An Historical Review
Chapter 4: The Economics of Trade and Protection in the Age of Marshall
4. The economics of trade and protection in the age of Marshall In this chapter we review some new arguments for protection and other statements of the free trade case that surfaced during the transition period from the classical age to the early development of neoclassical economics – a period that might, with a certain amount of chronological latitude, be called the ‘Age of Marshall’. During this period there ensued in general economics a gradual but continuous shift from the Ricardian one-factor labour theory of value to a subjective theory of value, namely, supply and demand (utility). Costs of production came to be treated not in absolute but in relative terms, that is, as alternatives foregone. However, despite this shift of direction in general economics, some notion of ‘real’ costs determining production was retained in trade theory well into the 1930s. The classical trade model survived the ‘marginal’ revolution’ of the 1870s for three reasons: (1) Mill’s incorporation of the demand side in his analysis of international values. (2) The transformation of Ricardo’s labour theory of value into Marshallian ‘real cost’ theory. Even when the labour theory was retained, this was tolerated since it was simply illustrative of the gains from trade and did not clash with ideology and substantive matters – for example, over the contentious issue of income distribution among social classes. (3) The concerns of trade theory with eﬃcient allocations of given resources and the rational behaviour of economic agents who exchange commodities on world markets, ﬁtted in...
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