Theories of International Economics

Peter M. Lichtenstein

• Publisher: Taylor & Francis
• Year: 2016
• Print ISBN: 9781138911543
• eBook ISBN: 9781317433491
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

International economic theories emerged within particular social, economic and political frameworks and were developed as solutions to the problems of contemporary economics. In order to understand the increasingly complex and interdependent state of today's international economy, we need to realise the importance of those theories that came before. However, many international economics textbooks do not place the theories they discuss within this historical context.

Theories of International Economics aims to redress the balance by taking a pluralistic approach, presenting with authority both orthodox and heterodox international economic theories. Each chapter shows the necessarily interdependent nature of schools of international economic theories by including an historical component that shows how each school of thought developed, why it developed and what it has to say about the contemporary world. This text examines a wide range of theories with an emphasis on the benefits of a pluralistic approach, addressing schools of thought including Classical, Neoclassical, Keynesian, Post Keynesian, Marxian, Austrian, Institutional and Feminist Economics, Mercantilism and Neo-Mercantilism, alongside – and in relation to – each other. This approach allows the scholarly value of each approach to be understood and appreciated, and in doing so enables a greater understanding of the world economy.

This book is suitable for use as either a core or supplementary text on international economics and international political economy courses.

1
Introduction

What is international economics?

International economics is the study of trade in produced goods, natural resources and financial assets between nations and regions. Trade has three dimensions: the volume of trade (the total amount of exports and imports of all kinds), the composition of trade (the kinds of commodities and assets traded) and the direction of trade (who trades with whom). These three dimensions constitute what we call the pattern of trade between nations.

One approach to the study of trade is to locus on a nation's availability of human, natural and produced resources relative to other nations. Relative resource abundance influences relative costs of production which, in turn, determines which industries, and which resource owners, benefit the most from international trade. This general approach is customarily called international microeconomics and the emphasis is on relative rather than absolute magnitudes.

Another approach to the study of trade patterns is to focus on a nation's aggregate economic performance. This involves analyzing the interaction between international trade and aggregate output, income, employment and inflation. This interaction is strongest when a nation's economy is "open," which means that goods and financial assets can flow freely in and out. Economists typically call this approach open economy macroeconomics or international macroeconomics.

Beyond these two approaches, international economics also tries to answer questions such as "How are the benefits and costs of trade shared among social classes?" "Does trade result in dependence on other nations?" "Does trade enhance or impede economic development?" "Should trade be regulated or left free?" "What is the connection between growing global inequality and the spread of capitalism around the world?" These are open-ended questions for which researchers have devoted a great deal of energy to answer.

Finally, international trade occurs in a social, cultural, political and institutional context. This context includes values, beliefs and attitudes. It also includes relations with other nations and with regional and multinational institutions. These contextual factors are always in a state of flux and vary widely around the world. They are an important part of the study of international economics because they directly affect, and are affected by, trade patterns.

The study of international economics can be narrow in scope, or it can be wide ranging, comprehensive and multi-disciplinary. It can be empirical or theoretical. It can be mathematically precise, or it can be qualitative, focusing instead on historical, cultural and institutional factors. There are indeed many roads that one can follow in studying the world economy.

The historical context of international economic theory

Today there are close to 200 sovereign nation states in the world, each with a particular endowment of natural and human resources. Each has unique economic and political institutions as well as distinct geographies, histories and cultures. A century or more ago, however, there were only half as many sovereign nation states as there are now. Most lands and territories were colonies of one or another European nation. In fact, the entire African continent, most of Southeast Asia and almost all of South America were colonized by a handful of European nations. And if we go back even further in time we will find no nation states at all, at least not as we know them today. There were only kingdoms, dynasties, empires, principalities, and, of course, their possessions and protectorates. Some scholars say that the nation state today is becoming irrelevant, that the "nation" as an analytical category has been superseded by large transnational corporations (TNCs) and global and regional organizations that dominate world economic affairs and act like nation states.

Alongside the proliferation of nation states has been the emergence and worldwide diffusion of capitalism, its philosophies and ideologies, its social structures, and its institutions. The capitalist way of thinking and doing things is relatively new, having begun in the late Middle Ages. Since then, capitalism has grown to dominate most of the world, especially since the collapse and transformation of the former communist nations.

