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A Survey of the Theory of International Trade: Part 1, The Classical Theory Author(s): John S.

Chipman Source: Econometrica, Vol. 33, No. 3 (Jul., 1965), pp. 477-519 Published by: The Econometric Society Stable URL: Accessed: 12/01/2009 14:51
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July, 1965




I must give notice that we are now in the region of the most complicatedquestions which political economy affords; that the subject is one which cannot possibly be made elementary;and that a more continuous effort of attention than has yet been required,will be necessaryto follow the series of deductions. - John Stuart Mill

ECONOMISTS HAVElong been puzzled by Max Planck's famous remark to Keynes

that "in early life he had thought of studying economics, but had found it too difficult!"' Keynes' own interpretation of the remark was that it was not the logical structure of economic theory that had dissuaded Planck, but rather "the amalgam of logic and intuition and wide knowledge of facts, most of which are not precise, which is required for economic interpretation in its highest form." Keynes cited Planck's remark in connection with his discussion of Marshall's work in the theory of international trade, in the Pure Theory (1879) and in the famous Appendix J to Money, Credit, and Commerce (1923), which had just appearedat that time; cf. Harrod (1951, p. 137). In expressing approval of Marshall's suppression of the Pure Theory from publication, and of his habit of relegating mathematics to appendices, Keynes observed (with an obvious note of disparagement) that "Professor Planck could easily master the whole corpus of mathematical economics in a few days." Even if this had been true in 1923 (which is most doubtful), it would certainly not be true today. To illustrate the point, Brouwer's fixed point theorem (1912) had not yet been proved when Marshall wrote his Pure Theory (1879); yet it is now known that the existence of equilibrium in Marshall's theory (when expanded to
* This is the last in a series of surveyarticleswhich Econometrica is publishingwith the support of the RockefellerFoundation.Because of its length, this articlewill be publishedin three parts. Part 2 on the Neo-ClassicalTheory is scheduledto appearin the October, 1965 issue, and Part 3 on the Modem Theoryin the January,1966issue. Researchwas facilitatedby a grantto the author of an AuxiliaryResearchAwardby the Social ScienceResearchCouncil, as well as a grantby the National Science Foundation. Grateful acknowledgmentis made to Professor Samuelson for commentson an earlierdraft; he is not, of course, to be held responsiblefor any errorsthat remain. Equallyabsolvedare M.C. Kempand R.W. Jones,whose valuablecriticismsof a laterdraft are greatlyappreciated. 1 J. M. Keynes(1924,p. 333n).(Worksare referred to by authorand year, sometimesby abbreviatedtitle, and are listed alphabetically and chronologicallyat the end of each part of the article.) 477



more than two commodities) cannot be established without it. Uzawa (1962) has shown, in fact, that Brouwer's fixed point theorem and the law of supply and demand are logically equivalent. The present survey will emphasize the mathematical structure of international trade theory as it has developed up to this time. But "mathematical" must not be interpreted in the narrow sense given to the word by Keynes. Symbols must not be confused with substance; as Schumpeter acutely observed (1954, pp. 954-5), "the restatement in algebraic form of some result of non-mathematical reasoning does not constitute mathematical economics: a distinctive element enters only when the reasoning itself that produces the result is explicitly mathematical." There are two reasons for this choice of emphasis. One is that the field of international trade is particularly well provided with surveys, especially (although not exclusively) of a non-mathematical kind, and it would be pointless to try to cover ground that others have covered so well. Special mention may be made of the surveys of Edgeworth (1894), Haberler (1936), Viner (1937), Metzler (1948), Haberler (1955-61), Caves (1960), Mundell (1960), Bhagwati (1963, 1964), and Kemp (1964), as well as the encyclopaedic History by Schumpeter (1954). The second reason is furnished by the opening citation. Difficult problems require adequate methods, and economists have special reason to appreciate the value of capital-intensive ones. The fact that Mill could and did use mathematical reasoning without using mathematical symbols, is a tribute to his genius, and makes his achievement all the more impressive. To try to do the same today would, like swimming the Channel, excite a certain admiration but not much respect. Appropriate mathematical tools are at last becoming available for the task; while they are not a substitute for common sense, they help remove the wasteful doctrinal controversy that has been so characteristic of the subject, paving the way for the supplanting of empirical mysticism by genuine empirical inference. In bringing the history of thought in this field up to date, it seems appropriate not only to report on developments of the last two decades, but also to discuss some of the older writings, which fall into two categories: those which have been neglected and recently been brought to light, and those whose importance may have been overlooked and which can be better appreciated in the light of modern developments. In the first of these categories, I would include the name of Torrens, who discovered the law of comparative advantage, and of whose work we now possess the invaluable study by Robbins (1958). In the second category, I would place John Stuart Mill, as well as his predecessors Say, Ricardo, James Mill, Torrens, Malthus, and Sismondi, who-as has become evident from the publication of Sraffa's monumental edition of Ricardo's Works and Correspondence (1951-1955)-discovered in the course of their lively interchanges the crucial assumptions required in order to prove the existence of competitive equilibrium. The present article deals with the theory of international values. It is divided into three parts, corresponding to the Classical, Neo-classical, and Modern theories.



This division is one of convenience only, corresponding to differences in emphasis. The "classical" approach (by which I mean that of Torrens, Ricardo and Mill), while.oversimplifying things on the production side, has the advantage of bringing out sharply the nature of the problem of international specialization; this early work has come back into prominence owing to the work of McKenzie and others who recognized their relationship to mathematical programming and Koopmans' activity analysis. The "neo-classical" approach (by which I mean that of Marshall, Edgeworth, Haberler, Viner, Lerner, early-Leontief, and Meade) rests in part on simplifications on both the production and consumption side, as represented by the concepts of opportunity cost and community indifference; the latter-whose status seems ambiguous in the literature, to say the least-is singled out for especial scrutiny. The "modern" approach, by which I understand the school of thought that began with Heckscher and Ohlin, but which did not really come into its own until recently with the work of Lerner and Samuelson, gives the most important role to factor endowment, and represents probably the most complex and impressive theoretical structure that has yet been developed in economic thought. The sequel will be concerned with capital movements, the terms of trade, and the foreign exchanges; trade and economic growth; gains from trade and commercial policy; and methodological issues in econometric studies.


The main distinguishing feature of international trade singled out by Ricardo (1817, p. 134) was the international immobility of factors of production. Factors were regarded as perfectly mobile within countries and completely immobile among countries, whereas goods were perfectly mobile within and among countries (at zero transport cost). Ricardo rather glossed over the question of the interdependence of industries, treating them as integrated, producing one output and using one primary input (labor). The latter being mobile internally, the unit cost of each good was constant, depending only on the amount of labor required to produce it. Ricardo's exposition of the laws governing trade between two nations was extremely concise, and not entirely free from ambiguity. In his celebrated example of trade in cloth and wine between England and Portugal, he says (1817, p. 135): "England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempt to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth." This is a non sequitur, since nothing so far has been said about Portugal; indeed, the argument could be turned around merely by redefining the units of measurement.

at the same expense of labour and capital. 312) that "when it is said that international trade depends on a difference in the comparative." But Ricardo saves himself in the passages that immediately follow by proceeding with a correct explanation of what was later to be called the law of comparative advantage. Historians of economic doctrine have debated whether priority for the law of comparative advantage should go to Ricardo (1817) or to Torrens (1808. (2) if so. who essentially spotted this same error in Cairnes).480 JOHN S. might require only the labour of 80 men for one year. I take the quantity of lace which England has acquired by this transaction. and Robbins (1958. are the costs in each country of the commodities which are the subject of exchange. obtain from Poland a thousand quarters of wheat. he misread Torrens' statement. 1911). if I wish to know the extent of the advantage which arises to England. 449) based his claims for Torrens in part on the following passage from Torrens' earliest publication (1808. 18-35). any given portion of our labour and capital can. It does not seem to have been recognized that Ricardo's own statement of the law is quite wanting. by working up cloth. whether correctly. But even then. this made it possible for Torrens to provide a correct argument for the gains from trade.. It would therefore be advantageous for her to export wine in exchange for cloth. p. except when read in conjunction with the first: "To produce the wine in Portugal. the two inequalities are mathematically equivalent (see Viner (1937. but as any high school student ought to know. pp. CHIPMAN The next passage is equally unsatisfactory. so much so as to cast some doubt as to whether he truly understood it. for what Torrens was comparing was the cost ratio in one country with the international price ratio." Hollander (1911. whether independently of Ricardo. not the different costs of the same commodity in the exchanging countries." In other words-Cairnes seems to be saying-if among four positive quantities. at best. from her giving France a hundred pounds. Hollander (1910. p. pp. 1826. and (3) if so. have acquired by manufacturing it at home. it must be carefully noted. The same kind of comparison was made by Torrens in the External Corn Trade (1815. pp. 607-8). 438-9). not in the absolute. 334): "If . but the comparison of cost ratios (or rates of transformation) between two countries was lacking. his version is carelessly worded. worth of lace.. Seligman (1911. Schumpeter (1954. while it . The debate has centered around the question of (1) whether Torrens stated the principle first. 459) objected that this statement "embodies the very error against which Cairnes warned" and proceeded to cite a statement from Cairnes (1874. 53): "Thus. worth of broad cloth. 1911). Viner (1937. might require the labour of 90 men for the same time. this must not be confused with the relation a'/a" <b'/b". and compare it with the quantity which she might. p. the costs compared. p. the relation a'/b'<a"/b" holds. Thus Hollander's case against Torrens rested largely on this elementary error in rudimentary mathematics. pp. p. pp. see Seligman (1903. 441-7). 221-2. cost of producing commodities. in exchange for a hundredpounds. 1815). and to produce the cloth in the same country.

" the closest Ricardo came at that time was in the statement (p. nay. pp. would be more advantageous.. The juxtaposition of the two sentences-if not the literal wording-implied comparison of cost ratios in two countries.. Torrens' External Corn Trade undoubtedly made an impression on Ricardo. only nine hundred. which has been cited by Leser (1881. 1829. p.. from our own soil.. IV. 22-3) has pointed out. whether he was conscious of the indebtedness or not. but added the most important point that this would entail England's neglecting the cultivation of "tracts of her territory. contains scarcely any recognition of the principle of comparative advantage. p. Ricardo's Essay on Profits. we must increase our wealth by being. and import the produce which is at present raised upon them. we should gradually withdraw our capital from the cultivation of such lands. to the lands in Poland ." This certainly expressed what is usually considered to be the essence of the law of comparative advantage. nevertheless he added a great deal in his own subsequent treatment. who described the work in a letter to Malthus shortly after its appearance as "on the whole a very able performance" (Works. The passage in question. a manufacturing.. which was published on the same day-February 24. 74-5). 5). or England prepare cloth comparatively cheaper than Po lndatter.. or it would not be adopted." Seligman (1911. p. then . Such a distribution . even though they should be superior. and Robbins (1958. and hence adopted. 1925.. VI. as Robbins (1958. 82-3n). Seligman (1903.. 188). Torrens came closer to enunciating the law of comparative advantage in another passage in the External Corn Trade(1815. pp. Viner (1937.. like the previous ones. The capital withdrawn would be employed in the manufacture of such commodities as would be exported in return for the corn. p. pp. p. pp. rather than an agricultural people. . 1815-as Torrens' External Corn Trade (cf. 264-5. p. Apart from a rather vague statement (1815.) There can be little doubt that Ricardo was influenced by it." But there is no very convincing explanation as to why it would be more advantageous." and perhaps it was this slip that helped deceive Hollander. 442). to this extent. did not help his case by misquoting it and substituting "their own soil" for "our own soil. 1826. left to ourselves . 23). 450). 39): "while Poland can raise corn comparatively cheaper than England. pp. who cited this passage.. compared the domestic rate of transformation with the international terms of exchange.INTERNATIONALTRADE 481 could raise. And it is only in subsequent editions of Torrens' work that one finds statements such as the following one from the third edition (1826. p. By way of contrast.. 56) as "one of the most valuable contributions that has of late years been made to the science of political economy" (The attribution of this article to McCulloch will be considered in greater detail in Part 2. p. 352-3). though they should be equal... 32): "If . pp. 344-5. Ricardo's Works. 1820. Some years later Torrens' book was described in an article which has been attributed to Ricardo's disciple McCulloch (1819. 25) to the effect that trade leads to an "increase of the general rate of profits" and to "abundance of commodities.

