The Gains of Trade

Extract

By the gains of trade is meant the gains from free trade between nations or the advantages of free trade as against no trade or the advantages of more free trade as against less. Historically the concept has been bound up with the doctrine of comparative costs, which has purported to be not only an explanation of the terms of international trade—of the conditions of international equilibrium—but also a guide to policy, a demonstration that each nation's gains are a maximum under free trade.

Lately the doctrine of comparative costs has been attacked by Angell and Ohlin among others on the ground that it does not provide an adequate account of equilibrium. With this side of the subject I shall not deal, taking it for granted that an account of international trade equilibrium should be at least as adequate as the present theories of general equilibrium, and that, therefore, the doctrine of comparative costs must either be dropped or be so transformed as to be indistinguishable from the ordinary price theory, or perhaps be retained for a while simply as a pedagogic device. But as Viner has pointed out in his notable article on the subject, the critics of the doctrine overlook the fact that it was forged as an instrument of policy and they themselves, though dropping real costs, make statements about policy which are very infirm without a basis in real cost theory.