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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

VI. The Gain from Trade Measured in Money

Marshall's Curves and Monetary Curves.—In the theory of international value as expounded by Mill and his followers the analysis is conducted in terms of exchange ratios between certain broad groups or classes of commodities which together include all of the commodities existing in the two regions, or if the analysis is presented in terms of the exchange ratios between a few particular commodities, then these are assumed to be representative of the broad groups of commodities whose price interrelationships are the special subject of interest of the theory. In their general-value theory, on the other hand, the same writers dealt mainly with the prices in terms of money of single commodities taken one at a time and selected for examination from a universe in which there was presumed to exist an indefinitely large number of kinds of commodities. In their handling of the theory of international value, therefore, the English school made two important change from their procedure in the field of general-value theory: (1) instead of dealing with money prices, they abstracted from money and dealt with exchange ratios between commodities; (2) instead of dealing with the variations in value of particular commodities taken one at a time on the assumption that the remainder of the system of values remained unchanged, they dealt with the internal variations occurring in the system of values as a whole. In their international-value theorizing, therefore, the English school, from the time of Mill on, made a substantial approach to the general-equilibrium method, although adhering, without important exceptions, to a strictly partial-equilibrium approach in the field of general-value theory.

This difference in method of analysis was not a historical accident but was a natural response to the difference in the nature of the problems which presented themselves most urgently for examination in the two fields. It is evident, however, that the earlier writers gave little thought to this divergence of procedure. Even in the case of Marshall, who is almost alone in drawing attention to the variation in his technique of analysis in the two fields, the explanation which he gives of the nature of the variation and of the considerations which make it desirable can scarcely be regarded as adequate. Marshall states that his reasons for dealing with international-value problems in non-monetary terms, as distinguished from the monetary approach of his general-value theory, are that any disturbance in international equilibrium will result in a change in the value of money in the two areas, or in “the standards of prices,” that if the analysis is in monetary terms allowance must be made for this change in value, but that attempt to make such allowance results in wholly unmanageable complications if one proceeds far into the pure theory of foreign trade.1

But the same objections, in kind, can be made to the use of money prices as a measure of value in domestic-trade theory, and it is a difference in the nature of the questions examined in the two bodies of theory, involving a difference in the degree of error resulting from abstraction from the variations in the value of money, which provides any basis for tolerating this error in domestic-value theory in the interest of simplicity while refusing to tolerate it in the field of international values. The substitution for the price-quantity demand and supply functions for single commodities used in domestic-trade theory of some such concept as reciprocal demand becomes almost inevitable if what is being studied is the value relationships between all the elements of the economy, grouped into broad classes, instead of the relative variations in value of money and one single presumably minor commodity.2

It is a misconception, however, to regard the theory of international value, because it abstracts from absolute money prices, as a theory of barter applied to foreign trade. The theory of barter, strictly speaking, is not applicable to an economy in which money serves as a medium of exchange and as a common measure of relative values. The theory of international value takes for granted the existence of money and its execution of its respective functions, but confines its analysis to the non-monetary manifestations of the equilibrium process.

Marshall, who wrote during a period when the exponents of the substitution throughout the field of value theory of general-for partial-equilibrium analysis were carrying on vigorous propaganda for their cause, cannot be supposed to have been unaware of the full significance of his departure in the field of the theory of international value from the partial-equilibrium method which otherwise he uniformly followed. It is regrettable, therefore, that he not only failed to emphasize the differences between his methods of analysis in the two fields, but that he expounded the two types of theory in such closely similar terminology as to lead some students to postulate a closer resemblance between the two bodies of analysis than could rightly be attributed to them. He must be held largely to blame, therefore, for the fact that able writers have supposed that his reciprocal-demand or foreign-trade curves and his domestic demand and supply curves in terms of money were so closely related that the former were simple derivatives of the latter.3 The two types of curves rest on radically different and irreconcilable sets of assumptions, so that it is impossible to derive one set from the other or to trace a definite relationship between them.4

The substitution in the theory of international values of analysis in terms of reciprocal demands for analysis in terms of demands and supplies of particular commodities with respect to money prices marks, therefore, a distinct improvement in method of analysis. For introducing this improvement the credit belongs mainly to John Stuart Mill, and when Marshall and Edgeworth later elaborated and refined upon it, and invented a graphical technique for its application, they freely acknowledged their indebtedness to Mill.

