Free market capitalism is based upon the premise that private individuals rather than the state make the best economic decisions. By confining the role of the government to protecting private property, maintaining law and order and shielding the system from external exaggeration, this laissez-faire policy of facilitation, rather than regulation; reduces the role of the state to that of the ‘night watchman’, leaving the ‘invisible hand’ of the market to be the controlling force (Marron, 2010).
Just as the free market is facilitated by a reduced state, the free market facilitates free trade. In an international sense the free market economy is accepted as widespread, meaning international trade is a truly globalising factor. Under a free trade policy, prices emerge from supply and demand as one nation’s economy interacts with many others. Twentieth century economist and academic Friedrich van Hayek wrote:
“It is necessary in the first instance that the parties in the market should be free to sell and buy at any price at which they can find a partner to the transaction, and that anybody should be free to produce, sell, and buy anything that may be produced and sold at all”.
(1944,p37)
Furthermore, nineteenth century economist David Ricardo continued the work of Adam Smith’s Wealth of Nations in advocating free trade suggesting that there is mutual benefit as long as nations focus on the areas where they have “relative productivity advantage” (Arnold and McGauley , 2011). A modern example would be the comparative advantage of Western nations in the field of the finance and service industry and that off South-East Asian nations on production. Essentially, nations should specialise. With these thoughts in mind, advocates of free trade believe it can ensure maximum prosperity across the globe (Sachs, 2005).
Some critics of free trade policy call in to question Ricardo’s belief in mutually beneficial trading through specialisation, suggesting that such a situation creates little economic mobility. A common example of this is known as the ‘agriculture problem’. As people become wealthier their desire to buy high-spec goods increase, generally produced in well-developed nations. However, as people become wealthier they do not become hungrier, at least not literally, and food production remains the same. Comparably the wealthy nation continues to gain wealth, and the poorer nation remains stagnant (Oxfam, 2011).
Moreover from the idealistic criticism of free trade policy is the realist criticism that free trade does not actually exist. The removal of the state from economic decisions is integral to developing a full and beneficial free market place; critics suggest that in actuality, this does not exist. Through trading agreements countries approve a number of criteria; tariff reductions for example, so as to increase economical interaction and create a trading bloc. This comes at the expense of other nations trading in to that bloc, who become over-priced through tariff increases to non-trading bloc members, undersold by tariff reduction to trading bloc members and even withdrawn by quotas on nations outside of the trading bloc (Cohen, 2008). Oxfam suggests that through trade diversion, some of the world’s wealthiest nations protect themselves from the free market they preach, the consequences of which for developing nations are dire. (Oxfam, 2011; CHUA, 2004).
When drawing conclusion on whether free trade policy works for all countries, we must consider what in reality free trade is, and what form of international trading we currently undertake. As the originally free market- and consequently developed- economies of the West have introduced trading agreements, they have since become common place, disqualifying many nations from the market. This form of ‘mixed economy’ rather than free market is what leads to the most intense criticism. In it’s current form free trade policy clearly does not work for every nation, this is why discussions on global tariff reduction such as the recent Doha round are of great importance. Supporters believe that a freer free market and resulting freer free trade can work for all nations.
Bibliography
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