De acuerdo a lo expresado Yoshinori Shiozawa creo que la omisión del desempleo como tema central en la teoría del comercio internacional refleja un sesgo ideológico neoliberal que históricamente priorizó la "eficiencia" del mercado por encima del bienestar laboral. Asumir el pleno empleo invisibiliza los costos sociales del libre comercio, especialmente en economías periféricas vulnerables a la competencia desigual.

La "tasa natural de desempleo" se presenta como un ajuste automático, ignorando el sufrimiento real y las consecuencias estructurales del desempleo causado por la globalización. El apoyo a políticas proteccionistas, incluso en EE.UU., señala un quiebre con esta narrativa dominante, reconociendo el impacto del comercio en la pérdida de empleos.

Para el caso de nuestra América Latina, esta omisión teórica es problemática, pues nuestras economías a menudo sufren desindustrialización y aumento del desempleo ante la apertura indiscriminada. Creo que una teoría del comercio debe integrar explícitamente el análisis del desempleo, considerando políticas activas de mercado laboral y estrategias de desarrollo productivo para mitigar sus efectos negativos y promover un comercio justo y con trabajo decente.

As I do not read Spanish, I asked DeepL to translate Andrés Gálvez Rodríguez 's answer to my question. Here is the translated text:

According to Yoshinori Shiozawa, I believe that the omission of unemployment as a central issue in international trade theory reflects a neoliberal ideological bias that historically prioritized market “efficiency” over labor welfare. Assuming full employment makes invisible the social costs of free trade, especially in peripheral economies vulnerable to unequal competition.

The “natural rate of unemployment” is presented as an automatic adjustment, ignoring the real suffering and structural consequences of unemployment caused by globalization. Support for protectionist policies, even in the U.S., signals a break with this dominant narrative, recognizing the impact of trade on job losses.

For the case of our Latin America, this theoretical omission is problematic, as our economies often suffer from deindustrialization and increased unemployment in the face of indiscriminate openness. I believe that a theory of trade should explicitly integrate the analysis of unemployment, considering active labor market policies and productive development strategies to mitigate its negative effects and promote fair trade with decent work. (Translated with DeepL.com, free version)

As Andrés Gálvez Rodríguez put it, there must be a clear neoliberal motivation behind the fact that international trade theory rarely incorporates unemployment that may be caused by trade liberalization. I do not deny it. However, the trouble of the international trade theory lies in a much deeper place than researchers can consciously know it. The very framework of trade theory hide the possibility of unemployment in the view of researchers.

The cover-up is structured in so a complex way that most of sincere researchers with good intentions do not remind that they are neglecting one of the most important questions in trade situation. i.e. trade induced unemployment. In the deepest layer of the theory, there is a question of equilibrium framework. When we simply assume that the situation we observe is in equilibrium, we are enforced to assume there is no unemployment. This takes a various form. A conventional way is to assume that labor is a kind of resources or factors of production. When we assume each factor of production is completely used, we are assuming there is no unemployment. This way of excluding unemployment by assumption is often

expressed as "assuming off unemployment".

A more subtle form of assuming off unemployment is to introduce search process. There may be certain transition period before the natural rate of unemployment is established. This is to deem unemployment as friction. Even there is unemployment, people are searching their jobs and those who are unemployed are simply unemployed for a certain lapse of time when they engage in the search activities. Before 1970 (the arrival of New Classical theory of economics), this kind of unemployment was called voluntary unemployment. Search or friction theory is only a new form of theory of voluntary unemployment that was rejected by J.M. Keynes. As Taichi Tabuchi observes, international trade theory was "insensitive" to Keynesian revolution. With this peculiar history of international trade theory, unemployment was never incorporated in the framework of trade theories.

Although there are certain numbers of empirical works that measure the trade impact on unemployment, those researchers face a difficulty, because they are normally required to insert a theoretical framework for their analyses. Constructing an international trade theory that truly incorporates unemployment is conditio sine qua non for international economics to go beyond actual inability to appropriately interpret Tramp tariff shock. Detecting ideology is important, but it is not sufficient. We should go beyond that.

Good news is a new theory now exists, although it is not yet well developed and widely known. See

Chapter The Nature of International Competition Among Firms

A new definition of regular international values was introduced in this paper and was further developed to a more complete theory. Those who are interested in this new development, please inform me. I will be happy to send you a new paper:

The new theory of international values: a restatement (yet in a draft stage).

This is a different paper than that with a similar title:

Chapter The New Theory of International Values: An Overview

If you combine this result (the new definition and theories in restatement) with other papers such as

Article The principle of effective demand: a new formulation

and

Book Microfoundations of Evolutionary Economics

you can get a trade theory by which you can analyze trade caused unemployment specified to an area and an industry.

Many economists now talk about Rust Belt in the USA. The unemployment was a phenomenon specified to a particular area and industry. To analyze such a phenomenon, we need a trade theory that normally assumes many kinds of goods, or thousands of industries. If not, the aggregate effect of (freer) trade is estimated minuscule, because the effect is diluted by unaffected industries ans areas.

Como economista, encuentro profundamente revelador y acertado lo que usted, Yoshinori Shiozawa, menciona, además de lo que usted y Taichi Tabuchi exponen en este texto. La crítica a la omisión histórica del desempleo en la teoría del comercio internacional resuena con las realidades que nuestras economías periféricas han experimentado ante la liberalización comercial.

La explicación de cómo el propio marco teórico, con su énfasis en el equilibrio y la plena utilización de los factores de producción, inherentemente excluye la posibilidad de desempleo estructural es crucial. Reducir el desempleo a una "fricción" temporal o un fenómeno "voluntario" ignora las cicatrices profundas que la pérdida de empleos industriales y la precarización laboral dejan en nuestras sociedades.

