IDS Discussion Paper No. 77 August 1975

SUMMARY

This preliminary paper develops some themes in the author’s earlier work, published in Unequal Exchange (New Left Books, London 1972).

The paper can be divided into four main sections. The first deals with the international division of labour and foreign trade, developing the critique of Ricardo’s theory of comparative advantage using both algebraic and numerical examples. The critique of the theory of comparative advantage is extended to deal more fully with the Heckscher-Ohlin theory of factor proportions. The second section deals with the formation of international values.

After spelling out what is called ‘the unmanageable reality’ for the factor proportions theory, it shows how the assumptions of the factor proportions theory should in fact be reversed.

The Theorem of Unequal Exchange is then stated and proven in terms of the Sraffa system modified to encompass international exchange. The section ends with an analysis of the tendency towards the international equalization of the rate of profit. The third section examines in some detail the economic and political factors which determine wages, and the final section deals with the question of unequal exchange and uneven development. Here, the relationship between consumption and accumulation, and the revolutionary consequences of the analysis are set out.

INTERNATIONAL DIVISION OF LABOUR AND FOREIGN TRADE

Private Exchange and the social framework

All economic relations between men or groups of men – communities, nations, etc., – are directly or indirectly connected with a certain division of labour. inside of each community this takes the form of a “social division of labour”; outside it takes the form of an “international division of labour”.

In turn, every division of labour, be it “social” or “international” implies some given rules of distribution of the product, in such a way that the one is the necessary condition of the other.

But neither the social division of labour nor the international division necessarily implies a private exchange of the product. This is important for it is on this point that the basic mistake of Adam Smith lies.

On the one hand, he noticed that no human society could exist without some division of labour, human needs being too great to be satisfied by an individual effort. He considered, on the other hand, that in the societies known to him the distribution of the products was indeed carried on through exchanges between independent producers. He therefore came to the conclusion that the propensity to exchange privately is as much an integral part of human nature as is the division of labour.

Now, we should of course admit that individual man – a social animal – having to appropriate nature in order to reproduce himself, is unable to do so without some sort of collaboration with other men. This entails the dividing up of the many tasks that this appropriation involves. It is, further, to be admitted that such cooperation in production implies a distribution of the whole product among the participants. But it does not follow at all from these premises that the only way of distribution is the private one.

In the primitive (tribal) community, a social division of labour does exist, but there is no private exchange, except occasionally, and to such a marginal degree that the essential process of the reproduction of social life is in no way interfered with. The same holds for the future socialist society when the market will have disappeared.

In these two types of integrated society, the social division of labour and the subsequent distribution of the product forma single inseparable process, set up ex ante by a single direct act of the decision-making centre, be it the chief and elders in tribal collectivism, or the plan in the advanced socialist society.

On the contrary, in the type of society where the distribution of the product is carried out by means of a system of privately agreed-upon exchanges (mercantile relations), it is those exchanges and their ex post outcome that determine indirectly the social division of labour through a series of micro-economic decisions taken at the level of independent producers.

Consequently, the second part of Adam Smith ‘s statement is unsupported. Social division of labour is indeed a permanent constituent of the social nature of man; private exchange and commerce are just one of its historic elements.

Private exchange and the international framework

Things are somehow different when considered in the international context. The Central planning of either division of labour or distribution of the product has never existed.

Even in the epoch of tribal collectivism, when the primitive communities exchanged their products between them, they always did it on a transactional basis and it is this fact that led some economists to contend that foreign trade historically preceded domestic trade. As regards the present, even the so-called States of transition towards socialism, more or less planned, regardless of the extent to which they have abolished their domestic trade, still present themselves internationally as independent bargaining dealers. ((We do not take into account here certain attempts of ex ante planning of exchanges and of the international division of labour within certain groups of countries, as, for instance, the COMECON. By any standard, these attempts do not seem to have gone very far.))

However, the fact that, up to the present time, the market has always conditioned the international division of labour and its extension is not sufficient in itself for reaching the conclusion that things could not be otherwise. One can perfectly well conceive of a socialist world plan implementing centrally the division of labour and the distribution of the produce on a planetary scale.

The determination of the International division of labour

When we say that the International division of labour has always, up to now, taken place on a private trade basis, we must add an important qualification. Although not centrally co-ordinated (planned) the international division of labour was nonetheless to a certain extent socio-historic (institutionally and politically) instead of being geo–economic. Instead of being the outcome of objective laws, that is, the effect of the variety of the natural resources of each country, the international division of labour has often been determined, if not globally, at least piecemeal, for the dominated countries by the deliberate action of the dominant countries.