The faces of capitalism

Capitalism is a distinct kind of economic system, and international economics is ultimately about global capitalism and its expansion. While capitalism is, broadly speaking, a single idea, it has many faces and bears the stamp of each society in which it has been practiced. That is to say, the essence of capitalism has many forms, depending on when and where it occurs.

Capitalism, therefore, differs according to time and place. Historically, capitalism has evolved in the last four or five hundred years from merchant capitalism in the late medieval Italian city states, to industrial capitalism in 19th-century Europe and North America and, more recently, to financial capitalism, its current global manifestation. Each variation has had a well-defined logic and dynamic force.

If instead we look at capitalism contemporaneously, we find variations in the way it is practiced on different continents. For example, there is North American capitalism, European capitalism, Chinese capitalism and Japanese capitalism. We can even identify variations within each of these regional categories. For example, European capitalism includes Swedish, German, French and Italian capitalism, all of which have very distinct features.

It doesn't matter if we look at capitalism historically or contemporaneously. All the many forms of capitalism have the same essential ingredients. These ingredients include (1) private ownership of the means of production by a minority of the population; (2) a property-less class that includes a majority of the population who must sell their labor to make a living; and (3) market allocation of resources and commodities.

History and economic ideas

As the novelist L. P. Hartley once famously said, "The past is a foreign country: they do things differently there." We might add, "People also think differently there." The same applies to economic reasoning and theorizing. Economic ideas about capitalism closely correspond to the particular historical and social circumstances in which they arise. And as capitalism has evolved, so too have economic ideas about capitalism.

The world today is a far different place than it was three hundred years ago when economics first came into existence as an academic discipline. The 18th-century world of Adam Smith was far different from the 19th-century world of Karl Marx, and Marx's world was far different from the 20th-century world of John Maynard Keynes. Each of these economists, separated by several generations, faced radically different domestic and international economic problems. These differences are reflected in the theories they advanced to address these problems.

The point is that theories of international economics are rooted in particular historical and social conditions. We must therefore be cautious about generalizing any one of these theories and making them universally applicable. What may be true today may not be true in another era or another place. Therefore, international economic theory is necessarily tentative and contingent: no theory can be absolutely true and universally valid.

International economic theory: orthodoxy and heterodoxy

One would think that the field of international economics welcomes competing views and approaches. Unfortunately, this has not been the case. For more than a century, a distinct methodology and theoretical framework has monopolized intellectual activity in the field of international economics. We call this the economic orthodoxy. For decades this orthodoxy has dominated university teaching, research and publication, and many of its adherents have an almost religious devotion to its principles. Some prefer the term mainstream economics to orthodoxy. We favor the latter term over the former because it insinuates a more dogmatic attachment to established principles.

Nevertheless, there are other schools of thought that reject the domination of economic orthodoxy and offer in its place alternative methodologies, perspectives and theories. This is the world of the economic heterodoxy. Seldom taught at colleges and universities, these alternative approaches view global capitalism very differently. The heterodoxy is a collection of independent schools of thought, each with roots going back a century or more. Yet there is no central core methodology or theoretical framework that everyone accepts. Diversity and dissent from orthodoxy are the heterodoxy's common attributes.

What is the economic orthodoxy?

The economic orthodoxy emerged in the latter part of the 19th century. Its rise to dominance coincides, more or less, with the rise of Marxism, socialism and revolutionary socialist movements in Europe and Russia. The latter exposed capitalism's abuses and challenged its moral legitimacy. The economic orthodoxy played, and continues to play, an instrumental role in defending capitalism against these critiques and in demonstrating capitalism's alleged superiority over socialist alternatives.

Five central principles make up the core of orthodox economic theory. These principles are employed in international economics.

The first principle is that a capitalist economy with unfettered competitive markets and well-defined private property rights efficiently allocates its scarce resources to their highest valued (i.e., best possible) uses. This is the economic efficiency principle.

The second principle is that markets are self-correcting. This means that prices and quantities will always adjust, automatically, to achieve equilibrium between supply and demand. This is the equilibrating principle.

