An Historical Review
Chapter 5: Trade and General Equilibrium
5.1 THE APPROACH TO GENERAL EQUILIBRIUM The 1930s Watershed The transformation curve (or concave production-possibility frontier) was introduced into trade theory by Enrico Barone in 1908, but for various reasons his contribution went unnoticed (as previously mentioned). Twenty-two years later, Haberler reintroduced the construction under the label of ‘production substitution curve’. It was a diagrammatic representation of a country’s maximum attainable set of outputs for two commodities from a given supply of productive factors, and described the rate at which commodities could be substituted for each other not only under constant opportunity-cost conditions, but also under increasing and decreasing costs as well. Under increasing costs (the assumption frequently made) the production-possibility frontier is drawn strictly concave to the origin, that is, the production-possibility set is convex, reﬂecting the law of diminishing marginal productivity. For Haberler, the great advantage of the approach was that it dispensed with the need for a labour theory of value, or a real cost theory or indeed for any other speciﬁc theory of costs. It enabled relative commodity prices to be analysed under conditions of variable factor proportions in a more straightforward manner than was possible with the real cost approach espoused by Taussig and Viner. It restored simplicity to the original Ricardian doctrine of comparative costs by making obsolete the use of illdeﬁned concepts like ‘bales’ and ‘units of productive power’ introduced by Marshall, Edgeworth and others to deal with the analytical problems posed by a multiplicity of productive factors. Although others...
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