Abstract
This paper deals with the recent empirical phenomenon of intra-industry trade, i.e., trade in similar goods between similar countries. It treats this phenomenon from the point of view of the theory of the structure of production, highlighting the importance of the sequential nature of production and the heterogeneity and specificity of factors of production, as developed by Carl Menger, Eugen von Böhm-Bawerk and their followers of the Austrian School of economics. The reader is first exposed to the historical development of production and capital theory. A simple theory of production structure, along the lines of Austrian economics, is afterwards presented and a useful tool for the analysis of intra-industry trade is developed. In the following discussion of existing theories of intra-industry trade, we make the case for vertical intra-industry specialization, complex manufactured goods and sliced-up production chains across countries. The reader immediately observes the importance of Austrian production structure theory for the analysis of intra-industry trade. We accordingly apply the concepts of the structure of production to intra-industry trade and analyze, in particular, the time- and place-aspects of international production. The concluding section shows the relevance of our approach to intra-industry trade for the analysis of business cycle synchronization across countries, and for the optimum currency areas theory.
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Notes
See “Intra-industry Trade and the Structure of Production” for more details on these competing theories of intra-industry trade.
Hayek (1962) put forward several aspects that distinguish the Anglo-American views of capital from the Continental, and in particular Austrian, views of capital. The Anglo-American view, highly influenced by Alfred Marshall, deals most of all with fixed capital. This is mostly apparent in the production-function approach of the neoclassical school. Durable goods are key to the analysis. Supply of capital is assumed to be given. The time element is brought forth only as far as the durability of fixed capital goods is concerned. Additional increases in the supply of capital are treated as a duplication of the existing capital stock. On the contrary, the Continental, and in particular the Austrian, approach concentrates on circulating capital and its nonpermanence. Capital is constantly used up and needs to be reproduced. Time is treated in the sense that what matters is that the production takes place in time. It is not the durability of capital that is important but its position in the time structure of production. Additional increases in the supply of capital imply a change in the structure of production.
See the last footnote of this section.
For more details see the following section.
See Hicks (1973, pp. 193–194). Also, John Hicks, in the first chapter of his Capital and Time: A Neo-Austrian Theory, reveals the following:
I have proclaimed the “Austrian” affiliation of my ideas; the tribute to Boehm-Bawerk, and to his followers, is a tribute that I am proud to make. I am writing in their tradition; yet I have realized, as my work has continued, that it is a wider and bigger tradition that at first appeared. The “Austrians” were not a peculiar sect, out of the main stream; they were in the main stream; it was the others who were out of it. (Hicks 1987, p. 12)
Three points however deserve our attention at this place since they will be useful for our simple theory of production structure to be developed in the next section. The alleged problem of fixed capital could be dealt with using the following argument. (a) As was deeply rooted in Menger (1994) and highlighted by Hayek (1962), the durability of capital is not of importance when we try to ascribe time to the concept of capital. What is, however, important, is the position of various capital goods in the time structure of production. According to this position, capital goods are classified as lower or higher order, based on their distance from the final product. This point is explicit in Menger (1994) and went a bit unnoticed. As was later expressed by Mises (1998), each capital good, whether regarded as fixed or circulating, is, in a sense, fixed in the particular production process. This means that as long as the production process lasts, a particular combination of intermediate goods is specific to that process and is fixed in that process, no matter whether these goods are regarded by an outsider as fixed or circulating capital goods. These capital goods cease to be fixed in this process as soon as the production is finished or ended due to other reasons. A classification of intermediate goods that really matters in this sense is their convertibility to other uses as soon as they are freed from their current use (no matter the reason of their being freed). (b) Economists very easily forget about the individual aspects of human action. Each production process is an individual process. For the sake of this process, each entrepreneur uses the services of the factors of production. History of these factors of production is of no interest for the entrepreneur, thus there is no difference for him between the natural and man-made factors of production when it comes to their usefulness. Also, there is no difference as to whether he owns these factors of production or just hires their services. What is important is that he uses a combination of their individual services for the purpose of each individual production process. An economist trying to work out a theory of value imputation needs to account for the fact that all capital goods are, in the end, a product of labor and land. This is not true for an entrepreneur and not a problem for analysis of individual production processes. Thus, as is a common practice in accounting, an entrepreneur assigns (on whatever basis) all relevant services of all factors of production used to the particular production process at stake. The fact that he can use services of some factors of production even for the next production processes in no way complicates our analysis of an individual production process. (c) If the joint-supply complication applies to fixed capital, it necessarily needs to apply also to durable consumer goods. Nobody has ever questioned the fact that it is a common practice that one durable consumer good is usually never used for the satisfaction of one need only, the one that it was originally aimed to satisfy. It usually satisfies various needs of various people in various times and at various places. Does this mean that we are unable to account for these particular individual needs-satisfactions and that we need to throw our whole theory of consumption away? Clearly not. The analysis of individual phenomena, as described in this footnote, sees no problems with this issue as well.
