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Welcome back you bunch of HomoEconomicus! In today’s Daily Dose of ECON, we will be exploring how “The Law of Association” built our modern society.

law of association by david ricardo

Today, we are going to bring back our old friend David Ricardo – the legendary economist who dissected Lord Adam Smith’s teachings. Ricardo introduced the necessity to create an international free trade system, due to the Law of Comparative Advantage. The theory of comparative advantage is a universal example of the Ricardian Law of Association. Let’s hop into it!

I wanted to share an article by the Mises Institute regarding this quite complex economic theory:

I highly suggest you explore the Mises Institute website, as it offers deep insight into many Austrian School theories. Plus, it contains the entire teachings of the infamous economist Ludwig von Mises.

The Law of Association focuses on how the voluntary cooperation under a free market economy emerged spontaneously and aided in the creation of modern society. How the theory of comparative advantage led to the clear advantages of free trade; even the least resource-endowed, less skilled nations had the incentive to specialise in the good/service in which they have the comparative advantage. This international division of labour and specialisation, led to the exponential growth of nations across the globe. Thus, the global inequity in terms of geographical blessings, culture and history has led to the birth of a highly productive society. Perhaps, the main man Mises will explain this fascinating development slightly more capably than yours truly:

“The law of association makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation. We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature. We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants.” 

Ludwig von Mises, Human Action

However, the theory of comparative advantage and the overarching Law of Association are being highly criticised. The criticism comes from the fact that global economic circumstances are shifting and in regions, such as the European Union, there exists free mobility of not only goods, but also labour as well as capital. Therefore, Ricardo developed his theory under very specific global conditions and may not hold in today’s economic climate, due to the fact that his assumptions are allegedly no longer valid. The article from the Mises Institute delves deeper into these modern skeptics of the Law of Association.  

May the ECON be with you