[Paleopsych] Buchanan and Yoon: Globalization as Framed by the Two Logics of Trade
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Buchanan and Yoon: Globalization as Framed by the Two Logics of Trade
Globalization as Framed by the Two Logics of Trade
JAMES M. BUCHANAN AND YONG J. YOON
The Independent Review, v.VI, n.3, Winter 2002, ISSN 1086-1653, 2002, pp.
[This should be read "sitting bolt upright in a hard chair," as Professor
Vining used to say. It will take more than one reading. I redirects the
James M. Buchanan is the advisory general director of the Center for Study of
Public Choice, George Mason University, and the 1986 recipient of the Alfred
Nobel Memorial Prize in Economic Sciences. Yong J. Yoon is a senior fellow of
the Center for Study of Public Choice, George Mason University.
Economists are professionally biased in favor of free trade and open markets.
Indeed, normative support for open markets is so universal among practicing
economists that the logical origins of their positions are often obscured.
Observers and sometimes economists themselves may fail to recognize that two
categorically different logical arguments inform economists thinking and that
these arguments, these separate logics, may have different consequences for
generalized public and political attitudes toward the openness of markets.
Globalization, as a catch-all term for movements toward more inclusive trading
networks, may be viewed quite differently by persons who, even if vaguely,
locate its normative bases differently. Such differences may surface more or
less directly as explicit policies for moving toward or away from further
globalization become alternatives for choice in democratic polities.
For expository purposes, we may label the two logics of trade as Smithean and
Ricardian, with reference to the two leading figures of classical political
economy, Adam Smith and David Ricardo. Neoclassical economic analysis, which
dominated the discipline of economics from 1870 to 1970, was informed during
that century by the Ricardian logic before returning partially and somewhat
reluctantly to the Smithean logic in the 1980s and later. As the scientific
arguments spill over into public and political attitudes, however, the
Ricardian logic continues to hold its place, with obvious implications for the
public perception of the effects of policy alternatives.
Specialization and Exchange
The Smithean logic is straightforward. Why do persons trade with one another?
They do so because specialization is productive; people can produce more
economic value if each person does one thing instead of trying to do
everything. Concentration of productive effort on one good followed by exchange
for other goods becomes a means of getting more of all goods than can possibly
be attained in autarky. Trading is, quite simply, a more efficient means of
Note particularly that in this model of exchange people need not differ either
in their relative capacities to produce goods or in their preferences for the
goods in consumption. Specialization and subsequent trade emerge between the
parties because of a recognition that mutual gains are available, that there
are increasing returns to be secured from concentrating effort in one activity
or the other. Note also that if people do not differ, it is impossible to
identify in advance which persons will specialize in which activity involved in
the production of which good. Specialization will be observed, but there will
be no naturally specialized factors of production.
The Ricardian logic that explains the origins of trade differs categorically
from the Smithean argument just outlined. As noted, Adam Smiths account of the
benefits of specialization explains why exchange will be mutually beneficial
even if the trading parties are initially identical in all respects. By
contrast, the Ricardian logic locates the origins of exchange in the
differences among personsdifferences in their capacities to produce separate
final goods. If such differences exist, specialization and exchange will always
prove mutually beneficial. Trade emerges because different persons (or trading
units, including countries) have different comparative advantages in producing
Consider what we might call a pure Ricardian setting in which there are no
potential gains from specialization as such, even over small ranges of
production. If persons are identical in both their capacities to produce and
their preferences, trade produces no benefits. For mutually beneficial trade,
persons must be presumed to differ in either productive capacities or
preferences. Note the somewhat subtle reversal of the logical sequence in the
two stylized settings outlined. In the Smithean setting, exchange emerges
because of the advantages of specialization; in the Ricardian setting,
specialization and subsequent trade become advantageous because of the inherent
differences among potential trading parties.
The differences in the constraints in the two models warrant attention. In the
Smithean model, as stylized, persons can freely choose their specializations,
and because they can do so, equilibrating forces are present to ensure against
permanent differentials in rewards. Adam Smiths familiar deer-beaver
illustration is useful here. Because persons may become either deer hunters or
beaver hunters, no differential in the net rewards of the two occupations need
exist in the natural or long-term equilibrium. By contrast, in the pure
Ricardian setting some persons are by nature relatively more adept at hunting
deer than at hunting beaver, given any relative demand for the two goods. The
net returns from the two occupations may remain different, even in a long-term
Empirically, economic exchange, from its simplest to its most complex forms, is
explained by some combination of the two elements emphasized in the contrasting
logics we have just outlined. Specialization has inherent advantages, as each
of us recognizes in managing our personal affairs. Each of us can produce more
economic value by concentrating on one thing than by trying to do a little of
everything. But people also differ: each of us presumably has a comparative
advantage in one sort of productive activity or another. Each of the two basic
arguments or any combination of them can be readily generalized into a
normative defense of free trade. The articulation of this defense may be
considered a fundamental task of economists, who may rest secure in their
conviction that everyones well-being is advanced by generalized public
acceptance of the elementary principles.
