An Outline of International Price Theories

CHAPTER VIII

DEVELOPMENTS SINCE 1918: ATTEMPTS TO EXTEND THE MUTUAL INTERDEPENDENCE THEORY OF PRICING TO THE DOMAIN OF INTERNATIONAL ECONOMICS

1. The Case of Joint Production and the Problem of General Equilibrium

Most of the doctrines that we have described in the preceding chapters are based upon a hypothesis of simple production, i.e. production with only one scarce factor, viz. homogeneous labour. This study would be incomplete if we do not take into consideration also the case of joint production, i.e. production with two or more scarce factors of production. Later exponents of the classical theory—Bastable, Edgeworth, and the Cambridge economists, for example—tried to treat the case of joint production by substituting “a unit of productive power” for “a unit of labour” as the unit of measurement of real cost. That treatment is correct in so far as the combination of factors is in a fixed proportion for all commodities. In that case the problem is the same as that of simple production. Therefore the term, “a typical combination of labour and capital,” is sometimes explicitly employed to take the place of “a unit of productive power”.

More important, however, is the case when the combination of factors is not in the same proportion for different commodities. As early as 1803 Sismondi noticed the importance of that case.1 He called attention to the fact that those manufactures which required for their production little capital but considerable labour were produced in countries where wages were low, while countries like England produced those commodities which required much capital.2 In the eighteen-thirties, Longfield studied the case of the existence of different kinds of labour. He found firstly that, other things being equal, each country would export those goods which required for their production those kinds of labour which were abundant in the country and would import those goods which required those kinds of labour which were scarce in it. He said:—

Suppose two countries between which existed a perfect freedom of intercourse, let them be similarly circumstanced as to soil and climate, but in one the inhabitants are all free, while in the other the labouring part of the population is in a state of slavery. The commerce between those countries will necessarily consist of exchange of the products of harsh disagreeable labour from the country of slave, for the results of skilled and educated labour from the land of freemen. The master will not employ his slave in a more agreeable kind of labour when he can gain a little more by a different sort, whatever be the hardship and disagreeableness. But the freeman will not sell so cheap this additional sacrifice of ease and comfort; but as his own interests, not those of his master, are concerned, he will learn every kind of skilled labour with greater facility and less expense than the slave.3

Hence, independent of every difference of soil and climate, the exchange between two countries such as I have described will consist principally of articles produced by that species of labour which in each country is relatively cheapest.4

Secondly, Longfield showed that the wage of each kind of labour was high in the country in which it was scarce and low in the country in which it was abundant.5 Finally, he demonstrated that in a country where slavery existed, capital was scarce and it would export goods which required little “skill and honesty”, while in a country of freemen, the rate of interest was low and it would export goods which required much capital.6

Before following that line of thought, we may turn to another line of thought, which has now become associated with the former. The line of thought that we are going to follow is that of the extension of the mutual-interdependence theory of pricing or, in other words, the general equilibrium theory of value, to the domain of international trade. With the possible exception of Cournot,7 Pareto was the first economist to extend his system of equations for a closed community to the case of two or more trading communities or countries. His way of extension is this: Write, according to the theory of value within a closed community, the system of equations for each of the two trading countries as separate entities. Now the opening of trade between the two countries introduces new unknowns. There are the n quantities of the n commodities exchanged between the two countries, and there is also the rate of exchange between the two currencies. There are n + 1 new unknowns. It requires, therefore, n + 1 additional equations to determine the economic equilibrium. Since there is a definite relation between the price of a trading commodity in the exporting country and the price in the importing country, we can write an equation for each of the trading commodities according to that relation. For n commodities there are n equations. We still require one more equation, which is supplied by the condition that in equilibrium the value of imports must be equal to that of exports. The system of equations thus becomes complete.8

The disciples of Pareto, such as Barone and Amoroso, have copied Pareto’s method of dealing with the problem without any important alteration.

