The History of Free Trade
Since time immemorial people engage in trades. Most commonly, people trade with one another to exchange goods or acquire something that they do not have in replace for something they have. For so many years, people from different regions had met and deliver goods from one place to another. This had happened way before the word ‘economy’ had been devised. Now, the action of trade is used more systematically and politically than the past centuries. Such intricacy in the concept of trade developed as nations becomes more and more integrated and wealth becomes tantamount to power and authority.
As the importance of trade unfolds, it had been a constant subject of debate whether the government should intervene with the market or not. This essay would like to uncover and discuss this aspect. More particularly, this essay would like to unravel the history of free trade from the pre-classical era to modern times. The arguments against and in favor of free trade will also be discuss to be able to show how free trade had progress and attained its current status. History The exact origin of trade is impossible to determine.
However, through speculation it can be assumed that trade begun soon after people had been able to acquire property (Hobbes, as quoted from Heilbroner, 1999). In western history, Douglas Irwin (1997) suggested that it is through the attitude portrayed in the writings of ancient thinkers and poets that the ancient attitude on commerce can be deduced. In engaging in trade with other people from the same country people are able to exchange the goods or products available in their place.
Nonetheless, through engaging in commerce with foreign places or across the sea, the people in one region are able to attain the goods and products that are not only scarce but might even be absent in their place. This is the basic concept of trade or commerce in the ancient world. The attitude of people differs significantly from one thinker to another. For instance, while Plutarch finds trade favorable, Horace finds it as a threat to the civilization. Those in favor of foreign trade see it as a tool or an opportunity for civilizations to grow.
On the other hand, those against foreign trade perceived it as inessential and disruptive. Ancient Period During the ancient period the act of retail trade was viewed as immoral. The acquisition of wealth was made through gifts, prizes and competition (Roy, 2009 Spring). Homer concluded that wealth was made out of “agriculture and war” (Roy, 2009 Spring). Trading was treated as an inferior way of living. Hesiod condemns greed and dishonesty (Perrotta et al. , 2004). Hesiod also maintained that people should be just and hard-working since it will bring them wealth and peace.
Hesiod contends that “wealth acquired by fair means is the only lasting wealth” (Perrotta et al. , 2004). This statement indicates that justice plays a significant role in ancient life and things that are acquired through injustice, is believed to be only temporary. In Rome, trade was also considered as a “vulgar occupation, especially the kind when the trader did not change the nature of the product” (Irwin, 1997). Cicero and Pliny had positive views of trade but it is restricted to wholesale and it must benefit the citizens.
Other early thinker includes Xenophanes, Thucydides and Sophocles. These thinkers admired the progress that man had attained in their civilization. Nonetheless, they also recognized the fact that progress not only has good results but may also lead man to evil and corruption. Another important ancient thinker was Xenophon. Xenophon was the person who first coined the term ‘oikonomikos’ to refer to household management. It is Xenophon that first discussed the connection of wealth and surplus. He believed that trade should be promoted and encouraged merchants to continue their works.
Xenophon was also the first to connect the supply of goods with the change in price (Perrotta et al. , 2004). In his work, Cyropaedia, he connected the size of the market to the division of labor. More particularly, division of labor improved productivity which was determined by the size of the market (Roy, 2009 Spring). While Plato forbade the rulers to acquire gold and silver, Xenophon promoted acquisition of wealth. Irwin (1997) mentioned that Plato viewed “laborers and shopkeepers as inferior persons” while Aristotle believes that non-barter trade is “taking another person’s things”.
Nonetheless, despite Plato’s negative attitude towards trade, he recognized the fact that state needs to import excess goods and gain products from other places. Therefore, merchants, although they were considered as inferior were still important elements of the state. Plato had also discussed the importance of ‘division of labor’. According to Plato, the quality and quantity of work can be increased if people would do task according to his/her nature. Aristotle, on the other hand, promotes self-sufficiency and put forward the idea that wealth was only an instrument to attain happiness.
