Wages and Trade: How Wages and Technical Progress Determine International Trade

Abstract

Some economic facts are so familiar that one usually forgets to ask why they should be and, yet, mainstream theory cannot explain them. Why are nearly all tradable capital goods and complex manufactures produced by firms of the advanced economies of the rich countries and East Asia? Why can these economies have far greater international trade and finance imbalances with flexible exchange rates than they could with fixed exchange rates? Do comparative advantages explain the successes of Japan, South Korea and China? Why can poor countries never extricate themselves from their foreign debts, despite giving priority to exporting? Why have their currencies been continually depreciating with no lasting improvement of their exports or foreign debts? And so on. This book shows how the questions can be convincingly answered with simple, rigorous, step by step reasoning starting from the facts that wage rates differ widely, most technical progress is from R&D, especially of firms, and capital goods are traded. Mainstream theory persists despite widespread dissatisfaction with it because it purports to provide a logically coherent framework. This book refutes the "logic" by meeting the theory on its own ground and laying bare the fallacies. And the description of the consequences of applying the theory in Pakistan will look familiar to many poor countries. As rich countries form divisive trade blocs, ecological degradation spreads, income inequalities increase and economies succumb to pandemics it is time to scrap the fantasies of equilibrium and efficient resource allocation of mainstream theory and reflect anew.