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2017 | OriginalPaper | Chapter

Comparative Advantage in the Light of the Old Value Theories

Author : Taichi Tabuchi

Published in: A New Construction of Ricardian Theory of International Values

Publisher: Springer Singapore

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Abstract

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.

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previous chapter An Extinction of Adjustment Time and an Introduction of Stability Condition in Economics through Misunderstandings to J.S. Mill’s Law of Supply and Demand and International Value Theory

next chapter An Overview of Research into International Values in Japan

I discuss roughly the same issues in more detail in my book in Japanese (see Tabuchi 2006, Chaps. 3–5).

Faccarello’s seminars on Ricardo’s theory of international trade, held at Tokyo University on March 23, 2016, and at Doshisha University on April 9, 2016, were also helpful on these points.

See Bloomfield (1994, Chap. 7), Gomes (1990, Chap. 7) and Maneschi (1998, Chap. 8) for useful surveys of this debate.

Mason (1926: 86) made an ironic remark about Marshall: ‘It seems strange, upon the appearance of his last book, to find him clinging to a branch of the tree which he had himself already cut off some years before’.

Haberler (1929: 381) mentioned Mason (1926) as the source of the ‘objection that the comparative-cost theory builds on an old-fashioned and abandoned labor theory of value’ and claimed that ‘cautiously formulated, our doctrine may escape even this dangerous criticism without losing importance, as I shall try to show on another occasion’. The reference to ‘another occasion’ may have been to Haberler (1930).

It is suggestive that in the epigraph of Chap. 8 of his book Gains from Trade: The Doctrine of Comparative Costs, Viner cited a passage from Jevons’ Principles of Science: ‘It is always to be remembered that the failure of an argument in favour of a proposition does not, generally speaking, add much, if any probability, to the contradictory proposition’ (Viner 1937: 437).

It is a misrepresented statement that ‘a point on the production possibility frontier shows that the economy is at the full employment level’. It expresses the maximum level of full employment, not full employment in general. In the labour markets, for instance, a point on the production possibility frontier, based on the assumption of inelastic factor supply, shows that the economy attains the ‘saturation level’ of employment, that is, each and every member of the society who has labour ability, say, at the age from 15 to 65 years old, is employed. On the other hand, Keynes’ full employment means not a certain level of employment but variable amount of employment that depends on wage level.

‘We should have to set out, instead of a series of absolute labour-costs, …a series of relative prices or exchange-ratios, using any one commodity as a numeraire with which to measure prices. This series would equally represent the substitution-ratios, since these are the same as the exchange ratios. Each country would specialise in those branches of production in which it had a comparative advantage or, in other words, would produce those goods whose costs were relatively lowest. For example, if in country I one unit of A exchanged against one-and-a-half units of B, and in country II one unit of A exchanged against one of B, country I would plainly have a comparative advantage in the production of B’ (Haberler 1936: 182).

Assuming community indifference curves implicates that the economy’s consumption decisions may be based on the tastes of a single representative individual. Viner criticized this as follows: ‘The opportunity-cost approach encounters, therefore, on the income side, the same type of difficulty of weighting in the absence of knowledge of the proper weights as does the real-cost approach on the cost side’ (Viner 1937: 523).

‘It must not be forgotten, however, that a shift in production will usually be accompanied by a redistribution of income. This precludes the uncritical application of community indifference curves, either as an explanatory device…or as a criterion of welfare’ (Haberler 1950: 226).

‘The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment’ (Keynes 1936: 5).

Samuelson was initially sympathetic to Viner’s approach. Samuelson was one of Viner’s students at Chicago University, and Viner was in turn a student at Harvard under Taussig (see Samuelson 1972).

I thank Prof. Y. Shiozawa for pointing me to this book.

Samuelson (1971a) is exceptional in that it showed how it is possible to integrate Ricardian comparative advantage, Marshall’ s partial equilibrium schedules of supply and demand and Hume’s gold-flow mechanism for exchange rate equilibrium with the neoclassical general equilibrium model of international trade.

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Title: Comparative Advantage in the Light of the Old Value Theories
Author: Taichi Tabuchi
Publisher: Springer Singapore
Book: A New Construction of Ricardian Theory of International Values
Print ISBN: 978-981-10-0190-1

Electronic ISBN: 978-981-10-0191-8

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-981-10-0191-8_9