I wrote (a day or more ago) >>There's a difference between proposing an alternative theory >>and getting into the standard academic and/or >>sectarian approach of "my Theory is better than yours."
Eric writes in response: >I think the "my theory is better than yours" can be productive, particularly if "my theory" really is better. < but you seemed to be saying that one of the problems with a Shaikh-type theory of absolute advantage was that it claimed to be better... >>what's wrong with rebutting the mainstream? >Nothing, of course, unless the rebutting that is taking place is not relevant to current mainstream theory. < what if your target is not to convince the professional economists as much as to (1) teach students an alternative view and/or (2) develop an alternative view (which might be in its infancy) that can grow and replace the current orthodox theory? >>what's wrong with absolute advantage?<< >It is wrong in most cases. I'm not sure it makes any sense in a floating exchange rate regime. It also might out of necessity presume a one-factor input (labor) model of production. This one input model is needed to clearly determine the country with the absolute advantage.< (1) No-one said that the theory is right in all cases. (Are there _any_ economic theories that are right in all cases?) Shaikh's point, as I understand it, is that if exchange rates do not adjust instantly, then there is a period in which absolute advantage applies. (The same works if the exchange rate is determined by such things as assets markets rather than by commodity flows, especially when exchange rates reflect "non-fundamentals," as you note in a different message.) That period of absolute advantage has the effect of changing the situation to the advantage of the country with the higher labor productivity. Path dependence kicks in, so that the final equilibrium achieved would differ from the equilibrium posited under the assumption of instant adjustment of exchange rates to reflect fundamentals (purchasing power parity). The issue in the Shaikh story, as I understand it, is not whether exchange rates are floating. Rather, it's whether they instantly snap to their long-term equilibrium levels corresponding to real fundamentals. Now, it's quite correct to note that the Ricardo/Shaikh story of autarchy being replaced by trade is a total myth. But it does say something about what happens on the margin as trade barriers are taken down. (2) The fact that the multi-factor model cannot represent absolute advantage is a strike against that model. But I'm not convinced it can't be done. Why don't trade models use production functions with technological shifters? That is, in a Cobb-Douglas story, q =AKL with exponents on K and L, why can't A differ between countries? Is there some sort of methodological imperative against such models? Jim Devine _________________________________________________ The simple way to read all your emails at ThatWeb http://www.thatweb.com
