Key insights and ideas for thirteen core topics in economics, organised by selecting the most relevant theoretical approaches per topic and contrasting them with each other.
This chapter provides a map through the complex jungle of economic theories. There are many different theoretical approaches, and each aspect of the economy has been analysed by a number of different ones. However, it is neither feasible nor productive for students to engage with every possible angle for every topic. Hence, the chapters on different topics, together with Building Block 8: Economic Theories, sets out an alternative approach: pragmatic pluralism. Rather than pursuing the extreme of either only focusing on one approach, or including every possible strand of thought for every topic, we propose a pragmatic middle ground: teaching a select number of approaches for each topic. In this way, it is possible to introduce students to the variety and diversity of economic thinking, whilst still having enough time and space to properly discuss each of the insights in detail with them.
We live in a globalized world in which many products are produced in global value chains and shipped overseas to be sold to customers all around the world. What drives globalization, what forces counter it? And why are electronics produced in East Asia and many raw foodstuffs grown in Africa? Does everyone benefit from trade or does it systematically favour some at the cost of others?
Main opposing perspectives
■ Post-Keynesian economics: Absolute advantage
■ Neoclassical economics: Comparative advantage
Main complementary perspective
□ Structuralist economics: Unequal terms of trade
Additional perspectives and insights
+ Other: International trilemmas (you can’t have everything)
Main opposing perspectives: Post-Keynesian economics and neoclassical economics
The two main theories on international trade were developed within classical political economy, respectively by Smith and Ricardo. Ricardo argued that only comparative advantages matter when nations trade. He did so, because he believed that Hume’s quantity theory of money showed how automatic exchange rate adjustments would arise in case of trade imbalances. Smith, argued, instead, that absolute advantages matter because international capital flows would prevent trade imbalances from being automatically corrected. Just like domestic competition and specialization happens on the basis of absolute advantages, Smith argued that international trade operates the same way because capital is both nationally and internationally mobile.
Most neoclassical economists, such Eli Heckscher, Bertil Ohlin and Paul Krugman, followed Ricardo with comparative advantage, while other economists such as Karl Marx, John Maynard Keynes and Roy Harrod, followed Smith with absolute advantage. Based on these different conceptions of what drives international trade, extensive and complex frameworks and models continue to be built. Some models focus on technological differences, others on variations in the abundance of production factors, and yet others on return to scale.
The issue about whether comparative or absolute advantages are relevant might seem minor and abstract, but many ideas on international trade are based on one of these two ideas to come to conclusions about, for example, exchange rates, current accounts, free trade, and globalization. One recent example is whether one sees currency manipulation as crucial in explaining US-China’s trade imbalance, as the comparative advantage approach suggests, or whether one sees unequal real competitiveness and productivity as crucial driver, as the absolute advantage approach argues (Weber & Shaikh, 2020).
Main complementary perspective: Structuralist economics
Contrary to the widely held view in rich countries, that they are already giving poor countries more than enough money through developmental aid, structuralist economists pointed out that the aggregate money flows are mainly the other way around. The terms of trade are systematically in favour of the rich countries because their export exists mainly of high value manufactured products, while those of poor countries are mainly low value agricultural products and raw materials. Instead of being simply the result of the economic efficiency and hardworking population of an individual country, the wealth of a country is largely a reflection of its power in respect to other countries. Poor countries, however, try to develop, industrialize and diversify their economies by pursuing protectionist policies, which help move from low-skill labour-intensive to high-skill capital-intensive sectors.
Additional perspectives and insights
Other: Within international economics a few trilemmas, in which only two of three things can successfully go together, are debated. The first and most well-known, is generally referred to as the impossible trinity and describes the impossibility to have independent national monetary policy, free capital movement and fixed exchange rates all at the same time. Countries are thus forced to choose two of the three as their monetary policy will otherwise fail. Besides this international monetary trilemma, recently it has been argued that there is also an international financial trilemma. It is argued that it is impossible to have independent national financial policy, international financial integration, and financial stability simultaneously (Obstfeld, 2015). Finally, Dani Rodrik has argued that there is also an international political trilemma arising from the impossibility to have democracy, national sovereignty and global economic integration all at the same time.