p.and Viner. and if the two commodities continue to be measured in the same units.p. p. p. 264) which detracts considerably from the worth of the statement.1820. p. This would explainwhy the changein wordingdid not take place until the thirdedition.It is mathematically impossible for the reciprocalof the arithmeticmean of two distinct quantitiesto be equal to the arithmetic mean of their reciprocals. in the self-effacingmodesty of Mill (1844. .Viner (1937. among the holdings of libraries in the United States. 446n) definedthe midpointin termsof the arithmetic mean.2 units of cloth.3 Even if comparative advantage explains why trade takes place. and that credit for the principal discovery should go to Torrens. for the produce of the labour of 80. then "the produce of the labour of 100 men" which England will supply for the produce of Portugal's 80 will be 20 per cent higher in quantity. 135): "Thus England would give the produce of the labour of 100 men." implying that the price ratio between cloth and wine would be equal to unity. Ricardo is widely regarded as having maintained that the equilibrium price ratio would settle "halfway between" the comparative cost ratios. 4 This very concept is questionable. v) that his Essays had been writtenin 1829-30. 118-124) certainlyplayed an importantpart in the evolution of the law. J. pp. Similarly. thus by Ricardo's own logic the price of wine will rise to 1. Mill's own achievementwas "obscuredby filial respect"for Ricardo. the word "comparatively" was added in 1826 in both places. 529) pointed out.The common attributionof the principleto Ricardo evidently derivesits origin. an ambiguousprocedureat best. which is intermediate between the cost ratios of 80/90 and 120/100.p. 353) this was changedfor the better to "excess of produce. Thus it would seem fair to say that both Torrens and Ricardo contributed in essential ways to the development of the law of comparative advantage. and six copies of the second (1820).long out of print. CHIPMAN will become an exporting.the passage referredto above. S. and were publishedin 1844 in responseto the writingsof Torrens. Accordingto the recordsof the Libraryof Congressthere are. pp.482 JOHN S." 3 It would take us too far into the sociology of knowledgeto attemptto explainwhy it has taken so long for Torrensto gainproperrecognition.This difficultywould have been avoided if Viner had chosen the geometricmean.The real difficultyis that Torrens'works are scarceand inaccessible. as Schumpeter (1954. the first three parts appearto have been reprintedfrom the same plates. Mill pointed out (1844. and unavailablein most libraries.4 This conclusion is usually based on Ricardo's assertion (1817. p. whose own statementof the law of comparativeadvantageis perhapsthe first completelysatisfactoryone. James Mill (1826. only seven copies of the first edition of the ExternalCornTrade(1815). country. 38).2 Furthermore. which corresponds to the 2 The second edition of the Corn Tradeis identicalwith the first except for the addition of a fourth part.Seligman. and the former an importing. quotedby Leser." This passagewith a subtle and significant difference of wording-had already been contained in the first two editions (1815. at least in part. 1820.containsa sentence(omittedin Robbins' citation)with a phrase"excessof profits"(Torrens1815. Ricardo succeeded to a greater extent than Torrens in relating the principle to a larger theoretical system. since differentconclusionswill resultdepending upon whichcost is in the numerator and whichin the denominator. it does not explain on what terms. 1-7).in the thirdedition (1826. But if England should experience a 20 per cent increase in productivity in both industries.

Mill later withdrewthis paragraph(by implication).INTERNATIONALTRADE 483 relative cost in England. Mill neverused the expression"barelyconceivable." This argument. 303n): "In a long and involved argumentintro- . It was implicit in his discussion that an intermediateprice ratio would necessitate complete specialization.Evidently." He followed this pun by agreeing with Bastable (1903. He said (1894. with good reason. 14) that "in generaltherewill not be this extremeinequalityin the degreein which the demandin the two countriesvarieswith variations in price." Elliott (1950.. the problem was then whether there would exist a price ratio for which "the demand shall be exactly sufficient to carry off the supply" (p.2. however. Mill set out to find a precise solution to the problem left open by Ricardo. p.since it was conspicuouslyomittedwhen the entire section was otherwisequoted in his Principles(1852a.seemsto the presentwriterto be very confused. 1. in the finalparagraphof ?1 of his essay (1844. He recogniized the possibility of "an extreme case" (p. p. p. "On the Laws of Interchange between Nations" (1844). entailing a fixed supply of each good.differences of "extremism" alreadyexisted before 1964. p.5 Mill's mature thoughts on the theory of international trade are contained in Chapter 18 of the Principles. 13) in which demand might be so rigid that no such intermediate price ratio would exist. in that case.p. is invalid." Practically without exception.6 Schumpeter 5Mill had in his exampleassumedthat demandwas rigid in one country. the equilibrium price ratio would have to correspond to one of the limiting cost ratios.. as the "great chapter. MILL'S LAW OF INTERNATIONALVALUE In his remarkable essay. and had then concluded. 609): "The splendid edifice of theory constructed in the first five sections is not improved by the superstructureof later date which forms the latter part of the chapter. Ch.though. 541) commented:"Therehas been generalagreementthat this additionalmaterialwas and unnecessary. the firstto point out the possibility. Thus Graham (1923) Mill whenhe arguedthat the latterruledout the limitingsolution as "an extreme misrepresented and barelyconceivablecase".Mill was. p. p. with regard to the supplementary sections 6-9 which Mill added in the third (1852a) and subsequent editions. since the solution at an extreme(limiting)cost ratio wouldresultequallywell (in fact with greaterlikelihood)fromrigidityof demandin both countries. 9). ?2). 18." Viner (1937. 24) speaksof the "mysterious ." Edgeworth expressed himself differently. after of opinion concerningthe meaning all.which Edgeworth (1894) described."and theredoes not seem to be any specialreason for believingthat he used the expression"an extremecase" in any sense other than the purelytechnicalone of the extremepoint of an interval. p."And accordingto Metzler(1950. This second story does not carry us much higher. subsequent writers have joined the monotonous spite of the gentletreatmentit has usuallyreceived. 29n) that the superstructure was "laborious and confusing. 158) on the basis of explicit assumptions about demand. the solution happens to correspond precisely to that which was later obtained by Mill (1852a. 302n) spoke of "the confusion of Mill's second statement. superstructure unsatisfactory which. and there would be partial specialization in the corresponding country. Whether or not this is a correct interpretation of Ricardo. 6 Nicholson (1897.

Mill attemptedwithout successto solve the problemarisingfrom neutralequilibrium. 155) to solve a special case: "As the simplest and most convenient. this would correspond to two countries' offer curves coinciding throughout their length. . yielding a utility function of the form duced at the end of the chapteron internationalvalues in the third edition of his Principles.7 This prepares the ground for the demonstration in the subsequent section (?7). zero cross-elasticities and unit income elasticity.484 JOHN S."Finally. is always the same. The assumptionof unitaryelasticitywas introducedby Mill in ?7 (not in ?6) of his chapter. It is time to reverse Edgeworth's judgment: for ?7 of the "great chapter" contains a convincing proof (admittedly for a special case) of the existence of equilibrium. not only that. p. Mill had already asserted the existence of equilibrium in ?4 of his "great chapter" under the heading of the "Equation of International Demand. p. pp. and Metz' ler (1950. Mundell (1960. and turning the equation of supply and demand into an identity. . p. since Mill suggested that "it is conceivable that the conditions might be equally satisfied by every numerical rate which could be supposed. p. 15-16). . in other words. CHIPMAN (1954. 73n) states that "John Stuart Mill recognizedthe possibility of multipleequilibria without referenceto stability.and on the contrary. there is a unit own-elasticity of demand with respect to price. 303n). whether that cost affords a greater or a smaller quantity of the commodity. at such values as are required in order that the whole of her exports may exactly pay for the whole of her imports. it does so in terms of what can today be recognized as an ingenious and correct solution of a problem in nonlinear programming. Mill's law is an extension of Say's law. which will now be described. but his treatmentwas faulty. 303n) states that Mill "arguedincorrectlythat such neutral equilibrium would exist if each country had a unitaryelasticity of demand for imports. Mill sets out (1852a. giving rise to neutral equilibrium." In Marshallian terms. the cost incurred for the sake of obtaining it. Mill used it in that section to prove the uniquenessof equilibrium. Subsequent writers have tended to interpret this as implying that Mill took this possibility seriously. and that uniqueness of equilibrium requires proof. this section was criticized by Marshall (1879." and expressed it in the words (1852a." As we might say today. This law of International Values is but an extension of the more general law of Value.. which we called the Equation of Supply and Demand." 7 Metzler (1950. pp. let us suppose that in both countries any given increase of cheapness produces an exactly proportional increase of consumption: or. 149): "The produce of a country exchanges for the produce of other countries. 608n) is almost alone in showing any appreciation and understanding of these supplementary sections. but a much more plausible reading evinces Mill to be simply pointing out that "on the face of it" the equilibrium price ratio might not be determinate." In other words. that the value expended in the commodity. Such demand functions are known to be integrable. Edgeworth (1894. p. p. In ?6 Mill raised the question of uniqueness. 610-12)." This is incorrect. as well as a unit elasticity of substitution between any two goods.

. x. y" the quantities of linen.. The problem of maximizing a quasi-concave function which is positive homogeneous of degree r > 0 is obviously equivalent to the problem of maximizing an appropriate concave function which is positive homogeneous of degree 1 (the new function being the old one ous in case r raised to the power l/r). x2... f is called positive homogeneous of degreer if.1) . Iff is quasi-concave and positive homogeneous of degree r where 0 _ r < 1.+-Y_1. f(Ax) = Arf(x). pp.e. for all A > 0.2) (.e. i. the set of all points x = (xi. half of expenditure is devoted to each commodity).. and that utility functions have the form U=xy in each country. . This inequality makes it possible to write (1. and then added. 9 A real valued function y = f(xl. that Germany has a comparative advantage in linen. the equalities hold) if and only if (1.2). then f is concave.e. x") for whichf(x) range./ and assume a'/b'<a"/b". b=b'+b"...e.<. let the corresponding world outputs be x=x'+x".2) is derived in the same way.- XII I.. respectively. + y x + y <b y < a. Let the production transformation sets be given by (1. Let x'. The problem is to maximize the quasi-concave function U=xy (or equivalently. This is a problem in homogeneous programming (Eisenberg (1961))-a special case of nonlinear programming (Kuhn and Tucker (1951)).2).1) respectively by b' and b"..3) < < i. this time multiplying the inequalities of (1.= x+y+) subject to the linear inequalities (1. ~ b' = a' a"I a' b' = bl where a=a'+a". to maximize the concave positive homogeneous9 function V= U.A)x + Ax'] _ (1 . y=y'+y". a blb= X/ yI all + bll'<..) = f(x) is called quasi-concave if. Mill chooses the special case a = . x" be the quantities of cloth produced in Germany and England. if the inequalities plied respectively by a' and a". is convex. is as follows: Given that a'/b' < a"/b".INTERNATIONALTRADE 485 U=xly# where x and y are the quantities of two commodities. obtained in all essential respects by Mill (1852a. x2. 158-9).1) are multi- x + (a'/b')y'+ (a"/b")y" < a' ?r a" = a . First.A)f(x) + Af(x).2) are effective (i.) x a iL+L<b x. if and only if the limiting cost ratios contain between them the ratio of England's maximum output a" of cloth (in which she has a comparative advantage) 8 Derivation of (1. and y'. _ yo.B(i. for all yo in its . . Now using the inequality a'/b' < a"/b" we obtain x + (a'/b')y'+ (a'/b')y" = x + (a'/b')y < a which is equivalent to the first inequality of (1. The second inequality of (1.1) in the equivalent form8 (1. we find that of (1. for all A in the interval 0 < A < 1. and simply positivehomogene- = 1. f[(I . The solution.2) requires a little manipulation. so without loss of generality we may take U= xy. both constraints of (1.. f is called concave if.

and OB has length b').e. which is the sum of the other two. y . where the x-axis measures the quantity of cloth. If. and b'= 200 =its maximum output of linen. a"= 100 and b"= 100 for its maximum outputs of cloth and linen. a"/b' < a'/b' < a"/b" (i.1 Mill's law is illustrated in Figure 1. a"/b'. B2 B. hence Germany will specialize in linen and England will produce both linen and cloth. and yet it has passed practically unnoticed for over a hundred years.. England is "small").e. and it is obtained geometrically by sliding . Following Mill's illustration. and for England. Then OAOCOBO set. and BBo has length b"). will be precisely the equilibrium price ratio of linen to cloth. Om nA 2 AO Al AZ x FIGuRE1. England's production possibility set is shown displaced. Germany's production possibility set is OAB (where OA has length a'. instead. In its astonishing simplicity. then the equilibrium price ratio will be equal to Germany's cost ratio a'/b'. its true is the world production possibility origin being at 0 rather than B. and if a'/b' < a"/b" < a"/b' (i.486 JOHN S. if only because it was so advanced for its time. at BCOBO (where BCo has length a".1. This is Mill's Law of International Value. CHIPMAN to Germany's maximum output b' of linen (in which she has a comparative advantage). so England will specialize in cloth and Germany will produce both linen and cloth. England is "large"). we have for Germany a'= 100 =its maximum output of cloth.. and the y-axis the quantity of linen. it must stand as one of the great achievements of the human intellect. furthermore this last ratio. then the equilibrium price ratio will be equal to England's cost ratio a"/b".

