Tag: free trade

Losing Their Free Trade Religion

The Tree of Woe contemplates the fallacies of free trade:

Fletcher’s assault on Fortress Free Trade consists of five interlocking theoretical arguments and one empirical argument. He begins by undermining the assumptions at the foundation of Ricardian free trade theory.

Labor and Capital are Mobile. Go back and re-read the examples above. Did you notice what was excluded from the hypothetical? The movement of capital and labor. That’s because Ricardian free trade theory simply assumes as given that labor and capital are immobile. All competition is via industry or product.

But this is not the case nowadays. Nowadays both labor and capital can move. The result of that is that investment capital and labor pursue absolute, rather than comparative, advantage. And with capital and labor mobility, absolute advantage trumps and gains from trade evaporate.

Let’s imagine that the advantage that accrues to British labor is due to better capital investment: each man-hour of labor is more productive in Britain because it has better factories. Let’s also imagine that Britain and Portugal have foolishly agreed to enter some sort of “union” which allowed their workers to work and live in either country. Labor is now mobile so each worker can move where the best jobs are available. Since labor wages tend to increase when productivity increases, the Portuguese workers will realize they can earn more and tend to move to Britain. The outcome is not happy Portuguese vineyard workers, but Portuguese immigrants trying to get jobs in British wool and wine factories.2

Now let’s imagine that the advantage that accrues to British labor is due to the fact that hourly wages are lower and working hours longer than in Portugal. The factories are equally the same, but you can get 60 hours of British labor for the cost of 35 hours of Portuguese labor. Let’s also imagine that Britain and Portugal have deepened their union such that financial investments can flow freely between the countries. Obviously, what happens is that the Portuguese investors invest their capital in Great Britain, where they can take advantage of the cheap labor. Many high-paying Portuguese jobs vanish as the capital flight causes the factories to shutter. This is, of course, exactly what has happened between the US and China.

Capital is Not Fungible. Go back and re-read the examples again. Did you notice that I said “each has enough factories to let 500 workers work in each industry” initially, but that when they began trading, “each specialize in the area where they have absolute advantage, changing their factories to the new type they need.” I didn’t allocate any cost to this switch — there was no depreciation of the old factories, no loss of investment, no scrap metal yards filled with wool-spinning machines the Portuguese no longer need, etc. Ricardian free trade theory just assumes that capital is fungible – an investment into wool factories is convertible into an investment into wine factories.

In the real world, we know this is not true. If it were true, the entire globe wouldn’t be fixated on Taiwan’s chip manufacturing factories. Capital is very much not fungible. To the extent that capital is not fungible, it means there are deadweight costs to free trade, in the form of shuttered factories, depreciated machines, and so on, that Ricardian theory does not take into account.

An orthodox Ricardian will reply to this criticism by asserting that in the long run capital is fungible and that the long term gains from trade will more than make up for the short-run costs. This argument will be accompanied by a complex econometric paper that uses 10 pages of math written in Greek symbols that says exactly the same thing as I just said in one sentence.

Not so fast, mathemagicians. Fletcher has another howitzer to fire at Fortress Free Trade, and it demonstrates why the infungibility of capital is a much bigger deal than the orthodoxy wants to admit.

Read the whole thing, particularly if you don’t fully understand why free trade doesn’t work. My Free Trade Efficiency and Labor Mobility critique is mentioned, but nothing more since it isn’t actually relevant to Fletcher’s critique of David Ricardo’s theory of comparative advantage. However, I do think it would be easier for people to understand if someone else were to explain it, as most people don’t appear to understand the real consequences if free trade were to actually work as advertised.

DISCUSS ON SG

Capital Controls Come to America

Remember when everyone believed that the USA was a free market economy that pushed for free trade all around the world because it was mutually beneficial? Yeah, those days are over now. This is additional evidence – not that any more was needed – that the free trade critics were correct all along.

On Friday, the Wall Street Journal reported that Washington is planning to outlaw American investment in the high-tech sectors of rival economies, citing sources and reports from the US Treasury Department and Commerce Department relating to the proposed regulation.

Sources close to the formulation of the new regulations said the restrictions will primarily be aimed against China and will likely focus on private and venture capital investments in the semiconductor, artificial intelligence, and quantum computing sectors

The Wall Street Journal noted that the reports did not specifically name countries which will be affected by the new regulations, nor did they single out the specific economic sectors which were being identified as being of particular risk to US economic security. However the reports indicated that the regulations will seek to target sectors which might increase the military capabilities of nations that rival the United States.