Products which today seem indigenous such as cocoa, palm oil, and groundnuts in Western Africa, grapes in Algeria, cotton in Egypt, maize, maioc, many varieties of bananas in Black Africa have often been the object of either entirely artificial transplantation or a deliberate expansion of preexisting cultivation, far exceeding the proportions which would be suggested by the geo-climatic environment. The famous comment by Marx in his Discourse on Free-Trade seems in this connection quite plausible.

“You probably think, gentlemen, that coffee and sugar production was the natural destiny of the West Indie. Two centuries ago, nature which does not care about trade, had put there neither coffee nor sugar-cane.”

Despite the existence of an international market and of a foreign trade based on transactional exchanges, which created a certain international division of labour, the evolution of that division was marked by innumerable discontinuities set up by the interference of the most advanced states when dealing with the rest of the world.

This interference either took place with the political domination of certain areas in the “rest of the world” or without this domination. We can include under the first heading all official measures implemented in the context of conquest and colonization, ranging from the open violence of direct plunder to the enactment in dependent territories of customs tariffs favourable to the home country. In between lay all other legislative restrictions on the products of the dominated country as well as regulations regarding maritime transport, such as the so-called “Navigation Act”, and so on. In the second category – deliberate interference with free trade without the political domination of the partner – we include all protectionist measures, direct or indirect, taken within the advanced countries themselves. Direct measures include prohibitions or quotas on certain imports or exports, legislative restrictions on the free circulation of monetized metals etc. indirect measures include customs duties of any kind on imports or on exports.

Mercantilism

The official steps mentioned above, were, during the whole period, from about the beginning of the 16th to the end of the 18th century, influenced by the economic infrastructure of the dominating country. An ideological superstructure called “mercantilism” corresponded to this infrastructure.

Mercantilism is less a system of Political Economy and more a doctrine of economic policy. Mercantilist authors, particularly those of the 16th, 17th and the early 18th century, are not theoreticians and it is admitted that Economics did not yet exist as a science. These authors appear as experts who endeavoured to create for their respective governments useful trade policies for the beneficial management of the affairs of the State, particularly in the field of its economic relations with foreign countries. They did not worry about rationalizing the world economy, the very concept of which was beyond their scope. Assuming        that the only possible profit in international economic relations is the “alienation profit”, they unhypocritically sought, each one for the benefit of his own country, ways and means of getting richer to the detriment of the others. “The city in its trade must care about itself, never about other peoples”, Aristotle had already said.

Mercantilists could not even imagine that it was at all possible for one to get richer without a proportionate impoverishment of one’s partner. According to Colbert, trade is like war. The victory of the one party meant ipso facto the defeat of the other.

Obsessed by the fear of unemployment which (notwithstanding widespread opinion to the contrary) was in their time more severe than in any other later period under advanced capitalism, the mercantilists were mainly interested in seeking outlets abroad for the national product. For this purpose, they recommended two sorts of measures, the first one quantitative, the second, qualitative.

1. 1.A policy of simultaneous autarky and trade expansion.

   The apparent contradiction between these two targets was resolved by a one-way trade, that is, by a permanent surplus on the balance of trade. 

2. 2.A policy of close selection of exports and imports so that the exports embody the most possible, and the imports the least possible amount of living labour. This meant that they attempted to export manufactured goods and import raw materials. 

John Law, who was not a mercantilist in the proper sense, was nonetheless clearly asserting towards the end of the 17th century that the greatest blessing in foreign trade was for a country to be supplied with raw materials from other countries and to find a market for its own manufactured products in those same countries. In this context, he complained about French wool being sent out to Holland and coming back afterwards under the form of manufactured articles.

The orthodox mercantilists of the 16th and 17th centuries were more outspoken. Thus Forbonnais could write:

“It is a law, springing out of the very nature of the colonies, that they ought to have no crops or industry which could compete with crops and industry of the home country”.

He blamed the Europeans, particularly the British, for having let sugar-refineries be established in the colonies which produced sugar. ((Elements du Commerce, Ed 1754,Vol 1,p 372 et p 393. The economic policy of the mercantilists, indifferently called the mercantilist system or nationalist system, has survived its promoters and constitutes a constant element of the everyday practice of developed capitalist countries. As late as 1907, Andrew Bonnar Law, afterwards Prime Minister of Britain, contended that the preferential regime for the Empire meant merely that a greater part of our imports must be composed of raw materials destined to be processed in the country, and that a greater and greater proportion of our exports must be composed of manufactured products providing jobs for our workers. (quoted by Bennett, The Concept of Empire, Edinburgh, 1952).