TRADE INTERNATIONAL 487 by Lerner (1932).Thebrokenline to all the possible is the locus of equilibriumpoints corresponding OC0C1C2D the samecomparative Englandmighthavewhilemaintaining absoluteadvantages both in the intervalCOC2 only Englandspecializes. Mill stated his Law of InternationalValue in terms of the cloth previously by Germany(beforetrade).5) m<n?n?Pm. in the productionof one of the commodities.This yields the following in each countryhave utilityfunctions condition:Giventhat consumers equivalent of the form U=xy. nor C1A1.owingto the special consumed(andproduced) be half of its maximum natureof the utilityfunction V=-y*.3) may be broughtout more sharplyafterit is multipliedthroughby b'/a" to obtain a'/a"< 1< b'/b". which likewise(given the same x-y4) utility function V= b"/a" must be n = a" -a"/2 = a"/2. if and only if eachcountryhas actuallyan absoluteadvantage. at curvetouchingBOCOAO Samuelson. andin termsof the additional after withdrawing from the productionof linen. 523).and Dorfman.4) at_ a" and b"< b'.dependscruciallyon the assumption conflictswith a literalreadingof the classicalstatement elasticitiesof substitution. at C1is tangentto neitherBIC. just a comparative of unit conclusion.p. countriesspecialize.p. Co (showingthe samecompossibilityset is BC2B2 production displaced if England's the worldproductionposparativeadvantagebut a greaterabsoluteadvantage). since England will always consumeexactly half of its maximumoutput of cloth. McKenzie( mustbe recalled. in the stretchOCO advantage. 151).and Solow (1958. we obtain respectively. both countriesspecializeif and only if (1.This advantage. 135)andTorrens(1826. or m=a'/2. The indifference extreme.whoseslopeis England's which England'sproductionpossibilityset is given by BC1BI. and to import the by Ricardo(1817. q .which.but greaterrelative.and thereafter The meaningof the inequality(1.p. at C2 curvetouchingB2C2A2 and the indifference sibilityset becomesOA2C2B2. other At cost the is ratio. by JamesMill(1826. slope Germany's is whose to tangent A0C0.p.which. would necessarily can make cloth England outputof cloth. 39)also fail other.p. in Germany and England and multiplying (1. Writingp = b'/a' and q= for the cost ratios of cloth in terms of linen. 35).3) throughby b'/2. only Germanyspecializes.In the intermediate is tangentto B2C2. ratherthan that is."The statements to bring out the distinction between conditions for trade and conditions for completespecialization. 123):"When it is not greaterabsolute.that inducesone of them to confine [sic] itself to the production of one of the commodities. case in cost ratio.p. bothcountries canproduce both commodities.facility. (1. the indifference curvetouchingB1CIA.suchsetshave down the edge BA in the mannerdescribed BCOBO been depictedby Whitin(1953.

Before trade. Pareto chose as an illustration the case of two individuals capable of producing bread and beads. Supposing II to have the comparative advantage in bread.permittingEngland to import them and therefore supply all of Germany'sneeds for cloth. without taking account of tastes. so Grahamcould have scoreda valid point againsthim. if they should trade and specialize. he argued correctly that. and it is both necessary and sufficient for complete specialization. if n < m. one could not justify the assumption that the increased world output of the other commodity would provide sufficient compensation. that "in order that Ricardo's conclusion be certainly true. 1948)."This is preciselythe possibility later emphasizedby Graham (1923. 159n) to the effect that "n is always. thus the total production and consumption in the absence of trade would be x=(a' +a")/2 and y=(b' +b")/2. since Englandcould not provide all Germany'srequirementsfor cloth. practicallyspeaking. Thus.Pareto's criterion is equivalent to Mill's. 613n)pointed out). pp. Germanywould produce both linen and cloth.6) 2 +2 b' which is equivalent to (1.4). Pointing out that specialization could lead to a reduction in the world output of one of the commodities."At firsthe gave an explanation of how."basinghimselfon the suppositionthattherewouldbe "other commodities" in which Germanyhad a relative advantage.confinedwithin these limits. 10 . but he could not have done so without withdrawing his chargethat Mill neverconsideredmore than two commodities. this might lead to a reduction in the total output of bread. so that a"/b">a'/b'. and "that England thereforewould be able permanentlyto sell her . under Mill's assumptions. Mill's statement of this inequality contains a qualification(1852a. although Grahammade no referencein his writings to this section of Mill's famous chapter. questioned Ricardo's assumption that the terms of trade would settle strictly in between the two countries' comparative cost ratios. 159). p.488 JOHNS. however. and let x be the quantity of bread and y the quantity of beads. 508-9). p. then complete specialization would entail x = a" and y = b'.p. He went on to argue. 507-11). to argue that this "would not be the practicalresult.. p.. Mill went on.1o Mill's inequality can be stated in yet another way. less convincingly (pp. Here Mill changed his premises in the middleof the argument(as Edgeworth(1894. CHIPMAN which is the form in which the inequality was originally stated by Mill (1852a. cloth at the Germancost of production. without making reference to Mill.For furtherdiscussionof thesepointssee Viner(1937. 449). production and consumption of bread and beads would be x' = a'/2 and y' = b'/2 for individual I and x" = a"/2 and y" =b"/2 for individual II. Pareto (1909." the total output of each good should be larger when there is complete specialization than would be the corresponding equilibrium output (and consumption) that would obtain in the absence of trade. hence Pareto's criterion implies (6) b-+ bit a' + a" < (1. and there would be no guarantee that this would be adequately compensated for by an increase in the total output of beads. Let each person devote half of his expenditure to each commodity (as in Mill's case).

" In Figure 1. 18." But this is not true even under Mill's assumptions. As Ricardo was alleged by Pareto and others to have done (but see Viner (1937. at least one of the countries would be worse off. and thus modify the terms of interchange to their own disadvantage. but it will be more convenient to discuss these in Part 3 (Section 3. gain the least by a given amount of foreign commerce: since. it cannot be a competitive equilibrium. namely that there is an intermediate price ratio for which a competitive equilibrium exists. who attempted to analyze more general cases (1852a. by the . if the elasticity of substitution is small enough it will still be necessary for one country to produce both commodities. for England. and conversely. having a greater demand for commodities generally. provided the elasticity of substitution is large enough. Taussig's explanation (1927.INTERNATIONALTRADE 489 But Mill's assumptions are very special. that is. referred to by Edgeworth (1899) as "Mill's paradox. "The fact that [the Americans] give up some wheat in order to get more linen proves that the rearrangement suits them better. seems to be at the root of some perplexing arguments presented by Valavanis (1954). Pareto's paradox. Ch. 24): "At any rates between. even if Pareto's criterion is not satisfied. p. This was recognized by Mill. 452)). which states that such a situation as the one just described cannot occur. they are likely to have a greater demand for foreign commodities. it may still happen that equilibrium is characterized by complete specialization.. caeteris paribus. This is Pareto's paradox." is an argument which assumes what has to be proved. and with Millian utility functions.1. ??8-9) but whose limited mathematical equipment precluded the derivation of any exact conditions. even if Pareto's criterion is satisfied. for instance. but they are neither necessary nor sufficient in general. and if the relative price r of the y-good is strictly in between the comparative cost ratios. If Mill's inequality is not fulfilled. both countries would gain from an exchange". and there need not be any equilibrium rates strictly in between. he said (p. that trade with complete specialization might be incompatible with tastes. That is. so that. then trade would necessarily lower the world production of one of the goods (the x-good)." which is also illustrated in Figure 1. it is resolved simply by Mill's law. a"/b' < a'/b' < r< a"/b"< a'/b".1. 30). What Taussig should have said (and possibly meant to say) was that "at any equilibriumrates between. p. so did Taussig (1927) appear to take it for granted that the equilibrium price ratio (terms of trade) would be strictly in between the comparative cost ratios. Mill's law contains an important corollary. the conclusion does not even follow if the utility functions are of the form V= xi-y0 where 0<0<1 (unless 0=). 163): "the richest countries. In Mill's words (1852a. Examples of both such cases are readily constructed. both countries would gain from an exchange. and possibly both. p. Pareto stated his conditions as necessary ones. In discussing one of the usual examples.8) of this article. what today would be called a "neutral technological change" is shown. depending on how the production was distributed.

3 10-1 1). C2. Viner (1937. pp. There ensued a controversy in which Nicholson (1897.Cl. the terms of trade stay constant along OC0 (at Germany's cost ratio). pp. which we cannot go into here. It follows that a neutral technological improvement.. we can explain the process by which. pp. ?5) to argue that an improvement in the export industry might actually make the exporting country worse off.. Allen (1952).490 JOHN S. Suffice it to say that a worsening of the terms of trade can be expected to be more severe (1) if the improvement is confined largely to the export industry. C1. this conclusionfollows from Marshall'sdefini- . the increase of commercial and manufacturing capital may lower the wages of the operative class. in a commercial and manufacturing country.C. However." This formed the basis for his advocacy of a policy of emigration." has also receivedconsiderableattention over the years. and which has been discussed by Bhagwati and Johnson (1960). Graham (1932. BB2C2. or general increase in productivity.A. and (2) if the elasticity of substitution between the two commodities is low. 185-7) took part. Edgeworth (1894. pp. and Bastable (1903. Thus "Mill's paradox" is not a paradox at all.C2 (the zone of complete specialization). as just stated above in the text). 40-41) took up the question on the basis of Mill's earlier treatment (1852a. Edgeworth (1899). and Bhagwati and Johnson (1960). 600-2). 177-80. and universally admitted principles of commerce. results in a worsening of the developing country's terms of trade. he did not say that they lose. CHIPMAN successive production possibility sets BBOCO. Ch." The question of whether a technological "improvement" can actually worsen a country's welfare is a subtle and involved one. A relatedphenomenon. 358-61) pointed out. 342-8). in the markets of America. in the American markets. pp. 18. decline along COC. England's terms of trade (the ratio of the price of the x-good to that of the y-good) are given by the slope of the indifference curve passing through C0. BB. importing raw produce. a given quantity of English goods would exchange for a less quantity of American produce than before. OB. the demand for English goods should remain stationary." Torrens then went on to argue that "on these obvious. it is another name for the Law of Demand.and the corresponding world production possibility sets OBOCOAO. 538-46). pp. and will be discussed in the sequel. Marshall'sparadoxconsists in the statementthat an increasein England'sdemand for German goods will result in a greaterworsening of England's terms of trade if England'sreciprocaldemand is elastic (ratherthan inelastic. i. The phenomenon has been emphasized by Bhagwati (1958). 132-3) who observed that "if. 0B2C2A2. rather.e. pp. who has called it "immiserizing growth. if demand is inelastic. see Marshall(1923. Kemp (1956). Mill said that the richest countries gain the least. It had already been anticipated by Torrens (1837. As Duncan (1938." 11 A voluminousliteratureon these questions has developed in recent years. pp. then. while the supply of them should be increased. and this for the simple reason that a market must be found for the increased relative quantity in world markets of the growing country's export goods. and stay constant thereafter along C2D (at England's cost ratio).referredto by Duncan (1938) as "Marshall'sparadox.