Me parece particularmente importante la conexión que se establece con la "revolución keynesiana" y cómo la teoría del comercio internacional se mantuvo "insensible" a sus aportaciones. Desde una perspectiva progresista, el desempleo no es simplemente una fricción, sino una falla del sistema que requiere intervención y políticas activas para su mitigación.

El reconocimiento de la dificultad que enfrentan los investigadores empíricos al tener que "insertar un marco teórico" que a menudo niega el fenómeno que están estudiando es un punto crítico. La necesidad de construir una teoría del comercio internacional que realmente incorpore el desempleo como una variable endógena es, como bien se señala, una conditio sine qua non para comprender adecuadamente los impactos de shocks como la política arancelaria de Trump y, más ampliamente, los efectos de la globalización en el mercado laboral.

Manifiesto mi gran interés en la "nueva teoría de los valores internacionales" y su potencial para analizar el desempleo causado por el comercio a nivel sectorial y regional, tal como se evidencia en el caso del Cinturón de Óxido en Estados Unidos y en tantas otras realidades en América Latina.

Agradecería enormemente que me facilitaran el borrador del documento "La nueva teoría de los valores internacionales: una reafirmación" y cualquier otra publicación relacionada, como "El principio de la demanda efectiva: una nueva formulación" y "Microfundaciones de la Economía Evolutiva".

Creo firmemente que esta nueva línea de investigación podría ofrecer herramientas analíticas más robustas y relevantes para abordar los desafíos del desempleo inducido por el comercio en nuestras economías, permitiéndonos diseñar políticas comerciales y de desarrollo más justas y efectivas para la región latinoamericana.

Fascinating topic. As most of the readers claim to be Keynesian, the issue might be relatively simple: China became the World Factory, but Chinese households keep on being in the highest savers league: a typical case of under-consumption. Trade disequilibrium translate into unemployment at worst, or rising debt for the net importers who can borrow on the financial market and sustain a large number employees in non-tradable services.

Not easy to find a Keynesian solution, as the PCR authorities have officially claimed that their objective was to rebalance to solve the issuevbut that they could not achieve this goal. So they keep exporting.

A more pessimistic view goes beyond Keynesian regulation. It states that we don’t live anymore in a neoliberal world where trade is supposed to follow supranational laws and the economic model of reference is General equilibrium where the winners are expected to compensate the losers.

Today, we face a neo-realist international environment were conflicts and trade wars prevail, and the economic model of reference is the non-cooperative strategic game theory. Back to mercantilism: my gain is your loss and too bad if your people get unemployed as long as we’re prosperous. Sad…

The post of Andrés Gálvez Rodríguez on four days ago was in Spanish. This is what I obtained as English text from automatic translation by Deeple free version:

As an economist, I find what you, Yoshinori Shiozawa, mention, in addition to what you and Taichi Tabuchi expound in this text, deeply revealing and accurate. The critique of the historical omission of unemployment in international trade theory resonates with the realities that our peripheral economies have experienced in the face of trade liberalization.

The explanation of how the theoretical framework itself, with its emphasis on equilibrium and full utilization of the factors of production, inherently excludes the possibility of structural unemployment is crucial. Reducing unemployment to a temporary "friction" or a "voluntary" phenomenon ignores the deep scars that the loss of industrial jobs and the casualization of labor leave on our societies.

I find particularly important the connection made with the "Keynesian revolution" and how international trade theory remained "insensitive" to its contributions. From a progressive perspective, unemployment is not simply a friction, but a system failure that requires intervention and active policies for its mitigation.

The recognition of the difficulty faced by empirical researchers in having to "insert a theoretical framework" that often denies the phenomenon they are studying is a critical point. The need to construct a theory of international trade that actually incorporates unemployment as an endogenous variable is, as rightly pointed out, a conditio sine qua non to properly understand the impacts of shocks such as Trump's tariff policy and, more broadly, the effects of globalization on the labor market.

I express my great interest in the "new theory of international values" and its potential for analyzing unemployment caused by trade at the sectoral and regional level, as evidenced in the case of the Rust Belt in the United States and in so many other realities in Latin America.

I would greatly appreciate it if you could provide me with the draft of the paper "The New Theory of International Values: A Restatement" and any other related publications, such as "The Effective Demand Principle: A New Formulation" and "Microfoundations of Evolutionary Economics".

I would greatly appreciate receiving a draft of the paper "The New Theory of International Values: A Restatement" and any other related publications, such as "The Effective Demand Principle: A New Formulation" and "Microfoundations of Evolutionary Economics". (Machine translation by Deeple free version)

Dear Andrés Gálvez Rodríguez ,

thank you for your deep understanding of the necessity of constructing a new trade theory that incorporates unemployment.

There are many international economists and papers written by them, but few of them understand that they are assuming off unemployment by assumption. The most easy case is Heckshcer-Ohlin (-Samuelson) theory. The standard model assumes two-country, two-good, and two-factor case. When they take capital ad labor as two factors, they assume the two factors are fully employed because this is the definition of the equilibrium. However, to assume that the second factor (i.e. labor) is fully employed is other other than assuming full employment by assumption. Similar stories apply to other trade models.

The biggest trouble with this state of the art is that economists do not acknowledge that they are implicitly assuming off the unemployment. Many of them live in the world where Keynes of the General Theory never lived. Those younger economists who were taught after 1980's consider international economic problems as if they have no memory of Keynesian economics between 1936 to 1970's.

