Dear Yoshinori! I answered your question yet and due to technical problems it was not displayed. I also sent a mail to you that hasn't been answered.

In short: the people studying economics in the last decades are not of the kind of a Max Weber, von Hayek, or Kenneth Galbraith.

They have zero interest in the public and common good. But they aim to be part of the successful capitalism without taking the risks of an entrepreneur.

So they focus on "behaviour" and hoping that economy is not political and societal reality, but a game on how to chosing between incentives and advantages.

From the antique (Aristotle) up to the enlightenment (Kant, Hume) the interest in theory was driven by Ethos, which was a political engagement.

But all they aim today is to achieving 150k per year by being quoted by their colleagues aiming the same. They call that "economic research".

Be proud of not being part of it!

Well posed question, most competent first answer. Congratulations, I feel at home. 

I do not think so. MIchael Storper, rom ucla, are matching international economics with regional development  https://www.researchgate.net/publication/269855313_Is_Specialization_Good_for_Regional_Economic_Development

Article Is Specialization Good for Regional Economic Development?

Good question. However, I do believe that it is mostly due to us academics ourselves.

Today there are, among academics, no clear segregation between research done in subjective sciences and in objective sciences. Objective sciences being theory, and subjective sciences being behaviour.

Objective sciences is universal theoretical observertions, and are far more dificult to make, patriculat in the field of ecomonics. It is however very useable and trustworthy by policy makers.

Subjective theory is observertions in society based on behaviour. These are not universal truth, and can change over time. However, they often describe complex environments, and thus less useable by policymakers, than theory. Because they are only true for the complex environment in which they were made, and such can be dificult to say is present in any given situation.

 As an example prospect theory and insurance theory are subjective sciences, as they deal with the consumers behaviour towards risk. Supported by Khanemann being a psychologist and insurances being a matter of preference and risk willingness by the consumer. Indeed most economic research these days are in subjective theory.

I think my point here is that economic sciences has become overveight in behavioural science, and rarely provides genuine changes to the theoretical framework of the "engine room"  of economics. And subjective sciences is just too "soft" for policy makers in that they are intuitively easy to accept, but lacks the applicability, and lack the universal truth aspect of objective sciences.

As such my view is a little different from Alexanders, but i recognise that a commercial/for profit issue may also be at play here. A thought could be that many historic researchers came from wealthy families and had little concern for money, or had royal sponsors.

Does anything fit in economic models ?

If it were so, "crisis" would not sprout the way they do.

We (economists) learnt how to describe well but fail on how understand the reality

To Guillermo Eduardo Ibarra 

When you say "I do not think so," do you mean that "researchers working on international trade are interested in theory questions"？ Is the paper you cited an evidence of your contention? 

I admit that the term "theory" is very ambiguous. It may stand for different ideas for different people. Let me define it briefly that theory is an effort to make our ideas clearer. This is a very broad definition. I use this phrase after Charles S. Peirce's article "How to make our ideas clear." As the paper itself argues it, whither a concept is clear is not very clear. This is a criticism against Descartes. There is no clear distinction between what is clear and what is obscure. The essence of Peirce's proposal is to make our concepts and arguments as clear as possible. Let me add that theoretical works are efforts to make our knowledge and sciences clearer. In that sense there is no limits in theory efforts. 

Please note that I am not identifying theory with mathematics or models. Making models is an effort to make what the proposer wants to say. Mathematics helps distinguish what is implied in the assumptions and what is not. However, there are also many other theoretical efforts other than models and mathematics. To make our science (in this case economics) more unified and coherent is another very important effort. When I say theory I am usually thinking of these efforts. To produce or create a new system of concepts and propositions which can give a new perspective for the problem we were familiar is another important theory effort.  

You may have other concept of theory. Can you explain where and in what aspects you see theoretical efforts in Kemeny and Storper's paper. Although there are some arguments about specialization and diversification, discussion remains rather superficial. I cannot understand why you have cited this paper as evidence that researchers working on international trade are interested in theory questions. 

For example, the authors made a survey of papers and dressed a table in a typology of theories. Typology and classification are preparatory efforts for a clarification of our arguments but as theory efforts they are at the beginning stage of theoretical efforts. We cannot say they are at a high level theory efforts.

The authors mention Jane Jacobs' idea on diversity. They emphasize that her concept is ambiguous. I agree it is. However, it does not seem that  Kemeny and Storper have ever examined Jacobs' works in detail. They cite two of her works but these works do not appear in the references. It is a symptom that they did not bother reading original works. I do not think this is a good habit in theory working. They have a high risk that they build their own concept as they understand. 

Well, real traders, both in goods and on exchange rarely read theoretical papers about equilibrium at those markets. Equilibrium will never make money.

But you probably mean that empirical researchers in international trade do not read theoretical articles in trade. Partly they may not understand complex math of theories (like Krugman's). Second, they may look for effects not considered in theories. Theories focus on comparative advantage of countries and often neglect trade costs of different types: transportation, legal, information.

Yuri Yegorov 

That is the point I want to examine in my question "Why did Eaton and Kortum model perform so badly?" 

You pointed that "theories focus on comparative advantage of countries and often neglect trade costs of different types: transportation, legal, information." If this is right, why do people not try to extend theory to include transportation, legal factors and effects of internet revolution? 

I admit there are many difficulties in incorporating these factors. However, there are many attempts for this direction and some attempts were successful. For example, the transportation cost problem is already solved.  

I showed explicitly how to introduce transportation costs and some features of transaction costs in my theory on Ricardo-Staffa trade economy. See my Dataset A Final Solution of the Ricardo Problem on International Values Chapter 3 Section 8 (this is only a table of contents. Main text is written in Japanese and not yet translated.) In my theory, each goods can have its unit cost of transportation. There is no need to appeal to unrealistic iceberg model (the idea that Samuelson introduced and continues to be adopted by Krugman in his many papers). The only restriction for this extension is to assume that the transportation is made by sailors of one country including a third country. 

In my paper The Economics of the Great Unbundling (not yet published, but you can read it in my ResearchGate Contribution page), I discussed how the big decrease of transportation costs and transaction costs made possible the so called fragmentation and the formation of global supply chains. 

Eaton and Kortum's paper also includes some improvements. We have to know what caused bad performance in this case. This is a failure, but we should learn from failure. In order to do this, we should be more open to our experience including failure and detect the possible main reason of bad fitness.

If I give one more remark, Krugman’s models are not complex at all. The famous model in which he showed the possibility of intra-industry trade depends too much on symmetric assumptions. There is not general theory when his symmetry assumption  was abandoned. I suspects this symmetry assumption is one of the reasons why Eaton and Kortum’s model works so badly. They thought that imported inputs can be treated as a single productive factor. This is another form of assuming undue symmetry.

Many international economics journals have plenty of the so called economic theory papers!  Hence I do not see the relevance of the question. So I think that there are many researchers who are interested in theoretical type of questions according to the contents of these journals. However, these days many researchers do empirical work in order to provide evidence on theoretical questions. So probably the distinction between those who are interested in theory questions and those who are not is not clearly defined. 

probably you need to state what theory you consider. Neoclassical theory? this is mainly comparative static and international trade the context is typically dynamic. In particular we need to consider economies of scale and their relation with growth and industrial development. I remember an interesting paper going back to Ricardo and Thornton and claiming the superiority of the second one. I don't know if this is of interest to you. If it is you can see

Ricardo's Gauntlet: Economic Fiction and the Flawed Case for Free Trade

Di Vishaal Kishore

Trade in contemporary society in most cases is not completely based on theory. Theories put abstract formulations of things with precise settings, and things which are built and put to function based on theories, are more stable and predictable, how ever trade as we see it, is a very volatile and chaotic, which has no patterns and seems lack theoretical basis and formulations for its activities. Surprisingly, today trade activities guide curves of trade activities instead of  following a predictable and theoretical curve.