the principal mathematical difficulties involved in fixed point theorems arise only in three or more dimensions. 354-5n) that "thereis no problemto be solved at all. not Mill. pp. which establishes conditions for full or partial specialization. or both. But one will not find a rigorous existence proof of any kind again until eighty years later in the work of Wald (1933-34. 303n). whereasthe opposite conclusion would result from Graham's(1932) definition of the shift as an increasein importsdemandedfor a given amount of exports. 1934-35). as will be apparent later on in Part 3 of this article."2 The second feature of Mill's law that is of particularinterest today is the inequality. Marshall'sbeing better suited to applicationsin the field of commercialpolicy. see Bhagwatiand Johnson (1960. From geometric considerations it is evident that Mill's conditions can be generalized along the following lines: the likelihood of complete specialization varies directly with (1) the elasticity of substitution between commodities. It will be seen presently that both (3) trade in intermediate products and (4) introduction of more factors of production increase the likelihood of incomplete specialization. and (2) the relative equality in absolute advantages among countries. it must be concluded. 609-14n) which.For the problemof technological change."But it was Marshallwho was in error.pp. . after all. and then proceed with a verticalone. Considerations of this kind turn out to be of great importance for the factor price equalization theorem. It is natural to ask whether these criteria must in any way be modified or supplemented if one goes outside Mill's (and Graham's) framework.start off with a flat segment.which failed to take account of the fact that each country's offer curve would. one must let it rest on either (1) a low elasticity of substitution in consumption. 78-9). Marshallconcluded(1923. 12 In discussing the relevantsection of Mill'sPrinciples. although of course Mill's mathematical limitations forced him to make very stringent assumptions. in the footnote already cited twice (footnotes 6 and 7 above). pp. stated: "Marshallpointed out the error in Mill's earliertreatmentof the subject. p. and McKenzie's methods are powerful enough to handle much more general cases). including economists of such eminence as Edgeworth and Marshall. In order to make a case for the prevalance of partial specialization (one of the principal premises of the factor price equalization theorem).INTERNATIONALTRADE 491 In conclusion. tion of a shift in demand as an increasein the amount of exports offeredfor a given amount of imports. there are two quite significant features of Mill's law which are apparent in the light of modern developments. under Mill's assumptions. or (2) inequality in absolute advantages. if Mill's framework is retained. And even McKenzie's existence proof (1954a) retains all the assumptions made by Mill with the exception that the model is extended to include any number of commodities and countries. This had alreadybeen spelled out by Edgeworthin a six-pagefootnote (1894. this remark is not intended in any way to detract from the importance of McKenzie's work (since. but rather to emphasize a feature of Mill's work which went unappreciated by his followers. Marshallhad never botheredto read! Metzler(1950." But this conclusion followed from an errorin his diagram. One is that it constitutes a genuine and correct proof of the existence of equilibrium. Graham'sdefinitionis the appropriateone.

and subsequent further investigations. Whewell's memoir was presented to the Cambridge Philosophical Society in 1850. He also developed (p. ??6-9) with the statement: "Thus far had the theory of international values been carried in the first and second editions of this work. But intelligent criticisms. Viner goes on to say: "Since it was primarily a criticism of Mill's doctrines.492 JOIN S." though it did not appear in the Society's Transactions until 1856." In the sixth edition (1865." which was later contained in Mill's new sections (?7-8) and became the object of criticism on the part of Edgeworth (1894. 609). Ch. p. and according to Viner (1937. Whewell developed (pp. stimulated Mill into rethinking the basic issues of the existence and uniqueness of equilibrium. Mill opened the new sections (1852a. The following year Thornton (1866) published-long after the appearance of the third editionsome rather naive criticisms of the law of supply and demand. though correct as far as it goes. Thornton had evidently. to which Mill subsequently replied (1869) in a careful and searching restatement. . given the cost conditions and demand susceptibilities in each country. 143.and one can only lamentthe fact that. he fell just short of derivingthe correctconditions." It is scarcely conceivable that he was not. 143) for the characterization of solutions with complete specialization. the following inference seems plausible: that Mill saw Whewell's memoir and found it of con13 Whewell assumed(1850. p. after the words "intelligent criticisms. PRECURSORSOF THE "SUPERSTRUCTURE": THORNTON AND WHEWELL There is still a certain amount of mystery surrounding Mill's supplementary sections that warrants some comment. have shown that the doctrine stated in the preceding pages. 360). p. Under Mill's assumptionsof zero susceptibilities. p. CHIPMAN 1. William Thornton)". line 3 of the text) that x < k implies tx < tk. except for this slip. however. for the memoir is devoted entirely to Mill's first essay (1844) and is an honest attempt to translate Mill's argument into mathematical language. None of these discussions was specifically related to international trade. in private conversation. and Mill's acknowledgment to Thornton seems like a curious afterthought-a bouquet to a close friend. and his formulas are therefore valid only for certain values of the parameters. unfortunately a slip entered his argument. 450n). p. Had he possessed an economist's intuition. is not yet the complete theory of the subject matter. havinggone so far.'3 From what is known concerning Mill and Whewell.Whewell'sformula would give t = -a"la' < 0. pp. Whewell might have spotted this error after interpretingthe result. Bastable (1903. 18. 146) the concept of "transferable capital. and Marshall (1923. but no other changes were added.3." there appears for the first time the explanation: "(chieflythose of my friend Mr. forgetting that this is true only if t > 0. 130-2) the concept of "susceptibility" of demand (equal to one minus the elasticity of demand) and addressed himself to the problem of the conditions for complete specialization. Whewell's treatment seems to be quite valid and even ingenious. 354-5). Mill may have been acquainted with it. it was "printed in the same year for private circulation. Whewell derived an inequality (p. The only work of that period bearing any relation to Mill's law is that of Whewell (1856). 29).

the issues dealt with above receded to a great extent into the background. it is one that he has in common with all those improvers of political economy by whom new and just views 'have been promulgated as contradictions of the doctrine received as fundamental. pp. yet did not trouble himself to go through the algebra. owing largely to the erosion of Mill's theory of value with its assumption of constant costs.p. But the modern emphasis on the importance of inequality constraints has led to a revival of interest in the classical problems. who pursued an iconoclastic course which Haberler (1961.'5 In spite of his protestations. a charge which is without foundation.'4 1. 358. GRAHAM After Mill.INTERNATIONALTRADE 493 siderable interest. In one of these (1948. his deep antagonism towards Whewell would be sufficient to explain the lack of any specific acknowledgment. 1932. 35) the exception. and wherehe acknowledgedin the Prefacethat this portion (pp. p. developments of them. much more so than that of others. the other is that of Graham (1923. It could be said of Graham what Mill already had said of Thornton (1869. his own work. Dr. and intermediate "limbo" price ratios (1948.' " Graham retained Mill's assumption of contant costs." Graham believed that limiting price ratios were the rule. p. instead of being. is largely an elaboration of Mill's doctrines. 513): "If there is a fault to be found with him.All this with servesmerelyto establishthat it is almost impossibleto believe that Mill was unacquainted Whewell's1850 memoir. see the latter'sLettresIneditesa AugusteCompte. Two post-Millian developments are especially noteworthy in their foreshadowing of modern ones: one is that of Mangoldt (1863).Mill also published a blisteringattack on Whewellin the Westminster his opinions of Whewell'swork in moralphilosophyin the words (1852b)in whichhe summarized (P. 10) has aptly described as "ultra-classical. with its inability to cope with corner solutions. p.4. and to some extent even a retrogression from them. pp. The very year of publicationof the thirdedition Review of his Principles.6 below. and his views on these subjectsaroused bitter feelings in Mill.I am glad to invoke the authoritative support of Viner (1937. The methodology of marginal analysis. what they almost always are. 189): "it can scarcelybe counted as any thing more than one of the thousand waves on the dead sea of commonplace. and based his conclusions on numerical examples. and that if his suspicions were not enough. and may even (correctly) have suspected it of being faulty. 448-9). William Whewell was the leader of the anti-utilitarian intuitionist ("moral sense") school of ethics. 185-418) of his Logic would not have been written but for Whewell'sHistory of the InductiveSciences."That Mill neverthelesstook Whewellvery seriouslyis evident from his System of Logic (especiallyBook III). 15 In making this assertion. he claimed with great vehemence that Mill had held the contrary view. wherehe discussedWhewell'sepistemologicalwritings at great length. 79-82) he assumed that commodities were consumed in fixed proportions. 1948). an assumption which practically guaran14 The Rev. . also contributed to this de-emphasis. to be taken up in Section 1.

185-224). there may be complete specialization in two of the goods (one by each country) and production in both countries of the third good (at equal cost). violent fluctuations in output. Elliott (1950. pp. if limbo prices were the rule. on Graham's premise. pointed out by Cournot (1838. 23). he also expressed mortification over the notion of a "naked theory of demand" (p. in this case the world price ratio may coincide with the intermediate country's cost ratio. Graham's views rested heavily on the belief that the terms of trade were empirically stable. 320). such stability (in the sense of low variance) has been borne out by many econometric studies (e. or else x and y must be consideredas being the pricesof the respective commodities. pp. was highly volatile and subject to the "shifting winds of desire" (1948. and Viner (1937. 18. ?9) and continued by Mangoldt (1863. although stable with respect to price. as Metzler pointed out (1950. 37). rather than in price movements. of which two examples may be mentioned: (1) There may be a third country with relative costs (between two commodities) intermediate between the relative costs of two given countries. CHIPMAN teed the extreme solution. Graham's analysis suffered from dependence on numerical examples. Edgeworth (1894. . of the law of large numbers and the consequent stability of aggregate demand. and therefore based his claim. 630-5). Houthakker (1957)). e. 4). Ch.. Of greater interest was Graham's attempt to liberate the theory of international values from the assumption of two countries and two commodities. from the same reasoning one would observe. which (he said) one does not. on this premise. and Whitin(1953. either the symbols x and y must be thought of as coordinatevectors in the commodityspace. one would observe violent fluctuations in prices. and from the use of a confusing mathematical notation which apparently derives from Bastable (1903) and which has been perpetuated by some of his followers. For such an equation to make any sense. Graham failed to appreciate the importance. rather than via changes in the terms of trade.g. again adjustments would take place via labor movements between the two industries in each country. pp. according to which demand. 33). (2) If there are three commodities (and two countries).g. to which one may 16 J referto the custom. p. Ch. p. at least in the case of two countries and two commodities. and the equalitysign must be thought of as denotingthe relation"is exchanged for" or "hasthe same value as". hence shifts in world demand will be reflected in reallocation of resources (labor) in the intermediate country. which goes back at least to Mangoldt(1863).494 JOHN S. largely on the belief that countries were of unequal size. The essence of Graham's doctrine lay in the idea of "linked competition" (1932). Thus. p. This had already been begun by Mill (1852a. For the most part he retained Mill's assumption of a unitary elasticity of substitution in consumption. 459-67).'6 Most readers will find Metzler's exposition (1950) more rewarding.. p. this belief was combined with a somewhat unusual view of human nature. 532)). of using a mathematical expressionsuch as "20x = 30y" to mean "20 units of commodity (x) exchangefor 30 units of commodity(y)" (see.

