The model developed by Gomory and Baumol is fundamentally flawed. Their argument regarding multiple equilibria ignores market factors, their analysis is confused, and their conclusions are fallacious. The distribution of the potential equilibria is defective because it is based on their mistaken concept of multiple equilibria, so we should not rely on their conclusion that trade leads to conflicting national interests. Furthermore, Gomory and Baumol’s policy prescriptions are naïve. While they show some recognition of the political difficulties of implementing effective government policy, particularly regarding the issues of the scarcity of knowledge and the potential for agents of the state to be influenced by political forces, for the most part they dismiss these possibilities out of hand.
The problems of applying theories about intervention to down-to-earth issues prevent intervention from being effective. Some of these problems, in short, are issues about the incentives faced by elected officials and by bureaucrats that lead them to act against the general interest, such as the fact that government agents cannot use dispersed knowledge as effectively as market participants, and that given the absence of prices in most government decision making, officials face a calculation problem that cannot be overcome. Of course, Gomory and Baumol fail to recognize any of these complications.
Baumol was reluctant to undertake this project. When the book was first proposed he “objected that he had never worked on international trade theory or directly related subjects” (p. xiv). He should have followed his first instinct. In short, this work is a setback for those making the case against free trade.