Chapters & Papers:
- Economics: The User’s Guide by Ha-Joon Chang, from 2014, chapter 12. This brief and accessible pluralist book contains a useful introductory chapter on international economics.
- Economics After The Crisis by Irene van Staveren, from 2015, chapter 14. This well-written textbook which in one chapter sets out the neoclassical, post-Keynesian, social economic and institutional perspectives on international trade.
- The Economy by The CORE Team, from 2017, chapter 18. This successful textbook introduces students to the economics of globalization, trade and inequality.
- Introducing a New Economics by Jack Reardon, Maria A. Madi, and Molly S. Cato, from 2017, chapter 16. This ground-breaking textbook introduces trade, exchange rates and the balance of payments and weaves together pluralist theory and real-world knowledge.
- Capitalism: Competition, Conflict, Crises by Anwar Shaikh, from 2016, chapter 11. This impressive and extensive book compares multiple perspectives on many traditional economic topics and includes a chapter on international trade and exchange rates.
- The Routledge Handbook of Heterodox Economics: Theorizing, Analyzing, and Transforming Capitalism by Tae-Hee Jo, Lynne Chester, and Carlo D’Ippoliti, from 2017, chapters 23, 24 & 29. This broad and diverse book sets out a variety of theories on trade, global value chains and international development.
- The Handbook of Economic Sociology by Neil J. Smelser and Richard Swedberg, from 2005, chapters 8 & 9. This extensive and yet accessible book for non-sociologists, provides an impressive and useful overview of the field of economic sociology, including two chapters on international institutions, organizations and arrangements.
- Principles of Economics in Context by Jonathan Harris, Julie A. Nelson and Neva Goodwin, most recent edition from 2020, chapters 7 & 29. This useful textbook, which pays particular attention to social and environmental challenges, contains two chapters on international trade, finance and policy.
- Macroeconomics by William Mitchell, L. Randall Wray, Martin Watts, from 2019, chapter 24. This ground-breaking and much-discussed textbook written by three leaders of Modern Monetary Theory (MMT), contains a useful chapter setting out the economics of exchange rates, balance of payments and international competitiveness.
- Foundations of Real-World Economics by John Komlos, from 2019, chapter 13. This critical introduction to economics contains one chapter on international trade and infant industries.
- Absolute advantage and international trade: Evidence from four Euro-zone economies by Stergios A. Seretis and Persefoni V. Tsaliki, from 2016. This paper investigates international trade in the eurozone and concludes it is persistent productivity differences and not comparative advantages that can explain observed patterns.
- The US-China trade balance and the theory of free trade: Debunking the currency manipulation argument by Isabella Weber and Anwar Shaikh, from 2020. This article describes the debates in empirical literature on the exchange rate of China and argues the findings can be explained by applying the absolute cost theory.
- International Political Economy: Interests and Institutions in the Global Economy by Thomas H. Oatley, most recent edition from 2019. This book introduces students to the political economy of international trade and finance, with state- and society-centred approaches.
- International Economics: A Heterodox Approach by Hendrik van den Berg, most recent edition from 2017. This book introduces international economics from a heterodox perspective, covering trade theory, policy, international finance and monetary systems, and immigration.
- The Globalization Paradox by Dani Rodrik, from 2011. An insightful discussion of globalization and exposition of the international political trilemma, written by a highly influential economist.
- Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik, from 2017. This book discusses various issues related to trade and globalization and argues for a pluralist world in which countries can have their own social contracts.
- Globalization and Its Discontents Revisited by Joseph Stiglitz, from 2017. This update of an earlier bestseller discusses globalization, its mismanagement, and what policies to tackle today’s problems.