S&S Quarterly, Inc.

Guilford Press

Foreign Trade and the Law of Value: Part I

Author(s): Anwar Shaikh
Reviewed work(s):
Source: Science & Society, Vol. 43, No. 3, Contemporary Issues in Marxist Political Economy
(Fall, 1979), pp. 281-302
Published by: Guilford Press
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FOREIGNTRADEANDTHE LAWOF VALUE:
PARTI*
ANWAR SHAIKH

/. Introduction
MARX'S ANALYSIS OF CAPITALISM the law of value
appears as the fundamental basis forthe lawsof motionof
capitalism.It is on this basis thatMarx developsthe laws of
money, prices, profits, accumulation,of reproduction,
of of of
and of crisis.Not onlythe struggleof workeragainstcapitalist,
but also the pittingof workeragainstworker,and of capitalist
appear as conditionedand limitedbythestruc-
againstcapitalist,
tureand operationsof the systemitself:the historicaldevelop-
mentof thesestruggles is therefore analyzedbyMarxagainstthe
backdrop of the historical developmentof these conditioning
and limiting relations, is, againstthebackdropof the work-
that
ing of the law of value.
In spiteof the extentto whichthe workingsof the law of
value are developedin the threevolumesof Capital,we knowof
course that many topics remainincomplete,while othersare
hardlytreatedat all. It was Marx's originalintention,for in-
stance,to extendthe analysisto be presentedin the threevol-
umes of Capitalto the treatment of the state,of foreigntrade,
and of the worldmarketand crisis- each to be dealtwithin a
separatevolume.1But thisneverhappened. Instead,even Vol-
umes II and III of Capitalhad to be assembledby Engelsafter
* Part II of this article will be
published in the Winter 1979-1980 issue.
1 R. Rosdolsky,The Makingof Marx's "Capital" (London, 1977), Chapter 2, p. 23.

281
282 SCIENCE AND SOCIETY

Marx's death,froma mass of papers varyingfromreasonably

polisheddraftsto mere notesabout pointsto be furtherdevel-
- on money
oped.2 To thisday,certainof Marx'smanuscripts
-
and on foreignexchangerates have never been published.3
It is the aim of thispaper to begin fillingout one of the
threemain areas outlinedabove: namely,the extensionof the
law of value to the questionof foreigntrade.
But beforewe beginthistask,itis firstnecessary to establish
-
thatit has notalreadybeen accomplished eitherbeforeMarx,
by authorssuch as David Ricardo,or afterMarx,by the many
Marxistswritingon the questionsof international trade, im-
perialism,unequal exchange,and so on. In whatfollows,there-
fore,we will firsttrace the mannerin whichRicardo'slabor
theoryof value givesriseto thefamousprincipleof comparative
costs,foritis on thisprinciplethatauthorsas diverseas Ricardo,
Ohlin, Samuelson,and Emmanuelbase theiranalysesof com-
moditytrade and the resultinginternational divisionof labor.
We will examine not only what specificmechanismsare sup-
posed to give rise to thiscuriouslaw, but also the mannerin
whichit becomesincorporatedintobothorthodoxand Marxist
theoriesof foreigntrade.Onlythenwillit be possibleto return
to the main task,and to develop the Marxianlaws of interna-
tionalexchangein contradiction to theirRicardiancounterparts.
Because of theextentof thisundertaking, thispaper willbe
publishedin two parts.Part I focuseson the derivationof the
law of comparativecosts,its subsequentadoptionby orthodox
theory,and its explicitor implicitpresencein modernMarxist
theoriesof foreigntrade. In Part II, Marx's critiqueof the
Ricardiantheoryof value is used to overturnthe principleof
comparativecosts,and Marx's own presentation of the law of
valueis extendedto foreigntrade.On thisbasiswe willbe able to
developthe phenomenaderivingfromthe flowsof commodity,
financial,and productivecapitalrespectively. Finally,we willbe
able to treatthe varioustransfers of value associatedwiththese
flows,and use these resultsto develop a critiqueof unequal
exchange.

2 K. Marx,Capital(New York,1967),VolumeIII, Prefaceby Engels,pp. Í-8.

M. Nicolaus,editor(New York,1973),Foreword,p. 12.
3 K. Marx,Grundrisse,
 FOREIGN TRADE 283

//. Ricardo's Derivationof theLaw of Comparative

Costs
Ricardo held that the principalproblem facingpolitical
economyin his day was the determination of the laws which
regulate the of
distribution the of
product (capitalist)society
amongthe threegreatclasses:thatis, the lawswhichdetermine
"thenaturalcourseof rent,profit,and wages."4
But verysoonin thecourseof hisworkRicardorealizedthat
his analysiscould not proceed withouta theoryof value. And
thistheoryof value,as he soon came to realize,requiredbotha
theoryof relativepriceand a theoryof money:
Beforemyreaderscan understand theproofI meanto offer,they
the of
mustunderstand theory currency and of price.... If I could
overcome theobstacleintheway giving clearinsight
of a intotheorigin
andlawofrelative value
orexchangeable I shouldhavegainedhalfthe
battle.5

/. The Theoryof Price

The firstproblemRicardosethimselfwas thedetermination
of the lawswhichregulaterelativeprice.Of coursehe was well
awarethatthe immediateregulatorsof marketpricesweresup-
plyand demand;butlikeAdamSmithbeforehimhe wasequally
wellawarethatoverthecourseoftimetheceaselessly fluctuating
interplayof supplyand demandwas itselfregulatedby a more
fundamental Thus, ifas a resultof
principle:equal profitability.
marketconditionsa particularsector'srate of profitrose above
theaveragerate,thentheflowofcapitalwouldtendto be biased
towardsthatsector,causingit to grow more rapidlythan de-
mand,and drivingdown its marketprice to a level consistent
withaverageprofitability. Conversely, the sectorwithlow pro-
would
fitability tend to grow less rapidlythandemand,causing
itspricesand profitabilityto rise.
The classicaleconomistswerethusable to demonstrate that
behindthe continuously varying of
constellation market prices
therelayanothersetof morefundamental prices,actingas cen-
tersof gravityfor marketpricesand embodyingmore or less
4 D. Ricardo, ThePnnciplesofPoliticalEconomyand Taxation,Vol. I of the CollectedWorks
and CorrespondenceofDavid Ricardo,P. Sraffa,editor (Cambridge, 1962), p. 5.
5 Ibid, pp. xiv-xv.
284 SCIENCE AND SOCIETY

