Beyond Keynes, Volume One
Edited by Shelia C. Dow and John Hillard
Chapter 14: Say's Law in the open economy: Keynes's rejection of the theory of comparative advantage
14. Say’s Law in the open economy: Keynes’s rejection of the theory of comparative advantage William Milberg1 I INTRODUCTION While much ink has been spilled over the question of Keynes’s trade policy views, very little has been said about his explicit or implicit theory of international trade.2 But – as Keynes himself stressed – all policy positions reﬂect an underlying theory, and Keynes’s views on trade theory were perhaps more controversial even than his political stance of ‘pragmatic protectionist’. As he developed his theory of the monetary production economy that would form the framework for the General Theory, Keynes came to reject the idea of comparative advantage as the determinant of the direction of trade. His position was contrary to the views of both Marshall (1879, 1923), his former teacher and expert in trade theory, and Eli Heckscher, whose 1919 article has been credited with ﬁrst stating the factor endowments theory. The principle of comparative advantage assumes full (or at least constant) employment and a price adjustment mechanism suﬃcient to convert comparative cost diﬀerences into absolute money cost diﬀerences and bring balanced trade. Keynes rejected the assumption of such an automatic adjustment mechanism, arguing instead that interest rates – not prices – do the adjusting, and that a persistent trade imbalance – not balanced trade – is the likely outcome. For Keynes, the balanced trade implication of comparative advantage theory is equivalent to Say’s Law in an open economy context, whereby an addition to export supply automatically creates an import of equivalent...
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