The Equality Assumption: Uneven development and the history of economic thought
Seminar with professor Erik Reinert, Professor of Technology Governance and Development Strategies, Tallinn University of Technology.
At the core of the problem of uneven development is what Nobel Laureate James Buchanan called ‘the equality assumption’ in economics (Equality as Fact and Norm, 1971). The largest problem globally in this regard lies in David Ricardo’s theory of international trade (1817) which models world trade as the barter of qualitatively identical labour hours under the absence of capital. In addition to the international dimension of the ‘equality assumption’ this assumption also has strongly implications for regional policy and, particularly, agricultural policy. In Norway the ‘equality assumption’ – as underlying the policies carried out by the Ministry of Agriculture towards the Saami reindeer herders – has also had very negative consequences for the aboriginal population in Norway.
This seminar will address on all these aspects of the ‘equality assumption’. We shall point to the fact that Ricardian trade theory only became popular in economic literature with two articles by Paul Samuelson in 1948 and 1949 and show how the core of Cold War Economics was created that way. For many years Ricardian theory dominated in economic theory, not in practical policies, which for a long time followed the pro-industrial policies of the Marshall Plan from 1947. Regional policies heavily subsidized agriculture: in 1985 the support of agriculture took 70 per cent of the total EU budget. Only after the 1989 Fall of the Berlin Wall, with the 1992 Maastricht Treaty, did the economic policy carried out start to follow the theories that had been created at the beginning of the Cold War (1948/49).
The Ricardian paradigm in international trade was the foundation for British colonial policy: it ‘proved’ that colonies specializing in raw materials would be equally rich as the Mother Country. Nations with a large white population – the US, Canada, Australia, New Zealand and South Africa – all industrialized in spite of the recommendation of David Ricardo. Now is the time to get rid of the Ricardian paradigm of comparative advantage because it keeps poor countries poor (and incidentally, is a main factor behind mass migrations from countries without a manufacturing industry)
Alternative theories have a long intellectual tradition, started by Italian economists Giovanni Botero (1589) and Antonio Serra (1613). The seminar will emphasize how these theories and their many successors – including the theories informing Norwegian industrialization until a few decades ago – show that the country which exports goods produced under increasing returns to scale and under dynamic imperfect competition – e.g. high-end manufacture – has huge advantages over the country which exports goods produced under diminishing returns and perfect competition – commodities. As Botero argued, the combination of economic diversity and adding value to raw materials are key elements that make nations rich. Since the Renaissance, no successful country has succeeded without protecting their nascent manufactures, and no country can achieve development without a sustained level of industrialization. The seminar will also show that if we look at economics through the history of economics books, a surprising picture emerges. Looking at economics books published before 1750 and 1850 respectively – which reached more than 10 editions (including translations) we discover that Ricardian economics is a quite modest affair, and that what is being taught in courses of economics is but a thin slice of the available wealth of economic thought.