2. Ohlin’s Theory of International Trade

In the last decade,9 there have been many important attempts made to extend the mutual interdependence theory or the general equilibrium theory to the domain of international economics. Among them the most important are those of Professors Ohlin and Haberler.10 Professor Haberler’s theory is essentially an extension of the classical theory and has been reviewed in Chapter IV above. Professor Ohlin’s Work,11 on the other hand, deals with the case of joint production at the very outset and is really an attempt at an alternative approach to the problem of international trade. Although we cannot approve of his hostile attitude towards the classical theory and cannot see, as he does, how the latter is not reconcilable with his theory, we think that his great work opens a new chapter in the history of thought on the economics of international trade. It is in his hands that the two trends of thought described in the preceding section are, for the first time, combined to form a comprehensive theory of international trade.

We may now examine his extension of the mutual interdependence theory of pricing to the domain of inter-regional and international trade.12 He begins with the consideration of a case of full mobility and divisibility within each market and assumes the supply of the various factors of production to be constant and known. On those assumptions the price system of each market, if isolated, contains five sets of functional relations: (i) The quantity—“the technical coefficient”—of any one of the factors of production needed for the production of one unit of any one of the commodities produced is a function of the prices of factors of production. The form of that function is determined by the physical conditions of production. In other words, the technical coefficients depend partly on the physical conditions of production and partly on the prices of factors of production.

(ii) The price of any one commodity is equal to its cost of production, which is obtained by multiplying the quantity of each factor required (i.e. the technical coefficient) by its price, (iii) Demand for each commodity is a function, on the one hand, of the prices of all commodities and, on the other hand, of the various individual incomes of the inhabitants. The form of the demand function is determined by the wants and desires of the consumers, (iv) Each individual income in turn depends partly on the number of units of the various factors the individual owns and partly on their prices, (v) The demand for each factor of production—which is the sum of the products of the demand for each commodity, into the production of which that factor enters, multiplied by the quantity that factor needed for producing one unit of that commodity—is equal to the supply of that factor which is assumed to be given. From those five sets of relations it is obvious that all prices of goods and of factors are ultimately, in each region at any given moment, determined by (a) the wants and desires of consumers, (b) the conditions of ownership of the factors of production which affect individual incomes and thus demand (c) the supply of productive factors and (d) the physical conditions of production. Those four basic data being given, one can deduce from the five sets of relations given above both factor prices and commodity prices.

He next investigates the conditions, which make the opening of trade between different markets possible. It is obvious that “the immediate cause of trade is always that goods can be bought cheaper from outside in terms of money than they can be produced at home, and vice versa. . . . In other words inequality as to the relative commodity prices in the isolated state is a necessary condition for the establishment of trade”.13 That does not, however, answer the question. One has to go further and to investigate what lies behind such inequality in prices. From the one market theory described in the preceding paragraph, it is clear that equality or inequality in prices depends on the factors (a), (b), (c), and (d). Factor (d), however, is “everywhere the same”, and may hence be left out of account.14 Consequently, differences in commodity prices depend upon the state of the supply of the industrial agents, i.e. factor (c), and upon demand conditions—factors (a) and (b) taken together. The supply of factors of production in relation to demand creates what he calls “the relative scarcities of factors”. “If differences in supply between the regions are balanced by differences in demand, the relative scarcity of all factors and relative commodity prices will be the same,” and hence trade becomes impossible. In reality, however, the relative scarcity of productive factors is not the same in different isolated regions. It is that difference in the relative scarcities of productive factors that is a necessary condition to the opening of trade.15 That condition is fulfilled when the equipment of productive factors is distinctly different in various regions, for it is practically inconceivable that a corresponding consumers’ demand, being indirectly a demand for factors, should exactly offset the difference in factor supply.16 Then he comes to the following conclusion:—

Roughly speaking, abundant industrial agents are relatively cheap, scanty agents relatively dear, in each region. Commodities requiring for their production much of the former and little of the latter are exported in exchange for goods that call for factors in the opposite proportions. Thus, indirectly, factors in abundant supply are exported and factors in scanty supply are imported.17

Although “inequality in the prices of factors in the isolated state is sufficient to cause different commodity prices and thus to cause trade”, that condition alone is not sufficient to determine entirely the nature of international trade. Even given the relative scarcity of factors, we cannot know definitely “which and how many factors will be cheaper in one region than in the other”. The difference in relative factor prices can reveal itself in the form of absolute difference in commodity prices (which is the immediate cause of trade) only through the rates of the foreign exchanges. The latter depend upon the condition of the balance of trade (i.e. the equilibrium between imports and exports), and thus upon the intensity. of reciprocal demand.18