Paul Krugman is a hero in the international trade theory. He received Nobel Prize in Economic Science in 2008. He is often praised for introducing New Theory of International Trade. He is still very active as popular polemic in various topics in economic affairs. This Krugman once wrote in the American Economic Review in 1993 a paper with a title:

What do undergrads need to know about trade? (AER 83-2 Papers and Proceedings of the Hundred and Fifth Annual Meeting of the American Economic Association), in which he emphasized that unemployment should not be the main theme of undergraduates' study in following terms:

• It should be possible to emphasize to students that the level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect. Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.

Dear Hubert Escaith

the question is not so easy. As I cited in the last post above a paragraph that Paul Krugman, who is widely considered as a New Keynesian, wrote in his "enlightening" paper in AER "What do undergrads need to know about trade?", he is abstemious in analyzing unemployment as a theme of international trade problem.

I do not believe Mr Trump is a good economist in trade theory, but we should keep in mind why he is so obstinate in trade problems including tariffs and trade balance. Trump represents popular sentiment of the people in the (American) Rust Belt who think that they had been victims for a long period after they had prospered until 1950's. There were continued conflicts between the United States and Japan since 1970's until early 1990's: Textile in late 1960's, steel and color TV in 1970's, and automobiles in 1980's. After 1990, there came China. During these half centuries, the people (or better workers) in the Rust Belt suffered from mass layoffs. International economists had a strong tendency to assume that this simply means that those industries in the Rust Belt lost competitiveness. They may be right in this diagnosis. However, were they right to assume those people in the Rust Belt were compensated enough? There was something very wrong in international trade theory.

What I am asking is not an immediate "solution". If the problem lies in the nature of international trade theory, it is the duty of theorists who work on international trade to build a better theoretical framework that at least incorporates unemployment. Actual standard trade theories have a structure that blinds economists to the very existence of unemployment problems.

Dear Yoshinori Shiozawa : I am afraid that from a pure theoretical point of views, it does not matter whether the losers are actually compensated or not. Trade theorists are usually uninterested in actual Pareto optimality. I never read anything, for example, about the Portuguese workers in the apparels activities that had to lose their jobs in the famous Ricardo cloth for wine story (which, by the way, is a fraud: when Portugal signed a free trade agreement with England in the XIX century, they actually exchanged wine AND gold to balance for their clothing imports. So there was only one winner in the Ricardo story: England).

Back to the first issue: the speed of change and the absence of comparable employment opportunities in the service sector is probably to blame.

In the 20th century, the agricultural sector, once the major employer, shrank to very low level in terms of employment, while the domestic production (and exports in the case of USA) increased. But the change took place over one generation or two, there was employment opportunities in manufacture to absorb the surplus workers and the great increase in the productivity of the farmers who stayed at the farm more than compensated the loss in manpower.

It is not occuring the same in manufacture: the sectoral employment collapsed in less than 50 years and the domestic production shrank dramatically too.

In brief, it is not a question of employment only (see the case of agriculture) but also an issue of losing production capacities and foreign reserves. Portugal could at the Ricardo time transfer the Brazilian gold they were mining in their colony, and the US could print dollars to pay for its ballooning trade deficit. But everything has an end…

Hubert Escaith wrote

• from a pure theoretical point of views, it does not matter whether the losers are actually compensated or not. Trade theorists are usually uninterested in actual Pareto optimality.

Compensation is not the very point of argument. The problem is that trade analysts are not aware of the fact that they are excluding unemployment from their models by assumption (simply assuming equilibrium).

The second point is that Ricardo's theory of international trade is independent from the historic context that Ricardo came to start his theory. For example, Ricardo talked about England and Portugal talked and Cloth, but his theory has little to do with actual situation indicated by these proper names.

I know that there are people, for example many people in International Political Economy (IPE), who want to mix up those historical context. I do not oppose those efforts, but they should make more solid arguments. Forceful arguments that distort the history of economic thought in such a way that is convenient for their story telling.

For example, Nat Dyer recently published a book titled Ricardo's Dream: How economists forgot the real world and let us astray (2025). I have read only its Introduction: ‘As Certain as the Principle of Gravitation’ A sketch of the book’s argument. But I am almost certain that the author had not read Ricardo's Principles (even its Chapter 7). He pretends that

• This book is about the most consequential attempt to create a kind of physics of society: economics. No other social science has so boldly aspired to capture mass human interactions and relationships in mathematical models.
• Ricardo's Dream investigates the dark side of this intellectual trend. ... How do we know that the invisible, hidden order is really in the world rather than in our minds? And, can the economics we've inherited deal with today's urgent global problems, from the colonial crash to rising inequality that threatens to rip democratic societies apart?
• Ricardo was the first person "to consider economics to be ... a strict science like mathematics.

It is true that Ricardo deployed logically rigid argument but it is hard to say that he originated mathematical model thinking. Extending this kind of arguments, he talks about Black Gold in Chapter 4 and denounces Ricardo.

If Nat Dyer wants to situate Ricardo in the International Political Economy. I believe he had another way of talking about Ricardo without developing this too rough summation of the history of economic thought.

In my understanding, Ricardo gave only a starting point of international trade theory. It may have Brasil and slave trade behind Portugal and England trade. But what is important for trade theory is his four magic numbers showed a good example to consider international trade situations. Trade theory must not be restricted to two-country, two-commodity case. A general theory must be able to analyze many-country, many-commodity situation. In such a theory (or model) Portugal and England has no meaning than it started connected with these names. It is all right if IPE wants to argue power relations and monetary flows, but the necessity to argue those questions does not exclude why trade occurs and in what situation emerges when a certain technological relations were given.