As one example, a report from the Treasury Department, noted that the new rules on foreign investment would focus on “preventing US capital and expertise from being exploited in ways that threaten our national security while not placing an undue burden on US investors and businesses.”

The new regulations have reportedly been in the works for months, while the US Treasury Department sought to craft the rules so as to be strictly focused on national security issues, while not being arguably designed to foster unfair economic advantages.

It will be interesting to see how a “rival economy” is defined. And it’s even more interesting to see decades of free trade propaganda abandoned overnight.

On the grand historic level, however, this is another bad sign for the survival of the USA as a unitary political entity. Empires that are forced to engage in capital controls in order to prevent money from being invested elsewhere usually are not empires that survive very long.

DISCUSS ON SG

An Ill-Conceived Policy

People are beginning to figure out that economic sanctions do not work, but they still haven’t figured out why:

Western sanctions against Russia are the most ill-conceived and counterproductive policy in recent international history. Military aid to Ukraine is justified, but the economic war is ineffective against the regime in Moscow, and devastating for its unintended targets. World energy prices are rocketing, inflation is soaring, supply chains are chaotic and millions are being starved of gas, grain and fertiliser. Yet Vladimir Putin’s barbarity only escalates – as does his hold over his own people.

To criticise western sanctions is close to anathema. Defence analysts are dumb on the subject. Strategy thinktanks are silent. Britain’s putative leaders, Liz Truss and Rishi Sunak, compete in belligerent rhetoric, promising ever tougher sanctions without a word of purpose. Yet, hint at scepticism on the subject and you will be excoriated as “pro-Putin” and anti-Ukraine. Sanctions are the war cry of the west’s crusade.

The reality of sanctions on Russia is that they invite retaliation. Putin is free to freeze Europe this winter. He has slashed supply from major pipelines such as Nord Stream 1 by up to 80%. World oil prices have surged and eastern Europe’s flow of wheat and other foodstuffs to Africa and Asia has been all but suspended.

Britain’s domestic gas bills face tripling inside a year. The chief beneficiary is none other than Russia, whose energy exports to Asia have soared, driving its balance of payments into unprecedented surplus. The rouble is one of the world’s strongest currencies this year, having strengthened since January by nearly 50%. Moscow’s overseas assets have been frozen and its oligarchs have relocated their yachts, but there is no sign that Putin cares. He has no electorate to worry him.

The interdependence of the world’s economies, so long seen as an instrument of peace, has been made a weapon of war. Politicians around the Nato table have been wisely cautious about escalating military aid to Ukraine. They understand military deterrence. Yet they appear total ingenues on economics. Here they all parrot Dr Strangelove. They want to bomb Russia’s economy “back to the stone age”.

I would be intrigued to know if any paper was ever submitted to Boris Johnson’s cabinet forecasting the likely outcome for Britain of Russian sanctions. The assumption seems to be that if trade embargos hurt they are working. As they do not directly kill people, they are somehow an acceptable form of aggression. They are based on a neo-imperial assumption that western countries are entitled to order the world as they wish. They are enforced, if not through gunboats, then through capitalist muscle in a globalised economy. Since they are mostly imposed on small, weak states soon out of the headlines, their purpose has largely been of “feelgood” symbolism.

A rare student of this subject is the American economic historian Nicholas Mulder, who points out that more than 30 sanctions “wars” in the past 50 years have had minimal if not counterproductive impact. They are meant to “intimidate peoples into restraining their princes”. If anything they have had the opposite effect. From Cuba to Korea, Myanmar to Iran, Venezuela to Russia, autocratic regimes have been entrenched, elites strengthened and freedoms crushed. Sanctions seem to instil stability and self-reliance on even their weakest victim. Almost all the world’s oldest dictatorships have benefited from western sanctions.

Whenever one’s logic is proven faulty, the correct response is to question the assumptions that underlie the syllogism. In the case of the repeated failure of economic sanctions, the false assumption is the beneficial nature of free trade. Sanctions intrinsically assume that trade is necessarily good for a nation in any and all circumstances, and therefore imposing sanctions that reduce the amount of trade will weaken the targeted nation.

This is a provably false assumption, as evidenced by the way in which economic sanctions have made Russia wealthier and stronger relative to its former trading partners. Economic sanctions don’t work because free trade doesn’t work.

