Neoclassical International Economics: An Historical Survey

285 Pages·1990·14.279 MB·English

by  Leonard Gomes

Neoclassical International
Economics
An Historical Survey
Leonard Gomes
NEOCLASSICAL INTERNATIONAL ECONOMICS
Also by Leonard Gomes
INTERNATIONAL ECONOMIC PROBLEMS
•FOREIGN TRADE AND THE NATIONAL
ECONOMY: Mercantilist and Classical Perspectives
*Also published by Macmillan
Neoclassical
International
Economics
An Historical Survey
Leonard Gomes
Principal Lecturer in Economics
Middlesex Polytechnic, London
M
MACMILLAN
© Leonard Gomes 1990
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First published 1990
Published by
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and London
Companies and representatives
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Printed in Hong Kong
British Library Cataloguing in Publication Data
Gomes, Leonard, 1933-
Neoclassical international economics: an historical
survey.
1. Economics, 1830-1985
I. Title
330'.09'034
ISBN 0-333-51667-2
Contents
Preface vii
1 The Classical Legacy 1
2 Early Neoclassical Contributions 10
2.1 Cournot 10
2.2 Mangoldt 22
3 Trade Theory in the Age of Marshall 28
3.1 Marshall 28
3.2 Edgeworth 45
3.3 Pigou and Bickerdike 52
3.4 Barone, Auspitz and Lieben, Pareto 55
4 The Tariff Reform Debate (1903) 65
5 Two Arguments for Protection 86
5.1 Schuller and the Idle Resource Effect 86
5.2 Manoilescu and Wage Differentials 87
6 Graham's Critique 91
7 Trade and General Equilibrium 102
7.1 The Approach to General Equilibrium 102
7.2 The Heckscher-Ohlin-Samuelson Model 111
7.3 Recent Developments in Trade Theory and Policy 131
8 Balance of Payments Theory 143
8.1 The International Adjustment Mechanism and the
Transfer Problem 143
8.2 The Purchasing-Power Parity Theory (PPP) 168
8.3 Keynes and International Monetary Arrangements 176
8.4 Keynesian and Contemporary Balance of Payments
Models 182
Notes and References 206
Bibliography 264
Index 266
v
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Preface
This book is about the history of neoclassical international econo
mics. It was conceived as a sequel to the author's well-received
Foreign Trade and the National Economy: Mercantilist and Classical
Perspectives (1987) which offered an historical perspective on the
development of mercantilist and classical trade theory and policy.
It is generally recognised that the problems of international trade
and finance have been amongst the earliest concerns of the subject of
political economy. In the long history of economics the best minds in
the discipline have been devoted to the analysis of such problems and
until recently trade theory was the pacemaker for general economics.
Given such a long and rich history of reflection, analysis and
judgement it is not surprising that economists are at their best when
they speak out on international trade. On such matters, not only do
they speak with the almost unanimous backing of professional
opinion, but what they do convey tends to command universal
respect (if not always agreement or full comprehension) among the
wider lay audience. Neoclassical trade theory, heir to the classical
heritage, was forged under the anvil of often fierce but intellectually
stimulating controversy and the theory still has its critics, hostile and
friendly. On the monetary side, no single all-embracing theory has
emerged. However, the centrality of the doctrine of comparative
advantage and the international adjustment mechanism within the
ambit of orthodox international economics imparts to its approach a
coherence and unity of purpose unmatched by other branches of
economics. This remarkable degree of professional consensus
together with the general recognition of a unique intellectual compe
tence in this field is often taken for granted by economists who
nevertheless take great pride in the achievement.
This book tells the story of that achievement as it evolved from the
beginning of the neoclassical period (1870-90), when economics
became an academic discipline, to contemporary developments. It
seems appropriate to have such a survey at a time when in so many of
its areas economics is showing a tendency to go 'back to its roots'.
Chapter 1 provides a synopsis of the classical heritage. Chapter 2
discusses the important contributions of two forerunners of neoclas
sical trade theory - Cournot and Mangoldt. The development of the
theory during the age of Marshall is the subject of Chapter 3, and
vii
Vlll Preface
Chapter 4 reviews the role of the economists in the Tariff Reform
debate initiated by Joseph Chamberlain in 1903. Two arguments for
protection (including the famous Manoilescu argument) are briefly
discussed in Chapter 5. Graham's constructive critique of the classical
trade model, including his controversial argument for permanent
protection, is the subject of Chapter 6. The Heckscher-Ohlin or
general-equilibrium model of trade, comprising the four 'Core Prop
ositions' of standard neoclassical trade theory, is treated in Chapter 7
which also reviews new developments. The finalc hapter is devoted to
the evolution of balance-of-payments theory and policy right up to
present-day models and issues.
No account is given of alternative paradigms such as the Sraffa-
based neo-Ricardian critique of comparative advantage theory and
the neo-Marxist 'unequal exchange' thesis. Any short doctrinal
history of a field with a compass as vast as that of neoclassical
international economics is bound to be selective, and hence there are
no explicit treatments of the technical literature on the 'gains from
trade' or matters relating to trade and development. However, the
central lines of development are fully surveyed and policy episodes
have not been neglected.
LEONARD GOMES
1 The Classical Legacy
INTRODUCTION
The early neoclassical economists were heirs to a rich legacy of
classical writings: (1) The Ricardo-Torrens principle of comparative
advantage; (2) John Stuart Mill's theory of international values in
terms of reciprocal demand and supply analysis, i.e. the 'equilibrium'
theory of trade. Complementing these essentially barter rela
tionships, there was (3) a theory of balance-of-payments adjustment
mechanism, i.e. Hume's price-specie flow mechanism and various
statements of it by Ricardo, Thornton and Mill.1 These three
analytical building blocks constitute the core of present-day orthodox
international economics. As recently as 1974, the late Joan Robinson
lamented the fact that 'the development of the theory [of internation
al trade] to this day runs in the narrow channel that was appropriate
to Ricardo's demonstration of the principle of comparative
advantage.'.2
Classical economists from Smith to Mill did not, of course, fill a
vacuum - they did not work in a void. They inherited a mass of
mercantilist writings concerned with international economic rela
tions. They criticised much of it, but some valuable notions were
retained: e.g. the law of one price, the purchasing-power parity
theory of exchange rates, rudimentary versions of the international
adjustment mechanism based on simple quantity theory of money
reasoning, etc. Useful insights were gleaned from pre-classical writ
ings: e.g. the doctrine which became known as the 'eighteenth-
century rule' (the notion of absolute advantage), notions of mac-
roeconomic magnitudes relating to international trade, such as
'balance of trade' and 'balance of payments', and crudely stated
microeconomic concepts such as the elasticity of demand for exports
and imports.
The discovery of the principle of comparative advantage was an
outstanding achievement of the classical school. The formulation of
the international adjustment mechanism was another; although here,
much of the work was completed in the first half of the eighteenth
century by Vanderlint, Gervaise, Cantillon, and Hume in particular.
Both principles were devised with practical purposes in mind: the
comparative cost principle was an intellectual answer to those who
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