S&S Quarterly, Inc.

Guilford Press

Foreign Trade and the Law of Value: Part II

Author(s): Anwar Shaikh
Reviewed work(s):
Source: Science & Society, Vol. 44, No. 1 (Spring, 1980), pp. 27-57
Published by: Guilford Press
Stable URL: http://www.jstor.org/stable/40402218 .
Accessed: 03/02/2012 01:10

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

S&S Quarterly, Inc. and Guilford Press are collaborating with JSTOR to digitize, preserve and extend access to
Science & Society.

http://www.jstor.org
FOREIGNTRADEANDTHE LAWOF VALUE:
PARTII*
ANWAR SHAIKH

PART I OF THIS PAPER we traced the derivationof the

Ricardian law of comparativecosts, and examined its influ-
ence on both orthodox and Marxisttheoriesof international
trade. In this,the second part of the paper, we derive the corre-
sponding Marxian laws of foreigntrade, and show that they in
turn give rise to many phenomena which are often mistakenly
attributedto internationalmonopoly power and/or to unequal
exchange.

I. MARX'S DEVELOPMENT OF THE LAWS OF CAPITALIST

EXCHANGE
1. Value,Price and Profit
In Volumes I and II of Capital, Marx develops the inner
connectionsbetween value and money-price(form of value) on
the assumptionthatthe centerof gravityof marketmoney-prices
are prices directlyproportionalto values (direct prices). On this
basis he is able to show thatthe value of labor-powerdetermines
and regulates money wages, and that surplus value forms the
basis of money profit.
In Volume III, the categoryof profitis furtherconcretizedby
allowingforthe equalization of profitrates across industries,and
for the formationof a general rate of profit.This in turn neces-
* Part I
appeared in the Fall 1979 issue, pp. 281-302. I wish to thankRobertHeilbroner,
Edward Nell, Adolph Lowe, John Weeks and Michael Zweig for their support and en-
couragementconcerningthis project. In addition, the late ArthurFelberbaum provided
valuable commentsand criticisms,as well as enthusiasticsupport. Lastly,I wish to thank
JavierIguiniz forhelpfuldiscussionsconcerningthe sectionon the transfersof value. His
own Ph.D. dissertation(New School of Social Research, 1980) makes a valuable contribu-
tion to this debate.

27
28 SCIENCE AND SOCIETY
sitatesa transformationin theformof value from direct money
prices to prices of production.These latterprices now appear as
the real regulatingprices, the real center of gravityof market
prices. As Marx develops it, a commodity'sprice of production
willbe lower or higherthan its directprice accordingto whether
the industry'sorganic composition is higher or lower than the
average organic composition for the societyas a whole.
It is at thispoint thatwe arriveat the famous transformation
problem, about which so much has been writtenand so little
understood. Withinthe confinesof thispaper it is not possible to
develop the transformationissue in any detail. This is a task I
treatat length elsewhere.1For our purposes here, three aspects
are of significance.First, the procedure by which Marx trans-
forms direct prices can also be viewed as the initialstep in an
iterativeprocedure forcalculatingthe actual pricesof production
themselves.2This helps establisha fruitfulmathematicalconnec-
tion between the prices of productionresultingfromMarx's pro-
cedure and furtherdeveloped prices of production. Second, it
can be shown (in the case of threedepartmentsof production,at
least) that for each sector both the price of productionas Marx
develops it and the furtherdeveloped price of production de-
viate in the same directionfromthe sector'sdirectprice.3Lastly,
it can be establishedthatthe transformedmoneyrate of profitis
directlyrelated to the value rate of profit.Though the two need
not be equal in magnitude,it can be said withprecisionthat the
former is a trans-formof the latter,subject to essentiallythe
same determination.4
For most analyses, knowledge of the above connections is
generally sufficient.In this paper, therefore,I have used only
1 A. Shaikh, "Marx's Theory of Value and the 'TransformationProblem,'"in TheSubtle
Anatomyof Capitalism,Jesse Schwartz, editor (Santa Monica, California, 1977), pp.
10&-139.
2 Ibid., pp. 130-133.
3 F. Seton, "The 'TransformationProblem,'"ReviewofEconomicStudies,25, June 1957,
pp. 149-160.
4 See M. Morishima,Marx's Economics(Cambridge, 1973), Ch. 5-6, and A. Shaikh,
Theoriesof Value and Theoriesof Distribution, Columbia UniversityPh.D Dissertation,
1973. In both of these it is established thatthere is a monotonieincreasingrelation-
ship between the money rate of profitr and the Marxian rate of surplus-value slv, for
given conditionsof production. Of course, the Marxian value rate of profits/(c+v) is
also a monotonieincreasingfunctionof slv, forgiven productionconditions.Thus the
money rate of profitis a monotonie increasingfunctionof the value rate.
 FOREIGNTRADE 29
directpricesand the pricesof productionderivedby Marx,on
theimplicit
understanding of theaforementionedconnectionbe-
tweenthe latterand theirfurtherdeveloped form.

2. The TheoryofMoney
In any period,if the distributionof sociallaboris such that
the commoditiesproduced correspondto the various social
needs,supplywillequal demand,and the money-prices of com-
moditieswillequal their"regulating" prices - direct pricesifwe
assumeexchangein proportiontovalues,pricesof productionat
a higherlevel of analysis.In eithercase, it is the amountsof
labor-time whichdeterminetheseregulatingprices.
If,on theotherhand,thedistribution of laboris notappro-
priate to varioussocial needs, then the market pricesof com-
moditieswilldeviatefromtheirregulatingprices,and a change
willtakeplace in the distribution of sociallabor so as to reduce
the discrepancy betweenmarketand regulatingprices.For the
purposesof thisanalysis,therefore, we mayleave out of consid-
erationthe constantly fluctuating market-prices and focus di-
rectlyon regulatingprices.
In any givenyear,the sum of pricesof all thecommodities
producedmustequal the numberof coins in circulationtimes
the velocityof circulation.This, as Marx pointsout,is simplya
tautology.In orderto makeit something more,we mustembedit
in a theoreticalstructure.
Let us beginby assumingthatthe regulatingpricesare di-
rectprices.Then thepriceof anycommodity is itsvalue relative
to thatof gold, so thatthe sum of the pricesof all the com-
moditiesproducedin a givenyearis givenby theirtotalvalue
relativeto thevalueof gold. Let TP standforthesumof prices,
TW for the sum of values,and Wgfor the value of a unit(an
ounce) of gold; we thencan write

TP=^L
wg
In thisequationthe sum of (regulating)pricesis the direct
expressionof thesumofvaluesofcommodities. If thevelocityof
circulation
is k, thenthe amountof gold G (in theformof one-
ounce coins)whichis requiredas a mediumof circulation is
30 SCIENCE AND SOCIETY

TP 1 TW
k~~k ~wT
The causation in this is clear: the sum of the values of the
commodities produced in a given year determinesthe sum of
their money prices, and this in conjunctionwith the velocityof
circulationdeterminesthe number of (one-ounce) gold coins re-
quired for the circulationof the commodities.5
Although the preceding relationswere derived on the basis
of direct prices,theyare not the least bit altered when we move
on to prices of production,for the regulatingprices of produc-
tion that Marx derives have the same sum of prices as do direct
prices. This means that as far as the sum of the prices of all
commoditésis concerned, the determinationis the same whether
we assume direct prices or prices of production: the sum of
prices equals the sum of values divided by the value of an ounce
of gold. As a result,the quantityof gold required is the same in
either case.
What happens, then, if there exist more gold coins than the
required number? Well, the quantityG is the number of gold
coins which circulate because they facilitatethe circulation of
commodities.Therefore any quantityof coin over and above this
amount will be redundant in circulation:it will at firsttake the
formof idle coin, excess coin.6
But an excess supply of gold is a very differentthingfrom
an excess supplyof any other commodity.All othercommodities,
in order to fulfilltheir function,must be sold, turned into gold
through the alchemyof exchange; but gold itselfdoes not have
to be, in factcannot be, sold. It is money,7the perfectand dura-
ble form of wealth which all other commoditiesseek to obtain.
From the earliest stages of commodityproduction, therefore,
gold circulatingin the formof coin has existed side by side with