What would be the price systems in the trading regions after trade is opened between them? The first of the five sets of relations given above would remain the same in each of the trading regions.19 The only difference would be that one would have only to deal in each region with those commodities which are still produced after the opening of trade. Since it is assumed that each commodity is to be produced only in one region, the commodities to be dealt with in each region are simply its exported commodities. A similar change would be made of the second set of relations. The more important changes are found in the third and the fifth set of relations. The demand function which depends, before trade, partly on the prices of all home products, now depends not only on prices of home products but also on prices of imported goods. Similarly, on the supply side, each trading country has now to produce a quantity of those commodities on the production of which it specializes sufficient not only for its own consumption but also for the total consumption of them at home and abroad.20 Furthermore, prices of foreign products can be converted into prices in terms of local currency only through the medium of the foreign exchanges. Hence demand is also a function of the exchange rate. Similarly the fifth set of relations which involves demand is also affected by the variation in the rate of exchange. Thus, the exchange rate must be simultaneously solved with the price systems of the trading regions as a whole and “a solution of the fundamental problem of foreign exchange . . . is tantamount to constructing a theory of international trade”.21 According to Professor Ohlin, the rate of exchange which gives equilibrium would be such that the imports from and the exports to each of the trading regions balance. So is the price system of the trading regions.

Professor Ohlin’s theory of international trade as described in the preceding paragraphs is, we think, reconcilable with the classical theory, as restated by Professor Haberler. Professor Haberler, as indicated above, pointed out that each trading country exports those goods which it produces at lower opportunity costs and imports those goods which it produces at higher opportunity costs than other countries. Now commodities requiring for their production much of the abundant factors and little of the scarce factors are commodities that the country can produce at lower opportunity costs; and commodities requiring much of the scarce factors and little of the abundant factors are commodities produced at higher opportunity costs. In that way Professor Ohlin’s theory may be combined with Professor Haberler’s theory.

3. The Theory of International Price Relationships in the Case of Join Production

Professor Ohlin also examines the problems of international price relationships in the case of joint production. He starts with the case of zero cost of production. Upon that assumption, prices of commodities would be equal in the trading countries. The tendency of commodity prices towards equality among trading countries, together with the new conditions of the fifth set of relations, exercises an influence on the prices and employment of factors, after trade is opened between different countries. The first effect of trade on factor prices is given by Ohlin in the following passage:—

The amounts paid for the use of all the productive factors during a year is always equal to the total value of the goods produced. As trade and inter-regional division of labour means a more efficient production and a larger volume of commodities, the prices of the factors must obviously rise in terms of commodities. Assuming that the commodity price level in each region has been kept constant, factor prices expressed in terms of money must rise. . . . What determines the extent of that rise? Evidently this is to ask if all regions reap any gain from trade and what determines the amount of the gain that goes to each of them.22

In other words, the factor prices in each region taken as a whole will, as a result of trade, tend to rise relative to commodity prices; and the amount of gain of trade or the barter terms of trade determine the degree of such a rise. That is, in effect, the Seniorian doctrine resuscitated. The relative prices of factors in a trading region also change when trade is opened. “The factor which is relatively abundant becomes more in demand and fetches a higher price, whereas the factor that is scantily supplied becomes less in demand and gets a relatively lower reward than before. The relative scarcity of the productive factors is made less different in the two regions.”23 That generalization of a tendency towards international equalization of factor prices needs some qualifications. First the proposition presupposes the comparability and similarity of factors in different countries, but in fact “the qualities of the productive factors and of the various commodities differ, even when they are treated as being the same factor or sub-factor or as the same commodity”.24 Although the existence of those differences in the quality of the factors makes the proposition less precise, that does not, according to Professor Ohlin, invalidate the main argument of the proposition. Second, even upon the assumption of similarity of factors in different regions, there will be no complete equalization of factor prices. The reason is:—

The localization of industry and thereby the demand for production factors cannot completely adapt themselves to the equipment with them in each region, chiefly because the industrial demand is always the “joint demand” for several factors. Their combination cannot be varied at will; on the contrary the most economical combination is determined by the prices of the factors and the physical conditions. Consequently, the best adaptation of production to the geographical distribution of industrial agents . . . cannot lead to a complete inter-regional price equalization; some factors will still command higher prices in one region and lower in the others and vice versa.25