As regards the quest for specialization in, (and consequently the quest for outlets abroad for), those products embodying more manpower, a qualification must be added. The point obviously is more manpower in relation to the consumed constant Capital, that is, in relation to the other material inputs entering into the production of a unit of the output, not in relation to the fixed Capital or to the total Capital invested.

Consequently, the matter is not one of “labour intensive” branches (“low organic composition of Capital”), which on the contrary are considered as disadvantageous.

The above criterion has actually played an important role in the evolution of the economic policy of the presently developed countries.))

Classical economics and Free-Trade Absolute costs – Comparative costs

A first reaction against mercantilism came from Quesnay and the French Pysiocrats towards the middle of the 18th century. But regarding foreign trade, it is Adam Smith and Ricardo in England who mark the decisive turning-point in economic thought.

For the first time a class – the industrialists – came into power that was interested in a two-way trade, in real exchanges, which would widen the international division of labour.

This class did not wish merely to import raw materials and export manufactured goods, something which everybody agreed upon. It also needed cheap provisions for its workers and this was something which ran totally counter to the interests of landowners whose rents weighed considerably on corn prices. It is on this point that Ricardo diverges from Adam Smith.

The latter had already realised the futility of seeking surplus for surplus’ sake, if only for the simple reason that if all countries did the same thing, international trade would be blocked and there would be no surplus anywhere. It is the equilibrated balance of trade with a greater turnover in both directions which was the goal to reach.

However, by linking international exchange to absolute cost, Adam Smith prevented the solution to the problem. For, in absolute terms, Britain was more productive than the rest of the world not only in manufactures, but also, to a lesser, but still considerable degree, in agricultural production. ((Here we have one of those forgotten facts of economic reality. Britain was a great exporter of corn, up to and including the 18th century. At that time she was considered as one of the granaries of Europe. It is only during the 18th century that little by little this status declined and it is only during the 19th century that the situation was reversed.))

Now, if landowners rents were reduced, British corn prices would become lower than those of foreign countries. Under these conditions it was not clear what Britain would import from abroad (except some raw materials like cotton or sugar, or some particular commodity like tea) in order to counter-balance her massive exports of manufactured goods. That is, it was not clear if substantial imports of corn were to provide a counter-part, or if corn outflows – however irregular were to be added to the export side.

It is the solution of this problem that Ricardo attempted with his comparative costs theorem. The solution consists in suggesting that, notwithstanding the superiority of Britain in corn production, free exchange would not induce exports of corn but imports because her superiority in manufactures was even greater than the one she enjoyed in production from the land.

Torrens formulated this idea in his “Essay on the external corn trade”, 1815, in the following words:

“If England should have acquired such a degree of skill in manufactures, that, with any given portion of her Capital, she could prepare a quantity of cloth, for which the Polish cultivator would give a greater quantity of corn than she could, with the same portion of Capital, raise from her own soil, then tracts of her territory though they should be equal, nay, even though they should be superior to the lands in Poland, will be neglected; and a part of her supply of corn will be imported from that country. For, though the Capital employed in cultivating at home might bring an excess of profit over the Capital employed in cultivating abroad, yet, under the supposition. the Capital which should be employed in manufacturing would obtain a still greater excess of profit; and this greater excess of profit would determine the direction of our industry.”

At about the same time. Ricardo completed his theorem with the famous example of Portuguese wine and British cloth: Portugal is able to produce one unit of wine with 80 units of labour (hours, days, etc.,) and one unit of cloth with 90, while Britain needs 120 units of labour to produce the former and 100 to produce the latter.

Countries	Wine	Cloth
Portugal	80	90
England	120	100

Although, according to absolute cost; both products cost less in Portugal, this country will nevertheless specialize in wine and leave cloth to Britain. The respective specializations are determined by the fact that the wine/ cloth cost ratio is more favourable in Portugal than in Britain and the cloth/wine ratio more favourable in Britain than in Portugal, that is, by the fact that:

8/9 < 12/10

or that

10/12 < 9/8

In this example, it is Portugal which is the most productive country in both branches under consideration. But this ordering is merely an assumption, outside the real scope of the theorem. What matters is that, despite the general absolute disadvantage of one of the countries, this country (Britain, under the circumstances) will be able to specialize in one of the products, namely in the one in which she has a relative advantage reflecting the fact that her absolute disadvantage in it is less important.

Formulated in this way, the theorem looks like an unfruitful intellectual exercise. But what Ricardo was interested in was to show that under whatever circumstances, the opening and liberalization of international trade was profitable to all participating countries.