5.. 323-5). Samuelson. The problem of international values was also taken up by Dorfman. As has already been indicated. his approach is more powerful and admits of much . Elliott's construction. 1954b. Reiter (1953). which would instead call for the use of nonlinear programming (cf. 176-7) likewise rejected Graham's presumption that "limbo" prices were improbable on a priori grounds. a problem in homogeneous programming. and displayed offer curves with numerous flat segments. McKenzie (1954b. 23) made a valiant attempt to translate Graham's analysis into Marshallian terms. pp.. and Jones (1961). Kuhn and Tucker (1951)). pp. Becker (1952). though echoing Graham's cavils against Mill. McKenzie (1954a) took up the Mill-Graham model in full generality. Whitin formulated the problem as one in linear programming. Elliott (1950. and Whitin (1953). pp. his approach closely followed a many-commodity example considered by Marshall (1923. Whitin (1953) considered the question of limbo prices from a geometrical point of view. McKenzie (1954a. this resulted from their use of a linear objective function. taking up models with two or three countries and two or three commodities and adopting the assumption of unitary elasticity of substitution. which is quite ingenious. WHITIN. discussion of it will therefore be resumed in Section 1. MODERN DEVELOPMENTS: MCKENZIE. Beckmann (1957). is closely related to those of Mangoldt and Edgeworth. Whitin (1953). implying that both commodities were perfect substitutes. was unaware of the fact that Mill had solved the problem for the case of two countries and two commodities almost exactly one hundred years before. 1954b. who stated that the equilibrium solution would "almost certainly" be one of complete specialization. Again. 1955-56). if the inhabitants of each country have utility functions of the Millian form U= XI IX12. Samuelson. Elliott concluded that numerical examples had prejudiced Graham's conclusions. 1. While McKenzie adopted this assumption. In quick succession contributions were made to the literature by Samuelson (1952). Dorfman. p. In his mathematical appendix. which would correspond to infinite elasticity of substitution in consumption. and Solow (1958. as well as the very thorough developments by McKenzie (1954a. In a significant paper. 1955-56). Schumann and Todt (1957) pointed out that Whitin's algebra did not correspond to his geometry. xnn(with the same parameters in all countries).6 below. the problem of equilibrium international values reduces to the problem of maximizing U subject to the appropriate linear inequalities in the nonnegative xi's. It is a measure of Graham's influence that Whitin. and Solow (1958). Isard and Peck (1954). AND OTHERS It became apparent soon after the pioneering development of activity analysis and linear programming by Koopmans (195 la) and Dantzig (1951a) that these new methods were particularly appropriatefor the analysis of classical models.INTERNATIONALTRADE 495 add the analyses of Elliott (1950). 31-45).

has determinate that outsideuniverse. 18. 17 . 2). and homothetic utility functions in every country.'7 His method can be roughly described as follows: (1) corresponding to any arbitrary selection of (normalized) commodity prices (which are nonnegative and add up to unity). as shown by Edgeworth(1894.p.1) become x-a u_-a"u" =O.Moreover."His own demand functions. one can compute (from the demand functions and the zero-profit conditions of competition) the world demand for each good. and it is upper semicontinuous (generalizing continuity to multi-valued mappings).1)-dimensional face of the production possibility surface. I should conjecturethat elementaryproofs do not exist of this theorem unless the demand functions are drasticallyrestricted. 1955-56) on the problem of efficiency in Graham models. 18 Geometrically. 155): "Assumingthe demandfunctions to be continuousfunctions of the prices of final goods.7) U'+V'+'=1 U" +"V' +6 1 = 1 McKenziestated (1954a. Fig. or (b) a closed convex set of such vectors-if the point is in a face of lower dimension (a vertex being considered to be a 0-dimensional face). pp. 610-12n) and Elliott (1950.the specialform U = of constantcosts. His analysis may first of all be taken up from the standpoint of the simple two-country two-commodity case considered by Mill." By exploiting these simple features of the problem. such as the proof of continuity and the problem of how to deal with zero prices. u" =x"/a". vis-a-vissome imaginary there is at least one set of prices for which these net supplies and demandswill all be zero. and it is this fact that madefor the simplicityof Mill's originaltreatment(1852a. There are difficulttechnical points of the proof. p. see the familiardiagramsin Viner (1937. Defining u' =x'/a'. 521). this corresponds to determiningthe supporting hyperplane to the world production possibility set. at any fixed prices. and recalling that x= x' +x". an elementary (and constructive) proof of McKenzie's theoremcan thereforebe obtained after all. McKenzie followed this contribution with two papers (1954b. v' =y'/b'. This approachshows that the internationaltradeanalogy is helpful even in establishingthe possibility of autarky. permitting the equilibriumproblem to be 1I of Z translatedinto one in homogeneous programming. so the fixed point theorem of Kakutani (1941) applies.496 JOHN S. the inequalities (1. they imply identical beingof the sameform as Mill's and Graham's.then the proof consistsin establishing for all goods. ?7)and which causedMarshall(1923. p. y=y'+y". and then the point of maximum utility in this hyperplane. p. 4). 355n)to say that "thereis no problemto be solved at all. y-b'v'-b"v'' =0 (1.combinedwiththeassumption with linear segments. These three steps define a multi-valued mapping from the set of normalized prices into itself. CHIPMAN weaker assumptions about demand. this mapping has values which are closed convex sets. 23)."8 (2) the latter determines a ray in the commodity space and a unique intersection with the boundary of the world production possibility set. (3) the latter point on the production surface determines in turn either (a) a unique price vector-if the point is inside an (n particular.Ch. v" =y"/b". It is suggestiveto think of this proof in the following way: Let the "world"be thought of as an aggre(not necessarilyunique)net suppliesand demands gate which. gives rise to demandfunctions theutilityfunctions. and Lerner(1934. Fig. Leontief (1933.

. take the place of a'. and Dantzig (195lb)) the important property of triangularity.e. i." allowing for the possibility of unemployment.8) L O 1 1 0 0 0 1 v" Ll1.U". and Solow (1958.e. But what is important to establish in the present case is that a nontrivial basic feasible solution exists (one with no unemployment. The parameters a'. say. . . and this is what underlies the graphical technique used by McKenzie (1954b). . Following McKenzie (1954b). b" are. strictly positive.. (j=l. of course. pp. a". a12. with all bj=O).. a21. 8' and 8" being the levels of the "disposal activities. if to these . there is always the trivial solution with uij = xi = O and b8= 1. Thus if country I is larger (or more productive) then country II.m). Any specialization contains m productive activities and produces. Samuelson. y. The existence of a nontrivial basic feasible solution can be demonstrated by a simple argument. Koopmans and Reiter (1951). and the assumption implied by (1. one with all variables > 0). yielding the n + m equations m (1. The system of equations (1. an exposition and interpretation of Dantzig's algorithm has been presented by Dorfman. 2.g. Dantzig's algorithm therefore applies.. a' and b' will be correspondingly higher than a" and b". b'. 117-21). x y 8' The model is readily extended to the case of n commodities and m countries.9) j-1 LUi_+_ - aijuij+xi=O =l (i = 1. 2. since labor need not be measured in the same units in the different countries. then a basic feasible solution exists (one with n + m variables _0 and the remainder= 0). where all. thus there are nmpossible specializations.9) exists (that is. It is well known (see Dantzig (195la)) that if a feasible solution to (1. It is obvious. to be described below. and furthermore that the model shares with the transportation models of Hitchcock and Koopmans (see Koopmans (1949). n) commodities.7) may be written in matrix notation as 0 -a" 0 1 0 0 F Iu' O --a' 0 -b" 0 1 00 v' O O -b' 1 1 0 0 010 u" = 1 (1. that a feasible solution exists: e. .INTERNATIONALTRADE 497 where the variables x. 8'.. a".. and so on.v". V. .. does not imply that the countries are of equal size or productivity). b'. 8" are all nonnegative. furthermore. U'.7) that each country has exactly one unit of labor available is not restrictive (i.. n).. .. k_ min (m. a solution may be called a specializationif each country specializes in exactly one commodity (these need not be distinct).

the resultingsolution is clearly feasible. in apparent contradiction to what has .in the case of three goods and two countries. one can choose some arbitrary set of prices.498 JOHN S. y=b'v'=b'. a good exposition of the method of proof. y.aftersuitablerearrangeMoreover. 89-90). CHPMAN we adjoin the corresponding k consumptionactivities. obtainingu"= 1. yet the solution is feasible. but futhermore.and maximize the value of output. one obtainsthe "efficientfrontier. esp.10) 0 I L O1 1 0 O 0 -c"0 1001 1 = 0 1 0 1 0 00010 1 0000 u v" x [Ii Ll 0 . r. will be found in Chapter 6 of Garvin (1960. The argument. is intricate. The basis here is not triangular. The following example will illustratehow the triangularity condition should be interpreted: 0 T I -ias-n alx -0o b O O I VI u"l = I .8) we have: -10 0 -a"t0 -x y = -o- 0 1 - b' 1 00 0 VI U" 1 Lo0 0 1uit_ the triangularity makesit possibleto solve by back substitution. we must maximizethe linearfunction f=px+qy+rz subjectto [-a' 0 0 -a" 0 0 0 0 -b' 0 O -b"i 1 0 0 0 0 010 u' 0 III v' w' (1. z and pricesp.with quantitiesx. y z 6' i" 19 The proof derivesfrom that of Dantzig (1951b).is alwaysuppertriangular.and will not be reproduced here. and x=a"u"=a" Not only is it true that everyspecialization is one of the possible solutionsof (1. proving that a nontrivialbasic feasible solution always exists. the basicmatrixcorresponding to this solution. v'= 1.while it proceedsin elementarysteps.'9 In orderto analyzethe problemof efficientspecialization. q. For example. ment of columns. every nontrivialbasic feasiblesolution can be shown to be representable in triangular form."For example. which lays bare the mathematicaltheory underlyingDantzig's method. pp. when this is done for all positiveprices.

which entails either qb'.12) f=pa" + qb'-(qb'-pa')u'-(qb'-rc')w'-(pa"-qb")v" . by Dantzig's simplex criterion. we obtain (1. country II in (x). i.rc")w". country I has a comparative advantage in (y) and country II in (x). just as in Section 1.qb" > 0 we have a'/b' < q/p ? a"/b". Substituting these values for x.e. 532) supported Graham's contention that "a country may import a commodity in the production of which it possesses a comparative adjust been claimed. then w" > 0 and pa" = rc".e.rc' = 0 or pa" . i. the relative price rlp of (z) and (x) must be equal to the corresponding cost ratio a"Ic" in country II. it is necessary that the above solution be non-unique. This has the explicit solution (1. 6' where the variables on the right are set equal to 0. the relative price rlq of (z) and (y) must be equal to the corresponding cost ratio b'/c' in country I. then w' > 0 and qb'= rc'. .11) Y z vI = a" b'I O _ 1 -a a a a b' O 1 b -b" O b' O c' O -c" 1 0 wI 8 ' v" w" 0 0 1 0 [u"-] 1 L 0 1 6' indicating that if the variables on the right are set equal to zero then country I will specialize in (y).rc" = 0.But it is degenerate.. Likewise. and can be replacedby the equivalent(also degenerate)basis -1 0 -a. if (z) is to be produced in II.'-all x 4) w i 1 Out 0 nu 1 o o o [o 0 1 = i -u"' -1 I which is now triangular. the coefficients of the variables on the right must be > 0.2 above. Thus.INTERNATIONALTRADE 499 Suppose an optimal basis is given by 1 0 0 0 -a"1 0 0 1 0 -b' 001 0 0 x Y z = O_ 000 000 1 0 0 vI 1 _u" I _1 _ 0 0 O O O OO O O O -b" O -c' 0 1 1 0 -c"0O 0 10 0 at Iu'I w'I v" O 0 1 1 0 1 w"I. p. Now from qb'-pa' > 0 and pa" . hence 8' = 8" = 0.with v' = 0." Whitin (1953.(pa" . that is. if (z) is to be produced in I. This provides one of the bases for Graham's phenomenon of "linked competition. Certainly qb' > Oandpa" > Oby assumption. y. z in the objective function f. and that (z) will not be produced. In order that the z-good be produced at all..qb'8' -pa" b"i For the basis to be optimal.

