International economics a heterodox approach 3rd edition

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 dependency theory 261 deposit insurance 295 –296 deregulation of financial sector 472 –475 derivative financial instruments (derivatives) 293 de-socialization 303 devaluation 437 diminishing returns 136 direct technology transfers 177 disorganization 386 Displaced Persons Act 519 diversification 300 diversity of ecosystem see biodiversity division of labour see specialization Doha Round 244 –246 doxa 43 –44 dumping 211 –214 ; defined 211 ; margin of 211 ; predatory 212 ; price discrimination and 213 –214 ; U.S government procedures 212 –213 Dutch East India Company 113 , 230 ; see also colonialism ; mercantilism ECB see European Central Bank ECLA see United Nations Economic Commission for Latin America ecological footprint 17 , 543 The Economic Consequences of the Peace 414 –415 , 432 economic growth: defined 128 –129 ; immigration and 498 –499 ; trade and 129 –133 , 149 –151 economic justice 171 –174 economic significance 131 economic union (EU) 248 , 444 , 448 economies of scale: immigration and 496 ; strangers and ; and transnational corporations 111 –113 , 181 –185 ecosystem 16 , 541 , 546 –550 , 552 –553 effective exchange rate 329 –330 effective resource stocks 543 effective tariff 197 –198 efficient markets hypothesis 36 electronic brokering system 320 –321 Ellis Island 515 Emergency Quota Act 517 emerging markets 116 emotional brain processes 91 empirical evidence: definition 19 ; examples of 19 –20 enclosure movement 85 endogenous growth model 146 –148 ; see also Schumpeter model of growth endogenous tariff model 226 –227 endowment effect 89 –90 enlightenment 231 entrepreneur 146 environmental externalities 39 , 96 –100 environmental policy: cap and trade 550 ; GHG tax 550 , 560 –563 ; self-regulation 550 environmental Solow model 554 –559 equal opportunity 171 equality 171 –172 ; psychological argument for 172 –173 equilibrium: definition 29 ; and stability 29 , 33 –34 equivalent quota 206 equivalent tariff 206 euro 444 –454 ; conditions for participation 448 –449 ; Greece 448 , 450 –454 Eurocurrency defined 349 Eurocurrency market 349 –350 , 376 European Atomic Energy Community (Euratom) 445 European Central Bank (ECB) 448 –450 , 452 European Coal and Steel Community (ECSC) 444 –445 European Commission 448 European Economic Community (EEC) 445 –447 European Free Trade Area (EFTA) 445 European Monetary System (EMS) 371 , 446 –448 ; and the trilemma 446 –448 European Monetary Union (EMU) 448 –454 ; trade effects 449 European Union 448 –454 ; environmental policy of 562 ; expansion 449 ; fiscal policy 450 –454 ; Greek crisis 450 –454 ; Stability and Growth Pact 450 European immigration policies 529 –535 exchange rate: effective exchange rate 329 –330 ; fixed 314 ; floating 314 ; forward rate 319 –324 ; managed 421 ; pegged 421 ; and rational expectations 371 ; volatility 440 –441 ; see also foreign exchange market exchange rate futures 337 exchange rate stabilization funds 421 exchange rate theory 259 , 323 –328 exhaustible resource 554 expansion of financial activity 303 expectations 318 , 294 –295 , 360 –365 , 371 ; see also convention ; John Maynard Keynes; uncertainty export orientation 265 export subsidies 210 –211 ; agricultural subsidies as export subsidies 211 export tax 208 –210 ; numerical example 208 –209 externalities 96 –97 , 286 , 360 ; immigration 496 ; internalization of 97 ; modeling externalities 96 –97 ; and trade 96 –100 “Fable of the Bees” 185 –186 , 188 factor abundance 63 factor accumulation 129 factor incomes and trade 62 –64 ; see also