This conclusive evidence of the failure of free trade dogma should inspire more economists to be skeptical of the claims of the comparative advantagists, but unfortunately, the history of economics suggests that it probably won’t.

DISCUSS ON SG

So THAT Didn’t Work

Sri Lanka’s plan for economic development, VISION 2025, didn’t even survive the summer of 2022:

Our economic policy, Vision 2025, is firmly embedded in several principles, including a social market economy that delivers economic dividends to all. In the first place we need to ensure we have a skill pool that matches the job market’s demands. Sri Lanka’s education system is being transformed through progressive and important policy reform: the minimum length of schooling has been increased to 13 years, while better education is being brought to rural areas through the Nearest School Is the Best School programme, and Sri Lanka is investing in more teachers and better training. Also, opportunities for vocational training in selected areas during school education will be introduced. Further, we have taken action to empower new and innovative ideas by strengthening the intellectual property regime in Sri Lanka. The plan for an “Empowered Sri Lanka” identifies the priorities of raising incomes, ensuring employment and housing for all, and improving the quality of life for all citizens.

The plan is delivering impressive results. The current government has created over 460,000 jobs and helped more than 260,000 families secure a home. Strong progress is being made on plans to bring opportunities to rural communities by building necessary infrastructure such as roads and bridges, connecting rural and urban areas and linking Sri Lanka’s economic hubs. A programme, Enterprise Sri Lanka, has been launched to encourage young and educated entrepreneurs, who will receive loans to start SMEs. The government has also invested in some mega projects, including the Colombo Megapolis constructions – to build a city of the future – and irrigation projects including the Moragahakanda-Kaluganga Dam, to generate green energy and provide water resources for agro-production.

For the first time, Sri Lanka has now been linked to the large ASEAN region by entering into the free trade agreement (FTA) with Singapore. To have struck its first comprehensive trade agreement (including not only goods but services and investment) with a country like Singapore, regarded as one of the most open economies, with high-quality institutions, is an important milestone for Sri Lanka, and a major achievement for the current government. The Singapore FTA is a strong step towards closer integration with ASEAN, and in fact was signed in the same month that Singapore took over the chairmanship of ASEAN for the year 2018. It signals to ASEAN that Sri Lanka is interested in the region, and signals to the world that it is serious about reform.

It only took FOUR YEARS for Sri Lanka’s embrace of free trade to lead to massive riots and politicians being forced to flee the country. This should cause even the most intrepid supporter of the Comparative Advantage concept to consider the possibility that Ricardo is indeed Retardo.

The American Century Debacle

As even its advocates now admit that the American Century is over, it’s worth looking back and seeing exactly what it was for which Americans abandoned the country founded by their forefathers:

What specific steps can the United States take, however, to reach Luce’s goal? We have already mentioned one of the steps – it must embrace internationalism over isolationism. But Luce provides us with other steps to follow. First of all, the United States must share its Bill of Rights, its Declaration of Independence, and its Constitution with the world—America’s principles of freedom largely rest on reverence to these documents, and although they may not be applicable to all peoples, other nations could learn quite a bit from them. Sharing them, however, is not enough; Americans must have a passionate devotion to the great American ideals embodied in those works for them to be effective – they must be devoted to freedom, the equality of opportunity, and a tradition of self-reliance, independence, and cooperation. By showing the citizens of the world that they are dedicated to the same ideals expressed in their documents, Americans will set an example that other peoples can follow.

Second, the United States must be willing to provide its industrial products and technical know-how to the world. In many ways, Luce writes, the United States is already doing this. After all, it sells its industrial products abroad and other peoples are consumers of the products of American scientific, artistic, and intellectual life. But the United States must be willing to do more than just export the products it creates. It also must be willing to provide the skills and training for others to create successful artistic, intellectual, and scientific products of their own. Luce guarantees his readers that such training will be needed and welcomed around the world, but only if Americans have the imagination to see it and “the sincerity and good will to create the world of the 20th century.”

Third, and related to the last, the United States must ensure that its vision of the international economic order is the dominant one—without that economic order, American prosperity could stagnate, and the idea of the “American Century” would fall flat. Pursuant to ensuring that its ideas of economy become (and remain!) dominant, the United States must be willing to defend a principle that Americans have long held dear: the freedom of the seas. Only by guaranteeing free trade among the nations of the world can this vision be fulfilled.