Dear, Yoshinori Shiozawa yes, but... As most economists of our age know, analysing economics from a labour value perspective and transforming it into actual market prices is a challenging task. I do not count the Marxian publications that were devoted to this topic in the 1970s, at least in France. By the way, your original approach of International trade in a multi-country/multi-product perspective is (implicitly at least) done in the monetary space --labour cost at market rates-- and not in the non-monetary labour value space).

Correct me if I am wrong.

Then if international trade situations are not equilibrated at current market prices (some with structural deficit, others with structural surplus) equilibration must take place in the nominal (monetary) space: transfer of international reserves from the deficit to the surplus country (Portugal to England; USA to China and Japan) or devaluation of the deficit country. Alternative in the real space would be a recession reducing demand for all domestic and imported products. It would occur if the loss of international reserves is large enough to cause a contraction in the monetary base. This often occurs in small developing economies that cannot finance their structural trade deficit.

I doubt Ricardo's magic numbers provide some guidance in this case, but, once again, correct me if I am wrong.

> Correct me if I am wrong.

There are many points to be argued, but I have no time for the moment. The only one thing I must correct is my theory of international values has nothing to do with Marx or Marxian theory of value. The worst example is Single System Interpretation, either Simultaneous or Temporal.

The term "international value" is used by John Stuart Mill and Alfred Marshall. Later this term became obsolete.

My theory of value is more loyal to David Ricardo, who declared that

• Mr. Malthus appears to think that it is a prat of my doctrine, that the cost and value of a thing should be the same: --- it is, it he means by costs, "cost of production" including profits. (Ricardo 1821 Principles of Political Economy and Taxation, Note added to the 3rd edition at the end of Section VI, Chapter 1.)

The biggest difference between classical theory of value (including mine) and neoclassical price theory (after John Stuart Mill and Alfred Marshall) is that the classical theory does not admit demand and supply functions that depends (only) on prices systems. See for example,

Conference Paper The Revival of Classical Theory of Values

For an evaluation of our theory, see for example Marc Lavoie's §§3.7.4

Quantity Adjustment versus Price Adjustment (pp.190-191) of Post-Keynesian Economics: New Foundations (2nd edition, 2022):

• Neoclassical economics assumes that price flexibility is at the core of a market economy and that, without it, adjustments to demand changes would be next to impossible. It is often argued that a complex market economy only avoids chaos thanks to these flexible price adjustments, and this would justify the use of the neo-Walrasian model as a rigorous benchmark model. By contrast, the whole chapter has sugested that firms generally wish to avoid price competition, so as to avoid destructive price wars. Leading firms try to stick to their costing margins while peripheral firms match the prices of the price leader, so that competition occurs through lower unit costs, investment and inovation. With the exception of raw materials, prices hardly react to demand changes and only react to changes in their unit costs. One may thus wonder whether a world which consists of such firms relying on cost-plus pricing, and with limited information as argued in Chapter 2, can truly constitute an adequate representation of a reality made of a highly complex and diversified set of interdependent firms and sectors where chaos is avoided.
• Herbert Simon certainly thought so.

Price provides only one of the mechanisms for cordination of behavior, either between organizations and within them. Coordination by adjustment of quantities is probably a far more important mechanism from a day-to-day standpoint, and in many circumstances will do a better job of allocation than coordination by prices.... Quantities of goods sold and inventories, not prices, provide the information for coordinating these systems.... Many observers of business scheduling and pricing practices have claimed that (with the possible exception of agricultural and mining sectors) models that use quantities as signals approximate first-world national economies more closely than do models in which prices are the principal mechanisms of coordinations (Simon, 1991, p.40)

• The question has recently been tackled in a book by Shiozawa, Morioka and Taniguchi (2019). They contend that capitalism is by nature a 'sellers' market'--a demand constrained economy--as opposed to the supply-constrained economy described by Janos Kornai(1980). They link this claim to Sraffa's 1926 statement that the expansion of firms is not limited by rising unit costs but rather by difficulty of attracting more customers. The separation of price and quantity adjustments is a fundamental principle. Quantities reflect changes in demand. Prices provide the criterion to judge if a new production technique is better than previously existing ones. Prices are regulated by production costs, that is, the minimum cost for a given markup structure. What we have here is a Sraffian theory of prices, slightly reinterpreted. The reinterpretation is based on three features: there is no uniform profit rate; the normal price, based on the normal unit cost, is the actual price, that is, cost-of-production are not prices achieved only in the long run; fixed capital is not associated with joint production, on the grounds that such joint production accounting is not practiced in actual accounting, thus setting the unit depreciation cost on the basis of the normal volume.
• Shiozawa et al. (2019) construct multi-sectoral models, each sector with several different firms, each firm of a sector disposing of a finite set of fixed-coefficient production techniques. Prices are set by firms on the basis of normal-cost pricing, where prices only change when unit costs change and not when demand or the proportion of demand attributed to each product changes. Production takes time--there is a time sequence, forecast and orders, then production, and finally delivery and sales--so production cannot immediately respond to changes in demand, and hence there must be a buffer, which are the stocks of inventories, for both intermediate inputs and produced outputs. Finally, as argued in section 3.5.3, firms have excess capacity.
• Shiozawa et al. (2019) show that supply adjusts to demand in a converging process, despite the complete lack of reaction of prices to the evolution of sales and inventories, under minimal conditions: production must be equal or higher than the break-even point given by the markup, so that firms do not go bankrupt; banks provide credit on demand; inventory buffers must be large enough, and there must be sufficient smoothing in forecasting demand. These forecasts are based on data that are easily obtainable, and the computations that are assumed to be made by firms require little capability.
• The message being conveyed by their book should by now be clear: the results achieved by Shiozawa et al. (2019) constitute a great breakthrough--an achievement of paramount importance as the authors say--for the analysis of the modern industrial economy (the financial sector requires a completely different story). The authors claim that their results are comparable to those of Arrow-Debreu, but obtained within the completely realistic framework of a production economy where agents dispose only of local information and frugal capabilities. Prices are not scarcity indices: changes in prices are not signaling changes in demand relative to supply. They are a tool to asses the best production method, as improvements or new combinations will be reflected by a decrease in unit costs. The information conveying changes in demand is transmitted and assessed through quantity signals--sales and changes in inventories--but not through prices. A key achievement of the authors is the demonstration that a multi-sectoral economy, where production takes time and with produced inputs, can adjust to changes in demand through the realistic decisions of managers to change quantities without any change in prices--something that previously was not thought to be possible. The only drawback of Shiozawa et al.'s book is the lack of aggregate demand feedback, which will be the main subject of the remaining chapters.

