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Adam Smith's theory of the gains from trade has caused a great deal of controversy among economic theorists. Throughout much of his work Smith argues that markets efficiently allocate resources. Smith's treatment of the gains from trade, however, is considered inconsistent with his system of natural liberty. This paper offers a new interpretation of the vent-for-surplus model. It is argued that Smith's theory of trade should be considered as an extension of his domestic theory of markets and his theory of productive and unproductive labor. Once interpreted in this light, no inconsistency is found between Smith's theory of trade and his system of natural liberty.
1. Introduction
Adam Smith's theory of the gains from international trade has caused a great deal of controversy and confusion among economic theorists and historians of economic thought. On the one hand, Smith is interpreted as arguing that foreign trade that vents surplus products is necessary to maintain or generate a full utilization of a country's resources. On the other hand, Smith, throughout much of the Wealth of Nations, advocates a system of natural or perfect liberty, which insures that markets operate to efficiently allocate productive resources across industries so as to "direct that industry that its produce may be of the greatest value" (Smith 1994, p. 484). But, if markets allocate resources to their most productive uses, how are we to make sense of such stark statements that surpluses in any given sector "must be sent abroad.... Without such exportation, a part of the productive labour of the country must cease, and the value of its annual produce diminish" (Smith 1994, p. 403).
Many economists write off the apparent discrepancy between a vent-for-surplus gain from trade and a system of natural liberty, and suggest it is a flaw in Smith's logic. J. S. Mill states, "It is in truth a surviving relic of Mercantile Theory" (Mill 1987, p. 579). Others have attempted to vindicate Smith's theory of the gains from trade, arguing that the vent for surplus is meant to apply only to underdeveloped economies (Myint 1958, 1977; Staley 1973) or where goods are produced jointly (Kurz 1992). Blecker (1997) develops an approach that reconciles the vent-- for-surplus gain with other aspects of Smith's trade theory for economies...