a" = 16. and that is that if there are more commodities than countries. This is a startling result: under classical assumptions. otherwise. if absolute advantages are approximately equal and elasticities of substitution relatively high." If the expression means that there exists another commodity ((z) in is less than this case) such that. But this conclusion depends on how one defines the term "comparative advantage. p. showing that the solution with only two commodities cannot be optimal. relative to that commodity. He showed that country I would specialize in (x). this one must be regarded as a gigantic quibble. However. he assumed a'=b' =24. there is. we can expect that the number of commodities produced will be no greater than the number of countries. and that country I would both produce and import commodity (y) "in the production of which it has a comparative advantage" (p. as McKenzie (1954b. On the other hand. 533). namely that it is methodologically unsound to assume in advance that it is known how many commodities will actually be produced. the situation is this: if one or both of the above conditions holds. we can expect some price ratios to coincide with cost ratios. in order to obtain Graham's result. c" = 96. In the example considered . z in (1." In our notation. one interesting fact is brought out by Whitin's analysis.11) are substituted in the utility function U= xyz. and country II in (z). like many of Graham's extravagant claims.500 JOHN S. II's cost ratio a"/b" -' is less than I's cost ratio a'/b' = 1. or (2) inequality in absolute advantages. if comparative advantage in a commodity is understood to mean that the cost ratio is smaller than that of other countries with respect to every other commodity. and that neither country had a comparative advantage in (y). one has to rely on either (1) a low elasticity of substitution in consumption. y. 177) pointed out. Thus. This can be seen directly from the fact that if the values for x. in the case in which there are more commodities than countries. This serves to bring out a point emphasized by Schlesinger (1933-34) and Wald (193334). and if utility functions have the form U= xeyflz (guaranteeing that all commodities will be produced and consumed in positive amounts). then there will be a natural tendency for the number of products to be less than or equal to the number of countries. CHIPMAN vantage. no particular reason for preferring on a priori grounds an extreme price to a limbo price. On the other hand. When the number of countries is greater than or equal to the number of commodities (the case considered by McKenzie in his examples). and the nonlinear terms dropped. then in Whitin's example one would have to say that both countries had a comparative advantage in (y) simultaneously. In accordance with Mill's law. then several price ratios-a number corresponding to the excess of the number of commodities over the number of countries-will necessarily coincide with some country's cost ratios. There is a further point that needs to be stressed. since with respect to (x). c'= 8. I's cost ratio c'/b'= II's cost ratio c"/b" = 3. and II in (z). then in Whitin's example it could only be said that country I had a comparative advantage in (x). and chose as utility function U= 'ylz. b" = 32. we obtain U= a" b' (c' w' + c" w").

it has already been pointed out that one of the coefficients qb'rc' of w' or pa" -rc" of w" must be zero. Accordingto Schumpeter 504). either by r/q = b'/c' or by rlp = a"/c". CLASSICALTREATMENTS:MANGOLDT. 381n)also reliedon the secondedition. namely. the geometricalapparatusthat Mangoldt devised for the theory of internationalvalues.and bearsno relationto Mangoldt's was referring peterpresumably diagrams. which is rather a rare item. took it second (posthumous)edition of Mangoldt's Grundriss (1954. 1. pp. 1948.p. whence c' = c" and q/p = a"/b'.12) must both be nonnegative. 320n) drew attention to the fact that FriedrichKleinwachter. Schumpeter scholarshipand did not check the originalsources. Taking the ratio of the last two expressions. the second edition "leaves out the most originalelement in it. editor of the der Volkswirthschaftslehre (1871).VINER. ELLIOTT.rc'= 0 andpa" .AND OTHERS Mangoldt (1863) foreshadowed much of the modern analysis in his book.rc"= 0 in (1. which appearedin 1863 and contains the relevant appendixthat the editor of the posthumous lapsed from his usual standardsof second edition of 1871thoughtfit to omit. If the third commodity is to be produced. it would seem a fair application of the principle of insufficient reason to suppose that both countries have exactly the same absolute advantages (for definiteness. It is interesting to inquire as to the conditions that will lead to this special result of Graham's: the phenomenon of linked competition (1932. Edgeworth (1894.INTERNATIONALTRADE 501 above.The relevantchapterof the original 1863edition. we obtain q/p = (a"/b')(c'/c"). 581. containingthe diagramswhich were . r/q = b'/c' and rlp = a"/c".6. but Edgeworthbroughtit to light again. turns out to be a necessary condition for the simultaneous production in both countries of a third commodity. Thus Mill's inequality. p. hence the price r of (z) must be linked to one of the countries' cost ratios. i. that both countries will produce (z). 607) "to the first edition of Mangoldt's Grundriss. but leaves the appendixintact.p. his page referenceswere all to the second edition.qb" of v" in (1. 630-6) referredto the supply and demandcurvesin the firstedition. in arguing for the former and against the latter. as Graham usually assumed. This does not necessarily imply.3). Now. Graham was trying to have his cake and eat it. In order that (z) be produced in both countries. we obtain simply (1. p. yielding a'/b' < q/p< a"/b"." Here. and country II in (x). to which SchumViner(1932. which (under Mill's assumptions) is necessary and sufficient for specialization in the case of two commodities. upon himselfto omit the diagramsin Sections62-7 of the text. however." Schumpeteralso referred(p. Now substituting this in the inequality a'/b' < q/p? a"/b" obtained above.The geometrical apparatus was originalwith Edgeworth. but in his discussion of the appendix of Mangoldt's work. An interesting necessary condition immediately emerges.20 known to most economists only through the exposi20 Walras(1890. The second edition omits the diagrams(which have nothing to do with internationalvalues as such). then the coefficientsqb'-pa' of u' and pa" . 69). suppose that at equilibrium prices it is optimal for country I to specialize in (y). The very circumstances that are necessary for linked competition in the case of three commodities are likely to give rise to limbo prices in the case of two commodities. p. EDGEWORTH. we must have qb'.e..12). identical production methods) in the production of (z).

which is a rather ponderous treatisedealinglargelywith labor productivity. . b a given m x 1 column vector. in turn. s" (which are unconstrained as to sign). after all. r are nonnegative. F. qb"_s" <q t rc" <sSi p>p>~O.0b' 1 -a"ll 0 0 -b" 0 -c' 0 0 O 0 10 000 0 010001 -c" 0 0 1 0 0 0 0 00 1 0 1 0 0 >(0 which become simply p3a'_s'. It is just a matter of notation (replacingA. q. constrained to be nonnegative. c by their negatives)to state the primalin the form: maximizef = cx subjectto Ax = b. in which the objective functionfwas to be maximized subject to (1. s'>O. 21 Dantzig and Ordenstate the dualitytheoremas follows (1952. and c a given 1 x n row vector. The primalproblemis that of findingan n x 1 vector x > 0 which minimizesf = cx subjectto Ax = b.10).14) <S'.q. r. then it follows from the duality removed by Kleinwachter. and min f = max g. so does the other. b. It should perhapsbe finally observedthat neither one of these editions should be confused with anotherposthumous work by Mangoldt entitled simply Volkswirthschaftslehre (1868). and its dual in the form: minimize g = wb subject to wA ? c. p. s" are. where use has been made of the original assumption that the prices p. If all three commodities are produced (so that the levels of the consumption activities in the primal are positive). (1. CHIPMAN tion and development by Edgeworth (1894) which. Mangoldt's approach may best be analyzed in terms of the dual of the above.13) 0 1 O . qbt_ rc'< S'. whence the variables -. As shown by Dantzig and Orden (1952). this is equivalent to the dual problem of minimizing the objective function21 g=( f r s' s")O =s'+s 01 01 with respect to the variables pf. Let A be a givenm X n matrix. s'. x > 0. subject to the inequalities s' s") 0-a' (1. r>r>O. >q>O. 0 O 0 0 1 0 1 0 1 0000 1 0 pqr 00). linear programming problem.502 JOHN S. If either problem has a solution. The dual problem is that of finding a 1 x m vector w (whose components are not restrictedas to sign) that maximizesg = wb subjectto wA ? c. the variables being constrained to be nonnegative. has been further elaborated by Viner (1937). p3a"_s". 52). q. s'.is now available in English translation(1962). sit >0O.

hencethe bars may be removed. Edgeworth(1894.Thens' and s" may be in the two countries.The firsthe replacedsimplyby the assumptionthat the ratio s'/s" of resourcevaluations(the factor terms of trade) a slidingscalecomprised of the logarithms of costs was given. Thusp'. arethe costs of wherethe symbol meansequalityby definition. First. and similarly for commodity (y). country I is to produce (y). this 22 We might say "wagerates"here insteadof "resource valuations. that there is some commoditythat is producedin both countries. 630-4) soughtto removethese objections.p. l/b'.wherethe commodity as are all the zation for the other commodities((x) in II.15) p s'/a'=p'.INTERNATIONALTRADE 503 pi_p."but this could be misleadof the resource(labor)will.14) is replacedby an equalitywhence s' and s" are determinedby s'= max (pa'. (y) in I) is assumes While Mangoldt'smethodis ingenious. etc. in generaldifferbetweencountries. The first that profitsbe nonrequirements six inequalities of (1. p ? s"/a" =p". of goods (x). q'. the ratios'/s" is determined. for instance. whences'/c' =s"/c". Mangoldt(1863.the relativepositionsof the two scalesbeingdetermined by the difference log s'/s" =log s'-log s". rc") (see Beckmann (1957.14)expressthe competitive positive on all productiveactivities(see Koopmans(1951a.1"in the respectivecountriesratherthan 1 in both. production etc. I shallcall this ratio Sincer= r'= r" by assumption. and s'. (" of the idle activitiesare equalto zero. q < s"/'b'-q".If comparableunits had been used. q _ q. gb'.)Let the inequalities (1. etc.p. q < s'/b'-=q'. since the price must be equal to the cost Thepatternof specialiis produced. then the objectivefunction would have become g = s'l' + s"l". the factortermsof trade. rc') and s'. .. 66)). pp.This wouldimplyrc'=s' and rc" =s". gb".14)now be written (1. commodityprices. l/a'. for any proinequalityin ductive activity carriedout at a positive level.. r ? s'/c'-r'.he then constructed for both countries. we havep' >p" = p and q" > q'= q. p. 188)postulatedthe existenceof a commodity(say the z-good)that is producedin both countries.=max (pa".it has two drawbacks. r ? s"/c"-Mr". 561). If. the corresponding (1.p. r > r will theoremof Dantzig and Orden(1952)that the inequalities be replacedby equalities. and the amountsof labor had been 1'. (y).whichwill be strictly interpreted as the resourcevaluations22 positiveas long as the levels 5'. as it is essentiallythe same as Viner's"doublefactoral terms of trade"(1937. (If c' = c" this impliess' =s"-an exampleof the factorprice equalization theorem. in the low-costcountry. s" could then be interpretedas wage rates. in the respective the "realcosts"being countries. Assuming for definiteness than p' >p" and q' < q". Then Mangoldt'scriterionstatesthat commodity (x) will be produced in country I or country II according as p' < p" or p' >p". Now. 69)).and secondly (and more seriously)that it is known in advancewhich one. accordingto the presentformulaing since the units of measurement tion.

