Learning Objectives
By the end of this section, you will be able to:
- Identify different radical of critiques of the orthodox free trade model
- Define the phrase factor endowments.
- Define the concept of an export-led growth model.
- Explain that critiques of the orthodox free trade model are not only technical but also functional.
- Analyze ways in which the orthodox economic trade does not explain the “real world.”
Whereas the model imperfections critiques often cite the idea that the orthodox theory, while too simple, still provides an approximation of the real world. More radical critiques of the orthodox free trade story argue that not only does the orthodox story not generalize to the actual world in which we live, but that the model also cannot be modified to explain certain events or phenomena. For many more radical economists the usefulness of any economic model is how well it can explain the basic functioning of the economy. Failure to account for the actual functional behavior of the economy cannot be corrected by ad hoc assumptions. Instead, what is required, is an altogether different theoretical structure.
The following critiques reflect functional limitations associated with the orthodox trade story. Functional limitations imply the failure of theory to adequately explain events relevant to the real world. Perhaps the theory is simply too narrow in scope and fails to account for other important economic considerations, such as economic growth or economic development. For example, the whole point of the orthodox comparative advantage story is to demonstrate trade between two countries improves the overall economic plight of both countries. Paradoxically, even as the immediate exchange benefits appear, the same theory can be utilized to also explain why the long term economic growth within both economies may be harmed as a result of free trade. In other words, trade is shown to make countries both better off and worse off? How is this possible? The answer is that it is probably not possible, therefore the functional usefulness of the orthodox economic trade story is called into question.
Three Counties and Three Products
Perhaps no example of the limits to the applicability of the orthodox free trade story is more direct than the curious situation of three countries and three products. Given three countries and three commodities, it is not obvious that each country will have a clear lowest opportunity cost product to produce. Absent a clear comparative advantage, what does a country do? If a country doesn’t have a comparative advantage does it produce nothing? Does it produce all three products? Can the country without a comparative advantage refuse to engage in trade? Should the country just export its entire population, put up a border wall, and stop functioning? The orthodox presentation of the trade story cannot answer any of these questions. The absence of comparative advantage is the absence of a theoretical explanation.
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