Stolper–Samuelson theorem factor intensity 63 factor payments 283 factor price equalization theorem 64 –65 , 175 fallacy of composition 40 , 468 fast track authority 236 Federal Reserve Bank 418 –419 , 436 , 460 feedback effects (environmental) 543 –545 feminist perspective 39 fiat money 317 –318 field (Bourdieu’s term) 42 finance 281 , 292 –293 , 302 –307 , 400 –401 , 407 financial account (in the balance of payments) 289 , 292 –294 financial asset 297 financial crisis 376 –383 , 387 –388 ; see also collateralized debt obligations ; foreign debt crisis ; foreign exchange crisis financial exchanges 293 ; see also over-the-counter markets financial fraud 352 –358 , 365 –366 financial innovation: defined 296 ; examples of 353 –355 financial instability 294 –295 , 361 –366 financial instability hypothesis 365 –367 ; see Hyman Minsky financial intermediaries 285 financial market failures 361 –363 financial markets: central exchanges 293 , 347 ; in circular flow 284 –286 ; financial sector 284 ; financialization of 302 –307 ; intermediaries 285 , 293 , 347 ; over-the-counter markets 293 –294 financial regulation 472 –475 financial sector 292 –297 , 302 –307 , 347 –358 , 466 –470 financialization 302 –307 ; definition of 302 –303 firewalls in finance 355 fiscal austerity policies 453 , 469 ; see also neoliberal paradigm fiscal policy 259 , 261 –265 , 464 –466 fixed exchange rates: and macroeconomic policy 373 –376 , 462 –463 ; trilemma 375 –376 fixed-factors model 85 –86 fixed-rate dollar standard 434 floating exchange rate 314 , 370 , 463 –464 Fordney–McCumber Tariff 235 , 416 foreign aid 287 ; see overseas development aid (ODA) foreign debt crisis: Asian Crisis of 1997 385 –386 ; Brady Plan 382 –383 ; Common Threads 387 –388 ; IMF 382 –383 ; introduction 376 –378 ; and Mexican peso crisis 384 –386 ; questions to be addressed 381 –382 ; Russian crisis 387 –388 foreign direct investment 111 , 297 ; greenfield investment 298 ; mergers and acquisitions (M&A) 298 ; and technology transfers 181 –182 ; vertical 111 –112 foreign exchange crisis 376 –383 ; Asian Crisis of 1997 385 –386 ; common threads 387 –388 ; and IMF 382 –383 ; Mexican Peso crisis 384 –386 ; Russian crisis 387 –388 foreign exchange market: arbitrage 324 –328 , 331 –339 ; description of 318 –323 ; forward vs spot 319 –320 ; history of 314 –318 , 400 –403 ; intervention 371 –374 ; location of 319 –320 ; online 320 –321 ; over-the-counter markets 293 , 318 –319 ; supply and supply and demand model of 324 –328 ; swaps 320 ; volume 319 –320 , 338 –339 foreign exchange reserves 461 –462 foreign exchange risk 312 foreign trade see international trade forward market 319 –320 fraud (financial) 352 –358 , 365 –366 free rider problem 224 free trade area (FTA) 247 , 445 fundamental disequilibrium 433 fundamental exchange rates 434 futures market 337 Gaia hypothesis 29 gain from international trade: gain from specialization 57 ; gain from trade 56 ; total gain 56 –58 , 67 –68 gambler’s ruin 323 GATT see General Agreement on Tariffs and Trade Geary Act 514 General Agreement on Tariffs and Trade (GATT) 236 –237 ; GATT rounds 237 general equilibrium model 72 The General Theory of Employment, Interest, and Money 433 ; see also John Maynard Keynes geographic arbitrage 326 Germany: post-World War I hyperinflation 415 –416 ; ThyssenKrupp –4 Gini coefficient 162 –168 ; wealth Gini 169 –170 ; see also global Gini coefficient Glass–Steagall Act 355 –356 global Gini coefficient 167 –169 global hectares (gha) 543 global warming 543 –546 going concern 305 , 308 gold-exchange standard 417 gold parity: defined 404 ; example of 405 gold standard: evaluation of 410 –411 ; Great Depression and 417 –419 ; introduction 403 –411 ; in the U.S 408 –410 ; trilemma 411 gravity model of trade 83 Great Depression 417 –422 Great Recession: causes of 296 –297 , 306 , 352 –358 , 365 –366 ; introduction to 464 –466 , 541 ; policies to deal with 465 –472 Greek crisis in the EU 450 –454 green revolution 17 –18 greenfield investment 298 greenhouse gas (GHG) emissions , 97 –98 , 544 –550 , 552 , 564 ; embedded in trade 98 –99 , 154 greenhouse gas (GHG) emissions tax 550 –553 gross domestic product (GDP): incomplete measure 39 , 89 –90 , 94 –96 ; relationship to international trade 11 –12 guest workers 491 ; see also temporary immigration habitus 42 Hanseatic League 229 happiness studies 92 –96 Heart of Darkness 270 Heckscher–Ohlin (HO) model 52 –68 , 256: assumptions 66 –67 ; basic model 52 –61 ; evaluation 65 –68 ; introduction 51 Heckscher–Ohlin theorem 63 hedge finance 363 –365 hedging 319 –320 heterodoxy: common themes 37 –41 ; definition 22 ; explanation of 27 ; holism and 28 –30 ; sociological justification 42 –46 heuristic 32 HO model see Heckscher–Ohlin (HO) model hold-up problem 115 –116 holism: definition 27 –30 ; immigration 505 ; and science 30 –32 homeostasis: definition 29 ; in human behavior 91 –92 horizontal FDI 112 –113 hot potato process 338 –339 housing price bubble 357 human capital 65 , 500 human technology 141 –145 human well-being 90 –96 hypothesis: definition 31 ; scientific hypothesis 31 –32 illegal immigrants see unauthorized immigration Illegal Immigration Reform and Immigrant Responsibility Act of 1996 522 immigrant remittances 287 , 494 –495 immigrants: government services 496 –498 ; sponsorship of 519 ; types of 490 immigration: and agglomeration 505 ; demand affect 493 –494 ; and economic growth 498 –499 , 566 ; Hispanic 13 ; history of U.S 511 –524 ; illegal –5 ; introduction 13 Immigration Act (1990) 521 –522 Immigration Act of 1924 416 , 517 –518 immigration law (1790) 513 immigration models 491 –498 ; labor market model of 491 –494 Immigration and Nationality Act of 1965 519 Immigration and Naturalization Service (INS) 515 immigration policy: Canada 524 –529 ; classification of 511 ; Europe 529 –535 ; purpose of 510 –511 ; U.S 509 –524 Immigration Reform and Control Act of 1986 (IRCA) 521 –522 immiserizing growth 183 –184 imperfect competition and trade 105 –111 import substitution industrialization (ISI) 263 –268 ; and agglomeration 268 –269 ; assessment of 264 –265 ; an example of a failure 266 –267 income inequality 161 –168 , 541 ; throughout history 166 –168 ; and trade 62 –65 , 86 –90 , 104 –110 , 174 –181 increasing costs 53 increasing returns to scale: agglomeration and 178 –181 ; defined 106 ; and indifference curves 53 –55 ; and international trade 104 –110 ; modeling trade and 105 –110 ; social indifference curves 54 ; see also aggregate welfare function indifference curves 53 –60 indirect transfers of technology 177 individualization of finance 303 , 307 ; see also de-socialization inequality see income inequality infant industry argument for protection 260 inflation 460 –461 inherited cultural capital 44 innovation: agglomeration of 179 –181 ; explanation 146 –148 institutionalized cultural capital 44 institutions: and economic thought 42 ; introduction to –9 intellectual property 181 , 244 interdependence: introduction to interest parity condition 331 –337 ; covered interest parity 331 –332 ; evidence 334 –338 Intergovernmental Panel on Climate Change (IPCC) 160n7, 543 –546 , 552 intermediary (financial) 285 intermediate goods 283 internalized transactions 115 International Bank for Reconstruction