5 K. Marx,Capital,Vol. I (New York,1967),p. 123.

6 K. Marx, A Contribution
to the Critiqueof PoliticalEconomy,with an introductionby
MauriceDobb (New York,1972),Ch. 2, Section3a.
7 Of course,goldbarsmayappeartobe soldforan equal weightofgoldin theformof
coins;butthisis onlya changeof formfrombulliontocoin.It is nota salesincethere
is no priceinvovled:an ounceof goldis an ounceof goldregardless
ofitsshape.The
sameconclusion appliesto theso-calledsaleofgoldforpapermoneybackedbygold.
In thiscase thepaperis a token
ofa quantity ofgoldequal to thatwhichitbuys.Marx
discussestheillusionsto whichtokenmoneygivesrise(Marx,A Contribution . . .).
 FOREIGNTRADE 31

non-circulating gold in the formof reservecoin,in the formof

hoards,and in the formof luxuryarticles.
The verynatureof commodityproduction,the unceasing
fluctuationsof marketpricesand quantities,requiresthatevery
commodity owner have on hand a reserveof moneyto accom-
modateday-to-day variations.Consequently,the firstmanifesta-
tionofa persistent excessofcoinovertheneed ofcirculation will
be the build-upof thesereservesabove the requisitelevels;but
then this superfluousgold, being necessaryneitherfor im-
mediatecirculationnor for its anticipatedvariations,will be
withdrawnaltogetherfromthe vicinityof the sphere of ex-
change.It willeitherenterintohoardsor willbe transformed
intoarticlesof luxury:
We have seen how, along with the continual fluctuationsin the extent
and rapidityof the circulationof commoditiesand in their prices, the
quantityof moneycurrentunceasinglyebbs and flows.This mass must,
therefore,be capable of expansion and contraction.At one time money
mustbe attractedin order to act as circulatingcoin, at another,circulat-
ing coin mustbe repelled in order to act again as more or less"stagnant
money. In order that the mass of money, actually current,may con-
stantlysaturate the absorbing power of the circulation,it is necessary
that the quantityof gold and silver in a countrybe greater than the
quantityrequired to function as coin. This condition is fulfilledby
money takingthe formof hoards.8

In countrieswhere commodityproductionis still primitive,

hoardstaketheformof privateaccumulations of gold scattered
throughout the country. But as commodityproduction,and
hence the bankingsystem,developsand expands,hoards be-
comeconcentrated in banks.9Underthesecircumstances, exces-
of gold moneyrelativeto theneedsof circula-
ses or deficiencies
tion manifestthemselvesas increasesor decreasesof bank re-
serves.10
Hoards in the formof bank reserves,however,are very
different fromprivatehoards: to the bank,an excessof bank
reservesover the legallyrequiredminimumis a supplyof idle
8 Marx, Capital, Vol. I, p. 134.
9 Marx, A Contribution . . ., pp. 136-137.
10 It is importantto note thatin Marx's analysis,hoarding arises out ofstructural
reasons
specificto commodityproductionand/orcapitalistcommodityproduction.In Keynes-
ian analysis hoarding is ultimatelybased on psychological"propensities."
32 SCIENCE AND SOCIETY

bank-capital,money-capitalwhichcould be earning profitforthe

bank but is instead lyingfallow.An increase in bank reservesis
thereforegenerally accompanied by a decrease in the rate of
interestas the banks striveto convertexcess reservesinto func-
tioning capital. Conversely,a drop in bank reserves below the
legal minimum tends to lead to a rise in the rate of interest.
Rather than raising the price level, the immediate effectof an
excess of gold-money is to lower the rate of interest:"if this
export [of capital] is made in the formof precious metals,it will
exert a direct influence upon the money-marketand with it
upon the interestrate. . . ."n
But now it may be asked: does not the fact that the bank
puts this extra money into circulationvia a loweringof the rate
of interestalso imply that effectivedemand is therebyraised?
And if so, won't this in turn implythat as a consequence of this
-
higher effectivedemand, prices will eventuallyrise so that in
the end the QuantityTheory is rightafterall? Marx's answer is
unequivocal: No.
We begin by noting that an increased supply of gold can
indeed lead to an increase in effectivedemand, eitherbecause it
is respentby its originalowners,or indirectlybecause it expands
bank reserves and hence the supply of loanable money-capital,
which tends to drive down interestrates, and may in turn in-
crease capitalist borrowing for investment.12However, even
though this increase in effectivedemand may temporarilyin-
crease prices of some commodities,and hence raise profitsin
some sectors,it must eventuallylead to an expansion of produc-
tion to meet the new demand. And as production expands,
prices will fall until (other thingsbeing equal) theyregain their
original levels. In that case the sum of prices of all commodities
willhave increased,not because the level of prices has increased,
but because the mass of commodities produced has itself in-
creased. Thus, insofar as a pure increase in the supply of gold
does generate an increase in effectivedemand (i.e., insofaras it
11 Marx, Capital, Vol. Ill, p. 577.
12 There is no automaticlink in Marx's analysisbetweena fallin the rate of interestand
an expansion in the level of investment.Investmentdepends ultimatelyon the possi-
of invest-
bilityof making profits;a lower rate of interestraises the net profitability
ments,other thingsbeing equal. But thisdoes not by itselfimplyan automaticexpan-
sion of investment;nor does it in any case implyany significantresponse even when
other factorsdo not intervene.
 FOREIGNTRADE 33
does notsimplyexpandbankreservesor go intotheproduction
of luxuryarticles),it will also generatean increasedneed for
circulating gold coin.
It is important to noteat thispointthatto Marx,the notion
ofa capitalism thattendsto be moreor lessat "fullemployment"
is a vulgarfantasy.Firstof all, Marx pointsout thatit is an
inherenttendencyof capitalismto createand maintaina relative
surpluspopulationof workers- thereservearmyof theunem-
ployed.13Second, even witha given patternof fixed capital
(plantand equipment),expansionof productioncan easilybe
undertakenby extendingand/orintensifying the working-time
in a givenworkingday.14Last,it is an intrinsic requirement of
capitalistcommodity production, whichis regulatedonlyby the
constantfluctuationsof the circulationprocess,to maintain
stocksof variouscommodities so thatthe exigenciesof circula-
tionmaybe met without disrupting thecontinuity oftheproduc-
tion process.It is preciselybecause of these different sortsof
reservesthatthecontinuity of theproductionprocessis possible
alongsideconstantly varyinglevelsof productionand sale.15
It is extremely important tograspthisaspectofcirculating andfixated
capitalas specific characteristic
forms of capitalgenerally, sincea great
manyphenomena of the bourgeoiseconomy- the periodof the
economic cycle;. . . theeffectofnewdemand;eventheeffect ofnew
goldand silver-producing countrieson generalproduction - would
otherwise be incomprehensible. It is futileto speakof thestimulus
givenbyAustralian goldora newly discovered market ... ifitwerenot
in thenatureof capitalto be nevercompletely occupied.... At the
sametime,notethesenseless contradictionsintowhichtheeconomists
stray - evenRicardo- whentheypresuppose thatcapitalis always
fully occupied.. . .16
Having located Marx's criticismof Ricardo's theoryof
money,we can nowturnto itsimplications forgold flowsgener-
atedbychangesin thebalanceof international trade.In thecase
of a tradesurplus,forinstance,therewillbe a netinflowof gold
intothecountryand a consequentincreasein thecountry's sup-
13 Marx, Capital,Vol. I, Ch. 25.
14 Marx, Capital,Vol. II, p. 258.
15 Marx, Grundrisse,Foreword by Martin Nicolaus (Middlesex, England, 1973), pp.
582-586.
16 Ibid., p. 623.
34 SCIENCE AND SOCIETY