To Giuseppe Tattara,

please read my answer (7th in the first page) addressed  to Guillermo Eduardo Ibarra.

I have given a definition on what I understand by the word "theory."  I am not thinking of neoclassical theory in particular. My concern is wider than that.  

As for the paper you have indicated, I did not know it. I will try to read it.

To Giuseppe Tattara,

I may have misread your suggestion. Are you asking which of theories I am thinking of? In the previous answer, I answered on the definition of the "theory" concept.

If I answer to your question directly, I am interested in Ricardian trade theory in opposition to Hechscher-Ohlin-Samuelson theory and its derivative Hechscher-Ohlin-Vanek theory.

There are other so-called theories: gravitation theory, Krugman-type new trade theory and Melitz-type new new trade theory.

I.m.h.o, Krugman's model is only a parable. He showed one mechanism how intra industry trade can take place. However, he has not presented a general theory in which his model is a special case. This history shows one more concrete example that trade economists are not much interested in theory. They seem to have been content with that simple model which cannot be generalized beyond the very strong (we may say unrealistic) assumption: symmetric assumption on production functions and preferences.

The gravitation theory may have a good fitness with the statistical data, but it hardly explains how specialization patterns of production appear. It does not make clear why we observe such a big discrepancy in the real wage rates among trading countries. HOS and HOV theories imply, as its typical situation, equalization of factor prices. This means that all countries have the same wage rates, because the wage rates are the prices of labors.

I wonder why almost all trade economists remain content of these theory states. Even if their interests are in the analysis of actual economic situations, they are influenced by a theory or theories. As J.M. Keynes warned in the end of his book General Theory:

• the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.

Keynes is addressing general audience. A parallelism may hold between international economists and trade theory as well. Those international economists, "who believe themselves to be quite exempt from any intellectual influences" of theories, "are usually the slaves of some defunct" theory.

To Dejenie A. Lakew, 

What you contend is quite new and sounds strange for me. Do you think that human society including economic phenomena is based on theory? In some cases, human behavior is influenced by a "theory", for example a type of knowledge such as behavioral economics. However, the main core of economics is in the interactions of these activities. An economic theory aims to give a framework by which to analyze economy, i.e. the interactions of those infinite numbers of activities. In this sense, Alexander Dill is right in pointing that actual focus on behavior is in some sense misplaced. I do not deny the usefulness of behavioral economics studies, but the core of economics is in the complex network of transactions. 

Whether economic activities are based on a theory or not (the latter is more common case, I believe), theory (i.e. economics in our case) is a system of concepts and propositions by which to analyze what are happening in the economy, i.e. the network of transactions which extend worldwide. 

The fact that majority of international trade is not based on a "theory" does not impede making an economic theory on international trade. Of course, this does not imply that theory making is an easy task. I only contend that this is the task of theory making.

To George Stoica, 

In the first answer to this question page, you wrote; 

• One possible mistake they make, is the belief that calibrating the coefficients of a wrong model will ultimately give a correct model.

 I think this is an extremely important remark. Calibration and even modification of models may not lead us to arrive to a good theory or model. This is one of reasons why we should pay due interests in theory problems and theory buildings.

When you say in the second answer that 

• the stochastic models are not doing much better either. I published a few papers with such models, at theoretical level, and the calibration using historical data went downhill,

 which papers are you referring to? You have more than one hundred papers and books and it is not easy to find correct ones. I have found several papers on stock price  fluctuations:

Do you have any article on trade theory? I am asking this question, because Eaton and Kortum's paper uses probabilistic reasoning in their model building. For example, they use Frechet distribution when they have to estimate the minimum value distribution of random variables. In this regards, I totally agree with Derek Anderson (respondent to my question below)

https://www.researchgate.net/post/Why_did_Eaton_and_Kortum_model_perform_so_badly

that 

• the strong dependence on the Frechet distribution for determining levels of productivity more a matter of convenience than a matter of creating a model that describes the data well.

Financial economy is important and now perhaps excessively influential on real economy. Your following papers seem interesting although I will not understand the real contents. However, a close communication across disciplines is a key to a breakthrough also in economic sciences. For example, stock market is full of large deviations: often 5σ and rarely up to 10σ. I know it is not good to assume that stock market obeys normal distribution law, but it is extremely difficult for a statistics amateur to build a new stochastic process which may fit to the stock market.   

Good morning

I write from the empirical side of the research program, so I may not be the most qualified to discuss the "theoretical" part. But in my day-to-day work, I deal with plenty of research economists and they look pretty much interested in modelling to me.

Yet it is true that most research today is mainly empirical, especailly since the New "New" trade theory and its focus on firm heterogeneity, most research work use micro-data to test some hypothesis.  Trade theory today is mainly micro-economics with national borders. And national borders are becoming more and more irrelevant. 

"Traditional" trade theory, looking at the macro-side, is in disarray. HO model is increasingly useless due to global value chains and fluid capital cum technology mobility, leading to "virtual" migrations of low-cost labour to high technology spaces. I do not know that anything better than Gravity or CGE have been developed recently in terms of modelling tools. Network theory is promising, but still at a preliminary stage (and it remains empirics).

Even the work-horse of terms of trade approach (both neo-classic and post-marxist, as in the theory of dependence) is increasingly irrelevant in 21st century trade in tasks. Besides the political economy approach of trade agreements as part of structural reforms (locking-in reforms and reducing uncertainty), there is no clear macro-fondation for entering trade negotiation today (vs. unilateral liberalization).  Critics of the liberal and neo-classical approaches remain ... well,.. critics and besides writing their New York Times columns, they are not able to propose any alternative solid trade theory to defend their discretionary approach to economic policy: the Post-Washington- Consensus pundits still wait for their O. Lange or M. Morishima.

So, in this context, most research is applied and looks at empirics. A good time for us, statisticians (by the way, there is a lot of new concpets and indicators being developed by trade statisticians, in particular for a better linkage between trade and industrial statistics. Many gaps  remaining, but we are heading in the right direciton)

Best,

Hubert

To Hubert Escaith 

Empirical researcher's participation is welcome. Theory has to work with the empiric.

Hubert Escaith cited various trends in theory. HO, Gravity model, CGE, New new trade theory, post-marxist approach (including dependency theory) and so on. In the previous post To Giuseppe Tattara, I mentioned nothing on new new trade theory. I want to comment (1) on this new new trade theory and (2) on dependency theory and terms of trade.

(1) New new trade theory

In my understanding new new trade theory is an important contribution to the trade theory by and large. They confirmed that some firms remain domestic and some extend their market beyond country border. This simple fact that we can observe in everyday life remained unnoticed for a long time. This shows that there is a grave lack in the traditional trade theory. However, Melitz relies heavily on General Equilibrium Theory and it will be difficult to work on trade patterns and wage discrepancies. It is possible in principle to discuss these topics but the GET framework is too flexible and general to detect any tendency or trend except when we include some assumptions that may foretell such and such phenomenon.