Aristotle further believed that “wealth must be limited because the source of wealth was never unlimited” (Perrotta et al, 2004). Moreover, Aristotle introduced the idea of reciprocal justice which settled a guide as to what price is just. Since Aristotle advocates ‘harmonic mean’, it followed that a just price is between the lowest price the seller was willing to accept and the highest price the buyer was willing to pay (Roy, 2009 Spring). In ancient period, it had been apparent that free trade was not yet discussed. Nevertheless, the basic concepts about trade were laid down in connection to the morality of the action and its effect.
Foreign trade was viewed either as threat and progress. Division of labor, the role of supply, and market size was discussed according to their practical implications during the period. Trade, in general, was regarded as unnatural and at times immoral. Medieval Period During the medieval period Judeo-Christian traditions abounds. The Old Testament displayed wealth as a source of evil and a product of greed. Pursuing wealth was believed to lead to dishonesty and exploitation (Roy, 2009 Spring). However, wealth through hard work was considered a good thing.
Trade, according to Irwin, was depicted by Christians as the “promoter of luxury and avarice that shift the interest of man toward wordly concerns”. Christianity assumed that good deeds done on earth would be rewarded on the afterlife. Such belief implied that a person should not concern himself of earthly pleasure but must instead pursue heavenly gains. If a person acquires wealth, “it was considered as a gift from God and must be shared to others” (Perrotta et al. , 2004). Among the medieval thinkers, Saint Thomas Aquinas was considered as the most supportive of trade and traders.
Aquinas advocated the importance of trade as “the storing of goods, the importation of necessary goods, and the transport of goods from abundant to scarce regions” (Irwin, 1997). However, Aquinas believed that the idea of self-sufficiency promoted by Aristotle was better than foreign trade. Furthermore, Aquinas was wary of how trade might affect civic life since it usually results to greed and corruption. Nevertheless, Aquinas also commended that some trade were necessary to redistribute resources. A region experiencing shortage of one good can only be compensated if merchants and trade exist.
Aquinas’ statement helped neutralize the public opinion on trade. Carletus, also a theologian, argued that the practice of trade is not bad in itself; rather the motive of the trader and the situation involved determines the morality of the action (Irwin, 1997). The popular view in the medieval era was a direct reflection on the idea that it is through providence that resources are allocated across different parts of the world which shall promote the interaction between different societies and culture. This maxim is known in economics as the doctrine of universal economy.
This doctrine has its roots to the ancient view regarding trade and was used by religious groups to explain God’s intentions. There was another dominant view during the era. It was with regards the necessity of inequality. Theodoretus stated that if there were no inequalities specialization would be impossible and if the rich will not consume then the workers will no longer be needed (Irwin, 1997). Jerome, a writer, had often said that the “wealth of one person is caused by impoverishment of the other” (Irwin, 1997). This relationsip between the rich and the poor is not only applicable to individuals but to nations and societies as well.
Inequality exists and no matter how idealistic a person can be, it is impossible to perpetuate equality in the actual world. The ethical concerns discussed by medieval thinkers had a great effect on the rational foundation of free trade principle. The medieval ages was a period where economic viewpoints are dictated largely by religious affiliation. Almost everything was controlled by religion during the dark ages. It was rendered as a time when rational thinking of the public was suppressed. Things were explained as something related to God or God’s representatives.
It was only on the twelfth-century that man had again become active in reasoning, especially against authority. It was this period, called Renaissance, that education developed and issues were discussed more logically. During this period, scholars tried to justify the ethical explanation of the past with logical arguments. This helps them uncover the basic notions in economy as well as the assumptions and principles that accompany the doctrine of free trade. One of the prominent thinkers during the time was Thomas of Chobbam. Chobbam believed that for commerce to be beneficial the merchant should only charge the true costs (Roy, 2009 Spring).
Albert the Great had been able to detect the connection between supply and demand in connection to price. Nicole Oresme, another thinker, had argued against the debasement of money (Roy, 2009 Spring). He mentioned that money is a standard and therefore, must be kept constant. Renaissance and Mercantilism Aquinas also contributed the idea of Natural Law which were self-evident laws interpreted through the use of reason. Vitoria used this doctrine to validate his claim regarding the law of nations with regards to the “sovereign rights of Indians against Spanish explorers” (Irwin, 1997).