equal ratesof profit.The name givento theseregulatingprices

in classicalpoliticaleconomywas "naturalprices,"what Marx
laterwas to call "pricesof production."
All thiswas wellknownbeforeRicardo'stime.Whathe him-
selfsoughtto do was to get behindpricesof productionthem-
selves,to discoverwhatin turnregulatedthem.In particular, it
was hisargumentthatchangesin theserelativepricesof produc-
tionwerebyand largea consequenceof changesin the relative
magnitudeof the totallabor requirements of the commodities
involved6- each totallabor requirement being definedas the
sum of the directlabor time required producea commodity,
to
plus the indirectlabor timesrequiredin the productionof its
variousmeans of production,plus the means of productionof
thesemeans of production,and so on. Having made the argu-
mentforthislaw of pricechanges,Ricardoproceedsto assume
in subsequentchaptersthat relativeprices of productionare
more or less equal to relativequantitiesof totallabor require-
ments.7Both the analysisof moneyand of foreigntrade are
conductedon thisbasis.
It is not possiblehere to tracethe logic behind Ricardo's
argument.8For our purposes,it is sufficient to note that in
Marxian terms we maysay that,subsequent Chapter1 of his
to
Ricardo'sanalysisis predicatedon theassumptionthat
Principles,
prices productionare more or less proportionalto (labor)
of
values.

2. The Theoryof Money

Havingarrivedat a law of relativeprice,Ricardothenpro-

ceeds to the causes of variationsin thelevelof moneyprices.
We willfollowRicardoin assumingthatgold is the money
commodity. Then the moneypriceof a commodity is itsrateof

6 Ibid,p. 36.
7 Ricardoarguesthatchanges in theratiosof pricesare, over a givenperiodof time,
roughlyproportionalto changesin the ratiosof the corresponding totallabor re-
quirements.Roughproportionality of theratiosof pricesto the ratioof the corre-
spondinglabor requirements is thus a sufficientbut not necessaryconditonfor
Ricardo'smainproposition.
8 For a fullerdevelopmentof thisissue,see AnwarShaikh,"On theLawsof Interna-
Essaysin theRevival of
Profitsand Property:
tional Exchange," forthcomingin Growth,
date 1979).
E. J. Nell,editor(Oxford,expectedpublication
PoliticalEconomy,
 FOREIGN TRADE 285

exchange withgold. But if commoditiesexchange more or less in

proportion to (labor) values, then the money price of any com-
modityis its labor value divided by the labor value of a unit, say
an ounce, of gold. This representsthe amount of gold money
required to purchase a unit of the commodity:the money price
of the commodityequals so many ounces of gold. Of course,
wheneverthere is a money commoditythere arise special names
for specificweightsof it. In England around Ricardo's time,for
instance,roughly 1/4ounce of gold was known as a "pound" (£).
A commodityexchanging for 1 ounce of gold would therefore
be said to have a money price of £4.
During any given year, the same gold coin may change
hands several times,being received by one person through the
sale of a commodityand then being paid over to someone else
when it is used to purchase some other commodity.In this way
the same gold coin can functionas medium of circulationmore
than once in any given year. Let us say thaton the average a coin
=
changes hands fivetimesa year; then its velocityof circulation
5.
Imagine now that the total labor-timerequired for all the
commodities produced in a given year is 40 million worker-
hours, and that the total labor-timerequired to produce £ 1 (lA
oz.) of gold is y%worker-hour.Then the money price of the
society'syearlyoutput will be 80 million.If the velocityof circu-
lation of £-coinsis indeed five,this means that only 16 million
gold coins, each weighing£1 (lA oz) willbe required as money in
that year.
Of course the laws discussed so far apply only to prices of
production. We know from the laws of market prices, however,
that if a commodity'ssupply exceeds its demand, then the mar-
ket price of the commoditywill fall - i.e., it will exchange for
less of other commodities.If thislaw is also applied to money it
leads straightawayto the propositionthat when the quantityof
gold coin exceeds the requirementsof circulation(the so-called
"demand" for coin), the "price" of gold will fall. Now, since gold
is money,it can not have a money price; however,since it can be
used to purchase any commodityon the market,it can be said to
have literallythousands of "commodityprices," these being the
quantitiesof the various commoditiesone can buy with£1 (lA oz)
286 SCIENCE AND SOCIETY
of gold. The classicalquantitytheoryof moneytherefore asserts
thatwhenthequantityof gold coinexceedstherequirements of
all
circulation, the "commodity of
prices" gold willfall;since this
meansthatgold willpurchaselessof each commodity, itis equiv-
alentto assertingthatall moneypriceswillrise.
The discussionso farhas been in termsof gold-money. But
Ricardorapidlygeneralizesthe argumentto coverall typesof
money:otherthingsbeing equal, an increasein the supplyof
moneywillraise all moneyprices,and a decreasewilllowerall
moneyprices.This theoryof money,as we shall see shortly,
playsa criticalrole in Ricardo'stheoryof foreigntrade.
3. The RicardianLaw of Comparative
Cost
We notedearlierthatRicardo'stheoryof valuecomprisesa
theoryof relativepricesand a theoryof money.In whatfollows
we shall see whyRicardo'stheoryof value necessarily givesrise
to his famouslawof comparative costs.In thisregarditis impor-
tantto recognizethatthecriticalelementin Ricardo'sderivation
of the lawsof foreigntradeturnsout to be his use of thequan-
whichprovidesthemecha-
titytheoryof money, for it is thistheory
nismnecessaryfor Ricardo'sresults.Neo-classicaltheory,as we
shall see in the next section,violentlyrejectsRicardo'slabor
theoryof price,but nonethelesscontinuesto embracevarious
theoriesof themoneypricelevelwhichare (as faras thisissueis
concerned)functionally similarto Ricardo's.Not surprisingly,
therefore,neo-classicaltheorytoo bases its analysisof foreign
tradeon the principleof comparativecosts.
Let us beginthe Ricardiananalysisof foreigntradebycon-
sideringtwocommodities, clothand wine,producedin England;
cloth requires 100 worker-hoursto produce, and wine 120
worker-hours. If,as in our previousexamples,£1 (14oz) of gold
required λΑworker-hour to produce,thenfromRicardo'slaw of
prices prices productionof clothand winewouldbe more
the of
or lessequal to theirrespectivelabor-timerelativeto thatof gold.
Clothwouldsellat about£200,and wineat about£240,domesti-
cally.
Considernow the same twocommoditiesin Portugal.The
unitof moneyin Portugalwe taketo be an escudo (e.), roughly
1/6of an ounce of gold; assumingthe same labor-time forgold
 FOREIGNTRADE 287
one escudo (1/6oz.) of gold wouldthenrequire
in all countries,
1/3worker-hours to produce. If thenin Portugalclothtook 90
worker-hours, wine 80 worker-hours,
and theirdomesticprices
of productionwouldbe roughly270 e. and 240 e. , respectively.
But notethatboth£'s and e.'s are merelydifferent national
money names for of If
quantities gold. England'spaymentto
foreigners exceeded its receiptsfromthem,i.e., if it ran a bal-
ance of paymentsdeficit,gold bullionwould eventuallyhave to
be used to make up the difference.9 Since both currencyunits
are actuallyquantitiesof gold, and the international means of
paymentis in factgold bullion,we can considerably simplifythe
all
expositionby expressing pricesdirectly in ounces of gold.
Giventhatan ounceof gold requirestwohoursof labor-time, we
have thefollowing RicardiantableauforEnglandand Portugal:

