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 Ali rights reserved. Nu reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may bc reproduccd, copicd or transmitted sa ve with written permission or in accordance with the provisions of thc Copyright Act 1956 (as amcnded), or under the terms of any licence permitting limited copying issued by thc Copyright Licensing Agency, 33--4 Alfred Place, London WClE 7DP. Any person who does any unauthorised act in relation to this publîcation may be liablc to criminal prosccution and civil claims for damages. First published 1990 Publishcd by THE MACMILLAN PRESS LTD Houndmills, Basingstokc, Hampshire RG21 2XS and London Companies and representatives throughout the world ISBN 978-1-349-38941-4 ISBN 978-0-230-37155-2 (ebook) DOI 10.1057/9780230371552 British Library Cataloguing in Puhlication Data Gomes, Leonard, 1933- Neoclassical international economics: an historical survcy. 1. Economics, 1830--19R5 1. Titlc 330'. 09'034
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 economics. 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 competence 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 neoclassical 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 Propositions' of standard neoclassical trade theory, is treated in Chapter 7 which also reviews new developments. Thefinalchapter 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 Sraffabased 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