A New Construction of Ricardian Theory of International Values

This chapter is a general introduction of the new theory of international values, which is an extension of the cost-of-production theory of value to the international trade situations. Within a general framework comprising input trade and choice of production techniques, the new theory analyzes the international values (i.e., the system that consists of wages of each country and prices of goods), gains and losses from trade, and the patterns of specializations. It is the first theory to treat traded input goods in this general form. It facilitates the analysis of recent conspicuous trade aspects, such as rapidly increasing trade volume of intermediate goods, fragmentations of production processes, and the complex network of global value chains. Besides the Introduction (Division I), this work is divided into four parts: (1) the presentation of the theory (Division II), (2) extensions of the theory to more complex situations (Division III), (3) some examples of applications of the theory (Division IV), and (4) possible implications to three neighboring fields (Division V). Terms and concepts are explained in detail and theorems are fully stated. A mathematical proof of the fundamental theorem is given in the Appendix.

In this article we introduce readers to the new theory of international values by placing it in the context of the Ricardo-Sraffian theory of value and distribution. Ricardo’s theory is described as that in which exchangeable values of commodities are regulated by the quantities of labour bestowed in their production, on which he established his theory on the distribution of the produce of the earth. Contemporary classical theory, founded by Sraffa, is described as preserving Ricardo’s perspective of the value independent of distribution and of demand by replacing the labour theory with the production-cost theory. After noting that Ricardo left the question of determination of values of the commodities traded internationally, it is shown that J. S. Mill argued that the law of demand and supply determines them, which conflicts with the classical perspective. We then demonstrate how the new theory of international values solves the question in line with the classical vision. Lastly, the similarity between this theory and Sraffa’s treatment of multiple products is indicated.

The principal theorem of the new theory of international values for a Ricardo-Sraffa trade economy is presented and then illustrated using a two-country, two-commodity model and a two-country, three-commodity model. It is shown that the classical vision of values as independent of demand is preserved, even when international trade takes place. In other words, values are mainly determined by costs of production or, ultimately, by technology. The values are, however, not determined uniquely, and demand plays a role in selecting a set of values from among those that are admissible under present technology and mark-up rates. Three different production possibility frontiers are introduced: R-efficient locus, physical maximal frontier and capitalistically feasible frontier. It is argued that distinguishing among these three frontiers is necessary in order to comprehend the role of demand in determining international value. Lastly, the similarity of this relation of value and demand to that of rent theory is pointed out.

Two rare analyses on the theory of international economics with linear economics exist that have different lines of thought but similar model specifications. One is the analysis of (production-)efficient patterns of specialization that allows intermediate goods with the Ricardo–Leontief model and that belongs to the field of modern economics. The other is the Sraffa model extended to international economy, which does not belong to the field of modern economics. In the model setting, the difference between the two analyses is whether the rate of profit exists or not, although the meanings whether the rate of profit exists or not are very different. However, at least in the era of Deardorff (2005a), only the definition of comparative advantage, including intermediate inputs, is not determined and has been the focus since McKenzie (1954a, b, 1955) and Jones (1961) analyzed the pattern of specialization in the multi-country, multi-good Ricardo–Graham model. Shiozawa (2007) made progress on this subject by extending the Sraffa model internationally on the evolutionary economics front but not in modern economics. In this subject, the solution to the problem which these analyses focus on is the production-efficient pattern of specialization; however, there are two problems with this approach. First, in the case where the number of goods is larger than that of countries, the efficient pattern of specialization essentially does not exist. Focusing on this case, Shiozawa (2007) showed the extended concept of pattern of specialization, i.e., “shared pattern of specialization,” and pointed out the importance of the case in the real-world economy. Second, as in Higashida (2005a, Japanese), which uses illustrations of price and specialization traditionally presented in Amano (1966) and Ikema (1993, Japanese), the (production-)efficient pattern of solution is not unique in the case of Jones’ (1961) setting allowing intermediate goods. Jones (1961) focused on the “production assignment problem” between technological parameters to determine (production-)efficient pattern of specialization. To solve the problem, Jones (1961) uses the method of the Hawkins–Simon theorem, where the concept of Z-matrix is the easier treatable concept of the linear complementarity problem. Higashida’s (2005b) result means that the (production-)efficient pattern of specialization cannot be determined easily with only a simple extension to Jones’ (1961) way. Considering the solution in the case allowing intermediate inputs, the more difficult concept—the S-matrix—which does not have the equivalent concept, must be used. Thus, the final solution, i.e., the necessary and sufficient technological parameters’ condition that determines the (production-)efficient pattern of specialization, may not exist. Shiozawa (2007) showed the general existence of a solution, considering the case allowing the number of goods is larger than that of countries (which may become the last meaningful progress of the model analysis), if the simple and meaningful economic condition like Jones’ inequality does not appear. Shiozawa (2014, Japanese) saw through this and positioned the result as a “final solution,” giving historical meaning to evolutionary economics. However, this progress has implications for not only evolutionary economics but also modern economics. This chapter discusses the significance of Shiozawa’s progress in terms of modern economics and in the context of historical illustrations.

