International Economics Now in its third edition, Hendrik Van den Berg’s International Economics: A Heterodox Approach covers all of the standard topics taught in undergraduate international economics courses Written in a friendly and approachable style, this new edition is unique in that it presents the key orthodox neoclassical models of international trade and investment, while supplementing them with a variety of heterodox approaches This pluralist approach is intended to give economics students a more realistic understanding of the international economy than standard textbooks can provide Changes to the new edition include: • • • • • • updates throughout to reflect recent world events, including coverage of trade negotiations and the Greek crisis; expanded discussion of pluralist approaches with more coverage of alternative schools of thought; discussions of the growing financialization of global economic activity; additional real-world examples; increased coverage of environmental issues; transnational corporations and their behavior in the international economy; the difference between international investment and international finance; and monetary history; a consolidated and updated chapter on international banking This book also maintains a broad perspective that links economic activity to the social and natural spheres of human activity, with emphasis on the distributional and environmental effects of international trade, investment, finance, and migration Chapter summaries, key terms and concepts, problems and questions, and a glossary are included in the book A Student Study Guide and an Instructor’s Manual are available online Hendrik Van den Berg is Professor Emeritus at the University of Nebraska, and he continues teaching at Mount Holyoke College in Massachusetts, USA International Economics A Heterodox Approach Third Edition Hendrik Van den Berg Third edition published 2017 by Routledge 711 Third Avenue, New York, NY 10017 and by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2017 Taylor & Francis The right of Hendrik Van den Berg to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe First edition published by M.E Sharpe 2012 Second edition published by Routledge 2015 Library of Congress Cataloging in Publication Data Names: Van den Berg, Hendrik, 1949- author Title: International economics : a heterodox approach / Hendrik van den Berg Description: 3rd edition | New York, NY : Routledge, 2017 Identifiers: LCCN 2016022783| ISBN 9781138945043 (hardback) | ISBN 9781138945050 (pbk.) | ISBN 9781315671611 (ebook) Subjects: LCSH: International trade | Protectionism | Investments, Foreign.| International finance | International economic relations | Emigration and immigration Classification: LCC HF1379 V36 2017 | DDC 337–dc23 LC record available at https://lccn.loc.gov/2016022783 ISBN: 978-1-138-94504-3 (hbk) ISBN: 978-1-138-94505-0 (pbk) ISBN: 978-1-315-67161-1 (ebk) Typeset in 10/12pt Bembo MT Pro by Cenveo Publisher Services Visit the companion website: www.routledge.com/vandenberg Contents List of figures List of tables Preface Acknowledgments PART I INTRODUCTION TO INTERNATIONAL ECONOMICS Interdependence! 1.1 1.2 Introduction The Bigger Picture 1.2.1 The Gains from Dealing with Strangers 1.2.2 The Three Benefits of Human Interaction Are Intertwined 1.2.3 Dependence on Strangers Is Inherently Problematic 1.2.4 The Crucial Role of Institutions 1.2.5 Institutions Evolve Slowly and Unevenly 1.3 The Evolution of International Economic Integration 1.3.1 The Growth of International Trade 1.3.2 The Growth of International Investment and Finance 1.3.3 International Migration 1.4 International Economic Integration Is Far from Complete 1.4.1 Economic Integration Is Not Inevitable 1.4.2 New Concerns about International Economic Integration 1.5 The Field of International Economics 1.5.1 The Bias of Mainstream Economic Analysis 1.5.2 The Spheres of Human Existence 1.5.3 The Natural Environment 1.5.4 Social Stress 1.6 How Economists Deal with Complexity 1.6.1 Economic Models 1.6.2 The Dangers Lurking Behind Economic Models 1.6.3 The Tyranny of Models and Paradigms 1.6.4 The Pro-Globalization Culture of International Economics 1.6.5 Heterodoxy 1.7 Summary and Conclusions Chapter Summary Key Terms and Concepts Problems and Questions Notes Introduction to Heterodoxy 2.1 Holism and Economics 2.1.1 The System Versus the Parts 2.1.2 Do Systems Move Toward Stable Equilibria? 