Marx on International Trade - Lesson 3 - Macheda

Lesson 3

Marx on International Trade Francesco Macheda

Course

Introduction to International Political Economy

Fall 2014

A Preliminary distinction: Marx and the Marxists

• Since the publication of Lenin‟s Imperialism (1917) it has

become a Marxist commonplace to attribute the phenomena of

international uneven development to the direct investment by the

rich capitalist countries in the Third World.

The focus shifts to:

domestic and

international rivalries

of giant monopolies

their political

interaction with

various capitalist states

the antagonisms between states

(imperialism as an aspect of

monopoly capitalism)

This means that uneven development appear inexplicable without some

additional factors: monopoly, IDE, political power, conspiracy.

All these theories of uneven development accept Ricardo‟s law of

comparative costs as being valid on its own grounds.

Marx on International trade (I)

• Marx (1818-1883) did not develop an organic and complete

theory of I.T.

• It was his original intention to extend the analysis presented in

the 3 volumes of Capital to the treatment of international trade.

But this never happened since he died before he could..

• Nonetheless, the development of the law of value as well as

the theory of money in Capital contains all the necessary

elements for its (their) extension to international trade.

• The goal is to examine how Marx‟s categories allow us to

understand why capitalism creates the inequality regardless of

historical and specific circumstance.

Marx on International trade (II)

• By using the Marx‟s categories, it is possible to derive the

phenomena of international uneven development from the free

and unrestricted trade of commodities.

• Free trade itself ensure that the advanced capitalist countries

dominate international exchange, and that the less developed

nations end up chronically in deficit and chronically in debt.

• The international exchange is uneven since the losses are

indissociable from the gains, that is, international exchange is

a system of unilateral transfers of wealth.

• This system is neither transitory nor accidental but it is an

endemic and chronic condition of global capitalist market.

Marx‟s theory of value and the concept of

unequal exchange (I)

• To Ricardo, the value of a commodity is given by the labour-time

required to produce it. Since all commodities exchange in

proportion to the labor-times required for their production, their

money prices are determined by the quantities of the labor-times

embodied in them.

• Marx agrees to Ricardo that, as far as production is concerned,

only labour produces value. But once commodities are

exchanged on the market, their prices do not usually correspond

to the labour-time embodied in them.

Quantity labour embodied

in commodity A Value of commodity A

Money price of

commodity A = =

Quantity labour embodied

in commodity A = Value of commodity A = Money price of

commodity A

To fix out idea more clearly let‟s see when a commodity is exchanged in proportion to

its own exchange value, so that we may isolate the intrinsic determinants of price. The

individual value of a commodity (W) produced by a single firm is given by:

a. value of C (means of production)

b. value added by living labor L

For capitalist production to be profitable, workers must accept as wages (V)

the money equivalent of a value less than that which they themselves add to

W: L > V


unequal exchange (II)

W = C+L The value of C and L is

transferred to the output W

during the production process.

To explains this difference it is necessary do distinguish between labor-time and labor-power

What workers sell in the market is non not their labor time, but their capacity-for-

labor, i.e. the sum of the mental and physical capabilities which a worker can put to

use in production. Through the wage paid out to him, the capitalist obtains the right to

set these capabilities to work each day. As such, the worker must receive as wages

enough money to buy its means of subsistence in order to reproduce these capabilities.

Workers enter production as inputs having a specific value. They leave production

having added a quantity of value to the product through their labor-time (L). Up to a

certain point, the value newly created equals the value of the labour power employed

(V). From that point on, extra, or surplus, value (S) is produced. S is the difference

between L and V.

0 8 4

Value – V (4 hours) Plus-value – S (4 hours)

Total Value added by living labour – L (8 hours)

S is the excess of value added

(L) by living labor over the

value of its labor-power (V).

S is the value appropriated by the

firm. Laborers are expropriated of

a part of the value they produce.

L-V = S


unequal exchange (III)

The value of a commodity is: W=C+V+S. Once detracted of the production costs (C+V),

profit can only arise if workers produce plus-value: W-C-V=S. In turn, the rate of return of

investment is given by the surplus-value divided by the invested capital: S/C+V.