Fourth, and finally, Americans must become the good Samaritans of the world, sending out an “army of humanitarians” to feed the world wherever it is needed. And why not? This kind of action would, Luce seems to argue, foster good will among the nations of the world that need it most, and it is certainly possible in light of the United States’ overwhelming prosperity. Feeding the world is not simply something the United States should think about doing, either. Rather, it is the “manifest duty” of America “to undertake to feed all the people of the world who as a result of this worldwide collapse of civilization are hungry and destitute.” If the United States can spend millions of dollars on weapons of war, it can surely spend some money on food for the people displaced by weapons: for “every dollar we spend on armaments we should spend at least a dime in a gigantic effort to feed the world.”

It probably sounded very high-minded and inspirational at the time. Now, it sounds like a horrifically bad, obviously stupid recipe for disaster. Feeding the world and free trade… did Henry Luce never read the historical aphorism that once you pay the Danegeld, you will never be rid of the Dane?

DISCUSS ON SG

The Benefits of Imposed Protectionism

The Russians have learned there is nothing to fear from Western sanctions:

Vladimir Putin ‘doesn’t give a s**t’ about the risk of Western sanctions if it were to invade Ukraine, Russia’s ambassador to Sweden said as US staff began withdrawing from eastern Ukraine amid warnings of an ‘imminent’ invasion.

In an outspoken interview, Viktor Tatarintsev told the country’s Aftonbladet newspaper that ‘the more the West pushes Russia, the stronger the Russian response will be’.

He claimed Russia had become more ‘self-sufficient’ amid the threat of sanctions and accused the West of not understanding his country.

‘We are more self-sufficient and have been able to increase our exports. We have no Italian or Swiss cheeses, but we’ve learned to make just as good Russian cheeses using Italian and Swiss recipes’, he said.

There is nothing that a big, resource-rich country needs from trade. Indeed, every nation large enough to be self-sufficient will be much better off, over time, by refusing to trade with the rest of the world. The USA has been impoverished, and is now debt-ridden, due to its foolish embrace of free trade and the Ricardian lie.

It’s only a matter of time before China and Russia cut economic ties with the USA. And that will harm the USA, and the West, far more than it harms the rising world powers.

DISCUSS ON SG

The End of Free Trade

What is being described as “the heist of the century” is striking fear into every banker and parasite bloating himself on the financial flows of the failing neoliberal world order and the so-called global economy:

Arm is widely regarded as the most important semiconductor IP firm. Their IP ships in billions of new chips every year from phones, cars, microcontrollers, Amazon servers, and even Intel’s latest IPU. Originally it was a British owned and headquartered company, but SoftBank acquired the firm in 2016. They proceeded to plow money into Arm Limited to develop deep pushes into the internet of things, automotive, and server. Part of their push was also to go hard into China and become the dominant CPU supplier in all segments of the market.

As part of the emphasis on the Chinese market, SoftBank succumbed to pressure and formed a joint venture. In the new joint venture, Arm Limited, the SoftBank subsidiary sold a 51% stake of the company to a consortium of Chinese investors for paltry $775M. This venture has the exclusive right to distribute Arm’s IP within China. Within 2 years, the venture went rogue. Technically it has always been legally independent, but Arm still maintained control. Recently, Arm China gave a presentation to the industry about rebranding their own IP, extending it by developing more, and emphasizing that they are striking their own independently operated path.

This firm is called “安谋科技”, but it is not part of Arm Limited.

This is the tech heist of the century….

Despite formally being fired, Allen Wu has remained in power. He ousted executives that were loyal to Arm. He has even hired security paid for by Arm China that reports to him. This security has kept Arm out of the Arm China offices. Allen Wu has aggressively taken over the firm and is operating it how he sees fit. One interesting tidbit is that Allen Wu sued Arm China in order to declare his dismissal illegal. He essentially sued himself as he represented both sides in that specific court case.

Arm has halted the transfer of any IP to entities on export control list. According to Arm, no IP has been stolen. Simultaneously, Arm has also tried to appeal to the government stating that this is bad for the Chinese semiconductor industry.

This leads us to the present day, where Arm China held an event at which they formally declared their independence. They proclaimed that 安谋科技 is China’s largest CPU IP supplier. It was born from Arm, but is an independently operate, Chinese owned company.

This is a fascinating situation, because the gunboat diplomacy to which the multinational corporations have appealed for the last 120 years is simply not an option in this case. There is absolutely nothing that the ARM investors or Softbank or its bankers can do if China decides that it wants to keep ARM China in the hands of the Chinese individuals who presently control it.

Demonstrating, once more, the profound difference between influence and power.