Yoshinori Shiozawa Thanks for taking the time of answering my previous comments with all these very interesting points.I am afraid I did not use “market price” in the proper way, at least from a theoretical perspective.

I am just a practitioner and for me, the market price is what you actually pay when going to the market: a value expressed in monetary terms. And not, to return to the Ricardo’s story, a value based on labour inputs.

This said, I am agnostic about the way this actual price is determined: when you go to a chic restaurant in Tokyo, do you pay a higher price because the variable production cost (food and wages) are higher or because this restaurant has a great reputation and is in high demand? Personnellement, I don’t know for sure, but my best bet is that both aspects (production costs and supply and demand forces) are playing a role.

At least in practice. In theory, I understand there are many conflicting points of view.

Dear Hubert Escaith ,

I am also talking about market prices at which you buy a product and pay the price in money.

Do not imagine how "market" prices are determined in Bourse de Paris or Tokyo Securities Exchange. They are special markets that are organized for a special purpose to give assets a prompt fluidity. The price I am talking about is that of industrial products whose volume of production per unit of time can be changed rather rapidly and cheaply if necessary.

Those products are produced at a constant cost provided that the volume of production stays in a normal range. The price of such a product is ordinarily determined by markup pricing. In other words, if the c is unite production cost, the price p is determined by the formula:

p = (1+m) c,

where m is the markup rate for the product. Customers buy the product at the price that producers (or sellers) offer. Even if each customer decides to buy a unit of the product or not at a certain period of time, the total volume of purchase is determined by customers. The producer produces their products as much as their products are sold at the prices determined by them. What we (Shiozawa, Morioka and Taniguchi 2019) have discovered is that a large economy as big as the world economy works with the above quantity adjustment processes with a properly fixed system of prices. (See the excerpts cited from Marc Lavoie's textbook in my previous reply in this QA page.)

If the markup rate is too high, fewer people will buy the product. As the profit of a producer is determined by the volume of sold product x times the profit margin m c, markup rates are not decided arbitrarily. If you want to know how the markup rate is determined, please see Section 5 of my paper:

Article Some supplementary explanations on Microfoundations

As producers choose their quality and design according to a business policy, some firms choose a policy (or a strategy) to price a very high price for a high quality product. Chic restaurants in Paris and Tokyo have chosen a policy of high-quality, high-price policy. The more popular restaurants choose a decent-quality, low-price policy. These choice depends on the managers strategy and what they want to achieve by their business.

In general, I believe more than 90 percent of ordinary goods are sold on the principle of "sellers set prices and buyers fix quantities". Higgling prices is a very old picture that may be common before the Industrial Revolution, but not in modern economy.

The trouble with mainstream economics is that it still conserve the above very old picture of "a market" or a "bazzar." It is impossible to make a good theory on how modern market economy works.

Yoshinori Shiozawa I cannot resist the temptation of asking you another question, as I always learn a lot from your answers. Not that it makes much difference now, I am long retired from economics, but I hope some younger researchers will have the curiosity of following your lead and dig deeper into this fundamental issue.

OK, my question:

I fully agree with the production cost + a markup (gross profit) approach. The firm has two objectives: stay alive (avoid bankruptcy) and increase the return on investment (increase profits).

Managers have two ways of increasing the gross margin: reducing production cost while selling at the same price or moving to a market niche that provides them with some monopolistic advantage. This can be done either by :

(1) moving into a higher quality variety of the same product; or

(2) investing in marketing and advertising to convince consumers that their product (e.g., a sneaker) is much better or provide higher social status than what the other sell on the market.

This strategy is usually called "branding" and is widely used in consumers goods and it may be considered as an irrational behaviour, but it is also effective in producer goods where buyers are professional specialists that cannot be easily conned by advertising (you prefer to buy an expensive Swiss machine tool rather than a much cheaper and perhaps as effective Indian one, just to be on the safe side because the Swiss firm has a good reputation).

In the end, what matter for the firm (and for the analyst) is the variation in the rate of markup and this can be analysed through the traditional (even if not neoclassical) monopolistic approach to market pricing.

What is new in this 21st century is that the options to reduce production costs have been dramatically expanded thanks to the global fragmentation of manufacture production (an extension of the Toyota model to a truly global perspective) and to trade in intermediate goods.

Or not?

Hubert Escaith You posed two big questions:

(1) Main differences between the traditional monopolistic approach and the new theory of prices (in Shiozawa, Morioka, and Taniguchi 2019 for example)

(2) What are principal drives of globalization in the world production?

In this post, I reply to the first of the problems. I will argue the second problem in the next post.

I will reply to the first problem in this post. In the next post, let me argue the second problem.

There is an ambiguity in the expression "monopolistic approach." Which do you imagine by these words: Chamberlain or Dixit-Stiglitz? If you mean Chamberlain, there are only two objections. First, the term "monopolistic competition" is not appropriate, because it is the normal or standard state of competition for modern industrial economies. Secondly, its theory components are unnecessarily complex. There is no need to argue marginal revenues and costs. If you imagine Dixit-Stiglitz or the second monopolistic competition revolution, there are many points to be blamed.