Third, “trade does not tend to equalize factor prices when quite different factors are closely competitive, being used in one industry to produce the same or a similar commodity while rendering otherwise quite different services.”26 He recognizes that “the factors may be so highly competitive that the result for relative prices is the opposite of what the general rule would lead one to expect”.27

Professor Ohlin next discusses the problem of international price relationships with the space factor and transport costs taken into full account. The general effect of the existence of costs of transport is as follows:—

If there were no such costs trade would take place in all or practically all commodities, whereas large groups of commodities are now excluded. In a word, costs of transfer reduce trade and weaken its effects upon prices. These effects were . . . a tendency towards an equalization of commodity and factor prices. That tendency is vitiated by the costs of transfer, although the trade which goes on in spite of them must exercise a price-equalizing influence so far as it goes. Trade means that the outside demand is brought to play on the inside supply and the inside demand on the outside supply. Costs of transfer interfere with this process, and lessen its influence upon prices in different markets.28

As between various regions, commodity prices tend to differ by the costs of transfer. But this is true only of goods subject to inter-regional trade; if the costs of transfer are greater than the differences in the costs of production in the various regions, then naturally each region will produce such goods itself and they will not enter into inter-regional trade.29

Following Cairnes and Taussig, he calls the latter “home-market goods” as opposed to imported and exported commodities, which together are called “international goods Home-market goods are subdivided by him into “competing home-market goods”, which are in more or less competition with international goods; and “non-competing home-market goods” which have no direct connection with other goods.30

Professor Ohlin shows that the connection between prices of international goods of one country and those of another is less direct than might be assumed at first sight, while the connection between prices of home-market goods in one country and those in another is more direct. The general statement that prices of international goods tend to differ by the costs of transfer needs qualification. It is true only of the relationship between a certain exporting region and the regions which import a particular commodity from it. It is not true of a comparison of prices of the commodity in the various importing regions. “Consider four regions of which A imports certain goods from B, while C obtains the same goods from D. Costs of production in B and D may differ considerably, perhaps as much as the costs of transfer between these regions. Furthermore, the costs of transfer from B to A and from D to C may be quite unequal. It follows that the import prices of A and C may also differ, although not more than the costs of transfer between them. The difference will in most cases be smaller, but no general rule can be given as to its dimensions. Inter-regional price relations are fixed by the costs of transfer only with regard to the regions which trade with one another in the goods concerned. Prices of inter-regional goods in two groups of regions which do not trade in them are not directly related.”31 Even when different exporting regions have common markets which connect their prices, the relation between prices in various producing regions is still “far from fixed”, because “the position of the common market may vary”.32

The inter-relation of prices of home-market goods (which are of similar technological composition) in different regions is more close than appears at first sight. Professor Ohlin emphasizes that international discrepancies in home-market prices are kept within narrow limits not only through the potentiality of home-market goods to enter into trade, which would come into existence if international price differences came to exceed the costs of transfer, but also through the actual trade in other goods. In the case of joint production, the production of a finished product passes through many stages of production. Goods in any one of the different stages of production—raw materials, semi-finished goods, auxiliary materials (tools, machines, etc.), and finished consumers’ goods—may enter into international trade when goods in other stages remain as domestic goods. When a raw material is an international good and the goods, which are products of that material, are not international goods, the tendency towards an international equalization in the price of the former leads to a similar equalization of the prices of the latter. The latter tendency follows the former, because the price of a product must in equilibrium equal its cost of production. The tendency of the price of the products of that material, however, is not towards a complete equalization, even upon the assumption that the technical conditions of production are everywhere the same. For that material may not be the only factor of production and accounts should be taken of other factors which also enter into the production of those products. In general, we may say that international trade in goods in the earlier stages (materials, machinery, etc.) tends to make the cost of production and hence the prices of domestic goods of later stages more closely related in different countries than they would otherwise be. Similarly, if goods in the earlier stages do not enter into international trade but goods in the later stages are international goods, the trade in the latter affects the prices of the former by making their prices more closely related in different countries. The price relation of domestic goods of identical technological composition among nations also becomes closer when the substitutes of those goods enter into trade. International trade in the latter prevents great differences in the prices of the former among countries. “The case is similar when two or more commodities are subject to joint supply, i.e. are manufactured in one process of production out of a common raw material; their prices are naturally intimately related. If in certain countries only one of them enters international trade, the prices of the other belonging to the home-market group are affected by their trade. Increased demand for the former commodity and its higher price in these countries will tend to depress the prices of the other goods. In other words, home-market prices tend to vary in the same way in all these countries.”33 There is another influence of a similar, though still more indirect, character, i.e. the influence through factor prices. Factor prices, upon the assumption of immobility of factors, are a kind of home-market prices. “But the trade in commodities of whatever sort tends to bring factor prices in various countries closer to each other; thereby costs of production of goods that do not enter international trade—home market goods—are brought more into harmony. The price at which a flat can be hired depends largely upon the height of the rate of interest. If the inter-regional differences in interest levels are reduced through trade, a tendency towards equalization of the price of flats is clearly brought about.”34 There is another equalizing influence which is peculiar to “competing home-market goods By its nature that kind of goods offers intense competition with international goods and hence its demand will react so as “to counteract any tendency towards price variations in one region exclusively”:—