23 (1894. or log (l/b')? log s"-log s'+log (1/b"). 633)that his slide-rule fullyrecognized methodleft entirely Edgeworth whichhesaid ofthe factortermsoftrades'/s"."In the presentcase.p. "in general no of the relationon the interconclusion. also that there is an unfortunatemisprintafter equation (3) ( has been shownby Gale (1955.p. Likewise. the "bale"is simplythe quantityof labor emtermsof tradearethe factoral of exports. (1945. o'. observed (1950. '. canbe drawnpendingthe determination national marketbetweenthe productivepowers of the two countries.and such exchangecan only be interpreted and abstractsense.p.Butthereis no reasonwhy this shouldbe so. of demandin each countryfor the different thus.15). his constructioncan be most easily derived by offercurvesarecontinuousbutjagged. 24 Readers of Elliott's article are advised to note that he employs Bastable'sconvention. 157) when he definedthem instead as "uniformaggregateinvestmentsof her labour (of various qualities)and of her capital. as Elliottpointedout.and Marshall's ployedin the production terms of trade s'/s".24 Theresulting Edgeworth's of infiniteand zero elasticity. etc.or indeedby Metzlerhimself obviousis.on the Millianassumption Marshallian each country'sincome being devotedto each commodity. b'.it is neces23 In orderto facilitatecomparison." This conjecture proval.the ask/ci of Beckmann(1957) correspondsto l/aki in (1.While he did not use Edgeworth'slogarithmicscale." It is this gap in the argumentwhich has been nicely filled by Elliott (1950). s" correspondto Edgeworth'so. of using the same symbol to designatea commodityand its price. Metzler demandtechniquebreaksdown whenthe numberof countries that the reciprocal was cited by Whitin(1953.504 JOHN S. furthermore-and this is what makes the constructionseem somewhatartificial-in orderto constructone country'sofferfunction.. openthe questionofthe determination in each country. CHIPMAN can only be so if q'< q". p.p. Quite correctly. of course.pp..Thatthis shouldnot haveseemedimmediately arebales(unitsof the a consequence of the factthatthe objectsbeing"exchanged" in a formal different countries'labor). 1/b". 23) to constructeach country's of a constantproportionof offerfunction.. 280).. In discussing Elliott'sconstruction.Elliottrejectedthe commonlyheld interpretationof Marshall's "bales" as aggregatesof commoditiesconstitutinga given country's exports. 159).9) above. Il/a".. then.being method. Elliott proceeded(1950. correspondto I/a'. referredto in footnote 16 above. in the above notation.we point out that the above symbols s'. etc. log q'=log s'+log (l/b')? log s"+ log (l/b")=log q".. had alreadybeen outlinedby Marshall(1923. hence from (1. p.A construction made up of segmentsof alternately this kind. 323-5).but also on the law "dependsnot only on the cost of production commodities". and his symbols a. 23) in which A and B have been interchanged. 521) in apparentapexceedstwo. 315):"I suspect. and took Marshallat his word (1923. .the ratio which we have designated as [s'/s"]. the individualofferfunctions for eachcountrycan easilybe aggregated to forma globaloffer(or excessdemand) function.p.

no such method has yet been proposed: the algorithms suggested by McKenzie (1954b) and Dorfman. and Solow (1958. "unconstructive. and no doubt more practical methods could be found for obtaining numerical solutions. p. but also the production coefficients (although not the utility functions) of the other countries. In fact this is not so. from which one can at once read off the minimum cost of each commodity. . The mathematical justification for Viner's procedure is to be found in the dual of the above linear programming problem. the foreign production coefficients will then be needed in order to translate the demand for foreign commodities into the demand for foreign bales. is their dependence on bilateral comparison. it will be well to try to set the record straight. Samuelson. The extension is quite straightforward: an arbitrary set of values is assigned to the factor prices s'. and McKenzie's powerful existence proof (1954a) is. But who indeed ever claimed that it was? ." and that "the deficiency of the classical methods .INTERNATIONALTRADE 505 sary to know not only its own production coefficients and utility function.. Thus." and therefore of little help in solving practical cases. 465-7) extended Edgeworth's method to several countries as well as several commodities. this fixes the relative positions of the Edgeworth scales. while Elliott's technique could be validly extended to more general cases. both linear programming approaches require an arbitrary selection of pricescommodity prices in the primal and factor prices in the dual-and neither procedure by itself provides a systematic method for exploring the entire efficient surface. 163). This definition of "comparative advantage" is the same as that of Whitin already referred to. The reason for this is simple enough: data in one country are enough to determine how many of its bales it is willing to supply and how many of the various commodities it desires to purchase. or indeed about those 'of Mangoldt and Edgeworth. p. It was to this latter objective that McKenzie (1954b) addressed himself. 117-21) are suitable only for the computation of efficient(ratherthan equilibrium)solutions. McKenzie's criticism of "the error of classical ways" (1954b. unfortunately. with methods based on that of Koopmans (1951a) and Koopmans and Reiter (1951). pp. s"." This criticism has been reiterated by Jones (1961. 180) seems to suggest that there might be something invalid about Viner's method. its price as well as the country (or countries) where it will be produced is thereby determined. 180) is that "the methods of the classical economists are entirely appropriate only to the analysis of trade between two countries. s"'. p. Viner (1937. and the two approaches are not at all as unrelated as has been supposed. and what the example proves is that the relation so defined is not transitive. it would probably become quite cumbersome. who displayed an example involving three countries and three commodities in a pattern of specialization which he showed was inefficient despite the fact that "each country has a bilateral comparative advantage in the commodity it produces compared with any other country and the commodity that country is assigned" (my italics). McKenzie's principal criticism (1954b. Since this has been an area of such great controversy. Nevertheless. pp.

But as Edgeworth (1894. pp. Ch. Bastable (1903. and of two commodities and three countries. in his words: "Frominspectionit is plain that [it is] the most economicalarrangement.. Edgeworth (1894. Ch. without suggesting specific criteria. Marshall (1923.that is. 401-7). Unfortunately. Appendix II). 36-40). Haberler pointed out that it was just a matter of notation to rank the commodities in order of comparative advantage." There would be severalother "economicalarrangements" in which commoditieswere produced . 462-7). In this sense." But it turns out that the only difference of opinion between Ohlin and Haberler is that the former believed he was attacking orthodoxy. pp. whereas the latter considered himself to be defending it. pp. which is in accordance with Ohlin's. and not essentially different from Edgeworth's. this. 18. is similar to that of Marshall. and in any number of commodities. the uniqueefficientspecializationin whicheach country producesa differentcommodity. and of three commodities and three countries.25 and showed (p. p. Bastable (1903. by Viner (1937. 9 and 10). as a'/a" > b'/b" > c'/c" > . p. and finally. . it must also export all the higher-ranking ones. and Haberler (1936. it must also import all the lower-ranking ones.But he erredin implyingthat this was the only kind of solution possible. must take place on the same essential principles as trade between two countries and in two commodities. the important point being that if country I exports a certain commodity. "bilateral comparisons" are completely valid in the case in which there are only two countries to compare. ?? 4. pp. CHIPMAN It is first necessary to identify the "classical economists" who dealt with cases involving more than two commodities and two countries." The case of many commodities (but only two countries) was analyzed by Torrens (1827. 40) that the pattern of 25 Bastable'ssolution was correctin the sense that he obtained what will be describedbelow as the uniqueefficientassignment. McKenzie and Jones have not denied. 136-40). 1933. 137) were careful to point out. that of three commodities and two countries. pp. p. Mill (1852a. Ohlin (1927. Appendix H). In analyzing an example of three commodities and three countries.506 JOHN S." must hinge on the meaning of "essential. pp. 143-4): "Trade among any number of countries. and that demand considerations would determine which intermediate commodities in the ranking would be exported or imported. 36) was not so careful. and as Ohlin took pains to stress. that of three or four commodities and two countries. 39) obtained a correct solution. 630-4). by Taussig (1927. and appeared to imply that comparative costs would by themselves uniquely determine the pattern of specialization. information on comparative costs alone is not enough to determine where the dividing line will be drawn. by Bastable (1903. The treatment by Haberler which followed. that of several commodities and several countries. . 633) and Haberler (1936. 131) to complain: "Somebody or other is always trying to show that the Law of Comparative Cost is valid only under the simple assumptions upon which it was originally formulated. and if it imports a certain commodity.9) treated the question in general terms. p. the validity of his famous dictum (1852a. Mangoldt (1863. p. pp. 583-6) criticized the orthodox doctrine in terms that led Haberler (1936.

the inefficiency of Jones' example can readily be determined by Viner's method. McKenzie (1954b. therefore. and although he confined himself to numerical examples involving three commodities and two countries (Ch. His exposition was most lucid.INTERNATIONAL TRADE 507 specialization could be changed as a result of the introduction of a third country. pp. and actually all three of them can be quickly read off Viner's scales. 64). Jones indicated the correct efficient specializations." Taussig's comparisons were all with respect to prices or wages. MODERN DEVELOPMENTS The record. he exhausted all cases. 66-7) was more concerned with Bastable'sbad arithmeticthan with his bad economics. 171) introduced an interesting multiplicative formula which was arrived at independently and in a different way by Jones (1961. Jones considered the case of an equal number of commodities and countries. p. and sought a method for ascertaining an optimal way of assigning in more than one country and countriesproducedmore than one commodity. Grahamcould have trippedBastableup on this score. . as in Mill's phraseology. Ch. In conclusion. having been set straight. 163n) that a solution obtained by McKenzie (1954b. 165) on the basis of an ingenious use of the Hawkins-Simon theorem (1949). but confinedhimself instead (1948. p. the blamewas in any case all shoved onto Mill.The remainderof the sentencefrom which the above passage is quoted also contains a bad howler. 10). I have not been able to find a single example in the classical literature of the use of bilateral comparison in the analysis of multilateral trade. Jones also pointed out (1961. we have to introduce some common measure of values for the world's markets.7. 174) was actually inefficient." His use of the word "money" for this common measure seems to have led later writers to question the validity of his analysis. p. Viner's treatment was certainly multilateral rather than bilateral. Nicholson (1897. that 'money has little to do in the matter except to furnish a convenient mode of comparing values. or indeed a nonlinear programming or equilibrium problem. and indeed. Even here Graham(1948. Finally. p.' " Taussig (1927) in his examples handled the subject from two standpoints: (1) that of the prices of the various commodities. p. since the particular solution arrived at would depend on "the play of demand. IV) to the latter's treatmentof the two-commoditycase. it is hoped. 299) remarked that "when we bring in the fact that any one 'nation' trades not with one another [sic] but with many others. RESUMED: JONES 1. 9) and two commodities and three countries (Ch. and were therefore multilateral and not bilateral. and having declaredthat Bastable was "rather slavishlyfollowing Mill'smisguidedlead" (p. and (2) that of the wages in the different countries. even though he qualified it by the statement that "it may be fully admitted. let us turn to the positive results obtained by McKenzie and Jones. thus he considered both the primal and the dual of what can now be recognized as a linear programming problem.