Dixit-Stiglitz (DS hereafter) utility is used in many fields. One of them is international trade. Paul Krugman was one of first users who adopted DS utility for formulating his theory. As we are both interested in international trade, let us argue the international trade theory that uses DS utility. This theory is often called new trade theory which compose four of mainstream trade theories: Ricardo, Heckscher-Ohlin, New, and New new trade theories. Readers who are not well versed in this topic are requested to read

Nearly (2004) Monopolistic competition and international trade theory,

A chapter in Bakman and Heijdra (eds.) (2004) The Monopolistic Competition Revolution in Retrospect. Cambridge University Press.

https://researchrepository.ucd.ie/server/api/core/bitstreams/7a14bfa4-e500-4da4-8379-98e0c1ef8c3a/content

As Neary contends, it is usually admitted that the new trade theory achieved the following:

• The DS approach provided a framework for modelling some distinctive features of contemporary international trade, especially trade in manufactured goods between　developed countries, which traditional competitive models failed to capture.　Above all, it　allowed consideration of the implications of increasing returns to scale and product　differentiation in general equilibrium. It is not that there is any inherent virtue in general rather than partial equilibrium.

The first part is often referred to as giving the reason of intra-industry trade. The latter part is the incorporation of increasing returns to scale in the general equilibrium. I object both of these two.

First, DS utility that is defined by the formula

u(z, x1, x2, ... , xN) = U(z, (x1ρ + x2ρ + ... + xNρ)1/ρ ).

This is customary to be interpreted as it expresses love of variety. For example, if 00,

which means that the subject prefers to buy a mix of products 1, 2, ... , N. An example is the preference to dine in restaurants. People likes to choose fifferent foods day by day: Chinese, Indian, Turkish, Italian and French, for example. This is called love of variety.

The first problem is that it is often explained that this expresses the state that passenger cars are made in Germany, United States, Japan and Korea, and those are exported between those countries. However, people usually buy a mark of these and do not mix up different cars at a time. But this may be only a misuse of love of variety. (Note that in Shiozawa Article Some supplementary explanations on Microfoundations

Subsection 5.1 p.351ff strong preference case (ρ>1) is treated.)

The second problem is love of variety only explains intra-industry trade for final goods. When Grubel and Lloyed wrote the book Intra-Industry Trade (1975), they are aware that this intra-industry trade is both horizontal and vertical. DS utility does not explain why a country imports parts and components from a different country that are used in the production of a product of the same industry.

The third problem is much more serious. Love of variety analysis draws too much on the symmetry of products. Krugman could show a reason why intra-industry occurs but love of variety is rather an extrem case that does not represent why international trade occurs. As Paul Samuelson emphasized by his simple model, international trade has much bigger effects. Representing love of variety as the (at least main) cause of intra-industry trade is grossly misleading.

Fourth, increasing returns to scale was difficult only in the framework of general equilibrium. Increasing returns are important because it composes the main mechanism of economic growth, but increasing returns to scale is only part of the mechanism. Much more important is the arrival or discovery of new production techniques. For the details of this point, see Section 9 of Shiozawa (2024) New Frontiers of Post Keynesian Economics: A Tentative Exploration.

Preprint New Frontiers of Post Keynesian Economics: A Tentative Exploration

As a conclusion, new trade theory à la Krugman misrepresents the nature and mechanism of international trade. Let me add that a new theory of international values offers an analysis in a much more general situation and shows how the international trade works.

The second problem is much more closely related to international trade theory, either it draws on perfect or monopolistic competitions.

Roughly speaking, mainstream trade theory from (textbook) Ricardo to New (or New new) trade theories, in other words, the four generations of (mainstream) trade theory, could not bring up the issue. Historically, the issue was raised mainly by historians and sociologists like Gary Gereffi and his collaborators (See Gereffi 2018). It started from the concept Global Commodity Chains, which was closely related to world system theory by Immanuel Wallerstein. At the beginning of the 21st century, the term was changed to Global Value Chains (GVCs). Until this period, the research was concentrated to the history of concrete commodities and then focused on multinational enterprises. It was natural that historians and sociologists were more interested in these questions, because main topics in the early phase of GVC studies were cultural conflicts between multi-national firms and locally employed workers. But, from the beginning, it was evident that GVCs were a specific feature of international trade that increased its weight in the world trade.

World Trade Organization (WTO) published in 2011 and 2013 the first two volumes on GVCs and then started to publish GVCs Development Report on a biennial basis from 2017. Hubert Escaith must know how these topics became major in WTO and other international organizations. If he writes a paper on this them, it will be a valuable record from inside for the history of international trade theory.

There are many reasons why majority of international economists remained indifferent of GVCs. Because, based on their theories, GVCs are phenomena that are hard to formulate and understand. A GVC is a network of productions linked by trade of intermediate goods (or more shortly input trade). Heckscher-Ohlin trade theory normally assumed two tiers of goods: primary resources and finished products. Urged by the necessity to consider vertical trade, they assumed three tiers system. Ronald Jones and others treid to generalize Ricardian notion of comparative advantage. For example, Alan Deardorff tride to define comparative advantage for a model of intermediate inputs but in vain (Deardorff 2005 Ricardian comparative advantage with intermediate inputs. North American Journal of Economics and Finance 16(1): 11-34). New trade theory (à la Krugman) relied to much on the symmetry and it was hopeless to develop a theory that incorporate input trade in general. It was Jones and Kierzowski who could develop chain of different services, but for prefixed pattern of servie-links with particular non-linear assumptions.

