Post on 24-Jul-2020
Nineteenth-century trade policy
Paul Krugman
The big story: trans-Atlantic divergence
Britain moves to free trade with repeal of the Corn Laws
US moves to high protection with tariff
Both countries move to favor manufacturing overagriculture …
English-speaking bias: I won’t try to discuss France, otherEurope
Largely illusory decline due to rising imports of raw cotton
Cloth Wine
Britain 100 120
Portugal 90 80
Comparative advantage: Ricardo’s example
Unit labor requirements
Suppose prices such that 1 unit of cloth trades for one unitof wine. Then Britain can use 100 men to acquire wine throughtrade – cheaper than producing itself; and Portugal can use80 men to acquire cloth – cheaper than producing itself. Mutualgains from trade
But not at all a realistic picture for Britain …
Specific factors model (aka Ricardo-Viner)
Labor
Capital Manufactures Food Land
Labor in manufacturing
Output of manufactures
Marginal product oflabor
Similarly for food
Production function for a given capital stock
Labor in manufactures Labor in food
Wage rate
PM*MPLMPF*MPLF
Equilibrium given prices of manufactures, food
Wheat prices
Labor in manufactures Labor in food
Wage rate
PM*MPLMPF*MPLF
Effect of rise in the price of food, e.g. due to Corn Laws
Nominal wage rises, butby less than price of food
Effects: Landowners clearly better off
Capital owners clearly worse off
Workers: ambiguous, since real wage falls in terms of foodbut rises in terms of manufactures
But negative if food a large part of consumption basket
Why repeal of the Corn Laws?
Formation of anti-Corn Law League, centered in Manchester
Role of ideas?
Refutation of “iron law of wages”?
15
17
19
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27
291
77
0
17
75
17
80
17
85
17
90
17
95
18
00
18
05
18
10
18
15
18
20
18
25
18
30
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35
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40
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45
18
50
18
55
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60
18
65
Real wage in Britain
Henry Clay's "American System," devised in the burst of nationalism that followed the War of 1812, remains one of the most historically significant examples of a government-sponsored program to harmonize and balance the nation's agriculture, commerce, and industry. This "System" consisted of three mutually reenforcing parts: a tariff to protect and promote American industry; a national bank to foster commerce; and federal subsidies for roads, canals, and other "internal improvements" to develop profitable markets for agriculture
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20
40
60
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100
1201
79
2
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00
18
08
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16
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24
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32
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40
18
48
18
56
18
64
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72
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80
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88
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96
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04
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12
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28
19
36
Customs share of revenue
Henry Clay, 1832