When prices are proportional to values, profit and rate of profit in any given

firm are directly determined by the plus-value produced in that firm alone.


unequal exchange (IV)

• Marx points out that the value produced within a production unit is not necessarily

the value appropriated by it (by that capitalist).

• Rather, the value produced by all the firms is redistributed among all capitalist units.

This transfer of value is inherent in exchange when the same commodity is

produced by capitals with different levels of productivity and is sold for the same

price.

SPHERE OF PRODUCTION

C V S

Value added

(v.a. per

worker)

Total W output Direct W

per unit

Producer 1 10.000 4.000 4.000 8.000 (1000) 18.000 10 1.800

Producer 2 4.500 1.000 1.000 2.000 (1000) 6.500 5 1.300

TOTAL 14.500 5.000 5.000 10.000 (1000) 24.500 15

SPHERE OF DISTRIBUTION

Market price

per unit

Gross

revenue Profit realized

Value added

(v.a. per

worker)

Surplus‟

transfer

Tech.

efficiency

OCC

Producer 1 1.633 16.333 2.333 6.333 (791) - 1667 2,5

Producer 2 1.633 8.166 2.666 3.666 (1833) + 1666 4,5

TOTAL 1.633 24.500 5.000 10.000 (1000)

To fix our ideas more clearly, consider two firms making computers of essentially the same power and

functionality. Suppose that producer P1 pays $10,000 in C. She employs 8 workers and pays $4,000 in V.

She produces 10 computers. Suppose that producer P2 makes 5 computers with $4,500 in C. She employs

2 workers, spending $1,000 in V. No question here of complex versus simple, or skilled versus unskilled

labour; this is the same work carried out by the same workers with the same level of skill and the same

intelligence. Therefore, wages are the same everywhere ($ 500 per worker).

There are now 15 computers on the market, which we assume sell for a total of $24,500.

Let us now compare the situation before and after production. Before, there was $10,000 in C in P1's

hands, and $4,500 in P2's hands: a total of $14,500. After production, there are only computers and they

are worth $24,500. Thanks to the workers' activities, total value has risen by $10,000: that is, they have

added this value. The workers received $5,000, so that a surplus-value of $5000 is available for the

producers. The rate of surplus-value in both sectors is 100%. But the proportion of this new value which

each producer appropriates is different. Let see why. Each computer sells for the same, average, price.

Since there are a total of 15 computers this comes to $24,500/15 =$1,633 per computer. Producer P1, who

sells ten of them, receives $16,333 of the gross revenue and P2 receives the rest, namely $8.166. Since

P2's C cost was $4,500 it appears that the P2 workers added $3,666, i.e. $1833 for each worker (instead

of only $ 2000, i.e. $1000 for each worker at the level of production). P1's C cost was $10,000 so it

appears that the P1 workers – who are four times as numerous – added only $6,333, that is 791 for each

worker (instead of $ 8.000, i.e. $1000 for each worker at the level of production). Apparently, therefore,

each P2 worker produces almost 2.5 times as much value as each P1 worker. From the point of view of

the individual producers, it seems as if the P1 workers are much less productive compared to the P2

workers. Moreover the owner of the more efficient technique realizes a profit of $2.666, even higher than

his rival who secures a miserable $2.333.

table‟s explanation

• This calculation obscures the reality that the difference is not the responsibility

of P1‟s lax workers but the less advanced machines they work on.

The efficiency differentials imply that the sale of products must actually take place

at prices which differ systematically from direct prices


unequal exchange (V)

Firms with high more capital intensive

techniques must sell their products at

prices above their respective direct prices

Firms with more labour intensive

techniques must sell at prices below

their respective direct prices

The only difference is the technology because

the differences result from the different

productivities of the 2 sets of machines

Firms characterized by different

levels of productivity must sell

the same commodities for the

same price to stay on market

Within the free

market

The fact that market prices deviate from direct prices means that some firms must get

less profit and others more, than that indicated by their respective S.

Exchange on the basis of market prices hides that appropriation of value and is called

unequal exchange (UE).


unequal exchange (VI)

It appears that differences between firms, regions and nations are

due to the differences between the intrinsic productive capacity of

their workers. But without changing a single attribute of the labour

force, a redistribution of capital & technology change everything.