Melitz and his followers are not aware that Ricardian trade theory at the state of the art can beautifully incorporate what they had "discovered." See for example, Fujimoto and Shiozawa (2010-11) Inter and Intra Company Competition in the Age of Global Competition: A Micro and Macro Interpretation of Ricardian Trade Theory. You may read a draft version of this paper in my RG page.

https://www.researchgate.net/publication/233943529_Inter_and_Intra_Company_Competition_in_the_Age_of_Global_Competition_A_Micro_and_Macro_Interpretation_of_Ricardian_Trade_Theory

Please note that there is a competition even inside of a firm. This is the most valuable discovery of Fujimoto who are visiting one or two factories every week since 30 years.

This kind of analysis became possible, because the new Ricardian trade theory is based on the assumption that there are an arbitrarily large number of different goods. Arbitrarily large does not mean countable infinity or the continuum. Each good has its independent existence and we can discuss the cost of each production site of the same goods. In opposition to Dornbusch, Fischer, and Samuelson (1977) model, which admits no industry to have positive production volume, the new Ricardian trade theory treats each goods as actually produced independently form others.

In the first part of Fujimoto and Shiozawa (2011-12), we discuss the case where the labor cost occupies the major part of unit cost, but in later part we discuss some features where intermediate goods (parts and raw materials) are inputted.

(2) Post-marxian approaches

As for (old) dependency theory, you are absolutely right. They talk much about powers and ideologies but there is no clear analytical theory in macro or micro perspective. Terms of trade have been examined in many occasions but as the dependency people lacked a theory by which to analyze the terms of trade movements. They argued based on the general tendency they observed in 1950's and 1960's. When this tendency was reversed they lost their relevance.

A new trend in dependency theory emerged after the appearance of Emannuel's Unequal Exchange. This new trend is some times called new dependency theory. However, Emannuel had not a theory to determine terms of trade. The terms of trade is not determined simply by the market forces between importers and exporters. Major factor which influence the terms of trade is the wage discrepancies between countries. It is only the new Ricardian theory that can formulate wage differentials.

Without having firm theory on wage differentials and knowing the causes of low wage rate, it is practically impossible to build a plausible policy scheme. The failure of dependency school comes from this lack of suitable theory to attack these questions.

Article Inter and Intra Company Competition in the Age of Global Com...

Yoshinori,

That is interesting that I have new and strange ideas here. In fact the human society in particular and nature in general are not happening based on theory but their behaviors are studied and theories are developed based on these observed behaviors so that we can say some how what they will be in a very near future of  time-space from the present or from the past.  That is why science, scientific theories and principles are developed, to study them,  empirically tested and validated through mathematical rigor. For instance the use of infinite dimensional H

It is true that economic phenomena are complex structures of economic transactions of productions, and consumers with the sole purpose of getting optimal profits,  interactions Hilbert spaces of square integrable functions as imperative basis or degrees of freedom to describe economic behaviors, is a theoretical description due to the observed behaviors in which finite dimensions do not work well or not at all.

I am not an economist, but arguing from mathematical perspective. Arbitrariness leads to lack order and hence the formation of chaos and instability are inevitable which will lead to short spans and distractions - the very reasons economies simply collapse in a periodical  pattern.   

One of the inconvenient factors may be that they are either not interested in or unable to answer the questions which a real theory of economic philosophy does pose. Data management is easier than delving into the serious questions belonging to the realm of equity and justice.

With regards

Israr

Dear George Stoica, 

thank you for expressing experience of your attempts. Talking openly about failure in theoretical attempts is extremely valuable, even though it is not our established custom. 

Rutu Verma cited an article in New York Times in his question: What is the role and what can we learn from the many failures of and in 'development'?https://www.researchgate.net/post/What_is_the_role_and_what_can_we_learn_from_the_many_failures_of_and_in_development 

To learn from failure is important either in business, in development project and in theoretical challenges. Sarika Bansal, the writer of New York Times report, emphasized the necessity to talk openly about failure. 

We must be more open to discuss our failure also in research. George Stoica is frank and sincere and shows a good example we should follow. 

As I have written in my question of this page, my question is a derivative from another question. It is concerned with an examination of Eaton and Kortum paper (2002). If we judge from the fitness, it is a failure, but I think it is not good to abandon it simply and search another model without seeking the reason of its failure. Each failure has its reason or reasons. We can learn sometimes better and often deeper than trying another attempt.  

Dear Mohammad Israr Khan, 

Yesterday I was attending a conference. One of three speakers, Professor Toshihiro Nishiguchi, talked about social network analysis. He cited a paper of Fleming, King, and Juda (2007) Small Worlds and Regional Innovation. Fleming and his colleagues used big data from patent offices but their test was inconclusive. They failed to find evidence that small-world structure enhances innovative productivity within geographic regions. Reflecting on the causes of their failure, they think that big data analysis does not necessarily give a good result and emphasized the importance of qualitative study to look at contextual issues in detail. 

A true theory effort is not a simple model building but rather a qualitative study in depth in search of new concepts which may be a key to deeper understanding of the phenomena. Nowadays we observe many economists who think that model buildings are all that are theories. We should change this state of mind.

I think some international economists do not know microeconomics and mathematical economics. I found some serious mistakes in some paper! I wrote some comment papers  on this.

Dear Nakada-sensei

Would you kindly give the titles of your comment papers? Are they specific comments on Eaton and Kortum or are they addressed to other papers?  

Dear Yoshinori

The theoretical base of international trade and international economics is based on the micro and macro economic principles. without such a strong theoretical base no one can explain the complexity of international trade. So international economists are essentially work with theories.

I commented on other articles, for example, Jones and Easton (1983), Journal of Internatiponal Economics. But I only presented in the seminer in our University. No persons outside perfectly understand. I have not yet submitted to any Journal. It might be good to upload here, or send by E-mail. I did not know about Eaton Kortum model. It seems that that is a Ricardian model. I have read you homepage. I have ever read your books.

Dear Siozawa sensei

I have just sent comment papers on three factor two good model by E-mail.

 Dear Nakada sensie,

thank you for sending me two papers. I will send you back a comment in Japanese.  

Shiozawa

Dear Shiozawa sensei

I see. I have just uploaded the two comment papers on Researchgate.

 Dear Mahinda Henegedara ,

thank you for your post. I almost agree with you.  You wrote

• The theoretical base of international trade and international economics is based on the micro and macro economic principles. without such a strong theoretical base no one can explain the complexity of international trade.

Your observation is stated in the indicative mood. I think you should add one more word: must.  Then it reads as follows: 

• The theoretical base of international trade and international economics must be based on the micro and macro economic principles. Without such a strong theoretical base no one can explain the complexity of international trade.

In this form, I totally agree with you. The problem that lies before us is that the so-called  "international trade theory" is not based on a firm theory.   

Have you read my question "Why did Eaton and Kortum model perform so badly?" and my post (5th answer of that page ) on it? In my understanding, Eaton and Kortum model is not a model that incorporated trade in intermediate goods. This must be a main reason why their model failed so apparently. 

Dear Yoshinori! I am an entrepreneur for 25 years now and never in this time I've been watching any "micro and macro economic principles" in reality.