and Development see World Bank international bankruptcy court 475 International Clearing Union (ICU) 434 , 473 –475 international economic integration 10 –14 international finance: definition of 12 , 281 ; welfare effects of 301 –302 ; see also finance international gold standard see gold standard international investment: definition of 12 , 281 ; diversification and 300 ; welfare effect of 301 –302 international investment position 344 –347 ; U.S deficit 347 ; stock vs flow 344 –345 International Labor Organization (ILO) 414 International migration: current numbers of 489 ; economic analysis of 491 –501 ; history of 487 –489 ; see also immigration International Monetary Fund (IMF) 288 , 304 , 311n2, 376 , 382 –383 , 387 –390 , 433 –438 , 442 , 452 –453 , 472 –475 ; and balance of payments accounting 288 international monetary order 398 , 431 –435 international monetary system: history 397 –455 ; definition 398 international trade: and comparative advantage 51 , 60 –61 ; externalities to 96 –100 ; and factor incomes 62 –64 ; growth of 11 , 129 –133 , 149 –151 , 566 ; and income inequality 62 –65 , 86 –90 ; increasing returns to scale 104 –110 ; and jobs 86 ; models of 52 –68 , 105 –111 , 145 –148 International Trade Commission (ITC) 212 –213 International Trade Organization (ITO) 236 intertemporal arbitrage in the foreign exchange market 331 –337 ; evidence 335 –338 ; numerical example 334 –335 intertemporal exchanges see finance intervention (in the foreign exchange market) 292 , 371 –374 ; as monetary policy 373 ; see also official transactions interwar period monetary order 411 –424 ; evaluation of 422 –423 intra-industry trade 105 investment: economic definition of 281 ; and economic growth 135 –138 ; finance of 281 –283 , 360 –363 investment house 407 investor-state dispute settlement (ISDS) 249 –250 invisible hand 35 involuntary immigration 491 ; see also slavery Irish immigration: to Canada 524 ; to U.S 512 –513 Irish potato blight 512 , 546 Islamic finance (sharia-compliant finance) 477 –478 jobs and trade 86 just society 171 ; John Rawls and 171 –172 justice 171 –174 ; economic versus social justice 173 –174 just-in-time inventory management 81 Kennedy Round 240 Keynesian macroeconomics 282 –283 , 421 knowledge 141 –145 , 149 –148, 307 , 311 knowledge transfers 180 , 181 –185 Know-Nothings 513 Kyoto Agreement 562 labor market segmentation 502 –503 Latin Monetary Union 403 law of similar 259 leader–follower models 176 –177 League of Nations 416 learning by doing –8 , 260 lender of last resort 404 , 470 –471 Lerner symmetry theorem 196 Lexington, Nebraska 13 libertarianism 510 LIBOR 335 life satisfaction 90 –96 liquidity trap 465 Long-Term Arrangement (LTA) on Cotton Textiles 240 Lorenz curve 165 ; defined 165 –168 loss aversion 172 Louvre Accord 442 Maastricht Treaty 448 macroeconomic policy independence 374 –376 ; see also trilemma macroeconomics: circular flow diagram 283 –288 ; financialization 302 –307 ; modern money theory (MMT) 466 –472 ; origins of 34 , 282 Maghribi traders 82 mainstream economics: bias of 15 –16 ; vs heterodoxy 37 –41 managed exchange rates 421 managed trade 120 –122 maquiladora 287 margin of dumping 211 market: foreign exchange 318 –323 ; futures market 337 ; imperfectly competitive 105 –111 ; liquidity 319 ; maker 318 ; over-the-counter 293 , 318 –319 ; segmentation 120 , 502 –503 Mariel Boatlift 494 marketing 111 ; international 118 –121 Marshall Plan 435 –436 , 444 mathematics: use in economics 33 –35 , 39 Medea hypothesis 29 –30 median voter model 223 medium of exchange 315 , 400 mercantilism 230 –232 , 269 ; holistic definition 269 merchandise