2.1.3 Holism and Science 2.1.4 Can the Scientific Method Ever Uncover Absolute Truth? 2.2 Economists and Complex Systems 2.2.1 Economists’ Embrace of Scientific Reductionism 2.2.2 The Neoclassical School 2.2.3 The Unbelievable Assumptions Behind Neoclassical Models 2.3 The Common Themes of Heterodoxy 2.3.1 Some Heterodox Ideas that Differ from Orthodox Economic Thinking 2.3.2 Heterodoxy and Economic Policy 2.4 A Sociological Justification for Heterodoxy 2.4.1 Institutions and Culture 2.4.2 Pierre Bourdieu’s Analysis of Cultures 2.4.3 Symbolic Violence 2.4.4 A Sociology of International Economics 2.5 Conclusions and Further Thoughts Key Terms and Concepts Problems and Questions Notes PART II INTERNATIONAL TRADE THEORY Orthodox International Trade Theory: Why Mainstream Economists Like Free Trade 3.1 3.2 3.3 A Simple Version of the Heckscher–Ohlin Model of International Trade 3.1.1 The Production Possibilities Frontier 3.1.2 Consumer Demand and Indifference Curves 3.1.3 Individual Indifference Curves and Society’s Indifference Curve 3.1.4 Combining the Supply and Demand Sides 3.1.5 The Gain from International Trade 3.1.6 The Gain from International Specialization Do All Nations Gain from Trade? 3.2.1 Why Production Possibilities Frontiers Differ from Country to Country 3.2.2 A Two-Country Model of Trade 3.2.3 The Principle of Comparative Advantage 3.2.4 David Ricardo’s Example of Comparative Advantage International Trade and the Distribution of Income 3.3.1 International Trade and Factor Returns 3.3.2 The Heckscher–Ohlin Theorem 3.3.3 The Stolper–Samuelson Theorem 3.3.4 The Factor Price Equalization Theorem 3.3.5 Estimating the Precise Distributional Effects of Trade 3.4 Evaluating the Heckscher–Ohlin Model 3.4.1 Evaluating the HO Model and the Gains from Trade 3.4.2 Some Especially Dangerous Assumptions of the HO Model 3.4.3 How Important Is the Welfare Gain from Trade? 3.5 Supply and Demand Analysis of Trade 3.5.1 Producer and Consumer Surplus 3.5.2 From the HO Model to the Partial Equilibrium Model 3.5.3 From the Supply and Demand Diagram to the Gains from Trade 3.5.4 Comparing the Partial and General Equilibrium Models 3.6 Conclusions Chapter Summary Key Terms and Concepts Problems and Questions Notes International Trade: Beyond the Neoclassical Perspective 4.1 4.2 4.3 4.4 Transport and Transactions Costs 4.1.1 Transport Costs 4.1.2 The History of Transport Costs 4.1.3 Case Study: Afghan Warlords and Transport Costs 4.1.4 Network Effects and Trade 4.1.5 Transactions Costs and the Gravity Model of Trade 4.1.6 Tentative Conclusions The Costs of Adjusting to Free Trade 4.2.1 Costly Economic Adjustments to Free Trade 4.2.2 The Fixed-Factors Model 4.2.3 Trade and Jobs International Trade, Income Inequality, and Welfare 4.3.1 A Simple Model of the Distribution of Trade’s Welfare Effects 4.3.2 In Search of a More Accurate Welfare Function 4.3.3 Psychology and Life Satisfaction 4.3.4 Evidence from Neuroscientific Research 4.3.5 Happiness Surveys Externalities, Prices, and International Trade 4.4.1 Modeling Externalities 4.4.2 Shifting GHG Emissions to Developing Countries 4.4.3 Externalities Associated with Transport 4.4.4 GHGs Embedded in U.K Trade 4.4.5 Another Example of Embedded GHGs 4.4.6 Policies for Adjusting Trade for Embedded GHGs 4.5 Conclusions Chapter Summary Key Terms and Concepts Problems and