There exists, however, a considerable literature, mainly of Continental origin, and still being added to, in which the problems of international value are analyzed in terms of absolute money prices and of independence of particular demand or supply curves in terms of money prices from each other. Of the many variants of the monetary approach to the problem of international value there will be selected for comment here the three types which appear to have had the greatest influence on later writers.

Cournot's Theory.—Cournot presents an argument for the profitability of import duties so obscurely stated and falling so far short of establishing its conclusions that it scarcely deserves attention on its own account. But his general authority as an economist is so high, and he is so often appealed to by protectionists as having successfully refuted the doctrine of comparative costs, that his argument cannot be wholly ignored. In spite of the fact that he stated his thesis at some length in all his economic works,5 it is by no means easy to determine just what he was trying to prove, and almost every commentator has given a different interpretation of his argument. I will attempt to reproduce his argument essentially in the form in which he first stated it.6

Country B removes a restriction on the import of a commodity M. Let p_b be respectively the price and D_b the consumption of M in B before the removal of restriction, p'_b the (lower) price and D'_b the (smaller) domestic production and E the quantity imported of M in B after the removal of the restriction. Then producers of M in B will lose

But for the consumers of M before the removal of the restriction there will be a saving of money available for the purchase of other commodities than M of

Since the import E must be paid for in other commodities, a foreign sum is added to the funds previously available for the purchase of other commodities than M, equal to

On the other hand, the increase in the purchases of M resulting from the decrease in the price of M will reduce the amount otherwise available for the purchase of other commodities than M by the amount of

But (2)+(3)-(4), or the additional funds available for the purchase of other commodities than M, equals (1) or p_bD_b—p'_bD'_b, i.e., equals the loss to producers of M in B. It would seem that so far there is no net change in the national money income, since the loss to producers of M in offset by a corresponding gain to the rest of the community. But Cournot, by virtue of a process of reasoning which no one has so far satisfactorily explained, calls this sum, p_bD_b—p'_bD'_b, the “nominal reduction” in the national income.7

Cournot concedes that the original consumers of M, as a result of its fall in price, are in the same position as if their income had increased by

what we would call a consumer's surplus item if this were an acceptable way of measuring it. There is also a possible additional gain to consumers of M, because at its reduced price the additional purchases thereof may yield more satisfaction than the commodities which they replace. But since Cournot regards this gain as not measurable, he excludes it from his computation. He concludes that there is a “real reduction” in the national income of B equal to the excess of the “nominal reduction” (1) over the gain (5), or

It is impossible to find any significance either in Cournot's mode of computation of the benefits and losses from the removal of a restriction on import, or in the “nominal” or “real” results of his computations. The correctness of the general verdict that the technique which he used at this point was inadequate for the purpose and his conclusions of no value seems indisputable.8

In his final exposition of his thesis, Cournot concedes that if the removal of the restriction on import resulted in an outflow of money followed by a general fall in the prices of commodities, the problem would completely alter in character, and his conclusions would not apply. This is an important concession, since the classical economists would have argued that a unilateral reduction in duties would have just these effects, and would have regarded as meaningless analysis of the effects of a reduction of duties which did not take these effects into account. Cournot also defends his technique of analysis in terms of money values by appealing to Mill's doctrine that the introduction of money would not alter the results of trade as compared to what they would be under barter. If this was correct, Cournot asserts, there could be no objection to the presentation of the theory of international trade in wholly pecuniary terms.9 This is, of course, an extraordinary non sequitur. Because analysis in terms of real costs, on the one hand, and analysis in terms of real costs and money values, on the other hand, would produce identical results, it does not follow that the same results can be produced by analysis in terms of money values alone. In any case, Cournot's analysis fails to deal intelligibly even with the pecuniary aspects of the problem.

Barone's Graphical Technique.—Cunynghame, in 1904, expounded the theory of international value with the aid of a type of graphical illustration related to the ordinary Marshallian domestic-trade demand and supply diagrams in terms of money prices and derivable from them.10 In Cunynghame's diagrams, as in Marshall's domestic-trade diagrams, only one commodity at a time is under consideration, and the diagrams relating to the two regions are set back to back for purposes of comparison and analysis. Cunynghame did not draw any conclusions with respect to gain from trade from his diagrams, but Barone, in 1908, used the Cunynghame back-to-back diagram to reach such conclusions.11