UE rewards the technological leaders and penalizes the technological laggards.

If a producer increases its efficiency, there is an increase in the appropriation of

value at the cost of all other producers in proportion to their level of efficiency

P2 enjoys a surplus profit (+1.666) due to his

temporary monopoly in a new technology. His

ownership of a part of human knowledge incarnated

in his machines lets him seize a share of the value

created elsewhere and concentrate it in his hands.

Looking back at computer producers An exceptional proportion of

surplus value will always be

appropriated by innovators, and

the rest will always be

correspondingly deprived.

Apparently there are no obstacles which prevent technological laggards

from gaining access to the most advanced technologies

All she needs is technology and capital

Uneven Development

Unequal exchange and uneven development

In reality, one of the biggest obstacles

relies on intellectual property

there is the possibility that the I mover would accumulate

advantage. The innovative firm may use the additional

profit it has already made to make further productivity-

enhancing investments that once again put it ahead of the

game, so it gains more technological rents that provide it

with the resources to continue the same pattern

Its function is to maintain the pre-existing

relation between knowledge and capital

through the protection of such relation

if the process of technological diffusion itself deprives the backward countries of the

capital they require to deploy the new technology, then these countries will never catch up

Attacca dopo “All she needs is

technology and capital”: It is true

that Marx described the

introduction of cost-reduction

innovation by a „first-mover‟

who initially enjoyed extra

profits. However, in Marx‟s view

this situation is necessarily

temporary, lasting only until

competition generalizes the new

technology across the sector.

Attacca dopo “to continue

the same pattern”:The result

may be a self reinforcing

process that gives rise to

privileged concentrations of

high-productivity capital.

Without a world market through which technically advanced capital can

exploit the labour of others, its source of super-profit would not exist.

Unequal exchange, free trade and uneven

development

Free market is synonym of

imperialism

it is systematic appropriation

of international value

capitalist enterprises in the imperialist

countries appropriate value systematically

from enterprises in the dominated countries.

The technological leaders (countries)

realize more surplus value (i.e., the

capitalists in those countries realize

higher profits) at the expense of the

other countries. In terms of

distribution of value, this means that

there is a transfer of value from the

dominated to the dominant bloc.

=

The dependent countries produce what the center

needs through the use of more labour-intensive

techniques so as to ensure both a transfer of value to

the center and continued technological dependence.

This appropriation is the

origin, and in a subsequent

period the outcome, of a

cumulative process involving

capital formation, investment

in research and development,

technological innovations.

When exposed to competition, firms within low productivity nations would

tend to suffer declining shares in the international market.

Their higher costs

International trade unbalances and financial

dependency (I)

would make it difficult for

them to sell outside the nation

would leave their markets vulnerable

to products originating in high

productivity (lower costs) nations.

Unlike the theory of comparative costs, there

are no magic mechanisms that automatically

make nations automatically equal.

in Ricardo this magic

mechanism relies on the

quantity theory of money

2. The money outflow from less

efficient economy would lower prices

1. The money inflow into the more

efficient economy would raise prices This process implies that sooner

or later UK cloth would undersell

its Portuguese counterpart. In the

end, free trade benefits all.


dependency (II) – Marx‟s theory of money

Marx was strongly critical of the quantity theory on which

Ricardo‟s results were based

a. There is no correlation between changes in

money supply and variation of commodity prices.

It is the amount and distribution of

social labor-time which determine

how valuable a commodity will be in

exchange, that is, its money-price.

b. It is not the quantity of money that determines

the price of the commodities.

According to Marx:

• Money price is the external measure of the

value of a commodity

• Money does not cause worth, it measures it

It is the sum of value of the

commodities produced in a

given period which determines

the sum of their money supply.

Any quantity of money over and

above this amount will be redundant

since the market absorbs only that

sum of money supply that is needs

for the circulation of good produced

in a given period.

