A Heterodox and Post Keynesian Bibliography on Trade Theory

I include the odd useful and relevant neoclassical work too.

I will update on a regular basis:

Baiman, R. 2010. “The Infeasibility of Free Trade in Classical Theory: Ricardo’s Comparative Advantage Parable has No Solution,” Review of Political Economy 22.3: 419–437.

Bairoch, Paul. 1993. Economics and World History: Myths and Paradoxes. Harvester Wheatsheaf, New York and London.

Brewer, A. 1985. “Trade with Fixed Real Wages and Mobile Capital,” Journal of International Economics 18: 177–186.

Chang, Ha-Joon. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press, London.

Chang, Ha-Joon. 2008. Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World. Random House Business, London.

Cripps, Francis and Wynne Godley. 1978. “Control of Imports as a Means to Full Employment and the Expansion of World Trade: The UK’s Case,” Cambridge Journal of Economics 2.3: 327–334.

Davidson, Paul. 2011. Post Keynesian Macroeconomic Theory: Foundation for Successful Economic Policies for the Twenty-First Century (2nd edn). Edward Elgar Publishing, Cheltenham. pp. 249–256.

Davidson, Paul. 2015. “Is International Free Trade always Beneficial?,” in Paul Davidson, Post Keynesian Theory and Policy: A Realistic Analysis of the Market Oriented Capitalist Economy. Edward Elgar, Cheltenham, UK. 124–135.

Duffield, J. 2010. ‘Ricardian ‘Comparative Advantage’ is Illusory,” Real-World Economics Review 54 (27 September). 62–78.
http://www.paecon.net/PAEReview/issue54/Duffield54.pdf

Fletcher, Ian. 2011. Free Trade Doesn’t Work: What Should Replace It and Why (2nd edn.). Coalition for a Prosperous America, Sheffield, MA.

Hudson, Michael. 2010. America’s Protectionist Takeoff, 1815–1914: The Neglected American School of Political Economy (new edn.). Islet, Dresden.

Kaldor, Nicholas. 1978. “The Nemesis of Free Trade,” in N. Kaldor, Further Essays on Applied Economics. Duckworth, London. 234–241.

Kaldor, Nicholas. 1980. “The Foundations of Free Trade Theory and their Implications for the Current World Recession,” in E. Malinvaud and J. P. Fitoussi (eds), Unemployment in Western Countries. MacMillan Press, London. 85–100.

Kaldor, Nicholas. 1981. “The Role of Increasing Returns, Technical Progress and Cumulative Causation in the Theory of International Trade and Economic Growth,” Économie Appliquée 34.4: 593–617.

Kaldor, Nicholas. 1985. Economics Without Equilibrium. M.E. Sharpe, Armonk, N.Y. pp. 68–75.

Kaldor, Nicholas. 1996. Causes of Growth and Stagnation in the World Economy. Cambridge University Press, Cambridge.

King, John Edward. 2013. David Ricardo. Palgrave Macmillan, Basingstoke, UK. pp. 81–88, 104–106.

Lavoie, Marc. 2014. Post-Keynesian Economics: New Foundations. Edward Elgar, Cheltenham. pp. 507–512.

Norman, Neville R. 1996. “A General Post Keynesian Theory of Protection,” Journal of Post Keynesian Economics 18.4: 509–531.

Palley, Thomas I. “The Free Trade Debate: A Left Keynesian Gaze.”
http://www.thomaspalley.com/docs/articles/international_markets/freetrade_debate.pdf

Palley, Thomas I. 2008. “Institutionalism and New Trade Theory: Rethinking Comparative Advantage and Trade Policy,” Journal of Economic Issues 42.1: 195–208.

Parrinello, S. 2006. “National Competitiveness and Absolute Advantage in a Global Economy,” Dipartimento di Economia pubblica, Working paper 95, University of Rome “La Sapienza.”

Prasch, Robert E. 1995. “Reassessing Comparative Advantage: The Impact of Capital Flows on the Argument for Laissez-Faire,” Journal of Economic Issues 29.2: 427–433.

Prasch, Robert E. 1996. “Reassessing the Theory of Comparative Advantage,” Review of Political Economy 8.1: 37–56.

Pullen, John. 2006. “Did Ricardo really have a Law of Comparative Advantage? A Comparison of Ricardo’s Version and the Modern Version,” History of Economics Review 44: 59–75.

Robinson, Joan. 1973. “The Need for a Reconsideration of the Theory of International Trade,” in M. B. Connolly and A. K. Swoboda (eds.), International Trade and Money: The Geneva Essays. Allen and Unwin, London. 15–25.

Robinson, Joan. 1974. Reflections on the Theory of International Trade. The University Press, Manchester.

Robinson, Joan. 1977. “What Are the Questions?,” Journal of Economic Literature 15.4: 1318–1339, at 1333–1336.

Robinson, Joan. 1979. Aspects of Development and Underdevelopment. Cambridge University Press, Cambridge and New York.

Ruffin, Roy J. 2002. “David Ricardo’s Discovery of Comparative Advantage,” History of Political Economy 34.4: 727–748.

Shaikh, A. 2007. “Globalization and the Myth of Free Trade,” in A. Shaikh (ed.), Globalization and the Myths of Free Trade: History, Theory, and Empirical Evidence. Routledge, London 50–68.

Some other work that looks interesting:

Meoqui, Jorge Morales. 2011. “Comparative Advantage and the Labor Theory of Value,” History of Political Economy 43.4: 743–763.

