TODAY trade among nations in goods, services, and financial instruments is conducted more freely, openly, and abundantly than at any time in human history. An economic boom of unprecedented scope is also sweeping the globe. These two trends are directly related and in deeper ways than conventionally thought. The usual explanation linking free trade to prosperity is that free trade creates wealth by allowing each nation to specialize in what it produces most efficiently. The economic argument for free trade —the theory of comparative advantage-—-is certainly a part of the explanation of global economic growth, but it is radically incomplete.
The more fundamental argument for free trade is political: it restrains government’s ability to redistribute wealth and hamper enterprise. Since the beginning of recorded history rulers of all kinds have used taxation and regulation to extract wealth from their citizens, thereby discouraging productive economic activity. The story is essentially no different in contemporary democratic society in which the rulers are the people themselves: the elected ruling coalition may tax and regulate for the benefit of its members with the same harmful effect on productive activity.
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