Although a certain commodity is an export commodity in A (exported to C) and a home-market commodity in B, the prices will not vary arbitrarily; a special case of this sort is “rival demand”, which exists when one commodity can be substituted for another. International trade in margarine tends to prevent great differences in butter prices between countries where the latter is a home-market commodity. Furthermore, prices of competing home-market goods in B and C, which are both importing similar products from A, will move more or less in harmony. If competition between imported and domestic goods is very close, then home-market prices in B and C tend to be equal, and to exceed A’s export prices by the costs of transfer.35

Finally, he endorses Professor Angell’s doctrine that in spite of all influences which tend to equalize prices, the existence of “friction” makes possible wide differences in prices in different countries greater than costs of transfer.36

So far we have dealt with Professor Ohlin’s doctrine concerning price relations of a particular commodity or a particular group of commodities. There remains his doctrine of factor-price relationships and of relationships of general commodity price-levels among trading countries. He again emphasizes the importance of costs of transfer. He lays down the following general rule: Productive factors situated close to the demand for their products (or so situated that those products can be easily moved there) obtain higher value than distant factors, and a country with its productive factors so situated will have higher levels both of factor prices and of commodity prices.37 That can be illustrated thus:—

Suppose . . . three regions A, B, and C . . . B and C have a similar equipment of productive factors (farm-land, etc). C is either situated further away from A than is B, or its means of communication with this region are for other reasons not so good as those of B. Costs of transport for import and export goods are assumed to be about equal. It follows . . . that B’s productive factors will be in relatively greater demand than C’s, in other words that their prices will be higher. The general level of commodity prices, as measured by a wholesale price index of the ordinary type, is therefore also higher in B than in C. It is true that import prices are higher in C, but export goods common to these two regions command higher prices in the ports of B than in C, since they are closer to the market in A. The consequent relative cheapness of C factors tends to make home market goods in C also cheaper than in B. Observe, however, that some home market goods in C are import goods in B. They may well cost more in the former regions. On the other hand, certain goods which B is able to export are home market goods in C, and will probably cost less than in B. These two qualifications do not impair the conclusion that the general price, as commonly computed, is lower in a region far from its markets than in another with similar equipment of productive factors but situated closer to the main markets.38

In the case of two or more trading nations, commodity price-levels would also be different, if costs of transport for imported and exported goods were not equal. Suppose two countries A and B. If A imports goods that are easier to transport than the imported goods of B, then the level of international prices must “evidently be lower in A than in B”.39 The differences in the costs of transport and those in the grades of labour being taken care of, “high level for wages goes hand in hand with a high commodity price level.”40 Thus a country with relative scarcity of common labour will have both high wages and high commodity price-levels.41 There is still another factor influencing price relations. “Other things being equal, home market prices will be low in regions where the factors of production important to home market industries are cheap.”42 Finally, the size of the market also affects price relations. “Home market goods, ceteris paribus, tend to be cheaper in regions where the home market is large, i.e. the number of people great, their standard of living high, and their demand for the commodity in question lively.”43 Taking his position as a whole, it is obvious that his doctrine is a continuation of the doctrines of Ricardo, Senior, Mill, and Taussig.44

