Abstract
An axiomatic analysis of the concept of unequal exchange (UE) between countries is developed in a dynamic general equilibrium model that generalises John Roemer’s (Central Planning and the Soviet Economy, MIT Press, Cambridge, 1983) economy with a global capital market. The class of UE definitions that satisfy three fundamental properties—including a correspondence between wealth, class and UE exploitation status—is completely characterised. It is shown that this class is nonempty and a definition of UE exploitation between countries is proposed, which is theoretically robust and firmly anchored to empirically observable data. The full class and UE exploitation structure of the international economy is derived in equilibrium.
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Notes
UE theory is also criticised because it contradicts the principle of comparative advantage, according to which profit equalisation and capital flows from rich to poor countries have growth-inducing and inequality-reducing effects. See, for example, the debate between Paul Samuelson and Arghiri Emmanuel in The Journal of International Economics in 1978.
Empirically, we simply note that recent studies have provided evidence supporting the idea that international inequalities have indeed increased. See, for example, Slaughter (2001).
This insight is compatible with the classical Marxian theory of exploitation, as Marx (1968, chapter 20, (e)) notes that “a richer country exploits a poorer one, even when the latter benefits from the exchange.”
We specify the framework in the case with a finite T in order to highlight the similarity with Roemer (1982, 1983) economies. However, the notation and definitions can be extended in a straightforward way to the case with one infinitely-lived generation, and all of our results hold both if T is finite and if it is infinite.
Vector inequalities: for all \(x,y\in \mathbb {R}^{m}\), \(x\geqq y\) if and only if \(x_{i}\geqq y_{i}\) \((i=1,\ldots ,m)\); \(x\ge y\) if and only if \(x\geqq y\) and \(x\ne y\); \(x>y\) if and only if \(x_{i}>y_{i}\) \((i=1,\ldots ,m)\).
For example, it is possible to allow for heterogeneous preferences over consumption goods with \(u^{\nu ^{{}}}(c_{t} ^{\nu },l_{t}^{\nu })=\phi \left( L-\Lambda _{t}^{\nu }\right) +v^{\nu ^{{}} }(c_{t}^{\nu })\); a weakly concave \(\phi \); \(v^{\nu }\) being homogeneous of degree \(k<1\); and so on.
The existence of a reproducible solution is proved in the Addendum.
The condition \(1+r_{t}>\max _{i}\frac{p_{it} }{p_{it-1}}\) ensures that undertaking production activities is better than storing goods to be sold at the end of the period. In order to interpret this condition, note that at a stationary IRS with \(p_{t}=p_{t-1}\) it reduces to the familiar requirement that \(r_{t}>0\).
The set \(B_{t}\left( \left( \mathbf {p} ,\mathbf {r}\right) ;p_{t-1}\omega _{t}^{\nu ^{{}}},\Lambda _{t}^{\nu ^{{}} }\right) \) does not necessarily contain \(\nu \)’s actual consumption bundle at t, as \(p_{t}\omega _{t+1}^{\nu }\) may be different from \(R_{t}p_{t-1} \omega _{t}^{\nu }\), in equilibrium.
Note that \(p_{t}\widehat{\alpha }^{c}\geqq p_{t}c\) implies \(p_{t}\underline{\alpha }^{c}\leqq p_{t}\overline{\alpha }^{c}-p_{t}c\), where the left hand side represents the real asset value of the commodity inputs of production activity \(\alpha ^{c}\).
In particular, it is worth noting that axiom LE does not require UE exploitation status to be defined based on imputing embodied labor magnitudes to exchanged commodity bundles as in standard approaches. But nor does it rule out the possibility that the labour received by \(\nu \) corresponds to the labour embodied in a specific bundle. We are grateful to an anonymous referee for pointing this out.
If \(p_{t}\left( \widehat{\alpha }_{t}^{\mathbf {p},\mathbf {r}}+\widehat{\beta } _{t}^{\mathbf {p},\mathbf {r}}\right) =0\), we set \(\tau _{t}^{c}=0\) by definition.
One may argue that such movements are still smaller than predicted by the standard neoclassical model based on international differences in the marginal product of capital. As Lucas (1990, p. 92) put it, “one would expect no investment to occur in the wealthy countries in the face of return differentials of this magnitude”. This issue is not really relevant in our framework, especially given that, as noted in Sect. 3, international capital flows are not determined by differences in the marginal productivity of capital.
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We thank Jon Cogliano, Amitava Dutt, Gary Dymski, Peter H. Matthews, Rajiv Sethi, Gil Skillman, Peter Skott, the Editors of this journal, two anonymous referees, and audiences in London, New York, Chicago, Amherst, and Sendai, for useful comments and suggestions. The usual disclaimer applies.
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Veneziani, R., Yoshihara, N. Globalisation and inequality in a dynamic economy: an axiomatic analysis of unequal exchange. Soc Choice Welf 49, 445–468 (2017). https://doi.org/10.1007/s00355-017-1062-8
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DOI: https://doi.org/10.1007/s00355-017-1062-8