The Theory of International Trade: An Alternative Approach

211 Pages·1999·0.878 MB·English

by  Branko Horvat (auth.)

The Theory of
International Trade
An Alternative Approach
Branko Horvat
THE THEORY OF INTERNATIONAL TRADE
Also by Branko Horvat
HISTORY OF THE YUGOSLAV OIL INDUSTRY, 3 Vols.
ECONOMICS OF THE YUGOSLAV OIL INDUSTRY
TOWARDS A THEORY OF PLANNED ECONOMY
INTERINDUSTRY ANALYSIS
ECONOMIC MODELS
ECONOMIC SCIENCE AND NATIONAL ECONOMY
AN ESSAY ON THE YUGOSLAV SOCIETY
BUSINESS CYCLES IN YUGOSLAVIA
AN INTEGRATED SYSTEM OF SOCIAL ACCOUNTING FOR THE
YUGOSLAV ECONOMY (with assistants)
THE YUGOSLAV ECONOMIC SYSTEM: The First Labour-Managed
Economy in the Making
INTRODUCTION IN THE THEORY OF PRODUCTION
ECONOMIC ANALYSIS
SELF-GOVERNING SOCIALISM (co-edited with R. Supek and
M. Markovic), 2 vols.
ECONOMIC POLICY OF STABILIZATION
THE POLITICAL ECONOMY OF SOCIALISM
THE CRISIS OF THE YUGOSLAV SOCIETY
THE LABOUR THEORY OF PRICES
ABC OF YUGOSLAV SOCIALISM
THE KOSOVO QUESTION
ENTREPRENEURSHIP AND THE MARKET TRANSFORMATION
OF ‘SOCIAL’ OWNERSHIP
THE THEORY OF VALUE, CAPITAL AND INTEREST
The Theory of
International Trade
An Alternative Approach
Branko Horvat
Director
The Institute for Advanced Studies
Zagreb
Croatia
First published in Great Britain 1999 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 6XS and London
Companies and representatives throughout the world
A catalogue record for this book is available from the British Library.
ISBN 978-1-349-40784-2 ISBN 978-0-333-98338-6 (eBook)
DOI 10.1057/9780333983386
First published in the United States of America 1999 by
ST. MARTIN’S PRESS, INC.,
Scholarly and Reference Division,
175 Fifth Avenue, New York, N.Y. 10010
ISBN 978-0–312–22003–0
Library of Congress Cataloging-in-Publication Data
Horvat, Branko.
The theory of international trade : an alternative approach /
Branko Horvat.
p. cm.
Includes bibliographical references and index.
ISBN 978-0–312–22003–0
1. International trade—Econometric models. I.Title.
HF1379.H675 1998
382'.01—dc21 98–30661
CIP
©Branko Horvat 1999
Softcover reprint of the hardcover 1st edition 1999
All rights reserved. No reproduction, copy or transmission of this publication may be made
without written permission.
No paragraph of this publication may be reproduced, copied or transmitted save with
written permission or in accordance with the provisions of the Copyright, Designs and
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Any person who does any unauthorised act in relation to this publication may be liable to
criminal prosecution and civil claims for damages.
The author has asserted his right to be identified as the author of this work in accordance
with the Copyright, Designs and Patents Act 1988.
This book is printed on paper suitable for recycling and made from fully managed and
sustained forest sources.
10 9 8 7 6 5 4 3 2 1
08 07 06 05 04 03 02 01 00 99
Contents
List of Figures viii
Preface ix
List of Symbols xiv
List of Abbreviations xvi
1 Introduction 1
PART I THE MAINSTREAM INTERNATIONAL
TRADE THEORY
2 The Evolution of International Trade Theory 7
3 The Heckscher–Ohlin Theory 10
3.1 Preliminaries 10
3.2 The Heckscher–Ohlin Theorem 12
3.3 The Factor–Price Equalization Theorem 15
3.4 The Stolper–Samuelson Theorem 21
3.5 The Rybczynski Theorem 22
4 Critique 24
4.1 The validity of underlying assumptions 24
4.2 The validity of neoclassical economic theory 27
4.3 Empirical evidence 28
4.4 The Evaluation of the Heckscher–Ohlin theory 29
Appendices to Part I 32
1 Empirical evidence 32
2 Leamer’s attempt at reconciliation of the theory
with facts 33
PART II THE SYSTEMIC THEORY OF VALUE
5 Diachronic vs Synchronic Labour Input:
The Two-Century Old Misunderstanding 39
v
vi Contents
6 The Employment Effect 42
7 The Replacement Effect 45
8 The Interplay of Employment and Replacement Effects 50
9 The Traverse 54
PART III THE BASIC THREE-INDUSTRY MODEL
10 Steady State 59
10.1 Integrated world economy 59
10.2 Open economy 62
10.3 Growing economy 63
11 The Wage–Rental Curve 67
Appendix to the Part III 70
1 A note on price movements 70
PART IV AN ALTERNATIVE THEORY
12 Three Models 75
12.1 The two received models 75
12.2 An alternative model of internationl trade 77
12.3 Comparative advantage 79
13 Intra-Industry Trade 82
14 Four Hypotheses 85
14.1 Comparative advantage hypothesis 85
14.1.1 Two commodities 85
14.1.2 Many commodities 88
14.2 Equalization of factor prices hypothesis 89
14.3 Hypothesis about the changes due to the
opening of trade 90
14.4 Increased factor supply specific effect 92
