Commodities in Economics: A Brief History
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Abstract
A review of economic thought in Western Europe since the 15th century reveals two streams of economic thought: interventionist and laissez fairist. The mercantilists saw commodities as complex entities with multiple attributes, some of which are more growth-enhancing than others. Governments intervene to promote commodities with the strongest growth-enhancing attributes. Of necessity, the classical economists built their case for laissez faire by stripping commodities of their complexity so that no commodity could be preferred over another for its growth-enhancing attributes. The neoclassical economists completed this evisceration of commodities in their core competitive paradigm. Almost from the start, however, this evisceration of commodities was challenged by economists from lagging countries eager to catch up with the advanced countries. In the post-War era, the development economists revived the more complex view of commodities to make their case for government intervention in support of economic development in the poorest countries. This period also witnessed a reaction within the neoclassical camp itself against the streamlined view of the economy in the competitive paradigm.
This paper deserves a high praise because of its acute analysis and insightfulness. In my view, it should be published. The author opposes two streams of thought in the whole history of modern economics. One is based on the view that development is due to the difference in productivity potentials of commodities and sectors of production. From this, a series of consequences derive as requisites for development: state intervention to foster more productive sectors or modernise backward sectors; productivity increase through skill, new technologies, trade specialisation. The pillars of this approach is to be found in mercantilists and in Smith’s principle of the division of labour as the very source of the increase in productivity. In this approach development is a dynamic, unbalanced process, based on decreasing costs per unit and increasing returns, where differences in speed and advance are founded on the difference in commodities and production sectors.
The second approach stems in the classical school and continues with neo-classics. It is based on the idea that economy tends to equilibrium through reciprocal advantages in trade, a balanced diffusion of the increase in productivity, constant costs and constant returns. Such an approach implies that market always provides the best solutions to economic problems, advantages for all (equilibrium) and commodities made equal (as the author says, “eviscerated” of their different productivity potentials). The obvious consequences are the principle of laissez faire, the Ricardian law of international trade and the preference for static analysis.
The whole confrontation is based on the opposition between the preference for manufacture and industry on the one hand, or for agriculture on the other. These sectors are respectively representative of more dynamic or more static process, as it has actually been in modern history (although now the positions can be reversed, while comparing mechanical industry and GMOs in agriculture).
The opposition put forward by the article, of course, is not new, but the author manages to show it in its entire historical scope and in all its main analytical implications.
I have only a few observations to do. The first ones refer to history:
1) mercantilism was born in the 16th century not in the 15th (its bulk arose at the end of 16th and the beginning of 17th c.). It was born against bullionism, which had dominated the 15th and a great part of the 16th c.
2) If I am allowed – in order to be clearer – the author can go back to the original interpretation of the mercantilist trade theory as based on the different productivity potentials of commodities. It is chapter 10 of my book Consumption as an Investment, Routledge 2004, or the early version as an article in History of Political Economy, 1991/2.
3) I don’t think that in modern age only backward countries were interventionist. All mercantilists were, the British included. Since the 15th c., Britain became the more advanced country, and she was the first to practise but also to theorise state intervention.
4) Heckscher appreciated mercantilists, but he thought they were wrong for not being free traders.
5) I doubt that Smith explicitly expresses a cumulative advantage in trade for the more productive country. The article’s interpretation is however logically plausible; but it should be presented as an interpretation. Smith plays a doble role in this confrontation. The author should stress more this aspect.
Other observations refer to the organisation of the paper. It is too full and too long, because it includes secondary themes which are only roughly connected to the main argument, for lack of space. The result is that, although they could be properly connected to the article’s subject, these themes are not clear enough. I refer for ex. to the alleged mercantilist confusion between wealth and money; or to the distinction productive/unproductive labour (which is important for our subject in the mercantilist period, just where the author neglects it). Besides, the introductory pages (1 to 5, about) appear too obvious, because the reader is not still aware of the linkage with the main subject.
Finally, the text requires a careful revision for both orthography and accuracy in expression.
Examples: second hand citations must be clear in indicating the proper source used by the author (see the equivocal quotation of Botero in fn 21). “Reinert”, not Reinart (p. 10).
The paper by Shahid Alam makes two points:
1) What a country produces matters for its growth potential. As the author says, it makes a difference whether a country produces microchips or potato chips;
2) free trade doctrines have always been advocated by those countries which, after reaching a leading position in international trade, “kick away the ladder” – i.e. interventionist and/or protectionist policies – in order to prevent other countries from following their route.