It follows

that

Rather than raising/decreasing the price level, the first manifestation of a

persistent excesses/deficiencies of money relative to the needs of circulation is:

The buildup of bank reserves

The drop of bank reserves

************************************************************


dependency (III)

which is generally accompanied by a

decrease in the rate of interest as the banks

strive to convert reserves into capital.

which tends to rise the interest rate.

we try to apply this „Marxian‟ theoretical framework to the „Ricardian case‟

Because of their greater competitiveness, Portuguese capitalists in both branches are able

to undersell their English competition. Portuguese cloth and wine invade UK markets.

In UK the supply of money decreases UK money begins to flow back to Portugal

In Portugal the money supply increases

It is at this point that Marx‟s theory of money becomes critical


dependency (IV)

as English cloth and wine

production succumbs to foreign

competition, the demand for

money-capital will also decrease.

Nonetheless, the continuing drain of money will lower bank reserves

This will tend to raise the interest rate

Insofar as this curtails investment, production of

other commodities will also contract

The primary effect of an outflow

of money from UK will be to

diminish the supply of loanable

money-capital.

In Portugal, the effects are just the

opposite. The primary effect of an

inflow of money will be the

expansion of bank reserves.

To the extent that investment is responsive to the interest rate, this

may stimulate the production and an expansion of productivity

Moreover, part of it will be

absorbed by the expanded

circulation requirements of

cloth and wine production; and

the rest will be absorbed in the

form of luxury articles.

This effect will increase the

supply of loanable money-capital

This will tend to lower

the interest rate


dependency (V)


dependency (VI)

ENGLAND

(Less competitive country)

Outflow of money

Increasing of interest rate

Contraction of investment

and production

Further loss of

competitiveness

PORTUGAL

(More competitive country)

Inflow of money

Decreasing of interest rate

Expansion of investment

and production

Further gain of

competitiveness

At some point, the interest rate differential will provoke a capital outflow

from the trade surplus country to the trade deficit one (less competitive).


dependency (VII)

it will be to the advantage of Portuguese capitalists to lend their money-capital in UK

(where the interest rate is higher), rather than at home (where the interest rate is lower)

because

when this happens

short-term financial capital

flow from Portugal to UK

1. UK‟s rate of interest would then

reverse itself and begin to fall

2. Portugal‟s interest rate would rise

UK running a situation chronic trade

deficit which it covers by means of

short-term international borrowing

Portugal running a trade surplus

which enables its capitalists to

engage in international lending

It may seem that at this point the

situation would be balanced

According to Marx this is not quite correct:

England would have to eventually pay back not only the original loan, but also

the interest on it

The net effect must be an outflow of money from England, albeit at a later date

England will end up with a persistent trade deficit and a chronic short-term

indebtedness


dependency (VIII)

Capitalist loans are made in

order to get profit

(in the form of interest).

so that

why?

1. Free trade does not make all nations equally competitive. Rather, it exposes the

weak to the competition of the strong.

2. Trade liberalization benefits the more efficiency firms located in the developed

countries because they are the most technologically advanced.

3. The technological backwardness of underdeveloped countries results in

chronic trade deficit and mounting international borrowing. Such imbalances

are the normal complement of free exchange between unequally competitive

trade partners.

The implicit conclusions inherent in the Marxist

trade theory

if the cause of inequality is external to the

market, then the solution is to remove the

external disturbance, not the market.

Marx’s predictions are the opposite

of those reached by Ricardo

4. The market itself is the cause of inequality. It is not monopoly or conspiracy

upon which uneven development rests, but the automatic tendencies of free

trade among nations at different levels of development.

Reference Materials

Carchedi, G. (1991), Frontiers of Political Economy, Verso, London (chapters 6; 7)

Desai, R. (2013), Geopolitical Economy, Pluto Press, London, pp. 142-146.

Freeman, A. (1996), The poverty of nations, MPRA Paper No. 482, Online at http://mpra.ub.uni-muenchen.de/482/

Marx, K. (1867/1992), Capital: Critique of Political Economy, Volume 1, Penguin Classics, London.

Shaikh, A. (1980), The laws of international exchange, in Growth, Profits and Property, Edward J. Nell (ed.), Cambridge University Press, Cambridge, chapter 13.

Marx on International Trade - Lesson 3 - Macheda

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