TABLE I

ENGLAND PORTUGAL
Cloth: 100 hrs -* 50 oz. gold 45 oz. gold -> 90 hrs iCloth
Wine: 120 hrs -> 60 oz. gold 40 oz. gold -> 80 hrs :Wine

Clearly,in thisinitialsituationPortugal'sgreaterefficiency
in productiontranslates intoa generalizedabsolute
directly advan-
tage in trade. If transportationcosts are not Por-
prohibitive,
tuguesecapitalists will export both commodities. England will
experiencea continuing balanceof tradedeficitwhichwillhave
to be made up by shippinggold to Portugal.
Accordingto Ricardo'slogicit is at thispointthatthequan-
titytheoryof moneybecomes crucial.10The outflowof gold
fromEnglandis a decreasein itsdomesticsupplyof money,so
9 In actual fact, the gold standard operated with exchange rates which could vary
within certain limits. These limits,called gold-points, determined whether it was
cheaper to change local currencyinto foreigncurrencyvia the exchange-rate,or buy
gold withthe local currencyand spend the gold abroad. The basic determinantof the
"gold-points"was the cost of transportinggold bullion fromone countryto another.
10 The example in Table 1 is used by Ricardo to argue for the benefitsof trade accord-
ing to comparativeadvantage. His derivationsof the mechanisms by whichthisspeciali-
zation is broughtabout are slightlydifferentfrommine, but the logic is identical. He
initiallysupposes England to have an absolute advantage in cloth and Portugal to
have an absolute advantage in wine, so thathere absolute advantage and comparative
288 SCIENCE AND SOCIETY

thataccordingto the quantitytheorythe gold pricesof all Eng-

lishcommodities willbeginto fall.Conversely, theinflowof gold
intoPortugalwillraise all pricesthere.As thishappens,Portu-
gal's competitive edge in international marketswillgraduallybe
eroded away,even thoughit willof coursehavejust as greatan
advantagein termsof efficiency as it did before.It is just that
thisgreaterefficiency will be increasingly offsetby the rise in
Portuguesepricesrelativeto thosein England.
Sooner or laterin thisprocessone of the twoEnglishcom-
moditieswillbecomejust competitive withits Portuguesecoun-
terpart.But whichone? Well, in termsof efficiency, England
always has an absolute disadvantage relativeto Portugalin both
commodities.But as all Englishpricesfall and all Portuguese
pricesrise,theEnglishcommodity withthesmallest disadvantage
willbe the firstto overtakeits Portugueserival.If we examine
the Ricardiantableau in Figure 1 above, we findthatEnglish
wine productionis only 66 2/3%as efficient as its Portuguese
rival (since Portuguesewine takes 80 hours and Englishwine
takes 120 hours),whereasEnglishcloth productionis 90% as
efficient as Portuguese.England'ssmallestdisadvantage, itsrela-
tiveadvantage, liesin cloth,and as Englishpricesdrop relative to
Portuguese,it is Englishclothwhichfirstbecomescompetitive.
By thesame token,it is clear thatifEnglandhas an equal disad-
vantagein both sectorsof productionthen both Englishcom-
moditieswould become competitive at exactlythe same point.
Though trade could stilltake place under thesecircumstances,
therewouldbe no fixedbasisforspecialization. Onlyif England
had different disadvantages in the two commodities, i.e., onlyif
it has a relativeadvantage in one, can Ricardiantrade take
place.11
advantageare thesame,and specialization accordingto eitherimpliesthesamepat-
terns.He thenallowsEnglandto catchup to Portugalin wineproduction, so thatit
nowcontinuesto exportclothbutceasesto importwine.Trade is thusone wayonly,
and goldflowsoutfromPortugaland intoEngland,raisingall pricesin thelatterand
loweringall pricesin the former(Ricardo,op. cit.pp. 139-140).The logicof this
mechanism justifieshis earlierexample(theone depictedin Table I), as wellas his
statement thattherelativepricesof internationally tradedcommodities are notregu-
lated in the same way as commodities exchangedwithina country(ibid,p. 133).
Insteadof following throughon the logicof his presentation, Ricardoat thispoint
switches to theimplications of hisanalysisforinternational in pricelevels
differences
(ibid.,p. 141).
11 In neo-classical presentations, the comparisonis betweenpnce ratiosof clothand
 FOREIGNTRADE 289
Once Englandcan competein cloth,two-way tradewillbe-
gin. This willimproveEngland's trade picture, it willproba-
but
the
blynoteliminate deficit;price level movements willtherefore
continueto takeplace,strengthening England'sinternational po-
sitionand weakeningPortugal's- untilfinallyat somepointtrade
willmoreor lessbalance,witheach countryexportingthe one
commodity in whichitnowhas a relativeadvantage.If forsome
reasonthe adjustmentprocessgoes too far,to the pointwhere
even EnglishwineundersellsPortuguese,thentheensuinggold
flowswould reversethe pricelevelmovementsuntilonce again
relativeadvantagereigned.
An importantimplicationof the processof adjustmentis
thatin the end each country'sinternational termsof trade (the
quantityof importsthatcan be bought with a unitof itsexports)
will necessarilybe betterthan its domestic.In England, for
example,the clothon the marketwillbe Englishcloth;but the
wineavailablewillgenerallybe importedfromPortugal.Those
whose unbounded patriotismwould require themto insiston
Englishwine will have to pay a higherprice for it than they
wouldforthe importedvariety.Thereforea unitof cloth,Eng-
land'sexportcommodity, willbe worthmoreunitsof Portuguese
wine than it willbe of domesticwine simplybecause domestic
winecostsmore.Similarly, in Portugal,itsexport,wine,is worth
moreunitsof Englishcloththanit is of Portugueseclothsimply
because the Englishclothis cheaper.
The proposition just put forward,on the termsof tradeof
each country,has oftenbeen used as the basis of a proofthat
each nation-as-a-whole gainsfromtrade.Thus itis said thatEng-
land can getmorewineforitscloththroughtradethanitcan get
domestically: trade is generallybeneficial.Though Ricardo is
carefulto derivethelawsof tradeon thebasisof itsprofitability
whenhe turnsto theanalysisof theeffects
to capitalists, of trade
he abandons the concept of classes and revertsto that of a
nation-as-a-whole. Now, it is undeniablethatthe conceptof a
nationis bothvalid and necessaryat some levelof analysis;na-
tionsdo existand theirinteraction is a real process.But to assert
thattradeis beneficialto thenation-as-a-whole is simplyto assert
that "what'sgood for General Motorsis good for the U.S."
winein each country,
ratherthanefficiency
of production.
But theconclusionis the
same.
290 SCIENCE AND SOCIETY

