International Trade and Money

Michael B. Connolly, Alexander K. Swoboda

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351043892
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

This book, first published in 1973, presents a collection of original contributions to the analysis of international trade and monetary relations by a number of distinguished economists. The papers bear on six topics in trade theory: the inadequacies of classical trade theory, customs unions, immiserising growth, the international transmission of technical change, multinational company behaviour, and comparative trends in income distribution.

Chapters dealing with international monetary relations focus on general equilibrium analysis of spot and forward exchange markets, money supply analysis in open economies, devaluation in developing countries, the sharing of the burden of international adjustment, the monetary approach to balance-of-payments theory, and the integration of Keynesian and monetary approaches to international adjustment. Taken together, they summarize much of the most advanced contemporary research in international economics.

The volume is unified by the contributors' common belief that economic theory can help solve important and relevant problems in international economic relations. All the contributions represent original work on the frontiers of research in international economics, but they use simple and understandable techniques to reach their conclusions.

PART I

INTRODUCTION

1

The Need for a Reconsideration of the Theory of International Trade

JOAN ROBINSON

University of Cambridge

There is no branch of economics in which there is a wider gap between orthodox doctrine and actual problems than in the theory of international trade.

I

The argument is usually conducted in terms of static comparisons of equilibrium positions of a model which has the following characteristics: there are two countries which represent the whole trading world; each country is in stationary equilibrium with given ‘resources’ fully employed; there is perfect mobility of labour between occupations within each country and no mobility between countries; the value of imports is equal to the value of exports.

These characteristics of the model exclude discussion of any question which is interesting in reality.

Even within the terms of static comparisons, it is necessary to consider at least three countries before any general conclusions can be drawn. Propositions intended to show that some change is inevitably beneficial to all concerned cannot be demonstrated for more than two partners. For instance, an increase in efficiency in producing an export commodity in country A, within the conditions of the model, benefits B and C taken together, but if C was exporting the same commodity it is likely to be injured. Furthermore, the model applies only to trade between countries at the same level of industrial development; it was ill-suited to dealing with the importation into an industrial metropolis of primary products from colonial and quasi-colonial dependencies, though this in fact formed the great bulk of trade at the very time when teaching derived for the model was in its greatest ascendancy. (Nowadays the traditional arguments are being used to indoctrinate the intellectuals of the ex-colonial nations.)

The analysis conducted in terms of stationary states leaves out development, accumulation and technical change. It leaves out the shock effect of change and the process of readjustment. However drastic the change in the pattern of trade, equilibrium has always been restored before the discussion begins.

The assumption of full employment rules out the problems of effective demand. The capitalist world (except in rare moments of strong boom) is a buyer’s market. Normally every industry has productive capacity for more output than it can sell. From the point of view of a national economy, exports promote employment and profits; imports reduce them. The comforting doctrines that a country ‘cannot be undersold all round’ was derived from the postulate of universal full employment. The argument consists merely in assuming what it hopes to prove.

Finally, the assumption that, for each country, the value of imports is necessarily equal to the value of exports rules out the problem of maintaining the national balance of payments which has been the great preoccupation of economic policy from the earliest times.

The aim of the traditional theory was to establish the beneficial effects of free trade. This was eagerly accepted by orthodox opinion in the country which had the most to gain from open markets for its exports. But in fact the case was made out by assuming away all the difficulties and all the aims which in reality give rise to protectionist policies.¹

The model is usually operated in terms of a comparison between a situation in which each country is isolated, consuming only its own products, with a situation in which trade is taking place, in equilibrium, without any. difference in the ‘resources’ or the ‘tastes’ of the two communities. Since the model was constructed for the purpose of a polemic against protection, the argument focuses on the case where the same commodities are produced in both countries. Protection would not arise unless a country could produce at home goods which others export. The import of exotic commodities did not need to be defended, and in any case, economic geography does not lend itself to the high abstractions of pure theory. Professor Samuelson’s remark, that the production of tropical fruit in the tropics is due to the prevalence of tropical conditions there, was not intended to draw the reader’s attention to a major aspect of world trade, but rather to dismiss it as uninteresting.²

II

Ricardo set out the case against protection in terms of two countries, England and Portugal, each capable of producing both wine and cloth. The argument implies that there is a constant amount of labour in each country which can be shifted from one line of production to the other without difficulty or loss. (Even when he takes the example of wine, there is no problem of specialised land. Constant returns prevail for each commodity up to full employment of the whole labour force.) There are different production functions (in modern jargon) in the two countries. Output per head of wine in Portugal, relatively to output per head of cloth, is greater than in England. Thus total output is increased when trade permits labour to be moved into production of wine in Portugal and cloth in England.

The relative prices of the commodities in each country are proportional to labour cost. (The rate of profit and the value of capital per man, in each country, are the same for both commodities.) Since the relative prices are different, it is impossible for both to rule in a free market. To work out the equilibrium position that the assumptions entail, we have to introduce the conditions of demand. If England consumes more wine than Portugal can export, she must produce some wine herself. The world price of wine in terms of cloth, in the final position, is then set by conditions of production in England. Portugal becomes specialised, exporting wine and importing cloth. She gains on the terms of trade in respect of all her imports. (Portuguese wine sells at the same price as English, which is dearer in terms of cloth.) England gains in respect of the part of her requirements of wine which she can get by exporting cloth, since this uses less labour per unit than wine produced at home. The results are reversed when Portugal is the country producing both commodities. In the borderline case where each country produces only one commodity, the division of the benefit between them depends solely on the conditions of demand, and relative prices are no longer governed by costs of production.

For Ricardo, the rate of profit on capital depends upon the labour-cost of producing the necessary real wage. Where the imported commodity is a wage good, trade tends to raise the rate of profit. (This was a point of great importance in his campaign against the corn laws.)