Chart XX is a reproduction of Barone's basic diagram.12 The demand and supply curves of the particular commodity under consideration, expressed in terms of money in a currency common to both countries, are given separately for each country, with the two diagrams set back to back. In the absence of international trade in this commodity, its price would be P₁N in England and PM in Germany. If trade is opened, England will therefore be the importer of the commodity and Germany the exporter. The cost of transportation per unit is assumed to be OO₁, and after trade, therefore, the price in England must be the price in Germany plus OO_1. Equilibrium will be established at the price, f.o.b. Germany, at which the quantity England would import,

CT,13 is equal to the quantity Germany would export, EF.14 The price, therefore, will be RE in Germany and HC (-RE+OO₁) in England. Each country, says Barone, will gain as the result of the trade. In England the gain to consumers will be P₁CAB monetary units, which is greater than the loss to producers, P₁TAB. In Germany the gain to producers will be AZPF, which is greater than the loss to consumers, AZPE.

The grounds on which this reasoning must be regarded as inconclusive are many and formidable. First, it ignores the effect which the removal of barriers to trade would have on gold movements and therefore on the heights of the demand-and-supply schedules and the prices in the two countries. Second, the area CP₁W included by Barone in the gain to English consumers is not homogeneous with the area BP₁WA, the latter being an actual saving in money (waiving the first objection), whereas the former is a “consumer's surplus” of indefinable meaning as compared to the area BP₁WA. A similar objection applies to the inclusion of the area EVP in the loss accruing to German consumers. These areas are akin to a portion of Marshall's consumer's surpluses in his domestic-trade theory, and are subject to the same criticisms. Third, the calculation of gain or loss to producers from changes in price and output assumes that the “producer's rent” areas represent net real income to producers without involving real costs to anyone else in the community, an assumption inconsistent with normal reality in the one respect or in the other, or partly in both. Fourth, the supply and demand curves in terms of money for each country are assumed to be independent of each other, and of the amount of national real income, an assumption always logically invalid, but seriously in conflict with the realities if the commodity under consideration represents, or is taken as representative of, a large fraction of the total national output or consumption, as distinguished from the theory of domestic value. Barone's technique of analysis is invalid, therefore, even if what is in issue is the gain or loss resulting from the removal of a single minor import duty, although the results which he obtains are for most situations probably the same in direction as those which would be obtainable by more acceptable methods. But Barone claimed that his conclusions are “manifestly” applicable, without need of additional qualification, to the case of the removal of an entire tariff.15

Auspitz and Lieben.—Auspitz and Lieben attempt to trace the gain or loss effects of trade and of the imposition or removal of single duties by means of graphical constructions, independently devised by them, which are in some respects intermediate between the Marshallian domestic-trade diagrams and the Marshall-Edgeworth foreign-trade diagrams.16 In their diagrams only a single commodity and money are represented, as in the Marshallian domestic-trade diagrams, but the vertical axis represents total amount of money instead of price per unit, and for each country the demand or supply situation is represented by two curves. In the case of the exporting country, one of these curves represents the total amounts of money in return for which the country would carry its export to the volumes indicated by the horizontal axis, while the other represents the total amounts of money which the country could accept for the indicated volumes of export without losing from the trade as a whole. This last curve, therefore, is a species of indifference curve corresponding to one of Edgeworth's “no-gain from trade” curves. It is assumed throughout that the money has constant marginal utility, and the effects of trade, or of duties, on the amount of gain from trade are measured by the vertical distances between the two curves. The restriction to single commodities makes the Auspitz and Lieben constructions akin to Barone's as far as the objective effects of trade and of duties are concerned, and open to the same objections, but their method of measuring gain, while not satisfactory because of the assumption of constant marginal utility of one of the constituent items in the trade, is superior to Marshall's because of its use of the indifference curve as an element in the measurement.

This book may appropriately end on a not which has been repeatedly struck before. The theory of international trade, at its best, can provide only presumptions, not demonstrations, as to the benefit or injury to be expected from a particular disturbance in foreign trade, for it deliberately abstracts from some of the considerations which can rationally be taken into account in the appraisal of policy and it never takes into account all the variables which it recognizes as significant and within its scope either because they are out of its reach or because to take them all into account would make the problem too complex for neat solution. The presumptions which the theory does provide, however, are important both because neglect of them in the formation of decisions as to policy would lead to wrong decisions in many, perhaps most, cases, and because these presumptions are not likely to be hit upon except by means of the rather arduous procedures of the theory of international trade in its more or less traditional form. Greater claims than this have been made for the utility of theory in the field of commercial policy, but their justification must await, I fear, an advance in power of economic analysis which is not yet in sight.

