OBSOLETE FACTORS IN THE INTERNATIONAL ECONOMY or WHY TORTOISES NEVER BEAT

MECHANICAL RABBITS
Author(s): Robert Faulhaber
Source: Review of Social Economy, Vol. 30, No. 1 (March, 1972), pp. 153-160
Published by: Taylor & Francis, Ltd.
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OBSOLETE FACTORS IN THE INTERNATIONAL

ECONOMY
or

WHY TORTOISES NEVER BEAT MECHANICAL

RABBITS
By Robert Faulhaber
De Paul University
Mr. Hudson's paper attempts a sweeping explanation of what is still
the modern world's greatest problem: the relative stagnation in destitu?
tion of a third to a half of mankind. Such a paper must of necessity
have its faults, some serious, but no critique of them, however justified,
can be a substitute for or be allowed to obscure a confrontation of the
main argument.
Unfortunately, Mr. Hudson, himself, is too diverting with irreverent
swipes at received classical and neo-classical trade theory. I tend to share
his iconoclasm, but in view of the strong opposition, which, I presume,
his Obsolescence and Ghetto theses invite, a more irenic challenge would
have been more effective. Theorists who apparently accept for their
analytical framework the Heckscher-Ohlin-Stolper-Samuelson (HOSS)
model are simply not as naive and do not believe it has as much "hoss

power," at least in policy matters, as Hudson implies. In G. M.

Meier's The International Economics of Development,1 probably the

best and most recent compendium of the literature, one finds extremely
judicious and cautious reasoning from theory and little neglect of em?
pirical findings, such as they are. Still, in fairness to Mr. Hudson, the
new conventional subtleties are ever so gently, but naggingly persistent,
if not biased, in reminding poor countries of the dangers of ill-afforded
losses from trade restrictions, of the "logically valid, but . . ." "infant
economy" case, and so on.
Neo-classical theorists may admit, though not entirely, to the justice
of Mr. Hudson's critique of the HOSS model, but they typically retreat
to a methodological citadel which to them seems impregnable whereas
it may be more an indication of intellectual impermeability. As Harry

G. Johnson puts it, "Fundamentally, the theorem," what I call the

HOSS model, "is not a prediction concerning the real world. Rather it
must be interpreted as an enumeration, deduced by the process of theo?
retical abstraction, of the factors that are present in the real world and
prevent the realization of factor-price equality, an equality which would
characterize world economic efficiency."2 In effect, the economist's mis

153

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REVIEW OF SOCIAL ECONOMY

sion is clear: urge the elimination of those factors exposed by the

theorem that prevent world efficiency, make the world conform to the

model.

What is to be gained by exposing the HOSS model's lack of realism,

as Mr. Hudson does? For some economists that is decisive, yet it is

fairly certain that most are unconvinced, not that they are blind to the

assumptions, but because the model seems to offer the security of a

logically correct guide (not to mention "job security") to the best of
all possible worlds with a number of "second best" worlds to be had on
the way. For essentially the same reason, most economists are fond
beyond belief of the perfectly competitive model for domestic economics,

and not because they would heartily agree with Milton Friedman that
it is our most powerful tool of analysis and predicts better than any
other. (You may recall that Johnson does not assert predictive value for
the HOSS model and thus he cannot, as Friedman might, use prediction
effectiveness as a defense of admittedly unreal assumptions.) My own
qualms in accepting Mr. Hudson's criticism are allayed not so much by
a rejection of explicit assumptions but rather more by the HOSS model's
primordial fantasy that economic, "economizing," relations are uniquely
exchange relationships. This is not the place to elaborate the point, but
let me merely say, by way of example, that, though I may be "economic,"

equating benefits and costs at the margin, in my relations with the

spouse, children, and friends or enemies, these relations are rarely if ever,

a case of exchange or trade; and maximum welfare is still my goal. In

the family and in the family of nations, maximization of welfare via
trade does deserve serious consideration by economists inasmuch as they
can show that strictly commercial relations, to the exclusion of others,
will not maximize welfare in short- or long-run and may even destroy
whatever the human groupings in question. The theoretical concept of
"nation" must no longer remain a practically "empty box."

I began this paper by charging Mr. Hudson with self-defeating

iconoclasm, but then proceeded to permit myself to indulge in impious
liberties. Furthermore, I had planned to complain of excessive idiosyn?
crasy because of his singular reliance on American protectionists and,
say, "energists." Upon first reading his paper, I was very annoyed at
his failure to cite Gunnar Myrdal who, I feel, has for almost two decades
been the leading critic of established development economics and the
man with the most sophisticated, complete, and cogent answer to the

question that is the main title of Hudson's paper. But I will say no
more since I, too, have already been rather peculiar in my mode of

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OBSOLETE FACTORS IN THE INTERNATIONAL ECONOMY 155

communication by failing above to employ Myrdal's critique (he says

it much better) of neo-classical bias. I should also add that, strictly

speaking, Mr. Hudson's argument does not need Myrdal for support;
there are basic similarities, but Myrdal is much more eclectic.