The only way to raise wages

Is to reduce the supply of labor. American workers can only benefit from the elimination of labor visas, increased limits on immigration, and stepped-up deportation, as evidenced by the response of Maine businesses to a “shortage” of H-2B visas:

Businesses in Bar Harbor, Maine are turning to locals to make up for a shortage of foreign guest workers that normally fill summer jobs in the bustling seaside resort town.

Because the H-2B visa program has already reached its annual quota, Bar Harbor’s hotels, restaurants and shops can’t bring in any more foreign workers for the rest of the busy summer tourist season. Like hundreds of similar coastal resort towns, Bar Harbor has for many years depended on the H-2B visas for temporary workers. The program allows non-agricultural companies to bring in foreign labor if they are unable to find suitable employees domestically.

Now they are coming up with creative ways to attract local labor, reports the Bangor Daily News.

The Bar Harbor Chamber of Commerce will hold a job fair Saturday in an effort to recruit significant numbers of workers from the region. Just about every kind of business in the town is looking for help, says chamber executive director Martha Searchfield.

“All types of businesses — retail, restaurants, the tour boats, all the trips, everything. All types of workers are needed,” she told the Daily News.

The shortage is so acute that companies are sweetening incentives for local workers. Searchfield says some businesses are offering flexible schedules that might appeal to older workers who might be interested in working only a day or two each week. And other companies have gone so far as to offer higher wages to entice locals.

That’s not a problem, that’s an indication of a solution. As long as tens of millions of Americans remain unemployed, there is absolutely zero net benefit to the economy or to American workers from immigration. All immigration accomplishes is to increase income inequality to the advantage of very large US corporations and the financial class that caters to them.

Whenever half-educated midwits talk about the economy and “business profits”, one thing you will note that they NEVER mention is that about one-third of all corporate profits go to the financial industry, which is up from three percent in the 1950s.

In other words, all that this failure to protect American jobs in the name of “free trade” has accomplished is to redistribute income from the working and middle classes to the .01 percent. Of course, there is nothing “laissez faire” about it, it is the direct result of government action. And as we’ve seen, even straight-up communism is better for a nation than this unconscientious corporatism.

AA comments: It’s people taking advantage of high-standards, high-trust society in which to produce and sell their goods, while importing low-standards/low-trust/low-quality laborers to provide their goods.


In other words, it is short-term societal arbitrage, which is the equivalent of strip-mining a society.

Reclaiming our heritage

The God-Emperor comes out swinging hard against free trade and anti-American globalism.

My fellow Americans,

On Monday, I signed a Presidential Proclamation declaring this to be “Made in America Week.”

We believe that our country is stronger, safer, and more prosperous when we make more of our goods and our products right here in the USA.  When we purchase products Made in America, the wealth, revenue and jobs all stay in our country – to be enjoyed by our people.

Since we first won our Independence, our Founders and many of our greatest leaders have promoted that we should afford a special level of protection to the products and goods manufactured within our borders.  They understood that as a nation, we have common bonds with our fellow citizens and common obligations to each other.  Making and buying made in America products brings us closer, and strengthens the ties that link us all together.

For too long, our government’s policies have punished production in America while rewarding and encouraging the movement of production overseas, which is totally ridiculous.  The result has been the loss of numerous industries, the decimation of entire communities, and years of sluggish growth and flat wages.

Throughout American history, our nation’s best leaders have believed in the importance of protecting our domestic industry.  This includes every President on Mount Rushmore.

George Washington encouraged Americans to produce their own goods so that our young nation could become truly independent.

Thomas Jefferson wrote that Americans should choose products made in America whenever possible – and by the way, I’m asking you to do that.

Abraham Lincoln warned that abandoning the policies that protect American industry would “produce want and ruin among our people.”

Theodore Roosevelt stated in his First message to Congress that “Reciprocity must be treated as the handmaiden of protection.”

James Monroe called on our nation to “cherish and sustain our manufacturers.”

James Garfield said of our nation’s manufacturers: “To them the country owes the splendor of the position it holds before the world.”

William McKinley believed that when America protects our workers and industries, we “open up a higher and better destiny for our people.”

And Calvin Coolidge stated that protecting American industry “enables our people to live according to a better standard… and receive a better rate of compensation than any people, anytime, anywhere on earth, ever enjoyed.”

We are now, under the Trump Administration, reclaiming our heritage as a manufacturing nation.  We are fighting to provide a level playing field for American Workers and Industries.  Other countries will cease taking advantage of us, believe me.

