Technology and the Terms of Trade: Considering Expectational, Structural, and Institutional Factors
Deprez, Johan, Journal of Economic Issues
Too often, heterodox critics argue against generalized free trade on the basis of (1) the existence of rigidities, (2) the negative impact on an economic subgroup-like particular industries or workers, and (3) supra- economic considerations such as the environment or political behavior and structures. There is, however, no need to take such a path. Heterodox approaches are fully capable of presenting their own independent theories of international economic interrelationships.
Keynes's general theory not only explains the determination of output, employment, and income in a capitalist economy, it also provides a general theory of pricing. Certain authors [Townshend 1937; Kaldor 1939] quickly recognized that Keynes's [1964, 222-244] discussion of "The Essential Properties of Interest and Money" in Chapter 17 made it clear that ". . . Mr. Keynes' doctrine of liquidity-preference really involves a generalisation of the classical (marginal) theory of value" [Townshend 1937, 160]. While discussions of this general theory of value or prices have focussed on the role of liquidity premia and factors impacting thereon, the roles of the marginal efficiency of capital and of user cost also need to be recognized. If this claim of providing a general theory of value is valid, then this theory will also be valid in the international realm and will provide for results that are different than the classical/neoclassical approach. This paper explores the implications of Keynes's value theory for the international terms of trade.
In this paper, the terms of trade are understood to be the commodity or net barter terms of trade. This is the relative price of the "exportable" commodities in terms of the "importable" commodities, that is, the number of units of the latter obtainable for each unit of the former. These relative prices are important not only for determining the relative benefits and cost involved in international trade, but also in determining which commodities are exported and imported. For neoclassical economists, the terms of trade are determined by the production technologies involved, the scarcity of the factors of production, and the preferences of households or individuals.
In this paper, four elements are pointed to that indicate different terms of trade in a heterodox context than in an orthodox model. First, Post Keynesian analysis is within the context of a monetary production economy, as opposed to the orthodox real exchange economy. This brings to the fore key expectational and subjective components based on time and uncertainty as being central to the decisions and actions of economic agents. Second, the monetary determination of exchange rates means that liquidity premia and speculation enter relative prices in a way that has nothing to do with technology and scarcity. Third, the marginal efficiency of capital brings to the fore long-term expectations in current investment decisions and the determination of actual prices. Fourth, Keynes's notion of user cost can enter prices in disproportionate ways, thereby influencing the terms of trade. While the latter three considerations may be dismissed by some as purely "short-run" ones, the appropriate ancillary theory of dynamics to these considerations means that these effects are permanent and build on each other.
The International Monetary Production Economy
In the transition from A Treatise on Money to The General Theory of Employment, Interest, and Money, a key step was Keynes's [CWJMK 13, 408-411] explicit adoption of the monetary production economy in opposition to the classical real-exchange economy [Skidelsky 1994, 460-461]. A monetary production economy is ". . . an economy in which money plays a part of its own and affects motives and decisions and ... the course of events cannot be predicted either in the long period or in the short, without a knowledge of the behavior of money between the first state and the last" [CWJMK 13, 408-409]. …