Appendix

A NOTE ON THE SCOPE AND METHOD OF THE THEORY OF INTERNATIONAL TRADE

Since the comparative absence of methodological discussion in the literature of the theory of international trade is a condition whose persistence need not, in my opinion, be deplored, this methodological note is presented in the spirit of Henry Sidgwick's famous lecture on the futility of lectures. One of the methodological criticisms which has occasionally been made against the theory of international trade is that its exponents have not formulated an adequate definition of its scope and objectives, so that it fails to deal with matters properly within its range and perhaps concerns itself with questions which do not fall within its legitimate boundaries. I find it difficult to conceive what useful purposes the formal definition of the scope of a discipline can serve, except the purposes of editors of encyclopedias and administrators of educational institutions, whose responsibility it may be to prevent overlapping, to obtain full coverage, and to arbitrate jurisdictional disputes. No damage is likely to be incurred by economics if serious consideration of these jurisdictional questions is confined to those for whom it is an unavoidable occupational responsibility.

It is indeed arguable that energy spent in trying to define the proper limits of disciplines is often worse than energy wasted, since preoccupation with such definition often arises from an inadequately suppressed desire to confine analysis to one's own private set of assumptions and concepts. In the absence of precise delimitation of the scope of a field there will, it is true, tend to be much overlapping and much raggedness of boundaries. Overlapping, however, is, outside of encyclopedias with crowded pages and the curricula of universities with strained budgets, an evil of a minor order. The waste of effort which may result from it is more than counterbalanced by the mutual stimulation of the overlapping disciplines which it tends to provide, and by the safeguards which it sets up against degeneration of the individual disciplines into formal and lifeless academic systems whose orginal organs of contact with the problems of real life and with the development of thought in other fields have become atrophied through more or less deliberate disuse. The opposite evil, too restricted a scope, with consequent neglect of promising areas of investigation, is a more genuine one, and definition may conceivably serve to expose its existence and to indicate its specific nature, but a sample demonstration of how the discipline would be improved by an extension of its scope would seem to be a much more effective means of securing such extension. It is surely reasonable to expect the economist who urges a novel program of investigation upon his fellows to demonstrate his own faith in its possibilities and to give some concrete evidence that this faith is not misplaced by himself executing some portion at least of his program.

The discussion, however, often turns not on the propriety of the existing limits of the theory of international trade, but on the appropriateness of the doctrine's label to its contents. It has been repeatedly objected that the term “international trade” or “foreign trade” in the label is misleading, on the ground that the theory deals with trade between regions, irrespective of whether or not these regions are “nations” or “countries.” Edgeworth remarked that: “International trade meaning in plain English trade between nations, it is not surprising that the term should mean something else in political economy.” 1 That the theory was not concerned solely, or was not applicable solely, to trade between sovereign nations was recognized from the start. The writers, from Hume on, when expounding some doctrine in this field in terms of trade between countries would stop to point out that it was applicable also to trade between regions or provinces within a country. John Stuart Mill, when asked whether Ricardo was correct in stating that the same rule which regulates the relative value of native commodities does not regulate the value of the products of different countries, replied in the affirmative, but said that he would substitute “places” for “countries” in the proposition.2 Bastable toyed with the idea of substituting “interregional” for “international,” but concluded that: “‘interregional’ would prove a troublesome word; it is better therefore to adhere to the old term.3 Ohlin adopted this “troublesome word,” but in giving to his important book the title “Interregional and International Trade” he seems to imply that even for him the former term does not fully embrace the latter.

Finding flaws in labels is much easier than finding patently superior substitutes. If what has gone under the label of the theory of international trade was simply an investigation of the spatial aspects of trade, “interregional trade” would be a highly appropriate label. It would have the merit that it stressed the main methodological difference between the theory of domestic (or “closed economy”) trade, as ordinarily formulated, and the “theory of international trade,” namely, the assumption by the former of a single market without spatial dimension and the assumption by the latter of at least two spatially distinct markets, each without internal spatial dimensions, but with substantial obstacles to the movements of factors of production and, in some cases, of commodities across the frontiers. But if the theory of international trade were distinguishable from the theory of domestic trade only by the recognition by the former, and the exclusion by the latter, of the existence of space in some abstract sense, it would have been surprising if someone had not long ago offered a demonstration that the theory of international trade could be absorbed into the theory of trade in general with gain to the latter and without loss form the abandonment of the former by introducing into the equations of the theory of trade in general additional s (for “space”) terms in the manner in which the complex economic problems arising out of the temporal flux of phenomena have recently been solved for us by the introduction into the equations of general equilibrium theory of magical t (for “time”) terms. Examination of the actual assumption, explicit and implicit, of the theory of international trade reveals, however, that the role of “space” in the theory of international trade is too varied and elastic to be adequately disposed of by any such simple stratagem.

