Abstract
It is now more than 250 years since Montesquieu wrote a letter to William Domville in which he discussed what would now be called the welfare implications of international trade. In what sense can a country be said to benefit from trade with other countries? Early in the twenty-first century, that question still lacks a complete answer. It was shown by Grandmont JM and McFadden D, J Int Econ 2:109–125, 1972 and by Kemp MC and Wan HY, Int Econ Rev 13:509–522, 1972 that, for a single country, free trade coupled with suitable compensatory lump sum payments confined to that country would leave each resident of that country better off than in autarky. However the normative trade theory of 1972 neglected the fact that all consumption, production and endowment of commodities take time and are subject to a second budget of 24 h a day. The importance of the time constraint was first recognized by Gossen HH, Entwickelung der gesetz des menschlichen verkehrs, F. Vieweg und Sohn, Braunschweig, 1854. His book was written in German but was neglected even by German scholars. Eventually the greatest of all economic theorists, Léon Walras (J des Economistes 30:68–90 and 260–261. Walras’ article was later published (in slightly abridged form) in English in Spiegel HW, The development of economic thought. Great economists in perspective, Chapman and Hall, London, 1952, pp 471–488, 1885, translated Gossen’s book into French and ensured that it would not be forgotten. Jevons WS, The theory of political economy, 2nd edn. Penguin Books, Harmondsworth, 1879, and Edgeworth FY, Gossen, Hermann Heinrich (1810–1858). In: Palgrave RHI (ed) Dictionary of political economy, vol II. Macmillan, London, 1896, were the first to write about Gossen in English, but it was not until 1983 that an English translation of Gossen’s book became available. Since then Gossen has become unforgettable for economists. Books about Gossen have become easier to sell than the book by Gossen in 1854. This chapter demonstrates that key propositions in normative trade theory remain valid in the presence of Gossen’s time constraint. Each individual must now pool his/her family’s time with members of other households. Pooling may extend across the world.
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Notes
- 1.
Since 1972 the proposition has been further extended to accommodate overlapping finite generations and infinite time horizons; see Kemp and Wolik (1995) and Kemp and Wong (1995). However, as shown by Kemp and Fishburn (2013), the extension is conditional upon a non-trivial additional assumption: that the government of each trading country requires all parents and parents-in-law to maintain under free trade their autarkic vectors of bequests.
- 2.
- 3.
Indeed it can now be reasonably argued that Gossen’s contribution to microeconomics is as fundamental as that of his illustrious predecessor von Thünen to the theory of economic growth.
- 4.
Kemp (2008) provides an example designed to help readers assess the plausibility of this assumption.
- 5.
In an extreme case, all households in a country might have endowments that are too plentiful to be completely consumed in the available time. In such a case, the country will have no incentive to trade with other countries, whatever the terms of trade. If it has only one potential trading partner, there will be no market-determined international trade and no gains from trade for either country.
- 6.
- 7.
For a small country, Hatta normality is a necessary condition of Walrasian (tâtonnement) stability , and this fact has served as justification of the assumption. However, it is now known that Walrasian dynamics are internally inconsistent; see Kemp et al. (2002). Thus any defence of Hatta normality based on the assumption of Walrasian stability is without value. In the present paper, we have found that there are other good reasons for mistrusting Hatta normality.
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Acknowledgement
I am grateful to Geoffrey Fishburn, Binh Tran-Nam, Henry Y. Wan, Jr., and an anonymous internal reviewer for their helpful comments. The present chapter is written to honour Ian Steedman (see Kemp 2010). Unlike its predecessor of 2010, which dealt only with consumption, this chapter considers joint consumption, production and endowment.
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Kemp, M.C. (2018). Normative Trade Theory Under Gossenian Assumptions. In: Tran-Nam, B., Tawada, M., Okawa, M. (eds) Recent Developments in Normative Trade Theory and Welfare Economics. New Frontiers in Regional Science: Asian Perspectives, vol 26. Springer, Singapore. https://doi.org/10.1007/978-981-10-8615-1_5
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