capitalism

Free Trade 189
occur daily in markets coalesce into a vast productive order.
If history is a guide, a free-market economy ensures continual
improvement in humankind’s material welfare.
See also Civil Society; Decentralism; Entrepreneurship; Laissez-
Faire Policy; Private Property; Wealth and Poverty
Further Readings
DJB
Cox, W. Michael, and Richard Alm. Myths of Rich & Poor. New
York: Basic Books, 1999.
Hayek, F. A. “The Use of Knowledge in Society.” Individualism and
Economic Order. F. A. Hayek, ed. Chicago: University of
Chicago Press, 1948. 77–91.
Kirzner, Israel M. How Markets Work. London: Institute of
Economic Affairs, 1997.
Lebergott, Stanley. Pursuing Happiness. Princeton, NJ: Princeton
University Press, 1993.
Polanyi, Karl. The Great Transformation. New York: Octagon
Books, 1975.
Rand, Ayn. Capitalism: The Unknown Ideal. New York: Penguin
Putnam, 1986.
FREE TRADE
Free trade means the exchange of goods and services across
international borders, unhindered by government tariffs,
quotas, or other restrictions. Since the publication of The
Wealth of Nations by Adam Smith in 1776, the debate over
free trade has been one of the major battlegrounds in the
broader controversy about economic freedom. Free trade is
an essential component of globalization, which includes not
only trade, but the international flow of capital and people
and the resulting integration of national economies with
each other.
Free trade has been a central tenet of the libertarian,
or classical liberal, philosophy for centuries. The same
philosophical and economic arguments for the freedom of
exchange within a national economy apply equally to
exchange across international borders. According to libertarian
principles, workers should be free to voluntarily
exchange the fruits of their labors with others for mutual
benefit, whether the trading partner lives across the road or
across an ocean. The increased competition occasioned by
free trade can indeed result in some domestic industries losing
market share and workers temporarily losing jobs, but
advocates of free trade see this loss as a normal and healthy
outcome of free-market competition.
Mankind has always engaged in trade. Even in the poorest
societies, households have traded with one another, and
rural farmers have traded with city dwellers. However, natural
barriers, long distances, and government controls have
hindered international trade throughout much of mankind’s
history. Despite those obstacles, trade flourished in the
Mediterranean basin for centuries before the rise of the
Roman Empire, reaching its height in the 2nd and 3rd
centuries A.D., while during the late Middle Ages, the
member states of the Hanseatic League were engaged in a
burgeoning trade in the Baltic and North Seas. During that
same time, Venice thrived as the center of the overland
spice trade from Asia. Venetian traders pioneered foreign
exchange, bank loans, accounting, and letters of credit.
Spices and manufactured goods were the staple of trade in
the Mediterranean, whereas lumber, fish, wool, and hides
were the chief commodities of trade in Northern Europe.
The voyages of discovery in the 15th and 16th centuries
opened new routes among Europe, the New World of the
Americas, and the markets of South and East Asia, ushering
in the Mercantilist Era. The discoveries and dramatic
expansion of sea-going trade were made possible by the
development of three-masted ships, called carracks, which
could sail more sharply into the wind and made shipping
less dependent on seasonal trade winds. The leading trading
nations of that era, which lasted until about 1800, were
Spain and Portugal, followed by the Dutch Republic and
then France and Great Britain. As trade grew, so did government
intervention. According to the prevailing mercantilist
ideas at the time, exports were preferable to imports
because they better enabled governments to acquire and
accumulate gold, the universal currency of the day. As a
result, a web of national laws evolved that hindered trade in
a broad range of goods, but especially manufactured items.
Against this backdrop, Adam Smith published his magisterial
work, An Inquiry into the Nature and Causes of the
Wealth of Nations. Smith argued, with systematic logic and
illuminating examples, that a nation’s wealth is not measured
by its stockpile of gold, but by the ability of its people
to produce goods and services of value to others. Nations
raise their productivity through the division of labor, with
households, regions, and nations specializing in what they
do best. Trade allowed the creation of more wealth by
expanding the size of the market, thus allowing a finer division
of labor among and within nations. As Smith famously
observed in Book IV,
It is the maxim of every prudent master of a family, never
to attempt to make at home what it will cost him more to
make than to buy. ...What is prudence in the conduct of
every private family, can scarce be folly in that of a great
kingdom. If a foreign country can supply us with a commodity
cheaper than we ourselves can make it, better buy
it of them with some part of the produce of our own industry,
employed in a way in which we have some advantage.
The intellectual argument for free trade was fortified in
1817 when British stockbroker David Ricardo first explained
the theory of “comparative advantage.” According to this
theory, even if a nation’s workers can produce everything