Steedman, I. 1999. “Production of Commodities by Means of Commodities and the Open Economy,” Metroeconomica 50.3: 260–276.

Meoqui, Jorge Morales. 2016. “Ricardo’s Numerical Example versus Ricardian Trade Model: A Comparison of Two Distinct Notions of Comparative Advantage,” July
http://etdiscussion.worldeconomicsassociation.org/?wea_paper=ricardos-numerical-example-versus-ricardian-trade-model-a-comparison-of-two-distinct-notions-of-comparative-advantage

Schumacher, Reinhard. 2012. Free Trade and Absolute and Comparative Advantage: A Critical Comparison of Two Major Theories of International Trade. Universitätsverlag Potsdam, Potsdam.

Ricardo’s Argument for Free Trade by Comparative Advantage

My purpose here is not to analyse it or refute it in detail, but merely to set it out.

Here it is taken from Ricardo’s On the Principles of Political Economy and Taxation (2nd edn.; 1819), in full context:

“It is quite as important to the happiness of mankind, that our enjoyments should be increased by the better distribution of labour, by each country producing those commodities for which by its situation, its climate, and its other natural or artificial advantages it is adapted, and by their exchanging them for the commodities of other countries, as that they should be augmented by a rise in the rate of profits.

It has been my endeavour to shew throughout this work, that the rate of profits can never be increased but by a fall in wages, and that there can be no permanent fall of wages but in consequence of a fall of the necessaries on which wages are expended. If, therefore, by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise. If, instead of growing our own corn, or manufacturing the clothing and other necessaries of the labourer, we discover a new market from which we can supply ourselves with these commodities at a cheaper price, wages will fall and profits rise; but if the commodities obtained at a cheaper rate, by the extension of foreign commerce, or by the improvement of machinery, be exclusively the commodities consumed by the rich, no alteration will take place in the rate of profits. The rate of wages would not be affected, although wine, velvets, silks, and other expensive commodities, should fall 50 per cent., and consequently profits would continue unaltered.

Foreign trade, then, though highly beneficial to a country, as it increases the amount and variety of the objects on which revenue may be expended, and affords, by the abundance and cheapness of commodities, incentives to saving, and to the accumulation of capital, has no tendency to raise the profits of stock, unless the commodities imported be of that description on which the wages of labour are expended.

The remarks which have been made respecting foreign trade, apply equally to home trade. The rate of profits is never increased by a better distribution of labour, by the invention of machinery, by the establishment of roads and canals, or by any means of abridging labour either in the manufacture or in the conveyance of goods. These are causes which operate on price, and never fail to be highly beneficial to consumers; since they enable them with the same labour, or with the value of the produce of the same labour, to obtain in exchange a greater quantity of the commodity to which the improvement is applied; but they have no effect whatever on profit. On the other hand, every diminution in the wages of labour raises profits, but produces no effect on the price of commodities. One is advantageous to all classes, for all classes are consumers; the other is beneficial only to producers; they gain more, but every thing remains at its former price. In the first case, they get the same as before; but every thing on which their gains are expended, is diminished in exchangeable value.

The same rule which regulates the relative value of commodities in one country, does not regulate the relative value of the commodities exchanged between two or more countries.

Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world. It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.

In one and the same country, profits are, generally speaking, always on the same level; or differ only as the employment of capital may be more or less secure and agreeable. It is not so between different countries. If the profits of capital employed in Yorkshire, should exceed those of capital employed in London, capital would speedily move from London to Yorkshire, and an equality of profits would be effected; but if in consequence of the diminished rate of production in the lands of England, from the increase of capital and population, wages should rise, and profits fall, it would not follow that capital and population would necessarily move from England to Holland, or Spain, or Russia, where profits might be higher.

If Portugal had no commercial connexion with other countries, instead of employing a great part of her capital and industry in the production of wines, with which she purchases for her own use the cloth and hardware of other countries, she would be obliged to devote a part of that capital to the manufacture of those commodities, which she would thus obtain probably inferior in quality as well as quantity.

The quantity of wine which she shall give in exchange for the cloth of England, is not determined by the respective quantities of labour devoted to the production of each, as it would be, if both commodities were manufactured in England, or both in Portugal.

England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth.

To produce the wine in Portugal, might require only the labour of eighty men for one year, and to produce the cloth in the same country, might require the labour of ninety men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of ninety men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth.

Thus England would give the produce of the labour of 100 men for the produce of the labour of 80. Such an exchange could not take place between the individuals of the same country. The labour of 100 Englishmen cannot be given for that of 80 Englishmen, but the produce of the labour of 100 Englishmen may be given for the produce of the labour of 80 Portuguese, 60 Russians, or 120 East Indians. The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.*

[footnote:
* It will appear then, that a country possessing very considerable advantages in machinery and skill, and which may therefore be enabled to manufacture commodities with much less labour than her neighbours, may in return for such commodities, import a portion of the corn required for its consumption, even if its land were more fertile, and corn could be grown with less labour than in the country from which it was imported. Two men can both make shoes and hats, and one is superior to the other in both employments; but in making hats, he can only exceed his competitor by one-fifth or 20 per cent., and in making shoes he can excel him by one-third or 33 per cent.; – will it not be for the interest of both, that the superior man should employ himself exclusively in making shoes, and the inferior man in making hats?]

It would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose. In that case, the relative value of these commodities would be regulated by the same principle, as if one were the produce of Yorkshire, and the other of London: and in every other case, if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities, than the additional quantity of labour required to convey them to the various markets where they were to be sold.