Trade is undertakenby capitalists because theycan make more

profitsthatway; it is they who always gain. Even if thisgain for
thecapitalists to
happens spill over to workers in eithercountry,
whichis certainly not necessaryfromtheabove analysis,one can
onlysaythatin thisinstancetradealso benefitsa particular setof
workers.It is not possible to reduce the fundamentally an-
tagonisticrelations of classes to the bland homogeneity a of
nation-as-a-whole. Christiansare not in a positionto cheer for
lionsso long as theyare bothbooked to playin the Coliseum.

4. ModernDerivationsof theLaw
It should be obvious fromthe precedingderivationhow
crucialthe"right"sortof monetary theoryis to thederivationof
thelaw of comparative costs.Anymonetarytheory which trans-
latestheinitialtradedeficitof thebackwardcountryintofalling
price levels (fallingrelativeto the price level in the advanced
country)willdo the trick.We need thereforeto say a bitabout
the moderntheoriesof the priceleveland theirrole in modern
derivationsof comparativecosts.
In general,modernversionsof the theoryof foreigntrade
leave intactthe basic principlesset out by Ricardo. But they
differfromRicardoon thetheoryof price,and to a lesserextent
on the formulation of the precisemechanisms bywhichspeciali-
zationaccordingto comparativecostsis broughtabout.
As faras the theoryof priceis concerned,neoclassicaleco-
nomicsreplacesRicardiantotallabor requirements as the reg-
ulatorof pricewiththe notionthatthe priceof a commodity is
regulatedby the commodities which the nation-as-a-wholemust
forego,at the margin,in orderto producean extraunitof the
commodity in question. Since this concept of cost-as-
opportunities-foregone has no meaningunlessall resourcesare
assumedto be fullyutilizedat all times,neoclassicaltheoryfinds
it necessary(and veryconvenient)to also assumefullutilization
of all resources.Thus,givensomeinitialendowment of resources
withina country,and assumingfullutilizationof thisinitialen-
dowment,relativepricesemergeas beingjointlydeterminedby
the structureof technology(as exemplifiedby the production
curveof a nation)and thestructure
possibilities of preference(as
exemplifiedby the commodity indifferencecurves).
 FOREIGN TRADE 291

The troublewiththisgeneral descriptionis thatvirtuallyany

outcome can be derived by appropriate combinationsof supply
and demand (production possibilitiesand consumption prefer-
ences). Like all near tautologies,it is consistentwith practically
everything,and can thereforeexplain practicallynothing. As a
result, the dominant explanation of the actual patterns of
foreign trade, the Heckscher-Ohlin-Samuelson model, is of
necessitya much more specific construction,with much more
determinateoutcomes.
Whereas Ricardo locates the patterns of international
specializationin the internationaldifferencesin relativecosts,the
Hecksher-Ohlin-Samuelsonformulationattemptsto go one step
furtherand tie these (refined) relativecosts to a single dominant
variable: the given national "endowments"of capital and labor.
In order to do this, the model assumes that consumers in two
differentregions of the world are essentiallyalike. Even more
astonishingly, it also assumes thata given commodityis produced
under identical production conditionsin both regions.12
The assumption concerning consumers eliminates dif-
ferencesin demand between two regions (say the developed cap-
italistworld and the Third World), as an explanation of relative
cost differences.But even more important,the assumption of
identical production facilitieseliminatesunderdevelopment itself-
and withit theproblemof absoluteadvantagesand disadvantages - as
an explanation and
ofrelativecostdifferences henceas an explanationof
thepatternsof trade.
The only thingthat remainsare the differences between
national"endowments" of capitaland labor. Here, it is argued
that regionswhichare relativelycapital-abundant (i.e., which
have a relativelyhigherendowmentof capitalto labor) willbe
able to produce capital-intensive commoditiesrelativelymore
cheaply than the labor-abundant regions.Conversely, the labor-
abundantregionwouldof coursehave comparative advan-
a cost
tagein theproductionof labor-intensive commodities. It follows
thereforethatthe capital-abundant region (the developedcapi-
talistworld)will,and forreasonsof efficiency and good of the
world-as-a-whole should,specializein capital-intensive
(manufac-
tured)products,exportingthemin returnforthelabor-intensive
Economics(Homewood, Illinois, 1973), Chapter 4.
12 C.P. Kindleberger,International
292 SCIENCE AND SOCIETY