To finally come to grips with Mr. Hudson's chief contribution, I

believe it is a question of great, if not overwhelming, emphasis on the

nature of technological progress and its consequences for trade and

development over the last century and a half and in the foreseeable future.

At bottom, his quarrel with Ricardian and HOSS models, in effect, a

single paradigm, is that they ignore the crucial importance of techno?
logical change. Though matters look rather bad when a nation is
assumed gifted with a genius for viniculture, generous quantities of
virgin land, or capital galore, technological change can definitely be
brought in through the back door disguised as a shift parameter. But
Hudson recognizes and shows, in effect, that this amounts to an "in?
genious displacement of analytical interest," an expression I borrow
from Francois Perroux who calls the displacement "ingenious" because
of "services rendered by the implicitly normative conceptualization" of

the HOSS model.3

Under the heading of terms of trade analysis, when Hudson proceeds

to a third mode of abstraction he is, in part, Ricardian with his distinc?
tion between "industrial commodity production" and "agriculture and
mineral production," but he does not leave the matter by simply saying

a country will have comparative advantage in one or another field.

Rather he necomes a technologist of sorts in speaking of "energy" and,

the same thing, "work effort," which I imagine refers to energy transfer

from one systen or body to another rather than "work" in Mechanics;

this work effort is considered the most important factor-input for in?

dustrial commodities. For agriculture and mining, soil fertility and

" 'extractibility'" are most important. The vital point then is that both
work effort and "primary-product extractibility" are provided by the

classic factors, "by labor, capital or natural resources" according to

relative cost schedules. Furthermore, and perhaps even more important,
is the fact, as I take it, that technological change increases greatly the
energy or work effort and "extractibility" power of capital, assuming,

of course, the incorporation of technical progress in capital.

Given this technological paradigm, one can speak directly and sig?
nificantly, as Mr. Hudson does, about the shifting terms of trade, the
structure of trade, once the progressive obsolescence of manual labor and
soil and even, in a sense, natural resources other than soil are under

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stood as the consequences of industrialization or technology. The plight

of the less developed countries (LDCs) may appear to have been greatly
oversimplified: they become technically obsolete; they must industrial?
ize; they must upgrade human capital resources and modernize agri?
culture?this perhaps first of all; they are justified in protecting infant
economies; and they must cope with Ghetto Function effects, the last
point being an important addition to Prebisch's prescription. Summar?
ized as a barren analytical statement, this amounts to telling the LDCs
to exploit comparative advantage wherever you have it, if you still have
any?and can locate it, but forget it wherever necessary if it interferes
with efforts to push out your production frontier, the root problem.
Simple, yes. But granted the almost infinite complexity4 of development
problems faced by any one LDC out of a motley variety, Mr. Hudson
still offers a clarification and valid ordering of basic priorities in our
technical world.
If only to avoid the appearance of uncritical acceptance, which would

weaken my support of Mr. Hudson's views, I will pounce upon a few

of perhaps a dozen of his remarks that deserve at least partial re?
jection. At one point Hudson writes, "There is at present no school
of thought which inquires why factor returns are diverging rather than

converging. . . ." (p. 113) The possibly saving phrase is "no school of
thought," but clearly Myrdal has pioneered and continues the inquiry
and does have his followers.
Another issue is a parenthetical statement (p. 134) that "free traders"

at present do not consider the possible external economies and dis?

economies of trade ? la comparative advantage. This is false, but writers
do demand such a degree of omniscience of the LDCs before they will
bless intervention on account of externalities that, practically speaking,
Mr. Hudson is correct. Certainly he does exaggerate the going-and-com
ing role of multi-national corporations and the use of aid to finance im?
ports from lending nations but, on the other hand, much supposedly
advantageous trade and aid must be seen, as Hudson would have it, as
a "transfer function." (p. 135) More important than the foregoing points
is the idea of the LDCs "Closing themselves off into regional blocs" and
that "Their cost of remaining members in good laissez-faire standing
in the international economy ultimately involves their total submission to
this economy." (p. 135) There is a qualification here, "to remain in good
laissez-faire standing," but clearly the LDCs are not at present in "good
standing" in a manipulated world economy and thus are not in "total
submission." Personally, I feel they are residents of a Minimal Security
Correctional Institute. As for LDC withdrawal en bloc from the world

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OBSOLETE FACTORS IN THE INTERNATIONAL ECONOMY 157

economy, while China is a unique case with very special power, she may
come to serve as a key example for LDCs of a highly closed developing
economy that will carefully select and control specific trading relations
to promote primarily her own development.

