Presentation Speech by Professor Assar Lindbeck of the Royal Academy of Sciences
Translation from the Swedish text
Your Majesties, Your Royal Highnesses, Ladies and Gentlemen,
The question why individuals, firms and nations exchange goods and services with each other, and how these processes are influenced by government policies, may be regarded as the basic issue in the science of economics. In the case of exchange between countries, the dominating theory was for a long time – from the beginning of the 19th century – David Ricardo’s theory of comparative advantage. Ricardo explained there the structure of foreign trade by differences in the production technology between nations. Over the years the theory was gradually improved upon in various ways, but a more basic overhaul did not take place until Bertil Ohlin in the early 1930’s published his work Interregional and International Trade, which is now a classic, and James Meade in the 1950’s came out with his important volumes on The Theory of International Economic Policy.
Bertil Ohlin showed in this work, which to some extent was inspired by a remarkable article by Eli Heckscher, that foreign trade may arise even if the production technology were identical in different nations. It is enough that the supplies of the factors of production of various kinds – such as labor of different types, capital, and land – differ among nations. The starting point of Ohlin’s theory is that a country tends to be an exporter of commodities that use relatively large amounts of the factors of production which are in ample supply as compared to domestic demand – in the hypothetical case without foreign trade. For instance, to take a simple example, if land is abundant in Australia while labor is relatively plentiful in England, we would expect Australia to be an exporter of commodities which for their production require much land, such as wool, while England would be an exporter of commodities the production of which requires relatively much labor, such as textiles.
From this simple theoretical structure, the so-called Heckscher-Ohlin model, follow a number of interesting theorems. One of them, the factor price equalization theorem, tells us that foreign trade tends to equalize the prices of the factors of production in different countries. For instance, when Australia starts to export land-intensive goods, the demand for land goes up relative to labor, with a rise in land prices as a result, while the export of labor-intensive goods by England pulls up wages there relative to the price of land. Thus, trade in commodities tends to have the same effects on the prices of the factors of production as if the factors themselves could move freely between countries. In this sense, commodity trade is a substitute for international mobility of the factors of production. Another inference from Ohlin’s theory is that a tariff on a labor-intensive good, such as textiles, affects the distribution of income in favor of labor in the importing country, while a tariff on a capital-intensive commodity, such as wool or steel, results in an income redistribution in favor of the owner of capital.
The research carried out by James Meade in the field of international trade has concentrated on the effects of economic policies, not only tariffs but also more fundamental institutional changes, such as the formation of customs unions and free trade areas. He has also provided new ways of measuring the level of protection, and has analyzed the possibilities of comparing non-optimum situations with each other – which later came to he baptized “the Second Best Problem”.
However, James Meade’s most original contribution to international economics has taken place in the field of balance-of-payments analysis, where he has shown how, and in what circumstances, a country may simultaneously achieve balance both in the domestic economy and its international payments. In this context, Meade showed that a conflict often tends to arise between the objectives of full employment and the balance of payments, but that this conflict can be resolved by the appropriate combination of several policy instruments at once to achieve both objectives. In particular he was a pioneer in analyzing the effects of interest rates and monetary policy on the balance of payments, as well as the role of the exchange rate system for the performance of stabilization policy. By analyzing the complications that emerge when several countries simultaneously try to influence their internal and external economies, Meade has also clarified the problems that arise when several countries simultaneously disturb each other by way of national economic policy actions; this analysis underscores the importance of coordinating stabilization policy among nations.
I now turn to you, Professor Ohlin. Your scientific contribution has largely laid the foundations for the modern theory of international trade. Your work has proven to be a firm cornerstone both for further theoretical work and for empirical testing. You have also inspired much research in international economics beyond the framework of strict formalized models, for instance concerning the international transfer of resources, and the effects on trade of social legislation and other political actions.
Professor Meade: Your have successfully analyzed the consequences for international trade and the international division of labor of different types of economic policy actions and institutional arrangements. You have also laid the foundation for the modern theory of employment in open economies, and have clarified the possibilities of achieving simultaneously, by way of economic policy actions, both internal and external balance in strongly internationalized economies. Your analysis has in particular shown the need, as well as the means, of simultaneously achieving in such economies both an adequate level of the aggregate demand for goods and services, and a level of domestic costs and prices that are compatible with full employment and equilibrium in the balance of payments.
Professors Ohlin and Meade: In view of your path-breaking research contributions in the field of international economics, it is a great honor for me to convey to you the congratulations of the Royal Academy of Sciences, and to ask you to accept from the hands of His Majesty the King the 1977 Prize in Economic Sciences, dedicated to the memory of Alfred Nobel.
Their work and discoveries range from the formation of black holes and genetic scissors to efforts to combat hunger and develop new auction formats.
See them all presented here.