Examples:

- Since the world's financial crisis in 2008 all economists reclaim that the interest rates must increase now. They do so for seven years now - and the opposite happens! So their principles do not exist.

- In theory there is a competition by pricing, currencies and advantages. In reality there is zero competetion in trade, technology or the energy markets. Market leaders are made by political decisions to avoid competition by allowing tax heavens, cheap labour and exploiting natural ressources.

International trade can only be understood in ist results:

- Only 26 out of 173 countries benefit from it (link attached).

So "theory" might to explaining that in some way, but there are no micro or macro economic principles guiding this result.

Why?

These leading countries have been rich yet in the time of monarchy and of course before even knowing Adam Smith or other scholars of capitalism.

Most of them were rich BEFORE economic thinking came up!

Dear Alexander,

what I am saying does not contradicts what you say.  If you combine my two sentences:

• The theoretical base of international trade and international economics must be based on the micro and macro economic principles.
• The problem that lies before us is that the so-called "international trade theory" is not based on a firm theory.

I think you can deduce that I am thinking that there is no such firm theory. However, I am not defeatist. Because there are no firm theory in trade, I am trying to provide one. There are similar lack in finance, in micro and in macro. They must be related with each other. A real paradigm change would be necessary.

You are forgetting to add the link to your paper:

Where did the Wealth go? After twenty years of WTO: only 26 countries are beneficiaries of globalization

https://www.researchgate.net/publication/274959170_Where_did_the_Wealth_go_After_twenty_years_of_WTO_only_26_countries_are_beneficiaries_of_globalization    

Research Where did the Wealth go? After twenty years of WTO: only 26 ...

I was recently at a workshop related to political economy of trade policy  and discovered that trade regulation perturbs it too much. Economists typically know about tariffs and assume them low. They would be surprised to find that for some commodities tariffs exceed original price of good! I was also surprised by the fact that for food trade costs are typically between 50 and 70% of the final price. This has nothing to do with Samuelson's melting cost but comes from perturbations imposed by politicians. Moreover, lawyers who decide about trade agreement often do not even want to hear any economic arguments. That is why the reality of international trade is far different from the theory, and people who do empirical work cannot rely on most of trade theories.

May I state the question differently ?

Why is so difficult for people who acts for enlarging and revising "theories" to emerge ?

At my low level, I set the basis of a "new" theory (micro and macro). When I tried obtaining founds to develop and journals to publish, the answer always was : "that's unusual".

Of course it is, as the usual does not work !

Maybe "my" model is poor (actually, I cannot know. Even if it allowed me to anticipate the lenght of the "crisis" and the difficulties BRICS are experiencing now). But what I am sure is there is, somewhere, a brilliant scholar (not me) who might put on the scene some novelty. If that wasn't "unsual"

 As Eaton and Kortum cite

Leamer and Levinsohn's article International Trade Theory: Evidence in The Handbook of International Economics, Volume III (ed. by G. M. Grossman and K. Rogoff. Amsterdam: North-Holland, 1995),

I would like to add two or three words.

In this article of total 48 pages (only main pages), the Ricardian models count only two and a half pages. This indicates how authors estimates these strands.

Here are some excerpts (Citations below are made from NBER Wirking Paper No. 4940 which appeared in November 1994.):

2.1 The Ricardo Model

• (1) The Ricardian model points to technological differences as the source of international comparative advantage. (§2, p.4)
• (2) The Ricardian link between comparative cost ratios and the terms of trade is quite fragile, hardly surviving even the generalization to the multi-good case. Any serious attempt to study the determinants of relative product prices would surely allow for other inputs including physical and human capital. (ibidem.)
• (3) We are inclined therefore to think of this results as a mathematical toy. It s great fun to have it in our play-pends but it has little to do with economics outside of the play-pen. (ibidem.)
• (4) Aside from the three propositions just mentioned, the Ricardian model is an important reminder that technological differences can be a source of comparative advantage. (ibidem.)

2.2 The Ricardo-Viner Model

• (5) The Ricardo-Viner model has one mobile factor, typically labor, that is used economy-wide and a set of sector specific factors. The second-specific factors can be interpreted as technological inputs, in which case the Ricardian model and the Ricardo-Viner model are very similar, differing only in assumption about constancy of marginal productivity of labor. (§2.2, p.5)

3.3.1 Empirical Studies of FPE (factor price equalization)

• (6) Given the policy importance of these results, it is surprising how little study there has been of FPI, FPE, FPE and FPA. Perhaps FPE is so obviously violated that economists feel it doesn't merit close scrutiny. After all, neither Heckscher nor Ohlin thought the results was empirically valid. (§3.3.1, p.17)

I agree with Leamer and Levinsohn that the essence of Ricardian model is its pointing to technological differences as the source of international comparative advantage. (excerpt (1) and (4)) If a specific factor is to be understood as representing differences of technology (excerpt (5)), Ricardo-Viner model is a method of generalizing Ricardo model (however it was a failure).

The first part of Excerpt (2) is not just, because the authors do not mention works of McKenzie and Jones who tried to generalize Ricardo model into multi-country, multi-commodity model. Factor intensity arguments fail in many-good cases, but the theory tells other stories and some of them may be put in empirical estimates.

As for the second part of (2), there are two neglects in Leamer and Levinsohn's article. First, by the time of 1994, it was known that Ricardian trade theory can well includes material inputs. By taking vertically integrated coefficients (à la L. Pasinetti), the models can be reduced to a labor input economy, even if there are material inputs in the production. Second, the only problem unsolved was to make input trade admissible in the theory. This was explicitly pointed in papers of MacKenzie and Jones around 1960. This reveals how economists like Leamer and Levinsohn are indifferent in the theory problems at least in the Ricardo model.

Excerpt (3) should be addressed towards Heckscher-Ohlin theory and its derivatives. The authors know well that Factor Equalization Theorem is explicitly contradictory to anybody, as they express in Excerpt (6). When there is such an evidence, what is needed is not to do empirical works but try to reconstruct the theory. This is also an evidence that the authors are indeed indifferent in theory problems.

The fact that Heckscher nor Ohlin thought the results was empirically valid does not make any pretext that their models deserves to be studied further without any fundamental modifications. They are really a mathematical toy equipped with many beautiful theorems.  

Leamer and Levinsohn criticized Ricardo model as a mathematical toy. What was really needed in the construction of Ricardian trade theory which includes traded input goods (or intermediate goods), new types of mathematics such as theory of polytopes and tropical convex geometry were needed.  

Dear Yoshinori,

thank you for your contributions here and for mentioning my study on the Wealth of Nations. You are a great "old school" scientist whom we hardly need today to keep the roots of science and to remember what it once was in the old Greece: the search of the human to understand himself.

Dear  Yuri Yegorov,

it is not astonishing that tariffs for some commodities exceed 100%.  Here is a list of tariffs tor Important  Agricultural Items  (Japanese import tariffs as of May, 2014):

(1) Rice 778％ (2) Wheat 252% Barley 256% (3) Beef 38.5% (4) Dairy products 218% (5) Sugar 328% 

It is important to know that this import represents very small percentage of  total import. Normal tariffs for industrial products are  from 0% to 10% in a rare case.

