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International Trade and Finance
Notes
4 LOVELY PROFESSIONAL UNIVERSITY
represented led to the increase of global production and originated the increase of internal and external
economies, which resulted in increasing income for the economy. But, although he understood the
importance of those externalities, he also recognized the difficulties of his analytic treatment. Among
his successors, only Young (1928) was concerned with EG when he considered, like Smith, that the
dimension of the market limited the labour division (and therefore, the productivity). He also examined
the inter-relation between industries in the process of EG, the creation of new industries due to the
specialization resulting from the extension of the market, the importance of specialization and
standardization in a vast market and the influence of this market on technological progress.
Another exception of this period’s remarkable was Schumpeter (1912, 1942 and 1954), who repeated
old points of view concerning the tendency of the profit to reach a minimum and the dependency of
the rate of EG on capital accumulation. But he went further, distinguishing ‘invention’ (advancement
of useful knowledge to production) from ‘innovation’ (economic activity of exploring that knowledge).
Considering the latter as the central element of EG, he described the exigencies for a successful
innovation, which included the need for markets opened to the exterior.
We conclude this subsection by mentioning some authors who made the restart of studies of dynamic
themes — and, consequently, of the EG theory — easier, thus laying a good foundation for future
investigations. Ramsey (1928) introduced the description of EG and the principle of research of an
optimum EG. Cobb and Douglas (1928) presented production functions that became known as Cobb-
Douglas production functions and which constituted an essential element of numerous models of EG.
Harrod (1938 and 1948) and Domar (1937 and 1946) independently developed a model inspired in
Keynes, which gave the research of EG an important momentum and a specific direction. Finally,
Rosenstein-Rodan (1943) retrieved some of Young’s ideas, when the problems of the Less Developed
Countries (LDCs) attracted the economists’ attention.
Reactions of Classical and Neoclassical Theories
Immediately after the end of WWII, the dominant position was questioned, namely in the case of the
LDCs. Those reactions abandoned the classical and neoclassical orientation in considering hypotheses
that were strange to them. The introverted and protectionist EG experiments of Latin America
(industrialization for import substitution) also stood out, with rationalization and justification owing,
first of all, to some structuralist economists [Prebisch (1949) — executive secretary of UN — and
Singer (1950)] and to the UN Economic Commission for Latin America (ECLA). Essentially, they
defended that the IT brought on negative consequences in the long-term for the LDCs because their
specialization occurred in products with low demand income elasticity and, therefore, with a weak
perspective of exports growth, and noticed a tendency for the constant deterioration of trade terms.
Furthermore, this specialization entailed significant economic and social costs of adaptation to the
evolution of the chain of IT.
Myrdal (1956 and 1957) sustained that IT didn’t equal the remuneration of factors (in contradiction
with the proposal of the neoclassical model) and that, unlike the industries of the DCs, the traditional
industries of the LDCs remained weak. In short, the IT had some positive effects of diffusion on the
LDCs, but in the long-term the negative effects remained because it stimulated a production of primary
goods (plantations and mining enclaves) subject to irregular prices and demand. Lewis (1954 and
1969) and the marxist author Emmanuel (1969) decided, respectively, on the deterioration of the
trade terms of the LDCs and on the existence of unequal trade biased against the LDCs. Nurkse
(1959) also questioned the relevance of commercial trade between the DCs and the LDCs for the
latter. Perroux (1978) considered that the LDCs were controlled. Consequently, the EG and the
structural transformation were induced by the DCs, which will cause the loss of potential positive
effects to the external world, in the long term.
Another group of (radical) authors observed the economic relations as a whole (chain of goods,
services and capitals) : radical marxist visions [among others, Destanne de Bernis (1977) and Andreff
(1981)] and the dependency theory [among others, Santos (1970), Frank (1970) and Amin (1970 and
1973)]. Basically, they defended that the underdevelopment was the consequence of the changes and
deformations in the economic and social structures caused by the economic and social relation that
existed with DCs.