Vitoria explained that the Spaniards could pass through the Indian’s land if they would not harm the settlers (Irwin, 1997). Irwin explained that in this context foreigners were permitted to transact or trade provided that no harm would be inflicted to natives. Following Vitoria’s approach, Franciso Suarez introduced the idea that the law of nations or jus gentium obliges international commerce to be free. Suarez based his assumption on the fact that every state lacks something and trade with other societies or nations is unavoidable.
Alberico Gentili and Hugo Grotius stressed on the legitimacy of the ‘laws of nations’ (Irwin, 1997). They believe that although trade are free, there are precautionary measures that needs to be considered prior to engaging to trade especially when the goods or products are deemed harmful. During the Renaissance new ideas, new science and a new geography developed. The earth was proven to be round or spherical, new continents are discovered and new scientific laws were formulated. It is in this period that mercantilism emerged as a prevalent school of thought.
Basically, mercantilism is the ideology that espouses protectionism (Sammuels, et al. , 2003). At its foundation, mercantilism was viewed as a philosophy to serve the royalty (Lynch and Cruise, 2006). Furthermore, mercantilism advanced the idea that it was the duty of the state to protect its citizens. Protectionism includes tariffs, trade policies and taxes to protect the economy. Predominantly, these actions are made by the government to control the flow of goods and services in the market. Economic policies are directed or affiliated towards the increase of political power.
Reinert (2004) emphasized that during this period the economic policies established by the state were designed to improve the ‘common weal’. Political power and authority was reflected by population and money (Roy, 2009 Spring). The accumulation of gold and silver had been the primary objective of the economic policies, which was known as bullionism (Mills, 2002). Imports had to be restricted to promote exports and increase the flow of money in the nation which corresponds to more power. From this, it can be understood that the amount of money is connected to the output production and employment.
Jean Baptiste Colbert introduced some of the cruelest economic policies in term of mercantilism. He believed that for the state to flourish, other nations must go down. He advocates the mercantilist thought of increasing exports while reducing imports. He encourage the growth of population to gain more laborers which will maintain the wages low (Roy, 2009 Spring). The taxes were raised and monopoly rights were used to gain allies. Overall, these policies results to failure since the gap between the rich and the poor were stretched by low wages and high taxes for the poor.
To further illustrate, Giovanni Botero, observed that wealth accumulate in cities and not in countryside (Reinert, 2004). Antonio Serra explained that production of finished products had more increasing returns than the production of raw materials. The economic system during this period supported the industry by establishing patent systems and prohibition of exporting machinery and exports of machinery. Raw materials’ prices were kept lower domestically (Parry et al. , 2002). Other important mercantilists are Bernardo Davanzati and Samuel Fortrey. Davanzati explained that the prospect of happiness drive people to work hard (Niehans, 1990).
Fortrey argued that the production for exports should be determined by the demand set by the probable buyers. William Petty illustrated that expenses is actually equal with income. (Roy, 2009 Spring). Jean Bodin “attributed the increase of prices with the abundance of money” (Mills, 2002). Copernicus also studied the nature of money and concludes that “money depreciates when it becomes abundant” (Spiegel, 1991). In line with this, Navarrus commented that money “becomes dearer when it is there is strong demand and less supply” (Spiegel, 1991; Roy, 2009 Spring).
The notions regarding money and prices had discussed the basic concept of supply and demand. Thomas Smith objected about exporting raw materials that will be processed by foreign nations and would be imported back to the country. Smith believed that imports of these products must be forbidden (Irwin, 1997). The idea that domestic exchange is more favorable for the economy was also maintained by Thomas Mun. Foreign trade was treated as the principal source of wealth from abroad as explained by Josiah Child. John Pollexfen argued that domestic trade did not make the nation any richer.
The views of these people showed that during the rise of mercantilism, the personal interest of the merchants diverged with the national interest (Irwin, 1997). This creates a nationalistic movement of idea. Samuel Fortrey even commented that “private advantages are often impediments of public profits” (Irwin, 1997). Misselden and Janssen agreed that the tax burden should be shifted from “domestic to imported products that are superfluous and unnecessary” (Irwin, 1997). James Steuart, a statesman and a mercantilist, holds that free trade would bring Europe to poverty (Samuels et al. , 2003).