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.

Gold and silver having been chosen for the general medium of circulation, they are, by the competition of commerce, distributed in such proportions amongst the different countries of the world, as to accommodate themselves to the natural traffic which would take place if no such metals existed, and the trade between countries were purely a trade of barter.

Thus, cloth cannot be imported into Portugal, unless it sell there for more gold than it cost in the country from which it was imported; and wine cannot be imported into England, unless it will sell for more there than it cost in Portugal. If the trade were purely a trade of barter, it could only continue whilst England could make cloth so cheap as to obtain a greater quantity of wine with a given quantity of labour, by manufacturing cloth than by growing vines; and also whilst the industry of Portugal were attended by the reverse effects. Now suppose England to discover a process for making wine, so that it should become her interest rather to grow it than import it; she would naturally divert a portion of her capital from the foreign trade to the home trade; she would cease to manufacture cloth for exportation, and would grow wine for herself. The money price of these commodities would be regulated accordingly; wine would fall here while cloth continued at its former price, and in Portugal no alteration would take place in the price of either commodity. Cloth would continue for some time to be exported from this country, because its price would continue to be higher in Portugal than here; but money instead of wine would be given in exchange for it, till the accumulation of money here, and its diminution abroad, should so operate on the relative value of cloth in the two countries, that it would cease to be profitable to export it. If the improvement in making wine were of a very important description, it might become profitable for the two countries to exchange employments; for England to make all the wine, and Portugal all the cloth consumed by them; but this could be effected only by a new distribution of the precious metals, which should raise the price of cloth in England, and lower it in Portugal. The relative price of wine would fall in England in consequence of the real advantage from the improvement of its manufacture; that is to say, its natural price would fall; the relative price of cloth would rise there from the accumulation of money.

Thus, suppose before the improvement in making wine in England, the price of wine here were 50l. per pipe, and the price of a certain quantity of cloth were 45l., whilst in Portugal the price of the same quantity of wine was 45l., and that of the same quantity of cloth 501.; wine would be exported from Portugal with a profit of 5l. and cloth from England with a profit of the same amount.

Suppose that, after the improvement, wine falls to 45l. in England, the cloth continuing at the same price. Every transaction in commerce is an independent transaction. Whilst a merchant can buy cloth in England for 45l. and sell it with the usual profit in Portugal, he will continue to export it from England. His business is simply to purchase English cloth, and to pay for it by a bill of exchange, which he purchases with Portuguese money. It is to him of no importance what becomes of this money: he has discharged his debt by the remittance of the bill. His transaction is undoubtedly regulated by the terms on which he can obtain this bill, but they are known to him at the time; and the causes which may influence the market price of bills, or the rate of exchange, is no consideration of his.

If the markets be favourable for the exportation of wine from Portugal to England, the exporter of the wine will be a seller of a bill, which will be purchased either by the importer of the cloth, or by the person who sold him his bill; and thus without the necessity of money passing from either country, the exporters in each country will be paid for their goods. Without having any direct transaction with each other, the money paid in Portugal by the importer of cloth will be paid to the Portuguese exporter of wine; and in England by the negotiation of the same bill, the exporter of the cloth will be authorized to receive its value from the importer of wine.

But if the prices of wine were such that no wine could be exported to England, the importer of cloth would equally purchase a bill; but the price of that bill would be higher, from the knowledge which the seller of it would possess, that there was no counter bill in the market by which he could ultimately settle the transactions between the two countries; he might know that the gold or silver money which he received in exchange for his bill, must be actually exported to his correspondent in England, to enable him to pay the demand which he had authorized to be made upon him, and he might therefore charge in the price of his bill all the expenses to be incurred, together with his fair and usual profit.

If then this premium for a bill on England should be equal to the profit on importing cloth, the importation would of course cease; but if the premium on the bill were only 2 per cent., if to be enabled to pay a debt in England of 100l.; 102l. should be paid in Portugal, whilst cloth which cost 45l. would sell for 50l., cloth would be imported, bills would be bought, and money would be exported, till the diminution of money in Portugal, and its accumulation in England, had produced such a state of prices as would make it no longer profitable to continue these transactions.

But the diminution of money in one country, and its increase in another, do not operate on the price of one commodity only, but on the prices of all, and therefore the price of wine and cloth will be both raised in England, and both lowered in Portugal. The price of cloth, from being 45l. in one country and 50l. in the other, would probably fall to 49l. or 48l. in Portugal, and rise to 46l. or 47l. in England, and not afford a sufficient profit after paying a premium for a bill to induce any merchant to import that commodity.

It is thus that the money of each country is apportioned to it in such quantities only as may be necessary to regulate a profitable trade of barter. England exported cloth in exchange for wine, because, by so doing, her industry was rendered more productive to her; she had more cloth and wine than if she had manufactured both for herself; and Portugal imported cloth and exported wine, because the industry of Portugal could be more beneficially employed for both countries in producing wine. Let there be more difficulty in England in producing cloth, or in Portugal in producing wine, or let there be more facility in England in producing wine, or in Portugal in producing cloth, and the trade must immediately cease.

No change whatever takes place in the circumstances of Portugal; but England finds that she can employ her labour more productively in the manufacture of wine, and instantly the trade of barter between the two countries changes. Not only is the exportation of wine from Portugal stopped, but a new distribution of the precious metals takes place, and her importation of cloth is also prevented.