This position is by no means new, but the paper deserves publication since the argument is well- presented and intelligently constructed around the idea that commodities have been gradually “eviscerated” by economic theory over the centuries. The paper reconstructs how the different characteristics and importance of agricultural and industrial products – obvious to the early mercantilists – disappear in the Walrasian approach, which reduces any difference between commodities to variations in their capital/ labour ratios. The “brief history” is convincing and effective, but I think that a few things could be improved/clarified.
a) Although I like the idea that commodities have been “eviscerated”, the section “commodities in the real world” is too long, and indeed superfluous, since the differences between commodities are manifest in the rest of the paper. Placed as it is at the beginning of the paper, its meaning is not clear to the reader. Moreover, the section may be open to the criticism that mainstream microeconomics textbooks are full of exercises on the different income and price elasticities of goods, their storability, and so on.
b) Shahid Alam maintains that mercantilist ideas go back to the fifteenth century (pp. 2, 5, 9, 32), but all the authors he quotes were active in the late sixteenth – early seventeenth century.
c) The question as to whether Adam Smith’s price theory is based on the implicit assumption of constant returns to scale is too vast to be dealt with in a few lines on the basis of what Blaug said (pp. 21-22). Moreover, it is not essential to the main argument.
d) Smith’s distinction between productive and unproductive labour is not so clear-cut as it is made out to be in the paper, nor can it be identified solely with the distinction between labour which produces material or immaterial goods. On this point, see A. Roncaglia, The Wealth of Ideas, Cambridge University Press, 2005, pp 131-2.
The article by M. Shahid Alam tries to tell the story of free trade vs. protectionist trade policies against the backdrop of how commodities are treated those economic theories that underlie these policy recommendations. He thereby retells a rather familiar story in a new light. This is an endeavour worth pursuing and I do find his approach interesting.
However, I have several comments on how he treats some of the theories and also on his story as a whole, because I’m not sure that he is in reality not telling a somewhat different story than he claims. I’m not convinced that the equation of free trade recommendations, on the one hand, and negligence of the properties of commodities, on the other hand, can be sustained. Also, I think some parts of the paper could be shortened, while others could be lengthened.
In the following, I will expound my major points, first to some single sections and last (point 5) to his story as a whole. Afterwards, I will mention to minor points.
My major points in detail:
1. Mercantilism: From the last paragraph of p. 5 until the bottom of p. 8 is a defence of Mercantilist writers against later interpretations. This is, however, not that relevant for the overall story and can be shortened probably to just one paragraph. Alam refers to several works that have tried to restore the value of Mercantilist thinking and it is worth to refer to those works. However, there is no need to comment on each work in detail. (I don’t think that there is much doubt that Mercantilist writers have for some time been misrepresented in a negative way.) The underlying bias in favour of Mercantilism is clear enough without such a long exoneration that is not relevant for the main story of the article.
2. Physiocrats: While Alam tries to exonerate Mercantilism, I fear that he does the opposite with Physiocrats. He argues that Physiocrats had only “a static economy” in mind that “only reproduces itself.” I’m not sure that this is true. It is widely believed that Adam Smith introduced capital accumulation into his economic theory after he met and was influenced by Physiocrats (e.g., McNally 1988, 234-250; Eltis 2004; Prendergast 2010). I would also suggest to quote (or at least refer to) the work of some Physiocrats to prove the asserted points (and not to rely on only secondary literature.)
3. Smith:
a. I’m not sure why the difference between productive and unproductive labour is discussed here. According to Smith, commodities, because they can store value, are always produced by productive labour. Thus, this differentiation is not irrelevant for a history of commodities.
b. However, productive labour is not equally productive (and useful for the society as a whole). Agricultural labour is the most productive (because land itself exerts productive labour). Labour in manufacturing is less productive. That the division of labour can be advanced further in manufacturing does not change this. In order to understand why he champions free trade his “natural progress of opulence” has to be understood. This would also clarify why Smith did not argue that developing countries will always lag behind and have no chance of catching-up (Schumacher 2015).
c. On the other hand, Smith differentiates commodities at length in ways which are omitted here. Transport costs play a big role and he discusses that some commodities are produced by labour alone, while others also need capital and rent and he discusses fixed and circulation capital,… This is all omitted in the paper, which thus distorts Smith’s treatment of commodities.
4. Ricardo:
a. As the Physiocrats, I think Ricardo is presented unfairly in this paper and, similarly, he is never quoted directly (nor are there references to his texts). Ricardo does discuss the properties of different commodities in detail. Most famously, he made a distinction between scarce commodities and those that are produced under competitive conditions (and are thus infinitely producible) (Ricardo 2004 [1817], 12); a point that is omitted in this paper. And later on in his book, he also differentiates those latter commodities further.
b. Also, I don’t think that it is true that he assumed that commodities “produced under conditions of constant unit labor costs,” that “only labor [is] required for their production” and that Ricardo argued with “unit labor costs.” This seems to originate in the misrepresentation of Ricardo by neoclassical international trade theory. He never uses those assumptions in domestic production and he also does not use them in foreign trade. He discusses the influence of several variables on the value and price of commodities. He always stresses the role of capital and land in the production. (The claim that Ricardo assumed only labour as a production factor is often made by neoclassical economists, but it rests on a misunderstanding (or rather incomprehension) of the labour theory of value.) And not even in his chapter on foreign trade does he make any of those assumption including unit labour cost. They cannot be found in his famous England-Portugal example (Ricardo 2004 [1817], 134-137) to which Alam presumably refers. Unit labour costs have been introduced into the theory of comparative advantage only later (I think it was JS Mill). Ricardo himself rather uses what has been labelled “labour embodied in trade” (Bernhofen 2009, 6; see also Ruffin 2002; Morales Meoqui 2011). Therefore, I would suggest that the author refers to or quotes Ricardo’s writings directly for his argument.
