Both fathers of economics, Adam Smith and David Ricardo, made a strong case for the implementation of free trade and laissez-faire policies, in opposition to the then-dominating theory of mercantilism, usually associated with France. Smith 's idea of absolute advantage, perfected by Ricardo 's comparative advantage, stated clearly that free trade is a win-win situation, because it pushes nations towards division of labour – today usually called specialisation – in an international market.
According to Smith:
“The greatest improvement in the productive powers of labour, and the greatest part of the skill, dexterity, and judgement with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.”1
Moreover, international institutions, such as the World Trade Organisation in Geneva (formed in 1995 as the continuation of GATT), laid the foundation of a legal framework for global trade, which has been growing at an incredibly high pace since then. This resulted in what we now call the phenomenon of globalisation, which has become evident to almost everyone in recent decades.
Shortcomings of Classical Theory
The effects of this phenomenon, however, do not exactly match the theory that supported it: in fact, many intellectuals including economists and politicians, have criticised globalisation as a trigger for inequality, and blamed it for hindering development. As Hung and Kucinskas (2011) state:
“there is a consensus that within-country inequalities in most countries have increased for the greater part of the past three decades under globalization”
where “three decades” refers to the 1980-2005 period. Also, data shows that between 1960 and 1980, average per c...
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...hat the most important feature of Kuznets 's “turning point” is the rise of social welfare and “pro-poor” policies actively carried out by governments, which are the natural response of societies to the rising wealth divide. We can find examples of the latter in Mexico 's large-scale social protection schemes Progresa and Oportunidades.15
More generally, four policies have proven to be the most effective in reducing income inequality.
Greater spending in education (not only the higher sector) as a percentage of GDP, along with a greater access to education for lower-income families, and higher tax revenues are two of the internal policies correlated to higher equality, whereas on the external side Foreign Direct Investment and depreciation of the currency are believed to indirectly lower inequality by boosting the country 's competitiveness, as found by Cornia (2012).
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