It has been alleged that what differentiates the theory of international trade from domestic-trade theory is solely the assumption in the former that there are transportation costs for commodities or factors and abstraction from transportation costs in the latter. Objection is then made to the differentiation of the two theories on the grounds that: there is no such difference in the facts; that if any differences exist in fact between internal and international transportation costs the differences are relative rather than absolute; and, finally, that transportation costs are often in fact greater between regions within a country than between countries. If these considerations are well-founded and relevant, there would nevertheless still be room for two theories, one abstracting from transportation costs while the other makes them its special concern. There would be no point, however, in labeling the latter the theory of “international” trade, and “interregional” would seem a highly appropriate substitute. But transportation costs are commonly abstracted from in both theories, and while spatial obstacles to movement are a special concern of the theory of international trade, these spatial obstacles do not, or need not, consist of transportation costs.

In their rare methodological dicta, the classical exponents of the theory of international trade explained that they were assuming international immobility and complete internal mobility of the productive factors. Mobility assumptions were important for part of their theorizing, but the mobility which they assumed to be absent internationally was a different kind of mobility from that which they assumed to be present internally. What underlay their analysis was the assumption of international place immobility of the factors of production, irrespective of occupation, and the assumption of internal occupational mobility of the factors of production, irrespective of location, and for a large part of their analysis only the former assumptions was significant. Much of the criticism of the mobility assumptions of the classical theory of international trade as unrealistic is irrelevant because it fails to note this distinction between types of mobility.

It will be conceded at once that contrast between an international immobility and an internal mobility, if valid at all, is valid only as a relative and not as an absolute contrast. But a relative difference in mobility, provided it is a substantial difference, suffices as a foundation for a separate theory of international trade. The differences in degrees of mobility of the factors of production, moreover, seem obviously to be great when countries are being considered and to be minor, or non-existent, or in the reverse direction, when neighboring regions within a country are being considered, if the mobilities being compared are place mobility between areas, on the one hand, and occupational mobility within areas, on the other.

There is from the entrepreneurs' point of view perfect occupational mobility of a factor of production within a country if any desired quantities of its services can be hired or purchased by any industry at the same terms as by any other industry. In the long run, occupational mobility of “disposable capital” and of natural resources must approach closely to perfection. Because of occupational preferences on the part of labor and because of non-competing occupational labor groups, there appears to be, however, a substantial departure from perfect occupational mobility of labor, whether from the entrepreneurs' or the laborers'4 point of view, even in the long run.

An appropriate criterion of perfect long-run international mobility of the factors is the existence of sufficient place mobility to prevent persistent international differences in their money rates of return in similar occupations. There is obviously, in this sense of the term, zero mobility of natural resources: existing immigration restrictions suffice, today at least, to guarantee almost zero international mobility of labor; but in normal times at least there is a high mobility of capital and of entrepreneurial skill. These international immobilities of labor and natural resources are all that is needed as a basis for a separate theory of international trade even if there were perfect international mobility of capital and imperfect internal occupational mobility of all the factors, although any variation in the mobility assumptions as a matter of course makes necessary a variation of some portion of the analysis and conclusions of the theory.

There are additional reasons why “international” is a more appropriate term than “interregional” for the theory of international trade, given its traditional range of interests. In the development of the monetary aspects of the theory of the mechanism of international trade, the classical economists had generally in mind a particular area, England, partly because it had a single monetary and credit system and partly because it was for them an area of special interest. “Countries” fit these two considerations much more generally than do regions within a country. In the analysis of gain from trade, attention was definitely centered upon particular boundaries, enclosing areas of community of interest, and these areas were also generally countries or nations. As Sidgwick remarked: “it is only in the case of foreign trade that the investigation of the conditions of favorable interchange excite practical interest; because it is only in this case that there has ever been a serious question of governmental interference with a view of making the interchange more favorable.” 5 In inductive investigations within the field of the theory of international trade, the unit of investigation has almost invariably been a “country,” partly because this was an area of special interest to the investigator, and partly because the concentration of public interest on country units has resulted in a relatively much greater supply of statistical information for such units than for “regions.” The subsidiary field of study of international economic policies confines its attention to the obstacles to economic intercourse, natural, institutional, statutory, administrative, which are associated with or correspond to national frontiers: import duties, immigration restrictions, differences in commercial law and commercial practices, differences in language, tastes, customs, etc. The theory of international trade is therefore to a large extent a genuine theory of trade between nations. Both by design and as an incidental by-product, it is also in large part an economic theory of regionalism. It is often something in between these two. Except for zealots in definition, this flexibility in its boundaries has not been a source of difficulty or confusion.

