Adam Smith, David Ricardo Had It Right

by: Brian McMorris

This severe recession (Great Recession?) has given life to the isolationists among us in America. I see more and more calls on our President and Congress to close our borders to protect jobs. This happens every time unemployment rises, but becomes fever-pitched when it approaches 10% as it does right now. I feel compelled to provide the reasoned arguments against protectionism.

The primary point against isolationism is that business is now global. The internet has seen to that. The jingoists among us will just need to deal with the fact that this ball of yarn can't be unwound. If the Iranian and Chinese governments, with their lack of Constitutional protections for their citizens, can't stop the Internet, most certainly neither can Obama nor our Congress.

The study of economics reveals that first, in the 1700s, Adam Smith through his "Invisible Hand" analogy theorized that labour would be directed to those who can do the work best (at the lowest total cost). Half a century later and building on Smith's work, David Ricardo developed the "Principles of Political Economy", and introduced the theory of "Comparative Advantage". According to Ricardo's theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations.

Here is a little background information on both of these seminal economists:

Adam Smith

David Ricardo

I would add a corollary: If a country is less efficient than another at producing a good, then most certainly it will reap gains by trading with other nations who are better (lower cost) at that task (China and India).

Disclosure: No Positions