The next contribution of Professor Ohlin is his analysis of international movements of factors of production and their relations to commodity movements and to international price relationships. In general, natural resources are immobile. The problem of factor movements concerns those of labour and capital only. To both labour and capital movements the obstacles consist not so much in actual costs of transport as in a psychological aversion to changes. “However, the stimulus which makes labourers and capitalists overcome the obstacles is chiefly a desire to receive a higher price, i.e. higher wages or interest rates.”45 What is the effect of those movements, if they do exist? “In general, factor movements—like commodity movements—tend to equalize factor prices in different districts,” and hence bring the price systems of trading regions closer together.46

What are the relations between factor movements and commodity movements? In general those two movements act as substitutes for one another. Through the exchange of commodities, not only commodity prices but also the prices of the productive factors are to some extent equalized among trading regions. Therefore international discrepancies in factor prices are reduced and international factor movements are rendered unnecessary. Factor movements make the differences of relative factor prices less and hence reduce the need for international trade. Thus he says:—

Variations would increase price discrepancies will be counteracted both by a change in trade, which directly affects commodity prices and indirectly factor prices, and by a change in factor movements, which affects the latter prices directly and the former indirectly. The tendency towards price equalization thus operates in two ways.47

Everything depends upon the intensity of the reaction of factor prices and therefore factor movements when trade varies; and upon the intensity of the reaction of commodity prices and therefore trade when factor movements vary.48

There end recent developments of the theory of international price relationships upon the assumption of joint production. We may now try to sum up the contributions of the authors, whose doctrines we have explained in the preceding chapters, by stating briefly the present position of the theory of international price relationships.

