Reacting to Samuelson: Early Development Economics and the Factor-Price Equalization Theorem

ABSTRACT

Paul Samuelson’s 1948 factor-price equalization theorem was his main contribution to international trade theory. He demonstrated conditions under which trade in goods would lead to full equalization of the remuneration of productive factors across countries. In practice, general factor-price equalization has not been a feature of the international economy, as Samuelson acknowledged. His theorem came out when development economics was starting to emerge as a new field of research and policy, largely based on observed international income asymmetries between poor and rich countries. The present paper provides an historical investigation into how development economists reacted mostly (but not always) critically to that theorem, with attention to the methodological issues involved and to Samuelson’s own perception of the theorem’s relevance.

KEYWORDS:

• Samuelson
• factor-price equalization
• development economics
• trade theory

JEL CODES:

• B20
• B27
• B30

Acknowledgements

I would like to thank Amanar Akhabar, John Davis, Wade Hands, Geoff Harcourt, Susan Howson, Bruna Ingrao, Andrea Maneschi, Flavio Oliveira, Cosimo Perrotta, Keanu Telles, John Toye and (other) participants at the 2019 History of Economics Society Conference and at the 2019 Brazilian economic meetings (Anpec Conference), and two anonymous referees for helpful comments. Research funding from CNPq, permission to quote from the Paul Samuelson Papers (David M. Rubenstein Rare Book and Manuscript Library, Duke University) and bibliographical support from Guido Erreygers are gratefully acknowledged.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Abba Lerner demonstrated factor-price equalization in a seminar paper presented at the LSE in 1933, but published only in 1952, under Lionel Robbins’ initiative, upon the publication of Samuelson (1948a).

2 It was only much later that Singer (1998, p. 23) would refer to the contradiction between the ‘assumption of a tendency towards global convergence implicit … in the Stolper-Samuelson [sic] thesis of an equalization of factor prices’ and the empirical evidence.

3 See Krugman (1993, p. 26), who contrasts Samuelson’s mathematical formulation of the Heckscher-Ohlin model with the largely verbal approach of contemporary development economics.

4 ‘If ever there was a case of looking in a dark room for a black cat that we are pretty sure is not there, it is looking for a static production function in international statistics’ (Robinson 1964, p. 205). For a powerful critique of FPE in a model with heterogeneous capital goods see Metcalfe and Steedman (1973); Samuelson (1975) largely agreed. See also Kurose and Yoshihara (2016) for a related criticism.

5 Samuelson (1948b, p. 8) maintained that ‘the test of a theory’s validity is its usefulness in illuminating observed reality. Its logical elegance and fine-spun beauty are irrelevant. Consequently, when a student says, ‘That’s all right in theory but not in practice,’ he really means ‘That’s not all right in the relevant theory,’ or else he is talking nonsense.’

6 Samuelson (1953–54) later extended the demonstration to n goods, n countries and n factors, establishing in the process the general ‘mapping’ proposition that to a given set of commodity prices there corresponds a certain set of factor prices, which raised criticism and further mathematical proofs from H. Kuhn, D. Gale, H. Nikaido, L. McKenzie and I. Pearce, among others (see Chipman 1966, pp. 29–31; Takayama 1972, Ch. 18). Haberler ([1959] 1985, p. 507) referred to that literature as a ‘highly esoteric disputation,’ an opinion probably shared by most development economists at the time.

7 Balassa (1961) produced the first literature survey.

8 Charles Kindleberger (1968, p. 33), Samuelson’s colleague at MIT, deemed the FPE theorem an ‘intellectual curiosity,’ whereas the trend toward partial equalization was considered a ‘significant’ proposition for the ‘real world.’

9 External economies also explained why, despite lower wages in underdeveloped countries, foreign investment in those areas had not been big enough to reduce the international inequality of factor rewards (Rosenstein-Rodan 1961, pp. 66–67).

10 Haberler, Machlup and Rosenstein-Rodan were colleagues at the University of Vienna in the early 1920s. Rosenstein-Rodan’s first articles reflected his Austrian background, which is also noticeable in some aspects of his contributions to development economics, such as the role of demand ‘complementarities’ in the development process.

11 Haberler (1955 [1961], p. 17; 1959 [1985], pp. 506–507) took Myrdal to task for his interpretation and criticism of classical trade theory in that regard. ‘What classical theory really teaches us,’ he claimed, ‘is that trade will benefit every country, rich and poor, but not that mere trade will necessarily remove or even reduce international inequality’ (Haberler [1959] 1985, p. 507).

12 Myrdal, like Nurkse and other development economists, tended to treat factor-price equalization and income per capita convergence as the same or very close phenomena. Factor-price equalization will indeed tend to induce income convergence, but actual convergence will depend also on factor quantities and their distribution (Slaughter 1997).

13 According to modern trade theory (see Leamer 2012, p. 76; Krugman 1982), if countries before trade have significant technological differences, then trade can cause divergences in factor prices, which vindicates aspects of Myrdal’s contention.

14 It was only in the 1980s and 1990s that Paul Krugman and others devised models of international trade under increasing returns and imperfect competition (see Maneschi 1998, Ch. 9).

15 Flanders’ (1964, p. 310) interpretation that Prebisch assumed FPE in his argument about falling terms of trade is inaccurate.

16 Samuelson’s (1976) only engagement in debate with a development economist took place when he rejected Emmanuel’s ([1969] 1972) model of unequal exchange. Emmanuel deployed the Marxian labor theory of value to criticize comparative advantages doctrine, with no explicit mention of the FPE theorem though (see Bacha 1978; Little 1982, p. 220; Boianovsky 2019a). Like Robinson (1964), Emmanuel assumed equalization of rates of profit through international capital flows.

17 That was also Samuelson’s (1973, p. 697, n. 4) preferred explanation for the so-called ‘Leontief Paradox’ of American international trade.

18 Samuelson’s source was probably Kindleberger (1943), who argued that data pointed to secular declining terms of trade of primary commodities. Samuelson contributed a chapter to the volume with Kindleberger’s essay (see Toye and Toye 2003).

19 On the absence of Mexico-US wage convergence see Hanson (2004). For an overview of the relation between globalization and poverty worldwide see Dinopoulos et al. (2007).