trade balance 290 –291 mergers and acquisitions (M&A) 298 meta-ideas 150 Mexican peso crisis 383 –385 Mexico: competition from U.S agriculture –5 ; illegal migration –5 ; labor practices microfoundations 36 , 360 , 478 Minsky’s financial instability hypothesis 363 –364 Minsky’s three categories of finance 363 , 388 models: description of 19 –22 ; justification of 19 –20 ; neoclassical 22 –23 modern money theory (MMT) 466 –472 monetary policy 259 , 361 , 463 –472 monetary system 398 , 431 –435 monetization of financial arrangements 303 money: bank creation of 317 ; fiat 317 –318 ; government role 316 ; history of 314 –318 , 399 –403 ; relation to debt 314 –318 ; symbolic money 401 monoculture 17 –18 , 546 moral hazard 295 –297 , 307 Morrill Tariff 232 most favored nation (MFN) principle 231 Multi-Fiber Arrangement (MFA) 240 multilateral trade negotiations 232 , 236 –237 multinational firms see transnational corporations naked CDSs 354 National Futures Association 323 national sovereignty: and transnational corporations 123 Native American culture –10 natural resource curse 135 nature’s services 547 –549 negative externalities 96 –100 neoclassical growth model see Solow growth model neoclassical school: description 35 –37 ; assumptions 35 –37 neoliberal paradigm 269 , 450 –454 neuroscientific research 91 –92 New Amsterdam: clash of cultures in –10 1982 debt crisis 376 –383 ; solutions to 380 –383 1946 Canadian Citizenship Act 526 no-injury clause 237 –239 nonrenewable natural resources 543 , 554 nonrival good 179 nontariff barriers to trade 239 North American Free Trade Agreement (NAFTA) –5 , 247 –249 , 384 objectified cultural capital 44 official transactions (in the balance of payments) 289 –290 offshore banking 350 omitted variable bias 542 online foreign exchange market 320 –321 , 323 –324 open market operations 373 ; see also monetary policy Opium War 233 opportunity cost 53 , 298 order (monetary order): defined 398 Order of the Star-Spangled Banner 513 Organization of Petroleum Exporting Countries (OPEC) 376 –378 original sin 388 orthodox economics: introduction 15 –17 , 27 outsourcing , 175 ; to Mexico –5 overseas development aid (ODA) 287 over-the-counter markets 293 , 318 –319 panel studies 131 paradigm: definition 20 ; neoclassical paradigm 20 , 27 ; habitus as 44 paradox of thrift 468 Paris Peace Conference in 1919 414 , 432 partial equilibrium model 72 ; see also supply and demand model of trade path dependency 143 –144 pegged exchange rate 421 –422 , 434 –436 , 462 –463 Personal Responsibility and Work Opportunity Reconciliation Act 522 petrodollars 376 Plaza Accord 441 –442 pluralism 27 ; pluralistic heterodoxy 46 policy independence: and fixed exchange rates 374 –376 ; trilemma 375 –376 political economy of trade 229 –253 , 269 Ponzi finance 363 –365 , 417 portfolio investment 300 positive-sum game 62 power of compounding 127 , 130 –131 Prebisch’s development model 264 precautionary principle 38 , 40 ; definition 40 predatory dumping 212 preferential trade area (PTA) 247 price discrimination 213 –214 primary budget surplus 389 , 450 principal-agent problem 295 –296 privatization of finance 303 , 307 producer surplus 69 product cycle model 175 –176 production function: aggregate function 135 ; mathematical function 135 production possibilities frontier (PPF): explanation of 52 ; under increasing returns to scale 106 –110 ; why it varies 58 proletariat 169 psychology: on life satisfaction 91 –92 public relations: Veblen’s definition 305 –306 public sector debt analysis 388 –391 , 450 –454 purchasing power 315 , 400 quantitative easing (QE) 471 –472 quantitative trade