The third principle is that the capitalism system can be understood best by first describing its individual elements, namely the individual consumer and the individual producer. Each of these individual entities behaves rationally by maximizing utility and profits subject to budget and cost constraints. This is all that is really necessary to understand how the entire capitalist economy works. This is the individual rationality principle.

The fourth principle is the belief that, in a perfectly competitive economy, income results from hard work and thrift and not from exploitation or oppression. Income and wealth are therefore the rewards for productive contributions to the economy which, in turn, derive from diligence, self-improvement, entrepreneurship and ingenuity. Moreover, if talents, abilities and ambitions are unequally distributed among the population then it stands to reason that income and wealth will also be unequally distributed. Inequality simply reflects the attributes of individuals and their choices to work and save. This idea provides a theoretical and moral defense of the unequal distribution of wealth and privilege that distinguishes capitalism. This is the economic justice principle.

The fifth principle is that any attempt by government to interfere with this rational sell-correcting system will undermine economic efficiency. This is the laissez-faire principle. The idea is that a government should play a neutral and unobtrusive role in the economy.

There are two main branches of the contemporary economic orthodoxy, each building on these five principles. One branch is Neoclassical microeconomics and the other is Classical-Keynesian macroeconomics. Neoclassical microeconomics is an outgrowth of Classical economics. It redirected scholarly attention away from the Classical theory in which social classes (capitalists, workers and farmers) competed against each other for national income, toward a theory in which individuals collaborate with each other in production to share the national income. In Neoclassical microeconomics, capitalism is a harmonious social system and not a system rooted in class conflict.

The second branch of economic orthodoxy is Classical-Keynesian economics, which is the foundation for modern macroeconomics. A key proposition of Classical-Keynesian economics is that a capitalist economy, if left alone, will always seek a long-run supply—demand equilibrium in which there is full employment. This full employment equilibrium is capitalism's natural state, and, in the long run at least, the government can do little to improve upon it. Classical-Keynesian economics represents, a rightward shift in the economics profession and actually stands Keynes on his head by making both discretionary fiscal and monetary government policies ineffectual if not perverse.¹

What is the economic heterodoxy?

Economic heterodoxy is a collection of distinct schools of thought. Each school has a distinctive history, methodology, theoretical framework and policy orientation. Economic heterodoxy is an umbrella term; there is no single approach to which all schools subscribe. We therefore Cannot provide a list of principles that all heterodox schools can accept. We can, however, provide a list of some of the ideas which heterodox economists reject.

First of all, heterodox economists would reject the five principles we enumerated above. Except perhaps for the Austrians,² heterodox economists would say that the individual as a category of economic analysis should not be the starting point. Further, capitalism is not a harmonious, efficient and self-equilibrating system. The competitive free market ideal is therefore a delusion.

Second, the heterodoxy rejects the orthodoxy's unqualified reliance on abstract, axiomatic and deductive reasoning and mathematics. While heterodox economists occasionally use these techniques, they also apply a large dose of historical, institutional and qualitative analysis.

Third, according to the heterodoxy, there is much more to Capitalism than rational individuals and firms interacting in perfect markets. The rationality assumption of orthodox economics reduces human behavior to robotics. And the assumption that only markets matter ignores a great deal of human experience. These assumptions capture only a part of real world capitalism. Non-market interactions and social institutions play an equally important role in heterodox economics.

When it comes to international economics, the heterodoxy is highly skeptical of any portrayal of the world economy as a well-oiled machine in which nations freely, rationally and efficiently trade, producing an optimal outcome for everyone. Things are far too complex to reduce to a single set of propositions.

This book includes six main heterodox schools of international economics: Mercantilism and neo-Mercantilism, Austrian, Institutional, Post Keynesian, Marx...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• 1 Introduction
• 2 Mercantilism and neo-Mercantilism
• 3 Classical trade theory: Smith and Ricardo
• 4 Neoclassical trade theory
• 5 The New Orthodoxy: trade theory recast
• 6 Classical and Keynesian international economics
• 7 Austrian international economics
• 8 Institutionalist international economics
• 9 Post Keynesian international economics
• 10 Marxian theories of imperialism and capitalist development
• 11 Marxian and Sraffian theories of unequal exchange
• 12 Gender and Feminist trade theory
• Index