Williams has complained, however, that the assumption in the theory of international trade of international immobility of the factors prevents it from taking into account the important economic consequences of the substantial international migration of the factors which have actually occurred throughout the past.6 It must be admitted that a theory which always assumes complete international immobility of the factors would be as inappropriate by itself for the economic analysis of the effects of migration of these factors as a theory of trade in general resting on strictly static assumptions has proved to be as an instrument for the analysis of business fluctuations. But this would constitute a valid criticism of the theory of international trade only if the latter professed to answer questions relating to the effects of international migration of the factors of production. The theory of international trade has departed sufficiently from its usual adherence to the assumption of international immobility of the factors of production to provide us with the only body of analysis of any pretensions relating to the mechanism of transfer of capital. But with the myriad long-run economic effects of the international migration of capital, or of labor, the theory of international trade has not dealt nor pretended to deal. While there is no doubt a valuable contribution still to be made by the theory of international trade in this connection, it seems to me that it is to the economic theorist, the economic historian, and other specialists, that we must mainly look for significant results in this field. Particularly in the field of immigration of labor, to whose vast specialized literature, as far as I know, no international trade theorist except Ohlin has made any contribution of consequence, it would probably sound like passing strange doctrine to the specialists in the field that they really were encroaching all the time on the legitimate boundaries of the theory of international trade. But it may be taken for granted that the specialists in industrial history or in immigration would welcome with open arms any genuine contribution to the analysis and solution of their problems which any specialist in international-trade theory has it within his power to make.

Williams makes another, and to me a completely novel, criticism of the theory of international trade, on the ground that, as a theory of benefits from territorial division of labor, its conclusions contradict its premises of internal mobility of the factors. Trade means national specialization for the world market. “Specialization is thus the characteristic feature and the root idea of international trade. But specialization is the antithesis of mobility, in this case of domestic movement of productive factors.” 7 What I understand him to mean is that national specialization, by leading to greater population and greater accumulation of capital within a country than could be productively employed within that country if access to foreign markets were cut off, brings into being (presumably by domestic growth as well as by immigration, since England is used as an illustration) such great increases in the amounts of the factors of production that the factors in large part have no satisfactory alternative to production for export, would with the cessation of foreign trade have either to starve or emigrate, and therefore have no internal occupational mobility. The effects of foreign trade on the amounts and rewards of the factors postulated by Williams are in kind quite in keeping with the expectations of the classical writers, though I cannot recall any instance of forecasts on their part so optimistic in degree. In default of careful investigation, I have no reason to doubt that the classical economists in general, and not only John Stuart Mill, whom Williams cites, overlooked the adverse effect on average occupational mobility of a great expansion in capital and population dependent on foreign trade for their employment. The alleged contradiction between the mobility assumptions and the conclusions of the theory of international trade, nevertheless, seems to me to be spurious. The relevant mobility assumption of the theory is not that occupational mobility is a consequence of national specialization, but that it is a prerequisite thereof, which instead of being a questionable proposition approaches closely to being a truism. Notwithstanding the passage cited by Williams from Mill, which seems to deny the possibility that foreign trade may result in a loss of average occupational mobility by the factors of production, I feel certain that Mill—or Ricardo, or Cairnes, or Marshall, or Taussig—would gladly have given assent to the proposition that a country can profitably employ more capital and can support a larger population at a given standard of living under trade than with foreign trade cut off, which seems to be the gist of William's argument.

[1]Alfred Marshall, The pure theory of foreign trade [1879], reprint 1930, p.I: cf. also ibid., Money credit & commerce, p. 157: Thus money, even when firmly hased on gold, does not afford a good measure of international values, and it does not help to explain the changes in these values, which are caused by broad variations in international demand; but on the country it diaguiscs and concenls them. For it measures changes in values by standards which are aatomatically modified by the very variations in international demand, the effects of which are to be measured(Italics are in original.)