restriction 198 –203 ; see also quota quota 198 –206 ; auction quota 204 ; numerical example of 202 –203 ; rent 201 –202 ; voluntary export restraint 203 –204 ; welfare effects 199 –203 quota compared to tariff 204 –206 quota rent 201 –202 QWERTY 144 race to the bottom: environmental rules and 98 –100 , 565 Rambouillet Summit 440 rational expectations 360 , 371 ; and exchange rates 371 ; see also expectations Rawls’ just society 171 –172 ; veil of ignorance 171 –172 real asset 287 Reciprocal Trade Agreements Act (RTAA) 236 –237 redundancy of ecosystem 547 –549 Refugee Relief Act of 1953 519 refugees 490 remittances 287 , 494 –495 , 501 rent 201 –202 , 227 –228 rent-evading activity 228 ; and smuggling 228 rent-seeking activity 227 –228 reparations payments 415 risk , 36 , 147 , 300 , 361 , 550 –552 ; calculable risk 36 , 361 RTAA see Reciprocal Trade Agreements Act rules of the game 398 Russian crisis 387 –388 sanctions see trade sanctions scarcity 53 , 153 Schengen Agreement 534 –535 Schumpeter model of growth 145 –148 , 307 , 311 , 499 , 500 science: definition of a scientist 30 –31 ; social scientist 31 –32 scientific hypothesis: and falsifiability 31 scientific method: definition 30 ; discussion of 30 –32 scientific reductionism 30 , 33 –34 Second Amendment (to the Bretton Woods agreement) 440 Securities and Exchange Commission (SEC) 295 securitization 357 seignorage 316 , 470 separation of finance and investment 362 –363 separation of finance from provisioning 304 –306 ; Dean’s degrees of separation 305 –307 services of nature 547 –548 settlers 490 sharia-compliant finance (Islamic finance) 477 –478 shrinkage 81 Silk Road 81 Singer Company 114 Single European Act 448 slavery: Brazil 256 –257 ; U.S 513 small country assumption 195 Smithsonian Agreement (1971) 437 Smoot–Hawley Tariff 235 smuggling 228 snake in the tunnel 446 social choice school 223 social justice 172 –173 social stress 18 –19 social welfare function 54 –55 social-contractionism 171 , 510 ; see also Rawls’ just society sociological justification of heterodoxy 42 –45 sociology of economics 42 –46 , 479 Solow growth model 135 –140 , 307 , 311 , 554 ; steady state equilibrium 138 ; transitional growth 138 specialization specialized agglomeration 181 specific tariff 191 ; numerical example of 194 –195 specification error 542 speculative finance 363 –363 , 417 ; see also Hyman Minsky; John Maynard Keynes spheres of human existence: definition 16 spot market for foreign exchange 319 stability: systemic 29 , 33 –25; see also equilibrium Stability and Growth Pact 450 standardized product 175 static model 77 statistical correlation 11 statistical significance 131 steady state equilibrium 138 ; see also Solow growth model Stolper–Samuelson theorem 63 –64 , 88 , 223 store of value 297 , 314 , 400 ; see also money strangers: interdependence with –8 strategic trade policy 110 , 271 –275 ; and TNCs 271 –272 ; Boeing versus Airbus example 273 –274 structural change 146 structuralism 262 ; see also Claude Lévi-Strauss structuralist school of economics 262 structured financial products 357 subprime mortgages 353 –354 sugar quota by U.S 224 –226 supply and demand model of foreign exchange market 324 –328 supply and demand model of trade 68 –73 ; and gains from trade 71 –72 ; and tariffs 192 –195 supply side 53 ; represented by production possibilities frontier 53 supporting services of nature 547 –548 surge protection 214 swaps 320 symbolic violence 44 system versus its parts 29 –30 tacit knowledge 180 tariff 191 –198 , 206 ; ad valorem 191 ; average tariffs 198 –199 ; effective tariff 197 –198 ; in the Heckscher–Ohlin model 