ply of gold. Insofar as this leads to an increase in effectivede-

mand, production will expand, and withit the needs of circula-
tion. Part of the increased gold supply will thereforego to meet
the expanded requirementsof circulation; part will pile up in
bank reserves; and part will be absorbed in the expanded pro-
duction of luxury articles made of gold. In addition, once we
take internationaltrade into account, a part of the surplus gold
may be re-exported in the form of foreign loans in search of
interest rates, or as foreign investmentin search of surplus-
value. These last two possibilities,as we shall see shortly,become
importantin a Marxian analysisof internationalexchange.
In any case, Marx emphaticallyrejects the notion that a
"pure" increase in the supply of gold will in general lead to
an increase in prices:
It is indeedan old humbugthatchangesin theexisting quantityofgold
in a particularcountrymustraiseor lowercommodity priceswithinthis
countryby increasingor decreasingthe quantity of the medium of
circulation.If gold is exported,then, according to the Currency
Theory,commodity- pricesmustrisein thecountryimporting thisgold,
and decreasein thecountryexporting in
it. ... But, fact, a decreasein
thequantityof goldlowerstheinterest rate;and ifnot forthe factthat
the fluctuations in the interestrate enterinto the determination of
cost-prices,or in the determinationof demand and supply,
commodity-prices wouldbe whollyunaffected by them.17
It should be noted at thispointthat Marx's theoryof money
implies not only a rejectionof the Hume specie-flowmechanism
on which Ricardo's results were based, but also rejectionof the
various modern versions (mentioned in Part I, Section 4) which
have replaced it.
Let us begin witha modern versionof the QuantityTheory,
based on the Cash Balance approach. It will be recalled that the
classical QuantityTheory of Hume and Ricardo argued that an
outflowof gold froma countrywould lead to a fallin the money
supply and hence in the price level. In the modern Cash Balance
version,on the other hand, it is argued that the decrease in the
money supply implies a decrease in the cash balances of indi-
viduals and firms;in order to "not let theircash balances shrink
too far," people in the deficitcountrycurtail theirconsumption
17 Marx, Capital, Vol. Ill, Ch. XXXIV, p. 551.
 FOREIGN TRADE 35
and investmentspending, and thisdrop in aggregate demand in
turn leads to lower prices and wages.18The opposite movement
takes place in the surplus country,and eventuallyan absolute
advantage gives way to a comparativeone.
An alternatepath to this same result is to tie the price level
to the level of money wages. In this version, since the competi-
tion of cheap cloth and wine fromabroad means a reduction in
domesticwine and clothproductionin the backwardcountry,the
resultingtrade deficitwill be associated witha rise in unemploy-
ment. Money wages in the backward countrywill consequently
fall,and withthem money prices; in the advanced country,the
trade surplus is associated withexpanded employment,a rise in
moneywages, and hence a rise in money prices. Once again, this
leads to the eventual rule of comparativeadvantage.19It should
be noted, incidentally,that even if money wages were relatively
stickydownwards,the above resultwould be said to hold since all
thatit requires is a movementin one of the two price levels so as
to arrive at those relativeprices which would ensure the rule of
comparativeadvantage.
We see, therefore,that the Cash Balance approach relies on
a fall in effectivedemand in the backward countryto lead to a
fall in money prices. But this connection between effectivede-
mand and the permanent level of price is preciselywhat Marx
denies. Similarly,since in Marx the price levels of commodities
are determinedby theirvalue relativeto thatof gold, the money
wage cannot permanentlyinfluencethe price level: the Keynes-
ian price theorythereforewill not work either.
All discussions so far have been in terms of the gold
standard,in whichthe "ultimate"basis of internationalcurrency
is a money commodity(which we call gold for convenience). In
most theoreticaldiscussionsthe gold standard is treatedas being
equivalent to a regime oí fixed exchange rates. Modern deriva-
tionsof comparativeadvantage thereforealso claim to hold true
for the case of fixed exchange rates.
That brings us back once again to the possibilityof purely
18 L. B. Yeager, International MonetaryRelations:Theory,History,and Policy(New York,
1966), p. 64.
19 A. Amin,Accumulation on a WorldScale: A CritiqueoftheTheoriesofUnderdevelopment,
2
volumes (New York, 1976), p. 47. It should be noted that Mandel is criticalof Amin
for accepting this vulgar theory(E. Mandel, Late Capitalism[London, 1975], p. 352,
footnote23).
36 SCIENCE AND SOCIETY
flexibleexchange rates as a mechanismto bringabout specializa-
tionaccordingto comparativecosts.As noted in Part I, Section 4,
the actual gold standard operated with a flexibleexchange rate
bounded by limits(gold-points)based on the costs of transport-
ing gold. This meant thatin its normal variationsit was a system
of flexibleexchange rates,whereas in its "limited"mode it oper-
ated as a fixed exchange rate system.
Out of this long experience orthodox theory falsely
abstracted the concepts of fixed and flexibleexchange rates as
two polar regimes. Purely flexibleexchange rates are presented
as a mechanismwherebyin theorya world capitalistsystemcan
be made up of fully"independent" national currencies.20As a
theoreticalpossibilitythis idea has always had an uneasy exist-
ence: the historyof currency "floats" stronglysuggests only a
and the historyof the internationalmoney
limited flexibility,21
systemis verymuch a historyof increasingmonetaryintegration,
not separation. In a sense, the notion of a purely flexibleex-
change rate determined solely by supply and demand consid-
erations is one more manifestationof the general neoclassical
method in which all prices are determined only by supply and
demand. In opposition to this, Marx's method emphasizes the
intrinsiclimitsto these apparent variations:in the case of prices,
these limitsarise fromlabor-times;in the case of exchange rates,
they stem from the existence of the money commodity(as in
gold-points).

II. THE LAW OF VALUE AND FOREIGN TRADE

We have seen that Marx's analysisof the exchange of com-
moditieswithina nation differsfromRicardo's. In what follows
we shall see that these same differencesnecessarilyimply an
equally distinctMarxian analysisof internationalexchange.

20 Yeager, op. cit.,p. 104.

21 Ibid., pp. 176-180.
 FOREIGN TRADE 37

1. Comparative
CostsReexamined

Table 1

England Portugal
Cloth 100 hrs-> 50 oz gold 45 oz gold <- 90 hrs C/o¿A
fc 120 hrs-> 60 oz gold 40 oz gold <- 80 hrs Wine

We begin once again withthe familiarRicardiantableau.

Portugalis absolutely moreefficient in bothbranchesof produc-
tion,and giventhevalueof goldas twoworker-hours per ounce,
thisall-roundgreaterefficiency translates into
directly an abso-
lutecostadvantage.22 Portuguesecapitalistswilltherefore export
bothclothand wine,and Englandwillhave to counterbalance its
ensuing trade deficit to
by shippinggold Portugal.
Accordingto Ricardo,thegoldoutflowfromEnglandwould
lowerall pricesthere,sinceitwouldlowerthedomesticsupplyof
money;conversely, thegold inflowintoPortugalwouldraisethe
prices of all Portuguesecommodities. As we have seen,thispro-
cessimpliesthatsooneror laterEnglishclothwouldundersellits
Portuguesecounterpart, so thatin theend two-way tradewould
alwaysreign.No nationneed feartrade,forit benefitsall.
But the mechanismwhichleads us to thisharmoniouscon-
clusionrestssquarelyupon theoperationof theclassicalquantity
theoryof money.And thiswe knowto be false.Let us therefore
beginagain.
Because of theirabsoluteadvantage,Portuguesecapitalists
in bothbranchesare able to underselltheirEnglishcompetition.
Portugueseclothand wineinvadeEnglishmarkets, and English
gold beginsto flowback to Portugal.In England,therefore, the
of
supply gold decreases,while in Portugal it increases.
It is at thispointthatMarx'stheoryof moneybecomescrit-
ical. In contrastto Ricardo,Marx expresslydeniesany linkbe-
tween"pure" changesin the supplyof gold and the level of
prices.
22 Absolute advantage may be defined as the abilityto produce a commodityat a lower
cost-price,given the same unit prices of material inputs and of labor-power. It is
thereforethe same as being more efficient.
38 SCIENCE AND SOCIETY