This figure is taken from Rothbard (1993).
There is no reason for not assuming also that land and labor are heterogeneous in use, specific each to some purposes and convertible, if at all, to only various specific uses and only after some adjustments, which take time.
See Mises (1998).
Even the so-called fixed capital goods decline in value through use and through the passing of time. They are perishable because of the ever-changing state of technological development. And since no good of higher order can be put into productive activities without the use of a complementary good of the same order, even fixed capital goods would be useless without the required complementary goods (mainly in the form of the so-called circulating capital). See Strigl (2000) on this point.
On this point see in particular Mises (1998).
This does not at all mean that the value of consumer goods is based on the costs of production!
For more details and implications of this treatment see above the last footnote in “Structure of Production and Capital in Historical Perspective.” By this treatment of factors of production, we do not mean, however, that division of factors of production into land, labor, and capital is not important. On the contrary, the understanding of advanced methods of production can be possible only with this distinction and a careful analysis of the origin of capital. Every time we speak of capital we need to bear in mind that originally, every capital good stems from the combination of land and labor. Additionally, an economist willing to work out a comprehensive theory of value, imputation, or prices, needs to account for these differences between land, labor, and capital. See Mises (1998) on this point. For our point about intra-industry trade, however, this distinction has only secondary importance.
In his original formulation, Hayek (1967) claims that in real terms, there is no problem, as we noted, with reckoning with durable capital goods. The problem only arises, according to Hayek, when we try to bring money into the question, since then we would have to assume that durable capital goods change hands with every stage of production, when they clearly do not. But since we account for the services of various production factors being gradually transformed to consumption goods, we need not worry about the durable-capital-goods complication.
In his original formulation, Hayek (1967) also tried to put his argument into mathematical terms. Looking back at the triangle from Fig. 2, we may describe the quantity of all intermediate goods at any point in time by a function of time f(t), depicted by the hypotenuse of the triangle. This function in no way has to assume linearity as we did in the diagram. Total quantity of all intermediate goods (goods in progress, i.e. the whole area of the triangle) is the integral of f(t) over a period r. This integral equals also to the total length of the particular process of production. If we assume that the production process begins at point x, then the total quantity of intermediate goods in process equals \(\int\limits_x^{x + r} {f\left( t \right)dt} \). Furthermore, the output of consumer goods at a moment of time equals f(x + r) and is depicted by the horizontal leg of the triangle. Since in our case, where Hayek assumed only intermediate goods, we assumed all factors of production, the above equation extends to all factors of production. We will not deal with this mathematical formulation further, since we are afraid of losing the clarity of exposition and we would need to construct an appropriate methodology before attempting at such a functional construction. Hayek himself did the same and replaced the continuous-flow-approach by a stages-approach. See Hayek (1967) for more details.
See below on coefficients of production.
See Mises (1998).
See especially Lachmann (1947) and references to Hicks therein, which will be the foundation of our treatment of this issue.
See Lachmann (1947) for this definition.
See Lachmann (1947) for this definition.
