Monday, May 29, 2006

Unregulated International Trade Unjustified By Comparative Advantage (Part 5)

5.0 Conclusions

I don’t think the interesting properties of the above example rely on the following properties:
  • The technology is discrete (generalized Leontief)
  • The circularity in production in ale and corn, in which corn and ale are, directly or indirectly, inputs into the production of ale or corn.
  • The fact that consumption goods and capital goods are the same set of goods, just used for different purposes.

Consider equilibrium prices in an autarky in which both techniques are cost minimizing and the interest rate is positive (see Appendix 4.A). The difference between the equilibrium price for ale and the slope of the Production Possibilities Frontier drives the result that international trade can leave this country worse off. And that difference can arise in models with none of those three properties listed above. The possibility of international trade leaving a country with less commodities to consume is a general possibility in models with capital goods, a positive interest rate, and the assumptions of the (mistaken) textbook argument.

So much for comparative advantage as a justification for neoliberal trade (non) policy.

By the way, the above example is only a start at explaining what Steedman and his colleagues have to say about international trade. Their comments are not all critical. Some are constructuve of alternative theories. But I would like to read the references mentioned here:
When produced inputs are introduced into HOS theory in the form that one of the two 'factors' is taken to be a given total value of capital, that theory simply disintegrates. This is so notwithstanding the apparent denial of this negative conclusion by Either (1979), who states that 'The central message ... is simple. The four basic theorems of the modern theory of international trade ... are insensitive to the nature of capital' (p. 236). In fact Ethier's paper constitutes a striking confirmation of our negative conclusion, because in order to maintain the appearance that capital has no influence on HOS trade theorems, Ethier finds himself compelled to replace the familiar theorems, which predict trade outcomes on the basis of exogeneous data, by entirely different theorems, which merely describe trade outcomes in terms of trade equilibrium prices, etc.

(... on Eithier's conjuring with HOS theorems, see Metcalfe and Steedman, 1981).

  • Ethier, W. J. (1979). "The Theorems of International Trade in Time-Phased Economies", Journal of International Trade, V. 9, N. 2 (May): 225-238.
  • Metcalfe, J. S. and Ian Steedman (1974). "A Note on the Gain From Trade", Economic Record (Reprinted in Fundamental Issues in Trade Theory (edited by Ian Steedman), Macmillan, 1979.)
  • Metcalfe, J. S. and Ian Steedman (1981). "On the Transformation of Theorems", Journal of International Economics, V. 11, N. 2: 267-271.
  • Steedman, Ian (1987). "Foreign Trade", The New Palgrave: A Dictionary of Economics (Edited by John Eatwell, Murray Milgate, and Peter Newman), Macmillan.

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