I see two problems with your reasoning, acknowledging that you still have to flesh it out.
1) The first best is usually not acheiveable because of imperfections, frictions, and the like. Thus the best you can do is a second best outcome.
2) The first best outcome for the world may not be the best outcome for an individual country. That is, matching labor to the most productive use of capital may maximize world net national product, but a particular country's net national product may be reduced from such a process.
Regarding the rest of your post, I suppose we just have a different philosophical perspective. You appear to be a libertarian. I am not. I believe that governments have a duty to work for the common good, and that includes protecting their citizens ability to earn high wages. Sometimes the cost of protection, in terms of national income, exceeds the benefit, but sometimes it does not. I think you are wrong that this presumption began with the great depression. One Lincoln's justifications for advocay of protectionism was the desire to prevent American wages from getting eroded by cheap foriegn labor.
Now I don't think our trade policy in the 19th century was optimal, so don't think I'm defending it. I bring up Lincoln merely to refute your assertion that it was only after New Deal that Americans started believing that the government had an obligation foster wage growth.
Not to belabor the point, and for whatever it's worth, I'd like to clarify a few points in the previous points (the responsibility for divergence is entirely mine).
1. When speaking of the first- and the second-best I used the term broadly: an introduction of any one constraint "reduces" the best by 1, from first to second. So, you may have a model with three constraints, but if some other, fourth constraint is in focus, then for the purpose of THAT model the three-constraint optimum is the first and and the four-constraint optimum is the second best. I understand that this terminology is usually applied in a more narrow sense -- to the absence/presence of informational asymmetries, as far as I know.
2. I was probably even less precise when I spoke of the role of government. I agree with you: I too think that it is the responsibility of the government to work towards the common good --- provided that what that good is and the commonality thereof are known.
What I spoke of earlier, especially referring to the post-war changes is not whether the government should work towards the common good but whether it alone should do so. What troubles me is the cultural decline of personal responsibility and accountability for one's actions. Under these circumstances, the government becomes the sole source of protection, and that inevitably deteriorates into socialism (the less we do ourselves, the more in trouble we get, the more help is need, the more we look to the gpv't to provide it). I believe, and others wrote extensively, that this narcissistic trait has appeared roughly after WWII and became increasingly more pronounces since then. (Your point about old roots of protectionism is well taken).
This is very far from being libertarian. In fact, I am usually somewhat irritated by the posts of libertarians on this board: they never tell me how they expect public goods to be provided, for instance. I am not for the absence of government but against big government -- there is great deal in between.
3. Back to the caveat about knowledge of what common good is. You write: "I am not. I believe that governments have a duty to work for the common good, and that includes protecting their citizens ability to earn high wages." The devil is, as usual in details: what constitutes "high?" Can the current wages be unreasonably high (in the sense of the national income)? DO you have any doubt that the income of IT labor was affected by what amounted to rationing? Do you find it fair that some retiree was paying that extra portion of wages?
The point is that nobody was arguing for any government intervention into IT wages, which were inflated for decades. It is only when they go down that we hear all the rhetoric.
What is "high" wage, then? It appears that we are not talking about high or low wages but about the sign of their changes: when wages rise, we are happy by default and don't expect the government to protect the investors and consumers; but when they decline, we all should be sad and ask the government to intervene to protect the status quo. Has anyone analyzed and questioned that status quo?
Sorry, I find that even on economics grounds completely unreasonable. But, again, who said that all these sentiments of the public are expressed by economic agents?
4. This is what I would like to make more precise: as you wrote,
) The first best outcome for the world may not be the best outcome for an individual country.
Undoubtedly true in the equilibrium state of a closed system. What is not clear to me whether it is true dynamically. [ To speak at the level of anecdote: an entity that adopts computers early may actually increase its advantages over others -- more generally, if there are increasing returns here). It is clear that social institutions are least vulnerable to free trade: most of the countries as we know them today did not exist when out Constitution was written --- how many of them have adopted it, or any sizable portion of it? I do believe that the main reason for the success of this nation is precisely in values and social/political institutions. Suppose I posit that our institutions translate into this specific comparative advantage: the ability to adjust, and make best use of, the ever changing environment (i.e., act when we do not know that the "common good" is). I understand that this all may be questioned. Buy suppose I take this as an assumption and ask, given that this comparative advantage is not likely to diminish, can free trade be disadvantageous for the country? As you can see, the question is intrinsically dynamic.
An analogy is two computers called America and China. If the first has a larger processor and memory, any FREE use of the resources of China cannot possibly be disadvantageous: a more computationally powerfull computer will be "a step ahead" in the game. Over time, the initial disparities may be expected only to increase. The only thing that can equalize the situation is to transfer some of the memory and processing power --- the analogue of social institutions that other countries are not willing to adopt. In sum, free trade cannot hurt unless other countries adopt our social/political institutions, which they have not done so far (if anything it is we who appear to be giving them up).
My question is therefore not even about the equilibrium but about a steady dynamic, perhaps. I know this is too vague (steady in terms of what? Constant rate of change? constant acceleration?) Sorry if I bore you with this vague intuition --- too vague to resemble even a rudimentary model.
In any case, thanks for your posts and pointers to the literature. I have enjoyed your comments.