ECONOMISTS love free trade. Their enthusiasm for it often seems to perplex outsiders. This may be due to the fact that "comparative advantage" isn't the most intuitive idea at first brush. Or it might also be a result of economists' frequent emphasis on a relatively narrow view of the gains from trade. The efficiency gains from specialisation are indeed important, but they merely account for a static rise in output. But trade also plays a role in growth: by expanding market size trade encourages the development of new goods, new ideas, and new ways of doing things. And there is also the tricky fact that lots of people live in very large countries, in which trade plays a relatively small economic role. Trade is a harder sell in America, for instance, than it may be in Ireland.

Animus against trade rooted in that sort of logic rests, however, on a false distinction: that there is something qualitatively different about trade across borders and trade within borders. In some ways there is, of course. But in many of the ways that matter economically there isn't at all.

Economists often begin teaching trade by acknowledging this fact. Econ 101 lecturers love to tell students about poor Robinson Crusoe, stuck doing everything on his own on a deserted island until a second person is introduced, to the same island. Here we understand that it isn't trade that is important so much as market size. As markets grow and become more populated, the scope for specialisation and trade grows, whether or not the expanded market jumps any political borders at all. It makes sense that the gains from trade in a little model economy are used in arguments in support of free trade. But it would make more sense to use them in arguments for larger markets, period. And of course, there are many ways to achieve larger markets. One good way is to take a very large country and integrate its domestic market. A large city, say New York, is a bigger market than a smaller city like Philadelphia, and by connecting the two institutionally and infrastructurally one can create a bigger market still. Indeed, when one looks at the importance of market size to incomes and growth one begins to appreciate that trade has been critical in American success. It just happens that for much of the country's history trade between domestic markets has been qualitatively and quantitatively more important than trade between domestic and foreign markets.

An interesting new NBER working paper by Natalia Ramondo, Andes Rodriguez-Clare and Milagro Saborio-Rodriguez helps put a little meat on the bones of this worldview. The authors write that models in which growth is driven by innovation naturally lead to scale effects (because ideas are "nonrivalrous", meaning that they can be applied all across an economy), and scale effects imply that larger countries should be richer than poorer ones. Yet this isn't especially consistent with empirical evidence; Europe is full of small countries that are as rich as their larger neighbours and almost as rich as the much larger American economy. Belgium should be poorer than France and much poorer than America, but it isn't.

The authors attack this problem by making two sensible observations: that individual countries aren't completely isolated and that domestic markets aren't completely integrated. International trade means that borders are permeable while "domestic frictions" mean that large countries aren't able to fully exploit their big domestic markets. In other words, the effective market size in small countries is bigger than size alone would indicate while the effective market size in large countries is smaller than size alone would indicate. Taking account of these facts goes a long way toward explaining observed patterns of incomes across the rich world, and indeed the introduction of "domestic frictions" is more quantitatively important than the introduction of international trade.

One implication of this model is that a large country like America could be even richer if it went about removing those domestic frictions, like institutional barriers to exchange across regions (such as in services, where certification is often handled at the state level) or inadequate infrastructure. But it is also important to point out that for much of modern economic history America's domestic frictions have been less of an obstacle to exchange than were international barriers to trade. And that provides a useful frame work through which to revisit some of America's economy history.

America has in the past been criticised for extolling the virtues of economic liberalism and free trade despite having industrialised behind relatively stiff tariff barriers. A fair point. Yet it would be mistaken to assume that American success therefore relied on a protected market. On the contrary, its tariff-free domestic market was enormous. And given restrictions on trade throughout the world, the American policy of allowing high levels of immigration into that open domestic market was in fact a very effective route to "globalisation", of a sort. In their classic paper on "convergence and deferred catch-up" Moses Abramovitz and Paul David describe the many ways in which America was able to take advantage of a large market:

By 1870, the United States already had a larger aggregate domestic economy than any of its advanced competitors. Moreover, extensive investments in railroads and other transportation infrastructure were helping to realize its potential as an integrated transcontinental product market. Boosted by its comparatively rapid population growth (which was sustained by a tide of international migration), the U.S. growth rate of real GDP between 1870 and 1913 outstripped all other industrializing countries... These differences indicate the advantage that the United States enjoyed in markets for automobiles and for the other new, relatively expensive durable goods, to which the techniques of a scale-dependent, capital-using technology (like mass production) especially applied. The American domestic market was both large and well-unified by an extensive transportation network. And it was unified in other ways that Europe at the time could not match. The rapid settlement of the country from a common cultural base in the Northeastern and Middle Atlantic seaboard closely circumscribed any regional differences in language, legal systems, local legislation and popular tastes. In fact, Americans sought consumer goods of unpretentious and functional design in preference to products that tried to emulate the more differentiated, elaborate and custom-finished look of the old European luxury crafts... The American development of mass production methods was also encouraged by the country’s higher and more widely diffused incomes which supported an ample domestic market for the new metals-based durable goods. By contrast, Europe’s lower and less equally distributed incomes initially restricted the market for such goods to its well-to-do classes, for whom standardized commodities had less appeal in any event, and thereby delayed the full application of American mass production methods.

It is certainly valuable to call attention to the gains from international trade, for reasons of freedom and geopolitical harmony in addition to economic efficiency. But it's also worth remembering the idea at the heart of case for trade, which is that it is a good thing, economically, to raise what you might call "market potential". Market potential is a function of the incomes of all potential trading partners, weighted by distance and transport costs, by barriers to trade and migration, and by far more woolly obstacles like culture and language. Viewed from that perspective, it becomes clear that realising the gains from trade concerns more than just the elimination of tariffs and quotas, but also the relaxation of restrictions on immigration, investment in infrastructure and education, and perhaps even the pursuit of reductions in economic inequality. A wild idea, no doubt, but maybe a little more intuitive in its way than the story commonly told.