Steuart believes that subsidies for exported goods must act as an insurance program that shall protect the producers when import products become lower than the costs of production (Irwin, 1997). He was known to be against free trade. He believed that different states exist with different interest and this interest may conflict and produce negative results. Dudley North reiterated that the reason that people trade is rooted in their differences. This idea was demonstrated by capital and land producing interest and rent. The reason why income was generated was because people need capital and land.
The payment per se was not the source of income rather it was the capital and the land. The mercantilist assumes the importance of government intervention to sustain the productivity of the economy as well as to increase the commonwealth. The economic policies were designed to acquire more and more precious metals. Nonetheless, inflation resulted and money had lost its value. Nevertheless, mercantilists had succeeded in lobbying for reforms that removes the restrictions placed by their medieval predecessors. Political liberties were promoted. Liberalization of commerce or trade was prioritized.
Wealth was generally conceived as the amount of money that the nation have. Conception of Free Trade The liberty to trade with other countries did not necessarily indicate what the term free trade was all about. Irwin introduced the concept of free trade as “a commercial activity in which entry was unrestricted, where the liberty of the merchant to participate in trade was unhindered by… regulations or grants”. It had been an “antimonopoly movement” that tried to liberate trade and commerce from the controls of government. The movement was inspired by the ideas surrounding the promotion of individual rights and liberty.
Misselden, agreed that in some way the imposition of grants and restrictions had reduced individual liberty but he noted that this was done to protect the traders against competitors (Samuels et al. , 2003). Boisguilbert believed that the productivity of the economy decrease as taxes increased (Niehans, 1990). He supported the view that the government should not interfere with the market because the market can settle their own disputes through rational compromise. Nonetheless, he still supported the actions of the government to stock grains to control the price (Roy, 2009 Spring).
Cantillon demonstrated how labor can be considered as a good and how it was connected with land value. Cantillon further elaborated that the increased in money would lead to spending which will generate additional jobs resulting to an increase in productivity (Niehans, 1990). If the amount of money or precious metal in a nation is more than what the nation can supply in the market, importation will become inevitable to satisfy the demand. Cantillon was the first to formulate the ‘circular flow of income’ (Roy, 2009 Spring). Another important thinker that opposed mercantilism was Turgot.
He believed that the intervention made by the government reduced competition and lowers the quality of the products. He argued that taxes and restriction burdens man in pursuing his interest and therefore the taxes must be reduced while the restrictions should be removed. Turgot assumed that this would create equal competition which would more likely result to price reduction. Turgot also mentioned that value was not mainly determined by the cost of production rather it was affected by scarcity and utility as well (Roy, 2009 Spring).
The imposition of barriers restricts the flow of goods and merchandise which also limits the possibility of profit and employment. Although the measures taken were scrutinized before being implemented, the acquisition of finished products from foreign trade might be more beneficial than producing it in the country. For example, instead of trying to cultivate grapes in a limited farm land then employing laborers to produce wine, it might be cheaper to import these products from nations who specialized in creating them.
To this end, moral philosophers such as David Hume argued that the government should take away the restriction in international commerce since this can create mutual benefit for the foreign traders and the nation (Irwin, 1997). Adam Smith Prior to Adam Smith’s argument in favor of free trade, Henry Martyn, in 1701, published Considerations upon the East India Trade that favored free importation of goods (Irwin, 1997). Martyn believed that free trade would increase the supply of goods to a country without increasing labor substantially.
This, Martyn concluded, would increase the country’s production as a whole (Irwin, 1997). When people spend more, previous thinkers believed that this would increase production. However, Smith showed that “parsimony” is essential to acquire new capital that can be lent to businessmen who were supposed to spend it to improve the production or build new enterprise. Smith emphasized that it was “parsimony is the immediate cause of the increase of capital not industry” (Ishay, 2007). The capitalist must “save and store up to increase the capital” from the profits that they have accumulated (Ishay, 2007).