We are going to build works of beauty and wonder – with American hands, American grit, and American iron, aluminum, and steel.

No longer will we allow other countries to break the rules, steal our jobs, and drain our wealth.  Instead, we will follow two simple but very crucial rules: We will buy American and we will hire American.

Already, we have created over a million new jobs this year – and doing even better than anticipated.  We are just getting started – believe me, we are just getting started.

For every job that comes back to this country, and every factory that reopens, and every town that is revitalized, we aren’t just restoring American wealth, we are restoring American pride.  We are restoring America’s future – a future where millions will be lifted from welfare to work, where children will grow up in safe and vibrant communities, and where our nation will stand stronger than ever before.

And most importantly, it will be a future in which you – our citizens – always come first.

Thank you, God bless you, and God bless America – we are truly making it great again.

Open Brainstorm with Steve Keen

Last night, we held a Brainstorm with Steve Keen and discussed his new book, Can We Avoid Another Financial Crisis? And his answer was clear: that depends upon what you mean by “we”, kemosabe. TL;DR: in a global context, no, we cannot avoid it, but it should be about half as bad as 2008. And we’ll probably get 6-12 months of warning from his model.


As usual, Professor Keen was brilliant, informative, and entertaining. And now that he’s embarked on a paper relating to David Ricardo and free trade, I don’t think he’ll object to me posting the email he sent me a few months ago when I asked him about the implications for free trade of the demand-based break between micro and macro caused by the Sonnenschein-Mantel-Debreu theorem. Or, as I memorably renamed it last night, Sonnensomething-Niederbopp-Whatever.

In this context the key point of the Sonnenschein-Mantel-Debreu theorem is not the failure to derive a demand curve, but the inability to represent the interests of everyone in a single country using a “Community Indifference Curve”, which is an essential part of the Hecksher-Ohlin model of free trade, which has of course supplanted Ricardo’s original model.

Samuelson’s defence of doing so is frankly comical, and also highlights one of the two key weaknesses of the model: it only works if income or wealth is compulsorily redistributed to equalise the “ethical worth” of every dollar earned/possessed, and he thought this was a reasonable assumption. From “Social Indifference Curves”, Paul Samuelson, 1956

  1. It is shown that the various defenses which have been offered for the use of community indifference curves are all open to some serious questioning.
  2. The Scitovsky community indifference contours are shown to be “minimum social requirements” contours of total goods needed to achieve a certain prescribed level of ordinal well-being for all. The dual properties of the Figures Ia and Ib, relating points in the commodity and ordinal-utility spaces, are demonstrated.
  3. By means of mathematical reasoning or by the demonstration of intersections of Scitovsky contours, a fundamental impossibility theorem is proved: Except where income elasticities are all unity and tastes are absolutely uniform for all, it is proved to be absolutely impossible to solve for unique market price ratios in function of market totals; hence, we must lack collective indifference curves capable of generating group demand.
  4. All this is shown to entail the nonoptimality of any shibboleth rule which once and for all and independently of changes in technology and taste data predetermines the initial distribution of income or endowments.
  5. Since most “individual” demand is really “family” demand, the argument can be made that such family demands have been shown to have none of the nice properties of modern consumption theory. However, if within the family there can be assumed to take place an optimal reallocation of income so as to keep each member’s dollar expenditure of equal ethical worth, then there can be derived for the whole family a set of well-behaved indifference contours relating the totals of what it consumes: the family can be said to act as if it maximizes such a group preference function.
  6. The same argument will apply to all of society if optimal reallocations of income can be assumed to keep the ethical worth of each person’s marginal dollar equal. By means of Hicks’s composite commodity theorem and by other considerations, a rigorous proof is given that the newly defined social or community indifference contours have the regularity properties of ordinary individual preference contours (nonintersection, convexity to the origin, etc.).

This is the key problem from the demand side: free trade is only universally of benefit to a given nation if the gains are shared; this requires redistribution mechanisms in addition to the market, which both don’t exist, and contradict the model of free competition if they were to be implemented.

The key problem for the supply side is easily stated: How do you turn a wine press into a spinning jenny (to use Ricardo’s examples). The standard model assumes the costless reallocation of capital between industries in response to a change in relative prices caused by reducing tariffs. But this is impossible. Capital is physical and attuned to specific industries. Free trade therefore makes obsolete some capital in a protected industry, while making that in a benefited industry more expensive, but not more productive.