• 1It is the practice of some economists to divide economic analysis into three departments, viz., statics, comparative statics, and dynamics. Economic statics deals with the conditions of equilibrium, if they exist at all. By conditions of equilibrium we mean those positions in which the price system will remain at rest, once it reaches them, provided that there is no fresh disturbance. That, however, does not imply that conditions of equilibrium must necessarily be reached ultimately by the price system. Comparative statics is concerned with the differences in the conditions of equilibrium in two or more price systems that are due to differences in the given data in the different systems. Economic dynamics deals with the problem, how a change in the fundamental data disturbs the price system and how the disturbances are corrected. It shows us, as Professor Robbins has pointed out, “the actual process of change—the path followed through time between one equilibrium position and the other.” In economic dynamics we have to see whether it is necessary or likely that the original change in data would lead to secondary changes in data. It is mainly because of those secondary changes in data that we have to differentiate between a doctrine of dynamics and one of comparative statics. In the latter we always suppose that when the original data change all other things will remain the same. In dynamics, however, we are not allowed to make the assumption of ceteris paribus.
• 2In dividing history into periods, we find it convenient to use certain dates, but the selected dates are only approximately accurate indicators. Nobody can point to a certain date as marking the exact point of time at which a historical stage or period either terminated or began. Nevertheless, we have to draw some lines of demarcation, however inexact they may be.
• 3The term, quantity theory of money, is sometimes defined as the theory that, in a given period of time, the product of the total volume of goods bought and sold multiplied by the average price of those goods is equal to the volume of the circulation of the medium of exchange. In such general terms, the theory does not indicate whether an increase in the circulation of money would lead to an increase in the volume of the goods or to a rise in their average price. The causal sequence may run either from the volume of the circulation to the average price of the goods transacted, or from the circulation to the volume of those goods. In the strict sense of the term, however, the quantity theory of money assumes the causal relation to run only from the circulation to the average price. We shall, in this essay, use the term in that strict sense. As to the theory that an increase (or decrease) of money would lead to an increase (or decrease) of the volume of goods and transactions, we shall call it “the doctrine that money stimulates trade and production”.
• 4Ibid., p. 34.
• 5Ibid., p. 69.
• 6Ibid., p. 105.
• 7For example, St. Thomas Acquinas, Nicholas Oresme, and Molinæus had developed, or at least indicated, a similar theory.
• 8Hales, op. cit., pp. 87, 115 f.
• 9That “theory of the store of value”, as it might be called, has been wrongly credited to Petty by Suviranta (The Theory of the Balance of Trade, 1923, pp. 52 f.). That theory is the natural outcome of the financial conditions in the sixteenth century and the greater part of the seventeenth century when gold and silver were alone easily exchangeable values, because foreign investment was practically unknown in those days and goods were not so easily exportable as at later periods.
• 10People having “plentie of things” and wanting to store up the surplus would naturally be willing to exchange these things for such wares as would lie in lesse Romes, and contineweth longest with out perishinge, and be carried to and fro with lesse charge, and be most currant at all times and at all places”. Gold and silver were “most of that sort” (Hales, op. cit., p. 72). See also p. 73.
• 11Discourse, Lamond’s ed., pp. 86–7; see also p. 113.
• 12Ibid., p. 35.
• 13That is in essence what has been called after Thomas Mun the balance of trade theory. The theory, in fact, had a long process of development. As early as the last quarter of the fourteenth century we find very definite statements of it in English by one of the officers of the Mint in his evidence before Parliament. The statement is as follows: “. . . As to the fact that gold and silver come not to England, whilst that which is in England is carried abroad, . . . if the merchandise exported from England be well and justly governed, the money which is in England will remain, and great plenty of money will come from abroad. It must be ascertained that no more foreign merchandise come within the realm than the value of the merchandise of this country that goes out of the realm.” However, the exact term balance of trade itself seems to have been coined in 1615 and the term favourable balance of trade in as late as 1767. See W. H. Price, “The Origin of the Phrase ‘Balance of Trade’,” Quarterly Journ. of Economics, xx (1905), pp. 157–167.
• 14Hales, op. cit., p. 102.
• 15Discourse, Lamond’s ed., pp. 88, 65.
• 16Ibid., pp. 47, 51 passim.
• 17Ibid., p. 40, see also pp. 43 ff., 47 f.
• 18It should be noted that the domestic demand for imported goods could not be permanently inelastic. When the balance of payments of the country turns unfavourable and specie flows out, then, other things being equal, the total income of consumers falls. The fall in consumers’ income will sooner or later lead to a reduction in the total value of its imports.
• 19Seigneur de Malestroit (second half of the sixteenth century) was a “member of the royal council of France and comptroller of the Mint”.
• 20“Lon ne peut dire qu’vne chose soit maintenant plus chere qu’elle n’estroit il y a trois cens ans, sinon que pour l’achepter il faille maintenant bailler plus d’or ou d’argent que l’on n’en bailloit alors. Or, est-il que pour l’achapt de toutes choses, lon ne baille point maintenant plus d’or n’y d’argent que Ion en bailloit alors. Doncques puis ledict temps rien n’est encbery en France. Les maxims sont clairs.” (Les Paradoxes sur le faict des Monnyes, Paris, 1578 ed. used, p. 4). Compare Paul Raveau, Précédé d’un Étude sur le Pouvoir d’Achat de la Livre, Paris, 1926.