However, it is not correct to say  "[t]hat is why the reality of international trade is far different from the theory, and people who do empirical work cannot rely on most of trade theories" as you put it in your post. Tariffs have been the subject matter of trade theory since the time of David Ricardo (and even before). Given the tariffs for each items we can analyze their effects in prices and so on. Theory can well assume those conditions.

I have read a paper of yours coauthored with G. Grohall:  

G. Grohall and Y. Yegorov   A Land Faraway  

FIW-Reserach Reports 2010/11

In the second part of your report, you treat the transport costs. In Table 1 you give the ratios of transport costs in value (4.2 Cost of combined transport for Austrian trade). For oversea delivery the share of transport cost to FOB range from 4% to 17%. This kind of concrete evaluation is valuable and important.  

Your main hypothesis or rater  a conclusion is fine: 

• The main hypothesis is that Austria has an advantage in exporting goods with large cost per unit of weight. (3 of Part II)

We should treat each item separately when we consider transport costs. Samuelson's iceberg model, which is adopted almost always by P. Krugman and many others, is too rough an assumption and excludes this kind of useful but easily understandable observations.

This is one of reason that I propose to switch our main theory in trade from HO or HOV theory to Ricardian theory with many commodities. The proportion of factor endowments plays a very small part in the real economy. Theoretically, it is dubious to treat capital goods as endowments, because they are manufactured or constructed and often imported according to the the necessity of production. Natural resources and climates can be incorporated as the differences of production techniques. 

Dear Claudio Pirrone,

•   Maybe "my" model is poor.

No, not at all. Your doctoral thesis : Théorie du développement territorial dans une économie de satiété is extremely interesting. You discuss demand saturation and try to incorporate it into the theory. In my opinion, demand saturation is one of the most needed theory works when we want to analyze development of advanced countries. Japan is also affected very much by demand saturation.

Of course, the standard consumers' choice theory assumes that consumers are insatiable. Your efforts are not in the line of this standard. That is why you always meet reluctant reactions from many of researchers.

•  When I tried obtaining funds to develop and finding journals to publish, the answer always was : "that's unusual". 

The reaction such as "that's unusual" is an order of merit. It proves that you are really doing a new theory. Cheer up, my Claudio! You are not alone.

Because  they do not perceive a utility difference between applying or not applying theory.

Actually, I have been writing and researching on international trade theory and empirical evidence for decades, evidently without any significant impact! The theoretical issues underlying conventional trade theory are addressed in many of my articles available on my homepage at homepage: http://www.anwarshaikhecon.org/ . The central argument is that comparative cost theory is wrong on its own grounds of free competition, which is why it works so badly at an empirical level. By contrast, the rule that lower cost producers fare well in competition is shown to apply to both national and international competition. Two recent articles are "Absolute Cost Differences and Persistent Trade Imbalances: The Harrodian Adjustment Process" 2014  and "Explaining Long Term Exchange Rate Behavior in the United States and Japan" 2012 (which also addresses the empirical evidence). Plenty more will be available in the international trade chapter of my forthcoming book from Oxford University Press, February 2016, called Capitalism: Competition, Confllict, Crises. The book is available for order now. 

I always highly appreciate your paper. 

Anwar Shaikh (1974) Laws of Production and Laws of Algebra: The Humbug Production Function, The Review of Economics and Statistics. 56(1): 115-120. 

This was the first theoretical critique of Cobb-Douglas production function. This kind of criticism is extremely important. The paper made clear before Herbert A. Simon and J Felipe and JSL McCombie that high fitness with data is simply a reflection of accounting identities into production function. 

We must be careful if a high fitness is obtained in economics.

Thank you, Yoshinori. My Humbug paper was my first seminar paper as a graduate student. I hope you will keep an eye out for my OUP book whose goal is to show that both theoretical and empirical micro and macro can be undertaken rigorously without any reference to rational choice, utility or profit maximizing, or rational expectations. 

Anwar

I have read Shaikh's  paper in his contribution paper in RG:

Shaikh, A. 2005 Nonlinear Dynamics and Pseudo-Production Functions. Eastern Economic Journal 31(3).

I am happy to know that he continued to fight against Solow-Swan type production functions.  As he cites it, Solow wrote

• One or more aggregate production functions is an essential part of every complete macro-econometric model...It seems inevitable...There seems no practical alternative... [Yet, n]obody thinks there is such a thing as a ‘true’ aggregate production function. Using an estimate of a relation that does not exist is bound to make one uncomfortable” [Solow, 1987, 15]. 

In the same issue as Shaik's, Felipe and McCombie is starting their article by this comment:

• It is somewhat paradoxical that one of the concepts most widely used in macroeconomics, namely the aggregate production function, is the one whose theoretical rationale is perhaps the most suspect.

Even though, aggregate production functions remain to be the basic ingredients of almost all kind of macroeconomics. We may cite (Old) Growth Theory, New Growth Theories (Endogenous Growth Theory), Growth Accounting in Historical Growth Analysis, and others. Production function is also used as foundation to Marginal Productivity Theory (A theory of distribution).

After late 1960's, macroeconomic models and theories are required to have micro foundation. Many of them found its foundation in production function. It was a false foundation, because production function had no firm foundations.

This question page is concerned with international trade theory. The second most famous theory in this field is Heckscher-Ohlin-Samuelson model. It is based on aggregate production function. What I call theory problem is this kind of problems. We have to acknowledge that HOS model has no relevance. Its foundation is undermined.  Anwar Shaikh started this critique of the very foundation of HOS theory, or neoclassical international trade theory. It is really a great achievement.

From last comment by prof Yoshinori on what he calls theory I understand that some problems might be considered as theory whereas some others might not ! But theory should not have any limitations not should it have any restrictions: e.g.  as prof Yoshinori said that HOS model has no relevance. If it is theory then it always has some relevance providing it is consistent and logical in its structure as a model. Then relevance to what? Prof Shaikh's paper is also relevant but no more nor less that the original HOS papers and books. Unless we want HOS to be empirically tested and confirmed (which it is in many papers). Unfortunately, in economics theories depend too much on the underlying simplifying assumptions; hence perhaps we should be talking much more about the latter (simplifying assumptions) than the former.

Have you read my post (the 6th post of htis page, To Guillermo Eduardo Ibarra ), Elias Sanidas?

 I have given a definition of "theory." Ihave written there that 

• To produce or create a new system of concepts and propositions which can give a new perspective for the problem we were familiar is another important theory effort.  

 I have also posted a letter to Mahinda Henegedara (the 32nd post of this page), in which I wrote

•  The theoretical base of international trade and international economics must be based on the micro and macro economic principles. Without such a strong theoretical base no one can explain the complexity of international trade.
•  The problem that lies before us is that the so-called "international trade theory" is not based on a firm theory.

 The HOS model is a typical case. It assumes that an aggregate production function exits and we can rationally argue on its base. If the production function is an entity that only reflects accounting identity, the price argument based on it looses its rational base, because the production function is obtained by assuming a particular system of prices. 

You wrote in your last post that 

• If it is theory then it always has some relevance providing it is consistent and logical in its structure as a model. Then relevance to what? ... ... we want HOS to be empirically tested and confirmed (which it is in many papers).

 Are you really thinking of your conditional clause "providing it is consistent and logical in its structure". If a theory is not consistent and not logical in its structure, and if the theory prediction fits well to empirical data, are you satisfied for all? Milton Friedman recommended that you should be satisfied. If all you want is to make a prediction "empirically tested and confirmed", it signifies that you are not interested in theory. 