195 ; as revenue source 229 ; specific tariff 191 ; welfare effects 192 –196 Tariff of Abominations 232 tariff compared to quota 204 –206 tariff escalation 246 tariff rates 198 –199 technological change: neutral change 134 ; in Solow growth model 136 –140 technological progress 129 ; equilibrium rate of 149 technology 141 –143 ; as a combinatorial process 142 –143 ; definition 142 ; diffusion of 177 –178 ; technology transfers 177 –178 temporary immigration 490 , 522 terms of trade 56 , 193 , 263 territoriality 91 , 172 ; see also endowment effect Three Mile Island 28 time-series data 19 ; in happiness studies 94 –95 , 131 , 133 Tokyo Round 241 trade adjustment assistance 240 ; effectiveness of 241 trade bloc 248 –249 trade creation 248 –249 trade credit 381 trade diversion 248 –249 trade policy 191 –221 ; history of 229 –249 ; strategic 271 –275 trade sanctions 215 –216 trade triangle 56 tranche, of a CDO 353 Trans Pacific Partnership (TPP) 249 –250 transactions costs 82 –83 transfers in the circular flow 181 –182 , 283 –284 transfers on the balance of payments 414 –415 transfers of technology 177 –178 transnational corporations (TNCs) 104 , 110 –121 , 268 –271 , 297 ; controversies 116 –117 , 269 –270 ; history of 113 –115 ; implications of 121 –12 ; and political power 268 –270 ; reasons for their growth 115 –117 ; technology Trans-Atlantic Trade and Investment Partnership (TTIP) 249 –250 transport costs 78–84: as shown in supply and demand model 79 –80 ; history of 79 –81 Treaty of Rome 445 Treaty of Versailles 234 –235 , 414 –415 triangular arbitrage (foreign exchange market) 327 –328 ; simple example 328 Triffin paradox 437 , 462 trilemma 370 , 373 –376 , 393 , 423 , 439 , 447 –448 , 462 ; see also foreign exchange crisis Tripartite Monetary Agreement 421 –422 truth: absolute truth 31 –32 ; science and 31 two-country model of trade 58 –60 ; under increasing returns to scale 107 –110 two-sector Solow growth model 554 –559 unauthorized immigration: discussion 490 , 501 –504 , 520 –522 ; as labor market segmentation 502 –503 uncertainty , 36 , 147 , 300 –301 , 360 –361 , 550 –552 ; Debreu and 36 ; Keynes and 36 , 360 –363 uncovered interest parity condition 331 –337 underdevelopment 261 uninformed voter model 224 –226 unit of account 315 , 400 ; see also money United Nations 155 , 173 , 475 –476 United Nations Conference on Trade and Development (UNCTAD) 347 –348 United Nations Economic Commission for Latin America (ECLA) 263 –265 , 277 United States Border Patrol 501 , 517 , 523 Universal Declaration of Human Rights 173 –174 Uruguay Round 242 –243 ; and intellectual property rights 244 U.S Citizenship and Immigration Services (USCIS) 523 U.S Immigration and Customs Enforcement (ICE) 523 U.S Tariff Commission 212 , 238 utilitarianism 510 value added 197 , 283 value equation 118 value of marginal product (in labor market model of immigration) 491 –498 vehicle currency 319 veil of ignorance 171 –172 Verenigde Oost-Indische Compagnie (VOC) 113 vertical specialization 287 volume of the foreign market 319 –320 , 338 –339 ; hot potato process 338 voluntary export restraint (VER) 203 –204 , 239 –240 War Brides Act 519 Washington consensus 383 wealth: distribution of 168 –170 welfare effects of finance 301 –302 ; and financialization 302 –307 ; in Schumpeter model 302 welfare effects of a quota 198 –20 welfare effects of a tariff 192 –196 welfare effects of a trade bloc 248 –249 welfare function 88 –96 World Bank 434 , 442 World Trade Organization (WTO) 244 World Wildlife Fund (WWF) 17 , 155 Zollverein (German tariff union) 231 ... 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