• 21Les Paradoxes sur le faict de Monnyes, Paris, 1578, p. 15.
• 22Other writers, especially Spanish writers, must have more or less noticed the effects of the influx of the American treasure in raising prices. But there can be no doubt that Bodin is entitled to the credit for first giving due emphasis to the importance of the supply of the money metals and that it was from Bodin and not from others that later writers got that explanation of the price revolution. For that reason we feel ourselves justified in choosing Bodin as the representative exponent of that view. See Earl J. Hamilton, American Treasure and the Price Revolution in Spain, 1501–1650 (Cambridge, Mass., 1934), pp. 283–306 and Bernard W. Dempsey, “The Historical Emergence of Quantity Theory,” Q.J.E., 1935.
• 23Jean Bodin (1530–1596) was bora and educated at Angers. He spent his college days in studying law; became, after his graduation, a lecturer on jurisprudence and later practised law in Paris. Not being very successful at the bar, he entered government service. In 1568 he published his famous Reponse aux paradoxes de M. de Malestroit touchant l’encherissement de toutes les choses et des monnaies, which was followed in 1578 by his Discours sur le rehaussement et diminution des monnaies, pour reponse aux paradoxes de sieur de Malestroit. It is, however, as political philosopher that he is chiefly noted. In political theory he was sometimes considered as “one of the most important figures after Aristotle”. His famous work, Les six livres de la République, was published in 1576. In it he incorporated the substance of his Réponse. The Réponse has an English translation in A. E. Monroe’s Early Economic Thought. The reference is to Monroe’s edition, pp. 123–6.
• 24Ibid., p. 127.
• 25Ibid., pp. 128–131.
• 26Ibid., p. 131.
• 27As early as the Saxon coinage controversy around 1530, the opponents of depreciation put forward arguments suggestive of the quantity theory.
• 28By the Quantity Theory of Money we mean the doctrine according to which, to use the words of Wicksell, “the value or purchasing power of money varies in inverse proportion to its quantity, so that an increase or decrease in the quantity of money, other things being equal, will cause a proportionate decrease or increase in its purchasing power in terms of other goods, and thus a corresponding increase or decrease in all commodity prices.” One may, of course, use the term, quantity theory of money in a broader sense, viz. in the sense that
• 29Réponse (Monroe’s ed.), pp. 138 ff.
• 30Bernardo Davanzati (1529–1606), A Discourse upon Coins (1582). We have used the English translation by John Toland (London, 1696), p. 18.
• 31Ibid., p. 15.
• 32Antoyne de Montchrétien, Traicté de l’économie politique, 1615, Funck-Brentano ed. (Paris, 1889) used, p. 257.
• 33See Professor R. H. Tawney, Introduction to a new edition of Thomas Wilson’s “Discourse upon Usury” (London, 1925).
• 34Ibid., p. 60.
• 35See Memorandum prepared for the Royal Commission on the Exchanges, London, 1564, reprinted in Tudor Economic Documents (edited by Tawney and Power, London, 1924), vol. iii, pp. 346–359.
• 36Ibid., p. 350.
• 37“The Exchange is the gouernere of prices of all warres enterchangablye vented betweene this Realme and the Low Contreyes, because the greateste quantetye of wares transported ether outeward or inwarde is boughte by money taken vppe by Exchange, and also because, althoughe the wares he boughte with his owne moneye, in sellinge of his hondred poundes worthe of wares he Consydered what gaynes he myght have made by Exchange of so muche moneye, and he maketh the price of his wares accordingly or to some Convenyent overpluse.” (Ibid., p. 347.)
• 38See Tawney, op. cit., pp. 138–154.
• 39“Protest against the State Control of Exchange Business,” 1576, reprinted in Tudor Economic Documents, vol. ii, pp. 169–173.
• 40Tudor Economic Documents, p. 172.
• 41See Thomas Milles, The Customers Replie or Second Apologie (London, 1604); The Customers Apologie (London, (1601) 2nd ed., 1609); An out-port-Customers Accompt (London, 1609); and especially Customers Replie, pp. 4–5; ch. x, pp. 14–32.
• 42Thomas Gresham went even so far as to say: “As the exchainge is the thinge that eatts ought [eats out] all princes, to the wholl destruction of ther common well [weal], if itt be nott substantially looked unto, so likewise the exchainge is the cheffest [chief] and richest thinge only above all other, to restore your Majestie and your reallme to fine gowld and sillvar . . .” (“Letter to Queen Elizabeth on the Fall of the Exchanges,” 1558—quoted from Tudor Economic Documents, ii, p. 148). Gresham, it may be noted, has been known for his excellent exposition of the doctrine that bad money drives out good. The doctrine was given the name “Gresham’s Law” by H. D. Macleod in 1858. It had, however, been formulated also by other writers.
• 43Gerrard de Malynes (fl. 1586–1641), the son of an English Mint-master, himself became an Assay Master of the Mint and in 1609 was appointed commissioner on Mint affairs. He had wide experience in trade and was frequently employed by Elizabeth and James I as an adviser on commercial questions. His writings, which bear on the present section, are: A Treatise of the Caker of England’s Commonwealth (London, 1601) and England’s View in Unmasking of two Paradoxes (by De Malestroit) with a Replication unto the answer of Jean Bodin (London, 1603). For his later writings see Sec. 5.
• 44Treatise of the Caker, p. 2.
• 45Ibid., p. 3.
• 46To him the causal sequence ran as follows: “Foreign exchanges—money—commodities.” See also The Maintenance of Free Trade, p. 2.
• 47See Lex Mercatoria, p. 415; The Maintenance of Free Trade, pp. 14–15; The Center of the Circle, pp. 41 f.
• 48Caker, p. 35; see also The Maintenance of Free Trade, p. 61.