Doubts Over the Effectiveness of Free Trade Economic Theory

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Paul Krugman’s article “Is free trade passé?” (1987) espouses the argument that free trade economic theory today is “more in doubt than at any time since the 1817 publication of Ricardo’s Principles of Political Economy” (p. 131, citing Ricardo, 1821). Ricardo was the first to put forth the theory that “[t]he value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour” (Ricardo, 1821, p. 1.1). It was his theory that specialization, even to the point of eliminating certain industries in a country, optimized a country’s trade advantage (p. 31.17). As Krugman points out, governments’ strategic trade policy intervention in free trade, through import restrictions or quotas, export subsidies, tariffs, and other trade interventions, have substantively moved international markets away from free trade. As the course module emphasizes, “The Ricardian model of trade…is of limited application to the complexities and realities of modern trade because it provides no insight into the sources of comparative advantage” (Colorado State University-Global Campus, 2014, p. 2). Krugman argues that although free trade may not be passé, the theory has become the reasonable rule of thumb rather than the optimum result, as it is not always the right policy.
Rethinking International Trade Theory
Krugman points out that from the early 1800s to the late 1970s, international economic theory believed that countries only traded to take advantage of their differences. This Heckscher-Ohlin-Samuelson factor endowment theory emphasized income distribution effects that were abse...

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