Instead, according to Marx's analysis,the primaryeffectof

an outflowof gold from England will be to diminishthe supply
of loanable money capital. On the other hand, as English cloth
and wine production succumbs to foreign competition,the de-
mand for money capital will also decrease. Nonetheless, when
these sectors have reached their minimal size (there will always
be Englishmenwho willneverbuy fromforeigners),the continu-
ing drain of gold will tend to raise the rate of interest;insofaras
this curtails investment,production of other commoditieswill
decline. In England, therefore,the drain of bullion will lead to
lower bank reserves,curtailed production,and a higher rate of
interest.
In Portugal,the effectsare just the opposite. As gold flows
into Portugal,part of it willbe absorbed by the expanded circula-
tion requirements of cloth and wine production; part will be
absorbed in the form of luxury articles; and the rest will be
absorbed in the formof expanded bank reserves.This last effect
will increase the supply of loanable money-capital,loweringin-
terestrates and tendingto expand productionin general. Thus,
in Portugal the inflowof gold will raise bank reserves,expand
production,and lower the interestrate.
What we find,therefore,is thataccording to Marx's analysis
England's absolute disadvantage will be manifestedin a chronic
trade deficit,balancedby a persistentoutflow of gold. On the
other hand, Portugal'sgreaterefficiencyin productionwill man-
ifest itselfin a chronic trade surplus, balanced by a persistent
accumulation of gold.
Obviously such a situationcannot continue indefinitely.23 If
we stickto commodityflowsalone, then as Englishbank reserves
decline, so too willthe credibilityof the English £; eventually,the
£ must collapse, and with it the level of trade between England
and Portugal.
The end need not come in such a straightforward manner,
however. We noted earlier that as English reserves shrink,the
rate of interestin England willrise; conversely,as money-capital
piles up in Portugal,the rate of interestwill fall. At some point,
therefore,it willbe to the advantage of Portuguese capitaliststo
lend their money-capital abroad, in England rather than at
23 We exclude the case where England is also a producer of gold, since thatis obviously
a special circumstance.
 FOREIGNTRADE 39
home.Whenthishappens,short-term financialcapitalwillflow
fromPortugalto England.24England'srate of interestwould
thenreverseitselfand beginto fall,whilePortugal'swouldrise,
untilat some levelof short-term capitalflowsthe twowouldbe
equal.
It may seem thatat thispointthe situationwould be bal-
anced; Englandrunninga chronictradedeficitwhichit covers
by means of short-term international borrowing,and Portugal
runninga tradesurpluswhichenablesitscapitalists to engagein
international lending. But of course this is not quite correct:
capitalistloans are made in order to get profit(in the formof
interest).Thus Englandwouldhave to eventuallypay back not
onlythe originalloan, but also theintereston it. The neteffect
mustbe an outflow of gold fromEngland,albeitat a laterdate.
All otherthingsbeingequal, thepipermustbe paid: in theend,
beset by chronictrade deficitsand mountingdebts,England
musteventuallysuccumbto the consequencesof its backward-
nessand restrict importsto a levelconsistent withitscapacityto
export. Of course, in the case of Ricardo's extremeexample,
Englandhas no capacityto exportsinceby assumptionit is less
efficientin bothof thetwobranchesof production.Butwhenwe
considerthe wholerange of productspossiblein twodifferent
regionsof thecapitalist world,it thenbecomesevidentthateven
an underdevelopedcapitalistregion(UCR), in spiteof itsgeneral
backwardness, maynonethelessproducecertaincommodities in
whichit has an absoluteadvantageovercorresponding produc-
tionin a developedcapitalistregion(DCR).
Sincewe are stillconsidering directprices,theonlypossible
exports of the underdevelopedregionwillconformpreciselyto
thesetypes:thosecommodities it can produceat a lowervalue
(higherefficiency) and/or those commodities peculiarto it only.
On thewhole,thesetypesof commodities willreflectsome spe-
cificlocal advantagesgreatenoughto overcometheUCR's gen-
erallylowerlevelof efficiency: a good climate,an abundanceof
particular natural a
resources, propitiouslocation,and so on.
Lowerwages,however,willnotmatterhere,sincein thecase of
24 Under the gold standard, in the event of a drain of gold, the central bank of a
countrywould frequentlymake money scarce preciselyin order to raise the interest
rate and attractshort-termforeign capital (Marx, Capital, Vol. Ill, Ch. XXXV, p.
575).
40 SCIENCE AND SOCIETY
directpricesthe levelof wagesaffectsprofitsbut has no effect
on prices.Underthesecircumstances, then,theunderdeveloped
regionwillbe able to eke out a fewexports;althoughof course
itsoveralltradewillin generalstillbe in deficit,and itsposition
willstillbe thatof a debtorregion.Trade willservenotto elimi-
nate inequality, but to perpetuateit.
This resultis notsubstantially modifiedbytheconsideration
of pricesof production.Since withina givenregiontheaverage
priceof productionis equal to theaveragedirectprice,theover-
all advantage of the DCR remains unchanged. What may
change,however,are the tradingpositionsof individualsectors.
Withineach region,sectorswithhighorganiccompositions will
have pricesof productionabove theirdirectprices,and sectors
withlow compositions, pricesof productionbelow theirdirect
prices;but thisdispersioneffectholds true in bothregions,to
differing degrees,so thatit is quitepossiblethatin eitherregion
somepreviously marginalsectorsmayenterinternational compe-
titionwhileothersdrop out.25
Up to now,we have implicitly assumedthatthe moreeffi-
cientproducersin the worldmarket(the ones withan absolute
costadvantage)willdriveout all others.But,as we notedearlier,
lessefficientcapitalscan continueto existin a particular market.
They can do so eitherbecausetheyplayonlya marginalrolein
the world market(such as supplyingonly a portionof the
domesticmarketof a particularcountryor region,and/orfilling
in the fluctuationsin theworldmarketand henceactingas part
of the"reservearmy"of capitals),or because theyare necessary
to supply that part of the world demand whichcannot be
suppliedbythemoreefficient capitals.In eithercase,as longas
they enter into the same market as the more efficient capitals,
theirindividualvalueswillenterintothe socialvalue governing
price and productionin that market.But in eithercase, they
continueto exist preciselyas backwardproducers,under the
continualthreatof extinction.
Above all, it mustbe keptin mindthattheseresultsrepre-
sent the automatictendenciesof free and unhampered trade

25 It should be noted that we are speaking here of a theoreticaldifferencefrom the

previous stage of analysis,not of an actual movementfromdirect prices to pricesof
in this
production. The same comment applies to all the successive concretizations
paper.
 FOREIGNTRADE 41

amongcapitalistnationsat different levelsof development.It is

not monopolyor conspiracyupon which unevendevelopment
rests,but freecompetition itself:freetradeis as mucha mecha-
nism for the concentration and centralization of international
capital as free exchange within a capitalistnation is forthecon-
centration and centralization of nationalcapital. We willreturn
to thispointafterwe considerthe effectsof wage differences
and of foreigninvestment.
Incidentally, it is worthremarking thattradebetweencapi-
talistnationswithmoreor lessthesamelevelof development will
have a characteristically different pattern.Suppose we consider
theexamplelyingat theheartof theHecksher-Ohlin-Samuelson
model, in which two capitalist countries possess similar
technologiesand similarlevelsof productivity, so thatneither
nationality an
possesses overwhelming advantagein efficiency.
In thiscase, factorssuch as climate,location,availability of re-
sources,experience,inventions, and above all the competitive
struggleamong capitalists, becomedecisivein determining the
pattern of absoluteadvantage(wage differences willbe treated in
thenextsection).Justas withina nationequallymatchedcapitals
mayproducesimilarbut differentiated use-values(such as cars,
etc.), so too betweenequally matchednationssimilarbut dif-
ferentiated use-valuesmaybe tradedin bothdirections. In gen-
eral,we would expect a much more balanced pattern of trade in
thiscase, witha large varietyof goods being producedin both
countries,and with the advantagein particularcommodities
shifting back and forthin the short-run. This pictureof trade
withina regionis quite different fromthe structural imbalance
of tradebetweenthe developedand underdevelopedregions.

2. The Effectsof theFlows ofProductiveCapital

In the precedingsectionswe have dealt withinternational
flowsof commodities and of money-capital.Whatremainto be
introducedare the determinants of the international
flowsof
productivecapital(directinvestment).26
26 It is importantto keep in mind the distinctionsbetween the flow of commodity-
capital,money-capital,and productive-capital, because theyhave differentdetermina-
tions and can have different(net) directions.The commonlyused term "export of
capital" is quite misleading, since it has been used variously to mean export of
productive-capital;of both productiveand financialcapital; of productiveand finan-
42 SCIENCE AND SOCIETY
Let us recall the resultsof commercialcapital (i.e., commod-
ity) flows alone: on the average, the less developed structureof
productionof the UCR translatesinto higherinternationalprices
for the vast bulk of its products. In general, the UCR will man-
age to eke out exports only in those sectors where local advan-
tages such as climate,availabilityof resources,etc. are so great as
to offsettheir generallylower efficiency,or where local capitals
manage to surviveas inefficientproducers in the world market,
in spite of theirbackwardness.27
However, even the flow of commodity-capitalalone neces-
sarilycarries with it the possibilityof modernization: the capi-
talistswithinthe UCR may (and do) importadvanced methodsof
production and thus switchover to the superior technologyof
the DCR. But there are many factorswhich militateagainst this:
the vastly greater cost and scale of advanced techniques, the
complex interdependence required among differenttechniques
forany one to be viable,and the greatersocializationrequired of
the work-force.The greatestobstacle is the presence of the ad-
vanced capitalsof the DCR themselves,whose crushingsuperior-
itycan be brought into play as soon as a profitableopportunity
arises. For these reasons, when trade is free and open, modern-
ization fromthe inside is usually overwhelmedby another more
powerful inherent tendency: modernization from the outside,
through directinvestment.28
cial capital minusprofits,interestand royaltiesrepatriated; and finally,of all of the
preceding minus value transferreddue to unequal exchange and/ordeclining terms
of trade. It is hardly surprising,therefore,that Marxists disagree about the size,
direction, impact and determinationof the so-called "export of capital." See, for
instance,Al Szymanski,"MarxistTheory and InternationalCapital Flows,"Reviewof
Radical PoliticalEconomics6, 3, Fall 1974, pp. 20-40; A. Emmanuel, "White Settler
Colonialism and the Myth of InvestmentImperialism,"New LeftReview(73), May-
June 1972, pp. 35-57; S. Amin, op. cit.,pp. 116-117; and E. Mandel, op. cit.,Ch. 11.
27 The UCR work-forceis often less conditioned to capitalist production than corre-
sponding workersin the DCR, so that other thingsbeing equal, even withthe same
technologyin both regions the productivityof UCR workerswould be lower. But in
practiceother thingsare never equal. The UCR work-forceis generallysubject to a
longer and more intenseworkingday, whichoften more than offsetsits lower direct
productivity.Thus, at this level of analysis,it is the differencein technologyand/or
natural resources,etc. which is decisive in determiningthe interregionaldifferences
in efficiency.
28 This by no means implies that it is impossiblefor a particularunderdeveloped capi-
talist country to modernize from the inside, any more than it is impossible for a
particular small capitalistto make the leap into the big-time.I am only concerned
here to analyze the overwhelmingtendenciesof free trade and competitionamong
capitalistnations.
 FOREIGNTRADE 43