5. My last point major point and arguably my most important point is, that I’m not sure this is really a history the connection of “eviscerated” commodities and free trade policies. I suspect the story is much more focussed, namely the view on manufactured and agricultural commodities in economics and the policy conclusions. First, those who argue that manufactured commodities (compared to agricultural commodities) are more beneficial for a country due to their properties, are those you are in favour of protectionist policies, at least until a country can first establish a competitive manufacturing sector (Mercantilists, List, Hamilton, modern development economists). Second, those who argue that agricultural commodities add more value to a country than manufactured commodities recommend free trade (Physiocrats, Smith). Both in the treatment of Physiocrats and of Smith, commodities are not eviscerated and I don’t think. Their complexities are discussed in those theories as well. The properties and conclusion differ from those writers in the first group, but it cannot be claimed that commodities are eviscerated in the Physiocrats and in Smith. Third, those who argue that both kinds of commodities are equal and that it doesn’t matter whether a country produces manufactured or agricultural commodities (or, in other words, it doesn’t matter whether a country produces “apples or Apple computers” (Çağatay 1994, 241)), these economists also recommend free trade (neoclassical economists). In case of neoclassical economists, commodities really are eviscerated. Fourth, Ricardo and other classical economist: I don’t think that they treated commodities as eviscerated. They could be grouped with neoclassical economist because they saw manufactured and agricultural commodities as equally beneficial (but not because they used eviscerated commodities). To sum up, I would argue that this story fits better to the arguments brought forward by Alam than his original story, which overlooks the detailed discussion of properties of different commodities in the Physiocrats, Smith and other classical writers. In this way, his story would be more convincing according to my opinion.
Smaller points:
6. Since Alam stresses the importance of manufactured over agricultural goods, he might want to include Verdoorn’s and Kaldor’s growths laws, which establish that manufacturing has more positive economic effects than agriculture (see Schumacher 2013, pp. 96-97).
7. The title suggests a history of commodities in economics and I (and probably others) would expect that Marx shows up at some point, because he discusses commodities at a greater length than probably any other economist that is mentioned in the text. Thus, at least in a footnote, a reason should be given, why he is left out. If, however, as I suggest in point 6, the real story is manufactured vs. agricultural goods, as I think it is, it would be plausible to leave him out.
8. As the previous commentators mentioned, there are some typos that should be corrected. On p. 5, e.g., Thomas Mun is written “Munn”.
References:
Bernhofen, Daniel M. 2009. “Predicting the Pattern of International Trade in the Neoclassical Model: A Synthesis.” Economic Theory 41 (1):5-21.
Çağatay, Nilüfer. 1994. “Themes in Marxian and Post-Keynesian Theories of International Trade: A Consideration with Respect to New Trade Theory.” In Competition, Technology, and Money: Classical and Post-Keynesian Perspectives, edited by Mark A. Glick, 237-250. Aldershot: Edward Elgar.
Eltis, Walter. 2004. “Emma Rothschild on Economic Sentiments: And the True Adam Smith.” The European Journal of the History of Economic Thought 11 (1):147-159.
McNally, David. 1988. Political Economy and the Rise of Capitalism: A Reinterpretation. Berkeley: University of California Press.
Morales Meoqui, Jorge. 2011. “Comparative Advantage and the Labor Theory of Value.” History of Political Economy 43 (4):743-763.
Prendergast, Renee. 2010. “Accumulation of Knowledge and Accumulation of Capital in Early ‘Theories’ of Growth and Development.” Cambridge Journal of Economics 34 (3):413-431.
Ricardo, David. (1817) 2004. “On the Principles of Political Economy and Taxation.” In The Works and Correspondence of David Ricardo: Vol. I, edited by Piero Sraffa. Indianapolis: Liberty Fund.
Ruffin, Roy J. 2002. “David Ricardo’s Discovery of Comparative Advantage.” History of Political Economy 34 (4):727-748.
Schumacher, Reinhard. 2013. “Deconstructing the Theory of Comparative Advantage.” World Economic Review 2:83-105.
———. 2015. Adam Smith and the “Rich Country–Poor Country” Debate: Eighteenth-Century Views on Economic Progress and International Trade. In The European Journal of the History of Economic Thought, in: http://dx.doi.org/10.1080/09672567.2015.1050046.