Ricardo’s (On the principles of political economy, and taxation, 1817) theory of comparative advantage is the first rigorous theory that demonstrates that free trade benefits every country. He explained his theory using a numerical example of two countries and two commodities. However, the fact that the theory cannot be true when we expand his model to the multicountry and multicommodity case, or to the model that assumes intermediate goods, became clear. Following the study by Graham (Q J Econ 46:581–616, 1932) and McKenzie (Rev Econ Studies 21: 165–180, 1954), the neo-Ricardian theories of international trade as developed by Steedman (Fundamental issues in trade theory, Macmillan, London, 1979) reconsidered gains from trade and showed the possibility of losses from free trade. Recently, Shiozawa (Evol Inst Econ Rev 3: 141–187, 2007) indicated the differences in the number of countries and goods and analyzed cases in which prices did not depend on demand but were determined by production cost. This chapter surveys the development of trade theories and analyzes the gains from trade using the most generalized model. Furthermore, it also considers how the new theory of international values proposed by Shiozawa (Evol Inst Econ Rev 3: 141–187, 2007) provides a new horizon to the previous results.

The Ricardo–Sraffa trade economy model is notable for the vital role it plays in determining international normal prices as well as link commodities. It has also laid a new foundation for the study of employment conditions in trade analyses. After comparing the views of Keynes (“National Self Sufficiency” in (1982) The Collected Writings of John Maynard Keynes, vol 21, Cambridge University Press, Macmillan, 1933), Parrinello (The notion of national competitiveness in a global economy In: Vint J, Metcalfe S, Kurz H, Samuelson P, Salvadori N (eds) Economic theory and economic thought : essays in honour of Ian Steedman. Routledge, London, 2009), and Shiozawa (Evol Inst Econ Rev 3(2):141–187, 2007, A final solution of Ricardo problems on international values. Iwanami-shoten, Tokyo (in Japanese), 2014) on the market mechanisms not eliminating unemployment, this study reviewed the elements regarding the long-term competitiveness of corporations and semiautonomous bodies.

Parrinello clearly shows that a bottom line of national competitiveness is established, that is, the condition that the international profit rate must be higher than the self-sufficiency profit rate during complete specialization. However, the RSte model shows that the complete specialization point does not occur in a more general international economic environment. Moreover, when full employment is not guaranteed by trade in the country, Keynes proposed spending time and carefully ascertaining the section that should be brought up in the country.

Finally, this study viewed the RSte model as a possible theoretical basis for the national self-sufficiency concept of Keynes. In this concept, Keynes indicated that some domestic industries should be preserved from a long-term viewpoint and not merely be regarded as a short-term cost consideration.