Although we cannot say it is perfect, Shiozawa (2017)

Chapter The New Theory of International Values: An Overview

is a trade theory with which we can treat a netwrok of input trade for any set of production techniques for a country. Rough idea is already given in Subsection 5.3 in my paper Shiozawa (2020)

Article A new framework for analyzing technological change

Most simply stated, a GVC is a realization of a new transforming General Purpose Technology (t-GPT), like mass production system (Ford) and lean production system (Toyota). The latter two systems are production techniques for a single production plant, whereas a GVC is a new production knowhow that became possible by the decrease of transport information costs in the last quarter of the 20th century. For the notion of transforming General Purpose Technology (t-GPT), Lipsey, Carlaw and Bekar (2005) Economic Transformations: General Purpose Technologies and Long Term Economic Growth, Oxford University Press.

This is what I posted against Peter Radford's Blog article

Big guns on trade: Ricardo via Malkiel

https://rwer.wordpress.com/2025/05/25/big-guns-on-trade-ricardo-via-malkiel/#comments

in Real-World Economics Blog.

May 26, 2025 at 1:30 pm Reply

This is a timely post. Peter Radford has picked up a topic in which almost everyone is interested now. He raises the problems that economics generally contains. In particular, when he talks about reality and economics and how the gains (and losses) from trade are shared and burdened among different peoples, he is practically and deeply right. In spite of these facts, however, when we reflect on the possibility of economics, focusing on Ricardo is not correct, or we should look at him from a different angle.

The actual trouble with economics and trade theory in particular (or international micro, as students often calls it), lies in neoclassical theory of economics rather than in Ricardo. Although he was a strong proponent of free trade, we must differentiate his policy recommendation and the theory. As a theory of international trade, Ricardo provided much better starting point than later trade theories (Heckscher-Ohlin, and all other more recent trade theories). Radford talks about history. After Ricardo, two hundred years had passed. We cannot dispense with considering the long history of international trade theory, because it is the only possible way in which we can go out of total confusions of mainstream trade theories.

As is often pointed out, there are four generations of trade theories: (1) Ricardian, (2) Heckscher-Ohlin (Stolper-Samuelson is a part of this), (3) New trade theory (Paul Krugman was the leader), and (4) New new trade theory (Marc Melitz was or is the main leader of this new trend). Note that Ricardian theory as the first generation is not a true Ricardo, because it is simply a textbook interpretation in the line of mainstream economics (This tradition starts from John Stuart Mill and Alfred Marshall). A new interpretation was presented 2004 by Andreas Maneschi and it is now well known that Ricardo’s original argument was misinterpreted in a way that is more understandable in the neoclassical framework. (See for this point, Faccarello [2017] A Calm Investigation into Mr Ricardo’s Principle of International Trade.)

The major trouble with mainstream trade theories is that they excluded unemployment from their framework of analysis by assumption. Some (neoclassical) theorists argued that gains from trade were divided unevenly. A typical one draws on Stolper-Samuelson theorem which predicts that unskilled workers in a high-waged country will be worse off as international trade increases. This point (of how much unskilled workers suffer from this effect by the opening of free trade) was much argued and collected many empirical studies. In this sense, contrary to the statement that Radford told us, distribution problem was amply argued in the mainstream international trade.

But, of course, this was not sufficient. The above distribution analysis hid a more important question. It was the unemployment that resulted as an effect of international competition. This is in fact much more important, as we easily know that the workers’ frustration on free trade concentrates in the unemployment.

The biggest trouble with generations of trade theories is that they neglected unemployment, or more precisely stated, excluded it by assumption. There were of course small number of exceptions which argued unemployment, but in an unsatisfactory way, because some assumed that unemployment occurs because of wage rate being too high or because unemployment is a temporary phenomenon in the course of matching employment and workers (search theory). The unemployment that workers suffered in the Rust Belt in USA (or other Old Industrial Areas in Europe) is of different nature. They were laid off in a region where job destruction was tremendous while few job was created.

Why did four generations of trade theories fail to acknowledge and focus on unemployment? Because these theories had a common framework of general equilibrium. For such a theory, full employment was simply an assumption to start with. A logical consequence of this observation is that we should reject equilibrium theory and construct a new theory. Here comes the importance of Ricardo, because Ricardo’s classical theory of value is the theory that does not draw on later equilibrium framework.

It is now possible to reconstruct an economics in a modern form. The new economics is characterized by three principles: (1) separation of price and quantity adjustment processes, (2) constant price system that fulfills the non-substitution of production techniques, and (3) quantity adjustment process that can follow any slow fluctuating final demands. (See for this point, Marc Lavoie [2022] Post-Keynesian Economics: New Foundations, pp.189-191). The new system can be extended to international trade situation (See Shiozawa and Fujimoto [2018] The Nature of International Competition among Firms). The new theory satisfies the principle of effective demand for each final demand (See Shiozawa [2021] The principle of effective demand: a new formulation). Thus, the new system can argue how a specific industrial district suffers specifically from a new trade situation (e.g. steel industry in 1970’s and automobile industry in 1980’s).

It is wrong to argue Ricardo only by what he argued as trade policy for 19th century England. In terms of theory, he was Aristarchus of Samos for a heliocentric revolution of modern mainstream economics which is still in a geocentric stage.

Estimados colegas,

Agradezco profundamente este intercambio tan enriquecedor. Me sumo a la discusión desde una perspectiva latinoamericana y reconociendo la valiosa reconstrucción teórica que el profesor Shiozawa ofrece, especialmente al desplazar el análisis hacia estructuras de precios fundamentadas en costos de producción y márgenes estables, frente a la abstracción neoclásica de funciones de oferta y demanda. En nuestras economías, marcadas por una estructura productiva fragmentada, desigual y dependiente, esta visión resulta mucho más útil para comprender la realidad concreta de nuestras firmas manufactureras.