Our thesis here is that the relative weights assigned to the quite different
Smithean and Ricardian logics, as they are transmitted from economists and
ultimately translated into public attitudes, are important factors in
determining the level of support for extensions of the trading network,
especially as that supportor opposition comes to be institutionalized in
political coalitions in democracies. Specifically, we suggest that an
incorporation of the basic Smithean logic generates stronger support for
extensions of the market nexus than does a comparable incorporation of the
Ricardian logic. Unfortunately, as we later discuss, neoclassical economics
tends to assign almost exclusive weight to the Ricardian explanation.
Extending the Market
In discussions of globalization, the question is not whether or not to engage
in trade, but whether or not to allow reciprocal entry and exit opportunities
to a larger number of potential traders.
In any economy, trade is carried out primarily among persons and groups within
a defined polity, and goods and services are produced largely by specialized
producers. In the Smithean conception, production takes place under generalized
increasing returns but without any natural or inherent differences among
persons. How will an increase in the size of the nexus for potential exchange
affect market participants? The additional exploitation of specialization will
increase the ratio of output value to input value for all participants. Aside
from possible transitional adjustments, there are no net losers, and ultimately
In the Ricardian conception, the observed preexpansion patterns of production
and exchange reflect, in part, the prevailing differences in natural
capacities. Differences in the net rewards of workers in separate occupational
categories are determined by their relative capacities to produce and by the
prevailing patterns of demand for final goods. In this setting, what are the
predicted effects of extending the trading nexus?
Persons who find it advantageous to enter the now opened market and to offer
goods for exchange will resemble some groups of internal or domestic producers
more closely than others. Net losers in the process may be those persons who
prior to the expansion had relative advantages in the production of goods that
after the expansion are offered for importation, even after transitional
adjustments, despite the aggregate gains resulting from the enhanced
exploitation of comparative advantage. By comparison, those to secure net gains
will be persons whose comparative advantage does not lie in the production of
importable goods. In their role as consumers, all persons will secure gains,
but those gains may be overwhelmed by losses as producers for the groups
threatened by imports.
The Ricardian logic necessarily draws attention to the differential effects of
extending market size on separate groups of specialized producers, a feature
that is totally absent from the basic Smithean logic.
Economics within Neoclassical Limits
The possibly conflicting implications of the two basic logics of trade have not
adequately informed the thinking of economists because economists implicitly
have been quite willing to add up gains and losses, despite the putative
rejection of naive utilitarianism in their normative judgments. Because the
gainers from market extensions can, in principle, always overcompensate the
losers, the fact that such compensation does not normally occur has not
received much attention. Economists might therefore accept and employ the
Ricardian explanatory framework without sensing the dramatic difference of
normative implications between it and the Smithean framework.
Importantly, acceptance of the Ricardian explanatory logic became necessary for
economists once the classical intellectual enterprise was replaced by the
neoclassical analytical structure, a shift that dates roughly from the 1870s.
The presumed lasting contribution of early neoclassical analysis was its
success in closing the circle, by which we refer to the incorporation of a
theory of distributive shares into the general theory of prices. Neoclassical
economics offered a theory of both input prices and output prices.
In order to effect this contribution, however, the so-called imputation problem
had to be resolved. How were economists to prove that the amount paid for
inputs equaled the amount paid for the total product created by those inputs?
How were they to explain the absence of either a surplus or a deficit?
Economists resolved this problem by imposing the constraint that the market
economy was characterized by constant returns to scale, that production
functions were everywhere linear and homogeneous. In arriving at this
solution, however, they almost universally failed to recognize that the
constraint of constant returns conflicted with Adam Smiths basic precept about
specialization. Smiths principle was placed in the dustbin, to be dredged up
only now and again over the course of a century until being recovered in the
last decades of the twentieth century.
The neoclassical constraint of constant returns forced economists to adopt the
Ricardian logic as their basic explanation of trade. In their textbook
examples, trade emerges under conditions of comparative advantage even when
constant returns are imposed down to the level of individual effort. In other
words, there is no inherent conflict between the Ricardian principle of
comparative advantage and the neoclassical constraint of constant returns. It
is small wonder that economists subconsciously locate the origins of trade in a
From Markets to Politics
Our elaboration of the distinction between the two basic logics of trade might
be viewed as an esoteric intellectual exercise if the subject of concern were
only the natural emergence and operation of markets. The distinction becomes
more significant, however, when we recognize that ultimately the extent of the
effective market nexus is determined politicallythat is, through explicit
collective action. Nation-states exist and draw boundaries. Almost everywhere
throughout history, the activities of participants in markets within the
boundaries of the polity have been treated differently from the activities of
participants in markets that extend beyond political borders. Only in a
relatively few instances have markets been opened to all who might choose to
enter into trading relationships, regardless of political identity.
