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Epub Institutional Repository ePubWU Institutional Repository Jorge Morales Meoqui Classical Free Trade: A Policy Towards Economic Growth and Development Thesis Original Citation: Morales Meoqui, Jorge (2010) Classical Free Trade: A Policy Towards Economic Growth and Development. Doctoral thesis, WU Vienna University of Economics and Business. This version is available at: https://epub.wu.ac.at/2952/ Available in ePubWU: January 2011 ePubWU, the institutional repository of the WU Vienna University of Economics and Business, is provided by the University Library and the IT-Services. The aim is to enable open access to the scholarly output of the WU. http://epub.wu.ac.at/ DOKTORAT DER SOZIAL- UND WIRTSCHAFTSWISSENSCHAFTEN 1. Beurteilerin/1. Beurteiler: a.o.Univ.Prof.Dr. Joachim Becker 2. Beurteilerin/2. Beurteiler: a.o.Univ.Prof.Doz.Dr. Andreas Novy Eingereicht am: Titel der Dissertation: Classical Free Trade: A Policy Towards Economic Growth and Development Dissertation zur Erlangung des akademischen Grades einer Doktorin/eines Doktors der Sozial- und Wirtschaftswissenschaften an der Wirtschaftsuniversität Wien eingereicht bei 1. Beurteilerin/1. Beurteiler: a.o.Univ.Prof.Dr. Joachim Becker 2. Beurteilerin/2. Beurteiler: a.o.Univ.Prof.Doz.Dr. Andreas Novy von Mag. Jorge Morales Meoqui Fachgebiet: Außenwirtschaft Wien, im Dezember 2010 Ich versichere: 1. dass ich die Dissertation selbständig verfasst, andere als die angegebenen Quellen und Hilfsmittel nicht benutzt und mich auch sonst keiner unerlaubten Hilfe bedient habe. 2. dass ich diese Dissertation bisher weder im In- noch im Ausland (einer Beurteilerin/ einem Beurteiler zur Begutachtung) in irgendeiner Form als Prüfungsarbeit vorgelegt habe. 3. dass dieses Exemplar mit der beurteilten Arbeit übereinstimmt. Datum Unterschrift Abstract The central aim of this dissertation is to make an unambiguous international trade policy recommendation for developing countries grounded on rigorous economic theory. As is generally known, trade models featuring increasing returns to scale and imperfect competition have challenged the mainstream case for free trade which is built upon unrealistic assumptions like constant return to scale and perfect competition. In this context, the core contribution of this dissertation is the restatement of the original free- trade case made by the classical political economists Adam Smith and David Ricardo. This restatement is based on the accurate interpretation of Ricardo’s famous numerical example in chapter 7 of the Principles. The classical case for free trade formulated by Smith and Ricardo neither relies on unrealistic assumptions nor the laissez-faire doctrine. On the contrary, it stipulates that free trade should always be accompanied by public policies that expand the provision of public education, job training, health care and infrastructure. Moreover, a widespread policy change towards free trade should always be implemented gradually, in order to take care of those groups who might be affected in the short run by the increased level of international competition and technological progress. The main conclusion of the dissertation is that free trade – as conceived by classical political economy – is the most suitable international trade policy for developed as well developing countries for achieving sustainable economic growth and development. Zusammenfassung Das zentrale Ziel dieser Dissertation ist es, eine internationale Handelspolitik für Entwicklungsländer zu empfehlen, die auf einer rigorosen ökonomischen Theorie beruht. Wie allgemein bekannt ist, haben theoretische Handelsmodelle mit steigenden Skalenerträgen und unvollkommenem Wettbewerb die traditionellen Handelsmodelle mit konstanten Skalenerträgen und vollkommenem Wettbewerb in den letzten Jahren zunehmend verdrängt, und die darauf beruhende These über die generellen Vorteile des Freihandels in Zweifel gezogen. In diesem Zusammenhang besteht der wesentliche Beitrag dieser Dissertation in der Überarbeitung der klassischen Freihandelstheorie, wie sie von den klassischen politischen Ökonomen Adam Smith und David Ricardo ursprünglich formuliert worden ist. Diese Überarbeitung besteht im Wesentlichen in der korrekten Interpretation des berühmten numerischen Beispiels über die komparativen Kostenvorteile von Ricardo in Kapitel 7 seines Buchs Principles of Political Economy and Taxation. Die klassische Freihandelstheorie von Smith und Ricardo basiert weder auf unrealistischen theoretischen Annahmen noch auf der Laissez-faire-Doktrin. Beide Ökonomen plädieren dafür, die Freihandelspolitik mit öffentlichen Investitionen in den Bereichen Bildung, Gesundheitsversorgung und Infrastruktur zu ergänzen. Darüber hinaus sollte der Freihandel immer nur schrittweise umgesetzt werden, um jene gesellschaftlichen