Asimismo, comparto con el profesor Escaith la relevancia práctica de analizar cómo las estrategias de rentabilidad empresarial —marca, diferenciación y relocalización de producción— están insertas en una lógica de competencia global, en la que las ventajas no surgen de una asignación eficiente de recursos, sino de posiciones de poder (tecnológico, institucional o simbólico). Esto es particularmente evidente en la forma en que nuestras economías se insertan en cadenas globales de valor, generalmente en eslabones de bajo contenido tecnológico y escaso poder de negociación.

Por ello, insisto en la necesidad de teorías del comercio internacional que no solo se liberen del supuesto de pleno empleo, sino que integren de forma explícita la heterogeneidad estructural entre regiones, los efectos distributivos persistentes del comercio y la dimensión institucional de las decisiones empresariales. La economía global no se rige por las "leyes naturales" del mercado, sino por reglas construidas políticamente que configuran ganadores y perdedores.

Un cordial saludo.

Yes, several academic papers have traced the history of unemployment in international trade theory, notably including works by Paul Krugman and Gene Grossman that examine how traditional models like Heckscher-Ohlin neglected unemployment, and how newer models integrate labor market frictions and structural unemployment into trade analysis.

While limited, some papers (e.g., by Paul Krugman or Dani Rodrik) discuss labor market impacts and unemployment themes in trade theory evolution, especially under New Trade Theory and globalization debates.

Papers like "Unemployment and International Trade" by Davidson, Martin, and Matusz (1999) and earlier contributions from Bhagwati and Brecher trace the evolution of unemployment as a theme in trade theory, examining how trade liberalization affects labor markets.

Dear Chuck A Arize ,

thank you for the precious information.

I could not find the very paper that you gave me, but I could download the paper of the same three authors in 1999.

Carl Davidson , Lawrence Martin, Steven Matusz (1999) Trade and search generated unemployment. Journal of International Economics 48: 271–299.

I could get many useful informations. Thank you very much.

Yoshinori

El Vínculo Perdido: Desempleo en la Teoría del Comercio Internacional

Estimado colega Yoshinori Shiozawa , su interrogante es crucial y toca una fisura fundamental en la teoría económica dominante. Como doctor en economía y negocios internacionales, concuerdo plenamente: la historia del desempleo como tema central en la teoría del comercio internacional es, sorprendentemente, escasa y a menudo relegada a una "fricción" o un ajuste temporal hacia una tasa natural de desempleo. Esto es una omisión grave y, en parte, explica por qué las políticas proteccionistas de Trump encontraron eco en el electorado estadounidense.

La razón principal de esta omisión radica en los supuestos subyacentes de los modelos neoclásicos de comercio. Teorías como la de David Ricardo o Heckscher-Ohlin-Samuelson, que formaron la base de gran parte del pensamiento sobre el libre comercio, asumen pleno empleo de los factores de producción. Se argumenta que, si bien el comercio puede generar ganadores y perdedores sectoriales, la economía en su conjunto se beneficia, y los trabajadores desplazados encontrarán empleo en otras industrias de ventaja comparativa. Esta "teoría de ajuste" ignora la fricción real, los costos de reentrenamiento, la movilidad limitada de la mano de obra y las disparidades salariales entre sectores.

Sin embargo, la realidad ha sido mucho más compleja. La globalización ha provocado la deslocalización de industrias intensivas en mano de obra de países desarrollados a economías con salarios más bajos. Por ejemplo, la industria manufacturera en EE.UU. perdió aproximadamente 5.7 millones de empleos entre 2000 y 2010 (Fuente: Bureau of Labor Statistics, BLS), un período de intensa globalización y aumento del comercio con China. Si bien no todo es atribuible al comercio, la percepción de pérdida de empleos en sectores como el automotriz, el textil o el siderúrgico fue un factor clave en el descontento que llevó a políticas como las de Trump.

Documentos que abordan el desempleo de forma más directa en la teoría del comercio suelen venir de enfoques heterodoxos o de análisis empíricos que cuestionan los supuestos de pleno empleo. Autores como Paul Krugman, en sus trabajos sobre la "Nueva Teoría del Comercio", o Dani Rodrik, quien ha criticado los excesos de la globalización sin una red de seguridad social adecuada, han tocado este tema, aunque rara vez como el eje central de la teoría del comercio.

La persistencia de esta omisión se debe a que el enfoque de "pleno empleo" simplifica los modelos y permite derivar conclusiones que favorecen el libre comercio. Sin embargo, ignora la dolorosa realidad social de los trabajadores desplazados, que ven cómo su sustento se esfuma y no se ajustan "automáticamente" a nuevos empleos. La bienvenida a políticas proteccionistas por parte de muchos votantes es un reflejo de que la teoría no ha sabido responder a esta realidad concreta. Es crucial que la macroeconomía y la teoría del comercio integren de manera central el desempleo estructural y los costos sociales de la globalización para formular políticas más equitativas y sostenibles.

A number of economic history and trade theory papers have examined unemployment as a recurring theme, particularly within the context of trade liberalization and labor market frictions—look for works by Krugman, Dornbusch, and Helpman, as well as historical analyses by Douglas Irwin and Dani Rodrik.

There is a modest literature linking trade theory to unemployment — survey and theoretical works examine search-friction unemployment in trade models and how openness affects joblessness (see survey articles and models like Dutt/INSEAD on trade and search-induced unemployment and broader reviews of trade and unemployment).