1. THE FOUNDATIONS OF INTERNATIONAL SPECIALIZATION
The classical theory of international trade alleges that it is in the interest of each of the partners in an exchange to specialize, because this will raise the level of total income, in terms of useÂvalues, in both countries.
For the classical economists, labor is the source of all value. This is why Ricardo sees the exchange of two commodities as being, ultimately, the exchange of two equal amounts of labor crystalized in two products with differing useÂvalues.for the partners in the exchange. Whereas, however, in the sphere of internal exchange the law of value implies equivalence of the exchange-values of two commodities containing the same quanÂtity of labor, in the sphere of external exchange the commodities exchanged contain unequal quantities of labor, reflecting uneven levels of productivity.To take Ricardo’s well-known example (but substituting “wheat” for “wine”), Portugal has more advantages than England both for the production of wheat (in which 80 hours of labor suffice to produce a unit of this commodity, as against 120 in England) and
for that of cloth (in which 90 hours of labor produce in Portugal what 100 hours produce in England). But it has comparatively more advantages for producing wheat than for producing cloth. It is therefore to Portugal’s interest to specialize in the first of these two lines of production and get its cloth from England, even though producing this cloth at home would cost Portugal less than England in absolute terms. The assertion that imports can be advantageous in terms of use-values even if the product imported could locally be produced more cheaply forms the main contriÂbution made by Ricardo, as compared with Adam Smith.
All that this theory enables us to state is that, at a given moment, the distribution of levels of productivity being what it is, it is to the interest of the two countries to effect an exchange, even though it is unequal.
Let us take Ricardo’s example again, inverting the terms so as to bring it closer to reality:Quantities Oflaborcontained in a unit product
| In England | In Portugal | Relative advantage held by England over Portugal | |
| one of cloth | 80 hours | 120 hours | 1.50 |
| one of wheat | 90 hours | 100 hours | 1.11 |
| Internal exchange ratio | |||
| one of cloth = | 0.89 of wheat | 1.20 of wheat | |
Let us suppose that Portugal agrees to specialize in wheat, and obtains its cloth from England. If the total available labor power in Portugal amounts to 1,000 hours, and the consumption of wheat remains fixed at five units; then Portugal will devote 500 hours’ labor to producing wheat for its own consumption. It will have 500 hours at its disposal that it can employ either to produce its own cloth (500:120 — 4.2 units) or to produce five extra units of wheat with which to obtain five units of cloth, gaining 0.8 of a unit of cloth through the exchange. But, although it has gained in use-values, it will have expended SOO hours of labor in order to obtain five units of cloth that England would have produced in 400 hours. Its own Portuguese one hour of labor is exchanged for 0.8 of an English hour: an unequal exchange. The inequality ofl the exchange reflects the lower productivity of labor in Portugal.
This is why, if the inequality in productivity of labor is not natural but historical, the comparative advantage is modified when the backward economy makes-progress. If Portugal is able, by modernizing itself, to attain the same productivity as England in all fields, in other words, to produce cloth in 80 hours and wheat in 90, it is worth its while to modernize.
For then it will be producing its five units of wheat in 450 hours and will dispose of 550 hours with which to produce 6.9 units of cloth (550:80). No further exchange will occur, since costs are identical in both countries.— but Portugal will have gained in comparison with the previous situation when there was exchange: 6.9-5 ~ 1.9 of a unit of cloth.If Portugal were to agree to specialize in wheat and devote all its efforts to catching up with England in this field, what would it gain? Henceforth it would have to devote 450 hours to producing five units of wheat for its own consumption (5 x 90); it would have 550 hours at its disposal with which it would produce 6.1 units of wheat "(550:90), which would enable it to acquire 6.1 units of cloth. This choice is less good for Portugal because the potential progress in the cloth industry (reduction of cost from 120 to 80 hours) is greater than in the production of wheat (reduction of cost from 100 to 90 hours).
It is therefore more to the country’s interest to develop those branches of production in which the greatest progress is possible, and to subject its choices where foreign trade is concerned to the priority requirements of this kind of development. The trading options thus decided on will have to be modified at each phase of development. This is certainly an aggressive conception of interÂnational relations; but it corresponds both to history and to the present situation.
Ricardo’s analysis, being based on comparison between real productivities, provides the operational concepts needed in order to understand the nature of international specialization, that is, to appreciate the reasons for this specialization and draw conclusions from it that explain its dynamics. If, indeed, England needs to spend only 80 hours of labor on producing one unit of cloth, as against 120 hours needed in Portugal, then this is because English industry is more advanced than Portuguese, since what is involved here is total hours of labor, direct and indirect. In England the textile industry is mechanized, so that the 80 hours of labor needed are distributed in a certain way: for example, 20 hours of direct labor and 60 hours crystalized in the machinery, etc., used in this production.