Both countries would probably find it their interest to make their own wine and their own cloth; but this singular result would take place: in England, though wine would be cheaper, cloth would be elevated in price, more would be paid for it by the consumer; while in Portugal the consumers, both of cloth and of wine, would be able to purchase those commodities cheaper. In the country where the improvement was made, prices would be enhanced; in that where no change had taken place, but where they had been deprived of a profitable branch of foreign trade, prices would fall.

This, however, is only a seeming advantage to Portugal, for the quantity of cloth and wine together produced in that country would be diminished, while the quantity produced in England would be increased. Money would in some degree have changed its value in the two countries — it would be lowered in England and raised in Portugal. Estimated in money, the whole revenue of Portugal would be diminished; estimated in the same medium, the whole revenue of England would be increased.

Thus then it appears, that the improvement of a manufacture in any country tends to alter the distribution of the precious metals amongst the nations of the world: it tends to increase the quantity of commodities, at the same time that it raises general prices in the country where the improvement takes place.” (Ricardo 1819: 141–155).

Some preliminary remarks:

(1) Ricardo holds to the labour theory of value and this shows in his analysis of profits.

(2) Ricardo’s argument for free trade is that it is better for the welfare of aggregate groups of human beings, whether considered as a nation of people or mankind as a whole: “This pursuit of individual advantage is admirably connected with the universal good of the whole” (Ricardo 1819: 144). This is interesting, and counter to Austrian defences of free trade on individual private property rights grounds which tend to shun consequentialist arguments (in the latter of which free trade is justified because it has positive outcomes for society as a whole).

(3) Ricardo accepts the Classical view that profits in a country tend to a uniform, long-run rate of profit.

(4) Ricardo assumes that capital and people do not move between countries on a significant scale.

(5) Ricardo seems to invoke the labour theory of value in his analysis:

“England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time.” (Ricardo 1819: 145–146).

Does Ricardo mean here that the men work the same number of hours in the working day, so that 100 and 120 men are both working, say, 10 hours a day for a year?

If so, this is the labour theory of value, and Ricardo’s analysis here is also based on the labour theory:

“Thus England would give the produce of the labour of 100 men for the produce of the labour of 80. Such an exchange could not take place between the individuals of the same country. The labour of 100 Englishmen cannot be given for that of 80 Englishmen, but the produce of the labour of 100 Englishmen may be given for the produce of the labour of 80 Portuguese, 60 Russians, or 120 East Indians. The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.” (Ricardo 1819: 146–147).

But it seems to me that this analysis is deeply flawed because of the mistaken labour theory of value invoked by Ricardo.

(6) Ricardo states explicitly that his argument assumes that capital and labour are not internationally mobile, even though he appears to think that if they were internationally mobile this would be good for both capitalists and consumers for different reasons:

“It would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose. In that case, the relative value of these commodities would be regulated by the same principle, as if one were the produce of Yorkshire, and the other of London: and in every other case, if capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labour price of commodities, than the additional quantity of labour required to convey them to the various markets where they were to be sold.

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.” (Ricardo 1819: 147–148).

But Ricardo is wrong even here. Under such a scenario, the aggregate stock of capital and investment in England would shrink, as capital was transferred to Portugal, and per capita GDP in England would shrink too. All the industries associated with production of cloth would also collapse, and people employed here would be made unemployed.

And, assuming England has trade balance, the collapse of its cloth export sector will open up trade deficits, which have to be paid for in some way (either by a new export trade or by capital account surpluses). If a balance of payments crisis happens, England will have to suffer reduced consumption. It is unlikely that the international mobility of capital and labour would be beneficial to England.

BIBLIOGRAPHY
Ricardo, David. 1819. On the Principles of Political Economy, and Taxation (2nd edn.). John Murray, London.

The Cult of Free Trade in a Nutshell

The argument for unrestricted free trade by Ricardo’s principle of comparative advantage requires a number of stated or hidden fundamental assumptions to work properly, as follows:

(1) domestic capital or factors of production like capital goods and skilled labour are not internationally mobile, and instead will be re-employed in the sector/sectors in which the country’s comparative advantage lies;

(2) workers are fungible, and will be re-trained easily and moved to the new sectors where comparative advantage lies.

(3) it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage;

(4) technology is essentially unchanging and uniform; and

(5) there are no returns to scale.

Assumption (1) doesn’t hold today and what happens is movement of capital under the principle of absolute advantage (Lavoie 2014: 508). This results in a type of race to the bottom for industrialised countries that do not protect their industries.

(2) is of course highly questionable. (3), (4) and (5) are utter nonsense. Abstract pro-free trade arguments often seem to make the implicit assumption of full employment, or the effective tendency to full employment, in all nations as well, which is yet another mad and unrealistic assumption (Lavoie 2014: 508).

Movement of capital to a place where it has absolute advantage tends to cause de-industrialization in Western countries, as capital moves to nations with the lowest unit labour and factor costs, and higher wage countries experience falling wages, high unemployment and rising trade deficits.

A country like China actually makes the process worse by actively intervening via mercantilist industrial policies to promote offshoring of manufacturing to their country. But even if this intervention didn’t happen, unrestricted free trade would still have deleterious consequences for the high wage countries. For Post Keynesian alternative policies to free trade, see Norman (1996), Cripps and Godley (1978), and Lavoie (2014: 507–512).