Because the extent of the market is subject to political choice, questions
about its appropriate size are central to present-day discussions of
globalization, a term that has become a catchall for a whole set of related
issues. We suggest that peoples understandings of the two separate logics of
trade may, and perhaps do, exert an important influence on public attitudes and
hence on political attitudes toward restrictions or expansions of markets,
toward immigration policies, and toward the increasing integration of
historically separated national economies, as exemplified by attitudes toward
such institutions as the European Union, the North American Free Trade
Association, Mercosur, and others.
The basic Smithean logic lends more or less direct and more or less universal
support for market extension. The central principle of this logic, enunciated
by Smith himself, states that the division of labor is limited by the extent of
the market, with the implication that the wealth of nations increases
directly with the size of the market nexus. Importantly, in this
intellectual-analytical structure, no need arises for a measure of gains to
gainers as against losses to losers. Basically, there are no permanent losers,
and everyone is a gainer. The expanded market nexus makes for further
specialization, with generalized gains in economic value.
In contrast, the Ricardian logic offers a much more questionable rationale when
a polity faces a necessary political choice concerning a proposed extension of
the scope of the market. Overall, the gains in aggregate value consequent on a
fuller exploitation of comparative advantages may be acknowledged, but
identifiable persons and groups may be affected differently by the extension of
the market precisely because persons differ among themselves in productive
capacities. Persons and groups who possess comparative advantages internally in
the production of the same goods in which potential entrants possess
comparative advantages may be damaged by the proposed extension of the market.
Members of such groups would tend to oppose proposals for integration of
markets across national boundaries, and their opposition would influence the
formation and impact of political coalitions.
Those economists locked implicitly into the Ricardian framework may still be
willing to defend the proposed expansion of markets by resort to concealed
utilitarian evaluation, even if they acknowledge the improbability of
compensation payments. But even such economists will for the most part accept
that the defense of economic efficiency in the abstract is a weak reed for
The Mind-Set of the Market
The Smithean and the Ricardian models offer differing lenses through which we
may view the observed processes of market exchanges. The phenomena themselves,
of course, are the same, and empirically observed exchange relationships surely
embody elements of both explanatory models. Persons specialize (including
specialization in the organization of institutions) because specialization as
such produces gains. As Adam Smith noted, the differences between the
philosopher and the street porter may be small prior to their commitments to a
But persons also differ in their relative capacities to produce economic value.
Presumably there exist noncompeting groups that would retain relative
advantages even after a full temporal adjustment to reach equilibrium. Only a
few persons are seven feet tall and adept at playing basketball.
The two contrasting mind-sets about the origins of trade are important in
determining how people evaluate the composite reality they observe. Persons
will be observed to differ, perhaps widely, in income and wealth. In the
stripped-down Smithean model, in which exchange is explained exclusively by
choice-driven specialization, people will tend to view the observed differences
as temporary and subject to elimination as market prices move toward their
natural levels. If philosophers currently earn much more than street porters,
we can predict that more persons will begin to specialize in philosophy.
Moreover, because the Smitheans mind-set suggests that street porters indeed
can become philosophers, they feel no need to express great concern about the
immigration of additional street porters or about the importation of goods that
are or might be produced domestically.
The Ricardian mind-set, by contrast, leads people to make a quite different
evaluation of the observed reality that contains major differences in incomes
among persons in differing occupational categories. Ricardians will view those
economic differences as more permanent and the forces of adjustment that tend
to reduce them as less effective. In particular, as may be the case in the
United States, if the opening of markets suggests that more of the types of
goods currently produced by relatively unskilled members of the domestic labor
force will be imported, political coalitions organized in opposition to market
extension will find support among unions and their political representatives.
Further, schemes for payments of compensation to those that seem likely to
suffer from the opening of markets will command more sympathetic hearings.
Thus, the basic mind-set about the origins of exchange may exert important
effects on public and political attitudes toward globalization and therefore on
the ultimate political choices that may be made. By exclusively following the
Ricardian digression, economists have perhaps been responsible for unwittingly
making movements toward open markets more difficult than they otherwise would
Smitheans, Ricardians, and Democracy
Finally, a note about politics and economics in general. The open politics
that democrats putatively hold as an attainable ideal depends on the
presumption that all persons in the polity are competent to participate fully
in collective choices. Democracy, as a plausible ideal, seems much more
compatible with the Smithean conception of personal capabilities than with the
Ricardian. If our mind-set allows for equality among all persons in their
ultimate competencies as citizens, should not our mind-set also allow for
equality among all persons in their ultimate competencies as creators of
An Adam Smith democrat is not at all self-contradictory. But what about a
David Ricardo democrat, who is forced, willy-nilly, to judge that some of us
are more equal than others?1
Buchanan, James M., and Yong J. Yoon, eds. 1994. The Return to Increasing
Returns. Ann Arbor: University of Michigan Press.
Yang, Xiaokai. 2001. Economics: New Classical versus Neoclassical Frameworks.
Oxford: Basil Blackwell.
1. The argument in this article implicitly incorporates our interpretation of a
research program that has emerged since the early 1980s. For a collection of
the important contributions to this program, including relevant precursory
materials, see Buchanan and Yoon 1994. For the most comprehensive treatment of
the approach, see Yang 2001.
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