A possibly final way of evaluating Mr. Hudson's technologically

based theses is to ask if he is not too much of an internationally oriented
Robert Theobald in disguise? In passing, I'm curious to know where Mr.

Theobald might be found "alive and well." As Hudson points out, the
problem is a very old one of the modern era when not even machines,
but sheep first replaced men during England's Enclosure Movements.
Replacement of inefficient men in the name of machine efficiency has
progressed, albeit at a debatable rate, up to and into the Age of Cyber?
nation, though at the moment ecological disaster has displaced the
specter of mass technological unemployment from the list of bestselling
problems. I wonder, incidentally, if this replacement is not also more
efficient in the sense that under the heading of ecological issues we must
include destruction of the human environment as so many men and
whole countries, according to Hudson, become obsolete. I do not wish to
argue that the problem is insoluble, no more than Hudson does, but I
do wish to recommend without qualification that you read an extraor?

dinarily precocious piece of "non-fictional" science fiction, PLAYER

PIANO, by Kurt Vonnegut, Jr., in order to see how the contemporary

scene could so easily shift into a monstrous, but quite pedestrian situ?
ation much too close for comfort to the future Hudson predicts if his
policies are not implemented.
With few exceptions the economics profession has, of course, long
pooh-poohed the possibility of severe technological unemployment and
will also brush-off the possibility of any large Obsolescence and Ghetto
Function effects. For present purposes I consider the two phenomena
quite analogous, if not quite the same. We know the standard rebuttal:
the data don't show the predicted secular trend, and the reason is that

technological progress increases real income and creates new goods

resulting in increases in old demands, though some decrease or disappear,
and creation of new demands, in all sufficient to maintain the overall level

of employment. The standard apologetics goes on to admit that some

workers?and other factor-owners are not forgot?will suffer tem?

porarily and even for some time for the usual frictional reasons, though
nothing close to permanent obsolescence is admitted; the whole argument
is topped off with some cliche about omelets and eggs, cake and eating
it, price and progress. Though the vocabulary will differ, economists can
reply in essentially the same way to Mr. Hudson.

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What is forgot, however, is the great point made by Myrdal in An

International Economy** and many of his other works. In the advanced
economies, "national integration" with its industrial and social legis?
lation, welfare state, organized economy, and disregard for international
consequences has prevented disaster and cushioned the remaining shocks.
I leave you to imagine what the proverbial data would have shown, if

laissez-faire had prevailed; how correct would the Theobald's of a

century ago and today have been? By contrast, Myrdal argues that

national integration in the LDC is feeble or non-existent while inter?

national integration is barely aborning?Hudson, I believe, would call
it a fraud. The situation of the LDC is not as uniformly bad as in
Northeastern Brazil or Bangladesh, particulary if her jute exports
should continue to decline due to the advent of cheaper synthetic ma?
terials, nor generally as good as in Mexico?I hesitate in naming even
one country. But in any case I feel there are sufficient grounds for
believing that Myrdal is wildly optimistic if he expects his international
integration can soon become the required reality and that Hudson is
equally so if he expects LDCs can withdraw as required from the inter?
national economy. Neither Hudson nor Myrdal, of course, predict what

can and will happen, only what should. For my part, I will be even
more optimistic by suggesting that both integration and withdrawal can,
should, and will advance simultaneously and in only apparent contra?

diction.

With your forebearance, I would like to add what I hope is a clari?

fying note to Hudson's technological paradigm. I will offer a distinction

which I believe directly gets at the essential consequence of techno?

logical change as we have known it and can expect it to continue. Hud?
son's third mode of abstraction to get at his terms of trade analysis
posits the somewhat awkward concepts of "work-effort" or "energy" and
"primary product extractibility," each of whose productive power is
steadily and greatly increased via the embodiment of technical progress
in capital, with labor having to upgrade itself in complementary fashion.
Understandably, those concepts fit his approach and are related to the
literature he cites, but I avoid them in order to proceed directly. I have
not decided whether my distinction is a reformulation of his third mode
of abstraction or if it is some fourth style, but I divide all output into

two classes: "H-goods," or "human energy "-intensive goods, and "P

goods," or "physical energy"-intensive goods, where "physical energy"
can be provided by capital, land, and labor and "human energy" only by
labor. Labor, man, of course, is inseparably both "physical" and "human"
energy in his concrete existence, but the analytical distinction can be

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OBSOLETE FACTORS IN THE INTERNATIONAL ECONOMY 159

valid for some purposes and, hopefully, for mine. I save myself a good
deal of trouble by inserting "intensive" in each definition; I admittedly

can offer no pure cases of either (scarce) good; easy, almost pure
cases are so easily imagined as to be not worth mentioning. For a
difficult case take "bartending": a dazzling and not too complicated
vending machine with a computer-memory could do it, but read Vonne
gut for conclusive proof that we have here an H-good. I should add that

a specific good can change category: "bartending" could be a P-good

in another culture.