The argument for pure free trade is built on sand and is almost wholly intellectually bankrupt if it is supposed to be describing the world in which we live. A longer analysis is here. This theoretical incompetence in neoclassical and Austrian economics on the issue of free trade is accompanied by a blockheaded ignorance of the real-world success of protectionism (see Bairoch 1993; Chang 2002 and 2008; Hudson 2010; Reinert 2007).

The argument for free trade would be a joke, if it didn’t have such disgusting and terrible consequences for real human beings.

Look at the images of Detroit here and weep. This once prosperous city has been wrecked by the cult of free trade.

Further reading
“The Early British Industrial Revolution and Infant Industry Protectionism: The Case of Cotton Textiles,” June 22, 2010.

“Protectionism and US Economic History,” June 8, 2014.

“Mises on the Ricardian Law of Association: The Flaws of Praxeology,” January 25, 2011.

BIBLIOGRAPHY
Bairoch, Paul. 1993. Economics and World History: Myths and Paradoxes. Harvester Wheatsheaf, New York and London.

Chang, Ha-Joon. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press, London.

Chang, Ha-Joon. 2008. Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World. Random House Business, London.

Cripps, Francis and Wynne Godley. 1978. “Control of Imports as a Means to Full Employment and the Expansion of World Trade: The UK’s Case,” Cambridge Journal of Economics 2.3: 327–334.

Hudson, Michael. 2010. America’s Protectionist Takeoff, 1815–1914: The Neglected American School of Political Economy (new edn.). Islet, Dresden.

Lavoie, Marc. 2014. Post-Keynesian Economics: New Foundations. Edward Elgar, Cheltenham.

Norman, Neville R. 1996. “A General Post Keynesian Theory of Protection,” Journal of Post Keynesian Economics 18.4: 509–531.

Reinert, Erik S. 2007. How Rich Countries Got Rich, and Why Poor Countries Stay Poor. Carroll & Graf, New York.

Robinson, J. 1973. “The Need for a Reconsideration of the Theory of International Trade,” in M. B. Connolly and A. K. Swoboda (eds.), International Trade and Money: The Geneva Essays. Allen and Unwin, London. 15–25.

Ricardo on Utility and Non-Reproducible Goods

From David Ricardo’s On the Principles of Political Economy and Taxation (3rd edn.; 1821), Chapter 1, “On Value”:

“It has been observed by Adam Smith, that ‘the word Value has two different meanings, and sometimes expresses the Utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called value in use ; the other value in exchange. The things,’ he continues, ‘which have the greatest value in use, have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange, have little or no value in use.’ Water and air are abundantly useful; they are indeed indispensable to existence, yet, under ordinary circumstances, nothing can be obtained in exchange for them. Gold, on the contrary, though of little use compared with air or water, will exchange for a great quantity of other goods.

Utility then is not the measure of exchangeable value, although it is absolutely essential to it. If a commodity were in no way useful,—in other words, if it could in no way contribute to our gratification,—it would be destitute of exchangeable value, however scarce it might be, or whatever quantity of labour might be necessary to procure it.

Possessing utility, commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them.

There are some commodities, the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply. Some rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quantity, are all of this description. Their value is wholly independent of the quantity of labour originally necessary to produce them, and varies with the varying wealth and inclinations of those who are desirous to possess them.” (Ricardo 1821: 1–2).

There are three points here:

(1) Ricardo in paragraph two seems to be on the point of understanding subjective utility, but doesn’t quite get there, because he cannot seem to extend the word “gratification” to include subjective value.

(2) in Ricardo, exchange values of commodities with utility are determined by two factors: (1) scarcity and (2) the quantity of labour required to obtain them.

(3) when Ricardo discusses non-reproducible goods like antiques, pictures, scarce books, coins, and wines, he sees that the “inclinations of those who are desirous to possess them” have a major role in price determination. Again, he is grasping at the concept of subjective utility.

It seems to me that Marx’s labour theory of value (LTV) was a regression from Ricardo, because at least Ricardo allowed a fundamental role for scarcity in determining exchange value. In volume 1 of Capital, Marx dispensed even with scarcity as a fundamental determinant of exchange value, when clearly scarcity plays a major part in determining the prices of, say, primary commodities sold in flexprice markets.

And it is clear that Marx’s labour theory of value requires another limitation: it is limited not only to commodities produced for exchange but also to those that are readily reproducible commodities that can be considered fungible.

In volume 3 of Capital, Marx admits that the prices of things which “cannot be reproduced by labour, such as antiques, works of art by certain masters, etc. … may be determined by quite fortuitous combinations of circumstances” (Marx 1991: 772). So this eliminates another category of goods from those that supposedly can be explained by Marx’s LTV.

When we also consider that, for Marx, land, since it is not a product of labour, has no labour value, and hence its price is not explained by abstract labour time, we have increasingly more and more goods whose prices cannot be explained by LTV.

BIBLIOGRAPHY
Marx, Karl. 1991. Capital. A Critique of Political Economy. Volume Three. (trans. David Fembach). Penguin Books, London.

Ricardo, David. 1821. On the Principles of Political Economy and Taxation (3rd edn.). John Murray, London.

The Foundation of Marx’s Labour Theory of Value in Ricardo

It can be seen in David Ricardo’s On the Principles of Political Economy and Taxation (3rd edn.; 1821):

“In making labour the foundation of the value of commodities, and the comparative quantity of labour which is necessary to their production, the rule which determines the respective quantities of goods which shall be given in exchange for each other, we must not be supposed to deny the accidental and temporary deviations of the actual or market price of commodities from this, their primary and natural price.

