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Abstract
This paper examines the theoretical underpinning of contemporary trade policies through a social economics lens. The paper offers a social economic critique of the theory of comparative advantage and the recently developed theory of comparative institutional advantage. Subsequently, the paper develops a more comprehensive and general theory of comparative institutional advantage consistent with the principles and methodology of social economics. Furthermore, it suggests ways in which this social economic–geographic version of the theory of comparative institutional advantage can be used in the construction of trade policies which are more likely to have a beneficial impact on the welfare of communities and to foster the fulfilling of human needs and potential. This version of the theory serves to reorient the focus of economic policy to the welfare of the community and the income-generating possibilities of trade. And it serves as a superior guide to policymaking because it is better able to define the root causes of regional success than standard trade theories.
Notes
1 Although there is a number of theorists writing on comparative institutional advantage from the comparative political economy tradition, the work of Hall and Soskice (Citation2001) provides the theoretical foundation for subsequent research. Thus, we focus primarily on their work.
2 It is also worth noting that game theory's focus on rational, interacting agents over-simplifies organizational behavior and removes from consideration many endemic capitalist structural economic forces. However, such a critique is beyond the scope of this paper.
3 Both economic geography and the new economic geography have sought to understand both centrifugal and centripetal forces of concentration and dispersion as well as the regional impacts of agglomeration. Economic geography includes more institutional, knowledge-based, and social-cultural factors. As Hadjimichalis (Citation2006b: 692) writes, “It is appropriate, therefore, to remember what Gunner Myrdal wrote as early as 1957: ‘Economic theory has disregarded … non-economic factors and kept them outside the analysis. As they are among the main vehicles for the circular causation in the cumulative processes of economic change, this represents one of the principal shortcomings of economic theory’” Myrdal (Citation1957: 30).
The new economic geography began as a project by Paul Krugman (Citation1991a, Citation1991b) to use a narrower, general equilibrium framework to address the same issues of regional agglomeration economies, especially in the context of monopolistic competition.
4 In the New Regionalism in geography, “regions took centre stage in a ‘new regional geography’ that viewed regions as relational processes that are produced, reproduced, and transformed through various forms of agency—rather than as fixed territorial entities” (Harrison Citation2006: 4).
5 Two examples of government supported programs altering market relations and displacing small farmers illustrate the point of people being forced into different livelihood systems. The Green Revolution in India provoked massive dislocation of small farmers who were forced to become wage laborers. In Mexico, the more recent North American Free Trade Agreeement (NAFTA)-linked loss of livelihood affecting over 1.6 million corn growers in Mexico as US corn imports out competed local produce, led to migration and forced changes in their livelihood systems.
6 Hall and Soskice (Citation2001), and indeed most of the work to date on comparative institutional advantage, focuses on developed countries and their attempts to attract large, oligopolistic firms to their country. These firms are seen as providing the best chance for innovative, ongoing economic activity in a particular place. But developing countries face a different set of issues entirely.
7 Note that the government-assisted economic development rule is also consistent with the experiences of the US and most of western Europe, indicating that the creation of comparative institutional advantage may be a crucial factor in almost all economic development success stories (Chang Citation2002, Citation2003). But prior to advances in transportation and telecommunications, the level of government intervention necessary to jump-start development was much less due to the natural protection of isolation. Export credit agencies continue to support private enterprise with the OECD reporting over $1.25 trillion in ventures in 2005 (www.eca-watch.org/problems/for a/oecd/documents/2005_OECD_ECA-Overall_Stats.pdf). More recently, Sweden's recent economic resurgence can be directly tied to successful public-private partnerships (Schneider Citation2007).