Questions Notes International Trade: Imperfect Competition and Transnational Corporations 5.1 Increasing Returns to Scale and International Trade 5.1.1 Intra-Industry Trade 5.1.2 Modeling Increasing Returns to Scale 5.1.3 An Example of Two Identical Countries 5.1.4 Krugman’s Model of Variety, Increasing Returns, and Trade 5.1.5 Some Further Implications of the Model 5.2 Another Implication of Imperfect Competition: Transnational Corporations 5.2.1 Foreign Direct Investment 5.2.2 Vertical and Horizontal Foreign Direct Investment 5.2.3 A Brief History of Transnational Corporations 5.2.4 TNCs and International Trade 5.3 Explaining the Growth of Transnational Corporations 5.3.1 Why Transnational Corporations Dominate the Economic Sphere 5.3.2 Transnational Corporations Are Controversial 5.4 Comparative Advantage and International Marketing 5.4.1 Comparative Advantage and Competitive Advantage 5.4.2 Marketing and the Perceived Value of a Product 5.4.3 Customers Are Not All the Same 5.4.4 Should the Product Look Local or Foreign? 5.4.5 Market Segmentation 5.4.6 Marketing and Transnational Corporations 5.5 The Implications of the Growth of Transnational Corporations 5.5.1 Managed Trade 5.5.2 Transnational Corporations and Economic Policy 5.5.3 Transnational Corporations and National Sovereignty 5.6 Conclusions Chapter Summary Key Terms and Concepts Problems and Questions Notes International Trade and Economic Development 6.1 The Growth of International Trade 6.1.1 Why Growth Matters: The Power of Compounding 6.1.2 Statistical Evidence on Trade and Growth 6.1.3 Cross-Section Studies 6.1.4 Time-Series Studies 6.1.5 The Relationship between International Trade and Institutions 6.1.6 The Stolper–Samuelson Theorem and Long-Run Economic Change 6.2 The Solow Growth Model 6.2.1 Technological Progress and Factor Accumulation 6.2.2 Increased Investment Brings Only Medium-Run Growth 6.2.3 Does International Trade Only Create Medium-Run Growth Too? 6.2.4 Technological Change and Permanent Growth 6.3 Technology and Technological Progress 6.3.1 Human Technology 6.3.2 Technological Progress Is a Combinatorial Process 6.3.3 Technological Change Is Path Dependent 6.3.4 Not All New Technology Constitutes Progress 6.3.5 Technological Change and Agglomeration 6.4 Joseph Schumpeter’s Model of Creative Destruction 6.4.1 Fundamental Ideas Behind Schumpeter’s Model 6.4.2 Recent “Schumpeterian” Models of Technological Progress 6.4.3 The Cost of Innovation 6.4.4 The Gains from Innovation Depend on the Speed of Innovation 6.4.5 The Equilibrium Rate of Technological Progress 6.5 International Trade and Economic Development 6.5.1 The Combinatorial Process and International Trade 6.5.2 The Geographic Diffusion of Technology 6.6 Economic Growth, Trade, and the Environment 6.6.1 The Clash Between Economic Growth and the Environment 6.6.2 Are There Limits to Growth? 6.6.3 Optimists, Skeptics, and Scientists 6.6.4 We Should Be Concerned 6.6.5 Must We Stop Economic Growth to Survive? 6.7 Conclusions and Implications Chapter Summary Key Terms and Concepts Problems and Questions Notes International Trade, Human Happiness, and Inequality 7.1 Income Inequality 7.1.1 Measuring Inequality 7.1.2 The Lorenz Curve 7.1.3 The Distribution of Income in Distant History 7.1.4 Global Measures of Income Inequality ... Transnational Corporations Dominate the Economic Sphere 5.3.2 Transnational Corporations Are Controversial 5.4 Comparative Advantage and International Marketing 5.4.1 Comparative Advantage and... and Mary Trade between José and Mar a Trade between Joe and Mar a Trade between José and Mary Summary: The Gains from Trade Happiness and Real Per Capita GDP in Japan, 1958–1991 Average Happiness... not grow faster, as neoclassical models of international trade suggest, is a clear anomaly that was nonchalantly explained away as exceptions caused by exceptional circumstances, poor data, or some