The Possibility of Permanent Unemployment

Building on Smith and Mill, modern analyses of international trade and of the gains which are to be derived from the unimpeded exchange of goods and services incorporate the assumption that resources in all countries are fully utilised. Meade’s modern classic (1955) is no exception. The doctrine of free trade must, therefore, accept the same presumption: that full employment will exist under conditions of perfectly free trade (given adequate aggregate demand). In terms of the definitions of adjustment given in Chapter 1, a lack of compatibility of free trade with full employment would constitute a case of ‘chronic’ adjustment costs. Under such conditions, workers displaced from import-competing industries would not be able to find alternative employment at a welfare subsistence income.1 As noted, ‘chronic’ in this context must mean that unemployment and adjustment costs endure for longer than is socially tolerable. The allegation that adjustment costs are ‘chronic’ does not require proof that a freely operating system of global markets would not be able to achieve full employment in some far, far distant time.