I then argue directly that technological progress, if a society has it,

increases the economy's ability to produce P-goods and to a much

greater extent than H-goods, that is, the economy's production frontier
shifts upward with a simultaneously flattening with respects to the

P-goods axis.

H H-goods, "human-energy"-in

AA' production frontier in

Country A.

BB' production frontier in

Country A.

A"A' trading possibility line

for CA, if T. of T. completely

in its favor.

BB" trading possibility line

for B, if T. of T. completely
in its favor.

CC new production frontier

in Country B.

, P-goods, 'physical energy"

In the usual elementary framework, I believe that one can now

restate a bit more clearly, though not exactly, some of Mr. Hudson's
trade and developmental remarks. In the diagram, initially, Country A,
less developed, has comparative advanage in P-goods, and Country B,

more developed, advantage in H-goods, the internal rates of sub?

stitution given by slopes of AA' and BB', respectively. I need not
bother stating any actual terms of trade once exchange takes place, but
may assume they were such that A received some benefit.

The next step is an immense one if I aim to provide a solid ex?

piation of why B develops and A does not, but I need not do so. Let me
risk suggesting, however, that B's advantage in certain H-goods, or, less
risky, simply that B had them, was responsible; say that, in historical
terms, Britain did have the socio-political organization and values, the

cultural base, necessary to start economic development. But this is

little more than tautology. Note, in passing, that B's early exports are

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presumably manufactured items and classed as H-goods; they are

assumed to change to P-goods as development occurs. Simply assuming
that B does develop and given the hypothesized nature of technology's
effect, the terms of trade fall for A and rise for B during a first "stage"
up to the where both production frontiers are parallel. As B's frontier
continues its rotating-rise, Hudson's unexpected event is illustrated:
developed B has relatively cheaper P-goods and now exports them to

LDC A. As I have set up the situation, the gains from trade via free
trade are of no consequence for development. Paradoxically, A is
supposedly exporting H-goods, whereas she needs, one may claim for
the sake of argument, certain of B's H-goods in order to begin develop?
ing ; and, in the first instance, what kind of H-goods can an LDC export ?

Does the question explain why so many LDCs are specialists in tour?
ist "attraptions" ? Should Latin America and India prevent outright
emigration of highly trained persons and lease them the United States ?
I should add, lest there be any doubt, that in this diagrammatic exercise
I do not make the usual assumptions about competition, internal factor

mobility, etc. In other words, Country A is the typical LDC with all
the Obsolescence and Ghetto effects that Mr. Hudson has depicted, and
similarly for Country B.

As a last word, I would ask you to consider the consequences of

what can be called "ultimate" technological progress, that is, the case
where P-goods, at the limit, are free goods, while H-goods remain scarce
as long as our wants in "human energy" exceed supply. P-goods could
be given outright to LDCs but would that be helpful if P-goods did not
stimulate development? As for continued development in B, it must
without equivocation, without the age-old distraction of acquiring bread
and-butter goods, face up to the purely human problem of improving the

output of "human energy" since marginal returns from P-goods are

zero and technology, in my book, does not produce human creativity.
1 New York: Harper and Row, 1968. See, in paticular, Ch. 8, "Development

Through Trade."

2 "La theorie du commerce international," L'Actualite kconomique, Montreal,

Jan.-Mar., 1969, p. 624, (my translation) cited by Francois Perroux, "Le Theoreme
Heckscher-Ohlin-Samuelson et La Theorie du Commerce International," Hecettepe
Bulletin of Social Sciences and Humanities, II, 2, Dec, 1970, pp. 118-119.

3 Perroux, "Le Theoreme Heckscher-Ohlin-Samuelson et La Theorie du

Commerce International," Hecettepe Bulletin of Social Sciences and Humanities, II,

2, Dec, 1970, pp. 115-122 (my translation).
4 If it is true that we know very little about the nature of development problems,
then how is it that we know they are infinitely complex ?

5 Harper & Bros., New York, 1956, see especially Chs. Ill and IV.

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