anwar shaikh, competition on a global scale: trade and uneven development (lecture 13 – 11/30)

paul krugman as a 'conservative,' when it comes to trade theory.

China as having 'undervalued' its currency; having run a balance of trade surplus.

the assumption, here, is that the currency should appreciate, of course—under free trade we should return to equilibrium ('the sacred tenet of international trade theory', since the time of david ricardo)

the classic story begins with two people (wouldn't trade if it was good for each) – generalizes to two countries (obfuscating all important questions)

in the world out there, of course, we see trade surpluses/deficits because we don't have enough competition (manipulation, etc) – not because the theory is wrong.

the counter-argument is made by Marx, Keynes, and Harrod (sp.?) – we need to look at the logic of the counter-argument. this has no presence in the textbooks, of course, despite these being major economic thinkers.

Marx's writings on Ricardo's theory of trade don't show up in what we have from Marx. it's inconceivable that he didn't write about it; but we don't have any public documents.

if you believe the Krugman story, then third world countries, with flexible exchange rates, ought to open up their economy. they can become competitive through opening up their barriers, rather than through development, etc.

logic of the conventional argument:

trade deficit –> finance outflow –> exchange rate decrease –> relative prices come down –> becomes more competitive

trade surplus –> finance inflow –> exchange rate appreciation –> relative prices go up –> becomes less competitive

what's Marx's argument?

if you have a country that has a deficit, money leaving the country doesn't produce a fall in prices (Marx doesn't buy the quantity theory of money, remember) – what happens, instead, is that liquidity dries up, raising the interest rate.

in the country that has a surplus, the opposite would happen – money inflow would produce falling interest rates.

this means that finance capital has an incentive to lend to the country with a trade deficit, which would produce an inflow of caiptal, counterbalancing the outflow that was produced by the deficit. this would, in turn, mean that prices wouldn't fall (as in the conventional theory), which would mean you could lock in trade deficits and surpluses.

the consequence of that is that the country with a trade deficit becomes an international debtor.

there's a deeper question, here, too. what happens when financial capital is unwilling to invest in a place with low interest rates to the extent that would offset outflows? the exchange rate moves. but what happens as a result of movements in exchange rates.

is it true that the exchange rate is determined by the balance of trade?

what's the relationship between competition and the exchange rate?

remember—on the basis of this theory, you will see the equalization of interest rates [what does this mean, though, re: the flows?]

krugman argues that competitiveness is not the source of trade deficit/surplus

classical theory says that what balances is the balance of payments, whereas neoclassical theory suggests that it's the balance of trade

what are the laws of competition, in this example? what are the laws of international competition?

in order to answer that, we need to know about intra-national competition – between firms

classical theory

1. competition within an industry: turbulent and rough; equalization of selling prices (the law of 'one price' says that prices are bound together, and would fall/rise as 'clusters')

2. competition between industries: turbulent and rough equalization or profit rates

in the event of differential profit rates, where firms from Industry A are looking to invest in Industry B, they'll reproduce the labour conditions of the 'regulating capitals'

equalization of profit rates happens across regulating capitals – the profit rate on new investment ('incremental profit rates') [equalization across industry and financial assets, interestingly enough]

these laws of competition are laws that punish the less competitive and reward the more competitive.

let's assume, then, that we have regional competition within a nation. you have three industries, both located in two regions.

some of the producers in each region will be 'exporting'/'importing' across regional boundaries. suppose you were to discover that one region was selling much more than it's buying. it had a trade surplus, in other words, due to its lower costs/superior competitiveness.

since there's no exchange rate movement to make it 'equal' (as per the neoclassical theory), there's no mechanism to prevent unevenness. in other words, the weaker firms are eliminated.

so it is bizarre, then, to hear the argument that if New York became a separate country, with its own currency, it would no longer have to worry about high costs, productivity, etc. (you don't have to have infrastructure, development, education, etc.) [cf. Ha-Joon Chang, “Kicking Away the Ladder”]

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having answered why trade imbalances can be sustained, we also have to ask how/why trade imbalances emerge.

remember, natural prices depend on costs – the fundamental regulator would be direct/indirect labour costs plus the rate of profit.

so in regions, relative prices will reflect regulating capital costs in one region divided by regulating capital costs in other regions

how does this relate to trade?

in international trade, relative prices are determined similarly – real costs in export industry A divided by real costs in export industry B (so high costs would mean that you would have relative difficulty selling your goods abroad). competitiveness, then, enters through the cost structure – productivity, real wages, long working days, etc.

so now you have an argument of the determination of the terms of trade that rests centrally on competition. the terms of trade are regulated by real costs.

(P Xa* Nominal Exchange Rate) / P Xb = Real Costs Xa / Real Costs Xb

relative costs change relatively slowly, remember (real wages and productivity don't change dramatically, over short periods of time). suppose a country's inflation rate was changing much faster, which would mean that you would expect nominal exchange rates to be depreciating. for low inflation countries, the nominal exchange rate doesn't need to move very much, since relative prices are moving together, more or less, and would be regulated by real costs.

(showing data on persistent trade deficits and surpluses)

for heterodox economists, the response is that the world is imperfect – so progressive economists will advocate that the State intervene to counter these imperfections.

for orthodox economists, the response to the world's imperfections is to demand as perfect a world as possible (no unions, no State, etc.)