(primary)productsof thelabor-abundant (underdevelopedcapi-

talist)region.In otherwords,acceptanceof,and adaptationto,
theexistingdifferences betweendevelopedand underdeveloped
is
capitalistregions efficient fromthe pointof viewof the world-
as-a-whole.Poor Ricardodared onlyto claimthatinternational
inequalityis best of all. It is no surprisethat so wondrousa
construct as thishas been readilyadaptedtojustifyand celebrate
othersortsof inequalitiestoo. GaryBecker,forinstance,views
marriageas a "trading"contractbetweenmenand women,to be
analyzed exactlyin terms of the Hecksher-Ohlin-Samuelson
model. The greaterthe generaldifferences betweenmen and
women(i.e. the greaterthe extent of institutionalized sexism),
thegreaterthegainsfromtrade,and thestrongerthebond that
holds the marriagetogether.13
As a rule,modernpresentations of the law of comparative
costsmake no referenceto the actualmechanisms by whichthe
law is to be broughtabout. The emphasisis almostentirelyon
the gainsfromtradethatwouldbe achievedif tradewereto be
based on comparativecosts;nonetheless, sincethesemodelsare
also intendedto be descriptive of actualtradepatterns, "theim-
plicitassumption is [made] that the of
adjustment moneywage
and price levelsor exchangeratesrequired to preserveinterna-
"14In this
tionalmonetary do
equilibrium actually take place. . . .
way the modernderivationsof comparativecostsrelyon what
are essentiallyvariantsof Ricardo'smechanism:in all cases,the
very nature of the desiredsolutionrequiresmonetaryvariables
(pricelevelsand/orexchangerates)to adjustin sucha wayas to
transformany existingabsoluteadvantageinto a comparative
one. In all versions,therefore, givenEngland'sabsolutelylower
efficiency and hence highercostsof production,
initially itsensu-
13 G. Becker, "A Theory of Marriage, Part I" Journalof PoliticalEconomy,Vol. 81, 4,
July-August, 1973; "A Theory of Marriage, Part II ,"JournalofPoliticalEconomy,Vol.
82, 2, March-April 1974. Sexism is proved to be both rational and efficient:Men and
women enter the marriage market with various "initial endowments" consistingof
home-capital and market-capital:men being in general relativelymore "endowed"
with market-capital,and women with home-capital,they specialize to their mutual
advantage in marketand home activitiesrespectively.The potentialof this fantastic
analysis is, I feel, not even approached by Becker's use of it. What about blacks and
whites?Surely there is much more work stillto be done.
14 H. Johnson, "International Trade: Theory," InternationalEncyclopediaof the Social
Sciences,David L. Sills, editor (New York, 1968), Volume 8, p. 84.
 FOREIGNTRADE 293

ing tradedeficitmustsomehowresultin a continuouslowering

of EnglishpriceswhilePortugal'strade surplusmustlead to a
continuousraisingof itsprices- untilat some pointeach coun-
tryhas a costadvantagein onlyone commodity.
The critiqueof comparativecostsconsequently requiresus
to contrastfour basic theoriesof the price level: the Hume
specie-flow versionof the QuantityTheory(Ricardo),the cash
balancesversionof the QuantityTheory,the Keynesiandeter-
minationof pricesthroughthelevelof moneywages,and Marx's
theoryof money.In orderto do this,we need a commonground
of some sort.
Fortunatelyfor us, most of the historyof international
trade,and hence most of its theory,has been dominatedby
preciousmetalsas the standardof both domesticand interna-
tionalmoney.15 Thus, in discussionsof the theoriesof interna-
tionaltradewe alwaysfinda commontheoretical ground- their
operationundertheso-calledgold standard.By contrasting var-
ious theorieson thisbasis,differences in thetheoriesthemselves
be
may separated from differencesin institutional arrangements.
And sinceneitherthe Ricardiannor the neoclassicalversionsof
thelaw of comparativecostsclaimto be dependenton any spe-
cificmonetary institutions,the gold standardis a validcommon
ground. So much so, in fact,thatthe neoclassicaltreatment of
the adjustmentmechanismunderthe gold standardis virtually
identicalto thatof Ricardo:
The adjustment mechanism underthegoldstandard . . . wasmoreor
lessautomaticinthesensethatcentral bankswereexpected toreactto
gold outflowsandinflows by more restrictive and lessrestrictive mone-
respectively,
tarypolicies, which would in turn react uponpriceand
wagelevels,loweringthem in thedeficit
countries and raising themin
thesurpluscountries.Thesepricechanges, in turn,wereexpectedto
shiftexpenditurefromsurplustodeficit countries, thusreducing and
eventually the . . .
eliminating disequilibrium. [T]hetheory is correctin

15 By mostaccountsthisperioddominatesthehistory of capitalism
up to at least1914,
and bysomeaccountsup to the 1960s.In anycase,theperiodunderconsideration is
as theultimate
one in whichpreciousmetalsfunction international
money;thisbyno
means excludesthe phenomenaassociatedwithtokenmoneyand creditmoney.
Though I do not developthe different formsof moneyhere,theanalysiscan be
extendedto deal withtokenand creditmoneybased on a commodity money(gold,
silver,etc.).
294 SCIENCE AND SOCIETY

its broad outlineeven if its practicehas been somewhatover-

simplified.16
In neoclassicaldiscussions,the gold standardis treatedas
being theoretically equivalentto a regime of fixed exchange
rates. Consequently,at the oppositetheoreticalextremefrom
fixedexchangesrates,we are told,liesthenotionof purelyflexi-
ble exchangeratesdeterminedsolelybytherelativesuppliesand
demandsof thenationalcurrencies.Here theclaimis made that
it is possibleforeach nationto have a fullyindependent monetary
system.11 In thiscase, the price levelsin each country are "insu-
lated"fromexternalinfluences, and all adjustments are brought
aboutthroughtheexchangerate.In a backwardcountrya trade
deficitimpliesa depreciationof the country'scurrency,which
makes importsrelativelymore expensiveto it and its exports
relatively cheaperabroad. Since thisprocessis assumedto have
no limits,eventuallythe flexibleexchangerate settlesat a level
whichmakescomparativeadvantagea reality.
We cannotconsiderthe meritsof thesevariousderivations
untilwe have examinedMarx'stheoryof money.But it is useful
to note even at thispointthatit is completelyfalseto treatthe
existenceof a gold standardas equivalentto some theoretical
notionof fixedexchangerates.In itsactualoperationthe gold
standardwas a systemof flexibleexchangerateswhose move-
mentswerebounded by limitsdeterminedby the costsof trans-
portinggold. This meantthatinsofaras the"normal"variations
of tradewereconcerned,thegoldstandardoperatedas ifitwere
a systemof purelyflexibleexchangerates.On the otherhand,
insofaras systematic imbalanceswere concerned,the exchange
ratesoon reached one of thetwolimitsand itbecamecheaperto
settledebtsbyshippinggold directly:in thismode,therefore, it
operatedlike a systemof fixedexchangerates.The orthodox
theoreticalnotionthat there exist two independentpolar ex-
tremesof fixedand flexibleexchangeratesthushas itsoriginin
one-sided(and hence false)abstractions of the real process.We
willreturnto thisimportantpointlateron.