Preciselythose factorswhichwork againstmodernization

fromtheinsidetendto workin favorof modernization through
foreign investment: from
capitalists the DCR have much larger
capitalsavailableforinvestment, are familiarwithmoderntech-
niques,and haveaccessto theworldmarketand to all theneces-
saryskilledworkers.On the otherhand, preciselythosefactors
whichmakemodernization fromtheinsidepotentially profitable
also favormodernization fromtheoutside.As we shallsee, the
low levelof wagesin the UCR playsan important role.
During the analysisof commodity trade,wage differences
did not appear to be an important factor.In the case of direct
prices,price is determinedimmediately by value; wages affect
onlythemassand rateof profit.In thecase of pricesof produc-
tion,the wage rateaffectsthe averagerateof profitand there-
forecan affectthe extentto whichindividualpricesof produc-
tiondeviatefromdirectprices;but the averagepriceis stilldi-
rectlyconnectedto value. Up to thispoint,it has been sufficient
to focuson differences in productiveefficiency as the mostim-
portant manifestations of uneven development, even thoughdif-
ferencesin wage ratesbetweenDCR and UCR also are symp-
tomaticof the disparitybetweentheirlevels of development.
Once we admit the possibility of international movementsof
productivecapital,however,wage disparitiesbetweencapitalist
regionsbecomean important factorin theirown right.
Considerthecase of an individualcapitalin theDCR. If we
ignore transportationcosts, then the same price rules
everywhere. Thus it willtake moreor less the same amountof
gold to build and supplya giventypeof plantanywherein the
world.Otherthingsbeingequal, as faras thelocationof a plant
is concernedthesole difference betweencountrieswilltherefore
arise fromthe differing costsof labor-power;thatis, fromthe
combinedeffects of thedifferences in directproductivity, in the
of
lengthand intensity the working-day, in
and wage rates.
In UnequalExchange, Arghiri Emmanuel pointsout thatal-
though the direct productivityof labor is generallylowerin the
UCR, thewagerateis lowerstill:whereasthedirectproductivity
"oftheaverageworkerin theunderdeveloped areasis 50 to 60%
of thatof theaverageworkerin theindustrialized areas . . . the
averagewage in the developed countries is about 30 timesthe
44 SCIENCE AND SOCIETY

averagewage in the backwardcountries."29 This meansthatal-

a
though given number of workers in a giventypeof plantin the
UCR will produce roughlyone-halfthe outputthatcould be
providedat home, each workercosts the developedcountry's
capitalistsonly1/30of whatworkerscostat home;theneteffect
is thattheaveragewagebillof a plantlocatedin theUCR would
be 1/15of whatitwouldbe at home:cheap laborattracts foreign
investment.
It mustbe emphasizedat thispointthatcheap laboris not
the only source of attractionfor foreigninvestment. Other
thingsbeingequal, cheap raw materials,a good climate,and a
good location(iftransportation costsare takenintoaccount)are
also important in makingindividualsectorsof production attrac-
tiveto foreigncapital. But these factors are specificto certain
branchesonly;cheap wage-labor, on theotherhand,is a general
social characteristicof underdevelopedcapitalistcountries,one
whoseimplications extendto all areas of production, eventhose
yetto be created.
One immediateconsequenceof consideringdirectinvest-
mentis thatthe exportindustriesof the UCR emergeas the
primetargetsof foreigncapital.As we have alreadyseen,when
we treatflowsof commercialcapital,the internationally viable
sectorsof the UCR are thosewhoseproductshave no foreign
counterparts, so thattheyfaceno competition fromimports;or
thosewhichdo faceforeigncompetition butcan overcomeitdue
to local advantagessuch as plentifulraw materials,etc.,which
enable them to offsettheirgenerallyinferiortechnologyand
lowerlaborproductivity; or thosewhichcontinueto existas inef-
ficientcapitalsbecause the advancedcapitalscannotmeetall of
the existingworlddemand.Such sectors,if theyexistat all, be-
come the exportsectorsof the UCR. Once the possibility of
foreign investment is taken into account, these export sectors
becomeleadingcandidatesforforeigntakeoverand moderniza-
tionfromtheoutside.Even ifforeigncapitalists had to shipover
workersfrom their own country,their superiortechnology
wouldstillenablethemto takeadvantageof thecheaprawmate-
rials,etc.,to makeexceptionalprofits. In addition,sincelaborin
of Trade (New York, 1972),
29 A. Emmanuel, UnequalExchange:A StudyoftheImperialism
refersheretoproductivity
p. 48. Directproductivity setsofworkers
ofdifferent using
thesame technology.
 FOREIGNTRADE 45
theUCR is availableat a lowernetcosttheexportsectorsappear
even moreattractive to foreigninvestors.
The sectorsconfinedsolelyto domesticproductionare not
exemptfromthisprocess,however.Insofaras thereexistwithin
thisgroup certainindustriesin whichthe superiortechnology
broughtin by foreigncapitaland the existinglowernet costof
domesticlabor power combineto lower the potentialcosts of
production(cost-prices) for the advanced foreigncapitals,and
providingthe domesticmarkets(and potentialinternational
markets)for these potentially cheaper commoditiesare suffi-
cientlylarge, these industriestoo will be prey to the foreign
invasion.It is notnecessary, incidentally,thatpre-existingprofit
ratesin theUCR be generallyhigherthanthosein theDCR. The
loweredcost-prices made posssibleby the moreadvancedtech-
niques of the foreigncapitalcan enable it to locatein the UCR
eventhoughtheprofitrateson theexisting(inefficient) methods
of productionare generallylowerthere than theyare in the
DCR.
Fromthepointof viewof localcapitaltheeffects of foreign
investment willgenerallybe disastrous.Withtheinfluxof more
efficientforeigncapital,thedomesticcapitalsin theaffectedin-
dustrieswilleitherbe drivenintomarginalrolesor forcedinto
stillunaffected areas or intonewindustriescreatedin response
to the needs of the foreign-dominated sectors.
We have up to now confinedourselvesto analyzingthe ef-
fectsof directinvestment on industriesalreadyexistingin the
UCR. Sinceonlya fewindustries survivetherigorsof commod-
itytrade, the questionthat arisesis: willdirectinvestment help
offsetthe devastationof competition fromforeignimports,or
willit make mattersworse?
From the pointof view of local capital,the answerseems
unambiguous:worse! Strugglingto exploit their workersin
peace, theyfindthemselvesbesetby foreigndevils:firsttheir
industriesare ruinedbycheap imports, and thenthosethatsur-
viveare takenoverby foreigncapital!It is no wonderthatpro-
tectionism becomestheirreligion.
The invasionand takeoverof existingindustries in theUCR
does not, however,exhaustthe possibilities inherentin direct
investment. It mustbe rememberedthat all capitalscompete
againsteach other.This meansthatwhencapitalfromthe DCR
46 SCIENCE AND SOCIETY
takesthe formof foreigninvestment it competesnot onlywith
capitalfromtheUCR but also withcapitalstillat home.Whenit
can takeadvantageof the cheap laborin the UCR, new capital
homeindus-
to existing
fromthe DCR can set itselfup in opposition
triesby opening plants abroad and exportingthe (cheaper)
products.
From a nationalistpointof view,the effectsof foreignin-
vestment on the UCR have a doublecontent.On theone hand,
we have seen thatin theabsenceof foreigninvestment theexist-
ing underdevelopment of the UCR will itself
manifest in the
formof structural tradedeficitsand foreigndebts- or else in
theformof an importlevelrestricted to thelevelsupportable by
the exportsector.Fromthispointof view,insofaras the socio-
politicaltransformationsnecessaryfor modernization fromthe
insideare not forthcoming, foreign investment appears as the
agencyof modernization fromthe outside.Thishelpscreatethe
typicaldual character large-scalemodern industries
of UCR exports:
in whichforeigncapitalpredominates, side by side withback-
wardindustriesin whichlocal capitalpredominates. It thusex-
pands and strengthens the exportsector,and takenby itself,it
tends to improvethe balance of trade. In addition,directin-
vestmentfunctionsas an importantbalance of paymentsitem
whichcan eitheroffsetan existingtradedeficit,or permitone to
be incurred.
On the otherhand, preciselybecause of the overwhelming
superiorityof foreigncapital,directinvestment acceleratesthe
devastationof local (capitalistand non-capitalist)production
whichfree trade itselfbringsabout,whilethe introduction of
moderntechniquesrequiresincreasedimportsof machinery and
materialsfromtheDCR. The veryexistenceof concentrated and
centralizedcapitalswhichcan entera marketas soonas a profit-
able opportunity presentsitself,constitutesa powerful blocking
mechanism againstthe development of the indigenous forcesof
production.30The destructionof nativeindustry displaces more
workersthancan be newlyemployedin the relatively highor-
30 The same blockingeffect,of course, also occurs withina developed capitalistcountry.
It is in the verynature of concentrationand centralizationthat the big become ever
more powerfulrelativeto the small. This does not at all implythatthe big capitals ca.
or do suspend competitionamong themselves,or that theycan thus escape the laws
which this competitionin turn imposes upon them.
 FOREIGNTRADE 47

ganiccomposition modernization sectors,whilethehighermass

of profitof thesenew industriesneed not appear as reinvest-
mentin theUCR (or reinvestment anywhereat all, sincepartof
theseprofitsand theirassociatedrevenuescan fuelluxurycon-
sumption).In addition,whenittakesoverand modernizesexist-
ingexportsectors,foreigninvestment also lowersexportsprices
and hencebringsabouta deterioration in thecommodity terms
of tradeof the UCR. This in turntendsto worsenthe trade
balanceand thusoffsetsto a greateror lesserextentthe initial
positiveeffectof directinvestment on thebalanceof payments.
Finally,to theextentto whichprofitsare repatriated, partof the
surplus value generated in the UCR is directly transferred
abroad, whichonce again appears as a negativeitem on the
balanceof payments.
We see, therefore, thatforeigninvestment can have a com-
plex series of as
effects, far as the UCR as a whole is concerned.
Moreover, it can be detrimental not only to local industry in the
UCR but also to certaincapitals in the DCR. It is for thisreason
thatthe cryforprotectionism can reboundon bothsides of the
developmentgap. Where commercial capital dominates,or
whereforeigninvestment is stillno threatto homecapital,then
onlythe plaintivewail of UCR capitalistsis heard in favorof
protectionism. But when foreigninvestmentdevelops to the
point competingwithhome productionitself,thenprotection
of
quicklybecomesthe realityof the day. Only the free traders
remain,tirelesslysellingthe patentmedicineof comparative
costs.

of Value
3. Transfers
One of the conclusionsof the previoussectionwas that
foreigninvestment helps createthe typically
dualisticstructure
of UCR exports.We now need to examinewhat thisdual struc-
turein turnimpliesforinterregionaltransfersof value.31To do
this,we beginbynotingthatthereare twomajortypesof trans-
fersto be considered.32
3 1 The transfersof value we speak of here are those broughtabout by the deviationsof
prices fromdirectprices. As such theyare quite distinctfromrepatriationof profits,
interest,etc., whichare transfersof the various componentsofprofitin general(i.e., of
profitof enterprise,interest,rents,royalties,dividends, etc.).
32 There is in facta thirdtypeof transferof value, frompettycommodityproductionto
48 SCIENCE AND SOCIETY
The mostfamiliartypeof transfer is thatbroughtaboutby
the formationof a generalrate of profit.Industrieswithhigh
organiccompositions (C/V's)willhavepricesof productionabove
directprices,whilethosewithlowC/V'swillhave pricesof pro-
ductionbelow directprices.Thus the formationof prices of
productiontransfers surplusvaluefromindustries withlowC/V's
to thosewithhighones.
These transfers of value between industriesarise fromthe
deviationsof pricesof productionfromdirectprices- i.e.,from
pricescorresponding to socialvalue. But the veryformation of
an industry'ssocial value impliestransfersof value within an
industry, sincethe social value is itselfthe averageof the indi-
vidualvaluesof different producerswithinthe industry.
Withinan industry,differentproducersin generalwork
underdifferent conditionsof production.This is in partdue to
differences in fertilityof lands and mines,and in part to dif-
ferencesin methodsof production.In the lattercase, whilethe
inferiorproducerstend to be progressively marginalized,the
constantintroduction of new methodsof productiontends to
make the previouslysuperiorcapitalsinto relativelyinferior
ones, so thatat any one momentseveraldifferent methodsal-
ways coexist.
No matterwhattheirconditionsof production, all the pro-
ducersin an industry compete in thesame market. In themarket
each commodityrepresentsthe averagelabor-time, and hence
the average conditions of production.33 Commodities produced
under betterthanaverageconditionswillthenhave individual
valuesbelowthe social (average)value,sinceit takesless labor-
timethan the averageto producethem;whilethoseproduced
underworsethanaverageconditionswillhave individualvalues
higherthanthe socialvalue.
It followsthatifthecommodity weresold at a pricepropor-
tionalto itssocialvalue (i.e., at itsdirectprice),thenmoreeffi-
cientcapitals,havinglow individualvalues,wouldrealizemore
valuethantheyproduce,and viceversaforlessefficient capitals.
In other words,directprice itselfimpliesthatwithina given

capitalist production. While this is importantfor any concrete analysis,it remains

outside of the scope of the present discussion.
33 Marx, Capital, Vol. Ill, p. 180.
 FOREIGNTRADE 49

industry,surplusvalue is transferredfromless efficient to more

efficientproducers.34
Of course,commodities sellon averageat pricesof produc-
tion,not directprices.But the net value transfers involvedare
nonethelessthe resultantsof two distincttypesof transfers:
intra-industrytransfers,whichdepend on differences between
individualand averageproducerswithinthesameindustry; and
inter-industry which
transfers, depend on differences in the or-
ganiccompositions of the averageproducers in different indus-
tries.Foranyindividual
setofcapitals,definedforinstancebytheir
or degreeof development,
location,nationality, thenettransferof
surplusvalue will be thesum of thetwo effects,35
The table sum-
marizesthedirectionof thetransfersinvolved,withthefirstsign
in each box referring
to the efficiency
effect,and the secondto
thetransformation effect.

Table 2

of Value
Transfers
C C
High- Low-

HighEfficiency ^~^"^t^ ^*^^^L

LowEfficiency ^^^^t. ^^""^^
Let us now returnto the typically dual structure of the ex-
portsectorof theUCR: a fewhighefficiency producersin high
organiccomposition industries(oil,copper, etc.),and manylow
efficiency in low
producers relatively organiccomposition indus-
tries(e.g.,agriculturalproduction).36We refer here to
only capi-
tals producingwithinthe UCR and existingwithinthe world
market, eitheras exportersor as domesticcompetitors of foreign
imports.
FromTable 2 it is clear thatthe formerset of capitalswill
34 Efficiencyhere is defined in the same way as absolute advantage in footnote22.
35 These joint effectsformthe basis of Marx's analysisof intra-industrial in
differentials
The theoryof ground rentthenappears as a special case (Marx, Capital,
profitability.
Vol. Ill, Ch. X and Part VI).
36 Amin, op. cit., pp. 57-58. Note that at this point we are not concerned with the
ownership of these export industries- i.e., whetherit is foreignor local.
50 SCIENCE AND SOCIETY

gain doubly in surplus-valuethroughthe formationof interna-

tional prices of production,while the latterset will lose doubly.
Therefore, for the region as a whole, the net effectis quite
ambiguous. Indeed, it is perfectlypossible for all of the struc-
tural patterns of internationaluneven development which we
derived earlier fromthe law of value to exist,while at the same
ofvalue forthe UCR
timethere is a zeroor evenpositivenettransfer
exportsectoras a whole.A positivetransfercould occur if,as
appears to be empirically true,themodernportionof the UCR
exportsectorweremuchlargerthanitsbackwardone.37
It is of coursepossiblethateven if the above weretruefor
exportsectorsas a whole,theunderdevelopedregionmightstill
lose value throughitspurchaseof imports.This wouldbe true,
forinstance,if the DCR producersof theseimportswere high
efficiency producersin higherthanaverageorganiccomposition
industries,so that theirprice of productionwould be higher
thantheirindividualvalue.38In thiscase, as purchaserof these
commodities theUCR wouldincura loss in value on theside of
imports. When thisis coupled withthe possibilityof a gain in
value on the side of exports,itbecomesclear thatthe neteffect
can easilybe zero.
But willtheconsideration of wage differences changeall of
this?In a word: No. To see why,let us modifythe previous
analysisbyallowingforhighwagesand ratesof surplusvalue in
the DCR, and low wagesand ratesof surplusvalue in the UCR
- keepingthepreviousworldaveragewage and rateof surplus
value unchanged.39
The simplestplace to begin is withthe transferof value
withinan industryarisingfromthe differences betweenindi-

37 Amin argues that in 1966 three-quartersof UCR exports were produced by the
"ultramoderncapitalistsector (oil, miningand primaryprocessingof minerals,mod-
ern plantations...)..." (Amin, op. cit.,p. 57).
38 Even this possibilityis by no means obvious. Leontiefs famous studyfinds that U.S.
exports are lesscapital-intensivethan U.S. productionas a whole. Since the U.S. is so
importantin the world market,this suggeststhat UCR importscould well be from
average or even below average CIV sectorsof the world market.
39 Marx's treatmentof rent makes it clear that the rates ol exploitationot various
workersdepends only on the lengthof theirworkingdays and on the social values of
their labor-powers,and not on their respectiveproductivities.The conclusion that
interregionalwage differentialsimplyopposite differentialsin rates of surplus value
is implicitlybased on the assumptionthatthe wage goods in eitherregion are primar-
ily internationalvalues.
 FOREIGNTRADE 51
vidual values and social values. For any individualcapital,a
changein itsratesof surplusvaluebroughtaboutbya changein
the wage rate will alter the proportionsof the necessaryand
surpluslabor-time in the workingday. But it willnot in itself
change the length the workingday,and therefore
of it willnot
change the value added by livinglabor; nor does it changethe
value transferred by thislabor. Wage changes,in otherwords,
change the profitabilityof individualcapitalsbut not theirpro-
ductivity.Thus they leave unaffected the structure of individual
valuesand socialvalues. It followsthatinterregional wage dif-
ferentialsdo not have any effectat all on the intra-industry
transfers of value broughtaboutby the formation of socialval-
ues.
The effectsof wage differences on inter-industry transfers
of valuearisingfromtheformation of pricesof productionare a
littlemorecomplex,becauseanyinterregional wagedifferentials
whichleave the worldaveragevalue rate of profitunchanged
willnot,in general,leave industry averagesunchanged.But for
thetwosetsof worldindustries in whichtheexportsectorof the
UCR is embedded,the effectsare opposingones and tend to
cancel each otherout. In the high organiccompositionworld
sector,capitalslocated in the UCR are the high productivity
producers,whichimpliesthatforequal quantitiesof outputthey
requirelesslabor-time thantheirDCR counterparts. The reverse
is truein theloworganiccomposition worldsector.If theworld
averageproportion of UCR employment to DCR employment is
betweenthe employment ratiosof the above twoworldsectors,
any wage differentialswhich leave the worldaveragewage un-
changed will tend to raise the average wage rate in the high
organiccompositionindustries(wherethe higherwages of the
DCR producerswill predominatebecause of their relatively
higheremployment per unit output),and lowerit in the low
organiccompositionindustries.This impliesa loweredrate of
surplusvalue (and hence value rate of profit)in the former
sector,and correspondingly raisedratesin the latter.
It willbe recalledthatin theabsenceof wage differentials,
the high organiccompositionsectorhas a value rate of profit
belowtheworldaverage,and theloworganiccomposition sector
a value rate above the worldaverage.Since interregional wage
differentials tend to lower the industryaverage value rate of
52 SCIENCE AND SOCIETY

profitin the formersectorand raise it in the latter,theyincrease

the differentialsbetween the sectoral value rates of profitand
the world average. This in turn implies that in the presence of
interregionalwage differences,the formationof international
prices of production will require a larger transferof surplus
value intothe high organic composition sector,butalso a larger
transferoutof the low organic compositionsector. It followsthat
Table 2 remains a valid description of the differenttypes of
transfersof surplus value. The only effectof wage differentials is
to increase the magnitudes of these two opposing flows, so thatit
is still perfectlypossible to have a zero net transfer of surplus
value between regions.
In summary:interregionalwage differentials perse need not
affect either the net transfers of value between industries or
between capitals withinan industry.In and ofthemselves, therefore,
theydo not give
necessarily risetoa net transferofsurplusvalue between
regionsof the world
capitalist market.
It does notfollow,of course,thatwagedifferences are of no
consequenceforindividualcapitals.For anycapitallocatedin the
UCR, the lowerwage theremeansmoresurplusvalue extracted
froma givennumberof workers, and hencehigherprofits. Even
if the transfers of surplusvalue remain the same, the mass of
surplusvalue produced is greaterand thereforethe mass of
surplusvalue realizedin the formof profitis also greater.For
high-efficiency, highorganiccomposition capitalslocatedin the
UCR, theiralreadyhigherprofitability arisingfromtheirhigher
efficiency enhancedbythelowerregionalwages;
is even further
and forthelow-efficiency loworganiccomposition capitalsin the
UCR, the low wages tend to their
offset low productivity and can
therefore backwardmethods
becomea meansofperpetuating ofproduc-
tion,whichsurvive(and mayeven prosper)becauseof theselow
wages.40
In an appendixto thispaper,availablefromtheauthoron
of all
request,a numericalexampleis providedas an illustration
of the above phenomena.

40 Marx notes that low wages may preventmechanizationand hence the raisingof the
productivityof labor, because when wages are low, the savingson variablecapital due
to the displacementof workersby machinesmay not be sufficientto offsetthe greater
flows of constant capital due to the mechanization(Marx, Capital, Vol. I, Ch. XV,
Section 2, p. 394).
 FOREIGNTRADE 53
The importantpoint to realize in all of this is that the
underdevelopment of theUCR does notnecessarily implya nega-
tivetransfer of value on itspart.This onlyservesto underscore
theearlierand even moreimportant pointthatit is the uneven
developmentbrought about by international competitionthat
lies at the heartof the matter,notany transfers of value which
or
may may not result from thisuneven development. Even with
a zero net transferof values,all the forceswhichwe analyzed
earlierwouldcontinueto enhancethe "developmentof under-
development."
For thesake of completeness, it is necessaryto referbriefly
to the implicationsof the foregoingdiscussionfor current
theoriesof unequal exchange:specifically, forthe versionsput
forwardby Emmanuel,Amin and Mandel.41Though consid-
erationsof space precludedetaileddiscussionof theseauthors,
some generalpointscan nonetheless be made.
The path-breaking workin thisdomain is thatof Arghiri
Emmanuel.In effect, Emmanuelassumesthateach regionis the
soleproducerof its products,42 and thatthe highorganiccom-
position industriesof the world marketare concentrated in the
DCR, whilethose with low organiccomposition are concentrated
in the UCR. He thusignores¿rc¿ra-industry transfersaltogether.
Since the formation of pricesof productiontransfers surplus-
valuefromhighto loworganiccomposition and since
industries,
interregional wage disparitiesgreatlyexacerbatethis transfer,
Emmanuelconcludesthat the veryexistenceof international
pricesof productionimpliesa large and persistentdrain of
surplus value for the UCR. Hence the term "unequal ex-
change."43
At the opposite pole fromEmmanuelis ErnestMandel.
Mandel begins by rejectingthe notion that profitrates are
equalized internationally. Thus he ignoresinter-industry trans-

41 A. Emmanuel, UnequalExchange,S. Amin,Accumulation on a WorldScale, and TheEnd

ofa Debate (manuscript, United Nations African Institutefor Economic Development
and Planning,September 1973); and E. Mandel, Late Capitalism.An earlier versionof
this paper contained a more detailed critique of unequal exchange theories. This
section,leftout for lack of space, is available on request from the author.
42 Emmanuel, op. cit.,p. 421.
43 Emmanuel notes that it is only the transferoccasioned by interregionalwage dis-
paritieswhich is specificto the UCR-DCR relation.Thus he calls only thisportion of
the overall transfer"unequal exchange" {ibid.,p. 161).
54 SCIENCE AND SOCIETY
fersaltogether.44Instead, he emphasizes the differencesbetween•
individual value and social (i.e., international)value - a com-
parisionwhichof course holds good only fordifferentproducers
of the same commodity(i.e., withinthe same industry).45UCR
exporters are characterized as low efficiencyproducers in low
organic composition industries,with the opposite holding true
for DCR exporters.46Since there is no equalization of profit
rates,the only transfersof value are fromlow to high efficiency
producers - which are, incidentally,independent of regional
wage differences.Thus Mandel's derivationof unequal exchange
is the antithesisof Emmanuel's: the latter locates it in inter-
industrytransferof value, the formerin intra-industry transfers.
Lastly, there is the position of Samir Amin. Amin begins by
insisting that UCR exports are in fact characterizedby the dual
structurewe derived earlier: high-efficiency,high organic com-
position producers in a large ultramodern sector, and low-
efficiency, low organic compositionones in the smallerbackward
sector.47
It is at this point that Amin makes a crucial error in his
analysis.We have already noted thatwithinan industry,competi-
tion forcesall producers to sell at the same price. But thismeans
that since producers having differentefficiencieswill have dif-
ferentunit costs but the same selling price, theywill in general
have differentrates of profit.Thus withinan industryindividual
profitrates willgenerallydiffer.Whereas competitionof capitals
equalizesaverageprofitrates across industries,it at the same time
differentiatesindividual profit rates within an industry.Amin,
however,does not appear to be aware of this,and in his numeri-
cal examples assumes equalization of profitrates both across in-
dustries (like Emmanuel) and withinindustries.Naturally,this
mistakenprocedure leads him to claim that his treatmentof the
subject "constitutesthe strong argument in support of [Em-
manuel's] view."48In point of fact,the conditions which Amin
44 Mandel, op. cit.,p. 353.
45 Ibid., pp. 351, 358.
46 Ibid., p. 354.
47 Amin rejects on empirical grounds Emmanuel's notion that each region's products
are specific to it only (Amin, End of theDebate,pp. 35-36). He argues instead that
UCR exportsare both non-specificand produced under a typicallydualisticstructure
(Amin,Accumulation . . . , pp. 57-58).
48 Amin,Accumulation ... , p. 57.
 FOREIGNTRADE 55

analyzesshouldhave led himto exactlytheoppositeconclusion:

namely,thatthereis no necessarytendencyfora nettransfer of
value fromthe UCR to the DCR.
Amin's advance over Emmanuelis his insistenceon the
dualisticcharacterof UCR exports,a characterization sharedby
Mandel. But Amin's mistakeis his conflationof competition
withinan industry withcompetition betweenindustries, forthis
leads himto expectequal profitratesevenwithinan industry -
and hence for any individual capital.In a sense,Mandel shares
Amin'serroralso, because thismistakenly impliesthat profit
ratesforanysetof capitals,suchas in a particular region,willbe
equal. And it is precisely thisimplicitexpectationwhichleads
Mandelto rejecttheinternational equalizationof profitrateson
the groundsthatprofitrates differsystematically by region.49
But, as the previousanalysisof transfers of value indicates,a
systematicdifferenceby region is perfectlyconsistentwith
equalizationacrossindustries.
The nettransfer of value fromUCR to DCR willbe equal to
theUCR importsminustheUCR exports,valuedat theirrespec-
tiveindividualvalues.50
The foregoinganalysisis notmeantto argue thattransfers
ofsurplusvaluedo notin factexist.It is meantto emphasizethat
these transfers,if and when they exist, are in themselves
phenomenaof international unevendevelopment, notitsmajor
causes. Their significance, indeed theirnet direction,mustbe
assessedin the lightof thisunderstanding.

III. SUMMARYAND CONCLUSIONS

The purpose of this paper has been to worktowardthe
treatment of thelawsof international exchangefromtheMarxist
perspective.This is a task,one whichhas itsrootsin
theoretical
the law of value as it is developedin the successivevolumesof
Capital.As such,theanalysisis notmeantas a substitute forthe
concreterealityof international tradeor of its historicaldevel-
49 Mandel, op. cit.,p. 353.
50 Of course we could always decompose this net transferinto intra-and inter-industry
transfers,by introducingsocial value (average direct prices) into the analysis, and,
insofaras marketprices differfrom prices of production,by introducingthe latter
also. Such a decompositionwould enable us to identifythe variouscomponentsof the
net transfer,but it would, of course, not change its magnitude.
56 SCIENCE AND SOCIETY

opment. No attemptis made, forinstance,to explain the histori-

cal roots of uneven development; nor is primitiveaccumulation
ever treated. Instead, the point is to uncover the sortsof forces
which are inherentin the internationalinteractionsof capitalist
nations so that we may be better prepared to deal with their
concrete existences.
But the matterhas another aspect too. The orthodoxtheory
of international trade has always been, as Amin puts it, an
"ideology of universalharmonies."51And the theoreticalbasis of
thisideology has in turn alwaysclaimed thatin competitivecapi-
talisminternationaltrade willnegate inequalitiesamong nations.
In itsoriginalform,thislaw was presentedby David Ricardo
as the extensionof his labor theoryof value to the area of inter-
national trade. Because of the superficial similaritybetween
Marx's and Ricardo's theories of value, the Ricardian law soon
came to be accepted as a Marxian one too. Orthodox theory,on
the other hand, while rejectingRicardo's labor theoryof value, at
the same timeappropriated his law of internationaltrade into its
own framework.This law thus came to be widelyaccepted by
Marxistsand non-Marxistsalike.
Of course, the law has always been in gross contradiction
with the facts. Consequently Marxists everywhere have been
forced to attackit and the conclusionswhich followfromit. But
because of itsvirtuallyunquestioned validityin termsof competi-
tive capitalism,the general line of attack has been to overthrow
the notion of competitivecapitalismitselfin order to overthrow
the law. Naturally,under monopolycapitalismMarx's analysisof
price phenomena is also said to be no longer valid. And so the
Ricardian law is jettisoned by abandoning the theoryof value
itself.
In recent years, a new alternativehas apparentlyarisen, in
the form of various theories of unequal exchange. These
theories have their origin in the path-breakingand challenging
work of ArghiriEmmanuel, and are widelyrepresentedas over-
throwingthe Ricardian doctrineof comparativecostswhileat the
same time retainingMarx's analysisof value. But this is an illu-
sion. These theoriesdo not reject the Ricardian law on its own
grounds. Instead, theymodifyit to take into account what they

... , p. 6.
51 Amin,Accumulation
 FOREIGN TRADE 57
consider to be features of modern capitalism. Explicitlyor im-
plicitlytheyleave the law unchallenged for the case of so-called
competitive capitalism, and in most versions of unequal ex-
change, it is assumed to operate even under modern capitalism,
albeit withaltered effects.
It is a central object of this paper to show that the law of
comparativecosts does not followfrom Marx's theoryof value.
Indeed, what does follow is a law of absolute costs; once this is
established,a whole series of phenomena which Marxists have
been forced to derive from either monopoly capitalism and/or
unequal exchange now become consequences of free trade itself.
Instead of negatinguneven development,free trade is shown to
enhance it. Instead of closing the gap between rich and poor
countries,direct investmentis seen to tighten the grip of the
strongover the weak.
None of these resultsis derived from transfersof value be-
tween developed and underdeveloped regions of the capitalist
world. On the contrary,since uneven development on a world
scale is a direct consequence of free trade itself,these transfers
of value and the theories of unequal exchange which rely on
them emerge as secondary phenomena, not primarycauses, of
underdevelopment.In fact,a criticalexaminationof the theories
of unequal exchange shows that even the net directionof value
transferscannot be simplyestablished.

New Schoolfor Social Research,New York

The Eugene V. Debs Papers Project at Indiana State Universityis searchingfor

correspondenceto and fromDebs for inclusionin the publicationof the complete
worksof Debs - his correspondence, his speeches, and his writings.The goal of
the project, which is supported by a grant fromthe National Historical Publica-
tionsand Records Commissionand by Indiana State University,is to publish Debs'
entire works in a microformedition and selected correspondence in letterpress
volumes. Colleagues who have access to or know the location of lettersto or from
Debs are requested to write to J. Robert Constantine,Editor, The Debs Papers
Project,Department of History,Indiana State University,Terre Haute, Indiana,
47809.