[2]Cf. the excellent statement by Haberler, Theory of international trade, 1936, p. 154: The material difference between the two types of curves is that the Marshallian [foreign-trade] curves give a complete picture, showing the final result of the whole international trade mechanism, and relate to representative bales, while the ordinary [domestic-trade] curves relate to the money prices of an individual commodity, upon the assumption that other things remain equal and in particular that all other prices remain the same, so that they can give only a partial picture ...” (Italics are is original.)

[3]See H. Cunynghame, A geometrical political economy, 1904, p. 97. (But cf. ibid., pp. 114 ff.)

See also T.O. Yntema, A mathematical reformulation of the general theory of international trade, 1932, pp. 47–50. In a footnote (ibid., p. 48) Yntema concedes that the foreign trade curves which he derives from domestic demand and supply curves in terms of money may not be equivalent to Marshall's reciprocal demand curves:

This derivation is based on the assumption that the import demand price on its fixed-height schedule is a function only of quantity imported and that the export supply price on its fixed height schedule is a function only of quantity exported. Marshall's comments on the interdependence of import demand and export supply seem to refer not to a functional interrelation of fixed-height schedules but to the interdependence which arises out of the necessity of balancing international debits and credits. Where a functional relation between fixed-height schedules does exist, Marshall's curves are still applicable, but they cannot be derived from their component elements by two-dimensional graphs. The “fixed-height schedules” referred to here are supply and demand schedules of two commodities in terms of adjusted money prices. Marshall nowhere explains the derivation of his reciprocal-demand curves from the complex factors operating within each economy. As Edgeworth comments: “A movement along a supply-and-demand curve of international trade should be considered as attended with rearrangements of internal trade; as the movement of the hand of a clock corresponds to considerable unseen movements of the machinery” (Papers, II, 32). Marshall allowed the operations of the internal machinery to remain imseen, but since his reciprocal-demand curves relate to two “commodities” taken as constituting the entire range of commodities, it seems necessary to assume that Marshall would not have regarded the demand functions and the supply functions of these respective commodities within each country as independent functions.

[4]Cf., however, J. W. Angell, The theory of international prices, 1926, p. 454: “First, the assumptions on which the [Marshallian foreign-trade] curves are based, and the limitations to which they are subject, are precisely the same as for composite demand and supply curves of the more familiar sort [i.e., the ordinary domestic-trade theory curves?]. The preference for them is based simply on their greater advantage, for certain purposes, as a graphic device.” Cf. also, ibid., pp. 456–57: “The curves also prmit an easy measurement of the direct benefits from trade....

[5]A. Cournot, Recharches sur les principes mathématiques de la théorie des richesses, 1838, pp. 173–81; Principes de la théorie des richesses, 1863, pp.316–24; Revue sommaire des doctrines kconomiques, 1877, pp.196–213.

[6]Cournot, Recherches, 1838. My subsequent references are to the translation by N.T. Bacon: Researches into the mathématical principles of the theory of wealth, 1927, pp. 150–57.

[7]Attempts have been made to explain this by the argument that Cournot is assuming that no increase takes place in the production of other commodities, i.e., that the values (2) and (4) above are therefore eliminated, and the gain (3) is offset by a corresponding reduction in the domestic consumption of other commodities than M. This interpretation has been made, by Hagen and by others, the basis for a rejection of Cournot's argument on the ground that it makes an unwarranted assumption that the productive resources released from the production of M will find no other employment. By Angell (Theory of international prices, p. 245), the only writer who finds sense and significance in Cournot's thesis, it is made the basis for a defense of the validity of Cournot's argument within the limits of his assumptions. But Cournot, in reply to Hagen, expressly rejects this interpretation and claims that his method of computation gives full consideration to any income resulting from a transfer to other employments of the resources released from the production of M. (Cournot, Principes, 1863, pp. 329–30; Revue sommaire, 1877, pp. 193–95, 205.) The only explanation I can offer, for which there seems some warrant in Cournot's exposition, is that Cournot held that since the change in the price of M and in the money income of producers of M would affect the price and the incomes of the producers of any other one commodity only to a negligible extent, it was permissible to assume that the prices and the incomes of producers in country B of other commodities than M would remain unaltered, i.e., it was permissible to ignore items (3), and (4) above. (See Cournot, Researches, pp. 130–32.) But this would be equivalent to saying that if the contents of a large tank of water were allowed to spread thinly over a great area, because at any one point the amount of water would be negligible, therefore the amount of water over the entire area could reasonably be regarded as negligible as compared to the amount of water originally in the tank.

