International economics-III

International economics 3These are disturbing revelations. And yet there is nothing in it that is surprising. Division of the world into ‘nations’ has been the result of a series of historical accidents rather than of set design. And in so far as there is at all any design, it is based on linguistic, racial or similar emotional affiliations rather than on economic viability; the political boundaries of the world are independent of the geographical distribution of material resources.

The inhabitants of these separate territories have also different social habits and attitudes. Some are thrifty and enterprising, some are not. Some have the ‘will to economize’, and some do not have it.2 These habits and attitudes may be partly natural; but partly also and perhaps very largely  they are conditioned by material environment itself. It is indeed difficult to understand why the people of the East should have in general an ‘other-worldly’ attitude in contrast with those of the West. It is more reasonable to believe that all of us have split personalities one inward-looking and the other more earthy. One has only to travel about a little to know how essentially similar we all are in respect of our conception of values and habits of thought and desire. Acquisition of wealth is a general desire, although it may be tempered in more or less degree by considerations of the non-material values of life the scale leaning more towards the latter not when you have an overdose of wealth but paradoxically when you have too little of it.

‘From him who hath not is taken away even that which he hath.’ And when on top of all this, account is taken of the fact that the relatively more resourceful part of the world, after having had an early start at industrialization and economic development, extended its acquisitive sway by manipulation or by conquest over the less developed areas of the world, the economic stagnation of the latter is easily explained. So international economics is most important.

But could not the widening gulf between the rich and poor countries be stemmed by international trade? If the distribution of resources between nations is uneven and these resources are not mobile, could not this unevenness be rectified by movement of  products? It has been the contention of liberal economists since the days of the Industrial Revolution in England that the comparative disadvantage of countries less endowed with capital and enterprise tends to be corrected by trade. The idea is implicit in the classical theory of gains from international trade, and the later reformulation of the theory gives it a more explicit sanction. It is true, these economists admit, that resources are not internationally mobile.

‘Home,’ says Adam Smith, ‘is the centre round which the capital of the inhabitants of every country are continually circulating, and towards which they are always tending.’1 Yet, in so far as commodities are free to move, poorer countries get relief, through trade, from an undue pressure on scarce resources. The benefit comes in two ways: First, it comes through increasing demand from relatively prosperous countries which raises the price of products and hence the wages of labour in the poorer countries. And secondly, it offers opportunity to the poorer countries to secure cheaper goods produced by superior, capital-intensive techniques in the relatively more prosperous countries. International trade in commodities is supposed to be a substitute for international mobility of factors of production.So international economics is most important.

Now this is a delusion. On a static view it does appear no doubt that trade reduces international differences in wages, for it permits the poorer countries with relatively abundant labour supply to specialize more and more in labour-intensive industries and to secure in return goods which require a relatively larger use of capital. If India has an abundant supply of labour, and England has a scarce supply of it, trade does make it possible for the former to develop labour-intensive industries beyond the level which its own internal demand would warrant, and to meet the demand for more capital-intensive goods by imports from the latter.

India can then specialize in more labour-intensive industries and England in more capital-intensive industries, the process bringing the level of wages in India nearer to the level in England. Indeed, arguing on these lines, it can be shown that, subject to reservations following from transport costs and international differences in the quality of labour, wages should tend to equality in different countries if there be free trade in commodities. So international economics is most important.

Leave us a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.