In the ordinary course of events, there is no commodity which continues for any length of time to be supplied precisely in that degree of abundance, which the wants and wishes of mankind require, and therefore there is none which is not subject to accidental and temporary variations of price.

It is only in consequence of such variations, that capital is apportioned precisely, in the requisite abundance and no more, to the production of the different commodities which happen to be in demand. With the rise or fall of price, profits are elevated above, or depressed below their general level, and capital is either encouraged to enter into, or is warned to depart from the particular employment in which the variation has taken place.

Whilst every man is free to employ his capital where he pleases, he will naturally seek for it that employment which is most advantageous; he will naturally be dissatisfied with a profit of 10 per cent., if by removing his capital he can obtain a profit of 15 per cent. This restless desire on the part of all the employers of stock, to quit a less profitable for a more advantageous business, has a strong tendency to equalize the rate of profits of all, or to fix them in such proportions, as may in the estimation of the parties, compensate for any advantage which one may have, or may appear to have over the other.” (Ricardo 1821: 80–81).

Ricardo refers to the “comparative quantity of labour” necessary for production as a foundation of the value of commodities. There is a “primary and natural price” at which exchange value or price somehow equals the “comparative quantity of labour.” But how this happens and how the quantity of labour maps onto, or corresponds to, natural price is left unexplained.

How, for example, do equal labour quantities determine equal prices when there are, and have always been, such radical differences in wage rates by sector, profession, skill, experience, privilege or competence? For if, at the natural price, equal labour quantities do not cause equal prices, how can anyone take the labour theory seriously? I don’t think Marx ever adequately explained this either.

Ricardo is also clear that market prices are driven away from “natural prices” because of supply and demand discrepancies in production. As those individual market supply or demand disequilibria are eliminated, prices move back towards “natural prices” in a type of equilibrium process.

But, as in Marx, the Ricardian labour theory of value is ill-defined and under-determined. How do you properly define the “comparative quantity of labour which is necessary” for production as a homogeneous unit that can function as a universal measure of the labour value of all commodities?

BIBLIOGRAPHY
Ricardo, David. 1821. On the Principles of Political Economy and Taxation (3rd edn.). John Murray, London.

Mises on the Ricardian Law of Association: The Flaws of Praxeology

I have already written a post criticising Misesian praxeology (“Mises’ Praxeology: A Critique,” October 1, 2010), but have recently been challenged to present specific examples of the unsound arguments in Mises’ praxeology which involve false stated or hidden assumptions (see “Apodictic Certainty of Praxeology”).

Mises’ discussion of the “Ricardian law of association” (or free trade by comparative advantage) is a perfect example of this, and is given in Mises’ Human Action: A Treatise on Economics (4th edn, 1996), pp. 159–164 (for discussion, see Murphy and Gabriel 2008: 65–66; Vaughn 1994: 78).

First, it is perfectly clear that even Mises admits some role for empirical evidence in praxeology. In fact, the alleged “apodictic certainty” for his praxeology claimed by some modern Austrians vanishes when we look carefully at a candid passage of Mises himself:

“Every theorem of praxeology is deduced by logical reasoning from the category of action. It partakes of the apodictic certainty provided by logical reasoning that starts from an a priori category. Into the chain of praxeological reasoning the praxeologist introduces certain assumptions concerning the conditions of the environment in which an action takes place. Then he tries to find out how these special conditions affect the result to which his reasoning must lead. The question whether or not the real conditions of the external world correspond to these assumptions is to be answered by experience. But if the answer is in the affirmative, all the conclusions drawn by logically correct praxeological reasoning strictly describe what is going on in reality” (Mises 1978 [1962]: 44).

An assumption about “real conditions of the external world” is a synthetic proposition. If the “question whether or not the real conditions of the external world correspond to these assumptions is to be answered by experience,” then we need empirical evidence.

And we can add to Mises’ last sentence: if the answer is in the negative, then the conclusions drawn even by valid praxeological reasoning do not describe what is going on in reality. They describe a non-existent, fantasy world.

Mises’ praxeological case for free trade is such an example. Mises’ argument is itself heavily dependent on Ricardo:

“Ricardo expounded the law of association in order to demonstrate what the consequences of the division of labor are when an individual or a group, more efficient in every regard, cooperates with an individual or a group less efficient in every regard. He investigated the effects of trade between two areas, unequally endowed by nature, under the assumption that the products, but not the workers and the accumulated factors of future production (capital goods), can freely move from each area into the other” (Mises 1996: 159).

“Ricardo, however, starts from the assumption that there is mobility of capital and labor only within each country, and not between the various countries …. Now, Ricardo’s assumptions by and large held good for his age. Later, in the course of the nineteenth century, conditions changed. The immobility of capital and labor gave way; international transfer of capital and labor became more and more common. Then came a reaction. Today capital and labor are again restricted in their mobility. Reality again corresponds to the Ricardian assumptions (Mises 1996: 164).

Mises correctly notes that there were certain assumptions made by Ricardo for his principle of comparative advantage to work. Mises was writing the original edition of Human Action before 1949, long before the era of globalization and liberalized capital markets that began from the 1970s.

The period from 1945 to 1973 was indeed a world where capital controls restricted foreign investment to some extent and labour mobility was more restricted than in the 19th century. Mises even concedes that by the late 19th century the conditions assumed by Ricardo did not necessarily hold.

What Mises completely misses is that, because of hidden assumptions in the argument for comparative advantage, it is highly doubtful whether his argument for comparative advantage works even for 1945–1973 period. Before we examine the hidden assumptions, however, it is useful to look at the stated assumptions.

