therefore, was worse off than it materially and economically could be due to government-imposed trade barriers and restrictions that hindered the free and competitive association among men.


To be continued…

This article was first published by the Foundation for Economic Education (FEE).

1 thought on “How free trade made Europe great (Part 1)”

  1. Posted 30/01/2017 at 09:17 | Permalink

    Really good article, a compelling case for unilateral free trade.

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