If you are interested in theory, you will try to find the rational core of the theory that is logically inconsistent but gives a good prediction. In the case of HOS theory, the worst prediction is factor price equalization theorem (FPET) (I know that there are some conditions for this theorem). If the conclusion of this theorem is true, every nation would have a similar wage level, because labor is one of factors and wage rate should converge to a unique level. I read that someone answered in defending FPET that it takes 75 years until the theory prediction becomes fulfilled. Despite of this wishful thinking, as Shaik’s Table 1 (Globalization and the Myth of Free Trade, 2003) reveals that the gap between Rich and Poor countries (a ratio of GDP per Capita) increased from 3 to 1 in 1820 to 72 to 1 in 1992. One of the HOS theory predictions is completely refuted. Do you still want to confirm it?         

 Obviously, you are providing a good example in person that researchers working on international trade are not interested in theory questions.

To Yoshinori

I am interested in theoretical constructions, that is why I defended the validity of HOS in my last comment; HOS is still relevant and it is not true that it is only macro related; you can make it micro related anytime somebody wishes to do so. As to the price equalization predicted by HOS, the assumption of perfect competition and no economic profits is crucial here; that is why I said that we should examine the underlying assumptions in theory very closely!

Also one note is very important: international trade cannot explain differences in economic development in all respects. We still do not have in economics a holistic and comprehensive theory that explains everything at the same time. Also very often theory cannot be constructed for everything at this stage of our knowledge in economics; then empirics can be useful. On the other hand if we really want to apply the scientific method to economics, then theory and empirics should be done in sequence or at the same time.

Finally regarding the theoretical issues of production function please see my publication in the journal of Socio-economics where I criticize the existing way of construction of production functions of the usual type . Overall, I agree with the use of theories as they are very useful in understanding the complex economics world. But one cannot make restrictions and judgements on the conclusions of theories unless we see the underlying assumptions and relevance in the real world. 

Dear Elias,

I do not object  that theory and empirics should be done in sequence or at the same time (as you wrote it in your last post). I do not object that empirics can be useful (as you wrote). I am only insisting that theory and theoretical examination have their own values and some judgement can have meanings independent of empirics. Logical contradiction is one of them. If a theory is proved to contain a logical flaw, it is necessary to reorganize the theory in order to re-establish logical   consistency. For this point there is no need of empirics. 

With regard to HOS theory, the problem is no longer to find some empirical  facts to save it. There are so many inconsistencies in theory and in empirics. We are not at the stage of wondering it it is true or not, or useful or not. We have to judge if it is a theory that has a future.

The point I want to emphasize is to know the possible capacity of a system (be it theory or technology). I adopted this term from Atsunobu Ichikawa. See for details my answer to Vitaly Voloshin's question:

https://www.researchgate.net/post/What_is_the_best_criterion_of_the_successful_research_project

Ichikawa emphasizes that any system has some margins left within its possible capacity. If we are satisfied that we have some research problems to elucidate in the present system, there will be no breakthroughs.

The question with HOS is to know if it has a good perspective to the future research or it has already come  to stagnating state and we cannot hope any more big improvements. My understanding is that it has come to a dead end. It is your freedom to believe that HOS is still hopeful. Nobody can prevent it.

This kind of judgement cannot be done without references to competing theories. It seems you know little about the state-of-the-art of Ricardian trade theory. You should compare which has a greater possibility. 

Elias,

I searched your Contributions page but could not find your paper in the Journal of Socio-economics. Can you give me an explicit reference?

The paper I could find was

Korean Augmented Production Function: The Role Of Services And Other Factors In Korea's  Economic Growth Of Industries

You propose to augment several variables as arguments of the production function in addition to standard factors such as labor, capital and land. The regression results you have got do not evade the criticism advanced by Shaikh, Simon, Flipe and Adams, McCombie, Pressman, and Frankin L. Fisher. (There is a symposium inEastern Economic Journal, Vol. 31, No. 3, 2005). What is questioned is the concept of production function itself and not the good or bad fitness to data.

Inspired by a post of Anwar Shaikh, I have read Shaikh's paper Globalization and the Myth of Free Trade (We can find the paper in Shaikh's Contribution page in RG and download it.)

 Shaikh's paper consists of two aspects: one is the examination on theories that support globalization and the other arguments on how history of trade policy and its results prove defects of these theories. I agree to a major part of his arguments. His overview of the history of trade theories is very comprehensive and informative. His comments on the history of free trade policy give a good perspective on what happened in two centuries from Adam Smith time to our time. This is a great paper. I do not object to this point. 

In newspapers and magazines, or on TV, industrialists, statesmen, and economists appeal for immediate trade liberalization. They argue for this on the basis of “economic theory” but I am afraid without deep understanding of trade theories. Theory is not so simple that it recommends any concrete policy. It may contribute in fermenting a trend of policy thinking but policy depends much on the concrete situation and history. In the case of trade theory also, there are so huge misunderstanding in the theory itself. 

In the following, I will not discuss policy aspects. I want to concentrate in theory problem alone. This may seem for many too long a detour. However, in my understanding, a correct and deep understanding of trade theory is evermore needed and we can arrive to a new insight with a deep detour to the theory. This is the reason why I discuss Shaikh’s paper, which was written already 17 years ago. 

To avoid confusion, it is necessary at first to add a few words on Saikh's terms: 

Standard trade theory (STT): This is explained mainly in Section II.1. It is a bit difficult to grasp his concept of "standard trade theory," because it contains miscellaneous elements. What is sure is that he included in this standard theory (1) comparative cost principle, (2) automatic balancing of import and export [(1) includes (2)], (3) theory of comparative advantage [a down stream of (1)], (4) HOS model [(1) is granted in (4)], (5) full employment is a natural consequence of competitive markets. 

Two main reactions: (A) Purchasing Power Parity (PPP) is a variant of STT (2). It only works in a long run (75 years or longer). (B) New Trade Theory. These are reactions of the STT to its empirical weakness (Section II.2). The latter tries to incorporate oligopoly or imperfect competition, increasing returns to scale, and strategic factors. Notion of factor endowment was expanded to include human knowledge. 

The classical theory of competitive advantage: Explained in Section 3. Be careful. It's competitive, not comparative. This is what Shaikh recommends as possible alternative. It encompasses Smith and Ricardo. Within a nation its real wages and production coefficients regulate relative prices. It is the differentials in real wages and technologies across nations that determine their international competitiveness (n.8 in p.8) Classical theory of competitiveness is different from the conventional theory of perfect competition (p.8). 

The first objection is his conception of the STT. Shaikh does not enter into the structure of the STT and combines all of the elements and rejects them. For example, he does not distinguish Ricardian theory and HOS model. In my understanding this is a serious error, because the key to develop his classical theory of competitive advantage lies in the Ricardian tradition (not exactly Ricardo itself). 

Shaikh argues that his classical theory of competitive advantage encompasses both Smith and Ricardo but it is not clear how Ricardo's trade theory is incorporated into his classical theory. I have also read Shaikh's The Laws of International Exchange (1980) [The RG members can read this paper in his Contribution page.] My impression was not changed. In his 1980 paper, he wastes many pages in illustrating the difference between Ricardo and Marx but spends only two pages among 29 pages excluding notes and references. He emphasizes that theory of international competition is already provided in Marx's Capital in three volumes. He must be right in some aspect of his analysis, but he does not notice the essential difference between competition in domestic (national) market and competition in international market. Marx could not give a theory of international values. If he could analyze international competition without having a theory of international values, it means that we can analyze domestic competition without theory of values. This must not be what Shaikh believes. 

