The analysis, however, overlooks certain vital elements in the chain of causation, in particular the relative bargaining strength of the poorer countries and the relation of terms of trade to the supply of resources and to economies of production.
On a dynamic view, when account is taken of these elements, one can visualize the possibility of a cumulative deterioration in the economic position of underdeveloped countries once they start with inferiors terms of trade, and of a reverse process operating in countries which have been ahead in the race. So international economics is most important.
There is a passage in Marshall’s Principles of Economics which brings out the nature of this cumulative process with reference to labour-capital relations:
‘It is certain that manual labourers as a class are at a disadvantage in bargaining; and that the disadvantage wherever it exists is likely to be cumulative in its effects.
For anything that lowers wages tends to lower the efficiency of the labourer’s work, and, therefore, to lower the price which the employer would rather pay than go without that work. The effects of the labourer’s disadvantage in bargaining are therefore cumulative in two ways. It lowers his wages; and this lowers his efficiency as a worker, and thereby lowers the normal value of his labour. And in addition it diminishes his efficiency as a bargainer, and thus increases the chance that he will sell his labour for less than its normal value. So international economics is most important.
The implication of this analysis is perfectly general; it applies to all exchange relations involving parties with unequal bargaining strength. Substitute ‘labour’ by ‘weaker nations’, and ‘efficiency’ by ‘economies of production’, and you have the spectacle of a cumulative process operating in the international economic field. Poorer countries, because they are poor, have low bargaining strength. They have, therefore, to accept less favourable terms of trade in their dealings with richer countries. Their invisible surplus turns out to be less, and they have to turn more to labour-intensive lines of production which offer less scope for economies of production.
The opposite happens in the case of richer countries; and the economic gulf between the two widens.2 Witness, as a practical example, the case of India vis-a-vis England under a r6gime of free trade, as it did exist over not-an inconsiderable period of time. Can there be any doubt but that the benefit of trade went more to England than to India? So international economics is most important.
Note; 1 Alfred Marshall, Principles of Economics (London, 7th edition, 1916), p. 569. The sentences are put non-consecutively with a view to bringing out the gist.
8 See J. R. Hicks, Essays in World Economics (Oxford, 1959), Supplementary Note C. Commenting on Samuelson’s Factor Price Equalization Theories, Hicks observes: ‘There is no tendency to equalization, either between the industrial and non-industrialised, or (what is also very significant) among the non-industrialised themselves. They may be rich or poor, according to their endowment of natural resources. Those which are rich in natural resources can industrialise themselves, if they choose; it is easy for them to accumulate necessary capital. But those who are poor in natural resources have no hope save in industrialisation and here is their dilemma. A small industrial sector does not develop sufficient economies to make it competitive; a large industrial sector requires so much capital as to be out of reach.’ Ibid