Knowledge, Truth and the History of Economic Thought
Edited by Stephan Boehm, Christian Gehrke, Heinz D. Kurz and Richard Sturn
Chapter 14: How new is the 'new trade theory' of the past two decades?
14. How new is the Ônew trade theoryÕ of the past two decades? Andrea Maneschi This paper takes up the theme of whether there is progress in economics by examining a paradigm known as the Ônew trade theoryÕ that was developed by international trade theorists over the past two decades. Authors contributing to it include James Brander, Avinash Dixit, Wilfred Ethier, Gene Grossman, Elhanan Helpman, Paul Krugman, Kelvin Lancaster and Barbara Spencer. Mainstream trade theory based on the HeckscherÐOhlin model posits not only internationally identical production functions, but assumptions such as constant returns to scale and the associated market structure of perfect competition, which some of the new trade theorists have rejected in favour of increasing returns to scale and imperfectly competitive or oligopolistic market structures. They claim that their models mirror more accurately the markets in which most industrial commodities are exchanged, and explain phenomena such as intraindustry trade that the HeckscherÐOhlin theory could not account for. First, I explore in greater depth the reasons for the birth of this new paradigm. Compared with its mainstream alternative, the new trade theory offers fresh insights into the nature of the gains from trade, and new rationales for trade that often dispense altogether with the notion of comparative advantage. Second, its antecedents in the history of economic thought, which hark back to Adam Smith, are examined. Of special relevance are SmithÕs productivity theory of trade, according to which productivity rises with specialization induced by the expansion of the...
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