Adam Smith believed that self-interest was not an entirely negative attribute as portrayed by Hobbes and Rousseau. Smith demonstrated the connection between passions, bias, moral rules and laws. He argued that laws ought to maintain prosperity or peace in a nation. Smith argued that to pursue self-interest one needs “to gain the favor of those whose service it requires”. Smith pointed out that it was a “national jealousy which prompt them to spite and ill-will each other and refuse to be supplied … in any convenience of life” (Irwin, 1997).
Smith noted that mercantilist policies would decrease the trade which would in turn “hurt the division of labor and diminish the opulence of both” (Ishay, 2007). Upon the publication of Wealth of Nations, Smith argued against the economic policies that tried to protect exports from imports because this would reduce the income of the state. Smith presented his idea through an analogy of the master of family. According to Smith, if the master of the family attempts to make something that will cost him more than to buy (Roy, 2009 Spring), it is out rightly impractical and would only increase the family’s expenses.
Smith further illustrated that it would be an inconvenience if tailors would try to produce or create his own shoes rather than buy them from a real shoemaker (Brown et al. , 2002). These analogies were in reference to the idea of the division of labor that had been popular during the ancient period, most specifically upon the discussion of Plato. Smith noted that “if a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it them with some part of the produce…which we have some advantage” (Brown et al, 2002).
The regulations inflicted by mercantilist policy denied the country of cheaper products and further burden the citizens with labor and taxes (Gomes, 2003). The wealth of nation was based on the division of labor since it results to improvement in the technology (Roy, 2009 Spring). The idea that the technology will increase was associated with the importance of practice, the amount of time spend on the task and the notion of automation (Roy, 2009 Spring). If the person did a certain thing over and over again, sooner or later, he will develop mastery and will therefore lessen the time it takes to finish a certain product or work.
Since the division of labor improves technology, it also increases production which is tantamount to economic progress. Adam Smith linked the division of labor with the extent of the market. Accordingly, the extent of the market results to the expansion of trade and therefore improves the progress of the division of labor (Roy, 2009 Spring). Brown mentioned that Smith argued that it will only be acceptable for the government to intervene in the industry if it concerned matters involved in national defense. Adam Smith succeeded in providing arguments against the mercantilist policies and advocating free trade doctrine.
He had been very influential in terms of economic policy. Other economist supported Smith’s view and argued for the superiority of free trade doctrine than protectionism that was used by mercantilism. Nevertheless, there are still those who argued in favor of mercantilist ideas. Against Free Trade Despite the mounting evidence presented by Adam Smith in favor of free trade, there were still several issues that other economists tried to raise against the free trade doctrine. These people tried to debunk the tenets of free trade and argued in favor of protectionists view.
Most of the people against free trade argued that the analogy used by Smith was insufficient. Some argued that free trade might indeed improve the wealth of the nation but it would not benefit everyone, most especially the infant industry. Robert Torrens was one of the most important critics of the free trade tradition. He emphasized that “advantages of foreign trade are reciprocal and equally divided between nations carrying it on” (Irwin, 1997). With this insight, Torrens argued that a country can manipulate trade through the imposition of tariffs.
With respect to this, tariffs should not be reduced independently because this will significantly affect trade and the flow of precious metals (Irwin, 1997). Instead of gaining profits, a country that will impose free trade unilaterally will be subjected to greater loss than gains. In this term, Torrens believed that the imposition of protection and tariffs were superior to free trade (Banks, 1995). Another argument against free trade concerns wage differences. Low-wage countries could not afford to trade with high-wage countries simply because this will lead to undersell of products.
According to the John Stuart Mill (Irwin, 1997), tariffs are necessary to protect the low-wage countries from being exploited by high-wage countries. The infant industries were believed to have not enough capacity to compete in the free trade economy (Anup, 2006). It is the same as an elementary student competing with master’s graduates. Obviously, this means that the infant industry would be in a severe disadvantage and therefore needs the support and protection by the government until it can compete equally. Nonetheless, many economists believed that such economic policy might be abused.
The infant industry might not strive hard to escape government protection. In a free trade scenario, competition was prevalent and therefore industries would try their best to survive. The increasing returns argument popularized by Frank Graham argued that agricultural-based industries did not bring as much increasing returns as manufacturing-based industries (Irwin, 1997). If the country would export agricultural based products and import manufactured product, other countries would increase profit while the agricultural industry nation acquired less returns.