He provides a mechanism to ensure balanced trade. In his scheme the rate of profit, in general, will be different in the two countries; if this occurred between districts within one nation, there would be a movement to invest where the rate of profit was higher.

Experience, however, shews that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and intrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations.³

It follows that an excess of imports has to be paid for in gold. The surplus country, receiving gold, experiences a rise of prices and the deficit country, losing gold, experiences a fall, until the value of goods traded between them is brought into balance.

Whether convincing or not, Ricardo’s analysis is perfectly clear. The model in Marshall’s Pure Theory of Foreign Trade, expressed in terms of ‘offer curves’, is not so easy to grasp. He refers to the Pure Theory of Domestic Values for the analysis of costs and prices in each country, but this theory is an inextricable mixture of static and dynamic elements. ‘Increasing returns’ is the result of investment and technical progress going on through time as the output of a particular commodity is growing. How can this be fitted in to the comparisons of static equilibrium? He was aware of the contradiction but did not feel able to deal with it.⁴

To make sense of his system, it seems to be necessary to confine the argument to the case in which each particular commodity is produced ‘under conditions of diminishing returns’, that is, where labour cost per unit is an increasing function of the level of output, presumably because each requires some specialised ingredient which is in limited supply. (A footnote⁵ promises an appendix which will explain the meaning of ‘cost of production’ but it is nowhere to be found.) On this basis, the analysis can be explained as follows. Two countries (which comprise the world) have different production functions for the various commodities. Each country has at least one commodity for which its productive capacity is limited relative to demand at home and at least one for which productive capacity exceeds demand. In a position of equilibrium with balanced trade, world prices (and the national incomes of the countries) are such that the cost at the margin of a unit of each commodity in each country is equal to its price in the world market (allowing for transport costs). Each country supplies part of its consumption of its high-cost commodity, importing the rest, and consumes part of its low-cost commodity, exporting the rest. The position of equilibrium is such that if either country were to export a little less, the cost at home of its commodity would be lower and the demand price abroad would be higher. Similarly, if it were to export a little more, its costs would be higher and its demand price lower; the equilibrium volume of trade is determined by the rule that supply price is equal to demand price for each commodity on the world market.

But this argument is completely hollow. There is no mechanism to make trade balance; it is merely assumed that the value of exports is equal to value of imports. Marshall refers to the fact that the rate of profit obtainable in one country must be the same for each commodity, but he says nothing about the rate of profit in the other. He does not discuss what would happen if the rates of profit were different. (Writing in the great age of British overseas investment, he could not very well use Ricardo’s argument as an excuse for not discussing the subject.) In his monetary writings Marshall relied on the argument about flows of gold, but in his Pure Theory he merely postulates that trade is always balanced. The apparatus of offer curves was intended to elaborate and refine upon the simple system of labour-value prices but Marshall only succeeded in producing a degenerate version of Ricardo’s model.

Samuelson’s version of the Hecksher-Ohlin theory is still more degenerate.⁶ In this model the production functions are everywhere the same; countries differ only in respect to their ‘factor endowments’.

It was on this basis that Samuelson produced the theorem that, in equilibrium with two factors, two countries and two commodities, either at least one country must be specialised, or, if both commodities are produced in both countries, the ‘factor prices’ must be the same in both countries. (Harrod pointed out that this depends upon one more assumption that Samuelson had slipped in – that the production functions are such that the commodity which is more labour intensive at one level of ‘factor prices’ is so at all levels.⁷)

Samuelson called the factors of production labour and land but the argument is usually developed in terms of labour and ‘capital’. Each country is endowed with a lump of ‘malleable capital’ which can be used in various proportions with labour and the ‘factor prices’ which are equalised, or not equalised, are the wage rate and the rate of interest. This was the neo-neoclassical system in its heyday. Recently, this conception of capital has retreated from criticism into a ‘one-commodity world’,⁸ which presumably would not allow any scope for trade, though it has been argued that there might be a one-way movement of savings of the commodity from the country where its ‘marginal productivity’ was lower to be invested in the other where it was higher.⁹

III

Ricardo relied upon adjustments of the price levels to keep trade in balance. We can make some sense of this without resorting to the Quantity Theory of Money if we substitute money-wage rates for gold flows as the equilibrating mechanism. On this view, if there is near-full employment when trade is balanced, a surplus of exports generates an excess demand for labour which drives up money costs and (with fixed exchange rates) reduces the competitive advantage of the country. In a very broad, long-run historical sweep, this tendency evidently works – high output per head, comparing one region with another, goes with high money-wage rates and therefore high real wages in terms of tradable goods. But the tendency is weak, sluggish and irregular. At any moment there is certainly not balanced trade between the various areas of the habitable globe that happen to be under separate national governments – there is an ever-changing pattern of deficits and surpluses.

Moreover, Ricardo’s doctrine that gold flows in when there is a surplus of exports and out when there are surplus imports, which may have been not far wrong in his day, was quite false when it was repeated by Marshall and Pigou. An inflow of gold (or gain of reserves) occurs when the outflow of finance is less than the surplus in the balance on income account (including interest and dividends as well as visible and invisible trade), or when the inflow of finance is greater than the deficit on income account. The operation of the gold standard mechanism was to keep flows of lending in line with income balances. A centre that was lending too much or borrowing too little raised its interest rate. Since there was perfect confidence in exchange rates, small differences in interest rates were sufficient to redirect the flow of finance. But this mechanism would not have been strong enough to do its work if there had not been har...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Editors’ Preface
• PART I: INTRODUCTION
• PART II: INTERNATIONAL TRADE
• PART III: INTERNATIONAL MONETARY ANALYSIS
• Index