The second objection to Shaikh's argument is that any theory can develop and it is necessary to observe what is possible in a strand of theories. Shaikh thinks that HOS model is the modern form of Ricardo's comparative cost theory. I admit that this is the standard understanding among trade theorists (particularly among mainstream economists). However, it is not necessary to side with neoclassical interpretation. As Shaikh emphasizes it, Smith and Ricardo have a better understanding with regard to competition. As he put it, "the conventional theory of "perfect" competition" is very different from the classical theory of competition (p.8). Why did he not try to build a theory of international competition together with theory of international values? 

As the Globalization paper was written in 2003, it is true that Ricardian theory was not yet developed sufficiently. However, there were theory construction efforts started by Graham (1948) and subsequent developments made by L. McKenzie and R. Jones. There are many deficiencies in their theory. For example, they could not succeed in incorporating intermediate inputs. Next trouble with their theory is that they have adopted equilibrium framework, thus excluding unemployment. Third point is that they could not make clear how the wage rates are determined across countries. They could only analyze patterns of specialization and price movement. Moreover, McKenzie and Jones were in the tradition of John S. Mill and could not understand Graham's criticism against "classical theory of trade" (Graham meant by this expression neoclassical theory of trade). 

Shaikh’s reading of Ricardo’s Chapter 7 is not very exact. The traditional interpretation made by John S. Mill and after is misunderstanding Ricardo’s reasoning on gains from trade. This misinterpretation came to be discussed by R. Ruffin (2002) and A. Maneschi (2004) but became known after Shaikh’s Globalization paper. This point has been known in Japanese reading people, because Yukizawa Kenzō wrote a paper in 1974 which made clear that the traditional explanation of gains from trade based on comparing two ratios aEC / aEW and aPC / aPW is not exact. I do not reproach Shaikh on this point. This came to be known in English speaking world after he has written his Globalization paper. However, he was too hasty to condemn Ricardo and this attitude did not give a good effect on reading Ricardo in its possibilities.

In my opinion, Shaikh's theory of competitive advantage and Ricardo's theory of comparative cost do not contradict at all. They are complementary. Excluding to work out Ricardo's theory in a modern form, he has lost the chance to get what is lacking in Marxian theory of international competition: i.e. theory of international values.

It would be necessary to add a few words to my previous post on Shaikh's Globalization and the Myth of Free Trade. 

As Eaton and Kortum writes (in their Article "Putting Ricardo to Work" 2012in Journal of Economic Perspectives), 

• however, the Ricardian framework has experienced a revival. Much work in international trade during the last decade has returned to the assumption that countries gain from trade because they have access to different technologies. (JEP, 26(2), p.66)

 This revival is natural in view of disastrous results obtained in the strand of Hechscher-Ohlin-Samuelson (HOS) and Hechscher-Ohlin-Vanek (HOV) models (See e.g. Trefler 1993 and 1995). However, Eaton and Kortum are rather busy in empirical research and have not poured enough effort in the theory making. A result is Eaton and Kortum (2002) on which we are examining in another question page 

Why did Eaton and Kortum model perform so badly?

https://www.researchgate.net/post/Why_did_Eaton_and_Kortum_model_perform_so_badly 

In my understanding, symmetric assumptions imposed on models are the mains cause of empirical failures. There are plenty of examples. HOS, HOV, Jones's assumption that all countries have the same coefficients for material inputs, Eaton and Kortum's assumption on symmetric inputs between industries (I posted an answer in the above Why question page with more detailed explanations). These assumptions are widely adopted for the sake of tractability and exclude asymmetries which are ubiquitous in the economy. 

Symmetry is a powerful theoretical assumption if it is supported by reality. Physicists assume various kinds of symmetries in the deep structure of theory of elementary particles. I am not sure if economists are unconsciously imitating physicists' behaviors, but if they are, this is not a good custom. Symmetric assumption in the presence of strong asymmetry is simply abandon of theory making efforts.

Dear Dr. Shiozawa,

Physicists study fundamental micro laws, and probably symmetries are there. Macro physical reality is quite heterogeneous. Take for example variation of frictions of different surfaces.

General principles of social science (like equality of rights) and microeconomics (general equilibrium) are also symmetric. However, real trade is awfully asymmetric, and we should not blame economists but lawyers and politicians for that. Take as an example growing practice of imposing embargo in trade with particular countries, like Iran and Russia for purely non-economic reasons. Add an exclusion of China from Pacific trade agreement. Then frictions of different tariffs in bilateral trade will seem like peanuts comparing to that.

Dear Yuri Yegorov,

Of course, economists are not to be blamed for the existence of  inequalities. What I am questioning is that many of economics models neglect asymmetries whereas the existence is evident and it may  influence the behavior of economics.

 Shiozawa

Relations between a theory and a policy

After having discussed in ResearchGate for many occasions, I came to conceive that many of economists (I may say the majority) assumes that a theory has a closely related policy recommendation. I do not think so. In my opinion, a theory cannot make any concrete policy recommendation. A policy depends on an examination of the concrete situation, the problem we face and what history teaches us.

For example, many economists think that Ricardian trade theory recommends free trade. It is true that Ricardo showed how two trading countries gain from trade, but if we study the theory in detail, implication is not so simple. A (suitably formulated) Ricardian trade theory can incorporate unemployment. For example, we can show that a sudden opening of the ports has a high possibility to induce unemployment in both countries (See my paper A New Construction of Ricardian Trade Theory, Section 4. Theorem 4.1 shows that unemployment is inevitable if there is no aggregate demand policy.).

The fact that international economists are not interested in theory questions may be a part of more general tendency which prevails in economics. 

I have posted a following question in May 8, 2015. 

What's wrong with economics and what's right with it?https://www.researchgate.net/post/Whats_wrong_with_economics_and_whats_right_with_it#563b1fbb5dbbbdbaea8b457e 

Unfortunately this question attracted an interest of a very few persons (exactly 3 including myself as of November 5, 2015). This may also be an example of evidence that economists are not interested in theory questions.

Sir

Everybody does not have the same interests and acumen as you.

I hope that you formulate an international theory of value using an innovative analysis.

Regards

Israr

Dear Israr,

you are right.  It is really important to formulate an international theory of value using an innovative analysis. Last year, I have organized a research group to study international value theory. There were very animated discussion and I learned much from the discussion. My theory in international values could make an unexpected development.  Discussions with Indian economists in this RG are also very illustrating for me. Thank you.

Yoshinori 

I have posed a question related to the question of this page:

Why did the notion of "processing trade" not become a major concept before fragmentation and global supply chain?

https://www.researchgate.net/post/Why_did_the_notion_of_processing_trade_not_become_a_major_concept_before_fragmentation_and_global_supply_chain

Please read my new question and answer it. 