PART V THE GAINS FROM TRADE
15 The Pattern of Specialization 95
15.1 Given autarkic prices 95
15.2 Primary and secondary specializations 99
Contents vii
16 The Gains from Trade 104
16.1 Autarky vs. trade 104
16.2 Domestic and international prices 106
16.3 Import and export gains 108
16.4 Wage–rental curve again 111
17 Unequal Exchange 116
17.1 Marxian values 116
17.2 Unequal exchange I 118
17.2 Unequal exchange II 120
PART VI TARIFFS
18 Tariffs and Subsidies 125
18.1 Effects of a tariff in a single market 125
18.2 Prohibitive tariff and subsidy 127
18.3 The pattern of specialization with tariff 127
18.4 Nominal and effective tariffs 129
18.5 Subsidies 132
18.6 Infant industry support 133
19 Customs Union 136
19.1 Degrees of economic integration 136
19.2 Trade creation and trade diversion 137
19.3 Customs unions in a more realistic setting 140
19.4 Dynamic effects 144
Appendices to Part VI 150
1 Empirical evidence 150
2 Economic integration of Eastern Europe:
The Project Bridge 155
I Introduction 155
II The Organization 160
III The Customs Union 162
IV The Monetary Union 172
Notes 190
References 192
Name Index 197
Subject Index 199
List of Figures
2.1 International and domestic prices of goods X and Y 8
3.1 Factor prices, commodity prices and factor
proportions 12
3.2 Isoquants, factor-proportion rays and isocost line 19
4.1 Factor-intensity reversal 26
7.1 Replacement effect 48
7.2 Replacement and rental curves 48
8.1 The growth rates of labour and capital and
capital cost saved 53
11.1 Two wage curves α and β 68
15.1 The pattern of specialization for Δw* (cid:2) 0 96
15.2 The regions of primary and secondary specialization 101
16.1 The gain from trade (1) 105
16.2 Wage lines for P* and αP*given 110
3 3
16.3 The gains from trade (2) 113
18.1 Imposition of a tariff t 125
18.2 No-trade regions 129
19.1 The effects of a customs union 139
19.2 Increased elasticity of the customs union supply curve 143
19.3 Reduced costs of customs union 145
19.4 Economics of scale 148
A-1 The profitability distribution of firms 164
A-2 General equilibrium with internal and
external balances 167
A-3 Demand and supply of reserve currency 181
viii
Preface
The theoretical foundation for the present study was established in
my book on Value, Capital and Interest. The book dealt exclusively
with a closed economy. Now, the same theory is applied to an open
economy, becoming thus the The Theory of International Trade. The
two books are intended to establish an alternative theoretical para-
digm. There is also a difference between the two books. While the
first book is more or less definitive, the second one is the first at-
tempt to apply the same theory to international trade.
Joseph Schumpeter noticed that different theoretical systems in
economics are determined by different value theories. Classical
economics was based on the labour theory of value and neoclassical
economics on the utility or scarcity theory of value. To avoid a
frequent misunderstanding, it stands to repeat that utility theory
and marginalism are two different things. The former is a theory,
the latter is a technique of analysis. Ricardo was a marginalist (when
developing the theory of land rent) but not a subjectivist utilitarian.
Marginalism is compatible with any theory.
The theory I am trying to develop is based on the theory of
value which differs from the other two paradigms in that its start-
ing point is the operation of the economic system rather than the
behaviour of individual economic agents. It may, therefore, be called
systemic economics. Consequently, macroeconomics cannot be based
on micro foundations, but rather the other way round. Technically,
the systemic theory differs from the classical labour theory in that
it does not aggregate labour inputs diachronically but synchronically.
What that means will be explained in Chapter 5.
Perhaps a note of clarification is necessary. This systemic approach
is not identical to sociological functionalism which ends up in func-
tional determinism. On the contrary, individual economic agents
are free to follow their separate interests and their individual choices
are not predetermined. But the mechanical aggregation of indi-
vidual actions does not and cannot explain the functioning of the
system. A system is a whole of interdependent parts and therefore
more than a mere summation of individual actions.
I was led to begin thinking about an alternative theory of value
by my experience as a chief methodologist of the Yugoslav Federal
ix