A Note on Equilibrium Theory of International Trade and Underdevelopment Sukumar Nandi* One of the earliest attempts in economic theorisation with the notion of equilibrium has been irr the field of international trade. The theory of comparative cost and the law of reciprocal demand are the corner stones of the classical theory of international trade, which, however, does not provide satisfactory answer regarding the reality of underdevelopment in a large number of countries, The basic premise of the theory is stable equilibrium and it is sought to be established with the assumption that the analysis can be carried out with the help of some ‘economic factors’ which are independent of other social factors. The theory attempts to show that trade works for equalisation of factor prices and incomes. At the same time the theory is silent regarding another world phenomenon—the growing inequality among the poor and rich nations ; here the theory seems to be biased against the poorer countries? It is argued in this paper that the problems with the classical theory of international trade along with its neoclassical counterpart are deep rooted, the historical premise of the law of comparative advantage is not sound and the continuous adherence to the principle of free trade on the part of the developed countries is a theoretical eyewash regarding the problem of underdevelopment in a large number of countries. The paper is divided into two sections. In section I, we will deal with the classical theory of international trade and its neoclassical counterpart. In Section II, we will take up the critique of the main- stream theory and draw some conclusions, Section I: The Classical and Neoclassical Theories Theory is often experience put in a formal way. There are occasions when the economist’s theory had been long overtaken by + Department of Economics, Asutosh College, and Teacher Fellow, Calcutta University. u7events In the late eighteenth and early nineteenth century Britain could establish herself as the workshop of the world and her steel and cotton textile industries produced much more than the domestic economy could absorb. The industrial empire needed many goods Britain did not possess. The result was a massive interchange of products between countries and the world was transformed into a set of economies dependend on and complementary to the British. Several such complementary economies developed at various times, mainly on the basis of specialised local products for which the Britain was the main buyer: wool in Australia, nitrates and copper in Chile, wine in Portugal are a few examples. Between 1600 and 1750 Portugal was converted into a satellite of Britain. The Anglo- Portuguese commercial treaties of 1642, 1654, 1661 and 1703 [Methuen Treaty] established an international division of labour between the two countries very much according to the principle of comparative advantage.? The relationship which emerged from these treaties made Portugal dependent on England, and she suffered from continuous deficit in the balance of payments leading to outflow of gold from the country. Portugal had no alternative to the sale of wine to England and this Ricardo interpreted as law of comparative advantage. The law of comparative advantage, whether formulated in the Ricardian or in. the neoclassical framework has rarely been challenged. The challenge of protectionist theory and its associated free trade doctrine has been integrated into the mainstream of international trade theory.* The argument of free trade has been able to survive the attack by directing the attention to the malfunctioning of the market mechanism. The case for protection provided by the Keynesian framework does not pose a threat to the theory of comparative advantage, as it is argued that efficient use of fiscal policies can remove market malfunctions and reduce unemployment. But it is conceded that the efficacy of the fiscal policy depends on soxe crucial assumptions.* Ricardo’s theory of international trade is related to his theory of capital accumulation in a closed economy. The latter theory reflected his deep concern regarding the power struggle in England between the ‘progressive’ industrialists and the ‘reactionary’ landed interests. Ricardo provided a theory which proved positive gains from free trade and this was utilised by the industrialists. The 118 Economic AffairsDp a d 0 removal of the Corn Laws would lower the price of Corn and hence the demand for higher money wages would subside. The share of the produce going to the landlord would not increase. Thus the theory of comparative advantage is linked to the dynamics of distribution theory. But later presentation of his theory is detached from that aspect of distribution. Ricardo showed that free trade would lead to gain for every body in the society. When machines and natural resources are introduced, given the supply of labour in each country, the exchange prices are proportional to relative labour inputs in the international trade. Trade takes place between the limits set by the internal price ratios, which are determined by technical conditions governing labour inputs in each economy. These technical conditions again are influenced by the availability of machines and natural resources which are incorporated in the Ricardian model implicitly. So it is difficult in Ricardo’s analysis to determine international values independent of labour theory of value. The classical solution to the determination of international values was found in the law of reciprocal demand of J. S. Mill. When demand is introduced as the determinant of equilibrium terms of trade, this implies a break from the Ricardian tradition. Moreover, one result of this theory is that small country will be gainer in the trade with the large country, since international values are determined by the cost condition of.the larger country, But once many commodities and many countries are introduced, the Presumption that international values will be determined by the cost condition of the larger country would not hold true.® More serious is the case of deteriorating terms of trade of small countriés vis-a-vis developed economies in modern world which jeopardizes the case for free trade. According to one study® countries like Ghana and Brazil had to pay the following prices in terms of export commodity to buy one ton of imported steel : 1951 1961 Ghana (Ib Cocoa) 202 570 Brazil (1b Coffee) 158 380 Obviously the poorer countries are not benefited through trade with rich countries. Neoclassical trade theory puts great emphasis on an automatic mechanism for the realisation of the gains from trade once unrestricted 119