The neoclassical revolution was a shift from economics of production to economics of exchange. The study shows from an internalist point of view that one of the origins of the neoclassical revolution can be traced back to young John Stuart Mill, who tried to sort out a problem left unresolved by David Ricardo. Due to a peculiar reason that I would later clarify, he was led toward examining a pure exchange economy. In this setting, Ricardo’s cost of production theory of value was invalid. When Mills found the answer to this, he came to the following conclusion: “we must revert to a principle anterior to that of cost of production, and from which this last flows as a consequence,—namely, the principle of demand and supply” (On Laws of Interchange between Nations. First essay in J.S. Mill, Essays on some unsettled questions of political economy, 1844. Citation is made from Library of Economics and Liberty, 1844, I.19). This thesis caused a long-lasting and strong influence on the research programs in economics. The study describes how Mill’s thesis profoundly influenced three founding fathers of British neoclassical economics, namely, Stanley Jevons, Francis Ysidro Edgeworth, and Alfred Marshall. Different alternatives were researched and discovered, but it was Alfred Marshall, with his concept of demand and supply functions, who paved the way for today’s mainstream economics.

It is generally considered that the theoretical development in supply-demand equilibrium theory by J.S. Mill from supply and demand ratio theory by Adam Smith and David Ricardo is the most important event in the history of economics. Marshall (On Mr. Mill’s theory of value. Fortnightly Review, April, reprinted in Pigou AC (ed) Memorials of Alfred Marshall, London, 1925, 1876) and Schwarz (The new political economy of J.S. Mill. Duke University Press, Durham, 1972) identify Mill’s pricing model about absolutely limited commodities in quantity as a partial equilibrium theory. However, his pricing model is not governed by the laws of simultaneous determination between a quantity and a price at all. Followers have been misunderstanding the term “equation” that Mill used in the pricing. Mill’s system is not supply-demand equilibrium theory, but rather sequential process model with time, like Robinson (Econ J 63(251):579–593, 1953) and Leijonhufvud (On keynesian economics and the economics of keynes. Oxford University Press, Oxford, 1968).

When Jenkin (North Br Rev 9:1–62, 1868; The graphic representation of the laws of supply and demand, and their application to labour. In: Sir Alexander Grant (ed) Recess studies. Edmonston and Douglas, Edinburgh, 1870, 151–185. Reprinted in series of reprints of scarce tracts in economic and political science, No. 9, The London School of Economics and Politcal Science, London, 1870) introduced the functions of supply and demand and an expression by a graph into the British economics for the first time, he misconstrued J.S. Mill’s system as the view that was almost identical to present-day microeconomics model. Additionally, Marshall (Pure theory (foreign trade-domestic values). No.1 in series of reprints of scarce tracts in economic and political science. London, 1930, 1879), who was very influenced by Jenkin, misread Mill’s reciprocal demand theory and introduced into economics the theme about the research of an equilibrium and the stability condition in his construction of pure theory.

The chapter examines the historical process of how the comparative advantage theory developed from James and John Stuart Mill to the modern theory, by way of Viner’s real cost approach, Haberler’s opportunity cost approach and Ohlin’s factor endowment approach, in the light of old value theories. Since J. S. Mill, the theory of values had met with a succession of modifications, while the doctrine of comparative costs remained unchanged. Thus, the divergence between the general theory of values and the value theory used in the theory of international trade widened. The debate between Viner’s real cost approach and Haberler’s opportunity cost approach in the 1930s was an important turning point and resulted in the emergence of the new mainstream theory – the HOS model. Its unrealistic assumptions were derived from Haberler’s opportunity cost approach.

In Japan, research into international values has been conducted vigorously since the latter half of the 1940s. From a global perspective, studies that emphasize demand factors in the determination of international values have been dominant; however, this has not been the case in Japan. Neoclassical studies of this subject have not been as vitalized. Rather, many of the studies have succeeded the works of Ricardo, Marx, Graham, and Sraffa who placed a high priority on supply factors in the determination of commodity prices. Research on this topic is divided roughly into two periods owing to its contents and characteristics. One is the period until the 1980s and the other is that since the 1990s. Research in the first period was chiefly carried out by Marxian economists, and that in the second period, based on Graham and Sraffa, has led to the birth of the new theory of international values developed in this book. In this chapter, we provide an overview of research into international values in Japan. In addition, we explain Graham’s relatively unknown theory of international values and show the fundamental structure of the Graham-type model (a modified version of Graham’s original model and a multi-country multi-commodity Ricardian trade model). Furthermore, we present a way in which to derive an equilibrium solution of this model practically.