This optimization could be expressed in two ways: maximization of the output for the same productive effort (cost), or minimization of this effort for the same output. It is this second form which was adopted by Ricardo in his example.

Before trading began,        the        whole        system        (Britain-Portugal) had to spend a total of 390 units of labour in order to produce two units of wine and two units of cloth. With the opening up of trade and the subsequent specialization of each of the countries in one of the two products, 360 units of labour would be sufficient for the same result

Such a theory could provide a century-late vindication of the Methuen treaty of 1703 establishing freedom of trade between the two countries for the greatest “mutual benefit” (according to the wording of the treaty)and assigning to Portugal the agricultural vocation. The theory has constituted ever since then the cornerstone of the free- trade argument. It was such a glaring        and        at the same time unexpected truth, that it seemed consistent with the common interests of mankind to send out the British gunboats in order to bring the good message to the most distant Barbarians, who persisted in opposing the free penetration of liberating and welfare-generating trade. ((At the same time, this theorem was given the force of dogma by academic economics. It became a commonplace reproduced in all textbooks on foreign trade. A humorous version presented by Kindleberger enjoyed a wide audience: Billy-Rose a well known personality of New York, was a theatrical impressario, but it so happened that he was, at the same time, a world Champion typist.        In        spite of this, he found it advantageous to hire a secretary, because notwithstanding his absolute advantage over his secretary in the field of typewriting, this advantage became negligible when compared with the one he enjoyed over her in the other activities of his profession. It was therefore advantageous that both specialize.))

Some critical comments on “comparative costs”

Physical and monetary costs

The first fact to be acknowledged on reading the comparative costs theorem is that its author argues as if each of the trading countries – Portugal and Britain – was a single economic subject possessing the decision-making power (for example, as if Britain was Billy-Rose and Portugal his secretary) to produce and exchange wine and cloth.

If this were the case it would be obvious that each of these two countries would be interested only in the physical costs involved in each line, in other words, in the social costs. So, if the wine-cloth social cost ratio is 8/9 in Portugal, it is obvious that Portugal will readily give up cloth production and devote herself to the production of wine, as soon as she is offered on the foreign market more than 8/9 of a unit of cloth for one unit of wine. Likewise, Britain, where wine costs 12/10 cloth will give up production of wine, as soon as she can get it through exchange by giving less than 12/10 of her cloth. The choice of the “right” specialization within both countries is, under the circumstances, beyond doubt.

But in the real world, the one of capitalist relations, and more particularly the one of free-enterprise, which, furthermore, is the one advocated by the promoters of the theorem, there are not merely two countries, but a crowd of Portuguese business-men on the one hand and a crowd of British business-men on the other. These independent producers are acting individually and with a view to maximizing their profit, which means that what they are interested in minimizing is not the social (physical) cost of wine and cloth but their private monetary cost.

In order that the actions of business men lead to the optimal specialization, it is therefore necessary that the ratio of monetary costs be equal to the ratio of physical costs. In other words, it is necessary that the quantity ratio of the factors, needed for producing wine and cloth, be equal to the price ratio of these factors. For this price is the only element which is of interest to the independent producers.

This equality holds if there is but one factor of production. It does not if there are several.

A single factor

Let us assume that the only factor of production in our system, and the before the only constituent of the social cost, is labour, which is homogenous, that is, simple labour of an identical quality everywhere.

Let:

Pwl be the quantity of labour for producing one unit of wine in Portugal.

Pcl be the quantity of labour for producing one cloth in Portugal.

Ewl be the quantity of labour for producing one unit of wine in Britain.

Ecl be the quantity of labour for producing one cloth in Britain.

Ricardo’s theorem says that if

Pl Pcl < Ewl Ecl

Portugal will specialize in wine and England in cloth and that these are the optimal specializations.

We contend that independent producers do not take into account quantities of labour spent on the production of wine and cloth but what they pay for these quantities. We should therefore examine whether or not the two ways of assessing coşt lead to the same results.

If the remuneration of one unit of labour is x in Portugal and y in England, the cost ratios which will be relevant for the independent producers will no longer be Pwl/Pcl in Portugal and Ewl/Ecl in England, but x (Pwl) / x (Pcl) for the former and y (Ewl) / y (Ecl) for the latter.

Nevertheless, there can be no bias therefrom for respective decisions. For it is obvious that

( x × ( Pwl ) ) ( x × ( Pcl ) ) = Pwl Pcl

and

( y × ( Ewl ) ) ( y × ( Ecl ) ) = Ewl Ecl

for any value of x and y.