[8]Cf. Edgeworth, Papers relating to political economy, 1925, II, 47–51; Bastable, Theory of international trade, 4th ed., 1903, pp. 173–75; A. Landry, Manuel d'économique, 1908, pp. 838–39; Irving Fisher, “Cournot and mathematical economics,” Quarterly journal of economics, XII (1898), 130–32.

[9]Revue sommaire, 1877, p. 209.

[10]H. Cunynghame, A geometrical political economy, 1904, pp. 48 ff. See especially his fig. 51, ibid., p. 98, and compare it with the Barone diagrams referred to later in the text.

[11]Enrico Barone, Grundzüge der theoretischen Nationalökonomie (German translation by Hans Staehle of the original Italian edition of 1908), 1927, pp. 101 ff. Barone does not refer to Cunynghame.

[12]Cf. Barone, Grundzüge, fig. 30, p. 102, and fig. 32, p. 105.

[13]England at this price would consume CA, but would supply TA from her own production.

[14]Germany at this price would produce AF, but would consume AE herself.

[15]Ibid., p. 105. Barone, however, had earlier stated that his diagrams deal with the problem “nicht in endgültig korrekter Weise” (ibid., p. 102), but without indicating the nature of their shortcomings.

An algebraic formula introduced in 1904 by A. C. Pigon, applied statistically by Henry Schultz in 1928, and receiving authoritative acceptance today as the “correct method” of determining the effect of duties on prices and domestic output, is essentially an algebraic application of the Cunynghame-Barone graphical analysis. Frovided the method is used only to trace the effect on the price of a particular commodity of a change in the duty on that commodity, all other related circumstances meanwhile remaining substantially unchanged, it probably produces fairly reliable results, and does seem to me to be superior to other methods commonly used. The method would become seriously questionable, however, if applied to trace the effect on price of a substantial change in duty on a major commodity or group of commodities, since some of the factors supposed to be remaining unchanged in the caeteris paribus pound would then actually be undergoing substantial change and these changes would react on the price of the commodity in question. The method would be even more suspect if it purported to serve as a means of measuring the amount of gain or loss to a country resulting from a tariff change, whether the change was a major or a minor one. For the nature of the formula, and an account of the literature relating to it, see Henry Schultz, “Correct and incorrect methods of determining the effectiveness of the tariff,” Journal of form economics, XVII (1935), 625–41. Schultz makes clear that the results of the use of this formula become questionable if “the effect of the tariff on the prices of other commodities and on the balance of international payments [are] too great to be neglected” (ibid., p. 641), which is certain to be the case when the tariff changes are major ones.

[16]R. Auspitz and R. Lieben, Untersnchungen über die Theorie des Preises, 1889, pp. 408–29. Cf. the comments of Edgeworth, Papers relating to political economy, II, 58–60.

[1]Papers relating to political economy, II, 5.

[2]Political Economy Club, Minutes of proceedings, VI (1921), 291.

[3]Theory of international trade, 4th ed., 1903, p. 12, note.

[4]The ability of labor freely to choose its occupation and the ability of entrepreneurs, whatever their occupation, to hire labor at uniform rates are, of course, different, though related, concepts. Both are significant for the doctrine of comparative real costs, but only the latter is relevant for the theory of mechanism.

[5]The principles of political economy, 2d ed., 1887, p. 216.

[6]J. H. Williams, “The theory of international trade reconsidered,” Economic journal, XXXIX (1929), especially pp. 205–09. It has conspicuously failed to do so in his own case. Cf. his Argentine international trade under inconvertible paper money 1880–1900, 1920.

[7]“The theory of international trade reconsidered,” loc. cit. p. 203.

[1]This is a list of titles of works cited in the text (including the footnotes). In order to save space, a member of titles to which references of minor importance only are made are here omitted, and where a number of different items in the collected works of an author have been used, the items contained in such works are not listed here separately. Where a date is enclosed in square brackets, it represents, unless otherwise indicated, the date of first publication. Place of publication is not given for periodicals, and for other works is given only if it is not London. Since there is little overlapping between the two lists, separate listing is given for the titles cited in the first two chapters and for those cited in the remainder of the book.