Gruppen zu schützen, die kurzfristig durch die Intensivierung des internationalen Wettbewerbs und des technologischen Fortschritts negativ betroffen sein könnten. Als wichtigste Schlussfolgerung der Dissertation ist festzuhalten, dass der Freihandel – wie er von der klassischen politischen Ökonomie ursprünglich konzipiert worden ist – die am besten geeignetste internationale Handelspolitik zur Erzielung eines nachhaltigen wirtschaftlichen Wachstums ist. To my family, for their love and support. A mi familia, por su amor y apoyo. Table of Contents PREFACE ........................................................................................................ VI! INTRODUCTION ............................................................................................. 1! 1! METHODOLOGICAL APPROACH ........................................................... 5! 1.1! ON THE CONCEPT OF FREE TRADE ........................................................................ 5! 1.2! THE CURRENT STATUS OF FREE TRADE IN MODERN ECONOMICS ................... 7! 1.3! POSITIVE VS. NORMATIVE ECONOMICS ................................................................ 12! 1.4! MATHEMATICAL VS. LITERARY ECONOMICS ....................................................... 17! 1.5! DEDUCTION VS. INDUCTION .................................................................................. 24! 1.6! CLASSICAL VS. NEOCLASSICAL ECONOMICS ......................................................... 27! 1.7! THE PRIMARY SOURCES OF THE CLASSICAL CASE FOR FREE TRADE .............. 30! 2! THE CLASSICAL FREE TRADE THEORY ............................................ 36! 2.1! WEALTH AND REAL NATIONAL INCOME ............................................................. 36! 2.2! THE MUTUAL GAINS FROM INTERNATIONAL TRADE ........................................ 41! 2.3! THE CLASSICAL RULE FOR SPECIALIZATION ....................................................... 49! 2.4! RICARDO’S NOTION OF COMPARATIVE ADVANTAGE ........................................ 54! 2.4.1! The Numerical Example ...................................................................................... 54! 2.4.2! The Cost Comparisons according to Ricardo .......................................................... 58! 2.4.3! Ricardo’s New Propositions ................................................................................... 62! 2.4.4! Some Charges against Ricardo Refuted .................................................................. 67! 2.4.4.1! The Gains from Trade in Ricardo’s Numerical Example ............................................. 67! 2.4.4.2! The Constant-Labor-Costs Assumption .......................................................................... 69! 2.4.4.3! The Assumption of Labor Immobility Between Countries .......................................... 71! 2.4.5! Reclaiming Ricardo’s Authorship .......................................................................... 73! 2.5! SOURCES OF COMPARATIVE ADVANTAGE ........................................................... 78! 2.6! THE CLASSICAL CASE AGAINST GOVERNMENT INTERVENTION IN TRADE ... 83! 2.6.1! Adam Smith and the Laissez-faire Doctrine ......................................................... 83! 2.6.2! Smith’s Arguments Against Trade Intervention ..................................................... 94! 3! THE NEOCLASSICAL CASE FOR FREE TRADE ................................. 98! 3.1! CLASSICAL VS. NEOCLASSICAL FRAMEWORK OF INTERNATIONAL TRADE ..... 98! 3.2! SOME CRITICAL REMARKS ON THE NEOCLASSICAL FRAMEWORK OF INTERNATIONAL TRADE ................................................................................... 102! 3.3! NEOCLASSICAL MODELS OF INTERNATIONAL TRADE .................................... 108! 3.3.1! The “Ricardian” Model ..................................................................................... 108! 3.3.2! The Heckscher-Ohlin Model .............................................................................. 111! 3.3.2.1! Antecedents and Assumptions ........................................................................................ 111! 3.3.2.2! The Four Theorems of the H-O Model ........................................................................ 113! 3.4! A CRITIQUE OF THE NEOCLASSICAL MODELS OF INTERNATIONAL TRADE 116! 3.4.1! Ricardo versus the Ricardian Model .................................................................... 116! 3.4.2! Some Critical Remarks on the Heckscher-Ohlin Approach ................................ 122! 3.5! THE NEOCLASSICAL BENCHMARK FOR INTERNATIONAL TRADE ................. 127! 3.5.1! The Welfare Indicator ........................................................................................ 127! 3.5.2! Critical Comments on the Welfare Indicator
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