Encyclopediaof theSocial Sciences,

16 R. A. Mundell, "Balance of Payments,"International
op.cit.pp. 8-9.
MonetaryRelations:Theory,Historyami Policy(New York,
17 L. B. Yeager, International
1966),p. 104.
 FOREIGN TRADE 295

and MarxistCritiques
5. Orthodox
The law of comparativecosts,whateveritsform,has always
been associatedwiththe advocacyof freetrade: Ricardo'sown
developmentof this principlewas in fact part of his polemic
againsttheCorn Laws (whichweredesignedto preventthe free
importof cheap cornintoEngland),and fromthattimeonward
Free Traders of all kindshave based theirown argumentson
thoseof Ricardo.It is not surprising, to findthatthe
therefore,
primary thrust of has
critics been to attacknotso muchthatpart
of thelaw whicharguesthatthepatternof tradewilldepend on
comparative costs,as the propositionthatfreetradeis efficient,
mutually beneficial,and good forthe world-as-a-whole.
We cannotdiscussthe orthodoxcriticsof the law in much
detail here, save for the followingremarks.In general,these
criticsfall into three categories.First,there are those (like
Graham,the Keynesians,etc.) who seek to modifyone or more
of the groundsof the law so as to providetheoretical counter-
examplesto it.18In spiteof theirapparentoppositionto thelaw,
these sortsof criticismsimplicitly acceptthelaw
(and oftenexplicitly)
valid on itsowngrounds.It is thereforenot at
as beingtheoretically
all surprisingthatthesecriticisms are usuallyviewednotas refu-
tationsof comparativecosts,but ratheras its furtherdevelop-
ment;typically, in neoclassicaltextbooks,the doctrineof com-
parative costsis presentedas thefundamental principleunderly-
ing international trade,withtheforegoingtypesof criticisms as
extensionsand concretizations of it.
Second,thereare empiricalstudieswhichappear to refute
the law, such as the famousstudiesby Leontiefand by Arrow-
Chenery-Minhas-Solow. Both of thesestudiescastseriousdoubt
on theempiricalrelevanceof theassumptions and predictions
of
the Hecksher-Ohlin-Samuelson model. But distressingas these
resultsare to theproponentsof thisparticularmodel,theyhave
littlebearingon the principleof comparativecosts,for (as we
have alreadynoted)thismodelbeginsbyassumingtheRicardian

18 The orthodox criticsare discussed in greaterdetail in my "On the Laws of Interna-

tional Exchange" (see footnote8). In addition,A. Emmanuel, in the introductionto
his book, Unequal Exchange:A Studyof theImperialism Trade (New York, 1972), pro-
vides a useful and illuminatingsurveyof orthodox critiquesof the law of comparative
costs.
296 SCIENCE AND SOCIETY

accordingto comparative
patternof specialization costsand then
attemptsto linkthispatternto the "factorendowments" of the
theempiricaland theoretical
nationsinvolved.At best,therefore,
paradoxes generatedby thesesortsof studiesmerelyseverthe
attemptedlinkbetweennationalfactorendowments and thepat-
tern of trade. Theyleave theRicardianlaw untouched.
Finallywe come to thosecriticswho attackthelaw as being
no longervalid because one or more of its premisesno longer
hold in today'sworld.Here we findthatthe empiricalcriticism
of thelaw,and particularly of theefficacyof freetrade,is based
on modern developmentssuch as the loss of wage and price
thedemiseof thegoldstandard,thedeathof competi-
flexibility,
tion, and systematicinterferenceby governments.19 For our
purposes,it is sufficient to note that this historicalschool of
orthodoxcriticism (which,as we shallsee shortly, has itsMarxist
counterparts) implicitlyacceptsthe law as valid where its prem-
-
ises primarily thoseinvolving competitive -
capitalism can be
takento hold. On itsown ground(whichin thiscase is takento
involvea particular epoch)thelawis acceptedas valid.
historical
In sum, we find that so far as orthodoxcriticism is con-
cerned (whetherit be theoretical,empiricalor historical),the
basicprinciplesof thedoctrineof comparative costsemergerela-
tivelyunscathed. We turn therefore to the Marxist critiques.
Given Marx's exhaustivetreatment of Ricardo'stheoryof
value,itwouldseemthatMarxistswouldhave longago extended
hisanalysisin one wayor anotherto deal withtheRicardianlaw
of comparativecosts.Curiouslyenough,thisis not so: instead,
the issue is seldom mentioned,20 and whereit is, Ricardo'sat-
tempt to determine the limits of international exchangeis ac-
knowledgedonlyimplicitly by accepting one of his centralcon-
clusions:whereasthe law of value regulatesexchangeswithina

19 M. Barrat-Brown, The Economicsof Impenalism(New York, 1974). In this book

Barrat-Brown surveys various arguments blaming "sectionalist monopoly and
obstructionistprinciples" (p. 32), "post-colonialnationalismand self-imposedautar-
chy" (p. 35), "trade union action," and the inequalityof "bargainingpower" between
developed and underdeveloped capitalist countries (p. 233), for the historical in-
applicabilityof free trade arguments.
20 Cf. E. Mandel, MarxistEconomicTheory,Vol I-II (New York, 1968), and P. Sweezy,The
Theoryof CapitalistDevelopment (New York, 1962).
 FOREIGNTRADE 297

