Neo-liberal

Policies
mplemented by
WB/IMF/WTO
Based on
Providing the ra:onale

Q) So how the regulators of the system

Theory of Free-Trade regulate the system if their understanding
logically s fundamentally wrong?

Shaikh claims that wrong

empirically

Based on
- Perfect market destroyed a=er the Great Depression of 1930s
Supplanted by a much more realis:c vision Keynesian Real object of the theory is capitalism itself
- Perfect compe::on
With Reagan & Thatcher it came back Recently (2007-8 global crisis) it was demolished
- Perfect foresight
 Perfect knowledge of what they like &
Free Trade: 2 agents engaged in trade because what they can get

They get something which is worth

More to them than they are giving in
return
Na:ons?? n Ricardo
NOT by na:ons, by na:onal
Businesses, mo:vated by prot.

High
Ricardo 2 countries
Cost with xed exchange rate
Low

So, if there is a free trade, the high cost company

Will be at an absolute disadvantage & eventually
destroyed

Eventually Imports exceed exports leading to trade decit

Portugal the compara:vely advanced
England the compara:vely backward
So, the weak lose, i.e. Buy more money out5lows with trade decit
the strong wins, i.e. Buys less, money in5lows with trade surplus

Ricardo introduces a new dimension from Quan=ty Theory of Money

Money out5lows less money.. P decline high cost low costmore competitive
Money in5lows more money.. P rise low cost high costless competitive

Until they are equally

competitive

The ones which are bene5itted from this process are the ones
With less disadvantage; so, not absolute advantage, relative cost matters,
i.e. Principle of the comparative cost

Ricardos argument was based on xed exchange rate, so the adjustment process
nuences na=onal prices
Though with exible exchange rates,the same story can be told by keeping na=onal prices xed.
In the end, the terms of trade (Px/Pm) in dollars through some exchange rate
Will adjust so that balance trade is achieved.

IMF intervenes, if does not work, which is most of the :me!!!

So, Chinese surplus was due to Chinas exchange rate policy, rather than its
Advantage in compe::venes.

Modern theory has 2 more features:

1) Full employment, high cost country would end up more job losses
a=er engaging free trade, even if trade is balanced the cost is too high.
2) Ricardo does not tell why any high absolute cost country (England)
Has compara:ve cost advantage in cloth ..beder endowed in Capital !!
Portugal, winebeder land!! .FACTOR ENDOWMENT THEORY
Empirical Evidence: The core opposi:on of standart trade theory suggests that the real
exchange rate, i.e. Terms of trade, will actually move to balance each countrys trade.

6 countries trade balances were persistent!

Alterna:ve theory (Keynes, Harrod, Marx)

1) when money inowsPs do not go up, instead liquidty increase (i) decline
exactly the opposite of thsi happens in the high cost country, i.e. (i) rises,
so the country with the trade decit will adract foreign capital due to high (i)
The US becomes an interna:onal debtor!!!

2) free trade harms the weak; it is almost impossible to become interna:onally
compe::ve due to WTO regula:ons. Ha-Joon Chang Kicking Away the Ladder.

3) trade liberaliza:on will benet rms of the world with low cost via advanced
and low wages. China