In Portugal, cloth is produced by craft techÂniques, so that the 120 hours needed are distributed in different proportions: less indirect labor and more direct labor (e.g., 90 of the latter and 30 of the former).It should be noted in passing that, in Ricardo’s example, real wages per hour are the same in both countries, being reduced to the physiological subsistence level. In their turn, subsistence goods are commodities that are subject to international exchange, and so can have only one and the same price (expressed in gold) in both countries. Gold prices of subsistence goods, nominal wages, and real wages are thus identical in England and Portugal. SpecialÂization and exchange, by obtaining for the countries involved quantities of use-values larger than they would obtain in the absence of exchange, increase the volume of real profits realized in both countries.
The whole of Ricardo’s argument amounts to asserting that, although Portugal is more backward in all spheres, it is neverÂtheless in that country’s interest to specialize. Ricardo stops at this point in his proof, refraining from making use of the analytical tool he has discovered. What I have shown, in rendering Ricardo’s analysis “dynamic,” is that the immediate advantage derived from specialization will determine the direction of development as beÂtween the two countries in such a way that the one that agrees to specialize in the less dynamic branches of production will lose by doing so, in the long run.
The basis for unequal specialization cannot be understood except in relation to the objective theory of value. It was, however, the subjective theory of value that triumphed in economic science after 1870. By refusing to reduce all the costs in different “factors” to the common denominator of social labor, conventional economics deprives itself of any means of comparing productivities, and loses the sense of the essential concept of level of development of the productive forces.
Relative advantage is thus to be measured by the ratio between prices, which depend on the relative rewards of the different factors and the relative use made of them in quantiÂtative terms. The theory is thenceforth based upon a vicious circle and deprives the principle of comparative costs of its actual validity. For the most profitable technique (the most efficient combination of factors) depends upon the relative rates at which these factors are rewarded. Now, these rewards themselves vary according to the quantitative use made of the factors, and so, ultimately, according to the methods of production employed. It follows from this that the bearing the principle has is more restricted than in Ricardo's theory. In the classical theory the sequence of the movements of commodities was established. Here, on the contrary, every change in the movement of commodities alters the comparative advantages, because it affects the relative prices of the factors. We are thus caught in a vicious circle: each nation should specialize in whatever it has the biggest advantage in, knowing that this is so because it possesses in plenty a factor that is appropriate to this particular line of production.Abandonment of the objective theory of value has thus transÂformed the nature of the theory of comparative advantages, giving it an apologetical-ideological character. For “advantage” no longer possesses any meaning: it is not contained a priori in objective reality. Empirical positivism is then obliged to invoke false theories (the quantity theory of money) or specious assumptions (no “perÂverse price-effects”), or else mistaken notions (“the factors of production — capital and labor — are given,” whereas it is the social division of labor between Department I and Department II that is the content of these so-called “natural” endowments). Degeneration into apologetical ideology has continued with the modern formulation of exchange in terms of substitution. With Haberler, Lerner, and Leontief the theory came finally to assume its present form: the cost of one product is defined as equivalent to the renunciation of another.
The compromise effected by Bastable, Marshall, Edgeworth, and Taussig, which consisted in assuming that, in each country," the cost of each product was made up of wages, profits, interest, and rent, in stable proportions (thus avoiding the problem of adding up the subjective utilities of different persons) was given up. I shall not recall here the details of the construction of the “collective indifference curves” obtained on the basis of the equivalence in utility of variable quantities of two different goods. Nor shall I recall the details of the construcÂtion of the “production possibility curves” obtained on the basis of the technical possibilities of producing variable quantities of two different goods with a constant stock of factors of production. The international exchange ratio was now situated between the two exchange ratios “in isolation” determined by the gradients of the tangents to the indifference curves at the points where these curves are themselves tangential to the production possibility curves. At these points, the rate of substitution of the products is. the same for the consumer as for the producer. The necessary and sufficient condition of international exchange is then that the exchange ratios in isolation should be different as between one country and another. We are imprisoned in the basic tautology of all conventional subjectivist economics: exchange brings “advantage” to each party by the mere fact that it takes place. But this “theory" is perfectly useless. It prevents us from understanding history, because it avoids the question of the initial level and the dynamic of the development of the productive forces.