Even neoclassical arguments for free trade rely on David Ricardo’s principle of comparative advantage, though of course modern neoclassical theory uses the more sophisticated Heckscher–Ohlin model as its defence of free trade. But this model has been increasingly challenged by modern critics (e.g., Gomory and Baumol 2000), and there are rival theories in mainstream economics like New Trade Theory (NTT), to which Paul Krugman has made contributions (for some other critical work on free trade, see Prasch 1996; Gomory and Baumol 2000; Reinert 2007; Fletcher 2008; Baiman 2010).

It should be noted that Ricardo wrote the book Principles of Political Economy and Taxation in 1817. This was at a time before the full effects of the industrial revolution were clear, a point which we will return to below.

Ricardo’s principle of comparative advantage requires two conditions to work properly, as follows:

(1) Domestic factors of production like capital goods and skilled labour are not internationally mobile, and instead will be re-employed in the sector/sectors in which the country’s comparative advantage lies;

(2) Workers are fungible, and will be re-trained easily and moved to the new sectors where comparative advantage lies (Prasch 1996: 39–40).

As is admitted even by Mises, by the late 19th century assumption (1) was questionable.

Today it is also the case that both capital goods themselves and investment money for production are very mobile, so that (1) is also not true. Proposition (2) is also questionable in many cases (Prasch 1996: 40–41).

Once capital becomes extremely mobile internationally, we no longer have comparative advantage, but absolute advantage. It is not at all clear that free trade under “absolute advantage” is beneficial to all nations. In Ricardo’s day, internationally mobile capital was not that significant. David Ricardo observed that the immobility of capital in his day prevented capital from seeking absolute advantage. He described it as

“the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the … [ease] with which it invariably passes from one province to another in the same country” (Ricardo, On the Principles of Political Economy and Taxation, 7.18).

In Ricardo’s day, capital mobility did not happen on a large scale because capital and technology were more difficult to transfer. But it never occurred to Ricardo that, in a world of mobile capital and easily transferable technology, capital would seek absolute advantage in a destructive way to its home country.

The neoclassical and Misesian argument for free trade is dependent on the capital of one country remaining in that country and being put to work in some other productive domestic industry, where comparative advantage lies. This is not what happens today, where capital from Western countries seeks absolute advantage in the developing countries. Movement of capital to a place where it has absolute advantage simply causes de-industrialization in Western countries, as capital moves to nations with the lowest unit labour costs, and higher wage countries experience falling wages and high unemployment (Holt 2007: 103). Moreover, the large-scale movement of service industries overseas (often called “outsourcing”) is just as damaging.

With the collapse of manufacturing and other production, nations suffer higher unemployment and higher trade deficits. Capital does not simply move from one domestic sector to another where comparative advantage lies, because of international capital mobility and the drive for lower wages and higher profits. Thus the changes in domestic investment that would happen under the assumptions of Ricardo do not happen.

But, even if all the assumptions stated above are true, there are still devastating hidden assumptions underlying the whole argument of Ricardo and Mises. These hidden assumptions are precisely the type of synthetic propositions I have referred to in my earlier post on praxeology.

The hidden assumptions are as follows:

(1) it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage;

(2) technology is unchanging and uniform; and

(3) there are no returns to scale (Galbraith 2008: 68; Chang 2003: 292).

These hidden assumptions are utterly absurd. First, it does matter what you produce. Reliance on primary commodity exports whose prices are subject to volatility is not a successful strategy for economic development in most countries; in fact, such countries reliant on primary commodities and service industries are usually poor developing nations.

Moreover, as Galbraith as noted:

“Comparative advantage operates on the assumption of unchanged technology and constant returns to scale. There are no economies of scale, no learning curve, no improvements in productivity as output increases. The only requirement is that conditions of production differ, so that one good—in terms of the other—is relatively more expensive in one country and relatively less so in the other. The only efficiency gained from trade stems from the reorganization of production and the reallocation of factors—labor, capital, land—to their best uses in the new, larger, common market … But the argument does not generalize to the real world. Given three countries and three commodities, it is not obvious that each country will always be the relatively most efficient producer of exactly one good. And then what? Does the country that has no comparative advantage produce nothing? Does it refuse to trade? If its “comparative advantage” lies in exporting labour and closing up shop, is this acceptable? The textbooks do not say. The actual world has some 220 countries and thousands of distinct commodities. In this world—the one where we actually live—the calculation of comparative advantage is intractable, and the doctrine says nothing about who should specialize in what, still less that specialization will exactly reproduce full employment in each place ... Further, comparative advantage is based on the concept of constant returns: the idea that you can double or tripe the output of any good simply by doubling or tripling the inputs. But this is not generally the case. For manufactured products, increasing returns, learning, and technical change are the rule, not the exception: the cost of production falls with experience. With increasing returns, the lowest cost will be incurred by the country that starts the earliest and moves fastest on any particular product line … For most other commodities, where land or ecology places limits on the expansion of capacity, the opposite condition—diminishing returns—is the rule. In this situation, there can be no guarantee that an advantage of relative cost will persist once specialization and the resulting expansion of production take place” (Galbraith 2008: 68).

In the real world, production in high-value-added sectors like manufacturing leads to innovation, advancement of technology, increasing returns to scale, synergies, and strong economic growth. That is why manufacturing drives industrialization and makes nations rich. The basis of a modern first world economy is manufacturing and high-value added industries. Writing in 1817, Ricardo did not understand the full implications of the industrial revolution for economic development.

