Takashi Negishi

Specie-Flow Mechanism

The classical economists, who followed Adam Smith, did not doubt that the arguments of their predecessors, the mercantilists, in favor of a chronic export surplus were based on an intellectual confusion. The classical refutation of the mercantilist principle is derived from the so-called Cantillon–Hume price-specie-flow mechanism. By this mechanism an inflow of bullion raises domestic prices, and selling dear and buying cheap tends to turn the balance of trade against the country. Purely automatic forces tend, therefore, to establish a natural distribution of specie between the trading countries of the world and there is a level of domestic prices such that each country’s value of exports equals that of imports.

Adam Smith and Disequilibrium Economic Theory

A great classic often has many different aspects that permit many different and mutually inconsistent interpretations by later scholars. The Wealth of Nations (WN) of Adam Smith is a good example of such a classic. Smith’s theory of natural prices has been interpreted and developed as an equilibrium theory by modern economic theorists. We shall try, however, to interpret Smith’s economic theory as disequilibrium theory. Of course, there already exist some disequilibrium approaches to Smith on the dynamic process of growth involving increasing returns to scale. We shall rather be concerned, however, with a disequilibrium approach to the problems of markets, that is, international trade, competition and division of labor, and a disequilibrium interpretation of what economists now refer to as “increasing returns to scale.” We shall start this disequilibrium analysis from a study of Smith’s theory of international trade. Smith explained international trade by the existence of disequilibrium, that is, surplus, and was criticized by Ricardo from the point of view of the equilibrium theory.

Theory of Production

To study the modern theory of the international trade, it is necessary to be familiar with the elementary theory of production. The basic model of an economy to be considered is a two-commodity two-factor one of a country. There are two industries, each of which produces a single different commodity from the input of two factors of production, say, labor and capital. The technology of an industry is given as an aggregate production function which relates the inputs of two factors of production to the output of a commodity.

Complete Specialization in Classical Economics

The so-called modern interpretation of Ricardian theory of comparative advantage results in the drastic conclusion that each country (England or Portugal) specializes entirely in the production of a single commodity (cloth or wine). But Ricardo himself was merely concerned with marginal adjustments of production to the given terms of trade in his famous theory of gains from foreign trade. Ricardo has nothing to do with the complete specialization. It was J. S. Mill, however, who used the assumption of the complete specialization skillfully to determine the terms of trade uniquely in his theory of the reciprocal demand. Classical economists, including Bastable and W. T. Thornton, critically discussed many important aspects of Mill’s theory, but they did not seem to raise the objection to Mill’s assumption of entire specialization. It was Pareto, a neoclassical economist, who presented a numerical example for which the assumption is inappropriate.

Marshall and Offer Curve

The marginal revolution against the classical economics is often attributed to W. S. Jevons, C. Menger, and L. Walras, who published their works in 1870s. From the point of view of international trade theory, however, we may also add the name of A. Marshall, though his Principles of Economics was published in 1890. As a matter of fact, his early tracts on The pure theory of foreign trade and The pure theory of domestic value are both dated 1879. Marshall reworked some of the theories of J. S. Mill into rigorous diagrams, which includes, among others, those of Marshallian offer curves to study the equilibrium terms of trade in a two-commodity two-country model. Marshall introduced the graphic apparatus of offer curves, though he did not show how they are derived from the underlying demand and production. It was left for later day’s economists, for example, Meade (1952), who skillfully derived offer curves by the use of trade indifference curves.

Mill and Infant Industry

Starting with Adam Smith’s criticism against mercantilism, economists of the classical school generally advocated the free trade and were critical to the protection of domestic industries. J. S. Mill admitted, however, the protection of the so-called infant industry, though he imposes a condition which an industry must satisfy to be protected. Then, it was Bastable who followed Mill to add another necessary condition for protection. This Mill–Bastable infant industry dogma was discussed critically by some modern economists from the point of view of the dynamic theory of the gains from trade.

J. S. Mill and Reciprocal Demand

J. S. Mill (1806–1873)s Principles of Political Economy (1848) was written as “a work similar in its object and general conception to that of Adam Smith, but adapted to the more extended knowledge and improved ideas of the present age” (Mill 1909, p. xxviii). It was highly successful as the last of the great books of the classical economics founded by A. Smith. From the point of view of the history of international trade theory, it is, in general, to be remembered by its extension of Ricardo’s theory of comparative costs to take account of the effects of reciprocal demand on the terms of trade. We must emphasize, however, that Mill seems to start the so-called modern interpretation of Ricardo, which we criticized in Chap. 4.

Export Promotion and Welfare

In view of the acknowledged success of the post-war Japan, where export promotion policies have played an important role, the role of subsidies in export industries should be studied from the point of view of the welfare of a country in an international economy. Except for the case of domestic distortions (see Problem 13.3), however, it is difficult to justify export subsidy by the use of the standard two-country two-commodity model of the international trade theory. In fact, it seems to be a well-established fact the export subsidies always reduce a country’s economic welfare in a competitive economy with full price flexibility.

Heckscher-Ohlin Theory (1)

In the classical theory of international trade, the comparative advantage in the sense of the comparative costs is simply given exogenously. In other words, it is presupposed that different countries have different technology of production, which includes the difference in natural conditions for the production like the climate. In the modern theory of international trade, however, it is assumed that different countries have the identical technology which is given in the form of the identical production function. The comparative advantage of the different countries is explained, then, not by the difference in technology, but by the difference in the factor endowments. Such a modern theory is generally known as Heckscher–Ohlin theory, because the groundwork for substantial developments in the theory is laid by Eli Heckscher (1919) and Bertil Ohlin (1933).

Marx and International Exploitation

In his Capital (1867–94) and Theories of Surplus Value (1905–10), K. Marx insisted two different types of exploitation. The first one is, of course, the exploitation of labor by capital in the case of equal labor quantity exchange, while the second is the exploitation of poor countries by rich ones through unequal labor quantity exchanges. The exploitation theory of interest, i.e., the exploitation of labor by capital, was criticized by Boehm-Bawerk from the point of view of the comparison of values differently dated. Marx’s own consideration of the international exploitation was fragmentary, but it was succeeded and developed by modern Marxian economists. The same criticism seems to be applicable to this Marxian theory of international trade, however, as the one used by Boehm-Bawerk against the exploitation theory of interest (profit).