A methodology that we follow in this sub-section and the one that we followed in Fig. 3 is that of process analysis. As we study a dynamic phenomenon in time, what we need is a sequence analysis to track all the changes that occur during that period of time. Equilibrium methods that imply consistency of plans prove insufficient to the study of ever-changing production structure, we need to apply a method that is suitable to deal with the phenomenon of change. See Hayek (1962) and Robinson (1953–1954). Production structure is characterized by a sequence of periods, during and after each of them a change may or may not occur. This sequence of periods is governed by a production plan and since the production is a process taking place in time, the chosen method of our analysis is process analysis. Our interpretation of this method is based on Lachmann (1978) but his work is directly drawn from the famous contributions of Hicks, Lindahl, and Lundberg on process analysis (see Lachman 1978, for more details). To use process analysis to describe production structure does not, however, imply that we are going to build dynamic models with behavioral functions using differential equations. “Our reason for this refusal is that to assume that entrepreneurial conduct in revising plans at the end of successive periods is, in any objective sense, determined by past experience and thus predictable, would mean falling into a rigid determinism which is quite contrary to everyday experience” (Lachmann 1978, p. 14; italics original).
This illustration is based on Lachmann (1978).
We will not deal here with cash reserves needed for acquiring factor D. Neither are we going to deal with the way factor D was acquired nor with the way factor A was abandoned. For more on these points see Lachamnn (1978).
Whether there is more horizontal intra-industry specialization, which is very successfully explained by the economies-of-scale literature on intra-industry trade, or whether there is more of the vertical intra-industry specialization, which we try to explain in this paper using the structure of production theory, remains an empirical question. We will follow the view of Krugman (1995), saying that most intra-industry trade is in intermediate goods, accounting for vertical intra-industry specialization. This view is in accordance with our basic prediction about the origin of vertical intra-industry specialization that follows.
According to Mises (1960, chap. 8, sect. 4), “economic progress in the narrower sense is the work of the savers, who accumulate capital, and of the entrepreneurs, who turn capital to new uses.”
For a detailed treatment of these five issues see above.
Again, it does not matter whether we are concerned with fixed or circulating capital, as soon as we realize, as we did above, that each factor of production is inevitably fixed to a particular production process for the duration of that process. The influence of past investment on current productive activities is, though, less strong on circulating capital.
In light of the treatment of factors of production in this paper, we need to add that the same influence of the past on today’s productive activities accrues to land and labor as well, though to a lesser degree and partially of a different nature.
Also, according to Mises, when we talk about mobility of capital, we have to be clear that it is only the money capital that is mobile.
Whatever the various capitalists and entrepreneurs may do, they can never make mobile and transferable inconvertible capital goods. While this, at least, is admitted by and large with regard to fixed capital, it is denied with regard to circulating capital. … However, the process of capital flight is in both instances the same. It is a change in the person of the investor. The investment itself is not affected; the capital concerned does not emigrate.” (Mises 1998, p. 515)
Therefore, most of the factors of production stay (if they are not moved according to the process described in this section), it is the investor and his money capital that changes places.
Where real divergence is defined as the degree to which growth rates of output and employment tend to diverge as a result of asymmetric shocks. See Krugman (1990).
But not of countries but of individuals, since it is individuals, according to Austrian economics, and not countries, that actually engage in trade.
Hayek received the Nobel Prize exactly for the Mises-Hayek monetary theory of business cycles.
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Acknowledgment
The author would like to thank Paul Downward for his help throughout the writing of this paper and for his insightful comments and suggestions. Also thanks to Jörg Guido Hülsmann, Roger Garrison, Robert Holman, Joe Salerno, and anonymous referees for helpful comments.
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Author works as an economic advisor to a board member of the Czech national bank and is also affiliated with the Department of economics and public administration at the University of Economics, Prague, Czech republic. The views expressed in this paper are those of the author and not necessarily those of the Czech national bank. The paper is based on a thesis, that was awarded the “Honorary Prize of the President of the Czech Economic Society” in the Young Economist of the Year 2005 competition in Czech Republic.
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Kollar, M. Production Structure in the Context of International Trade. Quart J Austrian Econ 11, 18–42 (2008). https://doi.org/10.1007/s12113-008-9029-3
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DOI: https://doi.org/10.1007/s12113-008-9029-3