To this end, Graham advised that the government should protect the country from increasing-returns goods. Current Stance on Free Trade Free Trade simply implies that the market would be able to balance itself without the control from the government. It recognized the fact that nations are interconnected. There is also an acceptance that resources are not only scarce but are scattered around the world. No one nation is self-sufficient. If ever, progress in this autarkic nation would be very weak, if it is possible. Free trade allows the government to focus in matters that concerns law and security.
It is only when the trade endangers the national defense of the nation that government can impose restrictions to trade. At the above discussion, it is obvious that not all people agreed that this should be the case. There are many instances where the economy needs protection in terms of tariffs and taxes. In our current situation, it might seem that free trade is ongoing since it is one of the tenets that the process of globalization promotes. However, a closer look would show that free trade is not as efficient and dependable as what Adam Smith perceived it to be.
The point being taken is the fact that in current reality, free trade hardly exists for there are international organizations that restricts or regulate trades, one way or another. Free trade agreements are constituted to involve only a few nations. Only the signatories are able to benefit from free trade. The United States labor unions are wary of Free Trade due to the fact that it permits the buying of imported products that harms the profit of export products (Anup, 2006). Imported products are sold cheaper and are therefore more preferred by most consumers.
In this case the exports are forced to lower their price and profits become low. Conclusion The concept of Free Trade started in the ancient period where philosophers where debating whether it is practical and beneficial to acquire goods and services from foreign lands. The ancient thinkers had succeeded in laying down the basic ideas in economy and trade. Trade had been established as a system of exchange. Merchants or traders who profit in trading products without adding value to the good is seen as immoral or at least degrading.
It had also been during the ancient period that the “division of labor” has been formulated as a social system that ought to promote specialization and contribute to societal growth. Through specialization, people are able to do what they do best. The best price is resolved as the mean between what the buyer can offer and what the trader wants. The ancient thinkers recognized that products are distributed unequally throughout different lands and the only way to acquire them is through trade. In the medieval era, the question was shifted from “should people engage in foreign trade” to “is it good or bad to trade”.
The common notion passed down from ancient times is that trading is unacceptable because it involves fraud. People can exchange goods that they made and they should not get merits just by delivering one product from one place to another. If ever, the merits they should impose must not be greater than the merits that the real producer or individual had. Trade is simply inevitable. Medieval thinkers had a conflicting view whether to promote it or not. Some believed that one should never profit from trade or at least, one should not overwhelm on the profits of trade.
Others believed that trading results to profits which generates greed and evil. Religious thinkers even advanced that one should not try to acquire material wealth or that wealth is something that is meant to be shared to everyone. Nevertheless, trade is significant since it brings people and culture together. Those from far places are able to learn and progress through trade. During the renaissance, the focus had been brought back to man instead of religion. Therefore, instead of prioritizing the things that concerns God and the afterlife, people looked for the things that can help them now.
During this period societies and knowledge prospers. This in turn had subsequent effects on economy and trade had been more inevitable. The acquisition of wealth had been the main interest of the people since it generates and assure security, prosperity and progress. As trade progress, the question was shifted to whether it is essential for the government to intervene with trade or just let the traders do their thing. The first response advocates the use of protectionism. The government needs to implement tariffs and barriers to control the flow of products and services.
These protections were formulated to increase the inflow of precious metal. As soon as gold and silver poured in from America, the powerful nations acknowledge a crisis. Money had been losing its value. Economic theories where formulated and the concept of supply and demand and its effect to price had been generalized. The Free Trade doctrine emerged as an answer to the prevailing economical problem. Trade requires competition and not protection. The restrictions imposed by the state normalize the economy but also lowers competition which results to lower quality.
Instead of protecting the industries, Adam Smith believed that government should not intervene with the workings of the market. The doctrine of Free Trade, although accepted by most economists was also criticized. Some economists argued that it would create more loses than the perceived gains. There are those who argued that it would be insufficient especially if only one country would engage in free trade while others do not. This observation is noteworthy, in current economic system, such free trade agreements exists. Although not as blatant as what the former protSample Essay of RushEssay.com