competitive capitalisteconomy,it does notdo so betweensuch

economies.21
Whythisstriking silence?In part,it arisesfromthe paucity
ofreferences in Marxto thequestionof foreigntrade- due, no
doubt,to his expressedintentionto treatthisissuein a separate
volumesubsequentto Capital.But thissilencein Marx is only
partof the explanationforthe ambivalenceof Marxistson this
subject.Anotherequallyimportant partlies in thefactthatever
since the publicationof Lenin's Imperialism it has become a
Marxistcommonplaceto assertthatcapitalismhas enteredits
monopolystage.22Now, in the case of monopolyit is widely
accepted by Marxistsand non-Marxists alike that the laws of
price formation must be abandoned:23 "the mostseriousaspect
of monopolyfroman analyticpoint of view,is that the dis-
crepanciesbetweenmonopoly priceand value are notsubjectto
"24 Whatremainthereforeare the basic
any generalrules. . . .
social relationsof capitalistcommodity production,and it is to
thevariousmanifestations of thesethatthe theoryof monopoly
capitalturns.
Of course,once the laws of priceformationin generalare
thrownout,thenthelawsof international priceformation neces-
sarilyfollow. The focus shifts insteadto the domestic and inter-
nationalrivalriesof giantmonopolies,to theirpolitical interac-
tion withvariouscapitaliststates,and to the antagonismsand
conflictsbetweenthese statesthemselves - in otherwords,to
"imperialism" as an of
aspect monopoly capitalism.The law of
value,likecompetitive capitalismitself,fades intohistory.
It is beyondthe scope of the presentpaper to attempta
properconstruction of a Marxistconceptof concentration and
centralization (as opposed to monopoly) to confront the views
mentionedabove. It must be noted, however,that even an
acceptanceof the aforementioned viewsin no wayputs to rest
the ambivalence among Marxists with regard to Ricardo'slaw,
any more than it resolvesthe recurringconflictson the trans-
formation problem,the theoryof wages,etc.; instead,it merely

21 Sweezy, op. cit.,p. 289.

22 V. I. Lenin, Imperialism:The HighestStage of Capitalism(New York, 1939).
23 Sweezy, op. cit.,pp. 270-271.
24 Itnd,p. 54.
298 SCIENCE AND SOCIETY

sidestepsthem.Like theirorthodoxcounterparts, theseMarxist

criticismsleave the law of comparativecostsstillstanding- in
the case of competitive at least.
capitalism,
Lastly,in recentyearsthiswholeissue has been once again
broughtsharplyinto focusby ArghiriEmmanuel'schallenging
new work,entitledUnequalExchange:A StudyoftheImperialism
of
Trade.,25In thisbook Emmanuelsetsout to overthrow the per-
niciousdoctrineofcomparative costsbyattacking whathe argues
is one of itsfundamental assumptions - the immobility of capi-
tal between differentcountriesand between regions of the
world.
Emmanuel begins by noting that Ricardo's analysis of
foreigntrade is predicatedon the assumptionthatboth labor
and capitalare immobilebetweenregionsof the world.These
are the conditionsof "pure" foreigntrade,so to speak,sincein
thiscase onlycommodities(and not capitaland/orlabor) flow
betweennations.
On these,itsoriginalgrounds,EmmanuelacceptsRicardo's
law.26But, he argues,the worldis different nowadaysin that
even thoughlabor remains,by and large,immobileacross re-
gionsof theworld,capitaltodayis fairlymobile.27 In themodern
world,therefore, whilethe relativeimmobility of laborgivesrise
to large and persistentdifferences in wages among the devel-
oped and underdevelopedregionsof the capitalist-dominated
world, the relativemobilityof capitaltendsactuallyto equalize
profitrates across these regions.It is Emmanuel'scontention,
therefore, thatwhereasthe law of comparativecostscontinues to
determine patternsof tradeand specialization(and
the international
divisionof labor), the modern mobilityof
hencethe international
new and unforeseenconse-
capitalgivesriseto a set of entirely
quencesarisingfromthislaw.Specifically, sincewagestendto be
much lowerin the underdevelopedregions,in the absence of
capital mobilitybetweenregionsprofitrates will tend to be
higherin the underdevelopedregionsthan theywillbe in the
developedregions.If profitratesare nowequalizedthroughthe
international
mobility of capital,the profitratein the underde-

25 Emmanuel,op.cit.
26 Ibid,pp. xxxiii-xxxiv.
27 Ibid,p. xxxiv.
 FOREIGNTRADE 299

veloped regionswillbe loweredand thatin the developedre-

gionsraised.It followsfromthisthatprofits(surplusvalue) are
transferred fromthe formerto the latter.Since profitsare an
important source of growth,the transferof profitsout of the
underdevelopedregionsis at thesame timea reductionin their
rateof growthrelativeto whatitcould have been in theabsence
of theintrusionof foreigncapitals.This effect,whichcompares
potentialprofitsin the absence of capital mobilitywithactual
profitsresultingfromthe existingmobilityof capital,is quite
different fromthequestionof whetheror nottheactualprofits
madebyforeigncapitalsin theunderdevelopedregionsare then
reinvested thereor repatriated. To the extentthattheseprofits
are repatriated,thiswouldof courseadd insultto injury.But the
primaryproblemremainsthe transferitself,whichEmmanuel
callsunequal exchange(in the narrowsense.)
We will not examine Emmanuel'sanalysisin any greater
to note two
detailat thispoint.For our purposes,it is sufficient
things about this debate. that
First, Emmanuel quite explicitly
acceptsRicardo'slaw on itsoriginalgrounds,and evenretainsit
as the basis for the internationaldivisionof labor in his sub-
sequent derivation of unequal exchange.In thissense,theRicar-
dian law remainsthebaseofEmmanuel'snewsuperstructure.
Secondly,
thoughmanyof theMarxistcriticisms of theproblematic under-
lyingEmmanuel'sargumentsare quitetelling,hiscriticsmanage
to neatlyavoid twocentralquestionsposed by his work.Firstof
all, at the levelof abstractionthatMarx maintainsin his three
volumesof Capital,is it reallytrue(as manyMarxistsappear to
believe)thatRicardo'slaw of comparativecostsis the interna-
tionalformof Marx'slaw of value? Second, is it true (as Em-
manuelargues)thatwhenthe exportof capitalbecomessignifi-
cant,the Marxianlaw of international value is transformedinto
Emmanuel'slaw of unequal exchange?
Posed in this way,these questionshave exactlythe same
theoretical statusas thatof anyotherlaw developedby Marxin
Capital. Marx laysbare thestructureof capitalismon thebasisof
its"ideal" form,thatof freecompetition, preciselybecause it is
thisformthatgivesthefreestexpressionto theimmanent lawsof
the system.It is on this basis that Marx derivesexploitation,
crises,concentrationand centralization, and a host of other
phenomenacharacteristic of capitalism.Is it not curious,then,
300 SCIENCE AND SOCIETY

thatwhereasfreeand equal exchangewithina capitalistnation

givesriseto all of thesephenomena,itappearsnotto do so when
it takesplace betweencapitalistnations?How is it thatwhereas
Marx derivesthe unevennessof developmentwithin a capitalist
nationon the basisof freecompetition, Marxistsgenerallyhave
to resortto monopolyto explaintheunevennessof development
betweencapitalistnations?These are thequestionswe willturnto
next.

