Thursday, October 30, 2008

The Myth of Free Trade

Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade adn the Secret History of Capitalism. Bloomsbury Press, 2008.

Ha-Joon Chang (Faculty of Economics, University of Cambridge) has written a witty and interesting reply to go-go globalization books. Anyone who believes the myth that today’s wealthy nations got that way through neoliberal free trade policies (and that this is the only road for developing countries today) will be entertained and informed by the “secret history” of protectionism.

The book is provoked by Thomas Friedman (The Lexus and the Olive Tree), informed by Friedrich List and driven by a deep understanding of the real history of economic development in Asia and elsewhere. I found the chapter on corruption especially good, although there is much to appreciate throughout.

The book is aimed at a general audience and the writing sometimes understandably lapses into the sort of rhetorical excess that Friedman et. al. are known for and therefore comes dangerous close to the sort of rhetoric I wrote about in Globaloney. Sometimes, alas, I think the author even crosses the line.

I wish that there had not been quite such a long gestation period between the debates that provoked the book and its eventual appearance. Finally, a bibliography would have made this volume more useful to potential student readers.

Interested readers should also check out Dani Rodrik One Economics, Many Recipes for a well-reasoned recent critique of free trade orthodoxy.

1 comment:

Pete Murphy said...

Dr. Veseth, it's always a pleasant surprise to find an economist who doesn't buy into free trade theories.

I'd like to offer you a complementary copy of my book, "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

I invite you to visit my web site at where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at However, as I said, I'd like to send you a free copy. If you'll just send me a shipping address, it'll be on its way.

Pete Murphy
Author, "Five Short Blasts"