82) had been obtained by Beckmann (1957. Geometrically. If the number of countries exceeds the number of commodities. except for degenerate cases. it includes as a special case the inequality (see (1. Whitin (1953. whereas if the a"b'>a'b" . there will be several such vertices (see McKenzie (1954b..(j)=117=jaj for 2(i)#i. which states that if country I has a comparative advantage in commodity (y) over country II with respect to commodity (x) so that b'/a' > b"/a"." reserving the term "specialization" for the broader concept of a solution in which each country produces exactly one commodity.(i) = aii for all i. p. this result states that if the number of commodities is equal to the number of countries. who spoke of "the" optimal assignment. n (Jones chooses cyclic permutations. 523)). which is an n-dimensional polyhedron. where aij is the maximum output of the ith commodity that can be produced in the jth country. 164).i(i). Let there be another assignment WX in which x=i aij and where j==(i). Then Jones shows that %![ (in the sense that there is some way for each country i to shift its resources from commodity i to commodity j-=t(i) such that the world output of each commodity is increased) if and only if (1. y = b' is more efficientthan the specialization x = a'. hence an efficient assignment exists.. and the countries' production surfaces are not parallel in any direction. Jones' criterion may be considered as a generalization of the law of comparative advantage. p. then the world production possibility set. 174). Thus. and that is that an optimal assignment can generally be expected to be unique. i= 1.(j) > H asi n n This may be called the Jones inequality. but it is not at all obvious on the face of it. . CHIPMAN exactly one country to each commodity and vice versa. . he called this an "i-i assignment.. y = b" if and only if the product of the outputs is larger in the first case than in the second. p. in which-in any event-there would be no trade. The second implication is still more remarkable. p. Jones' inequality has a number of interesting implications.16) Haj. the function t being a permutation of the integers 1. The first implication is that. 68).3) above). will have exactly one vertex in the interior of the positive orthant. suppose there is a numbering of commodities and countries such that the assignment W is defined by xi=aii. which can be ruled out on a priori grounds as completely improbable. since the only exceptions would be those in which Hg=ja . 2. there is a unique efficient assignment. but is more efficient than W his analysis can be generalized). . there is a maximum H1= 1aj. 2. except for cases such as ai." For convenience I shall instead call such a solution simply an "assignment. Jones took this for granted (1961.. In the notation of equation (1. p.508 JOHN S. Thus. then the specialization x = a".9) above. a proof based on Koopmans (1951a. but in which some commodities may be produced in several countries or in none at all. not all of which are made explicit by Jones.. n. though also apparentlytaken for grantedby Jones. since there is a finite number of permutations 2.

using up primary factors (which are completely immobile among countries) and producing final commodities (which are perfectly mobile among countries). p. cotton. PRODUCTS 1. an elementary exposition was subsequently presented by Koopmans (1953). and in which joint production is excluded. What the theorem states. only one such process will actually be used. p. TRADE IN INTERMEDIATE In the course of his analysis McKenzie (1954b. which should not be too surprising since. this is obviously not the case. but Ohlin dealt only with the implications of trade in machinery (rather than goods-in-process) and therefore failed to come to grips with the main problem. the representation of each industry as an integrated industry.. p. to a labor theory of value. is that any efficient nonnegative bill of goods (net outputs) can be sustained by only one price constellation (i. this leads. or at any rate Ohlin was discussing a somewhat different problem. p. kp2. was reformulated by Koopmans (1951b) in terms of his activity analysis model (1951a). generalized by Arrow (1951) and also independently developed by Georgescu-Roegen (1951). . 167). despite the fact. by one ray of prices (kpl.8.ut(1954b. of course. But in the case of petroleum.e. in which there is only one primary factor of production (labor). wheat.. all the possibilities previously open are still open. This theorem was sketched by Samuelson within a neo-classical framework. is justified by Samuelson's substitution theorem (1951). 587). What is the appropriate simplification in the case of intermediate goods? In the case of some of these. . What is more surprising is the effect such trade has on the determination of international values. It is strange that this had not been noticed before. essentially. as McKenzie pointed o. such as electric power and coal. 168). even though many processes of production may be available to each firm or industry. 533)). that the classical economists used intermediate products such as "cloth" and "linen" in their examples. there will be none (see Whitin (1953. using up only labor and producing only a net output. Some hints of recognition that intermediate products might cause difficulties are contained in Ohlin's discussion (1933. and more possibilities are available. transmission and transport costs may be so high that the assumption that they are infinite may be an appropriate simplification. 177) stumbled across the interesting discovery that the introduction of trade in intermediate products necessitates a fundamental alteration in the classical analysis. . copper. In the case of a single country. Reiter (1953) and McKenzie (1954b) both pointed out that trade in intermediate products would enlarge the world production-possibility set. p. Given this price constellation.16) to the case of unequal numbers of commodities and countries was also indicated by Jones (1961. kp") where k >0). if such trade is allowed. etc.INTERNATIONALTRADE 509 number of commodities exceeds the number of countries. The principal simplification that is used in the analysis of problems in international trade is the concept of an integrated industry. The procedure to be followed in extending (1. .

with respect to a given country. this of course is the Graham solution in which the terms of trade coincide with one of the countries' cost ratios. 179). allowing the corresponding net outputs to be negative. as soon as trade in intermediate products is allowed.2 .510 JOHN S. will be a flat surface.2. The reason for this can be appreciated from the following example. illustrated by Figure 1.e. there will be for any one country an efficient boundary of the set of net outputs that it could produce (this includes negative net outputs. Let the production possibility set of one country be given y d 0 l + FIGURE 1. CHIPMAN Geometrically (cf. In the absence of international trade. that part contained in the positive orthant. There is only one apparent exception to the above statement (and it is only apparent). there will be more than one possible price constellation. which of its possible production processes each of its industries will use. One of the results of trade in intermediate products pointed out by McKenzie (1954b. 1955-56) was that his algorithm for determining efficient specializations broke down. p. that part of this boundary which could be achieved under autarky. the coordinate vectors which "hold up" the flat surface can be regarded as the fictitious integrated production processes. Koopmans (1953. 104)). and it can no longer be known in advance. the Samuelson substitution theorem applies only to that one country. which of course would have to be matched by corresponding amounts of imports). p. countries may import some of their requirements. This was one of the points made by McKenzie (1954b. it is no longer necessary that net outputs be positive. and that is the case in which one country is so large that its prices-underautarky rule the roost under trade. i.. and furthermore we cannot know in advance whether a particular country's costs will dominate international prices. But even in this case. When trade in intermediate products is allowed.

which is impossible. 468)). p." Ohlin has said (1933. specializing in the x-commodity and importing the y-commodity." 1. Transport costs in international trade theory are either zero or infinite. for instance). To take an extreme case. The reason for the last result is obvious. Thus world output will be determined at D. and clearly the solution must be the point E. since it implies negative net world output of the ycommodity. Location theory emphasizes the continuity of space. As McKenzie notes (1954b. as already noted. so that eE and dD can be considered to be their indifference curves (we are thinking of a commodity that does duty as a consumer good as well as an industrial input. Now suppose the price ratio is chosen to correspond to the slope of eE (or of dD). whereas international trade theory stresses its discreteness. pp. pp. 179): "Thereis nothing shocking to common sense in these results. The feasible part of the world production possibility set is just OEH. had he considered it. Thus the world efficiency locus cannot be determined by finding the efficient solutions for each country. the slope eE cannot represent an equilibrium price ratio. the first country will produce at A. contrary to what one might expect. 177-9) and Jones (1961. suppose that in both countries the consumers regard the two commodities as perfect substitutes. such as gasoline." This is certainly a minority viewpoint (cf. So radical an idealization is this that it is a wonder that the theory has any bearing on reality at all. which intersects the axes at E and H. Not all nonnegative price constellations can be compatible with equilibrium. A moment's reflection will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England. then at this price ratio. "is nothing but internationale Standortslehre. This is an example which Graham would have greatly relished. 589). Sliding BGF down BA to ACD. even though both commodities are perfect substitutes. producing at F (measured from B as origin). but the only price ratio that will sustain this equilibrium is that represented by the slope FD. we obtain the world productionpossibility set OACDFB. namely the possibility of reversal in the pattern of specialization.INTERNATIONAL TRADE 511 by the shaded figure OAB. p. which is the same as that of BA. whereas the second country will do the opposite. at any given price constellation. and then adding them up. since this would entail a solution at D. Viner (1937. Then.9. This is a case in which the first country rules the roost. Undoubtedly the most interesting consequence of the introduction of trade in intermediate products is that which McKenzie (1954b. and for the other country by the (displaced) shaded figure BGF. there is nothing in between. One of the devices used by Ohlin was the concept of "home market goods" . TRANSPORTCOSTS "The theory of international trade. its cost ratios determining the terms of trade. 166-8) have emphasized. p.

cf. if there are n commodities and m countries. many attempts have been made to introduce transport costs in a more direct manner. and of these only steel and textiles were consumed by households. The treatment of shipping in these models does not take account of the routing of the moving equipment. the shipping activities. This is a case in which an equilibrium problem can be transformed into a maximum problem-one in linear programming. Nevertheless. CMPMAN (1933. but since they are substitutable in consumption and production with international commodities. and for each commodity. One of these is the model introduced by Isard and Peck (1954). as well as shipping. and the resulting theory remains extremely serviceable. Isard and Peck found an equilibrium solution to their model. relevant to the models that we have been analyzing in the previous sections. perhaps. 18. in fixed proportions. in which commodities in different regions are considered to be different commodities. transform one such commodity into another. by a tentative method. it can be shown to be legitimate. it is difficult not to take the whole step into location theory. source. of course. p. textiles. While Isard and Peck did not justify their method of solution. Book III. 35) had introduced under the name of "domestic goods". These authors acknowledged their indebtedness to Graham for many of their concepts. being closely related to the solution of the dual linear programming problem. 354-5n) and Mill (1852a. (The same feature was at the basis of Mill's problem.) More recently. the reason for this is that the same Lshaped indifference curves are assumed in each country. p. Thus. and community (world) indifference curves can be legitimately defined. with one scarce factor called a "'productiveunit" (to be interpreted. and destination. a "distance input requirement" was defined. Ch. The principal object of interest is the shipping. iron ore. once transportation is introduced. ?3). will now be discussed. hence they can be aggregated. . even if such movement can be shown to be empirically insignificant. in a treatment closely paralleling that of Arrow and Debreu (1954). They considered a model of three equidistant countries. 208-15).512 JOHN S. Isard and Ostroff (1958. pp. the concept goes back further still to Marshall (1923. Some of these. and rigorously studied its logical structure. as mostly labor) and various commodities such as coal. In the model of Koopmans (1949) and Koopmans and Reiter (1951) this was shown to be one of the major features of the transportation problem. 142). and steel. pp. which Taussig (1927. 1960)have greatly generalized this model. an element of continuity is restored. this could simply be a consequence of the effects of differential transport costs on the location of industry. These domestic commodities have infinite transport costs. these questions will be discussed in detail in Part 2. Isard (1956. there are already nm2 pieces of information required. The movement of empty carryingcapacity must presumably be accounted for in some way. Their model can actually be set up as one in activity analysis. as in the model of Koopmans and Reiter (1951).

Balassa (1963). which has been followed up by Stern (1962). and others. with given demand and supply functions in each. drawn on a double logarithmic scale. he drew a dividing line in his chart. 703) presented a diagram. Noting that during this period. in his words (p. This curious phenomenon bears a striking resemblance to similar phenomena observed in experimental psychology. 1904) and Barone (1908). Nevertheless. 697). 702). Ch. 1952. Thus MacDougall was using bilateral . 1962).INTERNATIONAL TRADE 513 Samuelson (1952) considered the problem of equilibrium in spatially separated markets.10. and complete specialization by Britain on the other. how small an effect small departures from assumptions will have on asserted conclusions. what we should expect to find would be complete specialization by the United States on one side of the dividing line. and given transport costs from each source to each destination. but in practice what is found is a smooth gradation. "American weekly wages in manufacturing were roughly double the British" (p. and below the line higher costs in the United States. where pure theory would predict one choice or another. since just one commodity was involved. Therefore we cannot hope to make a thorough evaluation of empirical tests of the Millian theory until we have surveyed the entire theoretical field. Before attempting to test a theory. it will be appropriate at this stage to make some remarks concerning the impressive empirical work of MacDougall (1951. this could be expected on the basis of the considerations mentioned above. and it may be conjectured that his method would not extend easily to more commodities without the addition of special assumptions. And if no other countries were involved. which. Thus the kind of function that would be predicted by pure theory would be a step function. in the case of one commodity." that is. any theory or model is difficult to test. But what MacDougall actually found was that a linear function fitted extremely well. His model was based on treatments by Cournot (1838. it is wise to form some judgment as to its "robustness. EMPIRICALEVIDENCE In a non-experimental field such as economics. 10) and Enke (1951) and related to earlier models discussed by Cunynghame (1903. p. MacDougall (1951. Of course. this is only a slight adaptation of Edgeworth's logarithmic scale. showing that commodities above the line had higher costs in Britain. "shows the ratio of American to British output per worker in each industry-measured vertically-and the ratio of American to British exports-measured horizontally" for a large number of products in a sample of data collected in the 1930's. His solution was also characterized by transforming the problem into a maximum problem. This relationship held despite the fact that both countries traded more with third countries than with each other. since conditions are not controlled. 1.

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