Summaryand Conclusionsto Part I

Perhaps the most enduringpropositionin the analysisof
internationaltrade has been the so-calledlaw of comparative
costs,which,as we have seen, has generallybeen acceptedby
orthodoxeconomists and Marxistsalikeas beingvalidon itsown
grounds.In all of its variousdisguises,this so-calledlaw has
assertedthatwhenit comesto international tradebetweencapi-
talistnations,inherentinequalitiesare negated.No nation,how-
everhumble,need everfeartrade,forlikebourgeoisjustice,itis
blindto differences in station.Or so the storygoes.
But it turnsout that aside fromthe multitudeof proofs
aboutthe so-calledoptimality accordingto com-
of specialization
parativecosts, the real heartof the matter lies in the assertion
that the basic thrustof international trade is actuallyto bring
about such specialization.And the automaticmechanismwhich
supposedlyaccomplishesthis,we pointedout,was theoperation
of the variousorthodoxtheoriesof the pricelevel.
We thenwenton to examinethedevelopmentof theprinci-
ple comparativecostsin itsoriginal(and basicallyunaltered)
of
form:that of David Ricardo. Only when this was done could
modernderivations of thelaw be presentedand analyzed.It was
important to showthattheso-calledlaw was a logicaloutcomeof
the conjunctionof Ricardo'stheoryof value withhis theoryof
money;thisenabledus to establishthatthelocusof a critiqueof
the law lay in itsantecedents- not in the law itself.
In PartII of thispaper we willfocuson Marx.In hisanalysis
of Ricardo, Marx providesus withthe necessarycritiquesof
Ricardo'stheoriesof value and money.Moreover,in his own
workhe treatsthesesubjectsunderthe developmentof the law
of value. We willalso presentMarx's own treatment of value,
 FOREIGN TRADE 301

price and money. This will have a double consequence: his cri-
tique of the antecedentsof the so-called law of comparativecosts
willprovide us witha basis fora critiqueof the law itself;and his
own development of the law of value will provide us with the
basis for an adequate treatmentof the laws of internationalex-
change. When this is done, the law of comparative costs will be
seen to be impossible preciselyon its own grounds. Rather than
finding, as Ricardo did, that Portugaland England willeach end
up specializing in one of the two branches of production - in
spite of Portugal'sabsolute superiorityin the productionof both
- we will find that Portugal will necessarilyexport both. Eng-
land, the underdeveloped capitalistcountryin this example, will
end up witha persistenttrade deficitbalanced by gold outflows
and/or short-termborrowing. Such trade must eventually col-
lapse, other thingsbeing equal.
When thisresultis expressed in termsof its real content,we
can say: free trade willensure thatthe underdeveloped capitalist
regions will eitherhave to confine theirimport needs to the low
levels supportable by their exports, or else they will be
chronicallyin deficitand perpetuallyin debt. It is absoluteadvan-
tage, not comparative,which rules trade.
This representsan extension of Marx's law of value (which
of course subsumes a theoryof money) to the realm of the inter-
national exchange of commodities.But as Marx pointsout, these
commodities are capitalistically produced commodities, the
commodity-forms of various national capitals. As such, the inter-
change of commodity-capitalsamong nations carries with it the
seeds of other formsof internationalcapital, flowssuch as those
of financialcapital (foreign borrowing/lending), and of produc-
tive capital (direct investment).
The question of direct investmentis particularlyimportant,
since its analysis plays so importanta role in various theories of
trade. Orthodox theory,for instance,finds direct investmentto
be a means of closing the gap between rich and poor capitalists
countries,on the grounds that it transferssavings from the de-
veloped countriesto the underdeveloped ones. Marxisttheories,
on the other hand, have traditionally derived the major
phenomena of internationaluneven development from the ex-
port of productive capital; Emmanuel, for example, makes the
302 SCIENCE AND SOCIETY

exportof capitalpivotalin his theoryof unevendevelopment,

sinceit is throughthe mobilityof productivecapitalthatprofit
ratesare equalized.
But mostof theseanalysesof directinvestment are based on
an acceptance of Ricardo'slaw of comparativecosts.Thislaw is
are built. Since the central
the base on whichtheirsuperstructures
argumentof this paper is to overthrowthis law, and sub-
sequentlyto locatemanyof the.phenomenaof unevendevelop-
menton a worldscale - previously attributed to the exportof
-
capital in the workingof commodity trade alone, it willbe-
come imperative at thatpointto extendthe analysisto incorpo-
ratethe effectsof directinvestment.
Consequently, thislatterquestionwillbe takenup. It willbe
shown that althoughforeigncapitalcan providean offsetto
chronicbalance of tradedeficits(in partbecause of the capital
inflowand in partthroughthe modernization and expansionof
theexportsectors),itcan do so onlyat the expenseofdestroying
nativeindustries,blockingthe developmentof the indigenous
forces of production,underminingthe termsof trade, and
generating corresponding capitaloutflows(suchas surplusvalue
in the formof repatriatedprofits).Insteadof negatinginterna-
tionalinequality,therefore,foreigninvestment willbe seen to
tighten the grip of the strong over the weak - not merely
throughmonopolyor statepower,but through"free"competi-
tionitself.
Lastly,thequestionof transfers of surplusvaluewillbe tack-
led. Here particularattentionwillpaid to the different sortsof
transferof value whichinternational competition bringsabout,
to theirnet directionsand effects. It willbe shown thatneither
theirdirectionnortheiroveralleffects can be simplyestablished.
Indeed, thesetransfers willemergeas secondaryphenomenaof
underdevelopment itself,not as its primarycause. This knowl-
edge willthenenableus to briefly criticizethenotionof unequal
exchange,as developedby its mainproponents.
New Schoolfor Social Research,New York