Dear Yoshinori,

about the interpretation of the comparative advantage theory have you read kurdas? may be it is of interest to you:

http://www.centrosraffa.org/pe/5,2/5,2.4.%20Kurdas.pdf

he provides some references to the work of Krishna R. Bharadwaj,

 whose major work I ma happy to remember here:

Classical Political Eocnomy and the Rise to Dominance of Supply and Demand Theories, 1978.

Hope you find it interesting as I found it

Regards

bepi

Dear Giuseppe,

thank you for your valuable information. I have read Kurdas' review article hastily. Is this the place you referred to?

• Another example is Ricardo's comparative advantage theory, long the centrepiece of mains stream thinking on international trade. Again one can argue that it has been subverted by the marginalist interpretation.

It is true that Ricardo's trade theory has been "subverted by the marginalist interpretation." As I have argued above, HO model is the typical one.

As for the review, I almost agree with Kurdas. At the end of his review he writes:

• It is to be hoped that Sraffa's clarification of classical ideas leads to a new economics in the full sense of the word. For this, the core relations have to percolate down to lower levels of abstraction, and to the study of today's economic issues. In the Essays on Sraffa, some scholars are trying to achieve just that. In the mean time, the vast majority of economists show no signs of being persuaded that this particular alternative to marginalism holds promise. And time is running out. (p.167)

 Kurdas is right in pointing that Sraffians have been working in a too abstract theory and are basing their arguments too much on historical thought. More concretely, he writes:

• [M]ost are shot down on theoretical grounds. As the rundown of the essays shows, theoretical and history of thought exercises dominates the research project. The theoretical constructs that are on the level of abstraction of marginalist general equilibrium equations are well elaborated. But the steps going from this level to more concrete analyses are not theoretically elegant enough to meet the approval of the Sraffian camp. (p.166)

I totally agree with Kurdas. If I am a Sraffian, I am not a Sraffa fundamentalist. We have to save the theoretical core but we should not stay within the discourse that Sraffa made. We should abandon standard commodity as an invariant scale of distribution. Classical theory of value should not be interpreted as that of long run or the abstract center of gravitation. 

The details of these points are written in my paper: On Ricardo's Two Rectification Problems (See the end of this entry). As for theory of international trade, I have generalized it as an extension of Ricardo's theory of value (i.e cost-of-production theory of value). My theory is very general in such a way that it can treat M-country N-commodity case. The choice of techniques is incorporated in it. It admits trade of input goods as well as final products.

This generalization is not a pursuit for theoretical generality itself. I believe that this generality is necessary as a theory of international trade that is useful for the analysis of today's problems. For example, input trade has been one of the most important forms of international trade but its importance has been kept covered by the theory which only assumes trades of finished goods. Please see the second part of the above cited paper.

Questions of outsourcing, subcontracting, fragmentation all requires a general theory. Marginalists can only appeal to their General Equilibrium Framework and lack a tool that is suitable to analyse these phenomena.

You have worked long on international outsourcing and subcontracting. Please read my incomplete paper The economics of Great Unbundling, section 5 in particular.

I want to know your opinion and criticism if any on the analysis there extended. I am wondering if this Great Unbundling is a good and sustainable thing for host countries. In the case of India or China, they may procure whole series of technology by which to crate their further development, but how about the case of Romania, for example.  She may receive a biased system of technology and it may become difficult for her to develop her economy further on her own foot.

This is the reason why i cannot finish my paper in Great Unbundling.  

https://www.researchgate.net/publication/266737921_On_Ricardo%27s_Two_Rectification_Problems

https://www.researchgate.net/publication/272943681_The_Economics_of_the_Great_Unbundling 

Conference Paper On Ricardo's Two Rectification Problems

Conference Paper The Economics of the Great Unbundling

thanks Yoshinori ,

I will read the two papers of you during Christmas holiday. 

Giuseppe

Dear Giuseppe,

good holiday to you. Please participate to our discussion in my question:

Why did the notion of "processing trade" not become a major concept before fragmentation and global supply chain?

https://www.researchgate.net/post/Why_did_the_notion_of_processing_trade_not_become_a_major_concept_before_fragmentation_and_global_supply_chain?

As I have written in the previous post, you have many papers based on detailed inquiry that analyse aspects of outsourcing and subcontracting of Italian firms toward Romania, India and China. "Processing trade" is a general notion that has a special history in the history of international trade. You must have something to say on it.

Arguments over Import-Substitution Industrialization and Export-Oriented Industrialization would have been different if the concept "processing trade" (in the East Asian tradition) has been well known during 1980's.

Yoshinori 

I have posted a new question on the comparative advantage principle. Ten odd years ago, a new interpretation of Ricardo's four magic numbers was discovered (re-discovered if I say more correctly). Many discussion were made since then and new interpretation of the Ricardo's theory of international trade changed substantially. It inevitably requires the change of what you teach in your classroom.

Please post your answer how you are doing and how you think about it. For those who are not well versed in the new interpretation, I have given there a suggested reading, which is a concise and precise paper written by Faccarello. 

https://www.researchgate.net/post/Comparative_advantage_is_what_you_teach_every_year_in_your_classroom_Are_you_sure_that_you_are_updating_your_knowledge_and_teaching?_tpcectx=profile_questions

I have posed a new question below. Please visit it as well.

https://www.researchgate.net/post/Would_someone_like_to_compare_two_Ricardian_systems#5788dae1615e27a81850cbc4

It ask to compare Eaton and Kortum's Ricardian model and another Ricardian trade theory named New Theory of International Values. A comprehensive explanation is given by my paper (still in a draft stage) below. It covers almost all points that I have argued in other papers cited in the previous posts, although each has its own merits and different focuses.   

Working Paper The New Theory of International Values: An Overview

 More than one year ago, I posed this question. Many aspect concerning trade theory have been discussed and I have to thank all of those who have participated in the discussion. I also want to express my thanks to all readers of this question pages.  I want to restart my discussion, because the result of the US presidential election which brought Mr. Trumps an unexpected  victory and it is, I believe, closely related to my question.

My initial question was quite vague. Now I can explain my question more concretely. Mainstream trade theory  only preaches gains from trade. It may mention to frictional unemployment briefly and passingly. However, as the political analysts are reporting, many white workers in the Rust Belt voted Trump. Despite the rosy promise that trade liberalization and globalization will bring them a prosperous economy, they felt betrayed by the fact and they voted Trump instead of trusting the established politicians. At the back of  of these politicians, there were policies recommended by the mainstream economics.

You may feel that chain of causation is too long, but if we think of trade policies the relationship between economic theory and the feelings of being betrayed is quite clear.

Liberalization policies were proposed without paying necessary precautions to prevent causing too big conflict of interests. Trade liberalization is beneficial to many people. But it brings also harms to some people. Imagine that  you are fired because of liberalization. Mainstream economics  contends that this job loss is temporary and the fired person can removed to a new industry of which the chance is opened by the liberalization. I may be true if we do not consider how long the suffer continues. Six months may be durable, but twp years must be too long.

Now my problem is this: 

• Why are the researchers working on international trade not interested in the characteristics of the theory that finds only gains from trade and does not see losses from trade?

I have posed a similar question in April:

Is conflict in international trade an illusion?

https://www.researchgate.net/post/Is_conflict_in_international_trade_an_illusion?_tpcectx=topic_detail&_trid=I1IXcehK8fVR9u607J5E2bVY_17

International trade theory has been too long time ignored this very theoretical questions. The basic structure of the theory (or models if you like) is questioned.