As is shown brilliantly by Erik S. Reinert in How Rich Countries Got Rich, and Why Poor Countries Stay Poor (Carroll & Graf, New York, 2007, p. 301ff.), a developing nation can follow rules of comparative advantage to the letter, and still remain mired in poverty and stagnation, with low-valued-added production and decreasing returns to scale.

A catastrophic example of the effects of comparative advantage was seen in Mongolia’s economy in the 1990s. Mongolia, under advice from the World Bank, implemented free trade, which caused its manufacturing sector to collapse, and it shifted to raising livestock (where its comparative advantage lay, according to classical trade theory). The result was a halving of per capita GDP and ecological disaster, as increasing livestock production led to diminishing returns, overgrazing, and desertification (Reinert 2004: 157–214).

Such free trade by comparative advantage is not a successful path to economic development.

In a world where a developing nation specialises in primary commodities, often according to the dictates of comparative advantage, it is normally cheaper to buy manufactured goods from overseas. But, under such circumstances, a Third World country will not industrialize. It will be permanently mired in poverty, commodity exports or service industries (the typical type of third world economy). There are sound reasons for violating free trade theory and creating your own high-value added industries, where the home market has sufficient demand for the products of those industries, through targeted infant industry protectionism or modern import substitution industrialization (Chang 2002, 2003, 2007; see also “Industrial Policy: A Brief Comment,” June 21, 2010)

The alleged economic advantages of free trade claimed by Misesian praxeology and by Ricardo are simply false, because of the false hidden premises in the argument.

BIBLIOGRAPHY

Baiman, R. 2010. “The Infeasibility of Free Trade in Classical Theory: Ricardo’s Comparative Advantage Parable has no Solution,” Review of Political Economy 22.3: 419–437.

Chang, H.-J. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective, Anthem Press, London.

Chang, H.-J. 2003. Rethinking Development Economics, Anthem Press, London.

Chang, H.-J. 2007. Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World, Random House Business, London.

Fletcher, I. 2008. “Fatal Flaws in the Theory of Comparative Advantage,” American Economic Alert (November 6)
http://www.americaneconomicalert.org/view_art.asp?Prod_ID=3076

Galbraith, J. K. 2008. The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should too, Free Press, New York.

Gomory, R. E. and Baumol, W. J. 2000. Global Trade and Conflicting National Interests, MIT Press, Cambridge, Mass.

Holt, R. P. F. 2007. “Post Keynesian Economics?,” in M. Forstater, G. Mongiovi, and S. Pressman (eds), Post Keynesian Macroeconomics: Essays in Honour of Ingrid Rima, Routledge, London. 89–107.

Korzeniewicz, R. P. 2001. “Comparative Advantage and Unequal Exchange,” in P. Anthony O’Hara (ed.), Encyclopedia of Political Economy. Volume 1. A–K, Routledge, London and New York. 127–131.

Mises, L. 1978 [1962]. The Ultimate Foundation of Economic Science: An Essay on Method (2nd edn, Sheed Andrews & McMeel, Kansas City.

Mises, L. 1996. Human Action: A Treatise on Economics (4th rev. edn), Fox and Wilkes, San Francisco.

Murphy, R. P. and A. Gabriel, 2008. Study Guide to Human Action: A Guide Tutorial of Ludwig von Mises’s Classic Work, Ludwig von Mises Institute, Auburn, Ala.

Prasch, R. E. 1996. “Reassessing the Theory of Comparative Advantage,” Review of Political Economy 8.1: 37–56.

Prestowitz, C. 2004. “Free Trade and Outsourcing Are Not the Same,” Financial Times (25 April).

Prestowitz, C. V. 2005. “China as No. 1,” American Prospect, February 21
http://www.prospect.org/cs/articles?article=china_as_no_1

Prestowitz, C. V. 2010. The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How we Must Compete in the Post-Dollar Era, Free Press, New York and London.

Reinert, E. S. “Diminishing Returns and Economic Sustainability; The Dilemma of Resource-based Economies under a Free Trade Regime,”
http://www.othercanon.org/uploads/SUM%20paper%20diminishing%20returns.doc#32;paper%20diminishing%20returns.doc

Reinert, E. S. 2004. “Globalization in the Periphery as a Morgenthau Plan: The Underdevelopment of Mongolia in the 1990s,” in E. S. Reinert (ed.), Globalization, Economic Development, and Inequality: An Alternative Perspective, Edward Elgar Pub., Cheltenham. 157–214.

Reinert, E. S. 2007. How Rich Countries got Rich, and Why Poor Countries Stay Poor, Carroll and Graf, New York.

Roberts, P. C. 2004. “Clarifications on the Case for Free Trade” Mises Daily (January 10) http://mises.org/daily/1420

Roberts, P. C. 2007. “Commentary & Analysis: Economists In Denial; Blind To Offshoring's Adverse Impact,” Manufacturing & Technology News 14.3 (February 6)
http://www.manufacturingnews.com/news/07/0206/art2.html

Roberts, P. C. 2009. “The Problem of Free Trade,” Counterpunch 16.2 (January 16–31).

Ruffin, R. 2002. “David Ricardo’s Discovery of Comparative Advantage,” History of Political Economy 34.4: 727–748.

Schumer, C. and Roberts, P. C. 2004. “Second Thoughts on Free Trade,” New York Times (6 January).

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge.