Comparative Advantage in International Trade: A Historical Perspective.

By Andrea Maneschi

Cheltenham, UK: Edward Elgar, 1998. Pp. x, 258. $85.00.

Andrea Maneschi has been the leading intellectual authority on the history of international trade theory for many years. This book further crystallizes his reputation. Comparative Advantage in International Trade is a remarkable book for its clarity, scope, and authoritative style. It is immediately apparent to the reader that Maneschi is fully versed in modern and historical trade theory. The story of the development and criticism of comparative advantage is woven into an intriguing and complete statement that begins with the ancient Greeks and ends with the linkage between comparative advantage and the new trade theory.

Alter a brief introductory chapter, Maneschi wastes no time in letting the reader know that this book is written primarily for an advanced audience. Chapter 2, "The Concept of Comparative Advantage" develops a well-crafted expose on the meaning, causes, and limits of comparative advantage. What will be of interest to economists not well versed in trade theory is just how limited the concept of comparative advantage is once it is expanded beyond the familiar 2X2X2 framework. Maneschi demonstrates that the general law of comparative advantage is not able to say that if country A has a comparative advantage in good 1 then country A exports good 1. "[A]ll that one can claim ... is that a country's net imports are positively correlated with the differences between the autarky prices in that country and in its trading partner.... Thus, a country tends to import commodities whose autarky prices are higher there than elsewhere, and vice versa" (p. 10). The law of comparative advantage holds as a law of tendencies bu t is silent with respect to trade in any particular good.

Chapter 3, "Theories of International Trade up to Adam Smith," begins the story of how the profession arrived at the main theorems laid out in the previous chapter. Again, what will be of most interest to the general reader is that trade flows were analyzed in a manner consistent with the notion of comparative advantage well before Ricardo's and Torren's statements in the early nineteenth century. For example, Josiah Tucker developed an argument that has a surpassingly modem tone. High wage countries need not worry about competition in trade with low wage countries because high wages are the result of more skilled and productive labor. He went on to develop a theory of trade between richer and poorer countries. Tucker theorized that there exists a positive correlation between a country's level of development (read wages) and its competitiveness in goods that require more complex production processes. As he states the case, "operose or complicated Manufactures are cheapest in rich Countries;--and raw Material s in poor ones: And therefore in Proportion as any Commodity approaches to one, or other of these Extremes, in that Proportion it will be found to be cheaper, or dearer in a rich, or a poor Country. . ." (p. 32). David Hume followed up on this line of reasoning in his famous essay "Of the Jealousy of Trade," written around 1758. A concern of many of his contemporaries was that one country's technological advances could create such imbalances that no other country could hope to compete with it in international markets. Hume's answer was that as neighboring countries advance, new demands are created for the products of other countries.

These two examples serve to demonstrate that thinking was developing along comparative advantage lines before Adam Smith.

What about Smith and trade? Did he say anything useful regarding the determination of trade flows, or should his thoughts on trade be shut off from the public as an embarassing "serviving relic of the Mercantile Theory," as J.S. Mill wrote? Maneschi's answer is that Smith's contribution to the development of trade theory is much more important than is generally observed. Smith's approach to analyzing the gains as well as the determinants of trade was to emphasize the impact of trade on the division of labor owing to an increase in the extent of the market. Smith's approach to trade should be thought of as an extension of his theory of growth applied to foreign commerce. This approach, it is suggested, creates room for a reconciliation between Smith's two theories of trade, namely, the productivity theory outlined above and the much maligned vent-for-surplus theory, which states that trade is necessary to vent excess produce from the domestic market. While Maneschi's reconciliation is understated, he is proba bly on the right track.

Given that the main theme of the book is the development of the theory of comparative advantage, I would be remiss in failing to point out a quirky statement made by Smith in the first few pages of the Wealth of Nations, as it comes very close to stating that trade between poor and rich countries is determined by comparative advantage. The passage is strange because it appears three to four pages into Chapter 1 and is never referred to again. In part, the quotation reads, "The most opulent nations, indeed, generally excel all their neighbours in agriculture as well as in manufactures; but they are commonly more distinguished by their superiority in the latter than in the former.... In agriculture, the labour of the rich country is not always much more productive than that of the poor; or, at least, it is never so much more productive, as it commonly is in manufactures. The corn of the rich country, therefore, will not always, in the same degree of goodness, come cheaper to market than that of the poor" (p. 4 4). Maneschi seems to follow Arthur Bloomfield in downplaying the significance of this statement. However, not withstanding Smith's standard hedging his language at every turn, it is easy to decipher a rather clear understanding of comparative advantage as applied to trade between agricultural goods and manufactures.

The discussion of the development of the complete model of comparative advantage begins in Chapter 4. Given that comparative advantage is so central to most economists' understanding of trade relations between countries, it is not surprising that minor brouhahas have arisen regarding who should be given the crown "inventor of comparative advantage." In most people's minds, the honor goes to David Ricardo hands down. But wait. Robert Torrens actually beat Ricardo into print by two years. Torrens developed a reasonably able description of trade based on comparative advantage between Poland and more advanced countries in corn that is very reminiscent of Smith's statement. Yet, it was Ricardo who took home the prize because he developed a simple numerical example that crystallized what others had been trying to gain an understanding of for years. Trade flows can be determined by comparative rather than absolute productivity advantages, and both countries do gain from such trade. Although Ricardo's analysis was incomplete and far from perfect, he succeeded in the space of one and a h alf pages of his Principles of Political Economy to forever change the scope of the debate over the determinants and gains from trade. All subsequent writers measured their models relative to Ricardo's.

What Maneschi brings to the foreground is that comparative advantage was not Ricardo's first concern with regard to trade. Ricardo was concerned with the abolition of the corn laws.

And, importantly, he never utilized his comparative labor cost example to fight this battle. For this, he employed a model of the relationship between trade, rent, profit, and capital accumulation. Ricardo's trade theory was one of dynamics that had no room, in his mind, for the simple comparative cost example. However, Maneschi develops Ricardo's dynamic model in modem form and demonstrates that comparative advantage is compatible with Ricardo's dynamics.

Maneschi takes an interesting detour in the next chapter in analyzing the writings of Alexander Hamilton, John Rae, and Friedrich List. These individuals are grouped together because of their interest in the link between trade and development. They were interested in creating advantages in trade rather than accepting such advantages as given. This led them to conditionally support various infant industry protection schemes. Of the three, Rae's thinking was the most interesting and well developed. In fact, after reading Rae and Smith, it seems quite remarkable how much good economics could be written without reference to comparative advantage. In fact, one is struck by how little comparative advantage added to the eighteenth century rule and the cost that was paid in terms of lost dynamic theorizing. One example will suffice. By not being confined by thinking in static terms, Rae took an interest in the transfer of manufacturing from one country to another and in the role played by government in this process. Rae's concern was with the public good nature of the transfer process. Although the capitalist will gain by investing in the transfer, the greater gain is to society as a whole. Therefore, society will tend to underinvest in transfers necessitating action by the legislator. As Rae states, "The difficulty is, to discover a method of inducing an individual to incur an unavoidable outlay, the returns from which, although very beneficial to the whole society, are no more so to him who lays out a great deal, than to others who lay out nothing. The whole society, or rather the legislator, the power acting for the whole society, might do so..." (p. 88).

John Stuart Mill's contributions are evaluated in Chapter 6. Mill completed the task that Ricardo had begun by demonstrating that reciprocal demand determines the terms of trade and thus the gains from trade to each trading country. Of interest here is Maneschi's discussion of Mill's advocacy of infant industry protection. Mill gave this policy the legitimacy that propelled it through the 1920s.

The next two chapters tell the story of the development of neoclassical trade theory from Marshall through Ohlin. The standout contribution here is, rather surprisingly, that of Vilfredo Pareto. He was the first to see comparative advantage in terms of opportunity costs. Moreover, he extended the general equilibrium theory of Walras to analyze international trade. His efforts increased the precision of analysis and made clear exactly what was being stated by analyzing comparative advantage and specialization in terms of the optimal allocation of resources. Pareto also expanded the analysis of comparative advantage beyond international trade. He pointed out that the concept was applicable to the gains from specialization at any level of aggregation. Also of interest is that Pareto was the first to think of the level of protection as endogenous. He also developed the theory of second best and demonstrated the superiority of a direct subsidy over a protective tariff to protect domestic industry.

How well did Heckscher really understand the analysis of trade based on factor proportions and its impact on domestic income distribution? Very well thank you. To give just a flavor of Heckscher's prowess, note his description of trade based on differential relative endowments: "A difference in the relative scarcity of the factors of production between one country and another is thus a necessary condition for differences in comparative costs and consequently for international trade. ... Foreign trade... will alter the distribution of income.... Trade must continue to expand until an equalization of the relative scarcity of the factors of production among countries has occurred. ... Differences in the relative prices of factors of production are thus eliminated even in the absences of movements of these factors, provided that techniques are the same in the trading countries..." (p. 170). He followed this up with a discussion of absolute factor price equalization and concluded that "it is an inescapable conseq uence of trade" (p. 170).

The person that brought the endowments theory of trade to economists outside of Heckscher's native Sweden was Bertil Ohlin with the publication of his 1933 book, Interregional and International Trade. Although the main focus of this book was the development of the theory of trade based on endowment differentials between countries, Ohlin spent a great deal of time arguing that another important, although secondary, basis for trade is economies of scale. Thus, Ohlin can be credited with important contributions to the standard theory, which bears his name, Heckscher-Ohlin (H-O) theory, as well as the so-called new trade theory based on increasing returns. Both of these modem approaches to trade are analyzed in Chapter 9.

One may be asking, where is Paul Samuelson in this story? Samuelson and other developers of H-O are viewed much as J.S. Mill viewed himself, that is, as cleaning up the loose ends left by the master. Samuelson popularized the theory by casting it in a 2X2X2 form that laid out all of the necessary assumptions of the theory that had been left previously unstated, such as the need to assume that factor intensities don't reverse as factor prices change. Beyond this, Samuelson (along with Wolfgang Stolper) developed the justifiably famous theorem relating changing output prices based on endowments trade to changes in the distribution of factor income. Extensions of the theory to account for multiple goods, factors, and countries are also analyzed, as well as the advent of the new trade theory.

The development of the theory of comparative advantage is a compelling story that will be of interest not only to trade theorists and historians of thought but also to anyone interested in the struggle involved in the birth, life, and death of economic theories. Did Ricardo truly understand the full implications of his comparative cost example? Why did economists propose the real cost theory and oppose the opportunity cost approach so vigorously? Why is H-O theory coming under such intense criticism? How might it all come out and what are the implications for the theory of comparative advantage and its place of reverence in the profession? Why is it that Ricardian theory seems to be making a comeback? Interested parties may consult Maneschi's new book. It will be a standard reference for quite some time.