In other words if

Pwl Pcl < Ewl Ecl

then

( x × ( Pwl ) ) ( x × ( Pcl ) ) < ( y × ( Ewl ) ) ( y × ( Ecl ) )

whatever x and y may be.

Consequently, in the case of a single factor, the capitalist’s cost calculation made on the basis of the remuneration of this factor, leads to the same results (therefore it is optimal) as the cost calculation which would be made by an integrated (planned) society on the basis of the quantities of this same factor.

To go back to Ricardo’s example, we say that Portugal will specialize in wine and England in cloth because 80/90 120/100.

If wages were 10 escudos for one unit of labour in Portugal and 20 shillings in England, the above inequality would become 800/900        2400/2000 and nothing would be changed. One can vary the rate of wages in the one and/or other country (and also, if one likes, the rate of exchange): it will always be more profitable for Portugal (or its entrepreneurs) to get cloth through exchange rather than to produce it locally. Likewise, it will always be more profitable for England to get her wine through exchange rather than produce it herself, and this holds, irrespective of whether the specialization is decided in a macro-economic way by the society or in a micro-economic way by the individual firm.

Several factors

1. a)In equal proportions 

The situation would be the same if we had several factors of production, with each entering in the same proportion into both wine and cloth in each country (ie. equal organic compositions).

Suppose there were any two factors (labour and Capital,’ or simple and qualified labour, or labour and land etc.,) symbolized by 1 and r, so that Pwr, Pcr, Ewr, Ecr are the quantities of the second factor needed to produce respectively one unit of wine in Portugal, one unit of cloth in Portugal, one unit of wine in England, and one unit of cloth in England.

If:

x = remuneration of one l in Portugal

y =    ”      ”   ”  r in Portugal

z =       ”      ”   ”  l in England

w =       ”      ”   ”  r in England

if, further:

Pwl Pwr = Pcl Pcr

and

Ewl Ewr = Ecl Ecr

(i.e., if the organic compositions of both branches in each country are equal)

and, if, lastly,:

( ( x × ( Pwl ) ) + ( y × ( Pwr ) ) ) ( ( x × ( Pcl ) ) + ( y × ( Pcr ) ) ) < ( ( z × ( Ewl ) ) + ( w × ( Ewr ) ) ) ( ( z × ( Ecl ) ) + ( w × ( Ecr ) ) )

then

( ( x ‘ × ( Pwl ) ) + ( y ‘ × ( Pwr ) ) ) ( ( x ‘ × ( Pcl ) ) + ( y ‘ × ( Pcr ) ) ) < ( ( z ‘ × ( Ewl ) ) + ( w ‘ × ( Ewr ) ) ) ( ( z ‘ × ( Ecl ) ) + ( w ‘ × ( Ecr ) ) )

for any value of x’, y’, z’, w’. That is to say, the choice of specialization is independent of the variations in the rates of remuneration.

Example

Let us suppose that there are two factors, labour and Capital (l,k), entering into the production of these two commodities in the proportion of 1:1 in Portugal and 3:1 in England. In this case, the costs assumed by Ricardo, 80, 90, 120, 100, respectively could be split up as follows:

( 40 l + 40 k ) ( 45 l + 45 k )

( 90 l + 30 k ) ( 75 l + 25 k )

If entrepreneurs pay the unit of l (labour) 2 escudos in Portugal and 3 shillings in England and the unit of K, one escudo in Portugal and 1 shilling in England, we will have the following cost ratio in Portugal:

( ( 2 × 40 ) + ( 1 × 40 ) ) ( ( 2 × 45 ) + ( 1 × 45 ) ) = 120 135 = 8 9

and the following ratio for England:

( ( 2 × 90 ) + ( 1 × 30 ) ) ( ( 2 × 75 ) + ( 1 × 25 ) ) = 210 175 = 12 10

and nothing will have changed as far as the ratios are concerned.

One can vary at will the respective rates of remuneration of l and k, in the one and/or the other country – wine will always be the most advantageous specialization for Portugal and cloth for England, whatever the multiplicand of factor quantities in each country. Consequently the micro-economic reckoning leads us to the same results as the macro-economic reckoning and Ricardo’s theorem remains valid.

1. b)In unequal proportions 

However, up to now, the assumptions upon which our analysis was based have been unrealistic.

In the real world, not only is there more than one factor entering into the various products but their respective proportions are unequal from branch to branch. In certain branches the proportion of Capital as compared to labour (the organic composition of capital or the capital-intensity) is greater than in others. The same can be said for the proportion of ski